Tuesday, July 30, 2013

Politicians are powerless over Australia's economy

Australia is a very small country with a very open economy.  These facts are sometimes easy to forget.

No matter what they say during the upcoming election campaign, neither Kevin Rudd nor Tony Abbott will have much control over Australia's economic fortunes in the next term of government.

Wrapping up his National Press Club address earlier this month, Kevin Rudd said Labor governments ''manage transitions ... sketch the future ... harness the energy and ambition of our people'' and ''put the changes in place that best secures our future.''

Tony Abbott has used the same sort of hyperbole.  A Coalition victory would immediately trigger prosperity.

Such boldness is par for the course at election time.  But it is a confidence trick.

The fate of the Australian economy — the big ups and downs of the economic cycle — will be determined by global conditions, not domestic ones.

No-one knows this better than the workers at Holden and Ford, for whom global exchange rates are more important than any subsidy or tariff our elected representatives can devise.

This has always been so.

A sudden increase in the cost of bank lending in London caused our first true depression — the largely forgotten Depression of the 1840s.  We suffered along with the rest of the British Empire.

Our better-remembered second depression occurred in the 1890s.  What little modern Australians know of the Depression of the 1890s is perhaps the housing boom in Melbourne which preceded bank failures and unemployment.

But the Australian episode is only part of a story that encompasses the near collapse of the London-based Barings Bank, sovereign debt crises in Latin America and the Mediterranean, a gold panic in New York, and a mining market collapse in South Africa.  Our trouble — as traumatic as it was — was just one crisis among many.

The Great Depression was even more clearly imported.  No way were we going to avoid suffering from the stock market crash of October 1929 or the collapse of world trade.

Historically our good times correspond with good times in the global economy too.

We boomed in the 1950s and 1960s along with everyone else.  We suffered stagflation in the 1970s along with everyone else.

And the recession we had to have?

Well, that recession had to be had by the United States, Canada, New Zealand, the United Kingdom, and Japan as well.

This all makes sense.  Australia is tiny.  Overseas there are cities with more people than our entire country.  We're almost entirely dependent on imports for consumption and exports for economic growth.  And we need foreign capital for investment.  A small country highly integrated into the global economy is going to be very sensitive to international crises.

Yet for each of these historical episodes there exists a cottage industry trying to explain the unique Australian factors that caused them.  The 1840s Depression is blamed on problems in the Australian wool industry.  The 1890s Depression is blamed on reckless Australian banks.  The depth of the Great Depression in Australia is blamed on our obsession with balanced budgets.

It goes on.  We've all heard Paul Keating blamed for the recession of the early 1990s and John Howard credited for the subsequent growth.

If there is growth or recession in the next term Abbott or Rudd will take the blame or credit.  They probably won't deserve either.

In the past I've mentioned research that suggests political success is more about dumb luck than virtue or competence.  In truth Rudd or Abbott will win government then cross their fingers.

But political debate struggles with powerlessness.  Voters like to assign blame and give credit for things that are actually outside any domestic politicians' control.

Kevin Rudd rightly points out the global financial crisis dumped a bucket on Labor's first term.  The policy agenda of any party would have been drowned out by the global consequences of America's subprime collapse.

But then he claims his decision to artificially stimulate the economy was responsible for Australia's relative endurance.

Not, for instance, Chinese demand for West Australian minerals.

In other words, Rudd believes the disease was entirely foreign, but the cure was entirely domestic.

Yet even if you are a card-carrying Keynesian — that is, you believe the government can and should spend more to boost the economy in a downturn — it is just as plausible that China's enormous stimulus package in 2008 is responsible for our prosperity, rather than Labor's smattering of insulation and community projects.

Australia spent around $90 billion to stimulate its economy.  Sounds like a lot?  Well, China spent over half a trillion dollars.  And nearly three quarters of that spending went towards the infrastructure whose raw materials we supply.

Our politicians pretend they can steer the economy like a ship.  But we have a very small ship and it's a very big ocean.  During an election, it pays to remember our economic future is determined by the wind, not the sails.

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