by Patrick J. Byrne
By the time this editorial goes to print, Australia may be under lockdown, with the Government running a command economy as it has in other crises, like World War II. Covid19 spells the end of globalisation as we have known it.
The promise of what economist Dani Rodrik calls “deep globalisation”, also known as the Washington consensus, was that free (unregulated) flows of money, industries and goods around the world would see a rising tide lift all boats.
In reality, it led to the failure of the international financial system in the 2007 global financial crisis. This resulted in the largest bank bailouts (corporate welfare) in history, which even then failed to restore global growth and full employment.
Thirteen years later, the covid19 pandemic has caused a crisis in the globally integrated productive economy, threatening a depression. The disruption of supply chains has left de-industrialised nations like Australia inadequately supplied with medical products (90 per cent come from China) and other essential goods for their own citizens, because governments have allowed a vast array of domestic industries to shut down or shift offshore in the name of globalisation.
Both crises represent the failure of four decades of globalisation policies, which were consistently and intelligently opposed by the NCC and its founder, B.A. Santamaria.
These failures illustrate the well-known economic trilemma outlined by Rodrik in The Globalisation Paradox. Nations can have only two out of three things: be a democracy; have economic sovereignty with the ability to decide your own economic policies; deep globalisation, that is, free flow of capital, industries and goods across national boarders.
China has economic sovereignty and is deeply globalised, but it’s an authoritarian state.
Australia is a democracy, but its radical commitment to globalisation has been at the expense of the nation’s economic sovereignty, causing the demise of rural and manufacturing industries.
As the current situation dramatically shows, we can export vast amounts of coal, iron ore and gas, but in a pandemic people don’t turn to global markets or global institutions to ensure their intensive-care needs, or to pay their unemployment benefits, or to subsidise their struggling business. No, they turn to the federal and state governments.
Prime Minister Scott Morrison’s $1 trillion commitment for the crisis (forget balancing the federal budget) is indicative of fundamental changes as people demand the Government acts: that is, that the Government reasserts it economic sovereignty.
For example, every Australian would applaud the Government announcing an industry policy to ensure essential medical supplies were to be produced by Australian companies.
What is needed now? Anatole Kaletsky, chief economist and co-chairman of Gavekal Dragonomics succinctly argues that governments must guarantee unlimited compensation (as close to 100 per cent as possible) for lost wages to workers affected by quarantines and lockdowns and lost revenues to businesses (at least small business). Almost all advanced nations could raise their debt-to-GDP levels by 25 per cent without undermining their currency.
Central banks like the Reserve Bank of Australia could expand the money supply by 25 per cent for this purpose.
Kaletsky says that full compensation is far from unprecedented. “Farmers are regularly compensated for agricultural disasters.” And following the GFC, “insurance companies, and financial markets have received effective fiscal transfers in many countries amounting to far more than 25 per cent of GDP”.
In addition, should the housing market fall substantially, the Government needs to do more than reduce interest rates and stretch out payments to keep people with mortgages in their homes. Economist Alan Blinder pointed out in 2009 that during the Great Depression, the United States had a Home Owners Loan Corporation, which purchased mortgages at discounts and refinanced them.
Longer term, it is clear that the Federal Government will need industry policies to secure, and in many cases, rebuild, strategic industries. These include agriculture, key defence industries, telecommunications, energy and rail. Some will need to be in public hands – Boris Johnson has just announced plans to nationalise Britain’s railways.
New trade policies will need to ensure domestic industries are not undermined by imports.
A new development bank will be needed for both infrastructure and industrial development.
If our leaders don’t grasp the new reality, they are destined to repeat the mistakes made in the Great Depression.
Patrick J. Byrne is national president of the National Civic Council.