Author: Eddlem, Thomas R
Date published: September 23, 2013
Journal code: NEAM
On paper, one would expect the openly socialist Labor Party of Australia to be far to the economic left of both American political parties. After all, Australian Prime Minister Kevin Rudd's party presides over a government that administers socialized medicine, extracts higher tax levels, and induces greater economic regulation than is seen in the United States. His party - which has run the Australian government since 2007 - is a member of the Socialist International. Conservatives might assume, if they didn't look any further, that the Australian economy is sinking far worse than the U.S. economy and is perhaps on the verge of becoming an economic basket case.
But that assumption would be dead wrong.
Australia's economy grew 0.6 percent more (2.4 percent versus 1.8 percent) than the United States' in 2011 and 1.3 percent more in 2012, and will grow 1.0 percent more in 2013. In every significant economic metric, the Australian economy has significantly outperformed the U.S. economy over the past decade: lower unemployment, higher economic growth, higher household income growth, etc. Australia actually has a higher per-capita gross domestic product (GDP) than the United States for the first time in more than a century - and that gap is widening. Moreover, in the global "Great Recession" of 2007-08, only one advanced country never went into recession: Australia.
In economically significant matters, Australia's Labor Party has actually been far to the economic right of both the Democratic and Republican Parties in the United States. The Australian Prime Minister Kevin Rudd has continuously stressed the need for not only balancing the national budget, but bringing it back into surplus to pay down debt, and cheered the nation's expansive semi-privatized retirement system. And the Australian central bank has promoted a policy that punished savers far less than the U.S. Federal Reserve Bank.
Reason #1 : National Debt
Part of the reason behind Australia's strong economic performance is that John Howard's National Party had nearly paid off the country's national debt by the time it went out of power in 2007. By way of contrast, the Republican Congress under President Bush larded on more debt in the first part of the last decade, with new entitlement programs such as Medicare Part D, wars in Afghanistan and Iraq, and tax cuts. In 2007, Australian government debt was just 10 percent of the nation's GDP. The U.S. debt-to-GDP ratio was almost 65 percent the same year.
Countries with high national debt levels tend to grow far slower than nations with low debt levels, losing about 0.75 percent of GDP growth every year on average for every 50 percent of debt as a proportion of GDP the nation carries. The cumulative effect of carrying a heavy debt over time is devastating to an economy. Although economies that manage their own currency (such as the United States with its dollar) suffer significantly less severe immediate economic damage from heavy national debt than do countries with a common currency, such as countries in the EU that use the euro, the debt load has clearly had a greater negative impact on the U.S. economy than Australia's economy.
Since 2007, the Labor Party has run deficits and increased Australia's national debt to 29 percent of GDP, which has been irresponsible. But Washington's irresponsibility has been of an entirely different scale: The Obama administration has - with the compliance of congresses controlled by both parties - increased U.S. debt to more than 100 percent of the nation's GDP.
And there's a key difference in rhetoric between Australia's Labor Party and the leaders of America's two major political parties. Australian politicians at least talk about paying down their national debt, while U.S. politicians of both parties only talk about keeping deficits at "manageable levels." Australian Labor Party Prime Minister Kevin Rudd made the following observation in a column for the Australian newspaper The Age on July 25, 2009: "Australia is performing better than most other economies, with the fastest growth, the second-lowest unemployment and the lowest debt and deficit of all the major advanced economies. And we remain the only advanced economy not to have gone into recession.... Just as it was necessary for the Government to borrow and to stimulate the economy while the private sector was in retreat, so too is it necessary for the budget to be brought back to surplus over time, once the economy recovers and the private sector expands. Responsible, conservative economic management is about both these things."
Ironically, Rudd remained clueless about the cause of the economic boomand-bust cycle, blaming it on unbridled capitalism rather than central bank intervention in the interest rate markets: "The boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector. The central principles of this extreme form of capitalism are that markets are self-regulating, that government should get out of the road of the market altogether and that the state itself should retreat to its core historical function of security at home and abroad." In reality, the U.S. economic crises of 2000-01 and 2007-08 were a direct result of suppressed interest rates by the Federal Reserve Bank, which redirected investments into capital-intensive industries such as stocks and real estate.
Rudd nevertheless promised to return the nation to fiscal sanity after a year or two of deficits. "The Government has committed to holding growth in real government spending to 2 per cent a year when higher growth levels return," Rudd promised, though neither he nor his successor Julia Gillard (also of the Labor Party that has ruled Australia since 2007) kept the promise. (Rudd returned as Prime Minister in June of this year.) Indeed, Australia's government spending has since increased by more than 60 percent.
Again. Australia's irresponsibility pales in comparison with the irresponsibility in Washington. President Obama has sent five budget proposals to Congress, none of which has a plan to ever balance the budget. Not in a hundred years, not in a million years. And bracketing the right end of the acceptable political spectrum in the United States is Wisconsin's Republican Congressman Paul Ryan, the chairman of the House Budget Committee. The most recent Ryan budget, The Path to Prosperity 2014, calls for 10 more years of deficit spending (the 2013 version called for 20 more years of deficits). If he were in Australia, Ryan might be told he was too fiscally irresponsible for Kevin Rudd's Labor Party.
Reason #2: National Savings Rate
More important than national debt is the national savings rate. The most significant factor in Australia's economic resilience has been its national savings rate, which is about double that of the United States. In 2007, Australia's national savings rate was 23 percent, compared with 14 percent for the United States. The U.S. savings rate actually fell to a historically low 11 percent in 2009 before recovering back to 13. percent by 2012. Meanwhile, Australia's savings rate continues to soar, increasing to more than 25 percent by 2012. Among the 35 advanced economies since 1980, according to International Monetary Fund statistics, nations gained a full percentage of GDP economic growth for every additional nine percent of national savings.
Part of the reason for this disparity is Australia's forced savings plan. Australia instituted a quasi-privatized Social Security program that both the conservative National and the leftist Labor parties have backed for two decades called "Superannuation." Every Australian worker is forced to save nine percent of his or her wages in a type of government-supervised 401k every year, a far more aggressive version of what the Bush administration nearly proposed to Congress back in 2005. (The furor from congressional Democrats forced Bush to withdraw his trial balloon for gradually privatizing part of Social Security.)
Australia's higher savings rates are also partly a result of central bank incentives that until this year rewarded savers much closer to actual market levels than in the United States. Australia's central bank - the Reserve Bank of Australia - has generally kept interest rates near market levels (in the four-to-six-percent range until this year) in order to ensure a return for superannuation savers.
The Federal Reserve Bank in the United States has suppressed interest rates for two decades, punishing savers with little or no return on their investments. Since 2008, the Federal Reserve Bank has set its "Federal Funds" discount rate at zero. As a result of low interest rates, no Americans save their money in a bank long-term, because they lose more through inflation than they get back in interest owing to inflationary Federal Reserve policies. And those who violate the Federal Reserve's impetus to "spend it or lose it through inflation" channel their funds into stocks, real estate, and commodities as a hedge against inflation. This, of course, has created stock market and real estate bubbles. And these bubbles eventually pop, causing cause more economic chaos.
The Australian government prevented those bubbles by avoiding the same massive suppression of interest rates employed by the U.S. Federal Reserve Bank. The Reserve Bank of Australia has championed a culture of savings, noting in a 2012 paper,"National saving is the difference between a nation's income and what it spends on the consumption of goods and services, and comprises household, corporate and government saving. The level of national saving has important implications for the economy; it provides a source of funds available for domestic investment, which in turn is a key driver of labour productivity and higher future living standards."
This savings-based growth model of economic policy employed by the Australian government is almost the complete opposite of the neo-Keynesian, demandbased economic strategy employed by the U.S. government. Under the Keynesian economic theory employed in the United States under the Obama and Bush administrations, spending and demand - rather than savings and investment - are presumed to spur growth. Both Bush and Obama pursued consumer demand policies at the expense of budget deficits and interest rate manipulation in the hope that these policies would spur both economic growth and reduce unemployment. These demand-based policies had no measurable positive impact on the economy, but instead racked up a massive national debt. And the national debt load and low savings rates are now cheating the U.S. economy of needed economic growth.
The Australian economic strategy pursued through the end of 2012 is perhaps the closest sovereign example of the economic model based on Friedrich von Hayek's in a modern national economy. Called the Austrian school of economics because many of its most prominent proponents were from the European nation of Austria, Hayek and Ludwig von Mises stressed that economic growth can only be a result of savings and investment, rather than spending and demand. And while Austrian school economists would still argue that Australia's Reserve Bank was nevertheless engaging in economically inefficient interest rate manipulation and that forced savings would not be as efficient as a truly free market, the Australian example does provide the clearest anecdote among the world's advanced economies that low debt and high-savings economies grow measurably faster than demand-based, government spending-based economies that lead to massive debt.
Some observers have attributed Australia's growth to its mining contracts with China, which grew vigorously throughout the economic crisis. And it is true that mining is a significant part of Australia's GDP growth (though mining was traditionally a larger factor in the Australian economy than it is today). The mining contracts explanation for the Australian economy, however, doesn't account for the possibility that those same Chinese mining contracts could just as easily been awarded to Canadian or U.S. mining interests in a free market. Australian mining interests have traditionally sold vigorously to the fastestgrowing economies. In the 1980s, Australia's largest mining contract was Japan (which is still Australia's second-largest customer), and in recent years Australia has amped up its sales to India, another fast-growing emerging market.
End of the Australian Miracle?
But Australia's miracle may be coming to an end, as the Reserve Bank of Australia has recently begun to follow the U.S. Federal Reserve Bank's lead in suppressing interest rates. The Reserve Bank suppressed interest rates to 2.5 percent in August 2013, creating a new line of thinking at the Australian central bank that more resembles U.S. central bank financial mismanagement. The Reserve Bank has deliberately depreciated the Australian dollar this year through its interest rate manipulation in the hope that a weaker currency would help exports. "This depreciation of the exchange rate will be helpful," the Reserve Bank reported August 8. "Since the May decision, the Australian dollar has depreciated noticeably, though it remains at a high level. The depreciation should assist with the rebalancing of growth in the economy." In the process, the Reserve Bank is congratulating itself on an incipient housing bubble. The August 8 report on monetary policy cheered that "conditions in the housing market continue to improve. Dwelling prices increased further in recent months and auction clearance rates remain high. This has been accompanied by an increase in housing loan approvals in response to low interest rates. These factors, along with strong population growth and the relatively low level of dwelling investment for some years now, point to a continued rise in dwelling investment in the period ahead." The report did project that Australian savings rates would remain stable over the next decade, however.
A Coming U.S. Economic Death Spiral?
Fiscal debate in Washington is still as focused upon spending and consumption through "stimulus" as it has been since the depths of the "Great Recession." While faster-growing economies such as Australia have been focused upon increasing savings rates. President Obama has been proposing new ways to spend more money in deficit on infrastructure. The difference in policies - despite recent divergence of Australian authorities from the path of economic sanity - may mean a major difference in economic performance in the years ahead as demographics change.
Most populations in the world's 35 advanced economies are aging, and countries such as Japan and Germany already face negative population growth as their populations age. The median age of the Japanese population - the oldest among advanced economies - is 45 and rising. Likewise, Germany's median age is 44 and rising. But the United States' and Australia's median age is only 37-38. The aging of populations puts tremendous stress on national government budgets, as older people draw far more heavily on government pension programs and incur the bulk of medical costs.
Despite the vigorous immigration of young people into the United States and Australia, U.S. and Australian populations are also aging, though at a slower pace than societies traditionally closed to massive immigration, such as Germany and Japan.
The difference between Australia and the United States is that Australia is preparing for the coming demographic shift by encouraging individual savings. Therefore, much of Australia's retirements will be self-financed by the retirees themselves using their own savings.
But while Australia used its "youthful" years to largely pay off its debts through budgetary surpluses, and amass savings, the United States piled on government and personal debt, even as it minimized the immediate negative budgetary side effects of its borrowing by suppressing interest rates. Suppression of interest rates discourages savings. By punishing savings, the U.S. Federal Reserve Bank policies in the United States will leave many more retirees almost wholly dependent upon government subsistence for housing, healthcare, and other necessities of life. In coming years, this will put a massive new strain on government finances, most likely by spiking government taxes or deficit spending, or both.
U.S. economic policy today will have dire consequences in coming years, and perhaps much sooner. The United States has created headwinds for an economic death spiral as a result of: 1. perpetually increasing national debt levels because of deficit spending, 2. aging population, 3. historically low savings rates, and 4. suppression of interest rates. Currently, the United States is running deficits in the $500 billion-$l trillion annual levels. But these deficits are under-counted compared with ordinary market conditions; they are offset by current Social Security surpluses, as well as interest costs on the national de)?t that are at historically low levels.
The economic death spiral scenario - already being played out in moderate fashion in Japan (where the economic pain has thus far been partially offset because of traditionally high, though recently diminishing, savings rates) - would be created by the economic chaos as a result of Federal Reserve Bank suppression of interest rates. Like Japan, the United States can no longer afford to raise interest rates because it cannot afford the increased interest cost of maintaining its massive national debt that would result from an increase of interest rates. So American policymakers will have a choice of continually building - and blowing up - economic bubbles with cheap interest rates, defaulting on the debt, or inflating their way out of the debt. Because inflation of the dollar is a slow-motion way of defaulting on the dollar-based national debt, policymakers may choose hyperinflation as their way out. But hyperinflation creates its own economic troubles, and carries political pushback as well for those leaders unlucky enough to have to face the voters.
The death spiral will come when a cheap money bubble bursts at the same time the baby boomer generation fully retires and the budgetary costs associated with retirees - especially with Social Security and Medicare - spike to historic highs. At that point, U.S. policymakers will have three choices, all of which will be unpopular with the voters: 1. default on the debt, 2. massive austerity cuts in benefits for retirees, or 3. hyperinflation. Politicians will likely choose hyperinflation as the path of least resistance from voters. But the economic chaos created by the destruction of the dollar may outpace the blowback from either of the other two choices.
This economic death spiral is only avoidable if Congress implements severe spending cuts now, and eventually forces the Federal Reserve Bank to stop punishing savers with its suppression of interest rates. Waiting another five years - when many of the giant baby boomer generation begin to retire - may be too late to prevent the looming economic chaos.