CHAPTER 2
The art of politics is to convey ideas to others, if possible, to persuade a majority to agree, to create or encourage a public opinion so soundly based that it endures and is not blown aside by chance winds: to persuade people to take long-range views.
R.G. Menzies in "The Measure of the Years"
THE SPIRIT OF THE 50s AND 60s
The liberal democracies were on the winning side, but for liberal democracy itself the Second World War, with much expansion of central planning, meant a setback for liberalism. Not even totalitarianism, let alone illiberal Government, ended with the defeat of Fascism. By 1950, half of the world's population was governed in the name of Communism and, to a greater or lesser degree, socialism and a facilitating doctrine, neo-Keynesianism, determined the style of Government in nearly all of the rest. ("Neo-Keynesianism" because Keynes who died in 1946 would not have approved of much that was later called Keynesian.) Socialism/neo-Keynesianism so dominated academic life that intellectuals who did not accept its tenets found advancement within most Anglo-Saxon universities difficult. Titles on bookshelves even in the 1980s showed that post-war socialist writing was of the order of twenty times more prolific than liberal.
People everywhere had faith in authority that today most believe unwarranted. Except in the United States, the limited Government tradition seemed barely relevant. During the war, soldiers' education units had pushed socialism. It was quipped in the UK that the 1945 election was the British Army Education Unit's only battle honour. Survivors of the war, both soldiers and civilians, had been led to expect rewards -- housing, education and social security -- which it seemed then that only Governments could deliver. Much of the intellectual opposition to communism -- in Australia, from BA Santamaria, Frank Knopfelmacher, Richard Krigier and the Association for Cultural Freedom -- was, at least initially, social democratic in spirit rather than free enterprise.
In Britain and on the European Continent whole industries had been nationalised with the high hope that, by eliminating profit, goods would be less expensive and supply more reliable. The nationalised industries, denied new investment and soon dominated by trade unions, were locked into pre-war production methods and wracked by repeated industrial disputes. They were soon failing to supply the economical coal, steel, transport etc that were their raisons d'être, indeed for extended periods were failing to supply the goods and services at all. Looking back, it is evident that as early as the 1950s the social democrat experiment was not working but it still had far to run. Even in the US, the reach of the state was extending and the discretion left to individuals regulated away.
It seemed not permissible to ask who was to guard the guardians. If Big Brother was not to be trusted what was the feasible alternative? It was widely assumed that once a Government had "given" the public a "benefit" that it could not take it away. Many measures that might have been taken to achieve efficiency or justice were thought "politically impossible".
The 1960s and 1970s were an era of personality cults. Sir Charles Court, Gough Whitlam, Don Dunstan and Sir Joh Bjelke-Petersen enjoyed worshipful followings. They had the reputations of "leaders" but seldom advocated anything unpopular -- they followed rather than changed public opinion. It seemed much the same the Western world over, even though respect for authority among large minorities almost vanished.
The zeitgeist of the 1950s and early 1960s was collectivist and more, it was authoritarian. Rather than pay what was necessary to recruit an army to fight in Vietnam, the Governments of the US and Australia conscripted young men to its service. The exercise of authority, however, as often as not reflected moral weakness. It was tyranny of the majority or of a dominant but fearful minority as in South Africa. It could not and should not have lasted. The American civil rights movement was to influence Australian Dries, as to a lesser extent did the South African anti-apartheid campaign. Although they were, with no exception that I am aware of, sympathetic to the American civil rights cause, some and perhaps most of the people who were later to be identified as Dries had been equivocal about South Africa. This was not because they approved of racial discrimination but because, at the height of the Cold War, they feared that majority rule would result in a Communist State and because elsewhere in sub-Saharan Africa majority rule had too often been followed by wholesale murder. They were fortunate that the dilemma posed by South Africa was not closer to home.
Throughout the Western world Government had expanded primarily through the public provision of health and welfare services and the regulation and ownership of commercial activity. In Australia's case this was on top of an unusual amount of state-owned enterprise dating from the colonies' origins as British prisons and socialist enthusiasms of the first half of the Century. Australia had an unusually highly-protected manufacturing industry. The 1929 Brigden Report had concluded, probably wrongly, that the tariff had allowed Australia to maintain a larger population than would otherwise have been the case. That belief persisted until the 1980s. The Report's warnings about the excessive cost of protection upon export industries, however, were almost immediately put aside during the Great Depression and did not much influence public policy, also until the 1980s.
Australia's collectivism was essentially democratic-socialist -- that is a high level of control of economic activity exercised by democratically-elected Governments. However, since shortly after Federation, there was within it a significant corporatist element. By this the elected Governments shared their authority and responsibility with the elites of the best-organised and strongest sectional interests, the union movement and industry. Corporatism had enjoyed popularity at a theoretical level in the twenties and thirties and had been adopted by the Axis powers. After the War it lived on in practice in many places outside the communist bloc, although seldom in name.
With hindsight the 1960s and 1970s seem surreal but at the time they seemed inevitable and irreversible. What were Court and Bjelke-Petersen doing leading parties that claimed to oppose socialism? Did so many Western leaders really believe that they were capable of regulating complex economic and social life in the detail that they attempted? Did they not seriously contemplate the likelihood of their own corruption? At first the belief that the wartime powers could be refined to develop a democratic-socialist state to avoid the horrors of the great depression had profoundly influenced popular and elite thinking. Even then, however, I do not recall either the union bosses or the industry captains volunteering to allow the state to govern on behalf of the dispossessed -¬on the contrary, the immediate post-war years were characterised by industrial strife and demands for protection. By the late 1970s, when in Australia socialism and communism were substantially discredited and had retreated to the universities, these major vested interests continued to dominate those of the wider public. Public ownership, the regulation of prices, quantities and qualities of many things from labour to butter fat were the status quo. Only a minuscule minority contested the received wisdom in any fundamental way. (17) Certainly people contested collectivism and favouritism where it affected them (wheat marketing in my own case) but those who attempted an assault upon the zeitgeist itself were rare indeed.
For two decades, despite a level of industrial disputation that no longer plagues us, the democratic, mildly-socialist state had seemed to work well. During the 1950s and 1960s that part of the world that was democratic and allowed markets to regulate significant parts of their economies had enjoyed unprecedented annual growth of nearly 4%.
The reasons for this sustained period of exceptional growth are disputed. However it was associated with:
- Unprecedented growth in international trade and capital flows.
- Unprecedented transfers of technical and organisational knowledge, some of it tested in war, from the US to other countries.
- New high levels of social mobility in more egalitarian and more widely educated societies.
- Cheap and reliable raw materials.
- The disruption of established vested interests' political networks by the Second World War preventing them from suborning their Governments especially in the defeated Germany and Japan that reaped greater benefits than other nations in catching up to the United States. (18)
- A sustained period of peace (even if it was only because the world lived in dread of nuclear Armageddon).
- Demand management using Keynesian techniques that eventually foundered on inflation.
- The coming together of developments in several leading technologies.
- A certain toughness of the spirit among those who survived the War.
- A shortening of the gestation period for new technologies.
- Confidence and social optimism -- these were bad years for doomsayers.
All of this was reflected in a more-or-less-on-schedule upswing in the long wave business cycle.
This came to an end in the early 1970s when social changes (new union militancy, attacks on authority and traditional mores) and the first oil crisis compressed profitability and led to cuts in investment and innovation. (19)
Until the lessons of stagnation and inflation (stagflation) were forced upon them, Australians saw Government more as a cure for economic depression than its cause. After ending war-time rationing we did little more to undo past collectivist practices and the seeds of the 1970s stagflation were sown in the 1950s and 1960s. But to dwell on these alone would be to lose historical perspective. Initially, Australia did fairly well avoiding some of what can now be understood to have been economic errors. By comparison with other Governments of the time the Menzies Governments respected the rights of individuals and of sub-national communities from families to States. They did not nationalise major industries, did reduce the public debt left from the war and, after the Korean War wool-boom, controlled inflation. Thus for longer than most countries Australia avoided the economic problems that beset, for instance, Britain.
From 1943 until 1950 when post-war reconstruction was under consideration and the Liberal Party was being built upon the ruins of the UAP, sharper philosophical differences divided the public than at any point since. The Communist Party was then a force to be reckoned with and the Labor Party then believed in nationalisation. From the latter part of the 1950s, however, the Liberal Party-Country Party Coalitions became more interested in office than principles and Labor State Governments quietly dropped nationalisation. In Canberra, the Coalition adopted as much of Labor's socialism as was necessary and gave in to as many vested interests as were necessary to defeat a divided Labor party.
Maybe my glasses are rose-tinted, but on the whole it seems to me that we were, despite differences over the Vietnam War, rather "happy little Vegemites". Throughout the fifties unemployment was kept below 2% rising only by a percentage point in the 1960s, people claiming the various disability benefits were relatively few, families were relatively stable, recorded crime rates were comparatively low, alcohol was the only drug causing serious social problems, and nobody had heard of the "culture of complaint". That is not to contend that there were no unhappy people in a society that, whatever its other conveniences, was by today's measure censorious. Nor is it to argue that injustices were not swept under carpets. We were, for instance, thoughtless of Aborigines' rights and welfare but, if what we are told is reliable, Aborigines' health and life expectancy in the 1950s and 1960s was closer to that of the non-aboriginal population than it is today.
Unlike most other Western nations, however, our economic growth was associated with rapid population growth of over 2% per year, almost half of which was contributed by net migration. Economic growth per head, that is improvement in living standards, did not compare favourably with the countries with which we liked to compare ourselves. From 1954/55 to 1978/79 annual per capita growth was only 1.5%. Consequently, Australians were slipping down the tables of relative living standards. (20) Migration, which subtracted from the physical capital available to an average Australian but added to the proportion of working age population, was not the cause of poor per-capita economic growth. It did, however, tend to mask it.
Wolfgang Kasper, Richard Blandy, John Freebairn, Douglas Hocking and Robert O'Neil, the authors of Australia at the Crossroads, a publication destined to inspire much dry activity, illustrated the decline this way:
Compared with the spectacular rise in living standards in the capital-intensive industrial countries of the Northern Hemisphere, Australia lost ground. In the early 1950s, Australia's per-capita income was higher than that of all European countries, except Switzerland, and Australia was one of the richest countries on earth, in a class with the United States, Canada, Sweden and Switzerland. By the late 1970s, Australian per capita incomes were about 25% below those of Sweden and Switzerland and about 10% below those of the United States or West Germany. Australia now finds herself amongst the middle-developed countries, below Japan but above the poorer European industrial countries like the UK and Italy. (21)
Hindsight inflicts some irony upon the passage. Sweden was to get into quite deep economic trouble; Canada was even then making many of the same errors that Australia was making; and the UK is no longer among the poorer European nations. It was nevertheless an accurate description of the situation at the time and a call to arms for at least four dry politicians.
In the late 1950s the Liberal Party published Broad Highway and this remained in currency for at least a decade but it contained no thinking that was new. If anything, it carried the seeds of the statism that gained prominence in the Liberal Party thinking of the 1960s. It stated, for instance: "As democracy develops it widens the social responsibility of Government" an idea that was to culminate in the Whitlam Governments. Liberalism had flowered briefly within the Liberal Party and it had been reflected in some of Menzies speeches, but for the time being that was over. Today Broad Highway looks distinctly wet!
The Western world over, the 1960's saw a remarkable rise in self-indulgence. The culture changed profoundly away from personal responsibility for both one's own and others' well-being. Prudence became old hat as the "me generation" lived each day as if there were no tomorrow. Moral decadence was to leave a trail of dashed hopes and neglected duties, ruined economies and broken families. Inflation, neglected children and much else have cultural as well as economic explanations.
By the mid-1970s many Australians were conceding that we might have lost the plot.
CAUSES OF RELATIVE ECONOMIC DECLINE
Australia at the Crossroads argued that Australia's relative decline did not have macro-economic or demand-side causes. What is more, we had the advantages of excellent access to capital and an educated workforce. The "deep seated malaise" that the Jackson Committee (22) had in 1975 identified in manufacturing could have referred to the whole supply side of the economic equation. Those industries that were the potential high fliers of a burgeoning economy carried the burden of those that were not. Tariffs and import quotas, monopoly Government-run utilities, and over-regulated services all imposed excessive costs that clipped their wings. In short, Government intervention made the supply side of the economy rigid -- ossified it!
Australia's decline was of course not absolute -- we did not become poorer. Rather, at a time when world living standards were rising as never before, we were not holding our own. The living standards of people in Singapore, Korea and Malaysia were rapidly catching up and per capita GDP in Japan and West Germany had passed ours. "Better to lose wars than to win them" was being said with people's tongues barely in their cheeks.
By the 1970s, reasons for our relative economic decline had been well enough explained to provide a basis for reform. Those who wished to know, knew that most economists attributed our poor economic growth to subsidies, tariffs, statutory monopolies, industrial awards, occupational licences and anti-competitive regulations. Many, however, preferred not to know. Donald Horne's well-named little polemic, The Lucky Country, had colourfully drawn attention to poor per capita growth and to some of its causes, rightly blaming conservative Governments for policy failures. Its prescriptions, however, were much less than helpful.
Government welfare policies may also have had adverse economic effects but, by Western European standards and those that were soon to be adopted by the Whitlam Government, Australian welfare was modest. The malaise was attributed in the main to only two forms of Government intervention that distinguished Australia from most other Western nations. These were our self-imposed barriers to international trade that were conventional in style but exceptionally high, and our industrial relations system that was like no other.
Australia had barely shared in the post-war trade boom, our share of international trade falling from 3 % in 1950 to 1.8% in 1960 to 1.3 % by 1977. (23) Conventional economic theory predicts that declining shares of world trade, other things being more or less equal, will to be followed by the declining relative living standards. We were experiencing these.
Conventional economics further predicts that one-size-fits-all mandated working conditions will be associated with poor productivity growth. We were experiencing that too. As well, minimum wages and mandated work conditions are meaningless unless set at levels that prevent people with low productive capacity from working in the regulated sector. In the 1970s, when the greater numbers of people denied work in the award regulated economy failed to find jobs mowing lawns, baby sitting etc, where the writ of awards does not run, unemployment resulted. Only the wilfully obtuse evinced surprise.
Our prosperity during the 1950s, which in any case was not impressive by international standards of the time, had been built upon weak foundations. Although the macro economy (money supply, fiscal balance, the fixed exchange rate and judicially fixed aggregate/average wages) had on the whole been about as well managed as such as structure could be, the micro economy had not. Uncompetitive manufacturing, sheltering behind high tariff and import quota walls, was claiming resources that could have been better employed; Governments had invested in grandiose uncosted irrigation, power and transport schemes; the service sector from rural marketing to airlines to the professions was regulated into inefficiency. Most seriously, employees and employers were prevented by law from raising productivity in return for higher remuneration.
Shaun Kenaelly describes the time:
The golden age [the 1950s] may also be seen as a period of extended childhood, all lived under the quasi-parental guidance of patriarchal politicians and the economic and social supervision of duly-constituted boards. The boards supervised the flow of everything, from eggs to literature. One board set a tariff on imported cottons, another censored books and films. A third ensured that the incoming flow of migration was kept racially pure, a fourth held comic-judicial hearings and granted general increases in wages. The Victorian Football League divided the state into zones to ensure that promising young footballers might only play for the city-team that owned the particular patch in which they happened to reside. This was what it meant to live in a protected country. After fifty or sixty years of the "New Protection", most Australians were happy that it was so: whilst simultaneously assuring each other that they were the most independent and pioneering people in the world. (24)
THE NEW XENOPHOBIA
"New Protection" dated back to the tariff debates between the Protectionist Party led by Alfred Deakin and Free Trade Party led by George Reid in the first decade of the century. It guaranteed the Australian market to Australian manufacturers on the understanding that they pay fair and reasonable wages to their employees and charge fair and reasonable prices. Deakin devised it to gain the support of the Labour Party, which until then had been divided on the trade issue. In 1909, to prevent the greater evil as he saw it of a Deakinite--Labour coalition, Reid abandoned his insistence upon free trade to form the "Fusion" with the Deakinites. By 1910, free trade was off the political agenda, dead, and it stayed that way until the 1980s.
Protection was further enshrined at the 1932 Ottawa Imperial Conference when, in return for easy entry of Australian goods to British markets, Australia agreed to put tariff making on a more rational basis and to grant British goods preference in Australian markets. At the time, Sir Hal Colebatch said of the Ottawa agreement: "The members of the British Empire agreed to buy from each other on worse terms than would have pertained in a free market".
"Fair and reasonable" were empty terms until quantified. A tariff board advised on tariffs and import quotas; parliaments legislated domestic wheat, milk and sugar prices, put a floor under medical doctors' fees, prevented competition in dozens of industries from banking to barbering; and arbitration tribunals ruled upon artificial disputes following ambit claims concerning wages and working conditions. In practice "fair and reasonable" became what each mendicant claimed that it needed to survive (which it usually equated with prosper). The costs of mendicants' successes became the causes of others' claims. The dog never did catch its tail.
The one virtue of Australian trade barriers was to be an important one. Protection tended to be in the form of relatively visible tariffs and quantitative restrictions that in due course enabling their economic cost to be measured with passable precision. But the anecdotal evidence that the cost was considerable abounded long before it was well measured. In the 1950s Australia had produced an approximately world-class Holden car at not wildly uncompetitive prices. But by the 1960s and 70s, protection had so destroyed the need to innovate that people who could afford to do so were paying the tariff and freight-inflated costs of imported motor vehicles to obtain their safety and reliability. Footwear, clothing and textiles form a larger portion of the poor household's budget than of the well to do. Nevertheless, tariffs and import quotas taxed these at punitive levels that were more regressive than any GST or other point-of-sale tax ever contemplated, let alone enacted.
Monopoly marketing boards, by force of law, "acquired" most rural produce except wool and meat. These monopolies exported at world prices but sold to the domestic market at higher prices than could have been obtained had there been competition. The price minimums sometimes led to the production of more than could be sold. Wheat production quotas had to be introduced in 1969. Grain was handled by monopoly bulk-handling authorities, moved by monopoly state-owned railways and shipped through monopoly state-owned ports only by vessels that met Australian standards. To the extent that it was exported, as most was, the unnecessary costs were borne entirely by farmers. The situation was similar with sugar, regulated by a system of mill quotas, and dairying that commanded prices in the regulated whole milk markets far in excess of those that could be obtained for the production of butter or cheese. Dairying also benefited from a virtual ban on the production of margarine. These processes were euphemistically referred to as "orderly marketing" and most farmers were in love with them. They were a particularly bizarre aspect of a bizarre economy.
Irrigation was heavily subsidised by charging for water at prices that did not come close to justifying the cost of the headworks. The Snowy Mountains project had turned the waters of the Snowy River back through the mountains to increase the flow of the Murray and to provide electricity. It was undoubtedly a noteworthy engineering feat but there had been singular reluctance to ask whether the resources could have been better employed elsewhere. The Ord River scheme in the Kimberley district of Western Australia to this day has not produced enough of anything to justify its cost, although an amusing paper published by the Centre for Independent Studies claims that its building established the minimum monetary value of a Senate seat.
Our capital markets were inhibited by fixed exchange rates, regulated interest rates, quantitative restrictions on bank assets and capital raisings by foreign companies within Australia. Some sectors and types of lending were favoured over others. Australian banks were protected from foreign competition, and the taxation system favoured retained profits. The Gorton Government in the late 1960s restricted foreign investment and takeover of Australian companies. The Government-owned Australian Industries Development Corporation invested in favoured Australian companies. Government approval was required to export minerals and petroleum exploration was subsidised. The Navigation Acts protected local shipping from foreign competition and, to protect Qantas, foreign airlines were denied landing rights.
The fair and reasonable wages that the arbitration tribunals quantified were enforced with complex, arcane, unjust and inefficient rules regulating employment. Australian unions and employers' organisations could represent their members before the quasi-courts that determined wages and work conditions only if recognised and the arbitration tribunals would not recognise an organisation if another existed to which the members could "conveniently belong". Recognition thus gave the favoured unions monopolies and effectively denied employees freedom to associate. Union membership was almost always defined by activity rather than by location, employer or other relevant characteristic. Some awards contained clauses giving unionists preferred access to employment and at many worksites unionists refused to work alongside non-members -- "no ticket no start". Union dues were often deducted from pay packets. With so much denied to non-unionists, Australia had one of the most highly unionised workforces in the world.
The union bosses were freed to conduct territorial contests with other unions. They would sometimes call their members out on strike in what were called "demarcation disputes".
The whole anti-competitive coercive arrangement was run by a few industrial relations experts -- commissioners, lawyers, union officials and company personnel managers. The most senior of these were based in Melbourne and were to become derisively known as "The Industrial Relations Club". (25) The system, as it then was, was comfortable for those securely employed and who had no wish to go the extra yard in search of reward. It was comfortable for large employers, who knowing their competitors were similarly constrained, did not have to negotiate employment contracts that would raise productivity. It was comfortable for unions and employer organisations that did not need to fear competition. Most of all it was exceedingly comfortable for members of the Club who enjoyed good incomes, high status and excellent wine.
Henry Bournes Higgins, the father of compulsory arbitration of labour disputes, had seen his social experiment as both ethical and useful. It would, he believed, avoid the nuisance of strikes and lockouts and bind the classes together. While Australia is a relatively classless community, there is no credible evidence that a system that pitted labour against capital in a quasi-judicial process contributed to that happy condition. As for strikes, Australians experienced more than their share.
Occupational protection was enjoyed also by medical doctors, lawyers and all professions except the oldest that was banned in most States.
After the World War II, the major nations had set up the General Agreement on Tariff and Trade (GATT). It had huge success in increasing world trade and economic inter-dependence. Australia, however, with a resource endowment that more than most countries could be exploited only through trade, had barely participated.
We failed to heed history's lessons. In 1930 the United States Congress had responded to Japanese imports with the infamous Smoot-Hawley tariff. More than any other single event, this and the retaliation it provoked had turned the common-or-garden 1929 recession into "the great depression". It and the retaliation destroyed Japanese-American trade and left Latin American debtor nations, such as Peru, with no way to pay their debts to American banks. Like the Ottawa Agreement, it provoked resentment in Japan that must have contributed to the decision eleven years later to bomb Pearl Harbour. The Japanese invasion of Manchuria had been encouraged by Japan's loss of opportunities to trade (26) and Hitler had tried to justify his demands for lebensraum in terms of the need for markets and resources that had been denied to Germany.
With restrictions placed upon everything foreign -- goods, services, capital, company control, land ownership, people and even culture -- we were distinctly xenophobic and our prejudices extended not just to foreigners but to members of other unions, other industries, etc etc. Although not very important in itself, nothing demonstrated our lack of confidence in our own maturity and good sense more graphically than the local content rules for the electronic media. Whether they wished it or not, infantile Australian audiences had to be protected from "American culture".
Risks and rewards were much muted in the Land of the Long Weekend (27) and throughout the post-war period, productivity improvement had, as we saw, been dismal. In 1974, the newly formed Industries Assistance Commission published a considerable list of complex, arcane, unequal and inefficient Government interventions. A quarter of a century later one can marvel that they should ever have been tolerated. Although Australians appeared to suffer Governments that interfered more than in most Western countries, (28) Australia was not so very exceptional. The times were different.
By the 1970s, Australians had a tiger by the tail and the first oil shock loosened our grip. We began the last quarter of the century not merely with less relative economic clout than we had begun the previous quarter century but turned in upon ourselves behind barriers of our own making.
ABSOLUTE SOCIAL DECLINE
During the 1960s, in Australia as elsewhere, personal restraint made way for hedonism, particularly among those people who propagate ideas -- Katherine Betts' "cosmopolitan new class". The link between the cultural shift of the sixties and the worrisome social indicators in the seventies and beyond cannot be proven or disproven but, when issues are too important to ignore, common sense and knowledge of the human species must guide us. A cultural dimension to the deterioration of these indicators seems eminently likely.
Although they were to get far worse, by the mid-1970s some social indicators were in absolute decline. Property crime rates were 4 to 4.5 times greater than immediately after the war, the rates of violent crime -- murder, rape and assault -- had each increased, with the rate of all serious crimes more than doubling. The incidence of marriage breakdown leading to divorce had nearly doubled and the percentage of ex-nuptial births more than doubled. One-parent households were becoming common. The suicide rate had increased. Unemployment that had remained within the 2-3.5 % range for twenty years had suddenly increased. (29) Fears were beginning to be expressed that the unemployed would become a more-or-less permanent, alienated underclass. Many but not all Aborigines had long been members of such a class. Drug abuse had not then become the serious problem that it is today but it was already increasing.
The effects of welfare payments upon these changes featured in popular debate but reliable correlations, let alone evidence linking cause with effect, were simply not then available, mainly because the intelligentsia had refused to test the hypotheses that suggested linkages. In 1970-71 expenditure on broadly-defined welfare occupied 17% of the Federal budget and 4.1% of GDP. These proportions were to increase to around 27% and 8.3% respectively at the end of the 1970s. This much was clear, however: the welfare state was failing to prevent an increase in human emiseration. In the United States Lyndon Johnson's "Great Society" program endeavoured to direct welfare towards empowering and encouraging people to take command of their own lives. It had seemed to me to be the right approach but it also proved unsuccessful.
As we entered the last quarter, thoughtful Australians were concerned not just about the relative decline of their economy but also the absolute deterioration of aspects of their society. They turned their minds to public policy formation and national governance generally, which was in a state of flux.
THE COALITION
By the end of the 1960s Gough Whitlam was, in effect, ruling Australia from the Opposition Benches. The ideological differences that had characterised early post-war politics had gone. Labor no longer believed in nationalisation while the Liberals no longer believed in anything and were accused of "stealing" Labor's policies.
The Liberal Party had never been consistently liberal and the coalitions it formed with the Country Party in Canberra and in most States, were even less so. Unsure of its beliefs, it would describe itself merely as "anti-socialist". The administrations it formed had been reasonably competent but want of a settled vision had gradually caused Menzies' Liberals to lose their way. Before putting too much faith in vision alone however, we should reflect upon the poor record of some visionary Governments. Even when the means employed had been as legitimate as for instance those of the Attlee Government in post-war Britain, ill-conceived visions had produced some highly unsatisfactory outcomes.
John (later Sir John) McEwen, the member for Indi and then Murray in Victoria, led the Country Party from 1958 until his retirement in 1971. He was protectionist through and through and a populist brought up in the hard school of Victorian Country Party politics with its base among the small dairy farmers, irrigation orchardists and Mallee wheat growers. His was an angry approach to politics with which he slowly took over the Country Party of Arthur Fadden and the grazier interests.
Nevertheless, McEwen, who was a considerable force in the Coalition, had had a national view of sorts. Not only did he want fixed high prices for farmers extracted from Australian households, he wanted high tariffs on farmer's inputs -- he wanted protection all round. What is more, although such a thing is a logical impossibility, he convinced a majority of farmers in the great export industries of grains, red meat and sugar that, if he had his way, the Government would provide it. The superphosphate bounty -- introduced under Menzies, abandoned under Whitlam, reinstated under Fraser and finally abandoned under Hawke -- was worth as much to the average farmer as a tariff cut of only a few percentage points but farmers blessed the Country Party for it. That most farmers in the 1960s believed that wealth could be created by a complete circle of taking from one and giving to another is less remarkable than that some executives of big mining companies, selling almost entirely into foreign markets and with access to expert advice, professed to believe it.
McEwen built a bureaucratic base for himself in the Department of Trade, and Trade and Treasury were pitted one against the other in formulating economic policy. Since ultimately imports must balance exports plus net capital inflow, the Department of Trade and its minister, by supporting barriers to imports, prevented far more trade than it encouraged. Dries likened it to a Fire Department, responsible for extinguishing fires.
By the end of the 1960s, the Coalition Government in Canberra was in poor shape. The Vietnam War, which was beginning to go badly, and dissension over conscription, had sapped the Liberal Party's confidence. The Coalition was obsessed with retaining office but racked with internal enmity. The post-war ex-servicemen who had brought honourable idealism to the parliament had been superseded in part by placemen.
It tried to buy the votes of interest groups with numerous promises, many of which involving a bit of smoke and a few mirrors, by promising subsidies, tax breaks, restrictive licences, marketing schemes with minimum prices, tariffs and expenditure upon a considerable array of matters -- "shopping list politics". Nevertheless, until the advent of the Whitlam Government in 1972, the budgetary consequences were kept within very reasonable bounds. When these bounds were abandoned, Commonwealth budgets were not brought back under control until the Hawke Governments from1987-88 to 1990-91. The Liberal/Country Party Coalition Government in Canberra from 1966 to its defeat in 1972 was, irresponsible, undisciplined and selfish in its pursuit of office.
I do not believe it can always have been thus, but from the mid-sixties, when I was first intimately associated with the Liberal Party, there was a tendency to see "the Party" as an end in itself. Almost no one was asserting what good Government consisted in and asking how it might be made better. Policy was debated in terms of interests. The better-organised lobbies influences upon it were made too easy by the lack of principles against which to test their demands. The Country Party was even worse and the quality of Government was by most western standards poor. Nothing better illustrated its poverty than the Country Party's capacity and preparedness to prevent the revaluation of the Australian dollar against all advice. The Coalition had been in office too long.
In contrast, debate within the Labor Party at that time was continuous and often divisive. Division was said to be the reason why Labor had not won Federal office but another explanation was that until the late sixties one faction had links with Communists and their fellow-travellers. From when the ALP could no longer plausibly be accused of being subject to communist influence, vigorous debates about policy seemed to do Labor no harm and some good. Might not the Coalition Parties have benefited from an equivalent of the Fabian Society discussing policy in terms of the liberalism to which the party still paid relatively thoughtless lip service? Be that as it may, the Coalition that won office in 1975 was much the same purposeless organisation that had lost it in 1972.
AT THE COURT OF THE GREAT GOUGH
Gough Whitlam, Labor Prime Minister from 2 December 1972 to 11 November 1975 was an aristocrat: charming, erudite and imperious. He tried to govern like a medieval prince and failed for the same reason that most princes failed. His extravagances out-ran what the Australian economy could sustain.
His Government spent as though there were no tomorrow. It came to office with a long list of policies referred to as "the program" for which it claimed "a mandate", pronounced "mhandate". Despite the reverence with which this was treated, it was little more than a list of promises to a new batch of vociferous interests. Even had the nation not gone into recession in 1974-75, the program could never, as it claimed, have been "paid for from the normal growth in Government revenue without increasing taxation". As it was, the program and the recession between them caused outlays to increase by 20.5% in 1974-75 alone and the budget deficit to blow out to 3.8 % of GDP. (30)
Whitlam won in 1972 from a stale and tired Government in what was perceived as a recession by a remarkably narrow margin. It is therefore doubtful that "the program" won Labor much electoral support on that occasion. Public choice theorists might argue, however, that in 1974, when Labor was itself beginning to be discredited but the vested interests had tasted their privileges, it saved Labor from the defeat the Coalition expected to inflict.
Labor used the public sector to set the pace in wage increases and wages climbed sharply ahead of productivity. In 1974 alone, average minimum wage rates increased by 36% for males and 40% for females with average weekly earnings rising by 28% reflecting considerable compression of the margins for skill. For the three years from May 1972 to May 1975, average weekly earnings rose by 61% and most award pay rates for unskilled workers doubled. (31) Even though annual inflation reached 18% in 1974, these increases were far above the sum of inflation and productivity gain and consequently unemployment rose from under 3% in 1972 to 7% by the time Whitlam lost office in 1975. Much worse was to come.
It is too often forgotten that the McMahon Government handed Whitlam a time bomb in the form of a badly inflated money supply. Whitlam could have been defused it promptly but didn't. Capital inflow and export revenue associated with the mining boom of the time had put considerable upward pressure on the exchange rate but McMahon, bowing to Country Party pressure, had refused to revalue the dollar. Inflation consequently climbed into double figures. The more or less conventional wisdom among most Dries that exchange rate policy had to be taken out of the hands of politicians developed from these events. As the problem's nefarious cause was widely known and reflected nothing but shame on the outgoing Government, the new Government's failure to act promptly defies my understanding.
When the Government reacted by implementing overdue stepwise currency revaluations it also took one significant step toward productive efficiency. As an alternative to further revaluation, in 1973, the Government chose instead to cut tariffs by 25% across the board. This was heroic, probably counterproductive in the long run and historic: it had started to abandon the protectionist side of the New Protectionism. The tariff cut had the same macro-economic effect as a small revaluation but concentrated the consequent adjustment to changed prices among those industries that were least efficient and, therefore, a burden to others.
The policy had been dreamed up by a small committee chaired by Alf Rattigan (32) and was without Treasury input or the knowledge of the Frank Crean, the Treasurer. Treasury, which was known to be opposed to industry protection but had been given only about five hours to respond to an urgent call from the Treasurer, opposed the measure on technical grounds and because of the abruptness of the decision. This reinforced the belief in Government circles that it was incorrigibly recalcitrant. The effect of the cut upon employment, even in the textile industry, was minor compared with that of the revaluations and the decision to raise the minimum pay levels for women to those for men.
The Government (and Treasury) also sought to control inflation by the conventional means of squeezing credit after an extended period of loose monetary and fiscal policy and, as so often was the case, introduced the squeeze when the boom was over. Recession, which the wage hike was more than sufficient to have caused, was already upon the nation. Before financial market deregulation, the practice was to squeeze credit by quantitative means; real interest rates were substantially below the inflation rate, that is, real rates were substantially negative. One effect of these negative rates was to transfer large sums from lenders to borrowers with access to credit. In my own case they went a good way towards paying for a farm I had recently purchased. They did the same for people who were home buyers. Those who lost were people who had deposited cash with banks and building societies. Low interest rate policies and inflation are regressive and when combined are very much so.
Australia had not been ready for the 25% tariff cut and a Government that was shortly thereafter discredited by "the Khemlani loans affair" had undertaken it. Launceston, in the Federal seat of Bass, was particularly dependent on the heavily protected textile industry and the Opposition led by Malcolm Fraser used the tariff cut untruthfully but successfully during the by-election there. When Eric Newman won the seat comfortably for the Liberal Party the episode did much to reinforce the received wisdom that tariff cuts were politically impossible. With unemployment approaching 7% and facing defeat at the hands of the Fraser Opposition, the Government tried to shore up employment in the heavily protected industries with import quotas that probably did more economic damage than the tariff.
By-elections tend to bring forth particularly unsatisfactory campaigns. The House of Representatives is seldom so finely balanced that their outcomes can affect the balance of power but doing badly in a by-election can mean a leadership challenge. Therefore, electors whose MP has in one way or another departed find all their Christmases coming at once. Even less constrained than is usual by the need to take the interests of people in the whole nation into account, political leaders plumb the depths of interest-group politics. Tariff reduction was the victim of the Bass by-election; means testing pensions was to be the victim of the Lowe by-election and Telephone time charging of the Adelaide by-election, etc.
A five-page passage from Australia at the Crossroads was the source of many a smile among Dries (some of them wry).
. ... The image of the lucky country -- of a people freakishly endowed by nature with good fortune -- emerged, forming the basis for a resurgence of heady cultural nationalism which reached its crescendo in the first 18 months of the Whitlam Government. Indeed the growing disenchantment with the predecessor Liberal Governments owed more than a little to their patent unworthiness in carrying the blossoming torch of self-assertion and expression which was probably epitomised by their involvement of Australia in a losing and unpopular war in Vietnam. The Whitlam Government was elected in euphoria as the harbinger of the new Australia, which was to be, above all, without a dull moment.
The preceding decades of Liberal rule -- particularly under Menzies -- had been associated with steady and unspectacular economic development enlivened by the fortuitous minerals boom which removed one of the main policy constraints -- the perennial balance of payments problem. Apart from major developments in tertiary education, subsidies for health care, and steady expansion of the Government bureaucracy, the Liberals failed to give due political recognition to the emergence of redistributive, cultural and environmental issues. These were rapidly picked up by the New Left of the Labor party.
The bacchanalia reached its crescendo as the glittering new Court [of the Whitlam Government] unlocked the vaults and flung the coin of the realm from the palace balcony to the euphoric populace below. Government outlays on education -- double in two years. Government outlays on health -- quadruple in two years. Government outlays on social security and welfare -- double in two years. Total receipts -- up 80 % in the same interval. It was a wingding of a party while it lasted. There was to be no settling. The greatness of our very own "Incredible Bread Machine" -- we were assured -- would pay for the party painlessly from economic growth as we raced out of the modest 1971/72 recession. The machine was indestructible. We deserved a bit of a binge. If there were Jeremiahs, they were silent or at least inaudible in the general hubbub of excitement. Those were the days. It was time.
Behind a screen of egalitarianism, the Trendies' vested economic interests emerged. The "Guardians" in the bureaucracy and public sector lobbies had at last arrived to do good to us by spending our money for us better than we could ever hope to for ourselves (and in ever larger lumps), thus not only protecting us from the depredations of the malign capitalists, but also from our imperfect selves. Collectivism was the order of the day. Political pressure and Byzantine bureaucratic manoeuvre was seen as superior mechanism for the allocation of resources than the imperfect market-place. The distributional politics of the left were about acquiring the power and resources to do good to deserving people, we discovered. A major part of the guardianism was also to feed the natural desire by most people -- and indeed most Australian companies -- to be protected against the vicissitudes of life. Guardianism vigorously promoted the image of a costless "no risk" society, striking a deep chord in the Australian psyche which had long had a sneaking fetish for Government-issue security blankets.
The celebration crumbled just as it was getting under way. Adverse international economic developments -- OPEC oil crisis and the global economic recession -- and homespun difficulties put a fatal dampener on the hi-jinks at the party. Unemployment ballooned in 1974/75, despite, or so the Government at least felt, our increase in Government outlays of a miraculous 46%. Private employment tumbled. The hangover from what had been such a splendid party began. (33)
By 1972 when Whitlam was elected, Labor, having been out of office for too long, lacked necessary ministerial experience and, having convinced itself of the existence of countless non-existent conspiracies, did not trust conventional sources of advice particularly in the civil service. Both McMahon and Whitlam led Governments that were more than bad enough to account for their defeat. Fun though it is to look for further explanations in Labor's inability to represent the Zeitgeist or the public's inability to appreciate Labor's Weltanschauung, I do not believe the search gets us anywhere. The Labor Party that was defeated in 1975 knew it had made a mess of governing and more than anything else that knowledge was to influence the Labor Government elected in 1983.
Although the Whitlam Governments got a great deal wrong, from a dry perspective they got one matter very right. They created the Industries Assistance Commission, of which more in Chapter 6. Whitlam on many occasions, including at Kelly's funeral, has credited C.R. (Bert) Kelly, the Liberal Party Member for the South Australian Federal seat of Wakefield, with the inspiration and education that led to his doing it but, of course, credit for the achievement id deservedly his.
By 1975 Australia was sorely in need of better Government but the beginnings of the counter-attack on the policy drift cannot be pinpointed. Liberal ideals had been kept alive by a remarkably few far-sighted and public-spirited individuals, among whom was Bert Kelly. Before the advent of readily purchased commercial yeast every batch of bread needed a little leaven from the last, so the intellectual ferment of the 1980s and early 1990s was worked by the leaven of Bert Kelly and his like.
His extraordinary contribution is the next chapter.
ENDNOTES
17. Most who were later to be numbered among Australian dries would in the 1950s and 1960s have been familiar with Hayek's Road to Serfdom and Parkinson's Law but probably little else. Few were as prescient as they would like to have been.
18. The economist Mancur Olsen, The Rise and Decline of Nations, Yale University Press, 1982 was to argue that periods of high economic growth follow when established vested interests lose their influence. He used the Southern States of the US and post-war Japan and Germany as prime examples.
19. Wolfgang Kasper, Building Prosperity, CIS, pp 6-11
20. Kasper et al, Australia at the Crossroads, Harcourt Brace Jovanovich Group, 1980, p 3
21. ibid p 40
22. Committee to Advise on Policies for Manufacturing Industry (1975)
23. Kasper et al, Australia at the Crossroads, Harcourt Brace Jovanovich, 1980
24. Shaun Kenaelly, unpublished
25. The term was first used by Gerard Henderson one time chief of staff in John Howard's office and now executive director of the Sydney Institute.
26. Paul Johnson, A History of the Modern World, Weddenfield Paperbacks, 1983, p310
27. The title of a book by R. Conway: The Land of the Long Weekend, Melbourne Sun Books, 1978.
28. Kasper et al, Australia at the Crossroads, Harcourt Brace Jovanovich, 1980, p 43
29. Sullivan et al, State of the Nation 1999, CIS
30. Walsh, Confessions of a Failed Finance Minister, Random House, pp15, 16.
31. Kasper et al, Australia at the Crossroads, Harcourt Brace Jovanovich, 1980, p 71
32. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p 24-25
33. Kasper et al, Australia at the Crossroads, Harcourt Brace Jovanovich, 1980, p78-81
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