The two decades after the end of the Cold War was a golden era in policymaking. It was one of those rare periods when politicians realised it’s impossible to defy markets – that is, the preferences of ordinary consumers – indefinitely. Regulatory structures were liberated, tariffs dismantled, taxation systems reformed and competition introduced into hitherto public and private monopolies.
The transformation to rational economic policymaking wasn’t pain-free. But it worked. Living standards rose, jobs were created, new industries emerged and productivity increased.
That’s all old hat now. We’re modern and we have replaced economic rationality with progressive economic orthodoxy.
Three things drove this change: the global financial crisis, Covid-19 and the emerging climate change policies. Western politicians decided economic rationalism wasn’t “modern” and policies were introduced to defy markets. The response to the GFC led to the introduction of regulatory restrictions on financial institutions. The consequence was to increase the cost of borrowing to everyone from homebuyers to business investors. That in turn guaranteed lower rates of growth in Western countries than would have otherwise been the case.
And then there was climate change. The economic rationalist response to the need to reduce CO2 emissions would have been the introduction of a global emissions trading scheme with an adjustable price for carbon depending on demand and the extent to which governments wanted to reduce CO2 emissions. The market would then have taken care of providing energy at the best available price.
For all sorts of political reasons, this rational policy was rejected almost everywhere, including in Australia.
As a result, politicians came up with all sorts of eye-wateringly expensive and fancy renewable schemes – normally involving the building of windmills and solar panels – which in turn have dramatically increased the price of energy. This has happened in Australia, the UK, the European Union and even in parts of the United States. Given that energy is the very heart of any economy, pushing up its price is going to reduce economic growth.
So since 2008, throughout the Western world, economic rationality has been replaced with what we might call progressive economics. This trend was accelerated during Covid. Civil liberties, which had been fought for for generations were suspended by governments and parliaments. It’s difficult to know precisely how much governments worldwide spent during that sorry period but one estimate suggests it was $16 trillion. This was funded partly by borrowings but substantially by quantitative easing by central banks. Not surprisingly, this was inflationary.
Having stimulated inflation, governments then decided to compensate people by borrowing more money, locking in inflation for longer than was necessary. The Australian government was not alone in being guilty of such malpractice.
So there we have it. All the work done in the 1990s and the 2000s was thrown away as huge budget deficits and debt were expanded. Added to this abandonment of sound economic principles has been the return by government to protectionism. This takes different forms in different countries. We all know about Donald Trump’s 10 per cent base tariff and his vigorous negotiations on reciprocal arrangements with everyone from the UK to China. But our own government has its protectionist measures not using tariffs but instead pumping borrowed money into favoured industries. An economic rationalist will draw attention to the fact that investable funds are being diverted from activities that will generate the highest rate of return into sub-optimal economic activities.
As a result, there will be less economic growth and pure jobs and lower productivity than would have been the case had these protectionist measures not been taken.
Progressive economics, which is now much favoured in Australia, has yet another characteristic. It is about levelling down.
It is rational to invest in trying to help lower-income people improve their living standards and their employment opportunities while leaving high-income people alone. After all, it makes sense for people to aspire to higher incomes.
What is more, the government does need to raise revenue and we would all agree whatever the economic consequences that it is fair to raise more income tax revenue from high-income people than lower-income people.
But today we have a situation where the 20 per cent highest-income earners in Australia pay somewhere in the vicinity of 70 per cent of all income taxes and the top 10 per cent around half of all income tax. And there are still politicians who think those high-income earners should pay still more. For example, the re-elected Labor government wants to impose a wealth tax.
This tax introduces a completely new principle: taxing people on the notional increase in the value of their assets. This is just another example of a mindset determined not to level up but to punish people who work hard all their lives, are creative and ingenious, and are good savers.
Coming on top of the massive increase in spending in response to both the GFC and Covid, the government is expanding the welfare state at an astonishing rate: free childcare, heavy subsidies for students, subsidies for electric cars and solar panels, and so on. In the recent election campaign both parties offered all sorts of enticing bribes to an electorate that has become immune to economic principles.
What is astonishing is that in the era of progressive economic orthodoxy no one asks where the money is coming from and what is the opportunity cost of taking money out of the productive economy and putting it into less productive activities. Sure, some of them may be necessary and virtuous but it would only be fair to do an intelligent cost-benefit analysis of measures rather than just play to prejudices.
With this descent from economic rationalism into progressive economic orthodoxy there have been no surprises. Rising living standards have stalled, productivity growth is static to negative, and private sector investment is plateauing.
So for the emasculated Liberal Party there is a huge opportunity to attack the irrationality of progressive economics and explain to the public that if you try to suspend the laws of supply and demand you will destroy economic growth. That means taking away from people the opportunity to better themselves.
And what is more, markets are not some curious right-wing ideological obsession: a market is a place where individuals make decisions about what they want and the price they’re prepared to pay. A market is about giving power to the people: progressive economics is about putting power into the hands of a few.
Alexander Downer was foreign minister from 1996 to 2007 and high commissioner to the UK from 2014 to 2018. He is chair of UK think tank Policy Exchange.
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