The grey-beards of Australian economics today unite to deliver one enormous wake-up call to the nation, its government, its interests, its media and its people.
Don’t get me wrong, the bucket of cold water is not deserved in equal measures. For mine, the Australian people have been awake to the dangers facing the country since the GFC, hence the community embrace of saving. But the nation’s media and government have existed in a bubble of hubris, forging ahead with yesterday’s policies and arguments as if Australia is immune to global and historic forces.
I am talking about the end of the mining boom, which is nothing more than the march of the GFC to those that have escaped until now, and the persistence of policy settings that assume that the private sector is immune to deleveraging, as well as the failure to plan beyond the next hole in the ground.
Ross Garnaut and Bob Gregory deliver the bad news today via a string of speeches and articles in the AFR. For those that don’t know, Garnaut is the architect of the open economy policy settings that have delivered 30 years of prosperity and Gregory is the local pioneer of arguments about the effects of Dutch disease. Both are eminent economists.
So what do they have to say? Nothing good.
Garnaut warns of falling living standards:
“I think we’re going to have a very difficult time adapting to the decline in living standards that’s going to be a necessary part of the adjustment to the end of phase one and two of the boom,” he told a conference on the rise of Asia. Professor Garnaut’s warning that the looming economic adjustment would be more painful because governments had not saved enough of the resources boom in budget surpluses came as international ratings agency Standard & Poor’s reaffirmed Australia’s AAA sovereign rating assuming budget cuts continue.
…Professor Garnaut said Australians would not be so anxious about potential risks if governments had saved more of the resources boom since 2003.
…“The time for careful management of a difficult adjustment is the time that lies ahead,” he said.
Meanwhile, Bob Gregory with Peter Sheehan write an opinion piece that endorses the Garnaut position but goes further with proposed solutions:
As the resources boom unwinds over the next few years, Australia will experience a large deflationary impact, primarily driven by the fall in the terms of trade and in resource investment. The production and export of resource commodities will rise as projects are completed, but this will generate few jobs and limited domestic income to offset the terms of trade decline and the falls in mining investment.
Many have argued productivity growth or labour market reform are central issues to be addressed as the resources boom passes. Productivity growth in the long run is particularly important but the key challenge over the next few years lies in addressing the change in the impact of the resources boom from expansionary to deflationary.
Until recently, theory and practice around the world has given primacy to monetary policy in responding to macroeconomic shocks. But, with many economies in the zero interest rate trap, the limits of monetary policy are being realised. Monetary policy cannot be expected to play the central role in addressing the long-term demand shocks Australia faces. The current de facto policy settings – that monetary policy will support the economy in the short-run while fiscal policy is restrictive – contain risks for the longer term.
They go on to argue that the Federal government will need to spend big on infrastructure to support growth and propose a new fund to finance the spending, in part through guaranteeing state debt.
I agree with every word. But there is little hope that those in power do. Treasury Secretary Martin Parkinson responded:
“Because boom implies there’s a bust,” he said. “Where we will end up at the end of this is with mining being a much larger share of a reshaped economy.”
Ironically, this is the very thinking that all but guarantees a bust.
