Economic rationalism has come under fire in recent months. RICHARD WOOD presents a defence and argues against increased government intervention in the economy.
THE decision of the political scientist Robert Manne to resign as editor of Quadrant magazine has been greeted as an indication that it is not only the "left" side of politics that is in trouble.
Manne's strong, often emotional, attacks on economic rationalist policies (The Age, 22 July 22) are being portrayed as part of a growing rejection by some on the "right" of the political spectrum of what they see as the the capture by economic liberals of the political platforms of both parties.
Yet closer examination of the structure of the traditional division between "left" and "right" makes it unsurprising that a conservative, non-economist such as Manne should be taking the stance that he has.
The conservative end of the political spectrum has always has always had a good deal in common with the socialist end in supporting government intervention in the economy and the extension of social welfare in particular. By contrast, those immediately to the left and right of centre have historically tended to want to limit strictly the role of government, to be less paternalistic and to believe that individuals should accept greater responsibility for their fate.
The more interesting issue is whether such attacks on economic rationalist policies from both the left and right are likely to halt the tide that started during the 1980s to push back the enormous expansion of government intervention throughout most of the 20th Century.
The expansion of government and the suppression of individual choice reached its peak in Eastern Europe, the Soviet Union and China. It is particularly ironic that the protest against economic rationalism should come when the failed attempt by communist governments to run society by economic and social planning is hailed as a victory for the more market-oriented policies pursued in the West.
Of course, Western capitalism is also going through a difficult period and we may yet experience a major world recession. Australia is itself in its worst recession since the 1930s and we are not yet out of the woods. The opponents of economic rationalism blame the current high levels of unemployment on the pursuit of rationalist policies during the 1980s. Financial deregulation and reductions in protection are particular targets.
There is not space here to go over that ground in detail. But at a time when there is considerable pressure on government to intervene through fiscal pump-priming, in, increased tariffs and/or import quotas, employment "creation" schemes and so on, it is pertinent to reflect on how we got into the present mess and whether such interventionism is likely to get us out.
THE extent of the present recession derives fundamentally from the accord strategy of trying to lift Australia's economic growth through a highly interventionist policy of expanding demand and employment. The strategy was based on the theory that, if only inflation could be contained by having trade union leaders agree to restrain wage demands in return for concessions on the "social" wage (including tax cuts), the Government could pursue expansionary fiscal and monetary policies which would let the economy and employment grow faster and to operate with lower levels of unemployment.
Yet against the background of Australia's endemic inflationary experience, those policies inevitably led during the 1980s to a rate of spending and borrowing that could not be sustained, except by a marked improvement in productivity. That improvement did not occur, and could not have without a marked reduction in government intervention in labor markets and in the protection of private and public enterprises from competition.
When in April 1988 the then Treasurer, Mr Keating, did eventually set out on a path of tightening monetary policy to try to reduce the growth in spending and borrowing, he faced a problem generated by his own rhetoric. Since we had been told that the Government would never impose a credit squeeze, many were initially unconcerned about the tightening and took no action to reduce debt. In consequence, to convince people that it was serious, the Government had to increase interest rates to much higher levels than should have been necessary -- and to hold them high for much longer than should have been necessary. The result is the much deeper cutback in spending and employment than should have occurred.
THE irony of the present situation is that, having caused the present recession, interventionist fiscal and monetary policies are now being touted by some as necessary to "stimulate" economic activity and bring down unemployment. At the recent Youth Jobs Summit even senior businessmen accepted that there was scope for a "little bit" of stimulus. If there is scope for a "little bit", why not a lot?
It is very unlikely that further fiscal or monetary "stimulation" will produce a sustained recovery. Government can "stimulate" all it likes, but the confidence is not there to produce a response that will lead to a sustained improvement in spending and employment.
This is not to overlook that the very substantial easing in fiscal and monetary policies that has already occurred has produced some "recovery", albeit insufficient to reduce unemployment.
But to imply, as an academic member of the Reserve Bank Board did recently, that the main option for reducing unemployment is through a further easing of fiscal policy is not only irresponsible but downright misleading. While such an easing could have some temporary positive effects at the margin, that would not provide the basis for a sustained reduction. Nor would it contribute to the structural reforms needed to achieve that.
It is relevant that the Government (rightly) committed itself last Friday to reversing the stimulus in One Nation and moving back to a budget surplus by 1995-96 because it accepted that, to lift economic growth on a sustained basis, Australia has to increase the deplorably low rate to which saving has fallen as a result of a whole raft of government interventionist measures over the past 20 years.
IT IS now widely accepted that any medium-term strategy for the Federal Government should include a contribution by that Government to national saving via the running of a surplus. A permanent reduction in unemployment must be based on a return to substantial budget surplus, among other measures.
This means the Government (whether Labor or coalition) needs to be able to present a convincing case that the deficit is only a "temporary" one caused by the recession. Given that the starting point deficit for 1992-93 is now said to be around $13.5 billion (or almost 3.5 per of GDP), any significant additional spending risks undermining whatever credibility Government policy action may have left.
Even if financial markets "accept" such additional spending for the present (that is, if there is no wholesale quitting of the $A), that is not the only test. The real test is whether such spending would do anything to encourage a sustained recovery in business investment and consumer spending.
To return to my theme. The failure of successive governments to "manage" the economy has come to a head with Labor's failure during the 1980s to succeed with the most interventionist strategy probably ever attempted. Until it is recognised that it was such government intervention, and not the pursuit of economic rationalist policies to reduce such intervention, that has caused our present problems, we will be in danger of repeating past mistakes and of avoiding the very policies needed to cut unemployment permanently.
Moreover, the more that credence is given to "stimulatory" government intervention as the means of reducing unemployment, the longer it is likely to take to start down the path to permanently lower unemployment.
ADVERTISEMENT
No comments:
Post a Comment