March 7th 2009

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Articles from this issue:

EDITORIAL: Behind Malcolm Turnbull's pitch for green votes

CANBERRA OBSERVED: The Costello question that refuses to go away

ECONOMIC AFFAIRS: China's spending spree: our sovereignty at risk

GLOBAL FINANCIAL CRISIS: Targeted spending needed to promote Australian jobs

NEW ZEALAND: Kiwibank goes from strength to strength

QUEENSLAND: Premier Bligh calls snap election

PUBLIC ACCOUNTABILITY: Shooting the messenger undermines democracy

HEALTH: Labor's campaign against doctors' private practices

UNITED STATES: The nightmarish cabinet of President Obama

FOREIGN AFFAIRS: UN whitewash of China human rights abuses

GLOBAL WAR ON TERRORISM: What to do with Guantánamo detainees?

SPECIAL FEATURE: The agnostic who took on Darwin and Dawkins

MARRIAGE AND FAMILY: Sexual suicide of Western society

AS THE WORLD TURNS: Social websites harm children's brains - top neuroscientist / Conspiracy theory? / 'Right to die' can become a 'duty to die'

Euthanasia and dementia sufferers (letter)

Wilson Tuckey I (letter)

Wilson Tuckey II (letter)

CINEMA: Stylised miniature of feminist mythology - Revolutionary Road

BOOKS: ATTILA THE HUN: Barbarian Terror and the Fall of the Roman Empire, by Christopher Kelly

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Targeted spending needed to promote Australian jobs

by Colin Teese

News Weekly, March 7, 2009
Rudd's stimulus package must not be dissipated on consumption spending on imports, for this will only generate economic activity overseas, warns Colin Teese.

Many responsible Americans - and not just free-market fundamentalists - have expressed misgivings over the cost of President Obama's US$750 billion stimulus package, just as many responsible Australians have questioned Prime Minister Rudd's AUD$42 billion rescue package.

Such people should rest easy. Seventy years ago, the US spent much more - some US$3.5 trillion in today's money, when the US had half its present population - to wage World War II. A side-effect of this spending was to pull the US economy out of the 1930s Great Depression.

From 1945, for the next 25 years, steadily growing demand saw the US enjoy its greatest and most widespread burst of prosperity.

Against this background, President Barack Obama's US$750 billion may be insufficient to meet today's crisis. Mr Rudd's package should be seen in the same light.


Will all of the package moneys be spent wisely? Almost certainly not. Think of it like advertising - half of which, people say, is wasted. The trouble is, nobody knows which half!

Free-market fundamentalists, frequently also political conservatives, prefer tax cuts which can easily be channelled towards their supporters - high-income earners. However, in recessions, successful stimulation packages must be aimed at low-income earners who tend to spend a higher proportion of their incomes on consumption.

Always remember, what got the US - and for that matter Australia - back on economic track after the 1930s was a redistribution of income towards those on lower incomes. That trend was over-corrected under the conservative influence during the presidency of Ronald Reagan (1981-89).

For things to come right, we will need, once more, to reset the balance. Stimulus packages, whatever their impact on the budget, can start that process.

Australia, under Coalition governments, has been represented as committed to balanced budgets and periodic tax cuts. In practice, Coalition Governments under John Howard and Peter Costello accumulated vast budget surpluses that could later be used to provide tax cuts and other pork-barrelling to coincide with elections.

An indulgent media and academia allowed those policies to be represented as sound economic management. They weren't.

Responsible budgetary policy would have balanced year-on-year spending, and used government borrowing to finance infrastructure development. Instead, government borrowing was cut and infrastructure expenditure neglected, while consumer debt based on foreign borrowing was allowed to soar to unmanageable levels.

Increased tax revenues from growth sustained by proper government borrowing for infrastructure development would have paid off any debt. A reading of Robert G. Menzies' memoirs Afternoon Light (1967) might help sceptics understand this.

The present dishevelled state of the federal Opposition is deeply worrying. Mr MalcolmTurnbull is, to this observer, a highly competent political leader who obviously entertains less doctrinaire views on economics than many of his Coalition colleagues; and he seems to be trying to gather likeminded colleagues around him.

But the free-market fundamentalist under-currents that still seem dominant in the Coalition as a whole - and particularly the Liberal Party - aren't helping him.

The custodians of this discredited economic orthodoxy haven't yet grasped that the financial meltdown (induced largely by the deregulated approach they want to hold onto) is in the process of reshaping the economic and political landscape of the entire world.

The rest of the Western world's politicians in large measure appear to have got the message. Is our Liberal Party to be the exception?

Most certainly, Mr Turnbull's detractors within the Coalition are making it hard for him to perform convincingly. At this time, for example, it is a mistake to accuse Labor's Kevin Rudd of socialist leanings.

Back in 1983, the Hawke/Keating Labor Government, anxious to convince financial markets of its sound economic credentials, was spooked into embracing free-market fundamentalist economics. This was to dispel the last cloud of Gough Whitlam and socialism still hanging over Labor (though, in truth, the Whitlam Government was probably less socialist than just plain stupid).

Under the microscope

Today, the boot is on the other foot. Now is not the time to be promoting deregulated capitalism. Capitalism is under the microscope as never before since the Great Depression.

The federal Opposition leader needs to persuade his colleagues of these new realities. The issue is no longer whether pure socialism or pure free-market economics is the right way to go. Both are fatally flawed. The correct economic path will be, as always, to strike the right balance between the two. Quite where that lies at any particular moment will be a legitimate area for debate between political parties of the right and left.

Robert Menzies, although he never said so explicitly, understood this well and worked it cleverly to his advantage.

Mr Turnbull appears to underestimate the strength of his position. Notwithstanding Mr Costello, Turnbull may well be the only credible leader the Liberal Party has. It needs him more than he needs it.

In addition, he can argue that the party's traditional support base - particularly business - seems to be rallying to the general thrust of the Rudd Government's pump-priming approach.

Mr Turnbull could do worse than follow the example of what Mr Rudd did when he took over the Labor leadership. Rudd used the strength of his position to impose his will on the party. He made it clear that he and his chosen team would be making policy. In doing so, he by-passed the old guard in his parliamentary party, who still held on to the Hawke/Keating policies that Mr Rudd has publicly, though diplomatically, rejected. Rudd could never have led Labor to victory by any other means.

Nevertheless, Mr Rudd, in pursuing his policies, still faces significant obstacles, and it is here that opportunities could open up for Mr Turnbull to win his spurs as a leader and statesman.

Mr Rudd's stimulus package is undoubtedly a step in the right direction. But it is only the first step. If it is to work, its focus must be on stimulating output and employment in Australia. Only by this means can Australian businesses and consumers work off their debt burdens, help us develop our economy and provide well-paid and sustainable employment for our people.

Equally, Australian homeowners need to be assured that their equity positions are safeguarded in the likely event of a significant fall in house prices. Other similarly affected countries are in the process of building the necessary safeguards. We must do the same.

The stimulus package must not be dissipated on consumption spending on imports, for this would only generate economic activity overseas.

Similarly in America, President Obama has declared that he has no intention of using his stimulus package to fund steel imports. And, presumably, he won't stop with steel. Predictably, he has been criticised by the now less potent anti-protection lobbies, both in the US and elsewhere, for this stand.

However, Mr Rudd must take the same position. But if he follows the Obama example, our more vocal anti-protection lobby will certainly condemn him. If he succumbs to these pressures, his package won't deliver what is needed.

Given Mr Rudd's attitude towards free-market fundamentalists, we may assume that he appreciates the need to ensure spending from his stimulus package primarily benefits Australia.

Up to now, he has not said so publicly. Perhaps he is hoping to be able to finesse the argument of how he will keep most of the spending here and still satisfy the anti-protectionist lobby.

That won't be easy. But the arguments against the anti-protectionists are there to be made - if Mr Rudd is prepared to look.

Actually, the anti-protection theories advanced by free-market fundamentalists can be turned back on them. A leading advocate, former federal Labor leader Mark Latham, advanced what he considers the basic argument in favour of free trade. He asserted that a small, open economy, such as Australia's, can't grow any faster than its trading partners.

Latham, of course, is right. Ours is a small economy which chose to fully expose itself to the trade winds, even though its export income is almost entirely at the mercy of world commodity prices. Make no mistake: we certainly can't grow faster than our trading partners.

In my book, that's an argument against free trade - especially as we watch our main customers, China and Japan, sink into depression.

We should never have yielded ourselves to this fate. The better option would have been to generate more of our growth from within the domestic economy and rely less upon a narrow base of commodity exports. And that is precisely the kind of economy we had, before Mr Latham's Labor predecessors painstakingly dismantled it some 25 years ago.

Foreign investment is another problem facing Mr Rudd. He must now decide whether the Australian national interest can be reconciled with Chinese interests gaining a significant ownership stake in major Australian mining companies.

On both of these issues Mr Rudd is likely to have to sell policies that may be unpopular in some influential circles. Mr Turnbull's help would be an advantage.

Bipartisan approach?

As of now, a bipartisan approach on these issues seems unlikely. But circumstances change. Mr Turnbull complains he is not being taken into the government's confidence. On the Labor side, some will remind him that the Coalition, in office, never offered them the same courtesy.

Nevertheless, the two leaders might benefit from sitting down quietly and considering whether or not they can't find some common ground. This casual observer, sitting on the sidelines, has already identified benefits for both the Prime Minister and the federal Opposition leader if they find some kind of common position on what's needed to protect our economy.

The nation certainly needs it, as it appears likely we are being dragged deeper into the gathering world crisis.

- Colin Teese is a former deputy secretary of the Department of Trade.

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