Seize the hour!

I attended the third and final session in the public forum series Getting to Grips with the Economy, organised by the Whitlam Institute at the Riverside Theatre in glorious Parramatta. This one featured John Quiggin, Steve Keen and the confessed non-blogger Guy Debelle from the RBA.

These particular speakers must have some pulling power, since this session was as well attended as the one with Ross Gittins despite being in the school holidays. The ‘general public’, including high school students, were well represented, and, except for the journalist from Reuters who came all the way to Parramatta to get a quote from Debelle about interest rates (and received the terse rebuff she deserved), I think they got their $10.00 (incl. GST) worth.

The topic this time was ‘New Times New Approaches: exploring Australias economic options’. Quiggin’s thesis, which will be no surprise to readers of his Financial Review columns or his blog, was that the global financial crisis discredited free market apologetics and strengthened the case for increased state involvement in the economy. The argument has a dialectical flavour: we are emerging from a failed ‘finance driven era’ that was in turn legitimised by failures of the preceding era of social democratic policy, which spawned stagflation and fiscal crisis; a synthesis is dawning. The details are laid out in ‘An agenda for social democracy’, the first essay in the Whitlam Institute’s planned ‘Perspectives’ series. The lecture slides are here.

The era of implicit or ‘quasi’ guarantees for banks is over: henceforth bank deposits will either be explicitly guaranteed or explicitly not guaranteed; and the guaranteed sector will have to submit to close regulation. The trend to private provision of infrastructure projects, through privatisation and PPPs, will be halted or reversed. Governments will provide more services and undertake more risk and more debt; at the same time households will save more, take on less debt, and pay more tax. The economy will be less captive to the vicissitudes of the financial sector, which will account for a smaller share of GDP. Quiggin favours a Tobin type tax, on all asset transactions rather than just international ones. He did not raise topic of creating a ‘people’s bank’, though there questions about that from the audience.

One point that confused several listeners, including me the first time round, had to do with the role of Australia’s current account in insulating us from the GFC. I think the point was that countries with current account surpluses and corresponding stocks of foreign financial assets generally did worse than those that had liabilities. If that’s what he was saying, it seems a dubious claim given that many countries’ net financial positions disguise massive gross portfolios of both assets and liabilities. John might offer a clarification if he happens to read this.

Steve Keen gave the first response. Again, readers of his blog will be familiar with the arguments, and possibly the dramatic graphs and computer simulations he uses to illustrate them. Keen disputes the common beliefs that the crisis is nearly over, and that the Australian economy in particular is inherently resistant. Keen thinks that Australia has far too much private debt, with a corresponding asset bubble that still has a long way to deflate. The recessions of the 1980s and 1990s were dealt with by further asset inflation — the real, 1930s-style correction we are due for is still around the corner.

Guy Debelle seemed sympathetic to most of Quiggin’s analysis, but reluctant to endorse any of the concrete proposals, presumably because anything he said might be reported as RBA policy. His main contribution was to express confidence in Australia’s overall macroeconomic and prudential management, and urge that various orthodox wisdoms not be lost sight of in the rush to reform. He stressed the importance of credit, noted that rising real estate could in principle be straightforward relative price changes, and warned that too much social insurance reduces private incentives to save. Unlike Keen, Debelle doesn’t see massively excessive debt as the fundamental problem.

In summary, I thought that Quiggin’s talk struck the right balance, recognising that the GFC has fundamental implications for how modern societies handle risk, without necessarily predicting further financial turmoil and depression. What we’ve had is bad enough, and fortunately there are ways to prevent it happening again, and eliminate some other systemic problems while we’re at it. The breeze of public opinion is blowing the right way. On the other hand, I found that Keen and Debelle were so far apart in terms of tacit assumptions and basic frame of reference that it wasn’t possible, at least in the time available, to discover where the ultimate theoretical and empirical differences lay. Perhaps a longer debate, just between the two of them, or between Keen and some other critic, would be more fruitful in teasing out the issues.

You can watch videos of the keynote addresses from the first two sessions, by David Gruen and Clare Martin, at the ABC fora website. Presumably the Quiggin talk will turn up there too.