Home » Commentary » Media Release » MEDIA RELEASE: Prof. Wolfgang Kasper – We can halt economic downslide if we take the right steps
Australia must take decisive steps to halt economic downslide, UNSW Emeritus Professor of Economics Wolfgang Kasper believes.
Speaking last night at the Centre for Independent Studies launch of his paper The Case For a New Australian Settlement – Ruminations of an Inveterate Economist, Prof Kasper said the downslide is likely to continue for the next 10 years, but is avoidable.
Prof Kasper urged the halt of xenophobic discrimination against wealthy foreigners who want to buy properties and settle here. “Why do we discriminate against them? Why this emotionalism and xenophobia … it doesn’t fit us well,” he said.
He said we must remove the obstacles for innovators, including red tape and OHS and environmental regulations that hinder enterprise.
There should be a rethinking of federalism, with state and local governments responsible for raising their own funds from the taxpayers. “Imagine that local governments got a share of mining revenue in their district, can you imagine what would happen if a local government would write to the electorate and say ‘should we allow fracking in our district and you get a 90% rate cut, or should we ban fracking forever and your rates will increase this year by 7% and it is likely that in the future they will double in 10 years’ time’. I bet you Lismore will get cracking on fracking,” he said.
He also outlined that we must be selective about immigration, and expect all immigrants to commit to the Australia’s foundation in the values of western civilisation. “I think we should acknowledge that we are becoming a multiracial country. But we should admit that this doesn’t mean that we become a multicultural country. That leads to fractiousness and disruption,” he said.
“And that means that whilst we need substantial immigration to increase the labour force and all these things, we should be selective about all we admit here. We should welcome those who fit in, and we can judge that maybe by assessments of workforce participation, intermarriage rates, and incarceration rates.”
Ultimately, he said, economic growth depends on economic freedom and stimulation of the supply side. “Demand manipulation won’t do it. Easy money, a bit of public spending, a mini tax cut here or there is not sufficient to power up the supply side,” he said.
“In the late Howard era, progress on economic freedom started and we know that the Rudd-Gillard backsliding on labour markets, government deficits, did great damage. And I only wish that the Abbott-Hockey administration were not so clueless about economic freedom. It matters.”
He proposed a government department of economic affairs, similar to Spain’s Ministry of the Economy and Competitiveness.
“We are now facing, whether we like it or not, a new era of free trade with all these free trade and investment agreements,” he said.
“If we don’t have something like that — and I would propose a department of economic affairs that draws in the Productivity Commission, trade, industry, industrial relations, that argues for making the supply site flexible and fosters economic freedom — if we don’t do that, the juggernaut of free trade from the US, Japan, Korea, China etc, globalisation generally, will destroy jobs in this country.
“We will be sitting there like rabbits in the glare of headlights.”
Transcript of Professor Wolfgang Kasper’s speech*
The title of this evening’s event is “Australia’s Future in the Balance”. Actually, I don’t think so…!
I say this at the risk of being labelled a clown by our bonhomie-radiating Treasurer. But if we consider economic growth, we have been drifting downwards. From my understanding of long-term economic development, that is also to be the most likely outcome in the next 10 years or so.
But the main message I want to leave behind tonight is it is not unavoidable. We can do something about it now.
When, some 50 years ago, , I served my apprenticeship as an analyst in applied political economy working for the German Council of Economic Advisers and OECD, I learned that growth measures the increase in the supply of goods and services per capita over the medium- to long-term. It’s not a year-to-year or quarter-to-quarter phenomenon. You adjust national production for inflation and take out the cyclical, seasonal and weather variations (graph).
Economic growth is never steady. Over the short- to medium-term, it always fluctuates. Over the long-term, decades are above the secular trend alternate with those below.
If we think about the case of Australia over the past 40 years, we see that – in the Whitlam Fraser years – we were well below the trend. I was new in the country at the time and found that the policies here confused and amounting to monetary masochism. Because of protection and structural rigidity, macroeconomic policy was toothless. The upswings in the business cycle (that short three-to-five year cycle of aggregate demand) were weak, unemployment ratcheted up, inflation was entrenched, there was much discussion about income redistribution. It was not a happy time — at least not from where I was in Canberra.
We had another big event in the early 80s: the second oil crisis and a wage explosion which led to a recession. We then had the famous Keating “cleansing or sobering-up crisis”–– that “we had to have”. And more recently a big event was of course Wayne Swan’s spendathon: a world-record swing from surplus into deficits; and the effects on economic growth were minimal. Big cost, small benefit!
If we stand back a little further, we see that there were two periods of deceleration into below-trend territory and a period of acceleration into above-trend growth (1983-2003).
This pattern of an alteration between generation spans of negative and then positive surprises for most people is well known in economics. It reflects what economic historians have long documented and what is known in the literature by the name of the ‘Kondratieff Cycle’ — named for a Russian Marxist statistician, who did a lot of work 100 years ago to study the capitalist system. He established that Marx’s ‘crisis of capitalism’ was not terminal, but sooner or later was followed by generation-long accelerations of economic growth. … Kondratieff understood even more about waves than Kelly Slater.
These long waves of economic growth are a socio-psychological phenomenon. It seems that the public mood — the zeitgeist, as the Germans would say — swings between generations of innovation, youth, reform and a generation that takes economic growth for granted. Things then slow down, untenable social economic positions are defended by political lobbying, worries about income distribution are ubiquitous. The vigour of the market is replaced by the rigour of collective action.
Though not by nature a Jeremiah, I think that we are now in a Kondratieff down-wave. Therefore, we have to think very hard about what if we will get something like a repetition of the Fraser-Whitlam experience (see above). That would mean that the next up-wave will be delayed until 2025 or so. On the other hand, as I show in The Case for a New Australian Settlement, we could become a front runner that catches the next up-wave early, if we play our cards right.
What can be done? To answer this question, you need a theory. My study of long-term economic history and my understanding of international comparisons — why certain countries have economic growth and others don’t — suggests to me a theory of economic growth, which runs roughly like this: The economic literature states that the supply of goods and services and its growth begins with the mobilisation of production factors. Economic growth happens when more labour and skills are being utilised, when more capital and technology is employed, when more natural resources are tapped.
But these are only proximate explanations of growth. The immediate question then is: why do some countries in some periods, for example, employ and develop more skills, and others don’t? Why., for example, do some countries develop natural resources and others die of the fear of fracking? And the answer to that proximate explication is of course that there is either the right entrepreneurship or it is lacking. Entrepreneurship is a general quality in people, not only in businesspeople … it’s in private people as well. Of course, there are producers, who think about new knowledge, new products and new production processes, although they know that it is risky to develop and test new knowledge. It is always risky: Will a new idea be technically feasible? Will the market make it commercially feasible, i.e. profitable? Entrepreneurship is also present for example when young people invest in themselves: do they acquire the right job-ready skills, or prepare themselves to become couch potatoes?
Now all this is very risky. People have to incur high costs without knowing whether they will reap the hoped-for benefits. To confine the risk, we must surround the entrepreneurial culture by what the literature calls ‘institutions’ — trustworthy, enforced ‘traffic rules’. In the first instances, these are the mores: reliability, honesty, the work habits of people, the customs– what, in a recent Bonython Lecture, Deirdre McCloskey called ‘the bourgeois virtues’. And of course, there must also be the right government-made rules: legislation, administrative regulations, how the courts decide conflicts and interpret matters. What matters for the economy and economic growth are of course secure private property rights and the freedom, or otherwise, of their use. Some call this economic freedom, others say that growth requires the right economic order. That is a concept, which is not much used in Australian parliaments.
But then you have to go on and ask: why does economic freedom flourish in some places and at some stage, but not elsewhere? The decisive factors are not the institutions alone. What really ultimately matters are the shared fundamental values. They decide whether economic reforms are feasible or stymied. This of course goes beyond mere economics. Some societies are lucky, because the people and their leaders share understandings that underpin valuable social capital. Good institutions are social capital. They are productive. The right values and institutions are absolutely key to the prosperity of a dynamic modern knowledge society. They are centrally important in service sector production, that sort of activity that now dominates the economy.
Fundamental conflicts about underlying values confuse societies, which then tend to fail economically. Societies that become unsure and antagonistic, easily start failing and produce less economic growth. Samuel Huntington, in his famous book about The Clash of Civilisations, talked about the importance of an agreed centre of social institutional gravity.
In the publication which is being released today by the CIS, I go through the various production factors and ask what are the likely trends, and what can politics — collective action — do to improve the supply of these production factors. I won’t dwell on these details here. Instead, I want to focus on the fundamental values … the framework within which we produce and risk new ideas. The question I want to ask is: could we possibly agree on a new set of fundamental understandings appropriate to a future Australia that would thrive in the global knowledge economy?
Some such basic understanding would be very useful in my opinion. Fundamental agreements of what sort of a country do we really want to leave behind to our children? What sort of a community do we want to be?
After Federation, we got what Paul Kelly called the ‘Australian Settlement’: certain shared, abstract understandings. For better or for worse, they served to create a certain policy cohesion, which helped Australia’s economic development and underpinned a degree of social harmony. Of course, we also know that, post-1960s, these basic tenets became untenable one after the other, and we got The End of Certainty, as Paul described it in his celebrated book.
In the 80s and 90s, we had partial economic reforms, which helped our entrepreneurs to exploit the China boom. The China demand covered up the deficiency in our underlying shared social capital. It also covered up the fissiparous effects of the IT revolution — the fragmentation, the anti-authoritarian consequences that augmented the lack of basic understandings. In what I would call the “anti-social media”, something new emerged, as fewer and fewer people read the same media, the same books and discuss the same issues.
Of course, diversity in social and political opinion and outlook can be enriching. But if we go beyond a certain level of cohesion about the principles and basic values, diversity becomes fractiousness and increases the entrepreneurial risks of producing in this country — of investing here. And that means slow economic growth. So, again my question is: can we subscribe to some fundamental principles, which constitute an intellectual and an emotional commitment, which can provide the final stopping point in policy debates?
I want to put to you a list of five elements.
The first: Australia should be, as it has been, committed to individual freedom –– self responsibility, tempered by respect for others. Most of us, the citizens, should spontaneously reject proposals that violate our freedom. If it has been established in a debate about the certain policy proposal that it violates individual freedom, it should be laughed out of court. It should be dismissed. That’s what I mean by ‘final stopping point’.
A second basic principle that would serve us well is recognition that we are open to the world. Much progress has been made on this front, compared to the old protectionist era 40 or more years ago. But odd remnants are popping up every now and then. To just give you an example: Australia has much land; we’re pretty good at building apartments and houses with gardens. Why do we frustrate this sort of “export”, which doesn’t even leave the country, by being xenophobic to well-to-do Chinese and Brits, who want to come here and see out part of their retirement years, enjoying the sunshine. It would be good for all sorts of high-value services, medical care, tourism et cetera. Why do we discriminate against them? Victoria has even a discriminatory tax against the Chinese. Why this emotionalism and xenophobia … it doesn’t fit us well.
Third, we should also be open to the future. We should laugh out of court the defensive lobbying by established groups, who were high in the pecking order and are now losing their socio-economic position because they have embraced wrong models of industry, production and so on. Let’s reject that sort of rent seeking when politicians engage in it and when lobbyists ask for it. Let’s embrace structural change. Everything that grows, changes the structure – a tree that grows, a child that grows into manhood or womanhood changes in structure. And let’s remove the obstacles for innovators.
I know many people who want to test new productive ideas. But I can tell you that the people I talk to are not motivated by a 0.25& interest rate reduction to be enterprising or not. That doesn’t trigger enterprise, although our Treasurer tried to make us believe that the other day. They are hindered by Occupational Health & Safety, by environmental regulations, et cetera, et cetera.
I know a case of a South Coast prawn farmer who had a very good project, the science all sorted out. He had already obtained a dozen permits and licenses, from local governments, state governments, federal authorities, which had cost him much money, nerves, and time. But then there was more coming, and vexatious labour market regulations on top of it all. So, he just gave up.
How many permits did Gina Reinhardt need for her new mine? It’s preposterous! Confused, excessive regulation is the main problem with innovation and being open to the future.
All governments of course talk about war on paperwork — they always promise us that. But then they allow the lobbies and the bureaucrats to inflate the regulatory burden. But everyone should know: red tape kills! –– kills private enterprise. Let’s streamline. Let’s remove the contradictions, make it simple, let’s go to one-stop shops. Unfortunately, some Australian States have introduced one-stop shops, but it turns out that they are ‘one more stop shops’.
The next one on my list for a fundamental rethinking is government. I want us a national discussion whether we shouldn’t have a small, modest, competing and secular government.
When I say small, I think we should cut back public spending to 25%, maybe 30%, of total demand. That’s what it was in the Menzies era, that’s what it is in East Asia. Why not?
I want us to be modest about it. We used to have Modest Members, but that was a while ago. Politicians should stop over-promising, especially on welfare. Governments cannot deliver, we know that. And NGO, lobbyists, the media, voters should know that big government is bad government. This is why governments fail, and why we the big disappointments are producing a perilous disillusionment with democracy.
I want governments in Australia to be competitive. We have to rethink federalism. The Australian model of federalism, which is very centralised, is the last remnant, the last monument to the ‘Great Australian Handout Tradition’. Its redistributionist and leads to irresponsibility. Canberra taxes, the States and local governments avoid the problem of taxation and get most funding from Canberra Centre by posturing, by lying at Premiers’ conferences, and then hindering economic growth. It’s just undignified how these Premiers’ conferences are conducted.
We need a devolution of powers to where a government functions can be done best. The technical word is ‘subsidiarity’, which is the essence of what is called competitive federalism, to end the cartel we now have of high taxing, big spending governments. The technical term again to throw in here is ‘fiscal equivalence’: each government is allotted or assigned certain tasks and raises the taxes to fulfil these tasks as it sees fit. In doing so, governments act in competition with each other. Some States or councils may promise less and tax less, others may try to provide gold-plated streetlights and taxe the local citizens a bit more….
The newly minted Member of Parliament for Eden-Monaro, Peter Hendy, has some very good ideas about this reform as a basis for reshaping the federation. I wholeheartedly agree.
Once State and local governments are responsible for raising their own funds from the taxpayers, they will become interested in growing their own tax base, in cultivating local economic growth. Just to give you an example of how things could happen: imagine that local governments got a share of the mining revenue in their district, can you imagine what would happen if a local government would write to the electorate and say: “Should we allow fracking in our district and you get a 20% rate cut, or should we ban fracking forever and your rates will increase this year by 7%; and it is likely that in the future they will double in 10 years’ time?’. I bet you that Lismore will get cracking on fracking!!
If the States are responsible for raising their own resources, I bet you they will find big savings that now – we are told – are impossible to find. But we know that the welfare state is broke. We know that centrally-planned government monopolies to deliver education, health care, public housing, and so on — administered by cumbersome, risk-averse administrations and dominated frequently by entrenched public sector unions — has become unaffordable.
Ineffectual service provision is another factor, I think an important one, in the disaffection with democracy in this and in European countries. I recommend to you a look at the Swedish experience of reforms about 10 years ago with charter schools that had to start competing for school vouchers. The quality of teaching went up enormously; good teachers really started to like it. And with hospital care, I find inspiring material in the trust hospitals in Spain and in the UK: great savings, great quality improvements, the mobilisation of creativity, diversity — different communities need different types of service — and the mobilisation of local voluntary resources. People like to volunteer, they like to be engaged, and that’s good for democracy!
Finally, I want the government to be secular. The atrocious European wars of religion have taught us that the separation of church and state is essential, absolutely essential, for social peace. And we must expect all immigrants to commit to this, otherwise they don’t fit in here.
The last point in a New Australian Settlement: we have been and should be absolutely clear that we want to continue to be part of Western civilisation. Australia is exposed, we are an outrigger in the Asia-Pacific region, a frontline state of the West. Long-term investors need strategic clarity on that. We should acknowledge that we are becoming a multiracial country, that’s fine. That’s probably a great potential growth asset. But we must understand that this doesn’t mean that we become a multicultural country. That leads to fractiousness and disruption.
Of course, we need substantial immigration to grow the labour force and much more. But we should be selective about whom we admit here. We should welcome those who fit in and who appreciate our basic values. We can judge which immigrant groups integrate by maybe assessing their workforce participation, intermarriage rates and incarceration rates. Because if we ignore these things, our skills base will suffer — and that’s bad for economic growth. Welfare dependence will explode, and essential social capital will deteriorate further.
This list of five elements together is what I mean by a ‘New Australian Settlement’. Getting them widely accepted will not be easy. Recent trends that we have observed in economic freedom have not been encouraging. They point, to my mind, to a continued Kondratieff downturn: to a slowdown into real economic crisis.
In the world as a whole, we have been stalling on economic freedom. There were massive improvements — Reagan and Thatcher, the fall of the Soviet Empire, China’s capitalist revolution –– they have triggered in the world at large (according to analysis of about 160 countries on average) the ‘Golden Growth Era’ of the 1980s and 90s. Now, it’s stalling.
The US used to be the benchmark, but started to lose ground massively under Bush’s compassionate conservativism and the engagement in costly wars without concern for the budget. Isn’t that reminiscent of Tony Abbott sometimes?
And more recently of course we have had Obama’s big society interventionism.. and now Clinton evokes Roosevelt — Heavens forbid! So, the US does not look to me like becoming a leader again.
In Australia’s history, economic freedom suffered from the Whitlam shock. It grossly diminished economic freedom and stimulated inflation. That had to do much with slowdown of Australian economic growth in the 70s and up to 1983. We then had the partial reforms by Hawke and Keating But they had two holy cows: labour markets and big welfare were untouched. But otherwise they were pretty good reforms. This was followed by partial reforms in the Howard-Costello era. The budget got sorted out, partial labour market reforms were gradually introduced, all of which accelerated the up-wave in economic growth that we all found so inspiring.
More freedom allowed Australian producers to meet the China demand better than some of our international competitors. Our boom became the envy of the Europeans. But the boom was not God-given. We earned it. If you know these export industries, you will appreciate that they competed successfully against other producers of coal and iron ore, because they were relatively free to do that.
In the late Howard era, progress on economic freedom stalled, and we know that the Rudd-Gillard-Rudd backsliding on labour markets, and their government deficits, did great damage. I only wish that the Abbott-Hockey administration were not so clueless about economic freedom. It matters!!
Demand manipulation won’t re-ignite real, long-term growth. Easy money, a bit of public spending, a mini tax cut here or there is not sufficient to power up the supply side.
When I speak like that, I’m of course at variance with the model builders that dominate the Treasury, with Keynesian bureaucrats who seek power to manipulate the levers of the economy. But I find myself in agreement with many business leaders and elders citizens.
One short, final point: growth is a long-term supply side phenomenon. We cannot take the underlying economic order for granted. It needs regular conscious cultivation.
In my career, moving around the world and looking at success stories, I found time and again that economies that had an advocate for economic freedom and the supply side at the cabinet table were successful.
I grew up in post-war Germany where ‘ordo liberalism’ — as they called it — created a very quick recovery and record job creation. It was not an ‘economic miracle’. It was good policy, good philosophy. I discovered the same in the Asian tiger countries.
For the present, I would invite you to look at the most successful growth success story in the Eurozone, which is Spain. The last three years the conservative government has had a Ministry of the Economy and Competitiveness, who is a very forceful voice at the cabinet table for long-term prosperity, freeing up labour markets, capital, natural resource development.
We are now facing, whether we like it or not, a new era of free trade thanks to all these new free trade and investment agreements. If we don’t have a political agency within the government, the juggernaut of free trade from the US, Japan, Korea, China and globalisation generally, will destroy jobs in this country. We will be sitting there like rabbits in the glare of headlights. I would therefore propose a Department of Economic Affairs that argues for making the supply site flexible and fosters economic freedom. It can draw together the Productivity Commission, Trade, Industry, Industrial Relations to foster long-term prosperity.
Free trade and free investment is an opportunity. But we have to prepare for it. Growth and job creation are not automatic –– I see too little realisation of that. If we remain rigid and reactionary-defensive, we’ll prolong the era of disappointment and misery. All this of course is goes beyond mere economics. It’s a moral issue ultimately. We can’t leave it to politicians, because they think too short-term, are too opportunistic. Maybe, they lack the courage and some lack the candle power to understand the underlying issues.
We therefore need a national debate, maybe initiated by groups of experienced leaders who could argue the merits of a ‘New Settlement’. Let’s discuss the pros and cons of what I’m proposing here and foster an understanding in our society of what it takes to make for prosperity and freedom.
* 25 June 2015 at Centre for Independent Studies, transcribed by Karla Pincott, edited by Wolfgang Kasper
MEDIA RELEASE: Prof. Wolfgang Kasper – We can halt economic downslide if we take the right steps