Squandering the crisis

A CRISIS is a terrible thing to waste. But it is easy to do. Here is how, in three simple steps. Step one, before the crisis strikes, hit roadblocks to continued growth. Step two, as the crisis strikes, promise to protect every important constituency from its ill effects, throw billions of dollars to do so and leave all the roadblocks you had so presciently identified unaddressed.

Step three, as the crisis abates, claim the credit, bask in the warm glow and prepare to return to step one. Sound familiar? It should, and not only in Australia. In fact, on any objective assessment, the advanced economies' long-term growth potential has gone backwards over the past two years.

What will the US get for the many hundreds of billions of dollars it has committed? A collection of terminally ill auto companies on taxpayer-funded life support, a social security system mired in claims it can never meet, and a fiscal position worthy of a failed African state.

Nor are matters any better across the Atlantic. Gordon Brown, who combines the skill of Nathan Rees with the pretentiousness of a Rudd essay, has been fully occupied staking his claim to have saved the world.

Angela Merkel speaks like a conservative and governs like a social democrat: too bad Germany needs the opposite. As for Nicolas Sarkozy, the reforms he promised have turned to dust, leaving the distortions that plague French labour and product markets, and the rents they create for favoured constituencies, happily undisturbed.

And Italy, already suffering from two decades of economic stagnation, is in the clutches of Silvio Berlusconi, of whom the less said, the better.

Why has this happened? Blaming the politics would be too easy. Leadership was, after all, hardly less challenging in the wake of the oil shocks, as "Sonny Jim" Callaghan, Jimmy Carter, Valery Giscard d'Estaing and Malcolm Fraser all discovered the hard way. These were smart men.

But those who replaced them knew one big thing, famously captured by Maggie Thatcher in the acronym TINA: there is no alternative. Restoring sustained growth demanded a genuine commitment to market-oriented reform.

That reform, implemented in the midst of high unemployment, persistent inflation and deteriorating budgetary positions, was spearheaded by an outstanding collection of finance ministers. Of those, only one, Nigel Lawson, was in a centre-right government; the others - Miguel Boyer (Spain), Kjell-Olof Feldt (Sweden), Jacques Delors (France), Roger Douglas (New Zealand) and our own Paul Keating - were all of the centre-left. But formed in the intellectual ferment of the 1960s, theirs was a politics of conviction, not of ticking the boxes. And they were surrounded by officials and advisers, also products of the rebellious 60s, who seized the opportunity to break with the past.

Those days are over. Restored to its former glory, the Keynesian orthodoxy, no less confused than before, is a packet of aspirins always at one's elbow, permitting every temptation to be indulged. As for the officials, they understandably prefer to be players rather than moralists, even if that means defending the indefensible.

The lead character in Woody Allen's latest film, Whatever Works, captures the spirit of the age: what counts is what works.

And work it does. Few voters complain when they get cheques in the mail. As for stimulating economic activity, it would be difficult to spend as much as governments have been spending without having some effect on the economy.

The question, however, must be whether any desired stimulus has been provided not only effectively but also efficiently: that is, in a way that avoids imposing unnecessary burdens on future taxpayers.

That is a question governments studiously avoid. As a senior official from our Department of Finance said a few days ago to a Senate committee, the problem with cost-benefit analysis is that "there's a huge amount of work involved".

That it is easier and more pleasurable to spend other people's money than to assess whether it is being spent wisely is not a proposition one can argue with.

Taxpayers, on the other hand, might well think that was exactly what departments of finance and treasury exist to do. But ministers clearly have other priorities.

However, it is not only the billions that have been wasted: it is the opportunity to tackle the accumulated impediments to sustained growth. Our case speaks for itself.

The export ports on the Eastern seaboard remain a paralysed mess. Grain transport is inefficient to the point of collapse. The telecommunications network is being renationalised.

The underlying problems in health care remain to be addressed. Education reform has descended into the farce of computers in schools and subsidies for building new classrooms.

The labour market has been re-regulated, in ways that seem certain to reduce its flexibility. Urban development restrictions, that feed inflationary pressures in housing markets, remain entrenched.

The Carbon Pollution Reduction Scheme, hardly the best idea to begin with, has become ever less efficient as exemptions, exceptions and side-payments proliferate.

And as for COAG, which was held out as the key to a new wave of reform, it has coagulated, with the number of meetings becoming its main performance indicator.

Overall, vast sums of money have been thrown at problems, but the required changes in governance are as far off as ever. Dollar notes can paper over cracks, but it is only a matter of time before they reappear.

This is not to suggest we are the worst of the pack: that is not the case.

But the fact that our economy is rebounding should not blind us to the reality: none of the roadblocks to sustained growth that Labour quite rightly pointed to before the 2007 election have been seriously tackled, much less overcome.

Little wonder, then, that inflationary pressures have emerged even while the economy continues to show signs of weakness, with full time employment 57,000 down compared to 2007. The reappearance of bottlenecks and shortages seems around the corner.

Despite this, the government sticks to its stimulus spending with angry obstinacy. Fully two-thirds of that spending lies ahead, much of it on infrastructure projects that have been poorly chosen and seem more likely to divert resources from productive uses than to expand our productive potential. In a recent paper, Alex Robson and I estimate that even on generous assumptions, the result will be welfare losses of between $10 billion and $48bn.

Those losses can still be avoided, and they should be. Whether the initial spending was sensible or not is water under the bridge.

What government needs to do now is draw the line. For unless it can shift from being the tooth fairy, dispensing favours to every core constituency, to the hard work of serious reform, it is not only the crisis that we will have wasted but also the opportunity for sustained growth.

Henry Ergas received the inaugural Enemy of the State/Friend of the People award from the Economic Society, ACT Branch, for advocacy in defence of economics and its application to public policy, earlier this week.