There is a terrific piece of rhetoric from Peter Costello today in Fairfax papers. It is a must-read in terms of historical revisionism and politicking:
Imagine an investment portfolio — say your superannuation fund — which has a whole bunch of assets that are going sideways and one prime asset that is growing strongly. Imagine it is growing so strongly that it lifts the whole portfolio year after year. You’d be pretty thankful for that.
The reason why fund managers diversify their investment is to find non-correlating assets that will do well when others do badly. They might even re-weight towards that area. They put a high value on such assets.
Australia’s mining industry is outperforming the rest of the economy. We are all very lucky that it is. The Reserve Bank estimates that had we been going through normal terms of trade — and missed out on the mining boom associated with it — our income would have been 15 per cent lower per annum.
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I am sick of government spokesmen bleating on about the “two-speed economy” as if this is some negative for the country. What could be worse than a “two-speed economy”? I’ll tell you: a one-speed economy in which the mining sector is performing at normal levels. In those circumstances our economic growth would look like Europe or the US. It has not yet dawned on this government how much it owes Australia’s miners and how lucky it is that Australia’s terms of trade are at once-in-a-century highs.
So, we finally have a mea culpa from the treasurer that oversaw the creation of the Australian credit bubble. Australia’s growth would absolutely be akin to other struggling Western nations without the mining boom. But Costello neglects to recall why. Western nations are suffering balance sheet recessions. That is, following the GFC, the value of their assets fell, whilst the value of their liabilities increased. Thus, they find themselves in various forms of liquidity trap, deleveraging cycles and the rebuild of savings. This was the result of their decade long booms in credit, asset speculation and over consumption to drive growth.
As treasurer, Costello presided over and encouraged precisely the same model of economic growth. Let’s take a quick look at the credit aggregates under his watch (I’ve shaded his tenure):
Note especially the purple line, investor housing. It was, of course, Costello that halved the capital gains tax on property in the late nineties. And, in tandem with Labor state governments, introduced various first home buyer grants in 2000-01 to keep the boom running.
It is great surprise then to find that on savings the Costello period was also dire, note 1996 to 2007:
Nor that the current account got worse:
I’m not making a political point. I’m sure Labor governments would have done the same. Rather I’m pointing out that Costello is also incredibly fortunate to have had his reputation saved by the mining boom. Without it, yes, his credit bubble would have near killed the country in 2008. But he isn’t finished:
Prior to the turn of the 21st century, the US experienced the dotcom boom. Microchips and the internet were all the rage. Entrepreneurs were becoming billionaires overnight. Our terms of trade were flat. Our currency was in the doldrums. Many predicted that relying on traditional industries such as agriculture and mining would leave us behind in the new economy. Jumping on a bandwagon, the Labor Party said that Australia should forget about the old economy and become the Knowledge Nation. Every futurologist and business writer was advising the government to invest in microchips.
I am glad I did not listen to them. As we know, the dotcom bubble burst. A lot of those one-time dotcom billionaires are now living in Buddhist retreats in California where they meditate on the illusion of money and the spiritual value of poverty.
The US did little to rein in spending and pay off debt during the dotcom boom, which is why it went into the downturn so exposed. But one thing it did not do was introduce new taxes on e-commerce and the internet. The Congress looked at it. So did the White House. But in the end President Bill Clinton declared there would be no tax on the internet. Being Clinton, he dressed it up in grandiose terms about how this would be a gift to the world and especially the poor in developing countries. In fact the US knew it had a decisive national advantage in the field and was not going to handicap itself in an area of strength.
Here is a chart of the US budget deficit:
Please note that during the dotcom bubble is the ONLY time that the US has run budget surpluses in decades. It was the one achievement of Robert Rubin that is still given some regard. It was not the dotcom period that hobbled the US budget so that it went into the GFC “so exposed”. It was George W. Bush and his foreign wars that did that. Wars that Costello enthusiastically endorsed. Which is, presumably why he’s making up an alternative history. There’s more:
Of course our government takes a different view. Australia has a decisive advantage in mining. It is carrying the Australian economy, but the old taxes such as company tax and royalties are not enough. The government thinks we need new taxes as well. I could almost understand this if the plan were to lock away money in our sovereign wealth fund for a time when trading conditions return to normal. But the plan is to spend all of the money raised by the new taxes and to spend a good part of it on industries in which we have no comparative advantage — such as “green energy”. When a government diverts resources from efficient industries to inefficient ones it has one effect — it lowers productivity. And over the longer term that makes a country poorer.
Some of the dimmer lights in the government have suggested that putting the handbrake on mining will help other industries — such as manufacturing — by lowering the value of the dollar. I suppose if Australia really crunched its principal export industry and ballooned out its trade deficit and rocked confidence in the business climate, the exchange rate would fall. We could deliberately impoverish ourselves as a devious strategy to help ourselves.
But after you’ve done all that damage, how do you know there will be a manufacturing revival and how do you know it will be strong enough to compensate for the income lost? Most other countries would behave logically. If there is a proven world-class industry that is investing and earning income for the country then, for heaven’s sake, respect it. A bird in the hand is worth two in the bush. An industry in profit is worth 200 in the fevered imagination of those with an axe to grind against Australia’s premier export earners.
Well, bloody hell, I actually agree with Costello in part. An SWF is great idea. But there is the small matter of Costello’s endless tax cuts, as opposed to saving the boom proceeds and his structural deficit (which Labor has happily continued). And, I’ll add, that one of the reasons you’d bother with an SWF is to help manage the currency so Costello is kind of contradicting himself, something a of speciality in this piece of “opinion”.
*This article first appeared on Macro Business Superblog