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Land of the Tweedles

By Steve Keen - posted Tuesday, 10 May 2011

Australia is once again proving itself to be the Land of the Tweedles. Though Labor and Liberal loudly proclaim their differences, on the key economic issues, they're (pardon the pun) carbon-copies. Both agree that the Federal Budget should be returned to surplus. Both believe that the "Global Financial Crisis" (which Americans and most of the rest of the OECD call "The Great Recession") is behind Australia, and the imperative now is to stop the growth in government debt. And both would leave untouched spending programs that make us worse-off by promoting asset bubbles rather than serious investment.

On their core economic beliefs, Tweedledee and Tweedledum are wrong. The GFC is still with us, and-certainly in Australia-government debt is not the key problem. Government policy that aims to drive the budget back to surplus may instead drive the economy back into recession.

Though 'Dee and 'Dum raucously debate the level of government debt, both the boom before the GFC and the crisis after it were caused by out-of-control private debt. Rising household debt fuelled bubbles in asset markets-particularly housing-across the OECD. While Dee and Dum concur that Australia was a responsible exception to the global rule, the bubble in household debt here was in fact bigger than that in the USA-mortgage debt peaked at 74% of GDP in the USA in late 2007; Australian mortgage debt peaked 14% higher, at 88% of GDP, in March 2010.


Figure 1

Against this, the level of government debt in Australia about which both Dee and Dum obsess is trivial. If government debt is a serious problem-an issue I return to later-then the USA might have something to debate. American government debt is 15 times larger than Australia's-relative to our respective GPDs. And American government debt is 117% the level of mortgage debt; while in Australia the ratio is less than 7%! That Dee and Dum can fill the airwaves with alarm about the level of government debt in Australia is truly surreal.

Figure 2

Dee and Dum concur that we avoided the GFC because of our lucky relationship with The Red Queen (China). There is some truth to this (they can't be consistently wrong), but both avoid discussing the major reason we boomed while the rest of the world slumped-which is that Dee encouraged households to keep on borrowing money while the rest of the world was deleveraging.


Dee and Dum don't discuss this policy-they call it the First Home Owners Scheme, I call it the First Home Vendors Scheme-because both worship the sacred cow of rising house prices. The twins both favour expensive affordable housing-yes I know that's a nonsense phrase, but we're on the other side of the Looking Glass here. So they both maintain, without discussion, policies designed to keep house prices high and ever rising, while at the same time pretending to make housing affordable with expensive policies that help keep the budget in deficit.

That's why, despite their obsession with reducing the deficit, neither Dee nor Dum will even discuss three simple policy ideas:

These policy changes would do wonders for the Budget bottom line while improving the economy-which both Dee and Dum claim they're trying to do ("Trust us, we're Tweedles...").

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About the Author

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and is a fellow of the Centre for Policy Development. He is the author of 'Deeper in Debt: Australia's addiction to borrowed money', published by the Centre for Policy Development, September 2007. He maintains a blog at

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