Politics

Hey ScoMo — Banana Republic here we come!

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Treasurer Scott Morrison delivers Bloomberg Breakfast Lecture (Image via http://www.abc.net.au/news)

Scott Morrison doesn't understand or care about our economic problems. His objective, like his predecessor, is to get the genuinely needy off the public teat and wind back 150 years of the humanisation of capitalism. Dr Evan Jones reports.

ScoMo delivers a history lesson

TREASURER SCOTT Morrison delivered a speech to a Bloomberg business breakfast on 25 August. He sent down a curly one:

“I recognize that in the absence of a ‘recession we have to have,’ or the threat of ‘becoming a banana republic’, achieving necessary change [through reining in expenditure] will be more frustrating and more difficult. … But it is no less necessary, and achieving it this way is far better than the alternative.”

What smart-arse resurrected that hoary chestnut of the “banana republic”? It couldn’t have been ScoMo himself, because he would have just turned 18 at the time. He was probably then immersed in Young Liberals politics or at a prayer meeting.

ScoMo has no idea, like his predecessor Joe Hockey and their contemporary Mathias Cormann. Worse, they have no interest in educating themselves, even on their own brief.

As previously noted, the Libs have no interest in comprehensive expenditure restraint to rein in the debt, as they continue to maintain an extensive shopping list. Rather, it’s a matter of restructuring priorities to kill off worthy programs (renewable energy) and to enhance inequality.

1986 revisited

If ever there was a story that has acquired mythical status, it is that of the 1986 Banana Republic episode. The purported lessons arising from the episode are misleading, and need to be stood on their head.

On 14 May 1986, Treasurer Paul Keating told the John Laws radio program:

“If, in the final analysis, Australia is so undisciplined, so disinterested in its salvation and its economic well-being ... we will just end up being a third-rate economy. You are a banana republic.”

Cartoon by Ward O’Neill, courtesy Sydney Morning Herald, 18 February 1989

Keating took the call from Laws in a local MP’s office in rural Kyneton, Victoria. This was an ill-considered spontaneous utterance par excellence. The cause of the utterance was the reportage of the balance on current account figures for April, almost $1.5 billion, 6 per cent of then GDP. The merchandise trade deficit had escalated to $500 million. The proximate cause of the blowout from the previous month was declining terms of trade for Australia’s major sectoral exports — agriculture and resources.  

The headless currency markets drove the Australian dollar down to US$57.30 in late July before it recovered marginally. And this in the period following the September 1985 Plaza Accord in which the USD was strategically pushed down against the Japanese Yen. The Australian dollar, floated in December 1983, had plummeted against major currencies in 1985, presenting new dimensions of instability and inexpertness to commercial activities and policy-makers alike.

At the moment of Keating’s “talking down” of the economy, Prime Minister Hawke was in transit (having taken off that morning), on a significant Asian tour. Hawke was not amused, and he attempted to reassert control from Asia.

Rarely has a throwaway line been leveraged by the pundits towards their own ends.

As a backdrop, the Hawke-Keating government was subject to daily harangues from a phalanx of economic/finance columnists. Nothing the government did was ever good enough.

There was P. P. McGuinness then Michael Stutchbury in the Australian Financial Review (complemented by long time South Australian Liberal MP Bert Kelly), Alan Mitchell, Max Walsh and Ross Gittins in the Sydney Morning Herald (Mitchell later joined the Fin), and Des Keegan then Alan Wood in The Australian. This pack was joined by Senator Peter Walsh in the Fin after 1990, criticising his own government from the backbench.

Backing this lot up from the hard Right were John Hyde, Western Australian Liberal MP, and later John Stone, former Treasury Secretary and then National Party Senator, both in the Fin.

Confront that in Australia the Australian Financial Review is honoured de facto as a “newspaper of record”, and that it is considered de rigueur that every white collar worker above a certain level, whether in the private or public sector, imbibes this paper’s offerings as a morning ritual. One learns how to march to the correct beat.

The common prescriptions were initially simple.

First and foremost, cut government spending. Add rein in wages growth (by demolishing the Accord, ultimately dismantling the Arbitration system, and emasculating the unions). Then cut government spending again.

The period was also beset by some simple “theories”.

There was the magical “J Curve”. After the decline in the dollar in 1985, the government and pundits alike were looking for an improvement in the current account because exports were supposedly more attractive globally and imports more expensive. Trade is seen simply as a matter of price. It didn’t happen, not in 1986 and not after, though the concept kept getting a run amongst the columnists.

More important was the “twin deficits” theory. Government budget deficits lead to debt, which, for lack of domestic savings, must be sourced internationally — the servicing of which blows out the current account. Ergo, cut government spending (and impel the population to save more) and the current account problem rights itself.

The twin deficits “theory” had nothing to say about the yawning merchandise (now goods) trade deficit, a key component of the current account.

The bulk of the punditocracy were also obsessed with demanding a rapid elimination of manufacturing sector tariffs and rural sector subsidies.

Regular reports by the purist Industries Assistance Commission (Industry Commission after 1990) added fuel to the columnists’ fire. The IAC, Australia’s premier “think tank”, was created in 1973 precisely to dismantle the manufacturing tariff regime and agricultural sector support measures.

The purist Alan Mitchell even consistently opposed anti-dumping measures. Tell that to the two BHP steel spinoffs — Bluescope and (what is now) Arrium. The tariff regime itself was established after Federation in part precisely to head off dumping of manufactured products by the then industrial powers into an increasingly urbanised society needing employment opportunities.

In this crusade, there was an evident dissociation between these demands and their shock horror at ongoing current account deficits. The implicit presumption was that exposing these sectors to the powerful wind of global competition would force them to enhance their own “competitiveness” which would, in turn, make them more successful exporters.

Reiterating the lesson

Meanwhile, the “banana republic” gaff took on a life of its own. It became the signature tune for the columnists’ crusade against government spending.

Thus an editorial in the Fin, 22 September 1987, when high interest rates were drawing in speculative capital:

There is thus no room for fiscal relaxation. … In the process of assuring the Australian populace that all is well, [Mr Hawke’s good news machine] muffles the signals needed to remind Australians that all is not well, and that it will take a hard slog over several years to stay clear of the Argentine road.

Paul Keating's banana republic remarks last year, however much they may have affronted the political managers at the time, undeniably set the scene for the subsequent spending cuts which underwrote the Government's claims for recognition as a competent economic manager.

Two years after the event brought further reinforcement of the lesson.

This from Geoff Kitney in the Fin, 13 May 1988:

On that day the nation was set on a tack of economic adjustment unprecedented in the post-war period. … the Treasurer set in train a process of adjustment involving the tight 1986 Budget, the 1987 May statement, a surplus in the 1987 Budget, the pursuit of privatisation, and tariff and productivity reforms.

The conventional rules of politics were turned on their head. Sound economics became good politics. By unwittingly forcing Labor to confront the reality of a fundamentally imbalanced economy Paul Keating had positioned the Government to win an election 14 months later. …

Labor's experience has provided a model to show that the political risks of economic adjustment have long been overstated.

In the same issue, P. P. McGuinness, Michael Stutchbury and an editorial writer all thought that the lessons had still to be learnt.

In his August 1988 Budget Speech, Treasurer Keating claimed:

"This massive structural wind down [spending cuts and targeted tax reforms] renders irrelevant calls for further savage cuts in public spending. Such parrotted calls in future should be seen for what they are; mindless shrieks by ideologues against the legitimate spending functions of governments."

Fourteen years later, Stephen Koukoulas, again in the Fin, 15 May 2000, was haranguing Treasurer Peter Costello for lax budget parameters.

Koukoulas opined:

  • Fast forward to May 2000 and the $A is floundering at banana republic levels, around US58¢ …
  • The poor discipline that Keating was talking of 14 years ago is creeping back into the fiscal and micro-economic settings, and was apparent in last week's Budget. … While some hard yards have been put in, more needs to be done.

And so on.

Meanwhile in current account deficit land

During the 1980s, Hawke-Keating governments experienced what has become known as the “balance of payments constraint” on economic growth. Increased economic activity fed immediately and unduly into imports, which threatened currency depreciation, inflation, etc.

The commentators and “the markets” followed zealously the release of monthly estimates data.

So what has happened to the balance of current account? Here are the figures for the last five years.

 

Balance on Current Account

$million

 
 

Overall

Goods

Services

Primary

Secondary

 

Balance

Trade

Trade

Income

Income

2010-11

-43688

21978

-7323

-56336

-2007

2011-12

-49462

8592

-10631

-45092

-2331

2012-13

-59112

-4604

-14152

-38036

-2320

2013-14

-51898

6441

-14262

-41977

-2100

2014-15

-59140

-14271

-8699

-33728

-2442

2015-16

-72828

-27827

-9071

-34199

-1732

ABS, 5302.0 Balance of Payments Summary Table 1

 
 

Lo and behold, the current account deficit just keeps on growing. The deficit for 2015-16 is estimated at a mega $72.8bn! This deficit at June 2016 was at 4.4 per cent of an estimated GDP of $1,649.4bn.

But the pundits now ignore it. Short of uttering hollow truisms like “Australians are living beyond their means”, they would be forced to ask themselves deep questions regarding the current account’s habitual deficit.

W. C. Wentworth — long time parliamentarian, general curmudgeon and strident “interventionist” — had an opinion piece in the Fin on 18 November 1988.

He noted:

'A couple of years ago, when Mr Keating dropped his "banana" bombshell, he based his whole warning upon our current account deficit. He said (quite rightly) that unless Australia could bring its current account under control, it would become just another "banana republic". He himself selected the criterion by which his policies should be judged and he must abide by the result. If these policies did not deliver the goods, then they should be discarded. … [Thus] present policies have failed.'

Quite. Keating himself noted in the same exchange with Laws (a comment wholly neglected):

'We are living through a process to restore Australia back to being a developed sophisticated economy again and not simply selling unprocessed minerals and agriculture.'

The instability of rural exports had always been a problem. By the late 1960s, coal and iron ore had come on board (especially bound for Japan). The laissez faire-oriented Treasury presumed that, once impediments to free markets were removed, resources exports would provide Australia’s hands-off long term trade salvation.

The optimists didn’t count on the fact that resource exports would prove to be as volatile as rural exports — exemplified mostly recently in a spectacular export boom exceeding all expectations followed by a spectacular collapse (note the marked variation of the goods trade balance in the table).

Neither the Hawke-Keating government nor any successors have engaged in the process claimed by Keating in May 1986. Treasurers, in particular, are nowhere to be seen. There have been the odd half-hearted attempts, but they have perennially withered against contrary pressures.

The post-World War II fixed exchange rate regime compelled close attention to the current account. On an emergency footing, comprehensive imports licensing was put in place during 1952-60. With the abolition of that regime in 1960, Trade Minister Jack McEwen and his Department worked assiduously to try to keep exports and imports in rough balance. The columnists have taken every opportunity to denigrate the McEwen era, pragmatically operating within the constraints of the time, without understanding it.

That mentality survived within the Trade Department until the mid-1980s when it (and the Trade Department itself) was killed off. Since then, the current account has never been an object of strategic attention. This failure, and the non-recognition of this failure, is itself the mark of a banana republic.

This background story on the current account is outlined at greater length in my three-part “A matter of sovereignty”, here, here and here (October 2015).

The IMF, in its International Financial Statistics yearbook (unfortunately not available publicly) publishes current account data for all countries. Checking the figures for the last decade to calendar year 2014, we find that (for example) Denmark, Germany, Italy, Japan, the Netherlands, Singapore, Sweden and Switzerland all run consistent current account surpluses.

And it’s not by accident. Something strategic is going on in those countries that Australian policy makers are oblivious to.

Local myopia on how capitalism works

The fundamental problem is that none of our major opinion-makers and policy-makers understand how global capitalism works. You won’t learn about in the university economics syllabus, an intellectual scandal, and you’ll pick it up in other academic “disciplines” only by chance. You won’t learn about it in the financial media.

The first axiom of global capitalism is that there is no such thing as free markets and free trade, and never will be.

McEwen and his Trade bureaucrats understood this rule, as they witnessed the US undermine the GATT negotiation structures by quarantining agriculture and then textiles out of the negotiating system.

The second axiom is that the big players make the rules or ignore those made by others. Our revered econocrats and columnists still haven’t caught on.

Worse. Whenever an expert pops up on other countries and their peculiarities (not least how they acquired industrial success), our pundits rush in, from total ignorance, to assert that the experts are wrong. This exchange has been particularly notable with respect to interpretation of the ascendancy of Japan as an industrial power and the subsequent success of the “Asian Tigers”.

With the IAC/IC gradually succeeding in the dismantling of manufacturing tariffs and agricultural support programs, with help from the aforesaid pundits, it simultaneously opposed any industry support mechanisms whatsoever (not quite — it steered clear of the privileged resources sector). There will be no “picking winners”, even for generic support programs.

This cultural backdrop ensures that those support programs that do get up are often poorly constructed, inadequately administered or (if successful) prematurely dismantled. Thus was the fate of the well-structured 150 per cent tax concession R & D program dismantled under bean counter influence in 1992, and the previously bipartisan Commercial Ready program in 2008. 


Capitalism is Rigged Against The Majority of People On The Planet Richard Wolff (7 August, 2016)

Signs of a systemic problem down under

The permanent and burgeoning current account deficit indicates that something is not right. It is a symptom of a structural disorder. The problem lies with structure, but all the orthodox measures directed to structural change (“micro-economic reform”) have had no effect on this indicator — one once held up by the policy elite as reflective of the deep-seated problems they purportedly want to eliminate.

The deeper problem is the political culture in Australia.

There’s an absence of lateral thinking. It has been stamped out of the political class and of the bureaucracy. But behind this absence are two now deeply rooted pillars of Australian politics. There’s the ideological hard-headedness —Abbott/Turnbull full-blown, with Labor soft version in camouflage. And there’s the endemic colonial cringe, re-embedded since 1975.

There are things that nobody in authority or in official opinion circles is allowed to touch. Undying devotion to Uncle Sam (and Israel), for example, is in this category — political division.

The factors behind the current account deficit are also in this category — economic division. It might come as a surprise to confront that the decisions necessary to redress the yawning current account deficit are politically off-limits. Australia doesn’t have a long-time and growing current account deficit by accident. Which is what makes that statistic such an important indicator of a country’s politico-economic character.

Paul Keating sniffed the problem, but proceeded to ignore it and fell in with the prevailing neoliberal zeitgeist.

Scott Morrison has no idea what the problems are and doesn’t care. His objective is, like his predecessor, to get the genuinely needy off the public teat, contributing to winding back 150 years of the humanisation of capitalism in the process. His rhetorical flourishes mask his government’s objectives and modus operandi.

Meanwhile, the real Banana Republic is already here. The more that the flunkeys run the shop, the further does the Banana Republic become entrenched.

Dr Evan Jones is a retired political economist. 

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