Oznomics is one of a series of recent books about economics written for non-economists. Charlton approaches the questions that people have about economics with one very particular goal: to show that the prosperity that Australia has enjoyed over the past decade is not solely due to the economic management of the Howard/Costello ‘dream team’.
On the way, Charlton skewers a number of myths about economics and the economy. First off, he tells us what economics isn’t. Economics isn’t very concerned with daily fluctuations in gold prices, share prices, and the value of the Australian dollar. In fact, Charlton argues, there are really only three issues that matter in economics: productivity, jobs and equality.
On productivity, Oznomics is uncontroversial. Charlton echoes Paul Krugman’s sentiment that productivity isn’t the only thing matters, but in the long run it is just about the only thing that matters. He is of the opinion that in Australia’s national debate, productivity doesn’t get enough attention.
On jobs, Charlton does a good job of de-bunking the myths perpetuated by ‘sandbaggers’ – people who would erect trade barriers to try to keep out the rising tide of the global economy. At the same time, he clearly opposes the ‘market fundamentalism’ of the Howard government’s WorkChoices policies.
On equality, Oznomics cites the growth of the gap between the lowest paid and the super-rich CEOs and sports stars, and argues that ‘conspicuous consumption’ for status is a zero-sum game that makes us all worse off (if everyone buys their fiancés a big diamond ring, big diamond rings are no longer a sign of status).
Oznomics then sets out the benefits of free markets – chiefly their ability to respond quickly to what people want. However Charlton challenges what he sees as dogmatic ‘market fundamentalism’ that considers that markets are always superior to government at providing services. He gives a couple of Mike Moore-esque examples of private companies doing a poor job of what he seems to think should be done by governments (contractors in Iraq and the failings of the US health system), and states that:
‘In Australia there are many examples of “deregulatory overreach”, where economic reform has ended up causing more inefficiencies than it has eliminated’ (p. 98)
Charlton cites the privatisation of the Commonwealth Employment Service and the subsequent poor outcomes for the long-term unemployed as an example of ‘deregulatory overreach’.
Ozonomics then moves on to the substantive matter of the book: the myth of Howard and Costello as ‘economic superheroes’. First Charlton outlines some of the major economic reforms of the Hawke/Keating era (floating the currency, the prices and wages Accord, the first microeconomic reform). Charlton correctly argues that these reforms have contributed to Australia’s economic performance of recent years.
The rest of the book is devoted to debunking six economic ‘myths’ perpetuated by Howard, Costello and their supporters. These myths (and Charlton’s rejoinders) are:
Myth 1: Budget deficits lead to higher interest rates.
Charlton: The market for funds is so large, and budget deficits relatively so small that the effect of budget deficits on interest rates is miniscule.
Myth 2: Government debt is irresponsible. Howard and Costello have done us a great service by paying down ‘Labor’s $96 billion debt’.
Charlton: The debt has been paid off by selling off public assets. Essentially public debt has been replaced by private debt.
Myth 3: Reforms to workplace relations have boosted employment and economic growth.
Charlton: The effects of getting rid of unfair dismissal laws are miniscule. WorkChoices was really an exercise in diminishing the power of unions.
Myth 4: Interest rates will always be lower under the Coalition.
Charlton: Interest rates have been low since 1996 due to low inflation and the actions of the Reserve Bank. Besides, it’s not interest rates that matter, it’s the total interest bill that people pay. People are now borrowing more (e.g. for more expensive houses), so are paying more in total to service their debts than in the late 1980s. He also takes the predictable shot at Howard’s performance as treasurer.
Myth 5: Something about house prices (this chapter is a garbled mess, not sure what it’s really saying).
Charlton: The housing boom is really just a great ‘intergenerational scam’ played out by Baby Boomers on the next generation.
Myth 6: The GST was a significant change to Australia’s tax system.
Charlton: Howard and Costello have been timid on tax reform. And anyway, we don’t need to worry about tax too much, as it’s part of a ‘social contract’ and people don’t mind paying tax.
So, there’s a run-down of the contents of Ozonomics. The question is, is it any good? Well, sadly it’s not, really. And I say ‘sadly’ because clearly Charlton’s ideas have gained some currency in the Labor party. Events of the last few weeks (Kevin Rudd’s mangled attempts to use productivity statistics; Kim Carr’s promise to ‘review’ tariff cuts; Rudd’s populist attacks on petrol and grocery price ‘gouging’) suggest that Rudd is a bit naïve when it comes to economic matters. On the surface, an Oxford educated Rhodes scholar should have been able to inject a little sense into Labor’s economic policy.
The problem is that while he debunks some persistent myths about the economy, Charlton falls for a few others that are just as bad. One myth that pervades Ozonomics is the ‘mercantalist myth’. Basically, this is the myth that Australia is like a big corporation, and ‘we’ are competing against the rest of the world. This myth shines through in phrases like ‘our national competitiveness’ (p. 114), and in references to Australia’s ‘ranking’ against the rest of the world.
The mercantilist myth is dangerous because it misses the point. Australia’s economic fortunes don’t depend on how successful Australian firms are in world markets. Australia’s economic fortunes (in the long run) depend on productivity. Instead of worrying about how we stack up against the rest of the world, Australian governments should be doing what they can to remove barriers to productivity growth. (For those wanting more, Paul Krugman does a good job of debunking the mercantilist myth in his 1994 article Competitiveness — A Dangerous Obsession, available at http://www.pkarchive.org/).
So what can governments do to increase productivity? Unfortunately Ozonomics has little to say. Charlton murmurs about education, innovation and infrastructure, but it’s motherhood stuff. Two possible areas of reform that could increase productivity in Australia are rejected: labour market deregulation and tax reform. According to Charlton, deregulating the labour will not do much to add to productivity (WRONG), and tax is an issue for crazy right-wingers to obsess over (nobody has ever explained to me exactly how it is ‘progressive’ for the government to waste vast sums of taxpayers money through welfare churning).
It seems that Charlton favours just pumping public money (our money) into education, innovation and infrastructure, and hoping for the best. He implicitly assumes that the government will get good results from its investments. That sounds nice in theory, but in practice governments waste money. They pork-barrel. They try to pick ‘winners’ that inevitably run a poor second to the private sector. And they soak up vast sums of money that could have gone to more efficient private investment.
As well as taking a mercantilist view of the economy and not offering anything much on the big question (productivity), Charlton is selective in the evidence he cites, and ignores vital counter-factuals. For example, he opposes cutting the conditions of employed people (WorkChoices), but doesn’t discuss the effects that this has on the unemployed (it keeps them out of the labour market). Nor does he mention that the best way to guarantee yourself a well-paid, secure job is not to get the government to protect you from evil employers: it is to get a set of skills that make you so valuable to your employer that they would not dream of treating you badly.
In rejecting privatisation, Charlton cites one example of a privatisation that did poorly by some people. The privatisation of the Commonwealth Employment Service may have reduced the support given to the long term unemployed, but there are far more examples of regulation and government intervention making us worse off than there are examples of deregulation making us worse off. Moreover, the fact that some groups lose out from privatisation and deregulation does not mean that the regulations should have been kept in place. All policies produce winners and losers. On average, the benefits of deregulation normally outweigh the costs. Isolated examples of ‘deregulatory overreach’ are not a convincing argument against deregulation.
On top of that, Charlton wastes time worrying about the biggest non-issue in economics: inequality. Sure, we may all find it offensive that there are kids starving in Africa while Posh Spice starves in a Malibu mansion, but the problem is not inequality – it’s poverty. Take Posh Spice out of the picture, and the fact that kids are starving in Africa is still offensive. Trying to ‘fix’ inequality through punitive taxation and income redistribution will achieve nothing. What we need to focus on is getting people out of poverty by equipping them with the skills to participate in a modern economy.
There are a lot more things I could say about Ozonomics, but this is getting too long (it is my first effort at a book review since high school). Suffice it to say that Andrew Charlton has his heart in the right place. I believe that he really does want higher productivity, more employment, better wages and all that good stuff. But I don’t think he knows how to get there.