Friday, November 21, 2014

The Crisis Down Under

CANBERRA – The Great Recession of 2008 reached the farthest corners of the earth. Here in Australia, they refer to it as the GFC – the global financial crisis.

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world. He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon. So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries. But, ironically, attention has focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created.

Of course, we should strive to ensure that money is spent as productively as possible, but humans, and human institutions, are fallible, and there are costs to ensuring that money is well spent. To put it in economics jargon, efficiency requires equating the marginal cost associated with allocation (both in acquiring information about the relative benefits of different projects and in monitoring investments) with the marginal benefits. In a nutshell: it is wasteful to spend too much money preventing waste. 

While the focus for the moment is on public-sector waste, that waste pales in comparison to the waste of resources resulting from a malfunctioning private financial sector, which in America already amounts to trillions of dollars. Likewise, the waste from not fully utilizing society’s resources – the inevitable consequence of not having had such a quick and strong stimulus – exceeds that of the public sector by an order of magnitude.

For an American, there is a certain amusement in Australian worries about the deficit and debt: their deficit as a percentage of GDP is less than half that of the US; their gross national debt is less than a third.

Deficit fetishism never makes sense – the national debt is only one side of a country’s balance sheet. Cutting back on high-return investments (like education, infrastructure, and technology) just to reduce the deficit is truly foolish, but especially so in the case of a country like Australia, whose debt is so low. Indeed, if one is concerned with a country’s long-run debt, as one should be, such deficit fetishism is particularly silly, since the higher growth resulting from these public investments will generate more tax revenues.

There is another irony: some of the same Australians who have criticized the deficits have also criticized proposals to increase taxes on mines. Australia is lucky to have a rich endowment of natural resources, including iron ore. These resources are part of the country’s patrimony. They belong to all the people. Yet in all countries, mining companies try to get these resources for free – or for as little as possible.

Of course, mining companies need to get a fair return on their investments. But the iron-ore companies have gotten a windfall gain as iron-ore prices have soared (nearly doubling since 2007). The increased profits are not a result of their mining prowess, but of China’s huge demand for steel.

There is no reason that mining companies should reap this reward for themselves. They should share the bonanza of higher prices with Australia’s citizens, and an appropriately designed mining tax is one way of ensuring that outcome.

This money should be set aside in a special fund, to be used for investment. The country will inevitably become poorer as it depletes its natural resources, unless the value of its human and physical capital increases.

Another issue playing out down under is global warming. If not a climate-change denier, the previous Australian government led by John Howard joined President George W. Bush in being a climate-change free rider: others would have to take responsibility for ensuring the planet’s survival.

This was especially strange, given that Australia has been one of the big beneficiaries of the Montreal convention, which banned ozone-destroying gases. Holes in the ozone layer exposed Australians to cancer-causing radiation. The international community banded together, banned the substances, and the holes are now closing. Nevertheless, the Howard government, like the Bush administration, was willing to expose the entire planet to the risks of global warming, which threaten the very existence of many island states.

Rudd campaigned on a promise to reverse that stance, but the failure of the climate-change talks in Copenhagen last December, when President Barack Obama refused to make the kind of commitment on behalf of the United States that was required, left Rudd’s government in an awkward position. The failure of US leadership has global consequences.

Citizens should consider the legacy they leave to their children, part of which is the financial debts they will pass down. But another part of our legacy is environmental. It is two-faced to claim to care about the future and then fail to ensure that the country is adequately compensated for the depletion of its resources, or ignore the degradation of the environment. It is even worse to leave our children without adequate infrastructure and the other public investments needed to be competitive in the twenty-first century.

Every country faces these issues. Sometimes, one can see them with greater clarity by observing how others are confronting them. How Australians vote in their coming election may be a harbinger of things to come. Let’s hope – for their sake and for the world’s – that they see through the rhetorical flourishes and personal foibles to the larger issues at stake.

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    1. CommentedMark Vella

      Like most western countries, Australia is spending itself into oblivion. Tax competition is holding governments accountable to their net tax payers, rather than pandering to the whims of the masses, most of whom don't make a net contribution their entire lives. The transition has been difficult for governments, who have just accumulated debt in an attempt to retain and buy votes.

      Where does that leave us now? Well left wing economic politics has started to disintegrate, a political concept that required other peoples money to prosper, no longer can just take without consequence.

    2. CommentedRobert Sugden

      Yes 90 billion in the piggy bank that maybe should have been used for investment in infrastructure etc. Yes 90 billion in the piggy bank that resulted from one of the longest boom periods on the back of the Hawke/Keating Labor govts reforms. 370 billion in debt in today’s money so not comparing apples with apples but let's not go there for now, 370 billion in debt after one of the biggest downturns in history and Australia’s government debt per head of population is one of the lowest in the developed world, with only New Zealand and South Korea below us.
      So possibly a non-sensationalised and rational comment might be a better plan Geoff .

        CommentedGeoff Walker

        If we examine the history of Australian money management, almost ALL labor governments have left huge debts for the libs to pay off. We still haven't got back on track from the disaster left by Whitlam & his mob of wreckers. Remember the old fable of 'The Goose That Laid the Golden Egg?' Labor is the mob wielding the axe!.....Oh, when times are good, shouldn't we all squirrel our money away for a rainy day? I do, so when the storm clouds gather,I'm sitting pretty.

    3. CommentedGeoff Walker

      The waste by the government was horrific. School structures costing $50 000 were done for $2 000 000!!! What a ripoff !!The insulation scandal saw 200 homes ablaze and four young Aussies dead. The worst waste of taxpayers' money in our history!! The previous liberal Govt. left 90 BILLION in the piggy bank. Labor will leave with an IOU of 400 BILLION!!! Can't believe that the ratings agencies of Moodys & Standard & Poors are still giving advise.THEY sucked us into this mess when honest Aussie brokers TRUSTED them....LYNCHING:way to go!!