So the Turnbull government is blowing itself up day by day and poll by poll.
It seems as though fanatics in the government cannot wait for the policy ‘purity’ opportunities of being in opposition and are keen to accelerate the process of getting there.
However, although the ALP have made some of the right noises in recent times and are doing well in the polls, they are still a long way from capturing the zeitgeist and turning a growing dissatisfaction with the government into a definite preference for the ALP. The ALP are getting ‘warmer,warmer’ but run the risk of veering off into “stop – you are getting colder” territory at any moment.
The ALP are looking better but mostly because the LNP are looking so woeful. A bit less chaos from the government and things (including polls) could turn around.
Start talking about the core of Australia’s economic ‘problem’
The problem is not just:
- Inequality in income
- Inequality in assets
- Unaffordable housing
- Flatlining wages
- Lack of opportunities for young people
They are very important but are symptoms of a much deeper problem. Or to put it another way, if you want to make a real difference to the above it will be easier to do so if the driver for change is a solution to the problem that is generating these symptoms.
There is less need to actively redistribute if the pie is growing and the policies that are causing income and wealth to artificially clot in certain wallets are addressed.
The core problem is that our national economic ‘model’ is not driving productive investment and has not for years – the last 20 in particular. Towards the end of the 1990s the deregulation of the financial sector was given a course of steroids and it has been causing damage to the fabric of our economy and consequently our society ever since.
Unproductive investment, more commonly known as asset price speculation, can make an economy ‘feel good’ for years as a few crumbs do fall from the table and some ‘wealth effects’ do trickle down and out. Likewise asset sales to foreign buyers provide a national lifestyle while we still have assets to sell. We can still ‘get by’ and buy ourselves some ‘nice things’ while doing long term damage to our future prospects.
Australia has been following economic policies for 20 years that ‘felt’ good but were consuming the foundations of our economic future.
In their bones most people know we have been living beyond our means but they can’t quite put their finger on how we have managed to do so for so long. It is only now, 20 years down the track as they notice their income is grinding to a halt and their debts and expenses still growing that they realise something somewhere went wrong.
To really convince the public that the ALP understand the nature of the problem and are offering serious solutions, the ALP must start talking about the core policy failures of the last 20 years (in truth more like 30-40 years) and that the solution lies in directing all arms of policy towards a change in direction – driving productive investment rather than speculation and offshore asset sales.
Productive v Unproductive is the criterion to judge policy.
The challenge for most of the current class of economic policy commentators and policy makers is that modern economics does not make a distinction between productive and unproductive investment.
All investment is treated alike and simply assumed to be productive. All of the formulas and all of the text books simply talk about “investment” when they need to distinguish clearly between productive investment and unproductive investment.
If you are struggling with how this criterion of ‘productive investment’ might be applied in practice and are fretting that “one person’s speculation might be another person’s investment” you should start with the easiest and most easily identified examples of unproductive investment.
Simply discouraging the worst examples of unproductive ‘investment’ better known as asset price speculation – the lowest hanging fruit – is likely to be enough for now (and the next 10 years). We need to wean the economy and ourselves off our destructive economic diet and that will take time.
Even if we wanted to stamp out all forms of unproductive investment right now – we cannot and should not – a gradual cure is better for everyone. Crashing the economy generally causes pain to those at the bottom.
1. Unproductive credit creation by private banks
Start restricting, by direct regulation, credit creation by our private banks where the loan security is an existing asset. This is not the article (there are many on the Glass Pyramid) to explain the significance of the privilege enjoyed by private banks but suffice to say that it is not in the public interest to have private bank credit creation directed to pumping up the prices of existing assets.
There is nothing difficult about requiring private banks to lend more readily where the security and purpose of the loan is the construction of new housing and lend less where the security is to buy existing housing.
At the end of the day – people do not even need banks to borrow money to buy existing housing. There are plenty of non-banks lenders that are more than happy to connect investors with those who wish to borrow to buy an existing house. The private banks have more important and more skilful work to do and that is assess loan applications and extend to private bank credit to those that wish to build new housing capacity and new productive capacity more generally.
More housing and commercial premises means lower prices, lower rents and lower input costs right across the economy. In cities like Sydney and Melbourne where the rental vacancy rate is less than 2% and immigration is running too hot more new housing is essential. Driving up the prices of the existing housing stock with private bank credit is an indulgent pastime we can no longer afford.
2. Unproductive capital inflows
Restrict/discourage capital inflows associated with No. 1 and the mere transfer of ownership of assets offshore. The discouragement can be in the form of taxes on unproductive inflows or outright restrictions on foreign acquisition of existing local assets or assets like land or existing infrastructure or industry.
Capital inflows that are directed to the construction of new productive capacity are different as they are adding to the productive capacity of the economy.
By the way, most of our most successful trade competitors restrict unproductive capital inflows as basic economic policy as those flows tend to drive up an exchange rate and reduce competitiveness. Why should we allow what China and many of our other trading partners either prohibit or bury with red tape and regulation.
3. Unproductive government capital inflows
Restrict the sale of Commonwealth bonds to offshore parties where the funds raised are not directly funding government projects that are clearly productive (not many perhaps but yes there are a few).
This may mean special classes of government securities and maintaining registers of ownership but so what? We should know exactly who has legal and beneficial ownership of our government securities and we certainly should not be selling bonds to foreigners to fund consumption or recurrent expenditure.
Selling government bonds offshore drives up our exchange rate and reduces our competitiveness and damages the productive sectors (export and import competing parts of our economy).
Banking system reform
Needless to say adopting the criterion of productive v unproductive involves reform of our private banking system and its role in our monetary system AND how it is regulated.
Because our current framework assumes that there is no need for deliberate policy action and regulation to encourage productive and suppress unproductive uses of the ‘privilege’ of private bank credit creation.
As a result the vast majority of the credit creation by our private banks is secured by existing assets and is extended for the purpose of purchasing existing assets.
Our massive household debt driven bubble in house prices did not happen by accident. It was the result of a bunch of policies and ideological myopia that assumed that every credit creation decision of a private bank in a free market would be productive.
It has been a public policy failure of massive proportions.
Trying to keep the house price household debt bubble inflated is now bending all other arms of policy out of shape, including immigration where excessively high rates of immigration are driven by a determination to provide support for the economies of Sydney and Melbourne which are now almost completely centred around the “pseudo investment” of asset price speculation.
While the Glass Pyramid is of the view that the ‘privilege’ of the private banks with regard to credit creation should be entirely removed at the very least it should be regulated to reduce the abuse of the privilege for speculative and unproductive purposes.
But what about APRA?
APRA has no mandate and no institutional rationale to make the distinction between productive and unproductive private bank credit creation. To the extent that some have called for measures that seek to have APRA do so they are resisted by APRA (and the private banks and the RBA) because drawing the distinction is not part of the economic ideology that informs the role of APRA (or the RBA).
Plus many of the calls for APRA to act and implement macroprudential policies have failed to call for the application of a distinction between productive and unproductive credit creation. Often the proponents of macroprudential policies by APRA are simply seeking to have unproductive credit creation reserved to a special class – i.e. Give more credit to first home buyers to buy existing housing than ‘investors’.
A banking and regulatory framework that inherently supports the enhancement of existing asset / wealth owners over new asset /wealth creation is not fit for purpose.
Can the ALP do it?
If the ALP can make the distinction between productive and unproductive investment the core of their reform narrative they will ‘smash’ the LNP who are currently determined to make existing asset / wealth owners even richer.
The creation of new productive assets and the expansion of a productive economy is an attractive story to sell.
Squeezing a few more drops out of asset price speculation and asset sales is the strategy of small minded people like Scott Morrison and Matthias Corman who, at the moment, are determined to support rent seekers and economic moochers every chance they get.
Selling economic reform is never easy and will require skill and building trust, but a story that has at its core the distinction between the productive and the useful over speculation and rent seeking should sell itself.
The ALP need to move quickly as we are reaching the end of an ideological era and there is a risk that the LNP will wake up, move first and adopt the language of reform and in seizing the initiative may persuade the Australian public to accept its ‘version’ of reform.
The result being another decade of LNP government and reform that is promised but never delivered.