Will Australia choose growth or stagnation?

| March 12, 2018

News that the United States grew by 2.6 percent in the last quarter of 2017 produced commentary which reflects two vastly different visions and outlooks for modern, Western economies.

The first can be seen in variations of Larry Summers’ much-quoted Age of Secular Stagnation article. This is premised on the “unique” conditions post-2008 that resulted in negligible economic growth in market-based economies, despite the lowering of interest rates which produced neither inflation nor growth.

At a deeper level, subscribing to secular stagnation theory discounts the potential of current technologies. It is also a mindset which believes growth potential will be permanently constrained unless there are Keynesian style interventions to increase demand.

This was the default setting of the Obama Administration which sought to expand the reach and presence of government across the economy, staffed by technocrats who believed they could coax business activity in a predetermined direction.

We should be careful with the Keynesian label however. At a recent Mannkal seminar, Andrew Reynolds pointed out that most modern politicians go much further than Keynes would himself advised, with counter-cyclical debt repayments and spending reductions rarely undertaken.

This alternative view of growth was regarded as outlandish as recent as a year ago. Excessive reporting of Trump’s Twitter feed and clashes with the press has meant most political analysts have missed his fundamentally contrasting approach to economic growth.

Trump’s staffers and advisors repeatedly refer to growth potential of 4 or even 5 percent. They understood that the anaemic growth under Obama, perhaps one of the most left-wing, anti-business presidents in modern-history, was an aberration and could be corrected.

With a quiet and systematic rollback of restrictive regulation, significant business tax cuts and continuing repatriation of profits, there are signs that the US could be poised for a resurgence. Notwithstanding concerns on trade policy, there is much to be optimistic about when looking to the future of the US economy.

Even those outside of the administration, and critical of Trump, have shifted their outlook of the US economy. On the sidelines of Davos, J.P. Morgan chief Jamie Dimon directly linked Trump’s actions to potential growth of 4 percent in 2018.

Increases to minimum wage and bonus payments by some large corporations has been explained away as anomalies. However, what Nancy Pelosi and US Democrats describes as “crumbs”; be it an extra dollar an hour, bonus payments or improved job opportunities all improve living standards and options for those at all levels of the job market. This is done by business, not government.

In Australia we have a variation of the debate over drivers of growth and the appropriate role of government, with an unfortunate tendency to import fashionable US critiques of capitalism such as the “one percent” or Uberisation of the job market.

They may appeal to the Fairfax and ABC set, who are familiar with these concepts from the New York Times, but are merely slogans which imply government can fix these supposed ills. Bad policy follows.

Beginning with the Thatcher and Reagan revolutions and domestically by Hawke/Keating and Howard, there was a move to remove government from the commanding heights of the economy. Around the 2008 financial crisis, and arguably since 2000, this reversed.

It is too early to tell if the early reforms of the Trump revitalisation of the US economy will influence Australia and halt the resurgence of Leviathan. At a minimum, they have put tax reform back on the agenda, if Treasurer Morrison’s comments are any guide.

Mannkal scholars who have spent time in the US, Canada, England and New Zealand are now returning to Perth. They have seen different approaches to economic reform. Australia has already begun to fall behind in its international competitiveness and it appears a greater acceptance by the political class in Australia for lower growth and secular stagnation.

Where will the ideas come from to reject this pathway? Can we develop a group of thinkers who reject “secular stagnation” and lower growth? Should we set our sights on 4 or 5 percent growth rather than settling for continued drift?

At universities, special events and in our student seminars, we will be exploring these questions. This will give future Mannkal Scholars an introduction to such topics and an understanding of economics and liberty.