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Oct 27, 2011

Who killed economic reform? Maybe we all did

There's plenty of blame to go around for the death of the economic reform project. But was popular resentment of its impacts the ultimate killer?

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So far, there have been two competing theories about why the economic reform project has died in Australia: the media blames the politicians, and the politicians blame the media.

The first, favoured by some media critics as well, is that reform has been made much harder by the dumbing down of politics and a media obsessed with gotcha journalism that discourages risk-taking among our leaders. The response, mainly from the media and economists, is that the current crop of politicians are duds, and no match in reforming vigour for Hawke, Keating and the early John Howard.

“The solution doesn’t lie with the media. Politicians need to grow a backbone,” insisted Laurie Oakes last week, specifically criticising Lindsay Tanner’s Sideshow. To be fair to Tanner, he didn’t blame all the media; indeed he specifically singled out some shockjocks for being more prepared to connect large audiences to policy issues than the political journalism professionals.

Given politicians are the ones who end up being the agents of reform, there’s a self-evident logic in blaming them. And it’s hard to see how the media can be blamed at all for some aspects of the retreat from economic rationalism. It was the major political parties — first the Coalition, then Labor — who turned against our long and successful history of high immigration last year, unprompted by anything other than focus groups and political cynicism. It’s also significant that the current government doesn’t have the potent one-two combination that the Hawke government had — a popular prime minister who provided reassurance to voters and an aggressive Treasurer who provided reform momentum. The Howard government had that, as well, though not as much.

Political failure has been more subtle than that, too. If the momentum behind reform stalled under John Howard, Kevin Rudd failed to restore it, talking consistently about reform but not delivering, most painfully on carbon pricing but on tax reform and housing affordability as well. Rudd even had the dubious gift of a global economic crisis to jolt Australians out of any reform complacency they might have had, but failed to use it.

But Australia’s economists share some of that blame as well. They, too, have failed to sell the case for continuing reform. They’ve also been lukewarm in their support for the reforms that politicians have embraced. Ken Henry pointed this out last year when he complained about the constant sniping of academic economists following the mining tax controversy. Economists as diverse as Joshua Gans, Judith Sloan and Warwick McKibbin reacted furiously to Henry’s remarks. But Ross Gittins nailed them when responded that economists demanding perfect policy had no right to complain about politicians lacking the will for reform.

If anything, the culpability of the economics profession has become greater this year. Recall the 1980s, and the sense of urgency policy makers and economists were able to engender in the wider community. Even without Keating’s famous “banana republic” line, the conviction that Australia needed to reform, and now, pervaded debate, as if our very future was at stake. Move forward to 2011, and what’s the issue economists are trying to inspire us with? What urgent national task do we need to address? Erm, productivity — a problem economists themselves still struggle to diagnose properly and one that we share with most developed countries anyway.

Typically, the business community, which has a long history of only supporting major reforms that benefit the bottom line of business, have seized on productivity to argue for the need to return to IR deregulation. That’s despite it being repeatedly demonstrated that the last round of IR reform, WorkChoices, actually undermined labour productivity (as forecast by Treasury). Then again, that’s OK if you bear in mind business is focused not on the national interest, but on easy ways to cut costs.

And like economists, business has failed to do its bit to back even the limited reforms undertaken by politicians. Most of the business community — the superannuation sector honourably excepted — stayed silent while the mining industry mugged the Rudd government last year. Some business leaders then had the hide to whinge when the newly installed Gillard government rushed a deal with the miners that halved the corporate tax cut linked to the mining tax.

What about the public? Tanner also suggested the long years of economic growth had sapped the public will for hard reform. Is it just complacency, or is it something more? Earlier this week, Essential Research released some data on questions it asked about support for key elements of the economic reform program of the past 30 years.

Only compulsory super and Medicare (which was instrumental in Labor’s selling of reform to the union movement and voters) get majority support. Other key reforms such as the floating of the dollar and the GST are now more widely regarded as good for the economy than bad, and reversing them is not supported. But privatisation, a key element of the reform project, is still regarded with hostility by voters and they would happily see the Commonwealth Bank, Qantas and Telstra all returned to public ownership.

This isn’t just dewy-eyed nostalgia. After years of interest rate hikes, diminishing service quality and gouging, such a result is hardly unexpected from voters, who were originally sold privatisation on the basis that it would improve efficiency and service quality because the private sector did those things so much better than the public sector. Instead, the dominant perception is of massive executive salaries built on doing over customers.

This ties into the perception that the rules of the economic game are now rigged in favour of large corporations and wealthy executives — the pointy end of which are the #occupy protests and Alan Jones’s railing against coal-seam gas. Executive remuneration is one of the focal points of this latent hostility in the community, with wage earners constantly being told to accept real wage cuts or negligible increases while executives reward themselves with double-digit annual increases.

From this point of view, more economic reform seems to many people to simply represent a worsening of the current imbalance in the economy.

For some in the community, it goes further. Resentment about the changing nature of the Australian economy, away from manufacturing towards services industries, has been driving a form of regional populism since the days of One Nation. It’s a sentiment that most recently found expression in the anti-carbon tax rallies, composed more or less of the losers from a generation of economic reform, older white people and particularly males, who in previous generations were guaranteed employment for life and an inviolable social status, but who now find they have to compete along with everyone else for economic and social status. Barnaby Joyce and Bob Katter have been effective at tapping this sentiment.

Such people — the class that used to benefit from the socio-economic system, now thrown on hard times — are easily mocked but are simply the most vocal expression of dismay at the atomisation inherent in the liberal economic reform project. What the economists and politicians and advocates of reform (and I’m one) never point out is that economic reform comes with a trade-off — higher economic growth, lower inflation and more jobs, but in exchange for a drastic curbing of the role of government, and a replacement of non-economic values with those of the market. In the world created by economic reform, your only value is as a functioning isolated member of a market economy, as a productive employee and big-spending consumer, and you shouldn’t rely on the community to soften that reality — except if you run a large corporation, in which case you can expect the rules of the game to be altered in your favour.

In such an atmosphere, voters may well wonder whether it’s time not merely that economic reform ended, but that it be reversed.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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33 thoughts on “Who killed economic reform? Maybe we all did

  1. Peter Ormonde

    Ben Shurman:

    Euphemisms? I’ve never used a euphemism in my life! Metaphors, similes … buckets of ’em but no euphemisms whatsoever.

    To answer some of your concerns: It was not stable because one man Kevin Rudd believed that he could overturn, re-write or ignore Cabinet decisions and those of Caucus. Government is not one man Ben – it is a team sport.

    The “plotters” as you call them did not end a Government – they ended Kevin Rudd… different thing. You are making the same mistake he did – the Government is much bigger than one man. The madness of King Kevin did not begin with the GFC – it began much later.

    And that is why Kevin will never ever come back Ben – not that some don’t people feel sorry for him, see him as a victim of plots and conspiracies. It’
    s because the people who dumped on Kevin were the caucus as a whole – and they did it because they had to. They will not have such issues with Julia Gillard – she is a lifelong team player that one.

    On a different note: please try and restrain yourself from making unpleasant comments and attacking me personally – I did not attack you or deride your ideas. You do not do St Kevin’s memory any good and you risk making me annoyed or bored.

    No even the NSW Right don’t throw away a leader that they believe can win an election. That’s pretty much all they care about – not policies, that’s for sure. If someone from the NSW ALP tells you they dumped on someone because they didn’t like his or her policies, don’t you believe them.

  2. Ben Shurman

    Peter Ormonde what an amazing insight you have into the operation of PM Rudd’s office. Your claim that Rudd was not a stable government is … piffle. In what way wasn’t it a stable government. Because you didn’t like the leader?

    Ending a government by betrayal is not instability of that government. The instability comes from plotters, having unclear reasons for change, having no clear direction yourself and, to continue your euphemisms, not being able to sell heaters to Eskimos.

    Some of the members of recent ALP federal caucuses [teams] have been the most spineless timid useless mob in living memory. For example on the coup night caucus members were not contactable, didn’t know it was on and just as importantly the current caucus team endorsed the actions of the government rather than argue for better policy – malaysia solution and the previous team endorsed the gang of four to run the government during the GFC, BER, Bats, etc.

    And what was the complaint of these caucus pretenders during Rudds term of office. During the GFC he didn’t have time to have them up to his office for a cuppa, iced vovo and a chat. Didn’t listen to that industrial buffoon and dinosaur Howes.

    The caucus team has brought about more instability because of their failure to challenge the current leader’s policies. If you are part of a team you have a responsibility to do your job to the max, not absolve yourself of responsibility. Teams fail when the members let the stars do all the heavy lifting. Under Rudds time if they didn’t like what the gang of four were doing then the cabinet team and the caucus team should have voted against the arrangement.

    Clearly you don’t follow the shenanigans that pass for NSW labour team politics if you say plotters don’t change horses mid-stream. There are a number of recounts from the various participants of plotters changing horses mid-stream simply because they didn’t like policies and even aiding and abetting their opponents.

    Peter, ol’ china, your comments are straight from the Paul Howes handbook on leadership change – my justification to replace Kevin Rudd.

    Lets call a spade a spade and not a digging implement, you are the person who has high flutin’ fantasies and your team sports, horses are part of your political delusions.

  3. Peter Ormonde

    Every now and again Cr*key carries an article that reminds one why it’s worth reading. Most of them are by Bernard. Or Guy Rundle early in the week.

    Not sure I agree that economic reform has been “killed”… The MRRT, the Carbon Price and recent taxation reform like lifting the tax-free threshhold are big economic reforms in my book.

    Perhaps the implicit death that you are talking about Bernard is that of market liberalisation … and that’s a different question altogether.

    I’d be pinning that on John Howard’s laziness and Workchoices with the final nails being driven into the coffin by the GFC and the global debt bubble.

    We are getting a clear lesson – at a safe distance so far – about the ruthlessness and instability of unregulated markets. That’s not to say we have unleashed the beasts completely here but we can see them rampaging about elsewhere with deepening inequality in the US and Britain, and an atmosphere of constant rolling crisis. And it worries people and leaves a bad taste in the mouth.

    I don’t think Australians have ever had an ideological libertarian view but are essentially pragmatic… we like things that work. And working does not mean hammering the poor into the ground by cutting welfare spending and driving wages through the floor.

    We like medicare. We think pensions are a good and decent thing to do. We think it is important to do something about mental health, to help people get over floods, to do whatever is necessary to stop Aboriginal communities seeing their kids abused and the future annihilated from a genocidal form of suicide.

    So I reckon what’s happening at the moment isn’t so much the death of economic liberalisation, it’s about putting up structures and reforms that protect the vulnerable and give us a bit of insurance. Not dead just a bit disgraced. But don’t worry, the chancers, the rent-seekers, the carpet-baggers will be back demanding more and promising less. It’s what they do.

  4. Douglas and Milko

    Jeebus Bernard, what sort of atomized society do you want, and more importantly why? Or are you being ironic, a bridge too far and all that..

    To quote you:

    “What the economists and politicians and advocates of reform (and I’m one) never point out is that economic reform comes with a trade-off — higher economic growth, lower inflation and more jobs, but in exchange for a drastic curbing of the role of government, and a replacement of non-economic values with those of the market. In the world created by economic reform, your only value is as a functioning isolated member of a market economy, as a productive employee and big-spending consumer, and you shouldn’t rely on the community to soften that reality ..”

    The real genius of Hawke and Keating was that they used the power of the markets to drive reform, but they used that power not to lessen the role of Government in people’s lives, but to use that new-found, market-based prosperity to make sure that the disadvantaged in our society: the poor; the disabled, and the aged, had a living “stipend”. This was when the family payment was introduced. I am a bit old now, but I remember the joy of some not-so-well-off neighbours (I lived in the country), when they could actually go to the supermarket, like normal people, and get a trolley of groceries. As a member of the Labor party, it was one of the proudest moments of my life. I did not end up keeping in touch with this particular family – they were basically farm labourers who worked often only for food and lodgings ( and relied on charity to get school uniforms for their children) and hence they quickly moved to a new district, but I suspect the new-found prosperity, in 1988 (no child will live in poverty and all that), and the consequent fact that their children could then blend in at the local school (able to afford uniforms, books and excursions) meant a much beter life for the children, who now probably do fit the bill as “[their only] value is as a functioning isolated member of a market economy, as a productive employee and big-spending consumer, and you shouldn’t rely on the community to soften that reality ..”

    Bernard, I really enjoy your articles, but do you think the parents of which I speak, should have been left to hang because they had nothing to offer the market, other than their ability to work on farms for food and lodgings, consigning their children to the same fate? Without some excellent economic reform (from Hawke and Keating) , coupled with a bit of a helping hand to those who are really on the bottom rung and had little chance of getting off, Australia would be a much poorer and less productive society. An investment in the health, nutrition, educational and living standards of our citizens should surely be seen as an investment in the market.

    Can you please tell me that I misinterpreted your article, and that you do actually think that as well as the economic reforms of Hawke and Keating, which I stand by 100%, their social reforms, which involved government “interference” were a good thing?

    I have a broader perspective these days. I spend about 50% of my time working in Chile, an interesting contrast to Australia. Here (I am in Chile at the moment) the Chicago school of economics still has much influence. 80% of people still make there living through “PYMES” (small independent businesses, which basically means they sell stuff on the street). For me as a consumer it is great. I buy fresh fruit and vege, clothes and all sorts of useful things (pens, pencils, bandaids, hair clips) from the vendors on the buses in Santiago.
    However, as one Santiguino woman put it, “we now have compulsory education to high school. But why should they read Neruda, when we know that they will spend the rest of their lives picking oranges for a living.” [it will only destroy their souls – my addition].

    I had been a believer that market reform could bring great efficiencies which could then be used to redistribute wealth to make sure we have a healthy and educated society, which apriori seems to be me to be good for the market not bad. However, I do not get the sense that this is what you think economics is about. From my astrophysics perspective, economics is about determining the most efficient way to make sure that the largest number of people in society have the means to actually contribute to society, thereby enhancing productivity. It is actually an economic rationalist perspective – you spend a little to make sure people can contribute to productivity, because they are well fed, integrated into society, and have the education level to make a positive contribution to productivity.

    However, this, of course is not the Ayn Rand sort of economic rationalism, where the fittest, who regard pity and charity as a weakness which will destroy the fabric of society, triumph to create the super race.

    Please tell me that this is not what you think. I have thought a lot about “Why should they read Neruda when they will only end up picking oranges”. Ayn Rand would say, “well. stop wasting money teaching them Neruda”. Is this what you mean when you say “In the world created by economic reform, your only value is as a functioning isolated member of a market economy, as a productive employee and big-spending consumer, and you shouldn’t rely on the community to soften that reality”?

  5. Jezza

    Bernard I’d like to see you address the limitations of economic reform and the market economics that underpins it. While economists may argue that they take account of externalities and not just financial measures the reality is that the vast majority of their models and plans are based on glorified financial models. With dollars as the measure you get the kinds of imbalances we are witnessing.

    Privatisation was often nothing more than a balance sheet shifting exercise, removing public assets and potential liabilities from improverished state governments to private hands. On more than one occasion, eg toll roads, the public, the government has had to resume the asset at cost to the taxpayer and the private buyer walked away with a windfall.

    I’ve yet to meet anyone who believes that dollars are a suitable metric for the standard of education or of health care and yet we have semi privatised a lot of our education and health care system.
    Where a market exists and there are inefficiencies in the market, economic reform can work, but in a mixed economy like most of the western world, there are choices to be made that are social, moral and political which are beyond economics. Sure lets use a model to optimise our financial efficiency but the choices and decisions that come first, our required standards of health care are about more than financial or economic choices.
    As the ABS points out in its measures of Australia’s progress we are going forward on every front, except the environment. We are still mining all our natural resources and until we adopt a broader based metric for assessing our success we wil continue down that path.

    I am concerned that money has become the dominant metric for determining success and failure in modern Australia and that is a very narrow and inappropriate measure for the kind of socially inclusive, smart and vibrant Australia I would like to live in.

  6. jeebus

    I don’t understand how anyone can say economic reform is “killed”. There is more to reform than flogging off public assets. If anything, it seems that the pendulum is starting to swing away from the laissez-faire economic rationalism that has led to staggering and unproductive wealth concentration, erosion of the middle class engine, and de-industrialisation of the west.

    Three examples of big economic reforms under the current government – NBN, carbon tax, mining tax.

    If a private monopoly owned all the roads in Australia imagine with all of the tolls how big a drag that would impose on the national economy. Should the NBN rollout proceed uninterrupted, and the infrastructure remains a public asset dedicated to selling low cost wholesale data to any and all private companies with equal favour, then as the foundation for Australia’s digital economy, it will ultimately be seen as a worthy reform indeed.

    The carbon tax will bring Australia to the renewables investment tipping point a lot sooner than would otherwise have happened, which will be a very transformative force in the economy. Whether Australian businesses seize the opportunity to innovate and improve their energy usage & environmental sustainability, or to whinge and price gouge is another question altogether.

    Finally, the mining tax is another big reform that is aimed at fixing Australia’s Dutch disease. Would have been much more effective under Rudd’s original plan, though. Can’t say he didn’t try!

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