Monday, September 13, 2010

Rationalists just don't get the new paradigm

The dismay with which economic rationalists have greeted the ascension of Julia Gillard's "weak and hopefully short-lived government" is overdone. What we're getting is different from what we expected, but I'm not convinced it'll be any worse.

What the rationalists want is continued sound management of the macro economy plus loads of unpopular micro-economic reform to lift our flagging productivity improvement. Considering most of the macro management task is handled by the Reserve Bank, and the parties' mutual obsession with getting the budget back to surplus, we can expect the macro economy to remain as remarkably well-managed as ever.

There's been much disapproving talk about pork-barrelling - as if the practice had been invented in the past fortnight - but the emerging details of how Gillard offered the independents a lot less than Tony Abbott, yet had her offers accepted by three out of four, is a cause for confidence all round: the more responsible side won and the indies restrained their avarice.

What we've learnt since the election about the quality of the Liberals's costings and the abandon with which Abbott tried to win office undercuts all his claims to be a prudent money-manager.

By contrast, it's clear most of Gillard's promised increase in spending in the regions will be achieved by "reprioritisation" - rural will be moved to the front of the queue at the expense of some other, less squeaky wheel (the outer suburbs, probably).

The rationalists are impatient to get on with big micro reforms. But they seem to be projecting their pent-up frustration onto Gillard and her motley crew as though, had she not managed to survive, a much better alternative was on offer.

Such as? John Howard - the man whose commitment to big reforms was limited to the goods and services tax and Work Choices (which he himself watered down when he realised how unpopular it was)? Paul Keating - who took great strokes as treasurer, but not as prime minister?

Let's get real. Whether the rationalists like it or not, the era of widespread reform is long gone. The notion that, had Abbott won, we might be back to the glory days is delusional.

Abbott, a man who has hitherto shown no great interest in economics, fought an almost completely negative campaign and resorted to blatant populism. He promised faithfully to avoid all changes to industrial relations, never introduce a price on carbon, ditch the mining tax (which was intended to reform the tax system by shifting the mix towards immobile resources) and shun anything that could be labelled "a great big new tax".

And don't forget he agreed to far more items on Bob Katter's anti-competitive 20-point wish list. The rainbow coalition is more susceptible to populism? Not on the evidence so far.

Of course, had Gillard been re-elected in the normal course, we couldn't have expected much better. She'd have proceeded with the mining tax, but done nothing useful on climate change nor anything more on the Henry tax review.

But here's what the rationalists have missed: Gillard's need to win the support of the independents may increase the likelihood of a few reforms going through. Andrew Wilkie, Tony Windsor and Rob Oakeshott each support serious action on climate change and a tax on mining.

We're now likely to get some movement towards a carbon price during this term. For good measure, the rural independents have obliged Gillard to reopen consideration of the pigeonholed Henry review.

Much of the rationalists' gloom arises from the Greens gaining the balance of power in the Senate. But this was always going to happen. The psephologists were telling us to expect it long before Labor's troubles began with its repudiation of its emissions trading scheme. What's more, the Greens took more Senate places from the Libs than from Labor.

Some people are delighting in quoting spooky things from the fine print in the Greens's policy statement - did you know they want to bring back death duties? Oh no! But anyone with any sense knows not to take that stuff too literally.

The strange fact is the Greens are now the only party committed to a rationalist, price-based response to climate change. They're also committed to the resource rent tax (and only a fool would fear they could bid Gillard back up to a 40 per cent rate for the tax).

It is likely there'll be a fair bit of public debating of policy options between the government and the indies. It will be a messy process. And it's guaranteed the opposition and the Murdoch press will portray this as disunity, indecision and chaos.

But I think it could be the making of Gillard. Once we got a hung parliament, messiness and continuous negotiation-mode were inevitable. But Gillard has already shown herself much better suited to this challenge than either Abbott or Kevin Rudd.

After Labor's disastrous first term, it has a lot to learn. But I reckon Gillard has a much steeper learning curve than Rudd. One thing Labor must learn is to stand its ground and fight for unpopular policies, not get its spin doctors to change the subject.

Fortunately, the need to garner the independents's votes on every major issue will now leave Labor no choice but to explain, explain, explain.