A major issue in this election campaign has been experience. Both parties accept that experience as an economic manager matters, and Howard and Costello regard it as their one trump card.But experience can be misleading if it teaches a rote set of behaviours, and then circumstances suddenly change. The colonisation of Australia almost failed because farmers used their experience in England and Ireland to guide their farming practices in Sydney. The colony only survived because ultimately it adapted its farming practices to this new land (and because it received some help from Indonesia) .
The rote behaviours that experience has taught our economic managers could probably be rolled off the tongue by any petshop galah, to borrow a phrase from Paul Keating: “keep the budget in surplus; keep inflation low; and undertake microeconomic reform”. But at least the first two could be the equivalent of sewing Sydney crops in May, if serious economic change comes our way.
That change has to arrive one day, because a trend that has underpinned the economy for the last four decades must ultimately reverse. The experience that established those three economic mantras was gained as private debt rose from 25 percent of GDP when Harold Holt was Treasurer, to 160 percent today.
As debt has risen, so has our dependence on yet more debt to sustain demand. Just as it is for a family, aggregate spending in the economy is the sum of income plus the change in debt. When Holt went for his fateful swim, rising debt made only a marginal contribution: the increase in debt that year added a only billion dollars in spending power to our $28 billion GDP.
Now, it is crucial. Last year, the increase in private debt added $240 billion in spending power to our one trillion dollar GDP (thankfully, for the first time in over a decade, businesses borrowed more than households, so at least some of that debt may turn into productive assets one day). Our national reliance on rising debt has to stop someday–just as it must for a family. Then, debt’s contribution to will either cease, or turn negative as Australians curtail spending to pay down their debt.
Picking when that will happen is impossible–you can’t predict when borrowers will decide that they’ve taken on too much debt, when speculators will en masse decide that house prices aren’t going to rise any more, or when lenders will decide that too many borrowers are unlikely to repay. But when it does happen, the economic landscape will shift substantially-and so should economic policy.
If the change is as severe as it was for Japan in 1990, when its 1980s boom collapsed into a debt-deflation, then the first two mantras become economic madness rather than good sense. In a depressed economy, government deficits help keep indebted individuals solvent, while inflation helps reduce the burden of debt repayment. Above all else, deflation must be avoided, because that compounds the problem of excessive debt.
Japan passed the first test of good economic management during a debt-deflation, but failed the second: wholesale prices have fallen for most of the last 15 years. Hopefully we can avoid Japan’s fate, but if we can’t, we need economic managers who can “think outside the square”.
We need flexibility, not rigid adherence to mantras defined by a different set of circumstances. I can’t say which Party will be more flexible, but what concerns me is that both are getting ready to criticise the other for abandoning those two mantras–when that may be precisely what “good economic management” may require.
In a day or so I’ll be publishing a podcast, courtesy of the good graces of Stuart Cameron. Hopefully the ink will be up by Thursday.
