Column from the Courier Mail

One of the reasons I thought I’d like to do some writing on Troppo is that I have recently become a columnist for the Courier Mail. I thought I would like to try out ‘open sourcing’ a column. So I proposed to Ken that I post forthcoming columns on Troppo a few days before they appear as I try to have something done by the Monday and they are published on Wednesday. That way bugs could be detected and fixed – just like open source software, and people could propose ways for me to improve the columns and perhaps ideas for others.

Ken was agreeable, but alas the Courier Mail didn’t like the idea as publishing first is a big deal in the trade. So given my original thinking I’d still like to go for second best here which is to post after the column has been published. I doubt if I’ll do this every week, but if I think I’ve put something in my column of any originality or independent interest rather than just rehash some ideas that are already well represented in our opinionosphere I’ll post a link to the article here and invite comments from readers.

Here is yesterday’s column, though I’ll also put the column as originally drafted below the fold as they sometimes chop it around. (They take out my jokes – which I guess some might see as an improvement).

The long and the short of it

A while back I was on a tram on a business day trip and got talking to the lady next to me. I was in Melbourne advocating a particular government policy and, since she asked, I explained my case. She said I’d convinced her and, given my perseverance till that time, she expected I’d succeed.

Often if I think of a witty riposte, its after the event. That’s what the French call esprit d’escalier literally ‘the spirit of the stairs’. (I guess it’s what you realise you could have said as you go up the stairs). On that day I cut right to the chase. “Yes” I yelled back to the lady as I alighted from the tram “I expect I’ll succeed . . . at about the time that what I’m advocating has become the wrong thing to do”.

That’s the long and the short of it. Most policies have specific short and longer term effects and sometimes they mutually reinforce each other. But sometimes they conflict. We spend so much time in grand ritualised ideological battles right versus wrong, left versus right, governments versus markets that we underrate the skill of matching policies to circumstances. As a result we’re not much good at it.

For example, we should still tackle the excessive tax preferences for investing in housing like capital gains tax concessions (50 per cent for investment housing, 100 per cent for your own home). But the best time for reform was a few years ago. That way its long-term benefits (less excessive investment in housing, lower house prices and stronger investment elsewhere) could have also helped us restrain the housing boom. Doing it now would impose short-term economic costs by exacerbating the housing downturn. And usually short-term costs attract more political hostility as in this case.

For me we had something of a golden age of economic management from around 1983 to 1987. Keating called it the ‘high wire’ act. (He was right – as we found as we watched his stick like figure twisting and plummeting Icarus-like to earth). The Accord partners the Government and the unions would meet and thrash out an agreement that produced outcomes we needed in the long-term while addressing the short-term needs of the macro-economy.

Twice in the first five years, we engineered sharp reductions in real wages of around 2%. On each occasion the short-term effects of this longer term policy couldn’t have been better with the recovery in 1983 and with the dollar’s collapse in 1986 the deals took the edge off inflation, and produced much needed strong employment growth. The alternative was slower growth. And, at least on the second occasion, recession.

Our loss of improvisational elan can be dated to 1989. Then we faced a ballooning current account deficit and rising inflationary pressures. (D©j  vu anyone?). We turned to monetary policy. (D©j  vu anyone?). Problem was, as we knew at the time, tighter money was not only a blunt instrument carrying the risk of misjudgment and recession. But its short-term benefits came with counter productive longer term costs.

As I argued at the time (I’ve got the newspaper column to prove it!) there was another option. Requiring workers to pay some small share of their wages into their newly established superannuation funds would have slowed consumption as we needed to do. But where tighter money did that with the side effects of less investment and a higher exchange rate which choked off desperately needed exports, increased super would have increased saving, lowered the cost of capital and the exchange rate and thus lifted exports.

We already had a long-term goal of dramatically increased compulsory super. But increasing superannuation was unusually attractive as a short-term economic tool as well. So we could have killed two birds with one stone the long and the short of it.

The powers that be said that people wouldn’t like it. Funny isn’t it, how hard it is to get people to consider something new on a ‘level playing field’ with what’s already in their minds? As I recall, they didn’t much like the alternative either 17% interest rates for which the ALP still pays the price.

So here we are again. Our once yawning current account deficit is now coming to resemble lockjaw. The labour market is tightening with skills shortages emerging as they were in 1989. And in the absence of other action by the Government, the Reserve Bank considers that it’s being forced to slow the economy with the wrong instrument higher interest rates. Exports have stalled and, though mineral exports will lift soon, our dollar is already overvalued.

I suppose we’ll get round to increasing compulsory superannuation one day. We’re just increasing the chances that when we finally get round to doing it, it will be at the wrong time.

D©j  vu anyone?

Printed as “Too much too soon, too little too late” in The Courier Mail, on 23rd March at 2005

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derrida derider
derrida derider
2024 years ago

The general point about timing of policy is right. But the specific example I’m much less sure about.

There is no evidence that compulsory super has boosted national saving. People indirectly borrow against it by increasing their mortgages, on the assumption that it doesn’t matter much if they’re not paid off at retirement (and why wouldn’t they, given the effective rate of return for super is negative for most people because of the pension means test). I predicted this at the time – and I’ve got the memos to prove it.

Given the housing boom of 1989, and the tremendous enthusiasm of newly-deregulated banks for dodgy lending, I reckon you simply could not have done much forced saving, other than by fiscal policy (which, of course, had and still has its own problems).

Once the inflationary cat got out of the bag in 1989 it was always going to end in tears.

Nicholas Gruen
2024 years ago

Its quite true that compulsory saving can reduce voluntary saving – a complication I didn’t have space to deal with in the column. But it not plausible that the tradeoff is 1 for 1. So compulsory saving can be expected to increase saving and so, at least those who think its a good idea to increase compulsory saving over time can kill two birds with one stone by using it now.

Meanwhile in the next post, it looks like Sophie’s killed more than two birds – though she’s not specified how many stones were used. Poor ducks :(