Kevin Rudd has emerged from his disguise as economic conservative. Denouncing 30 years of “neo-liberalism”, we now know he actually worships at the altar of Whitlamism. But he realised that going to Davos might have the same consequences for him as fleeing to Varennes did for the unfortunate Louis XVI. By not going to Davos, the world missed out on his message that his new Whitlamism is the economic salvation of the world.
Blaming neo-liberal capitalism for the economic crisis, he singles out Margaret Thatcher, Ronald Reagan and the Australian Liberal party as the villains. His solution is more regulation and bigger government, the agenda of the Whitlam government.
The Prime Minister could not be in greater error. The current crisis was caused by his solution: socialist regulation by big government. It came, as Howard Husock demonstrated in 2000, from the Clinton administration’s resurrection of President Carter’s misguided 1977 Community Reinvestment Act. This required banks to give housing loans to people whom any prudent banker would refuse, the so-called LMI’s, low and moderate income borrowers. In the United States this was necessarily related to racial issues.
The mission of the government sponsored enterprises (more socialism), Fannie Mae and Freddie Mac, was to be “affordable housing.” They also proved to be extremely useful in corruptly channelling off funding for the Democrats. As is sometimes the case, the Australian solution is more pragmatic and more successful than the American. It’s called the housing commission.
This lowering of banking standards initially for social engineering purposes spread like a disease. Encouraged by increasing values, borrowers were trained to spend their capital gains by remortgaging to the hilt. When values fell, state non-recourse legislation gave them an incentive to walk away. According to Peter J Wallison from the American Enterprise Institute, prior to the crisis, half of all home loans made were non-prime. He says international regulation also gave an incentive for banks to hold mortgages.
It was refreshing then to witness the return of Peter Costello on Lateline on 3 February. He pointed out that when Kevin Rudd could not go to Davos, he sent Ms. Gillard in his place. But instead of promoting the Rudd recipe for a return to Whitlamism, she proudly referred to Australia’s triple A rating, its fiscal rectitude, its prudential regulation and its sound banks. Peter Costello can of course take a bow for that; he and John Howard were responsible for each and every one of those achievements.
The Prime Minister continues to demonstrate that he just does not know what to do. Even when he was put under a very gentle spotlight on the 7.30 Report, he looked uncomfortable.
Peter Costello actually warned of this financial tsunami before the election. The opposition and many in the media ridiculed him. The Reserve Bank and Federal Labor said the problem was not the looming recession, but inflation. In one of its most political acts, the Reserve Bank even pushed up interest rates during the election campaign. For months thereafter we were harangued about the dangers of inflation.
When it became obvious even to the government and the Reserve Bank that Peter Costello was right, interest rates were reduced and the government decided to throw away almost half of the surplus. This went mainly to people who do not make a net contribution to government revenue, who do not employ anybody and often are unaccustomed to managing lump sums. Now he is going to repeat this, adding some social but not economic infrastructure.
The Prime Minister’s extraordinary barometer of success for his policy of frittering away half the surplus was that one retailer reported increased purchases over Christmas. He should instead be looking at the way competition law has allowed a duopoly to have a stranglehold over the retail industry which is unprecedented in the Western world.
As to money for government infrastructure, a serious problem with government spending today is that much of it is thrown down the drain. Just as an example, an extraordinary proportion of hospital funding is siphoned off into a highly paid and incompetent health bureaucracy. This substantially reduces the funding for nursing, doctors and such matters as air-conditioning in wards. (Is there any point in asking whether the offices of the area health services are air-conditioned?). While new bureaucracies have been created, old ones have been outsourced. An example was when the Howard government out sourced what was previously done by low paid public servants in placing the unemployed in jobs. Private companies created by those who are close to and understand government did well, but the taxpayer still paid.
There is an Australian antidote to some of the worst effects of the international economic crisis. It is in genuine infrastructure projects and in encouraging small business by removing unnecessary regulation and excessive taxes such as pay roll and capital gains taxes. As small business is a key employer, why reintroduce Keating’s so called unfair dismissal legislation which will make everybody think twice before putting on new staff? And why even think of a carbon tax? Even the true believers know that it will make no difference whatsoever to the climate.
Peter Costello lamented that in the short space of little over a year, we are moving from a $22 billion surplus to a $22 billion deficit. Instead of such infrastructure as new dams, electricity stations and train lines, and better ports, the taxpayers’ funds are being frittered away. The government will even borrow to do this, pushing up interest rates. The taxpayer will pay for years for this folly. And there are no more assets to sell.
Peter Costello has shown that if anybody knows what to do, he does. He should be on the front bench.