Along with Gary Humphries, Paul Bongiorno and new editor Michael Keating, I re-launched the journal ‘Inside Canberra’ last night. In the first issue, I have a short piece on economic growth, which is below. (And yes, my title is shamelessly cribbed from Gene Sperling’s splendid book of the same name.)
The Pro-Growth Progressive
Inside Canberra, Vol 65, No 1
Economic growth researchers have something they call ‘the rule of 72’. If you want to know how many years it will take for economic growth to double a country’s standard of living, just take the number 72 and divide it by the growth rate. For example, a country growing at 8 percent a year (think China) will double its income levels every 9 years. A nation growing at 4 percent a year (think Australia in our good years) will double its income levels every 18 years. And a nation growing at 2 percent a year (think Japan in recent years) will double its income levels every 36 years.
So while the difference between 2 percent growth and 4 percent growth may not sound like much now, it’s the difference between doubling our living standards by 2030 versus 2048.
Unlike some on the far left of politics, I firmly believe that growth is good. Higher incomes allow us to enjoy better food, travel and entertainment, spend more time with our families, and be more generous to the most disadvantaged. Far from threatening the planet, rising incomes offer the best hope for dealing with environmental challenges such as climate change.
So what are the policies that should underpin economic growth? In the long-term, it’s about productivity. As Princeton University economist Paul Krugman puts it, productivity isn’t the only thing, but it’s almost the only thing. A society that becomes more efficient every year tends to enjoy rapid economic growth. A nation that fails to innovate typically stagnates.
In the Australian parliament today, you see vastly divergent views on the question of productivity. On the left of politics, we believe that education is fundamental to boosting productivity. That’s why social democratic governments are typically so committed to improving the education system. Like the Clinton and Blair governments before us, the Rudd and Gillard Governments have set about increasing both the quality and quantity of the education system. We’ve encouraged states to raise school leaving ages, built Trades Training Centres, and expanded the number of university places. We’ve also created accountability through the MySchool website, and provided extra resources to low-SES schools.
But on the conservative side of politics, there’s a view that the way to raise productivity is by restricting union rights and making it easier to dismiss workers. This view of the world seems remarkably impervious to facts. Under WorkChoices, productivity growth continued to decline. Indeed, at a recent conference held by the Reserve Bank of Australia, prominent economist Saul Eslake noted in a lengthy discussion of productivity that the Howard Government’s workplace relations reforms didn’t boost productivity.
The other key to growth is ensuring that when a recession strikes, the government supports economic demand. This is what the federal Labor government did in 2008-09, when monetary and fiscal policy together helped save thousands of jobs and small businesses. As a result of this spending (and the revenue downgrades), the government accumulated a modest level of debt, which will peak at less than a tenth of national income.
As with productivity, the Opposition has inveighed against sensible economic policy, making incredible claims about our national debt levels being unsustainable. Yet the alternative to debt would have been to plunge the Australian economy into recession, with all the scarring effect that unemployment has on the jobless. Our fiscal stimulus was timely, targeted and temporary – and the cost is rapidly being paid off.
Good economic management is central to Labor’s vision for Australia. Whether it’s over the economic cycle, or across decades, we’re committed to the economic growth that will see living standards double as quickly as possible.
Andrew Leigh is the Federal Member for Fraser, and a former professor of economics at the Australian National University. His website is www.andrewleigh.com.