5633 words so going to need multiple comments.
Part 1:
In late October, just before the Albanese government’s first budget, a journalist I’ve known for two decades messaged me a quote from one of the earliest Greek philosophers, Heraclitus: “No man ever steps in the same river twice. For it’s not the same river, and he’s not the same man.” Heraclitus is sometimes considered the original humanist philosopher. By seeking to identify the essence of what it means to exist and understand the nature of the worlds we build for ourselves, he is thought to be the first to turn his mind from the remotely cosmic to the intensely human. It is believed that Heraclitus wrote only one book, depositing his solitary opus at the great temple of Artemis in his native Ephesus, where it was then lost. Somebody so aware of the vagaries of time and change as Heraclitus might have made a few more copies for safekeeping! Fragments of that work still made their way through time to us today – and eventually to the journalist who sent me the quote. She knew I had worked on or responded to 16 budgets in government and Opposition, but she also knew delivering a first would be something much more new than familiar. Experience would matter, but hers was a neat reminder not to assume that what had worked in the past would necessarily work in the present. Heraclitus’s words are especially salient and resonant for these times, and for that budget. As we put it together, the global economy was beginning a third crisis in 15 years, one which will play out more substantially in 2023. Now, once again, the world is entering a stream full of perilous white water. But each crisis is different, and each time, the people and country are different as well. This global downturn is not the same as the last two. This latest crisis, of global inflation, has already begun to force the bluntest and fastest interest rate increases since the inflation-targeting era began, and this could cause recession in some of the economies that matter most to us. The third crisis – supply chain pressures aggravated by a war, that became a price shock – came just months after the peak of the second. That one was a pandemic health crisis that triggered a supply shock. And both these crises have emerged in a global economy in many ways still defined by the effects of the first – the global financial crisis of 2008 that became a demand shock (and, outside Australia, a Great Recession). The crises are defined by their differences but have a common thread: vulnerability. In each case our communities, economies, budgets, environment, financial and energy markets, international relationships, and our politics – already fragile enough – became more so. While the latest inflation crisis began with events no Australian could control, Australian governments could have done more to prevent the fragilities left by the first two downturns. Successive leaders failed to find their way conclusively or convincingly past the neoliberalism of the pre-crises period. In other words, while the world was getting more uncertain, we had been growing more vulnerable. Domestic policies – and policy vacuums – accelerated rather than alleviated this problem. So, by the October budget of last year, our task in government was not only to respond to the immediate and urgent economic issue of high and rising inflation, but to begin addressing vulnerabilities that had been neglected for so long they had also become urgent. Recognising that the repair job would need to occur over time, not overnight, only added to the challenge. This has been the case in skills and training, energy and climate transition, the standard of aged care, women’s participation and economic equality, equal opportunities more broadly, including in regions and disadvantaged communities, and the unsustainable state of the nation’s books. But it’s urgent, too, that Australians think our way through what has been working well, what hasn’t, and how to change. It’s urgent that we move beyond a cycle of anxiety and regret, disillusionment and disappointment, and that we do so with leadership that analyses, includes and responds. So the Albanese government began the task in our first budget, helping with the costs of living, investing in skills, energy, early education and supply chains, funding our election commitments, and starting to put things on a more sustainable footing. But this was just the beginning of our ambition and aspiration. Our mission is to redefine and reform our economy and institutions in ways that make our people and communities more resilient, and our society and democracy stronger as well. This is the big challenge and the big chance before us.
Early in the COVID-19 lockdowns, I was drawn back to Jared Diamond’s 2019 book Upheaval, in which he argued that a nation’s destiny is determined by its capacity to learn from its own response to crisis. It was a troubling question: would Australia learn from these crises? If 2008 had changed us then 2020 surely would too – but what would it teach us? And what could we learn that might guide us in 2023? The emphasis on learning is important because while the pressures we feel around the kitchen table are brought to us from around the world, our ultimate success won’t be dictated or determined only by a dice roll of circumstance but by how we choose to respond. In these pages 14 years ago, prime minister Kevin Rudd’s essay “The global financial crisis” was already wrestling with what to learn from that event of “truly seismic significance”. That essay was published on a Sunday – the first of February 2009. Less than a week later, Australia faced the full horror of the Black Saturday bushfires. I see a dreadful symmetry between the global financial crisis and Black Saturday, in the way each overwhelmed our rational capacities to explain and grasp what was happening – not just our individual comprehension, but our collective understanding. I remember not just shock and disbelief, but sickness and fear; hearing how those fires created their own weather system, with winds exceeding 100 kilometres an hour, flames leaping 100 metres and embers igniting spot fires up to 35 kilometres ahead of the fire front. And then, how severe flames could persist in one area for an hour and emit deadly radiant heat for five hours in total. This last piece of new information mattered in the worst possible way: at that time, official advice to bushfire communities was often to shelter in place until a front passed through. That advice, during those fires, proved deadly. We just didn’t know fires could behave like that – until we did. A royal commission was set up, and by December 2010 Victoria had a new bushfire safety policy framework, including changed fire danger ratings and evacuation warnings. The new advice learnt from that period has saved many lives since, including during the Black Summer fires of 2019–20. But I see no mirror image in the longer term international policy response to the economic and political crisis of 2008. Outside of specific reforms to strengthen financial regulation, it is very hard to think of any similar set of changes in the way a budget is put together and an economy is managed that truly reflects the lessons of that crisis, 15 years later. This matters a great deal. Being a good policymaker begins with having the right information and mental models for how the world works – that always precedes any particular decisions or actions. It’s these mental models that John Maynard Keynes was thinking of when he wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist”. And since 2008, the mental models for most economic decision-making have been unchanged. This is the problem Wayne Swan considered in the Australian context, in these pages in March 2012. Economic historians would not be surprised that our bushfire policies changed so much faster than our economic ones. Keynes insisted that economic ideas – “both when they are right, and when they are wrong” – are almost uniquely stubborn. The entrenched systems and institutions that dictate and drive public and private spending are so complex and vast, and powerful economic interests have so much at stake in keeping them in place. So, for a decade before the pandemic, when most advanced economies had a terrible record, governments and independent authorities, backed by conservative prejudices and vested interests, still mostly stuck to a negative form of supply-side economics. They pursued loosely defined goals for competitiveness through a race to the bottom on wages and public investment. The “Washington Consensus” became shorthand to describe recommendations and orthodoxies for developing countries urged by the International Monetary Fund and World Bank – a reference to each institution’s proximity to the other in Washington, DC. Over time it became a caricature for ever more simplistic and uniform policy prescriptions for “more market, not less”. This school of thought assumed that markets would typically self-correct before disaster struck. It’s clear now that the problem wasn’t so much more markets as poorly designed ones. Carefully constructed markets are a positive and powerful tool. As the influential economist Mariana Mazzucato has explored in her work, markets built in partnership through the efforts of business, labour and government are still the best mechanism we have to efficiently and effectively direct resources. But these considered and efficient markets were not what the old model delivered. And while the 2008 crisis finally exposed the illegitimacy of this approach, no fresh consensus has yet taken its place.