Ozonomics – Inside the Myth of Australia's Economic Superheroes

The meme that the steadily growing economy of the last decade owes a lot to a) luck, and b) the Hawke-Keating reforms of the 1980s and 1990s, has been steadily propogating after, seemingly, starting out as a few grizzles in various corners of the blogosphere. The grizzles have, however, been getting louder, and now economist Andrew Charlton has come to the party with Ozonomics. In his new book, Charlton puts the various pieces of this critique together to form a rather comprehensive debunking of the myth John Howard and Peter Costello successfully built up for themselves about “good economic management”. Even better, it’s a highly accessible and entertaining read along the way.

Below the fold, an outline of the book, and some thoughts.

The book starts off with some anecdote-laden and well-written introductions to some basic ideas that underpin the latter part of the book; productivity, free markets, and their limitations. Through this section, Charlton critiques both the “neoconservative” (economic libertarians) and the “populist nationalist” (with which he associates both Hansonites and the old Labor left), arguing for a “progressive globalist” approach to economic policy. To greatly simplify, Charlton believes that the populist nationalist case for protectionism has been exposed as windmill-tilting by the experience of the past few decades; the neoconservative approach ignores the important role governments should play in providing opportunities and compensating the losers in a globalised world.

The next section of the book discusses at a more practical level the policy levers that influence economic growth in Australia, using the idea of the economy as racing car that should be driven as fast as possible – that is, economic growth be pushed as high as possibble – without crashing in an inflationary spiral. In this model, the Reserve Bank is the car driver. However, it is the government that engineers the car, and it is economic reform that allows the car to be driven faster, and it is at this point that Charlton introduces the reform record of the Hawke-Keating years, noting the success of the Accord, the floating of the currency, and tariff reductions, compared to the very limited reforms of the Howard-Costello years. It also examines the “recession we had to have”, making a good case that the recession allowed the Reserve Bank to keep inflation low for the subsequent boom years.

Finally, Ozonomics debunks, one by one, six key “myths” that Howard-Costello have used to bolster their image of economic competence and attack Labor:

  • The Budget Surplus Myth: pretty self-explanatory, debunking the idea that budget surpluses are always a good idea.
  • Debt is a Four-Letter Word: about government and private debt, while government debt has dwindled (thus leading to the neglect of infrastructure and the rise of expensive PPPs) private debt has soared.
  • Workplace reform: Howard v Higgins>: the economic case for WorkChoices is thin to nonexistent, and noting the ever-rising share of the economy going to profits and the ever-shrinking share to wages.
  • The Boy Who Cried ‘Interest Rates’:about the myth of interest rates under Howard, showing that the amount spent on bank interest has risen hugely and examining his historical record as Treasurer in the 1980s.
  • The House Price Heist: – how the huge rise in house prices has transferred wealth from younger generations to the Boomers.
  • The Tax Myth: attacks the idea that the GST, or massive tax cuts to the wealthy, have (or will) bring substantial economic benefits

The book ends with a very brief discussion of “what’s left”, the main point of which is that future progressive governments need to take into account the poor across the world, rather than thinking the world stops at Australia’s borders.

As noted above the fold, the ideas here are not new – if you searched around the Australian blogosphere and the more informed economic commentators in the media, the six “myths”, and others, have been discussed at length in the past. But this book provides a huge service in collecting the material together and presenting it in such an easy-to-read fashion and supplying much of the essential context, to the point where maybe even the Press Gallery can grasp it. Certainly, I’d expect the readers of LP to make very short work of it!

With any book like this that tries to summarise complex ideas for a wide audience, there are going to be quibbles. I’m sure the actual economists in the Australian blogosphere can do this better, but I had some questions on reading. One trivial quibble is Charlton’s use of the Baltic countries – Latvia, Lithuania, and Estonia – as evidence that flat taxes aren’t a panacea for the economy. I was there last year, and those countries’ economies are going like gangbusters, thanks very much. The contribution of flat taxes compared to the catch-up effect, joining the EU, and the enormous quantities of EU development aid probably have a lot more to do with it than the specifics of the tax system, however. More seriously, however, is any absence of the environment in Charlton’s discussion. Perhaps this is a deliberate choice in tackling the Howard myth on its own terms, but it’s rather unsatisfying. Has the Howard government’s tardiness in tackling climate change left us far more exposed to economic shocks than it would have otherwise? I suspect so, but I’m not the economist. I think it’s such a fundamental question for Australia’s future economy (and potentially damning for Howard) that it merited a least a brief chapter.

One point that I’m sure many LP’ers might dispute is Charlton’s view of the future of sectors competing directly with low-wage countries. This LP post about Thatcherism after Blair had some discussion about the preservation of a manufacturing sector. Charlton makes no bones about his view that government intervention to preserve such industries is futile “sandbagging”.

Regardless of your view on that issue, this strikes me as a very accessible, clearly written, and credible takedown of the myth that only the conservatives are able to manage the Australian economy. Hopefully, the message will spread.

If you want a taste of Charlton’s thesis, this SMH op-ed is well worth a read.

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Posted in Books, Writers & Writing, Economics, Federal Elections, government, Howardia, Policy, politics
19 comments on “Ozonomics – Inside the Myth of Australia's Economic Superheroes
  1. Mark says:

    Thanks for the review, Rob. I had a bit of a flick through at my local bookshop and suspected something along the lines of what you write here:

    As noted above the fold, the ideas here are not new – if you searched around the Australian blogosphere and the more informed economic commentators in the media, the six “mythsâ€?, and others, have been discussed at length in the past.

    So I didn’t buy it. But as you say, it’s probably aimed at a less wonkish and politically interested audience than we have here.

  2. Michael says:

    For whatever virtues they may have, could populist economic books stop riffing on the title of freakonomics?

  3. Mark says:

    Obviously not – given the economics of book publishing and marketing!

  4. Matt Canavan says:

    If that is an accurate summary of the book that myth debunking is very poor. You can quite easily debunk the attempted debunks:

    Debunking of myth 1 and 2: Sure this is partly true but that doesn’t mean all debt is good. There is no doubt that the efforts to control government spending have helped reduce overcrowding in credit markets and contributed to lower interest rates.

    Debunking of myth 3: I would like an alternative explanation to 4.3% then. Especially since the recent falls in unemployment have led increases in production (usually it’s the other way around).

    Debunking of myth 4: What does more spent on interest have to do with anything? Lower interest rates of course leads to people taking on more debt. Of course, in aggregate they may spend more on interest but they have more house, cars and o/s holidays to show for it.

    Debunking of myth 5: That is extremely debatable and I am not exactly sure what you expect the Commonwealth government to do about it. House prices have gone up for a range of factors including lower interest rates, scarcity of land and flight from equities post-dot-com boom. Note that the explosion in property prices has not been Oz specific and therefore is unlikely to be connected to specific Australian government policies.

    Debunking of myth 6: This is of course is a very complex debate. You haven’t really outlined his arguments so it’s hard to judge. Conservatives would argue that H/C have been able to deliver the tax cuts without imperiling the standard of government services or the fiscal position (like Bush), which is surely then only a good thing (unless you find paying taxes a carthartic experience). Also economists widely agree that the greater taxation of consumption was a good thing because it diversified the tax base.

    Overall, I think the whole premise of the debate is sterile. It’s not a game of football, scored on who can rack up the most reform. And, why would we expect H/C to undertake as much reform as H/K? Hawke and Keating inherited a sclerotic economy that desperately needed change. They did a commendable job with a compliant Liberal senate. Howard and Costello inherited a strong economy and have kept it on track for which they deserve credit, especially in the facy of loonies in the Senate (including the Beazley/Crean Labor party). And, Rudd still runs around seeing we HAVE to manufacture cars! I don’t think it’s hard to decide who are the better reformers at the moment.

  5. Matt, if you want to engage with the details of the arguments, might I suggest you read the book? I haven’t had the time or space here to explain Charlton’s reasoning on each myth.

    That said, to take some of your points.

    * Howard has blathered on endlessly about the merits of budget surpluses and the evils of “Labor debt”. You know it and I know it.
    * As for lower unemployment, try demographics (the impending retirement of the baby boomers) and the mining boom.
    * The point is that the falls in interest rates haven’t resulted in more money in people’s pockets.
    * Government policy giving tax breaks to housing investment has pushed up house prices. In any case, if you’re going to ascribe the house price rise to international factors, why not the unemployment rate?

  6. tigtog says:

    Howard and Costello inherited a strong economy and have kept it on track

    That’s about it yet. The myth is that they’re some super-managers of the economy for managing not to screw it up. They haven’t had any hard yards to do. The hard yards were done for them.

    So why should anyone be concerned that dumping them will hurt the economy?

  7. another matt says:

    given that unemployment is at 30+ year lows, and capacity utilisation – as measured by the NAB monthly business survey – is at all time highs, most economists would agree that it’s entirely appropriate that the government has not been running deficits. what’s called for is a contraction of the government sector, to give the private sector room to grow.

    While you may have argue that it was short sighted not to target a deficit in more difficult times – such as 2000/01, in hindsight the decision to run a tight ship seems to have been the correct one.

    according to the ABS, the mining sector has added 1.2k jobs over the past year – or 0.4% of the 308k jobs that have been added. I don’t think that your blighe ‘mining boom’ riposte holds any water at all.

    where the jobs have been added: +25k in manufacturing (despite the high AUD); +48k in construction (as less union interferrance lifts profit margins, lowers prices, and means more work – withness lieghton’s multiple profit upgrades on this score); +65k in property and business services; +31k in education.

    it’s true, globally we are seeing lower unemployment rates, and higher house prices; and lower labour shares of factor income. policy obviously plays a role in regional variations (such as Australia’s sharp move up in employment growth over the past year), but you should be looking for global explanations if you are honest.

    this looks like thin political point scoring.

    i’m bored already. used by date is yesterday….

  8. GregM says:

    Howard has blathered on endlessly about the merits of budget surpluses and the evils of “Labor debtâ€?. You know it and I know it.

    In times of economic expansion, as we have now, it is sensible for governments to run budget surpluses which, at the same time, takes them out as competitors in the capital markets, improves their sovereign debt profile thus strengthening the local currency, and provides them with options to re-enter the capital market with a lower inflationary risk, all of which leads to lower interest rates and prolongs economic expansion, keeping employment levels high.

    I can’t imagine that in the current circumstances a Labor government would do anything much different from what the current government is doing.

    The point is that the falls in interest rates haven’t resulted in more money in people’s pockets.

    Only because they are making the choices open to them in a booming economy to borrow money at low interest on housing and consumer goods etc. However one Keating reform that should get much greater credit is the superannuation reform which at the same time has provided some retirement savings to many Australians who did not have them while helping to develop a local capital market, thus reducing dependence on foreign capital markets and, in the long term, reducing federal government liability for old age pensions funded out of current revenue. Sadly the compulsory superannuation rate is only 9% and not the 15% that Keating aimed for, nor the 18 to 21% that is really needed. I hope that an incoming Labor government will take this issue up.

  9. Mark says:

    I’m still of the opinion that Paul Keating was on the money about the Howard economy – most of it is none of their doing. Monetary policy has been outsourced to the reserve bank (not that I’m complaining about that) and fiscal policy has arguably been driven by symbolism rather than being attuned intelligently to the business cycle. Keating is also right, for mine, about the floating dollar being a stabiliser – I’m not aware of how Costello claims to have seen off the Asian economic crisis in any practical way. Their record on micro-economic policy is poor, and they basically have no strategic macro-economic policy. That’s even before we get to the craziness and politicisation of much discretionary spending.

  10. steve says:

    The Farmers Union gets preference. Funny how the US Free trade agreement and the Federal Government’s single desk wheat selling system don’t seem to have helped farmers too much lately.

  11. Bingo Bango Boingo says:

    Mark

    You’re quite right about Howard and Costello riding along the economic wave created by Hawke’s macro stuff and some of Keating’s micro stuff. I’m intrigued, though, by your specific criticism of Howard and Costello’s policy record. As you suggest, we can ignore for the moment some of the politically dubious expense measures of recent times. But it’d be great if you could just give us a decent list of the micro-economic reforms that Howard and Costello should have introduced these past 11 years, but didn’t. Also, what for you are the key changes that need to be made to the macro policy framework?

    Cheers
    BBB

  12. Kim says:

    BBB, Mark is off interstate for a holiday and has vowed to have one and not look at blogs! So apologies on his behalf for the lack of an answer to your question.

  13. Bingo Bango Boingo says:

    Cheers Kim.

    BBB

  14. the munz says:

    the Maquarrie Bank exec was spot on when he said “the economy has done more for the government that what the government has done for the economy”. seems to sum it all up don’t you think?

  15. Brian says:

    Robert, thanks for the post. I wonder if you have any thoughts on the distortion of the dollar by the mining industry. My understanding of economics is strictly limited, but I understand that the dollar is seen internationally as resources linked and a way of gaining exposure to the resources boom.

    I recall the trade weighted index (TWI) as being at 54 in the early years of this century. Now it’s about 70, a 30% increase. This surely makes it hard for agriculture, manufacturing and tourism.

    The other significant determinant of the dollar is comparative international interest rates, where ours are very high. Again my limited economics tells me that they need to be high to attract the funds to service our balance of payments, one of the most negative in the OECD.

    What to do about it is the question. I think Rudd and Swan want to invest in education, infrastructure, research and innovation so that we can work higher up the feeding chain. Sounds good to me.

    And you are right about the environment.

  16. I dunno, Brian. Like I said, I’m no economist . One thing I’ve often thought is that the value of the Australian dollar is dominated by sentiment towards the resources sector, way beyond its actual importance.

    I do know that in Ozonomics Charlton describes our economy as suffering “Dutch Disease” – the weight of the mining sector on exports distorts other parts of the economy, and mining is a particularly cyclical industry.

    Charlton also agree with you on what we should be doing; he argues that in the long term innovation is the driver of economic growth and improved living standards.

  17. Brian says:

    Robert, sentiment yes and because it is a market largely traded for for the sake of trading, perceptions governed by fear and greed.

    One wonders how the true value of the dollar might be established. Bill Evans of Westpac this morning said that given the market for resources and interest rates they see fair value as US$95. That makes the current price about 25% below fair value. Fair to whom? I wonder how much manufacturing and agricultural activity we’d have if the market priced the dollar at 25% above what they regard as fair value – say US$118!

  18. If anyone is interested, I have posted a review of Ozonomics at my new blog, The Hippocratic Economist:

    http://hippocraticeconomist.blogspot.com/

  19. amphibious says:

    The old,but still accurate, description of a 3rd World economy was the export of raw materials. I forget the handy ABS acronym (some waste of space economist will know it – stood for ‘significantly increased value’- STP [sic!])for value added but wot ever we ain’t doing it. How could we, our education & training budget hgas been so eviscerated that we’re currently hard pressed to find qualified hamburger flippers or pizza delivery, hence the explosion in 457 visa. (Anyone who wants to argue with that, there ius a 20 sec. check on DIMIA’s database that will show how many entered in any given period – last time i looked it was almost 400K IN THE PREVIOUS 12 MONTHS)

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