The Great Australian Economic Malaise
There has been a great economic malaise that has afflicted Australia since the turn of the century. It has been stealthily making its impact felt until it has become the lens through which we view the state of the economy.
It is the staged reduction in productivity which entered its first phase at the turn of the century. Since the onset of Covid-19 we have been feeling its last phase.
Even as long ago as 2011, Saul Eslake was writing for an RBA Conference about the lost decade of productivity. Not long after, Dr Martin Parkinson writing for the Federal Treasury made similar remarks about Australia’s productivity.
Both writers used an oft repeated quote of Nobel Prize-winning economist Paul Krugman:
Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
The Problem Is Accelerating
More than a decade later, the economic malaise arising from the low level of productivity has entrenched itself.
There was a peak of productivity growth in the second half of the 1990’s which was at a level of around 2.5%. This fell to about half at 1.2% throughout the 2010’s and since COVID-19 has been virtually zero.
It has been failing to address this vital element of our economy that has allowed so many problems to manifest in the Australian economy.
There has been no shortage of reviews informing us that this was a problem. The recommendations arising from those reviews are usually politically toxic.
As a result, we have an endless series of them. Reviews in search of a recommendation that we might find palatable. But they don’t exist.
The last great policy initiative that enhanced the productivity was the GST. By eliminating other inefficient taxes, it improved allocative efficiency.
A Series Of Reviews – A Series Of Failures
Since then, in no order our economic malaise has reflected the following litany failures.
They declared climate change as the great moral challenge for our generation. A problem declared in 2007 and which still haunts us.
Economics has said that a cap-and-trade policy was a simple and effective method of dealing with carbon targets. In the end, we have a mix of direct interventions that are failing and costly.
Compare that to our response to the destruction of the ozone layer by cfc’s that we banned in 1995.
Remember the mineral resource rent tax that was established in 2012? It should have raised hundreds of billions of dollars by now, but we repealed that long ago. Compare that to the success Norway has had in trapping the wealth of its oil for the benefit of its citizens. They have a war chest to help them counter any economic malaise.
We turned back the boats. Only to let them return. Only to turn them back again.
The international security situation is at its most fraught for many decades. Yet our defence relies on inquiries to bludgeon potential adversaries with threats of formidable weapons. Sometime well after this decade. The fear in their war rooms must be palpable.
I was initially a bit more optimistic about this.
Lack of competition in Australia is making prices for goods and services higher than they should be. We pass oligopolistic profits onto the few large companies that can operate. While this is happening, we make it harder for a foreign airline to operate and further entrench the high prices and surplus profits.
Public debt, which was under control, is reaching the same levels of alarm as private debt. The important counterweight to high levels of private debt has now all but disappeared and sped up our economic malaise.
The current government blames the former government. Even though it complained loudly while in opposition in favour of the continuation of jobseeker. Workers needed more support! They also needed a payment of $300 if they received a covid injection.
The RBA is likely to have its method of operation changed. It will create ambiguous messaging from empowered factions of the new board. The Governor and the bank will be subordinate to the decision of its board rather than advised by it. They will extend its target of price stability to encompass full employment. Something it will eventually fail at.
Our treasurer has tabled a white paper on employment that has lots of great ideas on improving the operation of the workforce. Meanwhile, the minister for industrial relations is proposing the ‘closing the loophole’ bill. This will place restrictions on the operation of the labour force and reduce flexibility. Vested interest dominated national interest.
We have spent a vast fortune via the Gonski education review to lift the educational standards of our students. Only to watch them continue to slide down world rankings and leave school with difficulties in even the basics of reading and writing. This will entrench our economic malaise through time.
We cannot provide sufficient accommodation to our population. This has resulted in a staggering increase in the prices of housing. While our immigration intake, every 1 to 2 years, is equivalent to the population of our capital city.
If we stop it, our lack of productivity will show up as a recession. Instead, it shows up as congestion.
We are about to have a referendum about an alteration to the constitution. Its aim is to help provide a solution to the disadvantage faced by Aboriginal and Torres Strait Islander people. It has instead caused division and rancour within the country.
The regular method of bringing a referendum to the people via a constitutional convention did not happen.
We risk our institutions buckling under the weight of a chronic leadership vacuum.
Perhaps the gene pool of parliamentarians is too shallow. This article from 2013 shows the variety of professions that we draw parliamentarians from. It is likely to be quite similar in 2023.
It is as if members are more interested in doing something historic that will grant them immortality. Bringing a nation along on the tasks that need to be done is outside their capabilities.
This may not be our source of economic malaise. That will be for history to reveal. Just as time has revealed to us that a golden age of prosperity and productivity started in the early 1980s and ended in the early 2000’s.
How Will It End
If we persist in substandard productivity, we will continue towards a tipping point. One where, for the first time in generations, the cohort that follows the baby boomers will not have improved living standards to their parents.
It happens slowly, then suddenly, because that is how low productivity works. It may take another ‘banana republic’ moment, or ‘recession we had to have’, to get us to face up to this problem. More likely, it will take an economic crisis driven by a financial shock.
Lenders taking a view that the risk of loans they have made to us is higher than they thought and re rating our credit worthiness could cause this.
