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It's the cost of government, stupid

Australia is not facing a cost-of-living crisis but rather a ‘cost-of-government’ crisis. A crisis borne of an inefficient and bloated government sector that continues to expand, hindering economic growth while fostering social and intergenerational tensions.

Contrary to the argle-bargle from some quarters, the basic principles of economics are simple. Economic growth is not a product of government planning or of consumer or government spending. Economic growth stems from the expanded production of goods and services which is driven by savings, investment, entrepreneurship, and innovation. Importantly, growth is determined through how resources are used, principally labour and capital, and most importantly, how productively these inputs are used.

The lifting of hundreds of millions of Chinese people out of abject poverty came not from an expansion of government but from the retreat of government. It came from a massive expansion in production powered through savings, and labour moving from lower productivity subsistence and collective farming to higher productivity manufacturing and services.

Fundamentally, without production, there can be no consumption, and it is an unfortunate distortion of this simple reality by statisticians when they use spending data to measure GDP. This flawed approach also enables peculiar statements like that recently from Treasurer Jim Chalmers, who claimed that ‘Without growth in government spending, there’d be no growth in the economy at all.’ Chalmers conveniently ignored the fact that without production, there’d be no taxes, and without taxes, there’d be no government spending.

Federal Treasurer Jim Chalmers recently claimed that without growth in government spending, there’d be no economic growth, but UNSW Business School Professor Peter Swan observed that without production, there would be no taxes, and without taxes, there would be no government spending. Photo: supplied

A household does not measure its income by how much it spends but rather by how much it earns. And planning a household budget in the hope of winning the lottery is as irresponsible as the Commonwealth projecting a decade of budget deficits in the hope of perpetually high iron ore prices.

It’s very easy to increase the appearance of economic growth by increasing the volume of inputs, such as through immigration. This may increase aggregate output, but it necessarily translates into reduced returns to labour through lower real wages and per capita income. The Black Death decimated the population but dramatically raised per capita income.

By the same token, it may be an insight for members of the big government industrial complex, but real wages do not increase through legislation, regulation, or subsidies. Increasing wages through such means will ultimately need to be paid for via a combination of higher taxes, inflation and unemployment.

The Albanese government’s industrial relations alterations will not lead to sustainable increases in real wages.

It is only through productivity growth, by increasing output per worker, that businesses can increase wages without raising prices. And increasing productivity does not necessarily mean working longer or harder, but rather more efficiently.

Consider the cost of housing in Australia against the reality that ‘since 2014, labour productivity in the Australian construction sector has declined by 18.1 per cent’. Much of this productivity decline can be attributed to regulatory failure.

Addressing Australia’s productivity slump is the key to solving many of our economic problems. It cannot be ignored that, at the same time, Australia is experiencing an extended per-capital recession, per-capita government spending is growing at a rapid pace.

When capitalism works, it does so through what the Austrian-born economist Joseph Schumpeter called ‘creative destruction’. Competition in markets allows new firms to rise up and replace the complacent ones, making the economy ever more productive over time.

This process generates vast pools of wealth, personal and corporate, but only temporarily, as cut-rate competitors raze monopoly profits and concentrations of power. The downside of this rough cyclical justice is more volatility in the markets. The upside is human progress.

Grand government schemes like the ‘Future Made In Australia’ policy will only result in diminished economic growth and lower productivity.

UNSW Business School Professor Peter Swan explains that increasing productivity means working more efficiently, and not necessarily longer or harder. Photo: UNSW Business School

Since the turn of the millennium, and particularly after the dot-com crash of 2000, governments and central banks have jointly conspired to stop the creative destruction process working properly through repeated bailouts and stimuluses.

The decision to not bail out Lehman Brothers was a rare exception. What researchers have called ‘the cleansing effect’ of recessions has disappeared with recoveries lasting longer but at a slower pace of growth.

The rhythm of the financial markets has also changed in response to increasingly large and active government. Investors have come to assume that good economic news was good for financial markets, but so was bad news because it would trigger more government support. With growing government stifling competition and crippling the process of creative destruction, the largest firms will keep getting larger.

It was not government planning, regulation or industry protection that led to the creation of the steam engine, automobile, or smartphone. If these innovations were developed today, governments likely would impose taxes and regulations to protect jobs in the telegraph and horse-and-buggy industries.

The biggest beneficiaries of no market downside have been the wealthiest. Before the year 2000, billionaires numbered barely 470 but have since surged to around 2800.

The general stupefaction of a business culture pickled in debt might be of less social consequence were it not conspiring to slow economic growth. Who, after all, wants harsher or more frequent recessions, more bankruptcies, or a scarier ride in the financial markets?

By smothering capitalism’s competitive fire, big government is slowing productivity growth. This is lowering long-run economic growth, thus shrinking the pie and concentrating what’s left in fewer hands.

Many Millennials, the next generation of leaders, have been misled into thinking that their distorted version of capitalism is the root of the problem and that a bigger, more interventionist government is the solution. However, the distortions they observe and the inequalities they experience are actually the result of excessive government intervention, not a lack of it.

Australia’s only return pathway to prosperity requires a significant reduction in the size and role of government. As Ludwig von Mises observed and history has confirmed: ‘The worst evils which mankind has ever had to endure were inflicted by bad governments.’

 

Peter Swan is a Professor in the School of Banking and Finance at UNSW Business School, and Dimitri Burshtein is Principal at Eminence Advisory and a UNSW Alumnus (Master of Commerce and Bachelor of Economics). Originally published in The Spectator Australia.

This article was published by UNSW Business School’s BusinessThink. Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School.

 

33 Comments
Dan
November 04, 2024

Exactly!
Beautifully written.

Goronwy
November 04, 2024

Brilliant article. The only thing I disagree with is that immigration necessarily lowers output per worker. Skilled immigrants raise output per worker. Immigrants that allow us to exploit productive opportunities that we otherwise could not also raise output per worker. Immigrants also bring creativity and work ethic. Imagine how the U.S. or Australia would be without immigration.

Trevor
November 01, 2024

Would it be possible to abolish the ACT government and return the territory to NSW? Just wondering. Same for NT. Transfer it to its neighbour states.

Robert G
November 03, 2024

Would it be possible to abolish all state and territory governments, thereby removing one whole level of government, and having one set of laws for the whole country ? Think police, transport, education etc etc etc

Glenn
November 04, 2024

I’d agree - we have a layer more of government than we need- it’s the legacy of the federation movement of the 1800s.

The unfortunate aspect is that whenever we face a crisis we revert to state based tribalism (COVID) about which state is better.


And in WA at least the govt won the election by a wall between them and the east.

Mind you if WA and QLD do want to secede maybe a lot of us elsewhere might think that’s a great idea!!

Former Treasury policy maker
November 05, 2024

It was actually better for ACT residents when it was under the Commonwealth Government. Institutions like the old NCDC (National Capital Development Commission) were much better at allocating capital to important economic developments than any local government has ever been. So don't give it to NSW, return it to the government for which it was set up to exist as the location of its parliament.

Angus
November 01, 2024

Thank you Professor Swan.

It would have been accepted wisdom in Federal Parliament in the 1980s to write "Economic growth is not a product of government planning or of consumer or government spending. Economic growth stems from the expanded production of goods and services which is driven by savings, investment, entrepreneurship, and innovation."

Today I fear the majority on both sides would be so outraged at the first sentence they would not read the second.

Russell Wadey
November 01, 2024

Austrian econobabble.
Austrians, nor Neo-Classical Economists, don't understand how the modern monetary system operates.

Peter Hollings
November 01, 2024

Hi Russell. Care to share your wisdom?

Peter taylor
October 31, 2024

The current race to the bottom of customer service is a result of no recession to reset the economy.

The ex attorney General christen porters disclosure that he had 1 million dollars deposited into his blindvtrust account gave a rare glimpse of the influence big business has on goverment and just high high it goes

What Christen was doing to earn such generosity or how many ministers have such a blind trust account is still unknown to me as I may have missed the inquiry if there was one.

Peter Care
October 31, 2024

Better to live in an inefficient democracy than a brutally efficient dictatorship.
Benito Mussolini did make the trains run on time ad the Government , particularly the army and police were very brutally efficient.

Peter Care
October 31, 2024

Government in a functioning democracy is always bloated and inefficient. That is the nature of democracy. Dictatorships are more efficient, yet populations try to escape brutally efficient dictatorships and migrate towards less efficient democracies.

Some bloating and inefficiency is the price one pays for living in a functioning democracy.

Give me a bloated and inefficient democracy rather than a brutally efficient dictatorship always.

Stephen
November 01, 2024

Peter, I have good news for you. The richest and happiest countries in the world are democracies.

Aussie HIFIRE
October 31, 2024

Anybody who has ever had to deal with Centrelink or seen 10 workers stand around looking at the one person working on the roads can tell you how ridiculously inefficient government is.

Richard
November 03, 2024

Governments don't build roads these days, rather they contract the work out to companies. So then 10 workers you apparently now see standing around work for businesses.

James
November 05, 2024

Sloppy government contracts then. Overpaying no doubt, wasting tax payer money!

Bryan Waters
October 31, 2024

Excellent article can we make sure the Prime Minister and Federal Treasurer view this great piece of common sense

John Bone
November 01, 2024

Absolutely. Mandatory reading for socialists.

Ian
November 06, 2024

Thats pointless. Neither of them would understand, or if they did they'd take no notice!

DougC
October 31, 2024

There are many self-evident truths in Peter’s article but the problem might not be size of government but motivation of government. Our democracy allows everyone to make their choice re government representation and makes the term of the government just a few years. Long-term plans are near impossible, but short term plans for re-election are crucial and depend on pleasing most of the people most of the time (or at least in the 2 weeks before elections).
Pleasing most of the people most of the time depends largely on helping them to spend – with subsidies and regulations as necessary. The human race has long ago moved from survival to subsistence to consumption and there seems to be no way of reversing, stopping or even slowing the trend, and no government that did so would get re-elected.
Re the ‘Future Made In Australia’ policy; we no longer make cars, washing-machines, clothing, solar-panels or countless other useful products, but the government has announced that we are to make guided missiles ! – that will never benefit the economy, might never be used, but will cost a fortune; similarly we are spending a fortune on submarines that will likely be obsolete the day they are put into the water (if they ever are put into the water) while the same fortune could solve so many deficiencies in some many aspects of the economy.
. . . Perhaps it’s not the size of government, but the motivation.

Alasdair Edwards
October 31, 2024

I'm shocked an article riddled with so many inaccuracies has been published. There is no substantiation to any of the ridiculous claims. The entire thing is opinion and baseless rhetoric.
"The lifting of hundreds of millions of Chinese people out of abject poverty came not from an expansion of government but from the retreat of government." What a thoroughly moronic comment. The entire Chinese economy IS THE GOVERNMENT. No private enterprise is free from some level of control from the CCP.
I actually cannot believe anyone is taking this article seriously.

Take Off Your Blinkers
November 02, 2024

I think the majority of people reading this will be able to see the substantiation all around us. Have you ever had a house built? Seen road repairs? The time & money spent on excessive road & street signage? Compared the efficiency of like-for-like public hospital work to that of a private hospital.

Richard Lyon
November 04, 2024

Spot on, Alastair.

I'm not sure what's worse: all those unsubstantiated assertions or the uncritical acceptance of them.

Milkus
November 04, 2024

I would also argue that government plays a huge role in the development of world changing innovations. Governments provide the baseline education for research and development, in our case universities, CSIRO (anyone heard of WiFi), compulsory schooling... The corporations who then pick up the winners and develop them to commercial products are not always the innovators, and often use R&D tax benefits to bring game-changers to society. Its often a hand in hand progression to 'innovation'.
Capitalism doesnt equal democracy. Prosperity is not necessarily just financial, it includes health and happiness. Governments have a role that is wide spreading and accounts for diversity. Pure economics is not the be all and end all of democratic societies, workers dont always share the same goals as their employers. When capitalism works it also creates inequality of wealth and power, income disparities, worker exploitation, ecological issues and exclusion of many who cant participate effectively in society. When democracy works it regulates the downsides of capitalism.

Wildcat
October 31, 2024

Responding to several comments in one post:

To James Weir: - that is so easy, the bail out of the banks in 2008 that went well beyond emergency room triage to more than a decade of monetary stimulus that drove up asset prices and damaged the middle class. Personal experience, although anecdotal, changes to regulation in construction and ridiculous requirements by local councils driving delays and unnecessary costs into construction, massive over regulation of the finance industry putting planning out of reach except for the very wealthy, the ironically named "fair work" incentivizing good employers to outsource and remove workers as much as possible, to state govt's heavily pursuing GP practices for payroll tax at 5.45% (NSW) when most practices profit margin is between 2 and 4% then complaining bulk billing is dying. I'll stop now but have pages of where governments are destroying productivity and driving the economy backwards and regulating small business to death.

To Chris Allwood: Correct. Unfettered capitalism is more an American system with relevant gapping holes in the social safety net and public debts from private expenditure (eg pollution). What we need is more a 80's style government whereby guard rails and rules to control unfettered capitalism and provide a social safety net but is not overreaching and crushing good businesses.

To John: We would indeed be sand free in 5 years. If you want something done badly, give it government and committees. They should regulate reasonably and for public safety and good and get the hell out of the way.

Governments the world over now think if you make a law you fix the problem. When that doesn't work more laws and more bureaucracy is the solution. It's the same as drinking vodka to cure alcoholism. Their only output is paperwork and regulation, therefore to increase productivity you have more paperwork and regulation. This of course means you do less of things that actually ADD value.

Murder has been illegal for 1000's of years but it still happens. The sooner they realise this and stop strangling the real economy with useless, conflicting and just volume of ridiculous regulation the sooner the productivity needle will start to swing in the right direction.

Peter
October 31, 2024

Good government is about fostering. They take an idea that nobody wants, raise it up and set it loose on the world. Some crash and burn, others survive and grow. Yes, we need to destroy the lumbering behemoths that suck up financial resources, muddy markets, and crap all over stakeholders. Less government regulation is not the answer, smart government is. The vested interests in government and the moneyed classes stall and divert the resourceful people that drive productivity innovation. They practice stagnation as they know that their wealth is at risk in times of dynamic change. Calling for less government risks an accumulation of resources like money and people in the greedy hands of a few.

We need more resources provided to risktakers and makers, because as Schumpeter theorised, creative destruction brings creative and innovative solutions. The ongoing climate change driven destruction (See BOM report) of what was comfortable will be a chance to innovate and to bring in changes. Most won’t work, but those that do will survive. Suffice to say, burning thousands of years of accumulated sunlight in fossil fuels will not end well for the billions of homo sapiens that have spread out over the planet. They will have to move to survivor zones, which will be contested.

Worrying about productivity and economic growth is old economics. Sustainability and change management are the new, and we need better performance measures to ensure we survive.

Mart
October 31, 2024

Doesn't help that we have Federal, State, and Local government in a land of 27 million people ......

Kym
November 01, 2024

Hear, hear! The cost and the inefficiencies from this over governance is a big issue. And, despite the "review" in COVID19, we still are not prepared to question the governance structure in this country. We are perhaps too young a nation to question the colonial imposed systems of government.
My understanding of the economics I studied was the government's role was to intervene where there was a market failure but otherwise let private enterprise get on with it.

BeenThereB4
October 31, 2024

Great words.
Also add government projects like Snowy Hydro II, Inland Rail, Suburban Rail Loop in Victoria and many more.

James Weir
October 31, 2024

I am surprised that an article written by an academic is littered with unsubstantiated claims and nothing more than opinion. You have not backed any of your claims, such as, "Much of this productivity decline can be attributed to regulatory failure", or, "governments and central banks have jointly conspired to stop the creative destruction process working properly", with statistics or specific examples. Your conclusion is one commonly trotted out, that for things in Australia to get better, "requires a significant reduction in the size and role of government". Exactly where should those reductions be and what would be the consequences? If your answer to my observations is the article didn't allow space for it, then say so and provide references to evidence.

Chris Ailwood
October 31, 2024

It is not difficult to agree with Peter Swan's logic and conclusions. The flaw in his argument is that the owners of private capital cannot be trusted not to harm the community, giving rise to the need for greater government than otherwise would be necessary.

Stuart Macaulay
November 03, 2024

Herein lies the problem. Profit is the incentive for investment and growth, however there needs to balance between this and government regulation. The writer is suggesting that the pendulum has recently swung too far in one direction. Perhaps Wesfarmers chairman, Michael Chaney, was referring to this with his recent comments regarding profit being a “dirty word”in some sections of the system.

John
October 31, 2024

A good dose of old school economics, no doubt politicians will ignore the evidence and prefer some flavour of month scheme like MMT, industrial policy, democratic socialism or entrepreneurial government. "If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."

 

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