September 3rd 2011

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Articles from this issue:

COVER STORY: Canberra rally: "Don't meddle with marriage"

CANBERRA OBSERVED: Labor same-sex marriage bid out of step with voters

EDITORIAL: Behind the manufacturing industry crisis

SOCIETY: The UK school that beat the rioters


CLEAN ENERGY: Confiscation under a cloak of scientific respectability

ENVIRONMENTALISM: Why so much heat in the climate change debate?

INTELLIGENCE BRIEFS: Three important issues and what they portend

GLOBAL FINANCIAL CRISIS: Economic illusions have misled world leaders

SAME-SEX MARRIAGE: Should same-sex couples be allowed to adopt children?

UNITED STATES: Pro-life, pro-woman laws enacted in Louisiana

RUSSIA: Gorbachev denounces Putin for "castrating" democracy

HISTORY: Understanding the origins of the Great War


BOOK REVIEW Seven myths about the Mafia

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Economic illusions have misled world leaders

by Colin Teese

News Weekly, September 3, 2011

One of the astonishing things about economic and political commentary in Australia is how ill-informed are opinion-formers and politicians about the world around us — especially those who remain convinced about the virtues of economic globalism.

Take China, for example. For the last two decades, Australian commentators have insisted that Deng Xiaoping’s economic revolution, which commenced in that country 30 years ago, was about China’s throwing off the chains of communism and embracing free-market capitalism.

The fact that the Communist Party government remained in control of the country and most of the key institutions was been cast aside. Still less could these commentators recognise that China’s economy looked even less like a full-blown capitalist economy than either Japan’s or Germany’s.

Unobserved was the fact that China has discarded the socialist model for what its leadership saw as an unbelievable opportunity to pick the eyes out of market capitalism in the sole pursuit of Chinese interests.

Japan, Germany and the emerging Asian economies have followed the same general path, though with less intensity. Their necessary ties to the West required that they demonstrate some degree of enthusiasm for the U.S. model of free-market economics whatever might be their private misgivings.

By contrast, China has always been immune from U.S. pressures to conform. This is partly because self-deluded U.S. policy-makers were convinced that China was following Washington’s own free-market model, albeit by a different path, and that the adoption of capitalism would inevitably lead to democracy.

How cruelly Westerners were mistaken.

While the Chinese leadership exhibits no discernable interest in democracy, it nourishes an insatiable appetite for exploitation of the advantages of unrestrained access to the riches of the markets of U.S. and Europe.

The folly of permitting all of this to occur does not yet seem to have taken hold in the West. Western leaders, shackled as they are by the framework of their economic and policy thinking, don’t seem to have the slightest idea about what to do.

We should not be surprised. The problems of Europe and the U.S. are only fully understandable in terms of what is happening in China and Asia more generally. Without that understanding, the implications of it all for the wider world, including Australia, are not easily identified.

Our present government contents itself by sitting around musing about the merits or otherwise of selling Medibank Private!

What is happening in the U.S. should not be looked at separately from the problems in Europe, even if, at first sight the differences seem greater than the similarities. Neither can it be separated from the imbalances intensified in the world trading system from the emergence of Asia as a dominant production and export force.

Consequences are already emerging. In the U.S., the capacity of the machinery of government to function effectively is seriously being questioned. The same is true for the European Union, though not for entirely the same reasons.

That after more than two centuries after their establishment U.S. official institutions are no longer working satisfactorily is worthy of more than superficial study.

But what about the EU? Must we now accept that what began after World War II as an experiment in international cooperation — a venture hardly less noble than what the U.S. embraced in the late 18th century — has after a mere 50 years reached the point of collapse?

The U.S. created a workable system over 200 years ago — the first ever, truly workable, republic. Under the U.S. constitution, legislative, administrative and judicial functions were created totally separate and independent of each other. This was deemed, correctly, as a necessary safeguard against the possible abuse of power by any one agency. The U.S. believed that, with this kind of safeguard, it had built the perfect system. For more than two centuries that belief seemed well founded.

Curiously, the system came under some stress in embracing universal suffrage. It needs to be remembered that the Founding Fathers neither planned for nor suggested that the vote should have been extended to all citizens — not even, in fact to all males. The intention was that the vote should be confined to the property-owning classes since that group alone was deemed capable of recognising and defending the national interest.

There is nothing surprising about this: the 18th century was not the time for more radical democratic thinking. Even the idea of no taxation without representation was still in its early stages.

The U.S. Founding Fathers were preoccupied with what they saw as a more fundamental problem. It sought to move away from any idea of monarchy, which, the U.S. believed, had soured European politics. Having broken clear of Britain, it wanted a system where political leadership and power followed the constraints of a constitution, and where people were governed by laws founded in electoral outcomes rather than family pedigree.

Having engineered the creation and development of a great and powerful nation, what has intervened to undermine the functioning of its governing mechanisms?

The system perhaps reached its high water-mark in the decades immediately after the end of World War II when the U.S. emerged as leader of the West.

However, a more complicated and divided world followed after the 1960s, and the U.S.’s subsequent decline as a world power had its effect on U.S. political stability.

So have a number of unsavoury developments in the last 30 or 40 years. Most important of all, perhaps, seems to be that the House of Representatives section of the U.S. Congress appears to function less on behalf of its electorates than for those financially powerful constituents who pay for the election campaigns of individual House of Representatives candidates.

The U.S. Senate appears somewhat similarly affected, but to a lesser extent — perhaps due to the different basis for its election.

Another shortcoming, perhaps not unconnected with the first, appears to be that there is no longer a consensus crossing party lines over a broad spectrum of national policy issues. Equally important, each of the political parties is less inclined to acknowledge the legitimacy of the other in office. As a result, the differences between them on critical issues tend to fracture national unity.

Given all of this, it is hardly surprising that the government appears dysfunctional. An important consequence of this policy paralysis is a breakdown in economic management and leadership, especially in time of economic crisis. U.S. economic growth has been, and remains, a major casualty of this shortcoming.

The problems facing the EU appear substantially different, but on examination can be seen to have the same derivation. Orthodox economic opinion insists that the problem arises from a misguided and premature creation of monetary union. Certainly that is a factor, but the problem goes deeper.

Within the EU the merits of creating a single currency were not universally accepted. Indeed, not all member-states of the EU switched to the Euro. Britain in particular did not, and still remains outside the currency union.

That should have been, but apparently wasn’t, enough of a warning signal to the EU bureaucracy. Nevertheless, the European Commission in Brussels pressed on with the strong support from the most community-minded Europeans, the French and the Germans. The belief was that a European Central Bank (ECB), born of German fiscal prudence, would keep the rest in line.

The reality that neither the ECB nor Germany could control budget policy in other EU member-states was brushed aside. After all, had not member-states signed a treaty pledging they would keep their government spending in line with tax collections? In reality, only some could, and others had no intention of even trying.

Put simply, the 27 member-states of the European Union were not, and are not, sufficiently integrated in terms of economic strength, financial philosophy and cultural similarities, to undertake the disciplines of a uniform currency. The Brussels bureaucracy had carried them “a bridge too far”.

All it took was a decent-sized economic breakdown to expose the weakness. The global financial crisis provided that.

Currency union was part of an economic and political power grab by the EU bureaucracy in Brussels; it has now gone badly wrong. Adding too many new member-states too quickly, and seeking to subordinate ever more national power to Brussels, was too large a meal to swallow in one bite.

The consequences now appear to be disastrous. In the wake of a U.S.-induced financial and economic crisis, instead of advancing ever more widely and deeply into political and economic union, the EU, as a result of unmanageable debt levels in certain member-states, the rigidities of currency union and the intransigence of the most powerful member-states in the union, now seems poised to sink into a long and debilitating period of slow growth.

From that might well flow significant social unrest. Meanwhile, prospects for closer economic and political integration are, to say the least, bleak. More likely, many of the gains already made will be undone.

In the same manner as in the U.S., though for different reasons, EU institutions have failed the union.

As a result, stalled growth in the U.S. and Europe is now staring us all in the face. Meanwhile, back in Australia, we cling to the hope that continuing Chinese growth and insatiable demand for our minerals will see us right.

It won’t. Chinese growth has been fuelled by more than half a billion consumers in what were the two most prosperous regions on earth — Europe and the United States. That consumer spending is now stagnant or shrinking. Unless China can create offsetting domestic consumer demand, which is most unlikely, Australia will be among the sufferers.

What are we going to do about it?

Colin Teese is a former deputy secretary of the Department of Trade. 

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