Rudd’s Road to Austerity

Tuesday, 28 July 2009 

Economic crises contain a paradox of recovery. As growth returns, the economic conditions facing many families will deteriorate.

K Rudd ‘Pain on the road to recovery’ 25 July 2009

So very quickly we have the answer to why our brightest were talking austerity on Liberal Rule. It is the way things will be run, at least according to the Prime Minister’s latest work. Innocent readers might have thought a recovery means things will get better. Not so. Apparently a recovery will mean things will get worse, the recession on the other hand being an enjoyable time of government cash hand-outs and low mortgage payments. After making an effort to shield Australian families from the pain of the recession, Rudd’s latest essay seems to be warning us that he won’t be shielding us from the recovery. What on earth is going on?

Rudd’s essay carries on his moralising of the economic crisis, but starts to draw out where it is heading.

First the moralising.

The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom: living standards rose faster than at any time in recent memory; global economic growth reached a peak of 5.1 per cent in 2007, the highest global growth rate in more than three decades.

Here Rudd picks up again his theme of the cause of the crisis being the boom in credit:

in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: “For 25 years [the West] has been consuming more than we have been producing and living beyond our means.”

… and he especially focuses on the US.

In the United States, in particular, consumers went on a long, debt-fuelled shopping spree. Household debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The commentator Bill Gross summarised the US consumption boom as: “For too long it’s been McHouses, McHummers and McFlatscreens, all financed with excessive amounts of McCredit. What a colossal McStake.”

To make his point, Rudd is playing a clever trick here. He is trying to explain the boom in the global economy by the debt in the developed economies. Actually there hasn’t been much of a boom in the developed world. Growth over this decade has if anything been rather anaemic in the OECD, especially compared with the previous decades with western Europe not even reaching 2% annual growth and the US barely so. Hardly the roaring twenties. Global growth has naturally been driven by the increasingly prominent role played by fast-growing emerging economies such as China and India. Of course, US consumer debt was supposed to be propping up China as well, but as we see, they are doing OK without it.

But Rudd’s favourable quoting of Bill Gross with sniffy comments about McHouses (and those flatscreens again!) bought by ‘McCredit’ touches on a more unpleasant point, the supposed destructive role played by the excessive greed of the ordinary US consumer.

Let’s get some facts here. From the beginning of the oil crisis in 1973, the US economy has grown by around 160% in real terms. Yet incredibly, the median wage for a male employee in the US has fallen by 3% in real terms over the same time. In other words despite the sizeable growth in the US economy over the last three decades, the pay packet brought home by the average male worker buys less than it would way back then. This of course has been made up in households by the entry of women into the workforce, for whom real median pay has gone up by around a third and, of course, increased reliance on credit, especially in buying a house.

These decades of stagnant real wages is the background that is usually forgotten by billionaires like George Soros and Bill Gross when they get worked up about the rise of credit. It also explains why credit controls were loosened in the US over the last three decades. Keeping wages stagnant is fine and dandy to keep inefficient US firms like the carmakers afloat, the only problem is that it means the consumer is less able to buy the product when it reaches the showroom. So stagnant wages, personal credit and more company access to financing are the three pillars by which inefficient western manufacturers have kept afloat.

Yet curiously it is only the rise of personal credit that everyone seems to see as the problem. While the US public had their hit on wages in the 1970s, it was in the 1980s under Hawke and Keating, of course, that the Australian public got theirs, with real incomes falling during the late 1980s and early 1990s, especially for the lower paid. Once again this was the time when credit started to expand. To read Rudd’s essay, or listen to our brightest on Liberal Rule last week, you would think the expansion of credit took off just in the last decade, or as one commentator cutely said in the program, private debt went up just as the government ran down its own. But reliance on credit was a fact of life well before Costello began his privatisations.

Yet it is precisely the essential role of credit in keeping the show on the road, that gives this moralising a hollow ring. The irony, as Rudd’s essay reveals, is that after talking of the evils of all the liquidity that was pumped into the economy by greedy US consumers and bankers and those annoyingly productive Chinese, Rudd then has to highlight how rapidly the governments came in to pump in the their own credit in the last twelve months, all $US5 trillion of it. Of course, this credit will make GM no more competitive than all the other credit did. The real problem now is not as the Coalition and now Rudd are posing, that government deficits are distorting the economy, but that they are getting close to the limits, especially in the US, at which such government credit can prop it up. When that happens, it seems you credit card junkies will only have yourselves to blame.

Posted by The Piping Shrike on Tuesday, 28 July 2009.

Filed under State of the parties

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7 responses to “Rudd’s Road to Austerity”

  1. Riccardo on 28th July 2009 11:04 am

    Sharp post – although I preferred your discussion of the political ramifications and where it’s leading. Why would a leader make a virtue out of austerity? Is it ‘poverty chic’? And how does a rich man (or husband of a rich woman) get away with it?

    A lot of people complain retrospectively about the Labor Governments post WWII with their austerity fetishes but it was quite popular when it started – everyone ‘pulling together’ to deal with hardships and so on. And Bretton Woods – veritable orgy of discipline and self-restraint against the ‘hot money’ and so on. And the ‘decartelisation’ in Germany and Japan.

    It’s only when the rich ‘cut and run’ that the thing starts falling apart, and the poor start their resenting again.

    Maybe Copenhagen is the new Bretton Woods.

  2. Graeme on 28th July 2009 1:00 pm

    Interesting post.

    I’ve often wondered whether ‘sub-prime’ is not largely a creation of an economy with low minimum wages (and as you say, stagnant wages for the average US worker), mixed with a social expectation of real estate ownership.

  3. The Piping Shrike on 28th July 2009 4:40 pm

    I don’t think Rudd is making a virtue of austerity in the essay, more redirecting blame. I guess the political implications of that we will have to see. But in the past Labor had a way of making restraint politically acceptable, among those least likely to benefit, through the union movement. Now we have an essay writer.

    I also see there is an element of that, Graeme. In my view too often there is a discussion of people living ‘beyond their means’ without looking what happened to those means. I would argue the key driver of credit controls being relaxed is not ‘greed’ from the consumer but that business needs it to sustain demand.

  4. wayne on 28th July 2009 9:02 pm

    Great analysis- seriously love your work. What interests me most with Rudd’s essays is that they starve the liberals of oxygen. The people love it- do you think it is an extension of Sunrise a form of conversing direct with the voter one on one? The polls suggest Turnbull has to find some kryptonite asap. If not work choices may be to the liberals what the GST was to the Democrats. Remember them?

  5. Bilko on 29th July 2009 1:01 pm

    After WWii England elected a labour Gov and austerity became the order of the day everyone pulled together. It was near the end of the election cycle that the Tories promised the end of rationing etc the people felt enough was enough and the Tories were elected which then lasted 13 yrs. Labor here will need to recognise the “enough” moment so the better times can be introduced by them and not give the Libs and their media cronies any oxygen to start the movement. Young as I was then we needed a few more years to really get back on our feet but the Tories grabbed the moment and the rest is history.

  6. Riccardo on 29th July 2009 4:57 pm

    Is debt really a problem? Debt is just another part of a finance mix – and in a stable economy, stable debt levels can be quite high as they level out the costs of assets and their benefits.

    Fact: You might drive a car for 10 years, and it provides the benefit same benefit each year. It costs one-off payment of $x0,000.

    So in year 1 you get a massive underachievement of net benefit but every other year you get benefit for ‘free’. This is irrational and without the availability of debt much of this sensible financial management would be foregone.

    To say the entire economy is overcommitted is rubbish. The incentives in our economy are poorly enumerated and are biased towards the short term (a bit like the bias against debt, which is also basically short term thinking). If people were actually rewarded for their contribution to the economy (as Karl suggested) and I don’t mind some reward for risk – but not just for churning paper.

    To moralise is really to blame shift. It is like pass the parcel but only worse. And they crucified Madhoff but his was only the most bare-faced of the ponzi schemes in an entire economy of ponzi schemes, from shares to property to political influence.

  7. Larry Buttrose on 29th July 2009 10:13 pm

    Spot on Shrike. The US holding down wages to such an extraordinary extent has stymied things such as home ownership, forcing people who could not afford one because of low pay to borrow using risky sub-prime loans. The result – severe economic and social problems in working class America. Joe Bageant’s books Deer Hunting With Jesus is very good on this.

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