Tuesday, June 19, 2012
Look at the fundamentals, our leaders say. In a troubled world, our economy is growing at trend rates. Unemployment is only 5.1 per cent, jobs at record levels. Inflation is negligible. The government has low debt and, with a few fiddles, claims to have a budget surplus. The Reserve Bank's cash rate is near its historical low. So why aren't we confident?
There are many reasons, and we may differ as to how much weight each of them has. They reflect our fears for the future, from the global economy to the carbon tax. They reflect other economic fundamentals that the Treasurer and the Reserve Bank governor are less keen to mention. And they reflect the corrosive impact of the poisonous political partisanship and lack of common purpose in our fast-degrading democracy.
Let's take the global economy first. The narrow victory for the two mainstream parties, New Democracy (right) and Pasok (left), in Sunday's Greek election clears one hurdle facing European leaders. It buys them time to change course and set sail for growth. But Europe is awash with debt: too many governments and banks have taken on too much of it; too much time has been lost by bad decisions; and too many interests remain in conflict. There is a real risk that its great recession will turn into a depression around the world.
Even in Greece, Sunday's vote was anything but a clear mandate. New Democracy and Pasok shared just 42 per cent of the vote, compared to 46 per cent for the four main anti-bailout parties on the far left and nationalist right. Their majority came only from the 50-seat bonus given to the biggest party. The big shift since last month's poll is that the right has regrouped behind the pro-austerity New Democracy, while the left has regrouped behind anti-austerity Syriza, which will now await its time.
Still, a win is better than a loss. It is now up to Germany and the European Union to drop their hard line and admit what everyone knows: that their deficit reduction targets cannot be met by countries in deep trouble, such as Greece and Spain, without taking them into even deeper trouble. Julia Gillard is right: to reduce deficits of this order, you need growth. That requires not only a growth package, but a much slower timetable for deficit reduction.
Most Australians don't spend time thinking about Europe's problems (or those of the US, which by December could eclipse them if Democrats and Republicans can't agree on how to reduce its deficit). We have lost confidence mainly because our real economic situation is less rosy than Swan claims, and because 2? years of non-stop strident partisan politics has corroded confidence in everything: government, opposition and the economy.
Stevens highlighted one key factor. In the past our boat raced along, helped by the tailwind of rapid growth in debt. The ratio of household debt to disposable income almost doubled under Hawke and Keating, from 37 per cent to 70 per cent, and then more than doubled under Howard, to 156 per cent. In 25 years, the amount we owe relative to the amount we earn quadrupled. Some of us have argued for years that this was not sustainable. We now welcome the Reserve Bank to the club as a new member.
Rapidly growing debt felt good. It fuelled our house prices, which created the illusion of rising wealth. Between 1995 and 2005, Stevens said, household assets per head rose by 6.4 per cent a year, mainly due to soaring house prices. As a result, we spent more: on average, each of us bought 2.8 per cent more goods and services every year. And since consumer spending makes up 60 per cent of GDP, that produced strong growth: on average, GDP per head rose 2.5 per cent per head each year.
Contrast that with the years since 2007. In real net terms, the average Australian today owns almost $30,000 less than they did in 2007. Since the GFC sent stock markets crashing, our real wealth per head has shrunk at the rate of 3.25 per cent a year. GDP per head has grown by just 0.3 per cent a year. Growth in real consumer spending per head has halved to 1.5 per cent. Stevens welcomes that as necessary adjustment to the reality that we can't increase debt forever. But, he says, we resent it, and it is primarily that loss of wealth that makes us grumpy.
He is right, but there are two other keys to this story. First, we remain massively in debt. Since December 2007 household debt has grown by a whopping $310 billion. In December 2011, the ratio of household debt to household income was still 150 per cent. Mortgage bills still ate up 11.2 per cent of our disposable income, only slightly less than in 2007. Relative to our incomes, our debt was almost as big as ever and so were our interest bills.
Then shouldn't the Reserve's interest rate cuts lift our spirits? No, because of the banks. Since the end of 2007 the Reserve has cut its cash rate from 6.75 to 3.5 per cent, yet barely half of that has been passed through to households, and even less to small business. The other half has gone to the banks, whose profits, on average, have grown at double-digit rates each year since the GFC began.
Whenever the Reserve cuts rates, the good news is stolen by the banks appearing to grab more for themselves. Some of that was justified, but the bottom line is excessive. Essentially, the banks have looked after themselves, not their clients. So their clients are angry.
Another problem is that there is not one Australian economy any more. Mining is running red hot, some sectors such as health and finance are prospering, but a lot are not. Spending in the mining states is growing at 10 per cent a year. Spending in the south-east, where most Australians live, is growing at 2 per cent, and unemployment is rising. When policymakers ignore the reality around them, people get angry.
Then there is the corrosive effect of Tony Abbott's relentless war on everything Labor does. Politically, it has been very effective; helped by the Murdoch press and some right-wing radio shock jocks, the country's mood outside Victoria now resembles that of 1975. But one of the casualties is confidence in the economy. When Abbott and his troops tell us day after day that the carbon tax will wreck the economy, many people believe him and plan for the worst.
Successful economies tend to be those with a sense of common purpose, where compromise is not a dirty word and opponents are not enemies. Australia had that under Menzies, lost it in the Whitlam years, regained it under Hawke, and has now lost it again. It would help if we could get it back again.