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The Right Policy Diagnosis

Click here to buy - A How To Book of SMSF's by Tony Negline

John Robertson

Bad policy often comes from a poor diagnosis of a problem. The focus on greed by a few foreigners as a source of our current economic woes is an example which surfaced again on Australia Day.

In an Australia Day address this week, Prime Minister Kevin Rudd went out of his way to lay the blame for the world's recent economic turmoil squarely on the shoulders of the rest of the world. By the reckoning of the Prime Minister, Australia is an innocent bystander caught up in "crises beyond our shores" created by "a set of values that are the very antithesis of our own".

The world would have been better off if Australian values had ruled. Phooey!

Despite the fixation by the Prime Minister on the evils of "unrestrained greed", we have an economic system in common with most of the world outside North Korea, Cuba and Zimbabwe. It has two important characteristics. Resource flows are motivated by price signals and government policy. Periodically, this market system is prone to instability whenever excessive resources are directed toward the same activities. This propensity to instability would be true no matter whether people are motivated by greed or altruism.

This is a point I have made in a lengthier article in the November 2008 edition of the monthly ATC Digest.

In that article, I used a nautical analogy. If one person moves to one side of a boat, the effect might not be significant. Similarly, if several move, the effect could still be negligible. They could all be better off because they have an improved view. Sure, they could have been motivated to move by greed but there was no harm done as long as the boat could accommodate the shift.

But there will be a point, even for the biggest ships, beyond which they risk being destabilized by just one more person moving across. But who is to blame: the last person to move, the first or the captain ultimately responsible for the safety of all the passengers?

There are elements of this in our economic system. Lending to third world countries or technology entrepreneurs or supporting increased access to home ownership might all be commendable objectives. One loan might be unimportant. However, many loans, even driven by purely altruistic motives, could lead to instability if taken too far as, at various times, we have learned at great cost.

Following the nautical analogy, catastrophe looms when the captain of the ship allows too many people to move to the same side at once. In this context, regulators must know when to say that enough is enough. Sometimes it does but our market system will not always accomplish this.

Kevin Rudd is also wrong in denying that Australia has played a part in the behaviours which led to our present predicament. His contention that Australian values would have given us different outcomes leaves us arguing unconvincingly that house price inflation is only a problem if foreigners benefit but, confined to Australia, remains perfectly acceptable. The same attitude promotes a view that Australia can happily grab a growing proportion of global income as speculation drives up commodity prices but that once foreigners profit from excessive commodity market exuberance, they are somehow morally flawed.

Unless Rudd accepts that similar patterns of behaviourThe in the USA, the UK, Germany, Iceland, China and any number of other countries have combined to deliver our present circumstances, his policy prescriptions are likely to be correspondingly inadequate.

Differentiating between Australian values. on the one hand, and those that lead to economic failure, on the other, encourages us to self righteously sidestep appropriate policy responses here and turn a blind eye to economic behaviour which might be incompatible with economic stability.

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