John Edwards' Beyond the Boom tilts effectively against Australia's congenital Hanrahanism. It points out the extent to which we managed to finance the wild ride of the boom (the massive surge in mining investment, from 2% to 7% of GDP) without blowing out our current account deficit and foreign debt or setting off an inflationary spiral as we've done in the past.
We did it with a floating exchange rate, superior macro-economic policy and higher savings. How many people are aware of these facts as recited by Edwards?
By 2013, Australia's rate of workforce participation was higher than the US, once cited as a country far ahead of Australia in respect of that indicator. Australia's rate of investment was far higher than Japan or Germany, to which Australia had usually been unfavourably compared in this respect. Its rate of saving was also far higher than Japan or Germany, recognised as saving paragons.
Edwards is strangely muted on the role of compulsory superannuation in lifting savings, perhaps because he's aware of its huge and inequitable cost to the budget. (Naïve question: If we want to lift household savings, we can use compulsion or incentives. Why do we use both?)
What's more, as Edwards points out, much of our investment occurred not in physical structures — buildings, plant and equipment — but in human capital, in the skills of our people. The Herald/Age Lateral Economics (HALE) index of well-being takes GDP and adjusts it for some of the major inadequacies of GDP in measuring well-being. And our measure (see graph above) corroborates Edwards' story, with human capital rising faster than GDP.
For instance, consistent with the figures Edwards cites, the proportion of the workforce with Certificate III qualifications or above has risen from 40.7% in 2003 to 52.3% in 2013. These changes scored a squillionth of the column inches devoted to the mining boom, but they matter more. From mid-2005 to the latest quarter reported, real GDP has grown by 28%. Net national income (NNI) captures the rise in the terms of trade and so lifts our measured economic growth to 33%. The HALE index takes NNI as a better starting point for measuring welfare than GDP and, even with rising obesity and mental illness weighing it down, human capital increases our measured increase in well-being another ten percentage points to 43%.
Does this mean we're out of the woods? Well, yes and no!
I'm broadly in agreement with Edwards that we've handled the boom relatively well (and brilliantly when compared with our former booms). Still, just as Adam Smith asserted, it was ongoing production that mattered more than accumulated treasure. We will (or won't) adjust to what the future throws at us not because of the accuracy of our pundits' predictions today, but rather as a function of the quality of leadership as the future unfolds.
The upside here is that, as Edwards points out, labour productivity can be expected to grow at 1.5% per annum. Even if it grew at 1%, this would generate around four times the annual growth cost that aging will impose upon our economy in the coming decades. And fiscal drag exerts a powerful budgetary counterweight against the depredations of rising dependency ratios.
None of this is to endorse the complacency produced by our increasingly dysfunctional political-infotainment complex. Each major party campaigns by gravely warning of impending crisis while promising not to hurt a fly.
The world is a dangerous place, and pessimists like Ross Garnaut may be right that real income falls are in store for us. If he is right, then he's right also that bringing such a transition off fairly and efficiently (which is largely a function of how strongly unemployment figures in the transition) is a difficult business.
There's another kind of complacency that Edwards' helps illustrate. There's an unfortunate presumption among our policy elite that productivity-enhancing reform is conceptually straightforward and only requires the stiffening our political resolve. In this scenario the role of the pundit is as a kind of motivational spur. In politics as in sport, it's a case of 'no pain, no gain'.
Gary Banks' 'to do list' illustrates the problem. Edwards' claim that the adoption of any of the items on the list 'or for that matter the whole lot, would probably not make a measurable difference to GDP growth' is exaggerated. But his point, that the items on this list pale into insignificance against the reform strides from 1983 to 2000, is hard to dispute. Gary's list is mostly the unfinished business of those glory days of reform.
Since then we've failed to replenish the intellectual larder. Australia, a standard bearer for neo-liberal reform and the only one with a focus on equity, has been reticent to build on that legacy by moving beyond it.
Recently we at Lateral Economics were commissioned to estimate the benefits of more vigorous policies to embrace open-source data in the age of the internet. Despite high-level government commitment to the agenda, and the fact that the US and the UK are racing ahead of us, Australia is taking its time. Treasury and the Reserve Bank don't even have real-time tax data from GST returns to help them take the economy's pulse. We surprised ourselves to find that such an agenda could add around 1% to economic growth without generating any substantial losers. But it's not on Gary's list.
That's just one example. I could offer many more, having worked on my own list for some time. But none conform to the ideological formulas of the 1980s and 1990s, when the dominant criterion by which reforms were judged was as crude as asking whether they were more or less 'pro-market'.
Chest-beating endurance of electoral pain won't deliver reforms like this if there isn't the intellectual curiosity and courage to imagine them and get them on the list.