IPA Keeping In Touch – 7 April 2020

IPA Keeping In Touch – 7 April 2020

Dear IPA Members

Calls for a complete shutdown no matter the cost reflect a view that economic activity is a non-essential part of life, somehow superfluous to who we are and what we do as human beings. The error of divorcing economics from life can perhaps only be made by those disconnected from business.

When I think about my upbringing on my family’s dairy farm near Warrnambool, it is impossible to disconnect life from the daily operation of the farm. First thing every morning without fail my dad braced the weather to milk the cows (and he still does). Some of my earliest memories involve me and my siblings ‘helping’ mum feed the calves or shifting cows. My parents demonstrated the importance and value of hard work and allowed me to experience the dignity and meaning of work from a young age.

Dairy farming also taught me about the complexity of the economy. Dairy farmers are clearly an essential part of the food supply chain. But when you start to think through what is involved in delivering dairy products to supermarkets you realise the wide array of interconnected workers and businesses involved. Not only are there the tanker drivers, truck drivers and factory workers, there are also a multitude of businesses that make dairy farming possible. There are the vets, stock agents, grain and feed suppliers, plumbers, electricians, and farm supply shops to list just a few. And for each of these jobs there are webs of other connected businesses and workers that make their job possible.

It is short-sighted to imagine that the economy can simply be reduced to the ‘essential’ functions of providing health care and food, allowing most people to stay home in hibernation. Perhaps this view is only prevalent among bureaucrats who are largely protected from the downside of the shutdown measures, but I am sure most people understand that their jobs are valuable and aren’t so readily dispensable.

Scott Morrison’s finest moment of this crisis was when he noted that “everybody who has a job in this economy is an essential worker”. This resonated with people who understand the importance of work as the material means by which they provide for their family. And just as importantly, it resonated with those who understand that work offers purpose and dignity that cannot be replaced by a government welfare payment.

The widespread possession of a job that provides purpose, dignity, and self-reliance is a fundamental building block of our society, and one that is under very serious threat.

Daniel Wild wrote at Quadrant Online last Thursday about the tragedy of recent events with reference to work and the folly of assuming that we can simply restart the economy after a period of ‘hibernation’ as though nothing happened:

“Many of the Australians who will become unemployed over the next six months will not simply go into hibernation, to then thaw out and resume business as usual. They will never work again. Their wages will never recover. Their lives will never be the same.”

This crisis will have a widespread effect on many people across society. At particular risk are young people who will be starved of invaluable work opportunities over the lockdown period and will struggle to pick up work in the aftermath. Entry level jobs in retail and hospitality provide thousands of young Australians a foundation on which to build their working careers. While there will be those who overcome these challenges the loss of momentum will have long-lasting ramifications for many.

The ‘hibernation’ view of the economy is also dependent on the assumption that the Australian economy was healthy leading into this crisis and is therefore in a strong position to recover once the restrictions are lifted. Opposing this view, John Roskam wrote in the Australian Financial Review a couple of weeks ago that “It’s uncertain how Australia’s highly regulated, highly indebted, high cost and low productivity economy will withstand this global pandemic.”

Unfortunately, even before this crisis hit, the Australian economy has been structurally weak. This is why in the second half of last year we already had talk from the Reserve Bank of the need for greater levels of monetary expansion and calls for the government to engage in a round of fiscal stimulus. This is hardly a sign of a resilient economy that could only be brought down by a deadly pandemic.

Governments at all levels have allowed red tape to accumulate to the detriment of Australian business. The largely unseen role of red tape in destroying opportunity affects us all but is often only fully perceived by those on the front line in business.

I have recently released a report and video on environmental red tape that has allowed green groups to disrupt and delay over $65 billion of investment in job creating projects. This is the sort of red tape that weighs down the economy and will severely hinder the ability of businesses to rebound post-lockdown.

The issue of labour market red tape will again come into focus as businesses attempt to reabsorb the significant amounts of unemployment caused by this crisis. With unemployment and underemployment set to soar, now more than ever it is crucial that government regulation doesn’t stand in the way of people accessing the dignity of work.

The state of the budget also demonstrates Australia’s economic predicament. The federal Coalition loudly celebrated their fiscal management last April when they announced their first forecast surplus after six years in government. Of course, this surplus has suffered the same fate as Wayne Swan’s many forecast surpluses that failed to eventuate.

John Howard and Peter Costello left Australia in a very strong fiscal position with zero net debt and just $55 billion of gross debt. It was because of this zero net debt position that the Rudd government was able spend the way it did in the wake of the Global Financial Crisis. But ultimately this strong position was squandered by Labor and over the last seven years the Coalition was unable to rein in spending to restore the budget. Leading into the current crisis the country’s finances were simply not in a position to respond to a global economic shock without subjecting the country to record levels of debt. This fiscal record will not reflect favourably on the Coalition in years to come. Pointing out “we were better than Labor would have been” will not pay the bills.

Many things have been lost in the chaos of the coronavirus over the last month. But we cannot afford to ignore that debt still matters, that the $320 billion dollars of fiscal and monetary measures amounts to 320,000,000,000 actual Australian dollars, and that one way or another the costs of the shut down and the fiscal and monetary response must be paid for. The increase in spending combined with an expected hit to government revenue is likely to see federal government debt soar past $1 trillion over the next few years.

Relying on the Reserve Bank to monetise the debt through the purchase of government bonds risks doing further damage to the Australian economy. This will involve the creation of hundreds of billions of dollars of new money at a time of forced reduction of goods and services. With more money chasing fewer goods and services the risk of damaging price inflation will be high.

There have been suggestions from some, including President Trump, that now is the time for deficit spending because interest rates are so low. This is very short-sighted. Interest rates cannot remain low forever, they will rise again and governments around the world are going to need to get started on paying down their debt before they do. While some have pointed out that Australia’s federal government debt remains relatively low in terms of GDP, it is important to note that we have amassed record levels of debt despite 29 years of uninterrupted economic growth. If the Coalition government couldn’t pay down any debt in the last seven years during economic expansion, what will it take for a government to do so in the future?

As the dust begins to settle and Australians realise that the ‘freeze and reheat’ economy was not as advertised, the country is going to require some bold leadership. Things are not going back to the way they were before. In many ways, this could be an opportunity for the better if it allows a government to clean up the waste in the public bureaucracy, cut red tape that destroys jobs, and exercise fiscal discipline to ensure a debt-free Australia for our children.

Thank you for your support of the IPA,
Kurt

Dear IPA Members

Calls for a complete shutdown no matter the cost reflect a view that economic activity is a non-essential part of life, somehow superfluous to who we are and what we do as human beings. The error of divorcing economics from life can perhaps only be made by those disconnected from business.

When I think about my upbringing on my family’s dairy farm near Warrnambool, it is impossible to disconnect life from the daily operation of the farm. First thing every morning without fail my dad braced the weather to milk the cows (and he still does). Some of my earliest memories involve me and my siblings ‘helping’ mum feed the calves or shifting cows. My parents demonstrated the importance and value of hard work and allowed me to experience the dignity and meaning of work from a young age.

Dairy farming also taught me about the complexity of the economy. Dairy farmers are clearly an essential part of the food supply chain. But when you start to think through what is involved in delivering dairy products to supermarkets you realise the wide array of interconnected workers and businesses involved. Not only are there the tanker drivers, truck drivers and factory workers, there are also a multitude of businesses that make dairy farming possible. There are the vets, stock agents, grain and feed suppliers, plumbers, electricians, and farm supply shops to list just a few. And for each of these jobs there are webs of other connected businesses and workers that make their job possible.

It is short-sighted to imagine that the economy can simply be reduced to the ‘essential’ functions of providing health care and food, allowing most people to stay home in hibernation. Perhaps this view is only prevalent among bureaucrats who are largely protected from the downside of the shutdown measures, but I am sure most people understand that their jobs are valuable and aren’t so readily dispensable.

Scott Morrison’s finest moment of this crisis was when he noted that “everybody who has a job in this economy is an essential worker”. This resonated with people who understand the importance of work as the material means by which they provide for their family. And just as importantly, it resonated with those who understand that work offers purpose and dignity that cannot be replaced by a government welfare payment.

The widespread possession of a job that provides purpose, dignity, and self-reliance is a fundamental building block of our society, and one that is under very serious threat.

Daniel Wild wrote at Quadrant Online last Thursday about the tragedy of recent events with reference to work and the folly of assuming that we can simply restart the economy after a period of ‘hibernation’ as though nothing happened:

“Many of the Australians who will become unemployed over the next six months will not simply go into hibernation, to then thaw out and resume business as usual. They will never work again. Their wages will never recover. Their lives will never be the same.”

This crisis will have a widespread effect on many people across society. At particular risk are young people who will be starved of invaluable work opportunities over the lockdown period and will struggle to pick up work in the aftermath. Entry level jobs in retail and hospitality provide thousands of young Australians a foundation on which to build their working careers. While there will be those who overcome these challenges the loss of momentum will have long-lasting ramifications for many.

The ‘hibernation’ view of the economy is also dependent on the assumption that the Australian economy was healthy leading into this crisis and is therefore in a strong position to recover once the restrictions are lifted. Opposing this view, John Roskam wrote in the Australian Financial Review a couple of weeks ago that “It’s uncertain how Australia’s highly regulated, highly indebted, high cost and low productivity economy will withstand this global pandemic.”

Unfortunately, even before this crisis hit, the Australian economy has been structurally weak. This is why in the second half of last year we already had talk from the Reserve Bank of the need for greater levels of monetary expansion and calls for the government to engage in a round of fiscal stimulus. This is hardly a sign of a resilient economy that could only be brought down by a deadly pandemic.

Governments at all levels have allowed red tape to accumulate to the detriment of Australian business. The largely unseen role of red tape in destroying opportunity affects us all but is often only fully perceived by those on the front line in business.

I have recently released a report and video on environmental red tape that has allowed green groups to disrupt and delay over $65 billion of investment in job creating projects. This is the sort of red tape that weighs down the economy and will severely hinder the ability of businesses to rebound post-lockdown.

The issue of labour market red tape will again come into focus as businesses attempt to reabsorb the significant amounts of unemployment caused by this crisis. With unemployment and underemployment set to soar, now more than ever it is crucial that government regulation doesn’t stand in the way of people accessing the dignity of work.

The state of the budget also demonstrates Australia’s economic predicament. The federal Coalition loudly celebrated their fiscal management last April when they announced their first forecast surplus after six years in government. Of course, this surplus has suffered the same fate as Wayne Swan’s many forecast surpluses that failed to eventuate.

John Howard and Peter Costello left Australia in a very strong fiscal position with zero net debt and just $55 billion of gross debt. It was because of this zero net debt position that the Rudd government was able spend the way it did in the wake of the Global Financial Crisis. But ultimately this strong position was squandered by Labor and over the last seven years the Coalition was unable to rein in spending to restore the budget. Leading into the current crisis the country’s finances were simply not in a position to respond to a global economic shock without subjecting the country to record levels of debt. This fiscal record will not reflect favourably on the Coalition in years to come. Pointing out “we were better than Labor would have been” will not pay the bills.

Many things have been lost in the chaos of the coronavirus over the last month. But we cannot afford to ignore that debt still matters, that the $320 billion dollars of fiscal and monetary measures amounts to 320,000,000,000 actual Australian dollars, and that one way or another the costs of the shut down and the fiscal and monetary response must be paid for. The increase in spending combined with an expected hit to government revenue is likely to see federal government debt soar past $1 trillion over the next few years.

Relying on the Reserve Bank to monetise the debt through the purchase of government bonds risks doing further damage to the Australian economy. This will involve the creation of hundreds of billions of dollars of new money at a time of forced reduction of goods and services. With more money chasing fewer goods and services the risk of damaging price inflation will be high.

There have been suggestions from some, including President Trump, that now is the time for deficit spending because interest rates are so low. This is very short-sighted. Interest rates cannot remain low forever, they will rise again and governments around the world are going to need to get started on paying down their debt before they do. While some have pointed out that Australia’s federal government debt remains relatively low in terms of GDP, it is important to note that we have amassed record levels of debt despite 29 years of uninterrupted economic growth. If the Coalition government couldn’t pay down any debt in the last seven years during economic expansion, what will it take for a government to do so in the future?

As the dust begins to settle and Australians realise that the ‘freeze and reheat’ economy was not as advertised, the country is going to require some bold leadership. Things are not going back to the way they were before. In many ways, this could be an opportunity for the better if it allows a government to clean up the waste in the public bureaucracy, cut red tape that destroys jobs, and exercise fiscal discipline to ensure a debt-free Australia for our children.

Thank you for your support of the IPA,
Kurt

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