07/02/2012 - 09:14

Analysis: on the road to Eurogeddon

07/02/2012 - 09:14

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It’s a long walk from Perth to Paris, but Australia took two more steps on the road to Europe last week thanks to politicians playing personal popularity games.

First pollie to snatch a headline, after a few days of bad media coverage over the sudden departure of a media adviser, was the Premier, Colin Barnett, who announced a $1 million hand-out of tablet computers to junior-school children.

Second pollie to seek publicity was new Opposition Leader, Mark McGowan, who had an even simpler plan. He wants to hand-out $15.9 million in cash every year to parents with a child in senior school.

If those two events were nothing more than attention-seeking ahead of the next election they could be dismissed as an irrelevant sideshow, but when combined with other events they can be seen as examples of why some experts fear that Australia is sliding into a financial crisis similar to that gripping Europe – or “Eurogeddon” as it has been called.

At the same time Barnett and McGowan were handing out a few million dollars in taxpayer’s cash the latest warning about Australia drifting towards a European-style financial disaster was being published by Professor Warwick McGibbon.

Not a man to pull his punches, McGibbon is director of the Research School of Economics at the Australian National University and a recently retired member of the Reserve Bank board. In other words he has the credibility and clout to reprimand governments, a fact which might explain why his term on the board of the country’s central bank was not extended.

What McGibbon had to say in his first column for the Australian Financial Review newspaper deserves wider dissemination because of the power in his arguments. He started by noting that the flawed ideas behind Europe’s policy failures are the same ideas that have shaped the policy debate in Australia in recent years.

As you read through his list of European mistakes it is interesting to note the similarities with Australia today, starting with:

  • Too much government focus on redistributing wealth rather than generating wealth.
  • A focus on large-scale intervention to meet environmental goals set by the emergence of green parties rather than serious assessment of costs and benefits.
  • Wasteful industry support through massive subsidies that badly distorted markets over many years.
  • The idea that government can drive the economy and create jobs rather than the idea that governments provide the conditions through markets and ... the private sector create jobs.
  • A reliance of Keynesian economics that led governments to create an enormous overhang of government debt.
  • Labour market rigidities preventing wage flexibility when an economic shock occurs.

Two specific national targets are singled out by McKibbon, the latest car-industry rescue plan which involved a big hand-out of Australian cash to foreign car makers, and the national broadband network which is being built without any analysis of its business case.

“The debate about the car industry is vacuous (economist speak for stupid),” he said. “Where is the detailed evaluation of the industry’s future given the state of the world economy, and the global car industry.”

There is a time gap between Australia’s relative prosperity today, and Europe's trip down a road leading to a financial crisis, widespread austerity, a shrinking economy, massive unemployment, and the sense of hopelessness that comes from bankruptcy.

But, as the Chinese saying goes: “A journey of a thousand miles begins with a single step”, a reminder that mistakes made early in a trip can produce a disastrous outcome.

Barnett and McGowan will argue that they are simply redistributing taxpayer funds to people who need it most, though neither has explained their actions in a satisfactory way.

The tablet computer hand-out can easily be seen as a publicity stunt for Barnett after the problems associated with the sudden departure of an adviser, and perhaps an expensive stunt given the near-certainty that few of the 900 devices will survive a year at the hands of five and six year-old children.

The cash splash for everyone with children in secondary school is an even worse example of McKibbon’s core criticism, that politicians are inclined to spend money in a way that wins them popularity, no matter how unwise the spending.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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