Dead hand of the state will be our JobKiller if it persists beyond the pandemic

Tom Switzer

25 July 2020 | Sydney Morning Herald

In this week’s fiscal update, Treasurer Josh Frydenberg delivered the bad news – the highest unemployment since the early 1990s, the largest budget deficit since World War II and the sharpest economic downturn since the Great Depression. No wonder most people think these are the most terrifying economic conditions for generations.

How, then, should our leaders approach the post-coronavirus economy? What sort of attitudes should economic policymakers cultivate? And, just as important, what should they be careful to reject and avoid? Here are five suggestions.

First, don’t use this crisis as a license to increase the size of government permanently. Or, to paraphrase the late and great American columnist Charles Krauthammer, we agree to suspend the invisible hand of Adam Smith during a pandemic – but not in order to be crushed by the heavy hand of government in the recovery.

Indeed, the large and massive expansion of the state in response to the COVID-19 shock represents a temporary state of affairs. Once the pandemic passes, it will be the right thing for responsible leaders to do everything to ensure a true return to normal, and to manage expectations as sensibly as possible.

Otherwise, as my Centre for Independent Studies colleague Robert Carling warns: “JobKeeper becomes JobKiller because it stifles incentives and keeps resources bottled up in unproductive activities or in businesses that have no future.”

That is why the government has tapered and targeted the revamped income-support measures as recovery develops.

Second, liberate what John Maynard Keynes called the economy’s “animal spirits” – that is, the passions and competitive instincts that are essential to economic growth. Why not slash costly regulations that impede job creation? Modernise our enterprise bargaining workplace system to drive wages through productivity gains? Use the tax system to encourage entrepreneurship among younger Australians?

Third, resist the temptation to increase business or income taxation. The former will drive successful people abroad and restrict business incentive to invest in innovation; the latter will stifle talent and enterprise and deter people who exist on welfare from seeking to re-enter the workplace.

As unfashionable as it is to say, nations can’t tax themselves back to full employment. Jobs and growth are not created by state paternalistic power, but by private enterprises free to invest and innovate by being taxed and regulated less.

Fourth, recognise the limits to borrowing. Conventional wisdom holds that the huge debt is manageable because, in a world of very low interest rates and low inflation, governments can just rely on cheap money.

However, a higher debt burden increases our vulnerability to future economic shocks and reduces the government’s flexibility in responding to them. The stimulus spending that leads to rising debt might help us weather the present shock, but it’s not a sound basis for long-lasting recovery, never mind the wasteful spending that distorts incentives and diverts resources from more productive uses.

Supporters of increased government debt say as long as the economy grows at a rate in excess of the interest rate, the burden of the debt will fall. Perhaps. However, high growth rates and low interest rates are not guaranteed in coming years. Without a broad reform agenda that sharpens incentives to create wealth, future generations will pay for the high debt load with crippling taxation and a much-devalued currency.

Fifth, defend the market economy. No matter how much nonsense is spouted about capitalism, remember this recession is the result of government policies to stem the spread the virus. It has nothing to do with the “neo-liberal” reforms of the Hawke-Keating-Howard eras that helped spur almost 30 years of unbroken growth with low inflation, low unemployment and, according to the Productivity Commission, no great widening in inequality.

Nor is it the result of a shrinking state: for more than a decade, government spending on health and education as a percentage of GDP has increased.

History shows that markets are responsible for lifting so many people out of poverty and improving living standards. By linking effort with reward, the market economy creates wealth. Without wealth creation, there is no scope for the taxation that enables the functions society demands: education, health, welfare, defence, a public broadcaster and so on.

I readily acknowledge that in the current climate these suggestions won’t suddenly convert readers to the cause of fiscal discipline and economic reform. “Just as there are no atheists on a sinking ship, there are no free marketeers during a pandemic,” says the esteemed British writer-broadcaster Jonathan Freedland. Fair point.

However, there will come a day when governments need to exercise fiscal constraint and put in place productivity-enhancing policies to grow the economy. If they don’t, then the coming years could be grim beyond belief, with terrible consequences for each and every one of us.

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