Are conservatives better economic managers?May 10, 2016
Are conservatives better economic managers? Part 1
In my blog of 3 May 2016, I queried the claim by Malcolm Turnbull and apparently supported by many media commentators and also by the public, that conservatives are better economic managers. The evidence and the record do not show that.
In last week’s budget and in the public relations selling afterwards, Scott Morrison fell back on slogans again. In this case the slogans were ‘jobs and growth’, ‘jobs and growth’. This was quickly followed by ‘we have a plan’, ‘we have a plan’. But as Ross Gittins in the SMH has pointed out, there is really no economic plan to get the budget back into surplus. The surplus is now pushed out again for years. With no real economic plan, the government again resorts to slogans at it did at the last election – ‘stop the boats’ ‘eliminate the deficit’ and ‘reduce the debt’. But we know from experience that the Abbott and Morrison activities did not stop the boats. It was a myth, but still believed by many. And the deficit and debt are much worse.
In this blog Ian McAuley pointed out that in the post-war years only Labor Treasurers, Paul Keating and Wayne Swan have won the prestigious Euromoney Finance Minister of the Year award. Peter Costello and Joe Hockey didn’t make it.
In The Guardian on 2 May, economist Stephen Koukoulis said
‘In terms of jobs, the ABS data show that average quarterly GDP growth and average monthly increases in employment are stronger when Labor has been in government compared with the Coalition. … GDP and employment growth both rise at a faster pace when Labor is in government.’
In this blog, Ian McAuley has set out three reasons why we might be misled into believing that conservatives are better economic managers. The first is that Labor has been in office at the wrong time. Coalition governments held office in the long boom years from 1949 to 1972 and from 1996 to 2007. Both Robert Menzies and John Howard were very lucky. By contrast the Whitlam government, which made many mistakes, encountered the biggest economic shocks of the post-war era – the 1973 oil embargo, the end of the Bretton Woods exchange rate arrangement and severe contraction in the US economy after the end of the Vietnam War. The Rudd government was also unfortunate in that it was confronted by the Global Financial Crisis, the other major post-war shock.
Ian McAuley argues that conservatives have successfully persuaded many, including themselves that government spending is inevitably wasteful and Labor is all about taxes and spending. Yet there is much more to a successful economy than budget balance and public debt. In world terms, Australia does not have a large government sector and Australian government revenue is modest in global terms. The most successfully managed economies in the western world are the Nordics that have high taxation levels and high government spending.
As Ian McAuley also points out, there is thirdly an assumption that rich people are clever and therefore better managers. Some clever people may be good managers but many rich people have the benefit of inheritance. Other rich people like developers, are able to manipulate governments to obtain concessions, but they don’t show much ability to compete in an open market without government support. As John Maynard Keynes reminded us we need to distinguish between speculators and business persons who really make things. He might have had people like Malcolm Turnbull in mind. When Malcolm really had a business management job, the NBN, he failed badly.
My view is that the big and beneficial changes that have set the Australian economy up in the post war years were initiated by Labor governments – the Curtin and Chifley governments, and the Hawke and Keating governments.
The former guided Australia out of the depression of the 30s and the destruction of WWII into full employment and economic growth. The Hawke and Keating governments laid the basis for almost three decades of uninterrupted economic growth.
The Whitlam government clearly had problems, some of which I saw at first hand…too much spending and too many government supported wage claims. There was a poisonous relationship between the Government and Treasury. Both sides were at fault The Whitlam Government did however set Australia on the path to freer trade with a 25% across the board cut in tariffs. It refused to bow to the Department of Defence and knocked back the Navy’s plan for locally designed and built light destroyers. It chose instead to buy off-the-shelf frigates from the US. The Department of Defence went into quite a sulk. Bill Hayden was getting the budget back into shape in 1975 but the improved economic performance was cut short by the Dismissal.
The Fraser government’s economies performance was poor as both John Howard and John Hewson have told us. The Fraser Government was the most protectionists in history although Malcolm Turnbull may surpass him with the extraordinary French submarine deal. Malcolm Fraser said ‘we will give industry the protection it needs’. The effective rate of protection of the car industry rose from a high of 54% in 1974-75 to a peak of 143% ten years later. The effective rate of protection for the textile clothing and footwear industries peaked in 1984-85 at 250%.
The Hawke and Keating governments were undoubtedly the most successful economic managers we have had. Amongst other things, they floated the dollar, reduced protection, broke the wage spiral with a wages accord, introduced the concept of a social wage and broke down a centralised wage-fixing system. The political problem for the government at the time was the ‘recession we had to have’ and record high interest rates. But successful economic management reform was the hall mark of the Hawke-Keating governments.
The Howard-Costello government’s economic performance was poor despite John Howard grasping the nettle of the GST. The world economy and the mining boom gave the Howard-Costello governments an easy ride. But Peter Costello left us with more serious structural problems like no other Treasurer has bequeathed. He was described by the IMF as ‘the most profligate Treasurer in 50 years’. This view was shared by the Australian Treasury and the Reserve Bank. Peter Costello did achieve a brief budget surplus, but he squandered the mining boom with locked in and permanent tax cuts in response to a temporary increase in revenue There were eight tax cuts in a row.. He cut tax on capital gains by half. He made income from superannuation entirely tax free. With John Howard he handed out billions of dollars in middle class welfare. Money was being shovelled out both the front and back door as if there was no tomorrow.
Costello was true to his ideological bent. For ideological reasons he wanted to reshape the Australian economy by shrinking the public sector. The best way to ‘starve the government beast’ he believed was to reduce government revenue so that in future governments would have to contract government spending in areas such as health and education. We are still paying for the Costello legacy and profligacy.
The Rudd-Swan government, at a critical junction with the Global Financial Crisis, handled it extremely well. Australia was about the only advanced economy that avoided recession. Wayne Swann received international plaudits but was unable to explain his success at home. That success was obscured by the campaign of Tony Abbott with his slogans and the Murdoch media who picked holes in programs such as pink batts and the capital funding of schools. The success was blanketed out by the joint efforts of the Murdoch media and Tony Abbott. That economic success was also obscured by the political division between Rudd and Gillard. Swan also failed in his latter years to effectively bring the budget back into surplus. The Mining Super Profits Tax was good policy but in the face of a media blitz by the mining industry, mainly foreign owned the government failed to communicate the case for such a tax.
Are conservatives better economic managers? Part 2
In Part 1 I argued the best governments in economic management since WW2 were the Curtin/Chifley and the Hawke/Keating governments.
More recently we have had the Abbott-Hockey team which won an election through the default of Labor and by persuading us that we had a debt and deficit emergency. It was an artifice. In fact both debt and deficit have worsened under Coalition management. The last Swann budget forecast a deficit of $ 10 .6b .It is now $ $37b. In each year the budget prospects have got worse. Our budget deficit is now in the top third of of 39 advanced economies. Debt will grow from $ 450b last year to $ 497b this year.
From a budget and deficit emergency three years ago, the government has moved to denial that we have ever had a problem. It is abdication of economic responsibility.
Joe Hockey used to tell us that interest rate reductions by the Reserve Bank were the sign of a struggling economy. Yet on the day of Scott Morrison’s budget, the Reserve Bank cut interest rates again. Morrison told us that it was due to lower inflation. But the Reserve Bank refuted this by pointing out that the ‘prospects for sustainable growth’ were of concern. The Bank is clearly worried about the ‘growth and jobs’ that Scott Morrison tells us will occur under his watch. Economic commentators have similar doubts.
Joe Hockey blamed the problem of housing affordability on low income people who weren’t working hard enough and saving enough to buy a home. Malcolm Turnbull gives a variation on that theme by telling parents, presumably wealthy parents, that they should ‘shell out’ more to help their children get into the housing market.
In any event, Joe Hockey’s performance and particularly his 2014 budget meant that Washington couldn’t come fast enough.
Scott Morrison talks about the importance of transitioning our mining based economy to a more broadly based economy. But his budget made no mention of the importance of developing a sustainable economy based on renewable energy .That would make environmental, economic and business sense. But there was no mention of it in Scott Morrison’s ‘economic plan’.
For years, the Business Council of Australia has been urging repair of the budget. But has now been seduced by a large reduction in company tax. Corporate Australia was the real winner in the budget.
There is no credible evidence that a reduction in company tax or reduced taxes on the wealthy increases jobs and growth. As Michael Keating has pointed out in this blog that ‘where ever the tax rate has been changed it has never made a perceptive difference to investment, either here in Australia or anywhere else’. The ‘trickle down ‘theory does not really help ‘jobs and growth’
And after almost three years of Coalition Government the story on business investment is disturbing. The budget is framed around business investment falling by 11% in 2015/16, falling 5 % in 2016/17 and with no growth in 2017/18. The Treasury figures also show unemployment is expected to remain at 5.5% until at least the middle oy 2018.
The budget figures do not show much ‘growth and jobs’ in the years ahead despite what the Treasurer says. Ross Gittins in the SMH on May7/8, 2016 said ‘…there is no evidence to support Morrison’s claim that the budget will do great things for ‘growth and jobs’.
The Supply side’ economics of Ronald Regan, cutting taxes for companies and wealthy individuals that Scott Morrison is pursuing, left the US with record deficits and debt and dramatically increased inequality. This inequality is described by the OECD as ’harmful for long term economic growth. As Nobel winning Joseph Stiglitz put it ‘the world faces a deficiency of aggregate demand brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom. So that as money moves up, demand moves down’.
We are learning at last that growing inequality is not only bad for society but it is also damaging for the economy. This is the path that the Turnbull government wants to take us down.
Malcolm Turnbull has told us many times that the Free Trade Agreements with several countries are ‘massive building blocks’ for our economy. However the Productivity Commission has warned us that there is more hype than benefits in these FTA’s. ‘Pebbles’ would be a better description than massive building blocks.
For a government that presumably has some regard for markets and free trade, its decision on a $50 billion submarine and naval build in Adelaide is remarkable. Christopher Pyne must really be a national treasure if the government needs to spend so much money to help keep him in public life. This submarine decision by the Turnbull government will surpass by far the protection ways of the Fraser government.
In this blog on 29 April, Jon Stanford and Mike Keating pointed to
‘The implications for industry policy constitute a particularly egregious element in the [submarine] procurement decision. … We need to remember that the Abbott government showed the door to the car industry. The end of the ‘age of entitlement’ meant that around $500 m. a year, not high by international standards, was too much to pay to support a high technology(car) industry that, directly and indirectly, employed around 200,000 people. Now the government is keen to support a (shipbuilding) industry with a cost disability, according to the Rand Corporation, of up to 40%. Given the likely moderate local value-added in an industry where all sophisticated hardware is important, the effective rate of protection (assistance to value added) will be much higher than this. Indeed a leaked paper from Defence suggested an effective rate of protection of 500% would be required to build the submarines in Adelaide. Even at the height of the Fraser government’s protection excesses … the effective rate reached only 143% for the car industry. … On the Prime Minister’s figures, 2,800 jobs will be created directly and indirectly, a far cry from the 200,000 jobs that are related to the car industry. Some early estimates suggest we are looking at a cost of around $4 m. for every job created.’
It is hardly good economic or business management.
In his interview with Laurie Oakes, Scott Morrison acknowledged that the contract with the French submarine builder had not been signed and the design and specifications were open-ended even though we have apparently agreed on a price. It sounds like a thorough business mess.
The crack down on high income earners who mis use the superannuation system is welcome but as Saul Eslake and others have warned these same people are likely to now transfer their surplus funds into negative gearing of property, a problem which the government refuses to tackle. In its cautious way the Reserve Bank has warned about the risks of negative gearing. ’Any change which discourages negative gearing may be a good thing from a (financial stability) perspective. The concessional rate of taxation of capital gains might encourage leverage speculation, particularly in combination with negative gearing provisions’
We are likely to see even more wasteful infrastructure spending, particularly on roads. As Michael Keating has pointed out in this blog we must have’ proper pricing signals and evaluation’ for infrastructure investment. A government that professes to understand business, markets and pricing should know this. Unfortunately it doesn’t and allows so much of road spending to be influenced by powerful motoring organisations and construction companies.
There is no credible plan to bring the budget back into surplus or secure ‘jobs and growth’. But we will have plenty of slogans in the coming weeks as we had at the last election.
And the budget is quite silent on the two most important issues of our time climate change and growing inequality. Ideology has been put ahead of good economic management
The case that conservatives are better economic managers does not stand up to serious examination.