How Australia learnt the wrong lessons from the GFC

It came as a nasty surprise to almost everyone 15 years ago this Friday, when Lehman Brothers failed and the world found itself on the cusp of a greater financial collapse. In response, a few politicians blamed capitalism and used the crisis as cover to extend their powers.

The then-prime minister Kevin Rudd declared that “the great neoliberal experiment of the past 30 years has failed”, because it had “not served Australia well in preparing for the current crisis”. The irony was that Australia was better prepared to weather the global storm because of its long record of liberalisation and regulatory oversight under both Labor and Coalition governments.

Rudd later maintained that Labor’s big spending after September 2008 stimulated consumer spending and thus saved Australia from the global contagion. The China-based resources boom from 2003 onwards also helped us avoid a recession. But the primary reason for Australia’s resilience had more to do with its starting point. We went into the global crisis in an incredibly strong position. The story is worth retelling, for it helps in understanding where we are today.

In the 1970s, the Australian economy, prone to commodities-fuelled booms and busts, experienced stagflation. By 1980, we risked becoming what Singapore’s Lee Kuan Yew called the “poor white trash of Asia”. But Australia’s leaders — first Bob Hawke, Paul Keating, then John Howard and Peter Costello — helped create a new culture of competition that drove the nation to new heights.

With five great reforms from 1983 to 2007 — financial market deregulation, tax reform, tariff reductions, free labour markets, privatisation of state-owned enterprises — Australia was transformed from an inflexible, protected and overregulated economy into what The Economist dubbed “the miracle economy”.

Taken together with prudent regulatory oversight of our financial institutions, the results of the economic-reform agenda spoke for themselves. By 2008, unlike the UK and the US, Australia had no public debt. Our banks were well regulated, well capitalised and profitable; no bank had suffered a run or subprime mortgage default and all major commercial banks were highly profitable and in the top credit bracket of the world’s financial institutions.

Meanwhile, Australia enjoyed a long bull run with low inflation, low unemployment, and no great widening in inequality. In real terms, national income per capita from the early 1990s to the late 2000s, increased by two-thirds.

All of this gave Australia considerable padding and insulation from the global market meltdown. It was a position of unique strength bequeathed to the incoming Labor government.

None of this stopped Rudd from deriding neoliberalism. Having aped Howard and Costello as a devotee of fiscal prudence in the 2007 federal election campaign, the new prime minister charged that the ideas of Friedrich Hayek and Milton Friedman — which so profoundly shaped Thatcher, Reagan and Australia’s own economic-reform agenda — were the source of the global financial crisis.

Never mind that local short-term economic turbulence came courtesy of inappropriate government interventions overseas, as well as poor regulatory oversight of the US financial sector and the bursting of the asset-price bubbles.

But Rudd’s treatise on “neoliberalism” entered the political bloodstream. Ever since, both sides of politics have shied away from selling the kind of productivity reforms that made Australia more competitive and prosperous.

In the past 15 years, Labor and Coalition governments settled into what this newspaper has called “the complacency of prosperity”. Canberra rested on the windfall of the China-fuelled resources development boom while failing to curtail runaway spending projects (such as NDIS, Gonski schools, public hospitals, childcare and aged care).

At the same time, social media has accelerated the populist post-GFC wave led by Donald Trump, which has led to less rationalist policy and a more fractured and debased political culture.

The result has been productivity slowdown, wage stagnation and a trillion-dollar national government debt.  Add to this the energy and digital transition, the resurgence of global protection, the declining public trust in institutions, the new workplace regulation, the ageing of society, the falling nominal GDP, and the fears of a deteriorating security outlook, and it’s clear we have entered a new and dangerous environment.

This means that there will come a day when our political leaders and policymakers need to exercise spending restraint to pay down the pandemic debt and embrace productivity reforms to grow the economy. With the next financial panic, we can’t just rely on China or the magic money tree to save us.

Reform is a tough sell. But just think how the overregulated, highly unionised and inflation-prone Australia of the 1970s would have coped during the GFC if the nation had not embraced the “great neoliberal experiment”.

All pro-growth policies are controversial, at least in terms of attracting short-term criticism. That was as true in the 1980s, ’90s and much of the 2000s as it has been since the financial crisis. But Hawke and Howard each won four elections because although their reform agendas were disliked, the results they produced were not.

The lesson: good policy to drive productivity and growth still matters. And sold properly, it will improve living standards and shield us against the next global financial crisis.

Tom Switzer is executive director at the Centre for Independent Studies.

Photo by Andre Furtado