The policy debate needs fresh ideas to fill the gap left by the lack of popular and political support for the neo-liberal economic agenda. Paul Keating, who championed that agenda, recently said neo-liberal economics “has run into a dead end and had no answer to the contemporary malaise”.
But the Turnbull government’s willingness to subsidise a Queensland coal project and the local construction of naval ships and submarines in Adelaide reflects the failed protectionist thinking of an earlier era. The decision to split the budget into its capital and recurrent components is fine, but borrowing is still needed.
Two leading economists have just presented forward-looking thoughts on how the Reserve Bank can do better in this regard than simply fiddle with interest rates. The ex-head of the NSW Treasury Percy Allan has a break- through proposal for funding governments’ capital borrowing. Another original policy thinker Nicholas Gruen has more challenging ideas for banking sector and the budget balance.
Allan recently advocated in this newspaper an improved form of central bank “quantitative easing” to fund transport infrastructure. He rejects the quantitative easing formula used in the US, Europe and Japan as not doing enough to help the productive base of the economy. Allan says the US Federal Reserve’s program “ended up funneling a wave of money into existing stocks of bonds shares and property, rather than producing genuine fresh capital investment”. He wants the RBA to purchase newly issued common stock from the federal government for a big transport infrastructure program, including intercity links. He argues this investment will be needed as the housing boom wanes. He estimates it will also help cut the exchange rate to about US65c, which would boost tourism, agriculture and education.
Because the RBA wouldn’t need a large return, the capital costs could be very low. but a good business case would still be needed.. However, he acknowledges it would carry the risk that some projects wouldn’t be profitable. But central banks except this for other versions of quantitative easing and emergency bailouts.
Allan also proposes cutting the immigration rate from its current level of 190,000 a year to 90,000 to reduce pressures on housing prices, ease congestion and stagnant wages. Once these pressures eased, this writer would prefer immigration increased beyond 90,000, as it can add depth to the entrepreneurial pool and stop societies stultifying. It can also boost growth a little, provided the congestion and environmental impact is well-managed.
Gruen says his proposal would take advantage of the opportunities created by the way banks are part of a larger public–private system with the RBA at the apex. Writing in a recent edition of the Saturday Paper, he said the internet means that the RBA “could provide us all with cheap, basic ‘exchange settlement accounts’ enabling us to make payments to each other as we do today using our banks’ online facilities. It would be faster, cheaper and safer than the electronic cobweb connecting banks today.”
He said the RBA could also lend to people and businesses that provide super-safe collateral. It could fund homes up to, say, 65 per cent of their value, or 45 per cent for prime business real estate without the need for branches.
Gruen said this would also give revenue a big boost. If the RBA lent about 50 per cent of home-lending, he said this would provide an additional $11 billion to the budget annually at the current record low cash rate. At a more “normal” cash rate of 4 per cent, the return would be over $30 billion. If feasible, Gruen’s ideas might be best introduced in stages.
Meanwhile, it should be possible to adopt an idea advocated in libertarian and social Democrat circles — provide all adults with a guaranteed basic income, preferably as a tax rebate, to replace large chunks of the cumbersome welfare system and subsidies such as those for private health insurance.
This column explained in February why a leading Australian investor Mark Carnegie says an UBI “would promote economic dynamism and individual responsibility, and break dependency. People would be able to start businesses or join start-ups knowing there is a safety net during the no-income early phase.” Ideas abound. What’s missing is the political desire to embrace big changes.
Brian Toohey is a columnist. This article was first published in AFR on 10 May 2017