Austerity and the End of Growth: Australia’s Economic Future

Over the last three weeks I have read two fascinating and disturbing books: Mark Blyth’s, Austerity: The History of a Dangerous Idea; and Richard Heinberg’s, The End of Growth: Adapting to Our New Economic Reality. Both books are fascinating, because they provide compelling explanations for the economic conditions that everyday political dialogue fail to elucidate or resolve, and both books are disturbing, because they make it abundantly clear that we are living in dangerous (rather than interesting) economic times. As I read both books I could not help but think about how the concepts they discuss, and the implications they suggest, could relate to Australia and its economic future.

One of the first points that struck home while reading Blyth’s book was the concept of a Fallacy of Composition: austerity is good for an individual, or an individual state, so it is therefore good for every individual at once, or every state at once. A Fallacy of Composition is evident when it is assumed that the characteristics of a part are also the characteristics of the whole. In the case of economic austerity, this means assuming that because austerity can be good for one state, that it must be a good thing for multiple states to undertake economic austerity at the same time. If we compare the consequences of economic austerity on Europe after World War I and after the GFC, as Blyth does, then we should not be surprised if the circumstances for Portugal, Ireland, Greece, and Spain will decline further, and that the economic outlook for Europe will gets worse over all. Austerity did no good for Europe during the 1920s, and one would have to be a dogmatic economist to believe that it is going to work now. Along with austerity, the Euro is currently limiting policy options as damagingly as the desire to return to the gold standard did in the 1920s. We should not be at all surprised if populism and fascism end up presenting tangible threats to democratic governance.

The concept of a Fallacy of Composition first appears in Western thought in Aristotle’s work, Sophistical Elenchi, in which Aristotle sets out to refute many of the Sophists preferred rhetorical tools. Alongside the Fallacy of Composition Aristotle discusses the Fallacy of Division, which is evident when it is assumed that a part has the same characteristics as the whole. In the case of Australia’s current fixation with balancing our budget, we seem to be suffering from a Fallacy of Division: because so many Western countries are undertaking economic austerity, Australia is convinced that it has to reduce spending and balance the budget. The problems with this manic logic are many and varied, but two points are critical: Australia is at the end of a mining boom, and Australian manufacturing is in distressing decline. In both cases the private sector is not spending enough money to keep the market confident, or to transform the economy, so if we want to avoid the economic doldrums, then the Federal Government has to spend to maintain confidence and transform the economy. The ridiculous rhetoric of fiscal restraint that characterizes current Australian political dialogue suggests that we have swallowed the bogus economic modelling that Blyth elucidates hook, line, and sinker.

At present Australian politicians are constantly parroting that we have an economy in transition, but without presenting any cogent or comprehensive plan for where we are going, or how we are going to get there. While they repeat (at best) questionable economic arguments, Australia has a residential property bubble in Sydney and Melbourne that is truly concerning. As Heinberg argues, bubbles indicate a fixation on one area of potential economic growth, because there is so little growth possible in other areas of the economy. At a time when Australians need to be convinced to believe in the future of our economy, we are clinging to property speculation via investment properties like barnacles to a rock. There is no doubt that foreign buyers are contributing to our overheated East coast property bubble, but Australians are playing their part in this potential disaster, because there do not appear to be any other economic opportunities to believe and engage in.

Australia currently has historically low interest rates, which should help reduce the value of the Australian dollar, and stimulate local investment, but both things are conspicuous by their absence. Australians need their Federal government to map and back a clear path, which requires more aggressive and courageous policy than we have seen since Paul Keating was Prime Minister. Australia still has sizable reserves of coal, gas, and iron ore to sell when the price is right, but we should not settle for a boom and bust economic cycle that cannot go on forever. At some point fossil fuels will run out, and if Australia does not do something constructive before then, we will be left with nothing but regrets.

If Heinberg is correct, the world as a whole is near peak fossil fuels, near peak phosphates for agriculture, in trouble regarding access to rare earth minerals, at peak debt, and now subject to constant extreme climate events. The time for an easy economic transition and a soft social and political landing has passed us by while we were sleep-walking through unsustainable consumption. But the question still remains: how hard does the hard economic landing have to be? Australia has the energy resources and raw materials to bring about an economic transformation, the agricultural potential to double down on something we are good at, and a population that happily embraces new technology. What we do not have is leadership that will articulate and back a big idea.

From here on out every year that passes without meaningful action will limit our economic options, and increase the likelihood of a very hard social and political landing. Blyth and Heinberg’s bleak prognosis did not have to be inevitable, but they are becoming ever more unavoidable. Australian’s innate (or naïve) optimism is starting to take a battering, and we need leadership that will transform our economy before the battering becomes irreversible.

Author: David Olney, SIA Assoicate

***Views expressed in this article are not necessarily those of SAGE International Australia ***

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