Here’s today’s AFR column.
No pain no gain. Were all familiar with the cliché. Meet its twisted sister. Courting the pundits respect for taking tough decisions, our politicians simply make the economy worse. Call it all pain, no gain.
In the next few weeks the Federal Government will lower tariffs for cars and apparel even though simple economics says tariffs shouldnt fall further unless matched by our trading partners. Why? Because if we cut tariffs we import more thats the point of the exercise. And to pay for those imports we export more. And exporting more will slightly cut our export prices. Bearing that small cost is fine if were reducing high tariffs, but low tariffs impose miniscule costs, and they raise revenue that will have to be raised some other (costly) way.
Many of the major decision makers know all this. But they explain patiently they can’t stop tariff cuts because it just wouldnt look right. Theyre not referring to the economic merits here, but rather to the pundits.
Now, pointing to the emperors lack of attire can be hard work from Opposition. But its usually a doddle from government where your decisions control of the agenda and can be chosen to illustrate the tradeoffs being made. When, after years of economic reform the zero tariffs parcel was passed to Dr Hewson did it do Paul Keating any harm? Does the Federal Government really want to find the billion odd dollars extra revenue tariff cuts yield every year?
Still this is small beer compared with the pundits fiscal policy. It sounds so responsible to minimise debt. But debt can fund more infrastructure which improves amenity and accelerates economic development. Whats not to like about the economics or politics of that?
And the alternative? Well behold the NSW Government still shuffling towards its political grave with the contradictions behind its arbitrary minimisation of debt still ripping it apart AAA rating and all.
All this because State Governments havent had the stomach to give their opponents a few cheap shots about rising debt though of course theyre taking them anyway! In addition to controlling the political agenda, governments should also develop independent institutions to ensure infrastructure projects are well chosen and to reassure the public of their fiscal prudence.
Thus when battling perceptions of his partys past fiscal laxity Steve Bracks as Victorian Opposition leader promised to get the Auditor Generals seal of approval on government budgets. And so he did, but then retired back into debt aversion and under-investment in infrastructure which is now making life interesting for his successors.
And all this could really matter at the Federal level sometime soon. A few years ago I proposed that governments should start moving the institutions of fiscal policy towards the model offered by monetary policy. For instance the government could build some independent institution to publicly advise it on its fiscal stance, including on borrowing to invest in infrastructure and other assets (including financial assets). This would have cramped the Governments profligate style during the boom and so went nowhere.
But what if the economy turns down? Forecast budget surpluses would be at risk. Then, as the inevitable political pressure comes on, well be told – even though we’ve sensibly posted tens of billions of dollars in surpluses (and yes it should have been more) – that we have no choice but to prune the budget. Why? Because letting the budget bottom line suffer might be good for the economy, but it would look bad. It would offend the pundits.
Economists who want to run the economy according to the best guidance our discipline gives us will be complimented on our candour and forthrightness. But it will be patiently explained to us that doing the wrong thing economically will play better with the pundits as indeed it will at least for a while.
Still Im hoping that some in the Government, looking at the demise of Morris Iemma and with their eyes focused on making it through the political cycle over the next 24 months might be prepared to brave a few 24 hour news cycles to talk the talk and build the institutions that can help us apply ourselves to fighting the next downturn as best we know how. Some long term futures might depend upon it.
It mighnt be all beer and skittles. But then, as they say, no pain, no gain!