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QUARTERLY ESSAY 61 Balancing Act

 

Correspondence

Clare O’Neil

One fascination of economics is watching how trends in thinking ebb and flow. In the 1970s economic nationalism reigned. By the 1990s you were an economic rationalist or an economic illiterate. During the global financial crisis we were all Keynesians. 

Today, Australia’s economy faces obvious, urgent problems that none of these approaches will help us solve. Australians are not getting better at thinking, building and creating fast enough. For many, wages are growing slowly or not at all, and living standards in Australia have not improved for five years. The mining construction boom is drawing to a close, and the global economy is dominated by uncertainty and unease.

The old thinking isn’t working anymore, here or overseas. We’re not merely observing our economy in transition; there is a transition underway in how we think about government’s role in helping Australia out of the mire.

Enter George Megalogenis, whose essay offers a clear-sighted perspective on how the toxicity of politics is contributing to our economic malaise, and a thoughtful, evidence-based argument about stronger government intervention in infrastructure and cities policy in particular. Balancing Act is not, and is not meant to be, a coherent new philosophy of how government and the economy ought to interact. 

Politics is suffering due to a lack of agreement on this point. Much of our current economic debate feels as if it has no anchor, no shared starting point. One minute the scourge is budget deficit, the next the tax mix, then the tax burden on the middle class, then on companies. While we debate tax policy as though it is the only economic issue that matters, economic problems of vast national importance are being largely ignored. 

In searching for a new way to think about government’s role in the economy, it’s worth noting that what Megalogenis describes as the “open economy” model has been deeply rooted in the minds of Australian politicians and the public for almost thirty years. If the resident galah knew anything, it was that the best thing government could do for the economy was get out of the way. But suddenly, evidence is everywhere that the time for this idea has come and gone.

Today, there is broad recognition on both sides of politics that government shapes and influences our economy: it cannot avoid doing so. Government spending in Australia is 37 per cent of GDP. Some government interventions are very direct, such as removing support to the car industry, or signing a free-trade agreement that privileges one industry over another. Some are less direct: how much funding we provide to the CSIRO, how many young people we train in metallurgy or medical science, whether we build a new freight link in Penrith or Perth.

The bipartisan engagement on innovation policy demonstrates this shift in thinking. Today, it is accepted that innovation matters to economic growth, and that governments drive innovation through regulation, universities policy and other means, such as investment in science and research. This flies in the face of traditional economic thinking, but it has been adopted by Australian politicians with very little comment, because the evidence that it works is so strong.

The shift away from dogma is a global phenomenon. In Europe and the United States, economic decision-makers are busily enacting policies (for example, trying to drive growth by printing more money) which would have been sacrilegious a decade ago. There is global interest in the work on inequality of Thomas Piketty and organisations like the IMF and the OECD. All are arguing that without government intervention capitalist economies will create unequal societies, and that over time this will slow growth. Social policy is back in vogue, for economic reasons as much as any others.

Academic economics, too, is throwing off the shackles of textbook thinking. The exciting field of behavioural economics argues that some of the foundation principles of the science are, when tested in the real world, utterly wrong. 

These shifts have a common thread: pragmatism over philosophy, real-world thinking over textbook, evidence over theory. We may not be looking at a new economic orthodoxy, but rather a shift away from orthodoxy altogether. The guiding principle for government intervention might therefore be this: governments should engage where the evidence shows they can make a difference.

If we used this thinking to build an economic agenda for the nation, I think we would find there is plenty for Australian governments to do that is urgent, obvious and the subject of wide consensus.

If we asked most decision-makers and economists what the evidence tells us matters most to Australia’s prosperity, and what government can influence, I think they would agree on five big challenges. Our education system, so important to underpinning today’s prosperous Australia, is fast falling behind that of our peers. The sluggish engagement with Asia by Australian business and governments is seeing other countries sweep up export and partnership opportunities that Australians have long regarded as fait accomplis. Climate change has become an undeniable reality, and the chance to become a global renewables powerhouse is slipping from our grasp. We are lagging behind in big infrastructure investments (broadband, public transport) with huge potential to drive growth. And there are concerns about whether Australia could weather another financial crisis, due to the growing debt of Australian governments and households.

Not everyone will agree on how to order these issues, and some will add one or two to the list. But any government looking for an economic agenda can find plenty to get on with here, purely on problems that virtually everyone agrees are critical. 

Yet we spend disappointingly little time in politics talking about these, the most important economic issues facing our nation. Why this is so has plagued me since being elected to parliament almost three years ago. As a journalist, Megalogenis evidently finds it frustrating to comment on. As a politician, it can feel enraging to participate in.

One part of the problem that I see up close is that our political culture is addicted to conflict. Question Time, the centre stage of our democracy, is dominated by aggressive posturing and tit-for-tat point-scoring – an abominable way to conduct a deliberative process and, on many days, a total waste of time. Some politicians feel that focusing on areas of consensus is a missed opportunity to highlight political differences between the parties. From a policy perspective, this kind of thinking is starting to hurt Australia badly. And politically, I think it misreads the desires of the electorate.

The idea of a less hateful political culture isn’t a fantasy, because we’ve enjoyed it before. Our last great consensus leader, Bob Hawke, was not elected with a mandate to open up the Australian economy. But he was able to do so because he first brought the country together. Then, like now, what mattered most was finding an economic direction for the country that was broadly shared – by many, if not by all. Of course, politics had conflict back then. But today governments seek out policies specifically because they know they will be opposed. Past governments – better governments – strove for the middle ground. 

The role of government in a transitioning economy is to do what evidence shows us works. If we took that approach, we’d find the answers – and consensus about them – much more quickly than we are doing at the moment. In time, those interventions may come to be described as a coherent ideology. The neat way of describing the Hawke–Keating modernisation project didn’t emerge until it was underway. In the meantime, we politicians have plenty to get on with – even if we don’t yet know exactly how to define what we’re doing.

 

Clare O’Neil is a federal Labor MP. She studied economics at Harvard as a Fulbright Scholar and was Australia’s youngest female mayor. She is the co-author, with Tim Watts, of Two Futures.

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This correspondence discusses Quarterly Essay 61, Balancing Act. To read the full essay, subscribe or buy the book.

This correspondence featured in Quarterly Essay 62, Firing Line.


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