Amer­i­can delu­sions Down Un­der

Financial Mirror (Cyprus) - - FRONT PAGE -

For bet­ter or worse, eco­nomic-pol­icy de­bates in the United States are of­ten echoed else­where, re­gard­less of whether they are rel­e­vant. Aus­tralian Prime Min­is­ter Tony Ab­bott’s re­cently elected govern­ment pro­vides a case in point.

As in many other coun­tries, con­ser­va­tive gov­ern­ments are ar­gu­ing for cut­backs in govern­ment spend­ing, on the grounds that fis­cal deficits im­peril their fu­ture. In the case of Aus­tralia, how­ever, such as­ser­tions ring par­tic­u­larly hol­low – though that has not stopped Ab­bott’s govern­ment from traf­fick­ing in them.

Even if one ac­cepts the claim of the Har­vard econ­o­mists Car­men Rein­hart and Kenneth Rogoff that very high pub­lic debt lev­els mean lower growth – a view that they never re­ally es­tab­lished and that has sub­se­quently been dis­cred­ited – Aus­tralia is nowhere near that thresh­old. Its debt/GDP ra­tio is only a frac­tion of that of the US, and one of the low­est among the OECD coun­tries.

What mat­ters more for long-term growth are in­vest­ments in the fu­ture – in­clud­ing cru­cial pub­lic in­vest­ments in ed­u­ca­tion, tech­nol­ogy, and in­fra­struc­ture. Such in­vest­ments en­sure that all cit­i­zens, no mat­ter how poor their par­ents, can live up to their po­ten­tial.

There is some­thing deeply ironic about Ab­bott’s rev­er­ence for the Amer­i­can model in de­fend­ing many of his govern­ment’s pro­posed “re­forms.” Af­ter all, Amer­ica’s eco­nomic model has not been work­ing for most Amer­i­cans. Me­dian in­come in the US is lower to­day than it was a quar­ter­century ago – not be­cause pro­duc­tiv­ity has been stag­nat­ing, but be­cause wages have.

The Aus­tralian model has per­formed far bet­ter. In­deed, Aus­tralia is one of the few com­mod­ity-based economies that has not suf­fered from the nat­u­ral-re­source curse. Pros­per­ity has been rel­a­tively widely shared. Me­dian house­hold in­come has grown at an aver­age an­nual rate above 3% in the last decades – al­most twice the OECD aver­age.

To be sure, given its abun­dance of nat­u­ral re­sources, Aus­tralia should have far greater equal­ity than it does. Af­ter all, a coun­try’s nat­u­ral re­sources should be­long to all of its people, and the “rents” that they gen­er­ate pro­vide a source of rev­enue that could be used to re­duce in­equal­ity. And tax­ing nat­u­ral-re­source rents at high rates does not cause the ad­verse con­se­quences that fol­low from tax­ing sav­ings or work (re­serves of iron ore and nat­u­ral gas can­not move to an­other coun­try to avoid taxation). But Aus­tralia’s Gini co­ef­fi­cient, a stan­dard mea­sure of in­equal­ity, is one-third higher than that of Nor­way, a re­source-rich coun­try that has done a par­tic­u­larly good job of man­ag­ing its wealth for the ben­e­fit of all cit­i­zens.

One won­ders whether Ab­bott and his govern­ment re­ally un­der­stand what has hap­pened in the US? Does he re­al­ize that since the era of dereg­u­la­tion and lib­er­al­iza­tion be­gan in the late 1970s, GDP growth has slowed markedly, and that what growth has oc­curred has pri­mar­ily ben­e­fited those at the top? Does he know that prior to these “re­forms,” the US had not had a fi­nan­cial cri­sis – now a reg­u­lar oc­cur­rence around the world – for a half-century, and that dereg­u­la­tion led to a bloated fi­nan­cial sec­tor that at­tracted many tal­ented young people who other­wise might have de­voted their ca­reers to more pro­duc­tive ac­tiv­i­ties? Their fi­nan­cial in­no­va­tions made them ex­tremely rich but brought Amer­ica and the global econ­omy to the brink of ruin.

Aus­tralia’s pub­lic ser­vices are the envy of the world. Its health-care sys­tem de­liv­ers bet­ter out­comes than the US, at a frac­tion of the cost. It has an in­come-con­tin­gent ed­u­ca­tion-loan pro­gram that per­mits bor­row­ers to spread their re­pay­ments over more years if nec­es­sary, and in which, if their in­come turns out to be par­tic­u­larly low (per­haps be­cause they chose im­por­tant but low-pay­ing jobs, say, in ed­u­ca­tion or re­li­gion), the govern­ment for­gives some of the debt.

The con­trast with the US is strik­ing. In the US, stu­dent debt, now in ex­cess of $1.2 tril­lion (more than all credit-card debt), is be­com­ing a bur­den for grad­u­ates and the econ­omy. Amer­ica’s failed fi­nan­cial model for higher ed­u­ca­tion is one of the rea­sons that, among the ad­vanced coun­tries, Amer­ica now has the least equal­ity of op­por­tu­nity, with the life prospects of a young Amer­i­can more de­pen­dent on his or her par­ents’ in­come and ed­u­ca­tion than in other ad­vanced coun­tries.

Ab­bott’s no­tions about higher ed­u­ca­tion also sug­gest that he clearly does not un­der­stand why Amer­ica’s best uni­ver­si­ties suc­ceed. It is not price com­pe­ti­tion or the drive for profit that has made Har­vard, Yale, or Stan­ford great. None of Amer­ica’s great uni­ver­si­ties are for-prof­itin­sti­tu­tions. They are all not-for-profit in­sti­tu­tions, ei­ther pub­lic or sup­ported by large en­dow­ments, con­trib­uted largely by alumni and foun­da­tions.

There is com­pe­ti­tion, but of a dif­fer­ent sort. They strive for in­clu­sive­ness and di­ver­sity. They com­pete for govern­ment re­search grants. Amer­ica’s un­der-reg­u­lated for­profit uni­ver­si­ties ex­cel in two di­men­sions: the abil­ity to ex­ploit young people from poor back­grounds, charg­ing them high fees with­out de­liv­er­ing any­thing of value, and the abil­ity to lobby for govern­ment money with­out reg­u­la­tion and to con­tinue their ex­ploita­tive prac­tices.

Aus­tralia should be proud of its suc­cesses, from which the rest of the world can learn a great deal. It would be a shame if a mis­un­der­stand­ing of what has hap­pened in the US, com­bined with a strong dose of ide­ol­ogy, caused its lead­ers to fix what is not bro­ken.

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