6 Aug 2010

The following text comes from the 2010 Hamer Oration held at the University of Melbourne on Thursday August 5, 2010.  The speech was given by Professor Ross Garnaut, a Vice Chancellor's Fellow and Professorial Fellow in Economics at the University.

 

I am glad of the chance to deliver this oration in honour of Dick and David Hamer,

contributors to civilised Victorian and Australian political discourse.

Barry Jones once described Dick Hamer as the finest flower of the Victorian

Deakinite tradition. That tradition encompassed the ideas that people of

goodwill sharing sound knowledge could find the best way through a policy

dilemma; and that citizens should be seeking to reconcile competing interests

and perspectives, and to strengthen institutions that neutralised extreme views

by providing opportunities for sound elements in them to be partially absorbed

into the mainstream. Barry Jones had in mind leadership covering a wider field

than economic policy, extending into the environment, the arts and humane

administration of justice—contrasting sharply with Victorian Governments in

times immediately preceding the Hamer years.

 

These are matters of political culture rather than policy. They have been

influential and productive in Victoria and Melbourne, and part of the success of

this State and city as civilised polities and communities over more than a

hundred years.

I focus mainly on economic issues. Today, sound economic policy embraces

the environment. To ignore the environmental impact of policies is as

economically irrational as to ignore the effects of allowing demand to exceed

the productive capacity of the economy, or to ignore distortions which force

investment to shift from highly productive to wasteful activities.

I begin by introducing a few basic ideas about means and ends in economic

policy in a democratic polity. This is a bit formal, but hopefully will avoid some

misunderstandings and save some time later in this presentation.

 

It is a recurring challenge of democratic capitalism to reconcile Government by

the people, with its necessary concern for equity, with maintenance of the

competition in the market place and the incentives for economising behaviour

that are necessary for sustained prosperity. And it is a recurring challenge to

reconcile the inevitable accumulation of wealth from success in the market

economy, and the influence of wealth in the democratic process, with

Government by the people. Compromises that are made and political alliances

that are struck in meeting one of the recurring challenges can ease or

exacerbate the other.

For the outcome of the political process to be conducive to broadly based

prosperity and to the preservation of democratic institutions, there must be

knowledge of the effects of various policies; education of the democratic polity

in that knowledge; restraint in the use of political power to achieve sectional

economic objectives; and restraint in the use of economic power in the political

process. A successful democratic polity is built around analysis, public 

education, tolerance and restraint. The presence of these qualities in the polity

allows leaders who are concerned to follow some conception of the public

interest to appeal to the democratic electorate over the heads of vested

interests, which otherwise have a privileged influential place in the policymaking

process.

 

We now know from much experience and analysis quite a lot about the

conditions that must be met for a country’s economic success.

To the greatest possible extent, goods and services need to be traded and

capital allocated through competitive markets.

 

There are economic efficiency advantages in labour also being traded through

competitive markets, although in this case, democratic rights must constrain the

treatment of labour as a commodity. The legitimate debates on regulation of

labour markets are about the boundaries between what is conducive to good

outcomes for economic efficiency and equitable distribution of material

economic benefits, and what is necessary to preserve valuable human

freedoms in a democratic polity. The best outcomes for efficiency and equity will

give the largest possible role to the market subject to securing the essential

democratic freedoms, with budget rather than labour market interventions being

used to secure equitable distribution.

 

The prime role of markets does not mean that the role of Government is

incidental to economic success. Far from it. Many services that are essential to

good economic performance are provided by Governments or not at all. These

services have the characteristics of “public goods”—they cannot be provided

efficiently through private markets. In addition, there are activities which

generate benefits or impose costs on firms other than the parties to market

transactions. Efficient economic outcomes require all such external costs to be

taxed or discouraged by regulation, and all such external benefits to be

subsidised or encouraged by regulation. One special case of intervention to

increase economic efficiency is the increase in aggregate demand to maintain

full employment for labour and capital in times of “Depression Economics”. A

second is the internalisation of external environmental costs—now including the

important special case of greenhouse gas emissions.

 

Markets do not generate a distribution of income that bears any relationship to

what a society considers to be equitable. It is a legitimate and necessary

objective of policy in a democratic country with a market economy to intervene

to make the distribution of income and wealth more equitable than would

emerge from an unconstrained market. The challenge is to achieve the socially

desired modification of the distribution of income with a minimum loss of

economic output.

 

People place different value on the various distributional outcomes from policy

intervention. The political process arbitrates among these differences in values.

There is room for differences deriving from values about how far and precisely

for whom to intervene in market processes to achieve a more equitable

distribution.

 

There is no good reason for differences in values to lead to different views on

the extent of intervention that is necessary for the efficient operation of the

economy. On intervention for economic efficiency, the useful debate is about

the actual effects of different policies.

 

So one set of interventions is justified by and necessary for effective economic

performance. Another set of interventions is justified by and necessary for

varying the income distribution from that which would emerge from an

unrestrained market economy. Whatever their values, citizens share interests in

efficient intervention to improve economic performance, and efficient distribution

to achieve specified equity goals at the lowest possible cost.

 

Many of the dilemmas and contests over public policy arise because the most

efficient paths to both equity and efficiency involve judgements about the

optimal extent and nature of intervention.

 

Any intervention confers benefits upon some special business and other

interests that are unintended for economic efficiency or equity. The beneficiaries

of interventions seek to secure more of these interventions, whether or not more

is justified by national economic or equity considerations. Similarly,

interventions that are justified on efficiency and equity grounds damage some

special interests, which seek to have less of them. Parties and individuals

seeking political office undertake to provide more of the interventions that favour

the special interests, and less of the interventions that damage them, in return

for campaign funds and other support and favours. Special interests have

strong incentives to enter the political process directly, to persuade influential

elements of the polity or, less reliably, the community at large, that particular

interventions are in the national interest or against the national interest on

economic efficiency or equity grounds.

 

So the political process in a democracy is inevitably a contest between groups

seeking efficient economic and equity interventions, and others seeking

interventions to confer special benefits upon themselves or to avoid or constrain

interventions that impose special costs on themselves. The special interests

have powerful incentives to obscure the real effects of various interventions.

Those seeking greater economic efficiency and equity have an interest in the

links between policies and outcomes being well understood—in independent

analysis, transparency and public education. The special interests are favoured

by ignorance and the fog of politics.

 

The special interests have a large advantage in the concentration of benefits

from particular interventions on a small number of recipients. The sectional

beneficiaries of interventions know exactly who they are, and are prepared to

invest a proportion of the gains from favourable interventions into securing

them. Those seeking to advance the national interest are handicapped by the

free rider constraints on collective action. None of the many diffuse beneficiaries

of any particular act of good policy will have a strong interest in seeking good

information on the effects of policy and persuading others of its merit.

 

It seems that the special interests have the stronger position in a democratic

polity. That explains why good policy for economic efficiency and equity is the

exception rather than the rule. It explains Australia’s chronic underperformance

through most of its history, and the early restoration now of the conditions for

underperformance after a brief period of superior outcomes. It explains why

correctable flaws in the global financial system were not corrected, and why a

global financial crisis has for the time being crippled the greatest and most of

the least of the developed capitalist democracies. It explains why our civilisation

is at risk from a failure to limit growth in greenhouse gases, despite the science

having been clear enough on the balance of probabilities for a considerable

time.

 

Political leaders and parties can associate themselves with national interest

objectives, or align themselves with special interests. If they align with special

interests, they can catch a ride on the advantage that concentrations of capital

have in marketing a distorted perception of the national interest. These

opportunities expand with sophisticated modern analysis of opinion and

influence.

 

The vested interests have large advantages, but they don’t hold all the cards.

The big card in the hand of the public interest is the community’s capacity and

tendency to respond to leadership. An able leader’s articulation of his or her

conception of the national interest can elicit powerful responses, capable of

overcoming loyalty to private interests, and of swamping the appeals to

perceptions of the national interest that have been distorted by sectional

interests. Of course, the human capacity to be led can be used for good or ill;

Lincoln in his Inaugural Address referred to leaders’ opportunity to speak to the

better angels within us, while leaving unspoken the gruesome alternative that

was soon to consume the peace of his country. Strong leadership is powerful

when used for good or ill. Humanity’s capacity to be led is the essential reason

why human civilisation achieved its unlikely partial ascent from barbarism over

these last ten thousand years, and why civilisation has mostly flourished within

the special opportunities of democratic capitalism in modern times.

 

Within a democratic polity, a leader’s opportunity to appeal to a sound

conception of the public interest depends on having champions of good policy in

an independent centre of the polity. At various times in history and in different

countries, the independent centre is stronger or weaker depending on a variety

of influences that lie beyond this presentation. The independent centre cannot

exist unless there are academic and other centres of policy analysis, media and

mass communications that are funded independently of interest groups. Public

institutions can play a role in expanding the independent centre, including an

independent public service, and public organisations established specifically to

undertake transparent independent analysis and public education on policy

proposals. On the latter, the Australian Productivity Commission and its role in

the analysis of the effects of protection is an outstanding example.

 

Political parties and leaders always need to be seen as appealing to the

national interest. A healthy and productive independent centre of the policy

process creates opportunities for leaders to appeal to a genuine national

interest, rather than to a perception created by investment in influence by

special interests.

 

The outcome of the struggle between the national interest and special interests

determines the prosperity, and in the end the security and longevity of the

national community. The prospects for policies in the national interest and for

stable outcomes once adopted are shaped by the quality and strength of

leadership. Good outcomes are unlikely without effective, strong and clearheaded

leadership, drawing support from an informed electorate.

 

Now for some Australian political and economic history.

 

The policies through which the economic dimension of the Deakinite tradition

was expressed dominated Australian national life through the first eighty years

of our Federation. They were subject to much debate in the early years. I recall

the creative Australian economist Colin Clark commenting not long before his

death in 1989, that his older and overlapping contemporary Alfred Deakin

“...was everything that I abhor: an irrigationist, an immigrationist, a protectionist

and a prohibitionist”. In these days of focus on how women will use their votes

in the 2010 election, it is interesting to reflect on how the early female franchise

in Australia raised the profile of prohibition, as did the later female vote in the

United States in the 1920s. The sense of moderation and tolerance in Deakinite

Australian political culture meant that we did not attempt prohibition. Within a

less tolerant political culture, the United States tried and failed.

 

Successful policies always set in train changes that, over time, undermine the

foundations for their own success. My own views on the long-term

consequences of the Deakinite settlement in Australia are well known; that the

approach to reconciling the perspectives and interests of capital and labour in

Victoria and then Australia was damaging to Australian development. But the

approach was politically successful for an extraordinarily long time. Over time,

protection, interventionist industrial relations and heavy reliance on state

enterprise in delivering services, however mixed their early effects, changed

economic and political behaviour in ways that contributed to substantial declines

in Australian economic performance relative to all other developed countries

except New Zealand. Once comprehensive intervention by Government in the

market economy had been accepted on national interest grounds, the seeking

of Government preferment, and investment to influence Government policy,

became central to the business of business. By the early 1980s, a major policy

reorientation was required which, in turn, needed a sharp break with a political

culture that had been distorted grotesquely from its Deakinite origins. Policy

change required the elevation of processes that allowed considered concern for

the national interest to compete in the political process with union and vested

business interests.

 

From 1983, the Hawke Government implemented fundamentally different and

non-Deakinite policies within what could be seen as a restored Deakinite

political culture. The new political culture involved a commitment to applying

analysis and knowledge to define optimal policies to meet objectives; to

communicating on proposed policies and the reasons for them with affected

interests and the community, with a view to absorbing legitimate perspectives

and to dulling the force of residual opposition to change; to educating the

community on the main issues, so as to provide an electoral buffer against the

disinformation of sectoral interests; and to avoiding unnecessary surprises and

disruption by planning for change to be gradual where this did not defeat the

purpose of the policy. Within this changed political culture, a major part was

played by the commentary of informed analysts with acknowledged credentials

in the media, academia and “think tanks” that were independent of particular

business and political interests. To exercise influence, organised business and

the trade unions had to frame their pressures on the policy process

transparently within a sophisticated conception of the public interest.

 

So from 1983, there was a comprehensive change in the way in which policy

was made in Australia, away from the dominance of discrete rent-seeking

pressures from business and its relations with Government, towards transparent

analysis and discussion of the national interest in policy. The productivityenhancing

reforms of this period under the Hawke, Keating and early Howard

Governments are well known.

 

By the turn of the millennium, the more flexible Australian economy that had

emerged from seventeen years of reform had experienced the longest, and

relative to other developed countries the strongest, economic expansion in

Australian history. Whereas Australia in the first eight decades of its federation

had been the poorest performer in productivity growth and rising living

standards of all the countries that are now developed, in the 1990s it was at the

top of the productivity growth league. By now, 2010, the more flexible Australian

economy has delivered the longest economic expansion without recession not

only ever in Australia—that milestone was passed a long time ago—but in any

developed country.

 

It might be expected that the way that restoration of a public interest-focussed

political culture and comprehensively changed policy were reflected in greatly

enhanced economic performance and prosperity would entrench the new

approaches for a considerable period. No doubt success would set in train new

changes in political culture and institutions that would themselves one day

require dry-docking, when the slow accumulation of barnacles had passed a

critical point. But for the time being and for the foreseeable future, the main task

would be to extend policy reform within the post-1983 tradition, to the neglected

corners of Australian policy.

 

The expectation that success would entrench the policies and political culture

from which it had grown was an unspoken premise of my opening address in

2002, to the first of the Melbourne Institute—The Australian conference series

on the Australian economic and social outlook (Garnaut, 2002). The expectation

was false. Looking back with embarrassment at my naivety, that lecture more or

less marks the dividing line between the era of reform, and the current era—the

Great Australian Complacency of the Early Twenty First Century.

 

There has been no successful major step in productivity-raising reform since the

tax changes associated with the introduction of the GST in 2001. Even the GST

reform had a large and at the time obscure downside for productivity growth. It

was a perfectly understandable downside, arising out of the Federal

Opposition’s persistent and forceful rejection of the reform. Understandable, but

appallingly costly. To win the support of the States, the Commonwealth made

the whole of the proceeds of the GST available to the States and Territories.

But not to the States and Territories in which the tax was collected. Rather, to

win the support of the majority of States and Territories—not Victoria, where

Premier Kennett was a believer and supporter and sought no parochial favour,

nor New South Wales, where the Coalition Commonwealth Government could

afford to sidestep one dissentient Labor voice--the proceeds were to be

allocated according to the formulae of the Commonwealth Grants Commission.

They were therefore to be allocated within the Commission’s arcane formulae

on horizontal fiscal equalisation, compounding an impediment to rational

financial management, and favouring the smaller States. That was before the

China-led resources boom shifted Queensland and Western Australia from the

recipient to the donor column of fiscal equalisation. What had been a minor

idiosyncrasy became a central part of the Australian fiscal system, profoundly

affecting incentives for sound financial management in the Federation. This and

the continuing tendency of tied grants from the Commonwealth to turn State into

joint powers removed exclusive State and Territory responsibility for all of the

main State functions. The blurring of responsibility was a major barrier to

improved performance in all of the areas that have turned out to be crucial to

the outstanding agenda of productivity-raising reform—transport infrastructure,

resources taxation, education and health. In these areas, no-one within the

Australian Federal system is unambiguously in charge—and no-one will ever be

unambiguously in charge without fundamental reform of Federal fiscal

arrangements.

 

Economic policy since the GST has been characterised by change rather than

productivity-raising reform. The use of independent analysis and transparent

discussion of policy reform has become rare; when independent studies have

been commissioned by Government, they have tended to be sidelined at the

decision-making end of policy-making; and the capture of major economic

policy decisions by short-term political processes and operatives has become

endemic.

 

Since 2002, there have been some major policy changes with ambiguous or

negative effects on Australian productivity and incomes. Australian leadership of

an historic Asia Pacific shift from multilateral to preferential trade, led by the USAustralia

free trade agreement, is an example. The serious damage to the

terms of Australian access to regional agricultural markets is a predictable

consequence of the corrosion of multilateral trade. These and other costs of

change were obscured from public view by flawed analysis and process at the

time when critical decisions were made.

 

There are some examples of attempts at major reform that had the potential to

raise productivity and incomes, but failed comprehensively, and poisoned the

soil for further reform for a considerable while. Industrial relations changes

under the rubric of work choices, and the Henry Tax Review’s proposals on tax

reform and the resources super profits tax are the most important among them.

Both proposed reforms contained important flaws, which expanded their

vulnerability to fierce attack from and slaughter by sectional interests. We

actually need carefully analysed reform of the industrial relations and resources

tax systems. The dreadful dilemmas of economic policy in the period ahead,

discussed later in this Oration, would be eased by sound reform in these areas.

Is there now any chance, after the botched attempts at reform of recent times?

 

It has been recognised for at least the past decade that weaknesses in the

provision of transport and other infrastructure are major drags on Australian

economic performance. These matters are constitutionally within the

responsibility of the States, but have been rendered joint responsibilities by

developments within Federal-State financial relations. Actions to correct

weaknesses have been small and piecemeal, without comprehensive,

transparent, independent analysis of the range of alternatives. Effective action

is held back because no level of Government is unambiguously in charge of the

massive sustained effort that is required. Those steps that have been taken

have been highly politicised and correspondingly ineffective. The capacity of

transport infrastructure has grown less rapidly than the demand for it. In a

breathtaking side-stepping of responsibility, the leaderships of both major

political parties have turned a failure of leadership on transport infrastructure

into what is purported to be a fundamental change in Australian population and

immigration policy. The change has large implications for but has been

accompanied by no analysis of economic growth and incomes.

 

Health services are a huge and growing component of the national economy. In

Australia, these are funded to a high degree through the public sector. The

efficiency with which services are provided is therefore important both to the

future Australian standard of living, and to the public finances. Health services

warrant close policy focus and received it early in 2010; the productivity-raising

consequences of that attention are not yet obvious, and the ambiguity in policy

responsibility between Federal and State governments remains a drag on good

policy.

 

Improvements in education and training policy have been properly identified as

a potential source of productivity growth, especially by the current Government.

Some steps have been taken in the right direction. Sadly, any small contribution

from improvements so far in education policy will not affect the national

productivity numbers in significant ways for at least a couple of decades.

 

There has been little substantial reference to productivity growth even of a

hortatory or rhetorical kind by Australian Governments over the past decade of

stagnating and then declining productivity. A major Prime Ministerial speech on

the need for action to promote productivity growth in January 2010 stands out

as an exception. Its only steady echo since then—not trivial, but lonely—has

been the Minister for Competition Policy and Consumer Affairs’ consistent

advocacy of competitive markets. Neither leader has referred audibly to the

need to correct long-term stagnation in Australian productivity during the current

election campaign. The Prime Minister Gillard made welcome reference to the

productivity challenge in a National Press Club speech during the current

election campaign; that was buried comprehensively by a question from Laurie

Oakes about the Prime Minister’s ascension to office.

 

The polls say that there is a considerable chance of a change of Government

on August 21. We do not know even whether the Opposition knows that

Australia has a longstanding productivity problem, let alone what it would do to

resolve it.

 

Alongside the vacuum on productivity-raising reform, there have been

successes in macro-economic policy. Avoiding recession through the United

States “tech wreck” of the early years of the century, and more impressively

through the Great Crash of 2008 and its aftermath, required astute adjustment

of fiscal and monetary policy. While success built on the new institutions and

enhanced flexibility from late twentieth century reform, the macro-economic

dimensions of the twenty first century interventions were of high quality. In each

case, the adjustments were implemented with little regard for opportunities to

achieve an additional product through lasting productivity improvements.

 

How do we reconcile the continued growth of the Australian economy through

the first decade of the twenty first century, with the evidence that something has

gone wrong with our political culture and economic policy? In truth, it is only the

first half of the past two decades of strong economic performance in which

productivity-raising reform contributed to Australian prosperity.

 

The exceptional prosperity of the past two decades can be divided into three

parts. Through the 1990s, Australian productivity growth on the back of post-

1983 reforms was the highest of the developed countries, after our country had

been a chronic underperformer through the first eighty years of the twentieth

century. This delivered sustainable increases in living standards.

 

Productivity growth slowed in the early twenty first century, and soon stopped.

To use an economists’ term, total factor productivity has actually gone

backwards since 2005. However, output, employment and average incomes

continued to increase through the early years of the century. Productivity was

replaced as the engine of growth by a huge expansion of housing and

consumption, supported by increasing bank debt. The banks funded their

increased lending by borrowing from foreign wholesale markets to a degree that

is unprecedented in Australia or in any other country. The other side of the coin

to the housing and consumption boom was the emergence of a current account

deficit that was unusual even by high Australian standards. I argued in 2004

and 2005 that this was unsustainable—Australians were spending well above

their sustainable means. Sooner or later, some tightening of international credit

markets would place constraints on Australian borrowers, even if prudence had

not caused earlier adjustment by the borrowers themselves. In the event, what

would have been earlier recessionary consequences of the deflating of the

housing and consumption boom were avoided by the China-led resources

boom.

 

Jumping forward three years, the collapse of global wholesale markets in the

Great Crash of 2008 demonstrated that growth based on debt-funded housing

and consumption certainly was not sustainable. The banks survived through the

timely provision of an Australian Government guarantee to wholesale borrowing

in October 2008—eventually accumulating to today’s $157 billion of contingent

liabilities. One legacy is moral hazard, with the banks now expecting that they

would be bailed out in any future failure of global credit markets, and therefore

facing weaker pressures than ever before for prudent management of their

liabilities. The moral hazard increases the chances that the guarantee will be

called again, in circumstances when it may be more costly to provide than in

2008-10.

 

Without productivity growth, there can be no reliably sustainable increases in

the material standard of living. Neither is there scope for increases in the

material standard of living from another debt-financed housing and consumption

boom.

 

Nor is there likely to be additional scope for increased incomes per head from

the resources boom. China and the large developing countries are likely to keep

growing strongly. However, the expansion of productive capacity in Australia

and increasingly in many other countries will, over time, bring down the terms of

trade, and reduce the rate of growth of Australian resources investment. The

contribution of the resources boom to growth in Australian incomes is likely to

be at a peak in 2010.

 

Australians face hard economic policy choices in the period ahead. Not since

the 1930s have Australians faced such tight constraints on growth in living

standards, and such high risks of instability and rising unemployment if the

constraints are seriously breached.

 

Meanwhile, the exceptional strength of the resources sector has forced

structural change through other parts of the economy that further compounds

the difficulties of maintaining economic stability and incomes while sustaining

the Australian standard of living.

 

In the world after the global financial crisis in which our total access to global

financial markets is limited, a much higher proportion of the available

investment capital is being absorbed by our most capital-intensive sector—the

resources sector. This reduces capital available to more labour-intensive

activities, in services, manufacturing and agriculture. Standard economics,

embodied in what is known as Rybczinski’s theorem, tells us that, in these

circumstances, real wages may need to decline to maintain full employment.

The required decline in real wages is greater the more the capital-intensive

resources sector expands. These relationships are affected by taxation

arrangements in the resources relative to other sectors.

 

This “Rybczinski effect” is separate from and compounds the negative effects of

strong export growth in the resources sector on the services, rural and

manufactures industries through upward pressure on the real exchange rate.

This “Gregory Effect” or “Dutch Disease” could create difficulties when the

resources sector ceases to be a strong source of growth.

 

These considerations together suggest that tight constraint on all expenditure is

going to be necessary for the foreseeable future. Real wages will need to be

constrained tightly if full employment is to be maintained through these tight

limits on expenditure. These should be matters of careful analysis and

discussion, as a basis for sound policy in the national interest.

In the period ahead, any unnecessary waste or inefficiency in any area of policy

probably does not mean a lower rate of growth of living standards. It probably

means decline in living standards.

 

Within this stringent outlook, we must face the probable accumulation of climate

change costs, gaining force over time in the absence of effective mitigation The

odds can be improved to an extent that most Australians would find acceptable

only if we begin now to contribute our proportionate share to an ambitious

global mitigation effort.

 

Climate change mitigation will be cheaper than climate change.

 

It was a conclusion of the Garnaut Climate Change Review that I presented to

Prime Minister Rudd and the State Premiers two years ago, that effective

mitigation of the effects of climate change need only deduct one to two tenths of

a percentage point per annum from the growth in Australian living standards

over the next four decades. After that, the gains from avoided climate change

are likely to outweigh additional costs of mitigation.

 

Without effective mitigation, Australian economic growth would probably be

damaged over time by an amount that exceeds the costs of mitigation when

appropriate discount rates are applied to future costs and benefits, even if only

easily measureable effects this century are taken into account. It is possible that

catastrophic outcomes would terminate the era of global and Australian

economic growth. Probably, and not with certainty, because the science

acknowledges uncertainties in the climate impacts. But the uncertainties

encompass the possibility of much worse as well as more benign outcomes.

The uncertainties therefore add to the extent and urgency of the mitigation

response that is warranted.

 

The Review discusses in elaborate detail how human scientific, technological,

economic and public policy wisdom could break the nexus between economic

growth and environmental degradation at manageable short and medium term

cost. Australia alone could not solve the problem. But there would be no global

solution to the problem without Australia playing its proportionate part. .

The expected future costs of Australia making its proportionate contribution to a

strong global mitigation effort have now risen above the levels anticipated in the

Review as a result of delays that have already occurred, the uncertainty about

climate change policy, and the adoption by Opposition and Government of a

number of particularly costly instruments of mitigation. Every year of delay, and

every addition to the array of sub-optimal policy interventions, is an additional

deduction from a tightly constrained Australian standard of living. The

Government speaks of a possibility of considering a shift to less costly and

more effective policies during the next Parliament. The Opposition promises

unambiguous commitment to costly and less effective policies.

 

It was never going to be easy. As I said in the Introduction to the Climate

Change Review (pxviii), climate change is a diabolical public policy problem. It

is harder than any other issue of high importance that has come before our

polity in living memory. I noted then, in September 2008, that daily debate in

Australia and elsewhere suggests that this issue might be too hard for rational

policy making: the issues are too complex; the special interests too numerous,

powerful and intense; the time frames within which effects of mitigation become

evident too long; and the time frames within which action must be taken too

short.

 

And yet there is a saving grace that may make all the difference (Garnaut,

2008, ppxviii-xix). There is a much stronger base of support for reform and

change on this issue than on any other big question of structural change with

which the Australian polity has come to grips in recent decades, including trade,

tax and public business ownership reform. People in other countries, to varying

degrees, seem to share Australian interest in and preparedness to take action

on global warming.

 

The saving grace turns out to be powerful. Despite the abandonment of

effective approaches to mitigation by both major parties, and the

comprehensive disappearance now for two thirds of a year of leadership on

climate change policy from either side of Australian politics, a large majority of

Australians wants an Emissions Trading Scheme. When the pollsters tell

interviewees honestly that there will be an increase in energy costs and that

receipts from sale of permits will cover the cost of price increases for people on

low incomes, support rises to higher levels. (Here we need explicitly to reject as

unprofessional, the outcomes of surveys of opinion that refer to increases in

costs as a result of carbon pricing, but which make no reference to the use of

associated increases in Government revenue, for example for adjustments to

social security and taxation for low-income families).

 

There has never been a structural reform issue offering itself so positively to

effective political leadership.

 

Internationally, alongside the diplomatic fiasco at Copenhagen last December,

most of the large developing countries committed themselves to strong action to

reduce emissions below business-as-usual within the Copenhagen Accord.

China matters most, and its commitments under the Copenhagen Accord go

further than the Garnaut Climate Change Review assessed as its proportionate

share of a strong global mitigation agreement.

 

True, the structure of the Copenhagen Accord varies greatly from that which

Australians, including myself, had in mind. But there is an international

agreement, and a potentially important one. Australia stands out for the

weakness of its unconditional commitments under that agreement. There is a

basis in the Copenhagen Accord for Australia going much further than its

unconditional 5 percent, but no signs of Australia doing so.

 

Worst of all, neither of the major political parties has committed itself to policies

that can get us anywhere near even the unconditional commitment to 5 percent

reduction from 2000 levels by 2020. The small reductions in emissions that

would come from announced policies would be achieved at extremely high cost.

Australia will be called by the international community to meet its 5 percent

unconditional target and to do much more.

 

The Climate Change Review sketched some of the links between climate

change and the China-led resources boom (Garnaut, 2008, ppxx-xxi). It was the

sustained strong growth of China and other Asian developing countries in the

early twenty first century that gave us an opportunity for restoration of much of

the superior income levels amongst developed countries that Australians had

enjoyed in the early years of our Federation. Much of the expanded export

opportunity in the resources boom was in fossil fuels, especially in emissionsintensive

coal.

 

The China-led global resources boom was one half of the cause of Australia’s

exceptional prosperity of the early twenty first century. It was also the cause of

an acceleration in the “business as usual” growth in greenhouse gas emissions,

to rates far in excess of the expectations embodied in the climate change

projections of the International Panel on Climate Change. “For Australia”, the

Review noted, “the commitment to the mitigation of climate change can be seen

as the reinvestment of a part of the immense gains that have come from

accelerated Asian economic growth, in contributing to reduction of an adverse

side-effect of that growth”. To the rest of the world, much of which is paying for

our resources boom with higher import prices, this makes the retarded nature of

the Australian response a puzzle, and sometimes a source of resentment

We face great challenges on economic and climate change policy, but find

ourselves in a weak position to deal with them. Delayed or inadequate action on

climate change would make a hard economic policy problem much harder.

 

The position on climate change is weak only because of an extraordinary failure

of leadership. The failure is a product and represents the nadir of the early

twenty first century political culture, in which short-term politics and accession to

sectional pressures has held sway over leadership and analysis of the national

interest. Those political advisers who turned out to have greatest influence over

former Prime Minister Rudd weighed undoubtedly strong resistance from

special interest groups, and inchoate reactions from partially informed members

of the community, above more fundamental determinants of political success.

 

They played down the unusual reality of majority support for a measure

involving major structural change in the economy. More fundamentally, they

ignored the crucial respect for and role of leadership in the democratic process.

In accepting their advice, Kevin Rudd abdicated the leadership of Australia, and

set the scene for the destruction of his Prime Ministership.

 

More curiously, given the Rudd experience, is the acceptance of similar advice

from the same advisers by the new and current Prime Minister, Julia Gillard.

The statement on climate change policy on Friday 23 July has precipitated a

collapse of political support that is reminiscent of the Rudd abdication. We will

learn between now and August 21 whether the 23 July statement was a first or

final draft of pre-election climate change policy. We will learn on 21 August

whether, first or final draft, that was a second statement of leadership

abdication.

 

The essential elements of climate policy have been much discussed in

Australia, are surprisingly well understood, and have widespread support

despite the absence of leadership from the major political parties. The required

policy also faces strong resistance from special interests. These are

circumstances when the polity’s characteristic response to leadership could be

decisive.

 

The required climate change policy has two elements. The first is placing an

adequate price on greenhouse gas emissions through an Emissions Trading

Scheme or a carbon tax—or, as an interim measure, establishing the framework

of an Emissions Trading Scheme with a fixed price for emissions permits

pending the emergence of a framework for international trade in emissions

entitlements. The second is applying a substantial part of the revenue from

selling emissions permits or from a carbon tax to support research,

development and commercialisation of new low-emissions technologies—to the

extent possible, in a technologically neutral way. There is room for further

discussion about the details of the two elements of policy, in the process of

defining and building support for the way forward. There is no need for further

discussion of the central elements of policy.

 

The required refocussing of economic policy is fundamentally more difficult,

because there is no saving grace of community interest and support. It will be

rendered more difficult still by any delay or flawed execution of climate change

mitigation policy.

 

The Australian community has been given some indication of the constraint on

growth in living standards that will be required for the foreseeable future in the

Government’s commitment to the 2 percent per annum—roughly zero in real

terms—limit on Commonwealth expenditure growth. The commitment is harder

still when we recognise some of the realities requiring Government expenditure

outside the ways that contribute to the material standard of living—security

expenditure in a time of war; the restoration of public debt service payments as

a charge on the budget; and the expanding medical and other costs of an

ageing population.. The indication of the need for restraint that is provided by

the 2 percent limit draws attention to a large gap between what will be

necessary for economic stability and acceptably full employment in the period

ahead, and community expectations for continuing increases in living standards.

The big lift in Australian living standards over the past two decades—wage and

salary increases, and the fairly indiscriminate tax cuts and increased

expenditure on services and social security in the early twenty first century—

provides scope for adjustment without hardship. But who is ready for such

adjustment and restraint?

 

Through timely economic reform over the last part of the twentieth century,

Australia caught the tide of the China-led expansion of opportunity of the early

twenty first century. On that full tide we are now afloat.

 

It is time now to lay the foundations for staying afloat as we move forward into

new and more turbulent seas.

 

Meeting the two large challenges ahead of us requires the restoration of the

political culture of the reform period. It requires the rehabilitation of the

independent centre of the Australian polity. It requires restoration of the role of

transparent, independent authoritative analysis of policy issues, and public

education on the results of sound analysis.

 

The laws of economics cannot be repealed by ignoring them—any more than

the laws of gravity, or of climate science.

 

Independent analysis may discover truly awful choices; better to face them in

knowledge, than to choose blindly under pressure from interests that know their

sectoral implications.

 

Good outcomes in the difficult years ahead above all require firm leadership

built around clear articulation of the public interest.

 

Leadership, transparent independent analysis and public education are the

means through which sectional interests will be confined appropriately to

legitimate supporting roles, rather than being given central roles in formulation

of public policy in the national interest.

 

Leadership is an essential missing ingredient in contemporary public policy.

Omitted, all the voyage of our lives is bound in shallows and in miseries.