Are we in for big trouble in the aftermath of a misspent resources boom,
or has the boom been over-hyped, leaving us in good shape to face the
future?
This is a matter of debate among some of Australia's most
prominent economists. Professor Ross Garnaut, of the University of
Melbourne, advanced the former argument last year in his book Dog Days:
Australia After the Boom, and Dr John Edwards, a fellow of the Lowy
Institute and member of the Reserve Bank board, makes the
counter-argument in his new book, Beyond the Boom.
This week Dr
David Gruen, of Treasury, weighed into the argument in a speech written
with help from Rhett Wilcox. Gruen took a middle position, agreeing with
each man on some points and disagreeing on others. Appropriately, he
was speaking at the annual conference of economists in Hobart. They
enjoy that kind of thing.
Gruen strongly disagrees with Edwards'
claim that the resources boom "hasn't been as important for Australian
prosperity as widely believed", saying the boom was "one of the largest
changes in the structure of our economy in modern times" which
"generated the largest sustained rise of Australia's terms of trade ever
seen".
"The result was that resources investment increased from
less than 2 per cent of gross domestic product pre-boom to around 7.5
per cent in 2012-13, an increase, in dollar terms, from around $14
billion to more than $100 billion a year," he says. "This has seen an
additional 180,000 workers employed in the resources sector since the
boom began and will see the capital stock in the resources sector almost
quadruple by 2015-16."
But Gruen disagrees with Garnaut's
implication that the economy was not well managed during the boom. He
notes that all previous commodity booms - including the rural commodity
boom of the early 1970s - led to blowouts in wages and inflation,
followed by recessions after the boom busted.
This time, however,
wages have been well controlled and the rise in prices has rarely
strayed far from the Reserve Bank's 2 per cent to 3 per cent target
range. The boom in the resources sector has not led to excessive growth
in the economy overall. Real GDP growth averaged 3 per cent a year over
the decade to 2012.
Edwards supported his claim that the resources
boom has not been as important for our prosperity as commonly believed
by comparing this 3 per cent growth rate unfavourably with the 3.8 per
cent annual rate achieved over the decade to 2002.
But Gruen
counters by noting the earlier decade "saw above-trend growth as the
economy recovered from the deep early-1990s recession, with unemployment
falling from above 10.5 per cent to below 6 per cent over the course of
that decade".
So why has the upside of the resources boom been
handled so much better than in earlier commodity booms? Gruen gives much
of the credit to three micro-economic reforms: the floating of the
dollar in 1983, the move to letting the Reserve Bank set monetary policy
(interest rates) independent of the elected government, formalised by
Peter Costello in 1996, and the decentralisation of wage-fixing, largely
completed by the Keating government before 1996.
(This to me is a
point worth noting: the greatest continuing benefit from the era of
micro reform - but also from the move to set formal "frameworks" for
conducting the two arms of macro-economic policy - is a much more
flexible economy, one that is less inflation-prone and less
unemployment-prone. By the way, Garnaut and Edwards can take their share
of credit for these reforms.)
Next Gruen rebuts Garnaut's argument that the income the nation earned from the boom was misspent.
Garnaut
might have in mind the Howard government's decision to respond to the
temporary increase in collections from company tax and capital gains by
cutting income tax for eight years in a row, a move that does much to
explain the trouble we are having getting the budget back into surplus.
But
there is more to the economy than what the feds do with their budget.
And Gruen points out that, over the decade to March 2014, national
consumption spending (by households and governments) actually declined
from about 76 per cent of GDP to 73 per cent. If so, the nation's saving
must have increased by 3 percentage points of its income (remember:
income equals consumption plus saving).
Against that, over the
same period bar the last few quarters, national investment has been high
and rising, relative to income. "Rather than the income gains from the
boom having been consumed, it would be more accurate to conclude that
they were invested," Gruen says - a point Edwards also made.
(Had
the nation been "living beyond its means", that would show up as a
widening in the current account deficit. Instead, the deficit has been
narrower in recent years.)
But what about the downside of the
boom? Will the bust result in a period of contraction for the economy as
a whole? Gruen's answer is "so far, so good", but he concedes that,
over the next three or four years, investment spending by the miners is
expected to fall from about 7 per cent of GDP to about 2 per cent or 3
per cent, a subtraction from growth of about 2 per cent to 2.5
percentage points (remembering that about half of mining investment is
in imported equipment).
Remember, too, that mining production and
export volumes will be growing strongly. Even so, avoiding recession
will require a further significant fall in the dollar.
Gruen
agrees with Garnaut that for the economy to benefit from such a
"nominal" depreciation in the currency, it will need to be translated
into a "real" depreciation by only moderate wage growth. But this could
be achieved provided real wages grow by less than the growth in labour
productivity.
