Posted Online Opinion http://www.onlineopinion.com.au/view.asp?article=8604&page=1
There is probably not much that the Rudd Government can do to restore the health of the Australian economy in the face of the global economic collapse. The financial future is a guessing game, much like predicting the course and outcome of war. The pace and extent of the collapse has all the indicators of developing into a global depression. With this a distinct possibility, it behoves the government, the opposition, public servants, advisers, academics and the media to study all aspects of the Great Depression.
The study and analysis of history is not a strong Australian characteristic. History has been used to promote outcomes, prejudice, nationalism, and jingoism at the expense of critical examination and understanding.
Writing in 1927 to warn his fellow Australians against the signs that the country might be heading for a severe economic down turn, the eminent economist, E.O.G. Shann, Professor of Economics at the University of Western Australia, wrote:
The average man who loves a gamble turns a blind eye to any likeness between the sound prosperity on the continuance of which he budgets, and the booms or manias of long ago. Things are different now, he assures you as he shakes off the warning hand on his shoulder. But common prudence bids us turn even the distasteful pages of our history.
Shann was looking at the prospect of a downturn and sought to warn of the danger. We on the other hand are already in a downwards spiral without the tools to predict, prepare or repair. Those that sounded recent warnings were jeered as un-Australian, they were accused of talking the economy down, some observers were accused of doing so for political gain.
Shann concludes his essay by saying:
I am not insensible to the big contrast between the late eighties and the present, in that we are enjoying good prices for wool and wheat. But the level of world prices may not prove stable. Whole sale prices have been falling steadily of late and we cannot afford to mortgage every fresh margin of our living fund. Falling prices and the cessation of overseas credit wrought a painful havoc on the living fund of Australia in the nineties. A like combination of circumstances would do so again. At present the balance for home consumption or exchange, after meeting our overseas interest bill on the public debt, seems very buoyant … But if the prices of our staples fell, the interest bill … would not fall pari passu.
Substituting public for private debt was the position that Australia was in 12 months ago. So where are we heading, and what is the way out?
In October last year I quoted Australian economist in a number of articles. Dr C.B. Schedvin is not without qualification. At the time of the publication of his book, Australia and the Great Depression, in 1970, he was Senior Lecturer in Economic History at the University of Sydney. He was joint editor of the Australian Economic History Review, and co-author with Professor S.J. Butlin of War Economy 1942-45, published in the official history of Australia in the War of 1939-1945.
I put this before the reader to demonstrate that Schedvin’s book may have dropped off our radar in recent years, probably because we believed that a second Great Depression, like a second World War, was not possible.
Schedvin argues that: “The central point … is that deliberate policy measures were comparatively unimportant in influencing the nature of the contraction or the speed of the recovery.” This is something that the government, the Treasury and the Reserve Bank might examine and give consideration to.
Contrary to the widely-held belief about the high degree of control exercised by policy-forming instrumentalities during the depression, it appears that policy merely followed the market in most instances … the Australian economy was rendered acutely vulnerable to international disturbance by the end of the decade (1920s) … It was this vulnerability which explains in large measure the sharpness of the early contraction … It also accounts for the succession of hastily-devised expedients which were subsequently described as policy innovations.
And here is the rub:
… the massive withdrawal from the international economy that was forced during the early 1930s predicated the nature of the recovery process … it was on the basis of import replacement of manufactures that recovery was forged … a number of policy expedients helped, almost accidentally to moderate the decline in income and employment, it remains true … that economic policy played little part in shaping the course of the depression in Australia. What was gained by exchange devaluation and by deficit financing in 1930-1 … was lost in 1931-2 following the fall in public expenditure … between mid 1931 and 1935 most aspects of policy retarded the process of recovery … The modicum of unemployment relief expenditure that was sanctioned was not only totally inadequate but was also distorted by an unrealistic insistence that expenditure be confined to “reproductive” works.
In an observation that should resonate with the media, commentators and academics, but not with the opposition, Schedvin notes that, “More surprising than the ineffectiveness of recovery policy is the absence in Australia of any significant intellectual or official dissatisfaction with established policy doctrine”.
In terms of where Rudd might place our money, or more accurately our borrowings, he and his advisers might note the conclusion of Schedvin:
By 1937 there had occurred a substantial withdrawal from the international economy. Government had learned to live without overseas capital, and total investment – which had recovered to a respectable 16% of national product – was almost entirely financed internally … Aiding the growth in the size of the manufacturing sector was the relatively heavy fall in prices and money wages .. .The depression thus provided a powerful stimulus to Australian industrialisation, and by removing the excessive dependence on overseas capital … helped to lay the foundation for comparatively stable long term growth in the post war period. The depression also assisted, fortuitously, the transition to a war time economy …
If by “the economy” we mean the creation and distribution of wealth among and for the benefit of people living within a political entity, then Rudd has a responsibility in times of a shrinking economy to provide a minimum wage, housing, health care, transport and education for adults and children least able to financially cope in the forthcoming straightened circumstances. This is survival spending, it is not designed to create jobs: it is to keep people alive and healthy and to provide the means for their children to participate in and help engineer a revitalised economy when the global economic sickness has passed. This is basic humanitarian assistance; it will not in the short to medium term, of itself, rebuild the economy.
To help pull Australia out of this depression Mr Rudd will need to take some drastic and decisive action, taking into account the lessons learnt from the last Great Depression. He will need to cancel some overseas defence orders and rethink defence requirements and strategies, utilising local capacity, particularly in ship building. He will need to take over the local car manufacturing industry, which can also be used for defence production. These decisions will protect and provide new jobs as well as build a local defence production capacity in what will be uncertain times.
Rudd can stimulate the economy by designing and building energy efficient homes using cheap and readily available materials. From my own recent experience a 12 square home* (about 111 square meters) of corrugated iron, fully insulated, can be erected and fitted out for less than $100,000. The cost of land can be kept within reasonable limits if the government purchases the land or subsidises the cost. Many developer built homes are unsuitable or inappropriate for Australian conditions and sustainable use of energy. The first homebuyer grant should have some conditionality to reflect the forgoing.
He needs to stimulate the renewable energy industry and attract back all aspects of it that fled overseas in the past decade.
The government needs to regulate the banking industry and get back into the business of banking. It needs to take over Telstra, railway infrastructure and rolling stock, and provide an air service in remote Australia. The tyranny of distance demands it. User pay systems have failed, particularly in rural Australia.
The federal government needs to take over the management of water and abolish water licences, as a short and long term stimulator of the economy; particularly the rural economy.
The private schools must fend for themselves, that’s what private used to mean, and the funding of public education significantly must be increased, particularly in the area of skill creation. Pulling the country out of depression will require it.
Import replacement needs to be encouraged and funded, directly; and from loans through the government bank.
This depression is a direct result of globalisation. Australia should seek future protection from the buffeting of overseas financial institutions by exercising more control, discipline, stimulus and protection of its own economy.
* One traditional building “square” is a pre metric term for 100 imperial square feet (example a 10 foot x 10 foot room). This converts to approximately 9.29sqm.