Learning the lessons

If pushing $10.4 billion money into the economy to promote consumer spending were capable of doing the trick why not increase the largesse tenfold? There is no documented case of hand outs averting a recession. As is testified to by many inflation prone third world countries, unless the productive potential is there, more money will not bring increased output. And Australia’s productive potential has been diminished in recent years by wasteful investments and by regulatory impediments to development, in assets like wind farms, as well as in inflated housing.

Other measures being undertaken are similarly doomed to failure.

A host of infrastructure projects are queuing up for Commonwealth support. Some of these may be useful. But you can bet your government-guaranteed-bank-savings that those getting the tick will include lots of wasteful investment into public transport, desalination plants and other uneconomical projects.

The government has given $22 million to ABC Learning which had gone bankrupt. But ABC Learning’s failure was not due to lack of demand. ABC Learning was actually underpricing its services, and had been accused of pricing low to force out competitors.

The overwhelming number of ABC Learning’s 1,040 centres clearly generate sufficient cash to stay open. Most of those identified by the firm’s receiver as unprofitable can probably take pricing or other management action to remain viable. But the Minister, Julia Gillard, preferred $22 million of taxpayers’ insurance rather than watching any centre close down amidst heart wrenching appeals by parents.

ABC Learning getting $22 million of taxpayers’ funds was chicken feed compared to Canberra gifting $6.4 billion to the car industry, which the government sees as strategic for all industry. But granting firms blood transfusions of taxpayer money will only defer their collapse or, at best, their downsizing.

The coming recession will mean a string of businesses looking for similar government support and marshalling a case that they are “strategic”.

Part of the car industry subsidy was to pursue the mirage of the Australian green car. Linking the environment and job support is becoming increasingly fashionable.

In-coming US President Barack Obama has said he will create five million green jobs in alternative power resources based on wind, and solar. Maybe instead we could replace conventional power stations with people generating electricity by push-bike! This would create jobs but, like those created producing alternative energy, the accompanying subsidies and high costs would destroy far more jobs.

When emerging from Communism, Eastern Europe faced far worse dilemmas than those currently confronting the Australian government. In 1992, Hanna Gronkiewicz-Waltz found herself Chairman of the dominant Polish bank. Her frequent response was to reject claims for bail-outs and financial infusions arguing to the applicants, “you say these are valued assets but all I see is debts and losses”.

Forcing overweight businesses to slim down and divest their poorly performing parts proved to be necessary surgery. In post-Communist Poland, as in present day Australia, those businesses that can show an ability to profitably supply goods and services that people want will always find backers.

If we are to avoid a lengthy and costly recession, Australian governments need to absorb these lessons.

Simply reducing interest rates does not solve the problem, which is that assets are overvalued - and some financial businesses which have highly leveraged loans are holding some assets that are worthless.

While we should release funds that have been taken from the community in over-taxation we must simultaneously remove many other inflexibilities that have diverted savings from productive venues, as well as having reduced the real level of savings. Above all, we must recognise that many assets, especially houses, are not worth as much as we thought they were. Having done so, we have to allow asset prices to fall to their underlying market value.