ocean. Each nation-state is free to steer its own ship and set its own course in open waters. But each vessel has to deal with similar headwinds, like the Global Financial Crisis, which cross national borders.
The fate of domestic economies is impacted significantly by what blows in from offshore. No economy is immune from higher oil prices, movements in exchange rates and other seismic changes. Which is why the fate of most economies is largely determined by global conditions, not domestic ones.
In Australia’s case, our recent resources sector boom led to a surge in national income from exports. But the government can’t take credit for this boom cycle as it was driven by the voracious demand from developing nations in Asia, particularly China, for our raw materials.
Our central bank has more influence over the economy than the government. The Reserve Bank of Australia is independent of the government and has total autonomy over interest rate setting. Monetary policy directly impacts the demand for credit and consumer sentiment.
Interest rates go down when times are tough and go up when things are overheating. It is ironic, therefore, that glory-seeking governments take the credit when interest rates fall (a sign of a weak economy) and nit-picking oppositions are critical when interest rates rise (a sign of a strong economy).
As noted by author, Albert Alla, not only do politicians have no say in the rise and fall of interest rates, they cannot create jobs in the private sector. Moreover, they are unable to force companies to invest in declining industries and can’t micro-manage workers in order to increase productivity.
Consumption by consumers, investment by businesses and government spending are the three major parts of an economy. In Australia, personal consumption is the main driver of the Australian economy and represents more than 50 per cent of our nation’s GDP.
Personal consumption represents you and me. Collectively, we have more influence on the economy than the government. Ronald Reagan quite rightly noted that “a government can’t control the economy without controlling people” and no democratic government seeks to control the populace.
The Australian Government does not interfere in personal economic choices. We are best able to decide our wants and needs. As a result, the government can’t stop us living beyond our means. Nor can it force us to spend or compel us to save (except superannuation savings).
We operate an open market economy where people are free, within the bounds of the law, to engage in commerce at their will and their peril. All markets have rules (the term “free market” is an oxymoron) and governments play an important role in setting industry standards.
With regard to economic competition, the Federal Government is the rule-maker, the referee and the umpire – it regulates markets, ensures a fair playing field and enforces the law. Importantly, it also invests in infrastructure.
In short, the government’s job is to improve the functioning of the marketplace and not play a direct role in markets. While government interventions to improve market infrastructure such as roads are necessary and welcomed, over-regulation is not and can be counter-productive to the workings of a capitalist society.
It can be seen that our economy is based on the market forces of supply and demand and the economic interactions between millions of people. Our politicians have little control over most things that actually affect the economy. Yet we unfairly hold them responsible for short-run ups and downs.
The way forward is clear: We should stop blaming politicians for our financial woes and our elected leaders should cease grabbing credit for things that are beyond their control. Let’s all be honest about the respective roles that we play in the functioning of our economy.
Posting Date: 3 March 2014
Over regulation
Politicians have made an art form of over engineering things. Governments often rush through knee-jerk legislation in response to consumer or media pressure. Yet, sometimes the best response to an event or crisis is to take a collective deep breath and wait until the dust settles instead of making policy on the run.
In the era of the 30 second TV grab, our political leaders are quick to jump on the bandwagon of consumer sentiment and pander to voters and the popular press. However, in their bid to act decisively, governments often behave impulsively and fail to address or solve the underlying issue. The end result is unnecessary regulation on business, the cost of which is invariably passed on to the consumer.
In a recently released report, Deloitte Australia estimates that government regulation costs the Australian economy a staggering $94 billion a year. This red tape, together with private sector rules and regulations, is “...the biggest single drag on our nation’s productivity”, according to Deloitte. In the report, Deloitte laments the proliferation of new government rules:
Not even the federal government knows how many rules you are meant to obey. In fact, we don’t even know how many government bodies currently have the ability to set rules in the first place, let alone the number of rules those agencies have laid down.
The Report, Get out of your own way: Unleashing productivity, also takes aim at business. Deloitte argues that while the private sector needs rules, it has “...overdone it, spawning an entire industry”. Australian businesses spend $21 billion per annum on self-imposed rules, which generate a stunning $134 billion a year in compliance costs. “When combined”, says Deloitte, “the costs of administering and complying with public and private sector rules equate to a quarter of a trillion dollars a year.”
Deloitte notes that a cost saving of just 10 per cent of that total would equal 1.6 per cent of national income. This is an achievable target and one that business and government should set as a goal. However, both the public and private sectors “regulate in haste and repent at leisure, with each additional rule ratcheting up the pressure on our economy”.
Alarmingly, Deloitte claims that one in every 11 employed Australians now works in the compliance sector.“As a result there are already more ‘compliance workers’ across Australia than there are people working in the construction, manufacturing or education sectors”, the report states. The rise in new ‘compliance workers’ is a key reason why Australian productivity growth has been in low gear:
New technologies are delivering a huge dividend but we’re not seeing the gains... ‘back-office’ workers such as switchboard operators, mail sorters and library assistants have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia’s compliance culture.
In any country, the key drivers of economic growth are population size, workplace participation rates and productivity levels. An increase in any one or more of these factors leads to economic growth and improved economic prosperity. Deloitte, quite rightly, notes that one way to improve productivity is to reduce red tape.
Improving productivity is not just important for businesses – it’s also linked to higher standards of living for us as citizens. The reality is that if we don’t find ways of becoming more productive, our way of life will suffer. Our need to boost productivity by reducing regulation is critical. The time to act is now.
Posting Date: 10 November 2014
Depositor protection dilemma
