Australia suddenly seems optimistic again. It could be news of not one, but two, COVID vaccines with over 90% effectiveness that could be widely distributed before winter. It could be some economic green shoots, with some forecasters — particularly at the big banks — predicting a far faster recovery than first feared.
It could be just that it’s nearly summertime.
Economic optimism is a good thing in more ways than one: it’s like a self-fulfilling prophecy. Optimism breeds consumer and business confidence, which itself generates the desired investment and economic growth to beat the pandemic recession.
Of course, given what 2020 has dished out thus far, it might be wise to exercise some caution amid the optimism — lest we next suffer a plague of locusts or some other biblical black swan.
Yet, while the short-term issues associated with the recovery are crucially important, they’re not the only serious economic problem we face.
Although it may seem like the sort of dull thing we used to be concerned about back when we didn’t have any real problems (circa 2019), you may recall that wage growth leading into the recession was at near record lows, despite a 28-year run of uninterrupted economic growth.
As the Productivity Commission pointed out in their latest report on productivity, stimulating and maintaining productivity growth are the only things that will boost wages in the long term.
There are two roadblocks to rebooting productivity, one on the left and one on the right. From the right, the concern is the re-emergence of economic nationalism and protectionism. From the left, the issue is the strangling growth of regulation.
It took a long time for Australia to move away from protectionism. There is a serious risk that the border safety concerns of the pandemic will drive Australia, and the rest of the world, back towards the insular, protectionist attitudes that were prominent in the 1950s, 60s and 70s.
As the Productivity Commission explained, the ‘Fortress Australia’ approach of protection all around was deeply flawed: “The walls of Fortress Australia were unable to protect us from the economic turmoil of the 1970s and contributed to Australia sliding down the income ladder.”
Scepticism of a free trade led approach to international relations has been growing for years before the pandemic.
In the United States, both sides of politics have been openly expressing hostility to the merits of free trade deals. President Donald Trump has been a strong proponent of economic nationalism: specifically the idea that American was a loser from trade with the rest of the world.
A big part of Trump’s pitch to “make America great again” was bringing manufacturing jobs back to America.
Of course the unexplained flaw in this argument is that most of the job were actually lost to automation not trade. And the ability to manufacture far more than we used to, at a lower price, thanks to automation and productivity gains, is one of the most tangible examples of why we should embrace a pro-market agenda.
A pro-market agenda is not a pro-business agenda: it’s a pro-consumer agenda. After all, despite what the politicians say, the gains from trade do not primarily arise from chiselling out access to distant markets for producers.
The biggest benefit comes from the competition that foreign producers bring to domestic markets.
Competition drives innovation and cuts margins: that means more products and lower prices for consumers.
Competition forces firms to become more efficient to thrive. Firms protected from that competition grow fat and lazy, taking their customers for granted because they have nowhere else to go.
Regulation is a different type of limitation on competition, one that is equally damaging and even more insidious.
Whatever lofty language is used to justify them, regulations are primarily about government control over businesses and markets.
Sometimes that control is exercised effectively, for a good purpose; such as regulations around manufacturing standards for medicines and medical devices.
But more often, regulation — regardless of how well intentioned government is — creates as many problems as it solves. Regulations may create barriers to entry and flow through into unaffordable price rises.
The best example here is childcare, where the National Quality Framework has driven rapid growth in prices and out of pocket costs, despite increasing government subsidies.
Over-zealous regulators can also create perverse outcomes, like ASIC’s enforcement of responsible lending laws.
And sometimes, regulation exists solely for the purpose of protecting vested interests to the detriment of consumers, such as restrictions on the placement and ownership of pharmacies.
The number and scope of regulations imposed by government has exploded in the last decade or so. It would be convenient to point to the global financial crisis and its supposed failure of capitalism as the genesis of this trend, but in reality a desire to tamper with market forces to control economic outcomes far predates this downturn.
The left of politics in particular has embraced the regulatory state, both because of a discomfort with markets and because the declining power of unions has weakened their ability to push their social and political agenda on business and society through industrial muscle.
The distrust of market forces and the supposed unfairness of the outcomes from free markets are common to both right-wing protectionists and left-wing regulationists. The COVID pandemic has enabled and encouraged the expansion of these attitudes.
Yet, as the Productivity Commission and the Governor of the Reserve Bank have both made clear in recent days, freeing up market forces is the key not only to emerging from the COIVD recession but to sustained income growth thereafter.
If the green shoots of recovery are indeed more robust than they seemed a few months ago it will be because of Australia’s efforts at deregulation and opening of markets in the 1990s and 2000s made our economy one of the most resilient in the world, in spite of the hostility to those ideas that has been growing since then.
It will not be easy to reignite this agenda. A lot of the low hanging fruit has been picked, and what’s left will require taking on entrenched vested interest (particularly in the public sector, where the productivity gains promise to be the greatest).
But if we want broad-based wage growth, then it’s time to go to work.