Unemployment remains fearfully high in much of Europe, growth in the US is tepid and China may be on the verge of an unprecedented slowdown. In the midst of all this unpleasantness, Australians look around their bountiful land and ask, Can our luck last?
In Beyond the Boom, John Edwards, says it can. More precisely, Edwards argues that significant reforms in product and labour markets and in social policy in the 1980s and 1990s led to strong growth in the decade before the export boom. Moreover, with a few exceptions, Australians used the boom to make appropriate investments in physical and human capital. Speaking as an admirer of Australia from afar, I agree with a great deal of Edwards' analysis.
Edwards focuses on the past. I will say more about the future. First, a simple point about China. China does not have the institutions — rule of law, honest government, sound property rights and so forth — to push beyond middle-income status. China's growth rate, therefore, while it has been astonishing, will decline. The Chinese economy will get bigger, just at a slower rate. Thus, the demand for Australian exports will remain high even as prices moderate and, with its recent investments in infrastructure, Australia is well placed to deliver exports profitably even at lower prices. Second, mining is not just about getting stuff out of the ground. Mining is about transportation, automation, and logistics. Rio Tinto's driverless train system, for example, is the most advanced in the world. Exporting logistic services is another boom field for Australia.
As Jon Stewart memorably illustrated, every US president since Nixon has called for freeing the US from 'dependence on foreign oil' (within ten years!). Every president has failed. Fracking, however, has delivered the goods. Fracking has reduced the price of energy while generating millions of jobs and reducing net emissions of greenhouse gases. The fracking revolution has only just begun in Australia. Australia has abundant supplies of natural gas and if it creates a national market and avoids parochial calls for price controls and environmental NIMBYism it will certainly become the world's largest exporter. While profiting from natural gas production and infrastructure investment, Australia will also help the world to move closer to greenhouse gas targets.
Edwards regards substantial productivity improvements over the next several decades as doable. I am slightly more concerned if only because Australia's productivity improvements rely on those produced by larger economies such as the US. Tyler Cowen and Robert Gordon, for example, have argued that the US is in a period of stagnation with no end in sight. If so, Australia will follow that path. I am more optimistic but their warnings are worthy of consideration.
Australia has performed well on innovation policy, most notably on immigration. Immigration is an innovation policy because, as Stephen Kirchner writes, it brings not just more mouths or more hands but more minds, the key to productivity growth. On balance, current and future Australians would benefit from a larger population. In my report for Alliance 21, I discuss in greater detail how Australia can build on its strengths in innovation policy.
When a rational person wins the lottery they don't blow it all on one mad spree. A rational person smooths their winnings over a lifetime. Governments rarely behave like rational people. Edwards argues that during the boom the federal government spent and cut taxes madly, with little thought for the future. The Australian government, however, appears to have been much more rational and far sighted than many others, including that of the US. Should surpluses have been higher in the good years? Sure, but the miracle is that there were surpluses! Moreover, debt is low and the deficits are already in decline.
The Charter of Budget Honesty Act of 1998 requires Treasury to produce an Intergenerational Report every five years. Surprisingly, it seems to have made a difference. But what was the incentive structure that made this possible? Looking to the future, should Australia make more formal use of generational accounting? Should it follow Sweden and include a more explicit requirement for balanced budgets across the business cycle? As someone who looks to Australia for ideas and innovations in policy I wish Edwards had spent more time in comparative analysis.
Edwards is a member of the board of the Reserve Bank of Australia so it's surprising that he says very little about monetary policy and the role of the Bank in Australia's remarkable record of recession free growth. Australia, for example, did not avoid the 2008 recession: exports tumbled and real GDP growth slowed. Australia, however, did avoid mass unemployment and credit for that should be given to the Bank. Most importantly, the Bank has not let inflation and nominal GDP growth fall too rapidly. A little bit of inflation, say 3-4% a year, can be a good thing because it keeps real wages flexible and gives the monetary authority room to adjust interest rates in response to shocks. The Reserve Bank has kept inflation at this level since around 2000 (although there was a worrying drop in 2012 with some recovery since). The mining boom has detracted attention from the success of the Reserve Bank, which remains an understudied source of Australia's advantage.
In short, Edwards has written an excellent counter-point to the view that Australia simply got lucky with the mining boom. Luck favours the prepared and as the mining boom slows, Australia is well prepared for future growth.
Photo courtesy of Wikipedia.