John Howard was Prime Minister of Australia between 1996 and 2007. He is in London as guest of the Legatum Institute.
This week’s release of the Legatum Prosperity Index, a global assessment of wealth and well-being in 104 countries, provides a good occasion to assess government policy and the global economic crisis. As the Prosperity Index finds, there is a strong and mutually-reinforcing relationship between a nation’s economic growth and the happiness of its citizens. In particular, whether people have freedom of choice and opportunity in their lives is a strong determinant of their life satisfaction and their productivity. Yet being heavily in debt severely limits the choices available to both individuals and governments.
This is a major reason why governments ought to be pre-occupied with debt repayment; so should Oppositions, because the task is a mammoth one. Britain’s Conservative Opposition, eschewing the customary timidity of Oppositions which have big poll leads, showed much courage in spelling out in such detail, at its recent annual conference, proposed expenditure cutting plans, if it wins government.
The task of debt repayment ahead of my country, Australia, is not as great as in Britain. This is because Britain started so deeply in debt, whereas when the financial plunge hit the Australian budget was in surplus, and the nation had no net debt. In fact the stimulus package in Australia, as a proportion of Gross Domestic Product, was larger than that of Britain’s; 4% in Australia against 1.1% in Britain. There are plenty of people in Australia, myself included, who think that the Australian Government overdosed on the stimulus, taking a little too much liberty with the benign starting point. Both nations have big challenges. Britain has had to pour enormous sums of money into her banks, something Australia has not found necessary, because our banks were not as heavily geared.
Even more important, is the challenge to understand the reasons for the great financial meltdown of 2008, and not be seduced by the false argument that it was caused by a systemic failure of free market capitalism. This argument is easily put because, in the search for scapegoats, there are some quickly identifiable targets, who can be readily besmirched, namely wealthy bankers and other financial manipulators largely, but not only, from Wall Street and the City of London. It was their greed, so the argument runs, which produced the excesses surrounding the securitisation of housing loans and as a result the collapse of major financial institutions such as Lehman Brothers, and the onset of the dramatic events of a little over a year ago.
This argument has gained traction because the targets are easily hit and some have been guilty of great excesses, whether or not those excesses caused the meltdown. The other great appeal of this argument is that it lets governments off the hook. This is especially important to those who see a permanently expanded role for governments as one of the desirable results of this crisis.
The issue of executive remuneration is, for example, a complete distraction from the real issue. I hold the conventional market view that remuneration is something for owners or shareholders to decide. This means, incidentally, that if the government is one of the owners or shareholders, companies must put up with the government putting in its bib on the subject. That is the price paid for accepting a bail out from the taxpayer.
Governments should not be let off the hook, either for the causes of the crisis, or the state of domestic economies when the crisis struck. If one accepts that the origins of the meltdown lay in the state of the sub-prime lending market in the United States, then it is impossible to absolve government intervention, both through the Congress and otherwise, from a large share of the blame for the development of lending practices whereby loans were made to people who never had any real capacity to service the principal and interest payments on those loans. Worthless securities on the books of institutions, comprised of bundles of sub-prime housing loans, were made so because the loans were bad in the first place and not through the process of securitisation, although securitisation fuelled disinterest in obligations under the loans.
The social goal of expanding private home ownership to poorer socio-economic groups was laudable. The device chosen of pressuring mortgage providers to make as many loans as possible, with little regard to sustainability, was irresponsible. This crisis should have reminded us all again that if a government wishes to help an individual or a group it should do so transparently through the budget, with the government assistance appearing as a government outlay, to be paid for with government revenue. It should not provide the help indirectly by distorting the financial system. As we have seen to our great cost this can have far reaching consequences.
If any government wants to help a person or family buy their own home it should provide a direct grant or subsidy, justified as welfare assistance which a decent society can afford, so as to advance a social goal. Such an approach would deliver transparency. It would also ensure that there would be sensible limits on the size of such programmes, and that recipients would be required to meet affordable re-payment obligations to the taxpayer-both highly desirable outcomes.
The global financial collapse has had differential impacts on individual economies. That has been due mainly to the state of those economies when the crisis came. If I may be forgiven for saying so, the fact that Australia has performed rather better than most, experiencing only one quarter of negative growth, was due largely to the robust fiscal position of no net debt and a budget surplus, which the Government I led bequeathed to our successors, when we left office. It was partly for these reasons that Australia ranked number one in the 2008 Prosperity Index.
The global financial crisis has been a giant stress test on the quality of domestic economic management in the many economies of the world. It is little wonder, therefore, that certain governments have sought to locate the blame in the activities of the private sector. Free market capitalism has, over the past thirty years, with the aid of globalisation, delivered hundreds of millions of people from poverty. Those who see ideological grist for the mill in recent economic woes should not be allowed to use those woes to discredit the capitalist system, and in the process extend the boundaries of the state. Doing so risks undermining not only future economic growth but also the happiness of the people.