WHY THE LIBERAL PARTY
SHOULD ADVOCATE (AND USE)
MORE ECONOMIC RATIONALISM
Talk to Young Liberals
On Friday 4 January 2002
By Des Moore
Director, Institute for Private Enterprise
In his now regular column for Victorias bastion of liberalism (The Age), Malcolm Fraser suggested on 28 December that globalisation threatens to diminish our economic and cultural identity, is exacerbating inequalities within and between countries, and is not tackling world poverty and so ensuring a peaceful world. But such assertions reflect only a superficial understanding of underlying influences of economic forces and should not provide a basis for policies for a modern political party with "Liberal" in its title.
Whether they are ex Prime Ministers or S11 spokesmen, anti-globalisationists reflect a strand of thinking that would lead us back in time, down the track of even more government intervention designed, supposedly, to protect Australians against overseas competition, to solve the alleged inequality problem by increasing taxation of higher incomes and providing more social welfare, and to tackle world poverty through increased aid. These paternalist aspects of conservatism fail to recognize that, under modern conditions, the solution to such problems requires a greater role for private enterprise and individualism, not government. We need to move ahead, not simply sing the Bee Gees signature tune of Staying Alive.
Of course, the social components of conservatism remain relevant and important, such as the need for political and legal systems that provide a stable foundation for society, protecting the individual and fostering family relationships. But, while a more globalised economy means greater exposure to competition that will involve changes, Australian achievements in sport and the arts alone show how well we respond to that and how well we retain our cultural identity.
The Liberal Party should do much more not only to promote the benefits from a more competitive society, but to pursue the economic rationalist (ER) policies needed to develop them. The benefits from espousing ER are well illustrated by a brief survey of what happened in the 1990s.
Some Benefits From Economic Rationalism
If we first take 1992-93 as the starting point and 2000-01 as the end point, we find an average increase in incomes per head of over 2.8 per cent a year after allowing for inflation. This was double the rate of growth in the 1970s and 1980s. In fact, during the eight years Australian living standards actually increased by an astonishing 25 per cent.
Second, this was due almost entirely to faster productivity growth. But what caused that improvement in efficiency? Analysis by the Productivity Commission suggests it mainly reflected economic reforms under ER policies rather than the strength of the business cycle or increased usage of more advanced information technology.
Third, notwithstanding the earlier reduction in tariffs driven by ER policies, imports did not grow faster than exports. Reduced protection did not produce an external crisis nor did it lead to higher unemployment.
Fourth, did these developments disadvantage wage earners and advantage nasty capitalists? Well "no", the increase in incomes was equally shared between wages and profits.
Fifth, it is true that amongst individual wage earners there was a widening in the distribution of earnings. However, the progressive income tax system paid out generous social welfare benefits and this prevented any increase in the inequality of total incomes.
Finally, what about the much-touted rural decline? Well, there was actually an increase in people living outside capital cities between 1995 and 2000 - and at a rate not much below the growth in capital cities. Unfortunately for Hanrahan, the bush was not "rooned".
These developments in the 1990s provide very strong evidence that ER policies produced large economic benefits for the great majority of Australians and that governments protected the less advantaged through the social welfare system. Could the Liberal Party advocate more ER policies and respond to the criticism of them?
Some Reasons for Criticisms (& Some Responses)
One criticism is that, as there is no "authorized text" explaining ER, common misconceptions develop that it is primarily concerned to get the best economic results and has little regard to social consequences.
Such reactions, however, tend to focus on unfavourable initial effects and overlook the second and third round effects that are usually favourable - and favourable from both an economic and social perspective.
Reductions in protection of manufacturing, for example, have initial unfavourable effects on some industries and some employees, and that is what most people perceive. But this also leads to expansions of other industries. Why? Because lower protection reduces costs for other industries and it also reduces the prices that consumers have to pay, leaving them with more money to spend on other goods or services.
This indicates that reductions in protection are likely to have net favourable effects for the community as a whole. Lower protection in the 1980s, for example, has been followed by an increase in manufacturing production of 17 per cent and manufactured exports are now 24 per cent of total exports compared with only 16 per cent at the end of the 80s.
It may seem "unfair" that lower protection eliminates or reduces some businesses and their employment. But isnt it unfair to ask the rest of the community to sacrifice their living standards to keep the protected sector going when there are more efficient alternative businesses and forms of employment? It is also surely more equitable and more socially healthy to have a community that consists of as many individuals as possible who are not dependent on others.
Another misconception arises from the belief that the ER policies of financial deregulation and reductions in protection adopted by Labor during the 1980s caused the end 1980s recession. In fact, the underlying cause of that recession was Labors attempts to stimulate growth through the pursuit of highly interventionist monetary and budgetary policies that were not consistent with ER. The boom-bust ending led Mr Keating to pronounce it as "the recession we had to have" - but should not have had, of course.
Governments Have a Role But It Should be Minimal
Any Liberal Party advocacy of ER would need to start by making it clear that it is not the same as laissezfaire and does not rule out government intervention provided the intervention is minimal.
Experience has shown that, when governments try to "manage" a business enterprise let alone fine-tune the economy, they run into intrinsic practical difficulties. Governments also tend to make decisions in the interests of lobby groups rather than the community as a whole.
This experience led about thirty years ago to the identification of a new phenomenon described as "government failure". The most striking example was the mess produced by the attempts at economic planning in Eastern Europe and the old Soviet Union - but Victorians also experienced government failure on a smaller scale in the 1980s.
The recognition that government manipulation of the economy is much harder than Keynes thought in the 1930s has had major repercussions. Most importantly, it has led to a radical modification of the notion that there is a fundamental flaw in capitalism and that governments need to intervene to prevent or smooth business cycles. In Australia today there is pretty much bipartisan agreement that government budgets should not be operated deliberately to try to anticipate and/or offset cyclical swings in the private sector. This is also now widely accepted amongst overseas governments and international economic organisations. It is a development that has given ER a substantial credibility boost.
ERs support for minimum government intervention also reflects a view that, in a modern society with relatively high degree of education, individuals should be relatively free to pursue their own interests and should be better able to look after themselves. A better balance is needed between the equity of assisting those on low incomes and the equity of rewarding individuals for their economic contribution.
Redistribution of Incomes
The most contentious issue is how far to go in reducing inequalities of income. The perception that the "fairness" of society would be improved by reducing inequalities is part of the supposed Australian culture of egalitarianism the idea of giving everyone a "fair go". But, although this is even reflected in theorizing by academic economists, the policy conclusions drawn from that find little support amongst ERs.
Of course, economic rationalists do agree that governments should assist those on low incomes and that higher income earners should be net contributors. But they are also concerned to minimise the many adverse effects from government involvement in redistributing incomes.
One major problem is the growth in welfare dependency. Since the last economic expansion ending in the 1980s the proportion of the working age population on income support has jumped from 15 to 22 per cent and now covers an incredible 3.2 million people. If we include education and health benefits, the top 40 per cent of incomes receive nearly 15 per cent of government benefits and allowances. With the ageing population and the potential for a massive blow-out in government health expenditure, the Liberal Party badly needs to start reducing the eligibility for health and other welfare-type benefits.
Arguments for greater income redistribution based on calculations purporting to show up to 20 per cent living below the poverty line also need to be rejected. The problem here is that the line is constantly being raised at about the same rate as national income. This means that the standard of "poverty" becomes ever-higher and that, while the population increases, there will always be growing numbers of "poor". That does not provide a sound basis for intervention by governments, particularly as most who were poor at some earlier time would by now have moved up the income scale.
The Prime Minister has rightly indicated support for reducing the high degree of regulation of employer-employee relations. But much more explanation needs to given of why such regulation reduction would not be unfair. The idea that a much less regulated labour market will leave a bargaining imbalance between employers and employees is based on a widespread failure to understand that, with over 1,000,000 employers competing for the services of over 9,000,000 employees, there is little scope for employers to impose conditions on workers.
The basic problem is that the regulatory system seriously inhibits employers from adding to employment, particularly of low skilled workers. For example, by setting the minimum wage at a high level relative to the average wage, the Industrial Relations Commission has almost certainly kept out of employment many with low skills and earning capacity, convicting them to reliance on social security.
In any event, the existing regulatory system has been unsuccessful in preventing a widening in the inequality of earnings. Moreover, it is nonsensical to try to protect the low-paid by adjusting wages. Why should the majority of low wage earners have their wages protected when they live in households in the upper half of the income scale? It is Government social security, not Commission wage decisions, that makes incomes more equal.
Privatisation, Competition and Monopolies
Ensuring competition is an area where economic rationalists have no in principle difficulty in supporting government regulation and intervention. Preventing monopolies or at least regulating them helps to protect consumers and to level the playing field for those who want to be competitors.
This of course leads ER to support the privatization of monopolistic public sector enterprises. Such action will expose the enterprises to competition of various kinds and is most likely to produce a more efficient use of resources that provides a better quality service. Critics need to ask themselves why there has been no significant reversal of the over 15,000 privatisations world-wide in recent years, including under Labour in the UK.
Environment, Education and Immigration
The environment, education and immigration areas provide further examples of the ready in-principle acceptance by economic rationalists of government intervention. The basic logic here is that, while such intervention imposes costs on individuals or impinges on their individual freedom, it produces more-than-offsetting benefits for the community at large.
For example, government intervention to regulate and control the level of pollution is usually appropriate because individual factory or car owners have no economic incentive to limit the extent to which they emit pollutants and there would otherwise be excessive pollution. Similarly, government intervention is justified to ensure free and compulsory primary and secondary education because there are net "spin-off" benefits both economically and socially from having an educated community.
Immigration is another area where ERs accept that potential economic benefits from a faster growing population have to be balanced against the potential for social instability from higher immigration. It is relevant that the potential economic benefits of a larger population are much exaggerated.
The table attached to my speech suggests that high productivity and high living standards are readily achievable with "small" and even slow growing populations. It also indicates that "big" populations do not ensure better performance. The reality is that economic performance is predominantly determined by the institutions, cultures and policies existing in or pursued by a country.
The table is of particular interest in confirming that Australias much-vaunted productivity growth in the 1990s still leaves a long way to go before the 20 per cent "gap" with the US is closed. That gap is not going to be closed by higher immigration but by establishing a more entrepreneurial environment.
The terrorist threat also increases the risk of accepting immigrants who may be extremist Islamists and raises the question of moving to a more selective immigration policy. The continued growth in Muslim minorities is causing increasing concern in Europe, with the British Labor Government criticising the separatist behaviour of some ethnic communities, and Home Secretary Blunkett calling on their members to abide by British norms of acceptability when they become citizens. The four British reports on the extensive race riots earlier this year concluded that certain races are maintaining parallel lives with separate schools, jobs, community groups and places of worship and have no sense of British identity. This should provide food for thought here as well as in the UK.
Quality of Life
Finally, can ER be blamed for the view that the quality of life has declined? My belief is that there is little evidence to support this view. It probably reflects concern at the increase in competition and the associated perception of increased stress. Yet Australians have continued to become healthier during the 1990s.
In conclusion, I hope that I have outlined some sound reasons why the Liberal Party should do more to espouse the benefits from ER and more to advocate ER policies. First, it is not the same as a free-for-all laissez-faire system. Second, while government intervention and regulation is needed, a reduction in such intervention would improve economic efficiency and living standards. Third, there would be an improvement in equity resulting from the elimination of government assistance to particular groups that have no needs basis for it.
Supporters of government intervention are often either pushing their own barrows or some barrow that reflects their own interventionist view of how the world should be organised. History tells us that we should be extremely cautious of jumping on to such barrows.
NOTE: Figures in bold indicate productivity in the country has grown faster than the US. Productivity and living standards are measured here by reference to GDP per person employed. Inadequate historical data on hours worked prevent the use of the more accurate measure of GDP per hour worked.
Sources: For productivity: Angus Maddison, The World Economy: A Millenial Perspective, OECD 2001 (appendix E). For population: US Census Bureau, IDB Summary Demographic Data, 5 Oct 2000 www.census.gov/ipc/www/idbsum.html