Kevin Rudd is learning a difficult lesson, not only politics, but in popularity. That is, if you try too hard to be liked, you almost certainly won’t be. Think of it as a macro version of the principle, treat them mean, keep them keen. Much like John Howard before him, Rudd’s policies have attempted to mirror what the electorate is thinking.
When the polls favoured reconciliation, Rudd said “Sorry”, when the polls favoured action on global warming, the federal government cobbled together an emissions trading policy, when the electorate started to fear the ETS as being a giant tax, the policy was cast out like old dishwater. When the global financial crisis struck and unemployment started to rise, Rudd and Wayne Swan harnessed the spirit of John Maynard Keynes and undertook a massive stimulus program
In a desperate bid to spend money, the federal government divvied out taxpayer funds to schools who didn’t know how to spend it, to home owners for insulation, who would then hire tradespeople who didn’t know how to install it.
Then the government made arguably its biggest error — allowing the residential property market to turn into a huge bubble and refusing to let the market return to its intrinsic value.
First, Rudd gave money to first home owners (through a first home owners grant), which in actual fact was a grant to vendors. This was because the handout proceeded to inflate the price of properties by in some cases, hundreds of thousand of dollars (as banks allowed buyers to leverage their additional equity using loan-to-valuation ratios of 95%). That lending was supported by another government policy, which enabled banks to utilise the AAA credit rating of Australia taxpayers to raise funds overseas (this policy helped banking profits and ensured that ensured that highly paid bank executives received remuneration to which they had grown accustomed).
Then the government threw its support behind the securitisation market, buying billions of dollars of unwanted debt from smaller financial institutions who had been hurt by the government’s other policies of funding and deposit guarantees.
Now, the Rudd government has turned to the mining sector for its next great idea. This time, instead of giving, it is taking away (to pay for its giving in other places). Like any shrewd politician, Rudd and Swan have chosen to pillage a group who don’t vote for them anyway (mining executives and contractors) or who can’t vote (foreign shareholders). The intention behind the policy appears to be to raise the maximum amount of funds while, costing a minimum number of votes. The money raised will be far more usefully spent on bribing the people who will be deciding whether Rudd and Swan should be keeping their jobs later in the year.
On the fact of it this all appears pretty smart (politically anyway). Except for one small problem. The person who came up with the idea and the bloke who is implementing it, Ken Henry and Kevin Rudd, are life-long public servants (except for Rudd’s three years in China) who seem to have forgotten about the economic cycle.
At the moment, mining companies (from the majors such as BHP and RIO) down to the small explorers are enjoying the fruits of a near unprecedented commodity boom. The boom has largely been spurred by Chinese stockpiling of raw materials and huge stimulus (which, according to some sources, has led to construction of millions of square metres of unused office space).
Rudd’s super-profits tax assumes one important thing — that mining companies will continue to earn “super” profits indefinitely. Anyone who has studied economic history knows that irrational increases in the price of certain assets will inevitably revert to their long-term levels. It happened with tulips in 1637, it happened with shares in the late 1920s, it happened with commodities in the late 1960s, it happened with gold in the early 1980s and it happened with US property in 2008.
By the time the federal government actually imposes its super profits tax, there is a substantial likelihood that there won’t be all that much super profit to tax. It was only 18 months ago when questions were being asked of Rio Tinto’s and Oz Minerals’ survival (both companies would turn in desperation to the Chinese for emergency capital funding although Rio never went through with the deal).
The government is vindicating the mining super tax by claiming that Australia’s natural resources belong to all Australians, and anyway, a substantial proportion of the large miners, such as BHP and Rio, is owned by foreigners. So long as the tax rate isn’t so high as to discourage investment, this may be a valid reason — but then the government is proposing to use part of the money raised to reduce level of company tax payable. Such a reduction benefits foreign shareholders of Australian companies. (Locals pay income tax on dividends or wages from companies, so the company tax rate, aside from timing benefits, is of little relevance to local shareholders).
But despite all this, it appears Labor’s popularity is plunging — last week’s Newspoll indicated that the Liberals had taken a lead in the two-party preferred vote, despite Rudd trying desperately to please every swinging voter in the country.
It appears that for all the trying, the Australian public don’t like someone who is trying too hard to be liked.