Big-Picture Vision of Reform Needed

(Courtesy of The Australian, by David Uren, Economics editor.)

THE 1980s appear through the telescope of history as a sunlit era when political leaders understood the challenges they faced and had the gumption to deal with them.

The release by the National Archives of the 1984 and 1985 cabinet documents highlights the the dizzy pace of reform as prime minister Bob Hawke and his treasurer, Paul Keating, built on their floating of the Australian dollar with the deregulation of the financial system, sweeping tax reforms and an accord with the union movement to slow inflation.

Policy breakthroughs were occurring around the world. The election of Margaret Thatcher’s conservative government in 1979 rolled back the pervasive state influence through the British economy.

In the immediate post-war period, policy had been framed in reaction to the Depression, World War II and the rise of the Soviet Union. It brought the development of the welfare state, economic management by interventionist regulation and public-sector ownership of strategic industries.

Thatcher unleashed a wave of privatisation while she also deregulated the finance sector, lowered top marginal tax rates and toughened regulation of trade unions.

Inflation was a global problem. Ronald Reagan, elected US president in 1981, introduced “supply-side economics”, arguing that lowering taxes and removing the regulatory constraints from business would allow demand to be met by rising output rather than rising prices.

The era had its apostles. In place of Keynes, leaders such as Thatcher and Reagan turned to the free-market advocate Friedrich Hayek and the monetarist economist Milton Friedman to support their embrace of the private sector and monetary assault on inflation.

As the 1980s progressed, Germany’s chancellor Helmut Kohl presided over the unification of his country while the Soviet Union’s Mikhail Gorbachev understood that socialism had failed, and introduced both political and economic reforms that culminated with the dissolution of the Soviet state.

Opening the economy to the private sector was also occurring in China under Deng Xiaoping and Zhao Ziyang, starting with the creation of special economic zones where private enterprise and foreign investment were fostered.

This flowering of activist government around the world in the 80s followed a decade in which government appeared impotent in the face of the problems rising around it.

Until the 1970s, it had been thought that inflation was caused by excessive demand, which would be accompanied by very low unemployment. But during the 70s, both inflation and joblessness rose, a phenomenon tagged as “stagflation”.

The Organisation of Petroleum Exporting Countries-inspired oil crises, which quadrupled energy costs, contributed, but so too did the overweening state that choked private enterprise and the easy monetary policy intended to stimulate economic activity.

There were critics in the 70s who identified what had to be done, but governments either failed to recognise or lacked the courage to implement the needed reforms. They experimented with wage and price freezes but deeper structural causes of the problems confronting the world were left untouched.

The political leaders – whether Jimmy Carter in the US, James Callaghan in Britain, Leonid Brezhnev in the USSR, Hua Guofeng in China, or Malcolm Fraser in Australia – did not have a vision for reform which they believed they could execute.

In Australia, the failings of the tax system, the cossetted financial regulation and the wall of tariff protection had been identified through high-level reviews but the Fraser government would not engage.

Political leadership around the world today resembles the 70s much more than it does the 80s. Economic growth has faltered and no one knows quite what to do about it. Budgets are out of kilter – perilously so in many nations – but governments are loath to act.

To the extent that anyone is thinking about reform, it is reactive to the crisis rather than focused on lifting competitiveness and productivity.

It may be that in another time, a clearer sense of how to resolve the economic problems they confront would enable political leaders such as Barack Obama, David Cameron, Shinzo Abe or Julia Gillard to shine. But it may also be that they do not have the political will to spend whatever political capital they possess on reform that brooks unpopularity.

The character of the reform needed now is not so different to that of the 80s. The spread of middle-class welfare needs to be rolled back to bring budgets under control, protected industries should be exposed to the winds of competition, workplace regulation should encourage flexibility and the mix of taxes needs to be overhauled to lighten the weight of the most burdensome while improving the reliability of government revenue.

Instead, responsibility for lifting economies from their bog is being left to central banks pumping stimulatory cash into the system, while a few governments still flirt with fiscal stimulus. Lowering the value of their currencies has become the objective of the major powers.

Japan captures the mood of the era. For 20 years now, its economy has been at a standstill while ballooning government debts eclipse those of Greece.

The new leadership of Abe is talking about getting more monetary stimulus from the central bank, with the objective of lowering the value of the yen, while also canvassing further fiscal stimulus. Abe’s Liberal Democratic Party remains vehemently opposed to the free-trade agreements, any opening up of the farm sector or liberalisation of foreign entry into the highly protected services sectors of the economy.

Lacking long-term vision, government becomes prey to vested interests and the quest for short-term political survival. The public is left to wait for another generation.

Comments are closed.

Copyright © Christian Family Study Centre