MISGUIDED, WOULD-BE MESSIAH

 AS Prime Minister of Australia, Kevin Rudd has to be taken seriously even though he doesn't deserve to be on the strength of this week's extended essay in The Monthly. His declaration that "the great neo-liberal experiment of the past 30 years has failed" is pretentious and self-serving twaddle. It's just not true, as Rudd himself mustknow.

The past 30 years have witnessed perhaps the fastest and greatest increase in prosperity in human history. If nothing else, Rudd has surely not missed the movement of hundreds of millions of Chinese peasants into the middle class. Of course, there have been big problems with the Chinese economic miracle just as there are now serious problems (although far less systemic) with the world economy. What Australia needs, though, is a leader with a sense of proportion about the present difficulties and a measured plan for dealing with them, not a would-be messiah with apocalyptic visions of a new world order.

Greater exposure to market forces over the past three decades has eventually led to more jobs, higher pay and much greater wealth. Not everyone has been equally able to make the most of these opportunities so there is always a big constituency in favour of wealth without effort and success without merit. That's why it's so dangerous to pander to it by pretending, as Rudd does in his essay, that bigger, more intrusive government could have avoided mistakes that almost no one saw coming.

If you don't understand a problem, you can't properly deal with it. As Rudd's essay makes plain, he has confused a cyclical (if severe) downturn with a fundamental crisis of capitalism. Especially with the benefit of hindsight, it's now plain that serious mistakes were made in the US home loan market. This has compounded the bursting of an asset price bubble with consequent flow-on to business decision-making and jobs.

In a market economy, cyclical downturns are as inevitable, if not necessarily as predictable, as storms in winter. You batten down the hatches but you don't conclude that the sky is about to fall in. Rudd, by contrast, says that the rules have changed; that government spending and government regulation that would not have made sense before makes sense now. It's on this basis that he's shifted without any specific justification from being an "economic conservative" to a born-again socialist and without any embarrassment from a forecast budget surplus of $22billion last May to a deficit of $22 billion just eight months later.

As always with Rudd, there are enough parenthetical qualifications to lend a spurious consistency to what is actually a radical change of position. Still, his essay is a rallying cry for everyone who doesn't trust markets and who thinks that the Government is far more likely to spend money wisely than misguided individuals. It provides the supposed intellectual justification for this week's $42 billion spending spree (on top of the $10billion pre-Christmas cash handout to families and pensioners, the $15 billion Council of Australian Governments deal, the $5 billion state infrastructure grants, the $8billion non-bank lender fund, the $2 billion commercial property fund and the extra $3billion for the car industry).

There's also the near certainty of even more spending still to come on pensioners and on the specific problems (such as public hospitals) that have so far missed out on Rudd's social spending dressed up as recession busting.

If this is what Rudd does with unemployment at just 4.5 per cent, imagine what gargantuan spending will be called for when unemployment hits the 7 per cent that's forecast notwithstanding the latest $42 billion boost. So far, Australians have actually experienced the upside of a recession -- lower interest rates and prices -- without the downside of mass unemployment and businesses going broke. If the premonition of a recession panics the Prime Minister into doing too much, too soon, what excesses will the real thing bring?

What the Prime Minister can't do, though, is change the iron law that government doesn't spend a dollar that it won't take from voters through higher taxes, higher interest rates or higher inflation in the future. In just over 12 months, Rudd has already turned the surplus painstakingly gained over 12 years into deficits approaching 3 per cent of gross domestic product and an imminent $130billion of commonwealth debt, more than the Keating government had in 1996. The deficits, of course, are said to be temporary but so was the Old Parliament House and that lasted for 60 years.

Since September last year, Rudd has been furiously talking up a crisis so that any dissent from the Government's response will look petty and even disloyal. It's instructive to compare the Rudd Labor Government's response to a looming recession with the Hawke government's response to an actual one. Hawke floated the dollar, cut tariffs, and de-regulated financial markets. The need to respond to a crisis prompted good policy. For a time, Bob Hawke and Paul Keating even managed to suppress their party's anti-market instincts and, in doing so, helped to create the foundations for the prosperity of the past decade. By contrast, this new Labor Government is using the need to respond to a recession to indulge old-fashioned big government prejudice.

The real story in Rudd's essay is not that the world has changed but that Labor has, as even sympathetic commentators are starting to notice. This week, John Edwards (Paul Keating's former principal economic adviser) wrote that "it is possible to see the global financial crisis in another way (than Rudd) that I think makes more sense". The Australian's Paul Kelly detected "breathtaking hubris" in Rudd's scathing dismissal of 30 years of economic policy making.

With its crusading tone and almost total absence of argument from fact, Rudd's essay is more of a religious sermon than a work of serious political and economic analysis. It involves three articles of faith: first, that the past 30 years has witnessed the triumph of extreme capitalist ideology; second, that this kind of capitalism has comprehensively failed; and third, that only social democratic political parties can be trusted to shape the future. All of these propositions are demonstrably false.

Rudd defines the enemy as "neo-liberalism: that particular brand of free market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time". Neo-liberalism, he says, wants government activity to be replaced by market forces, dismisses the idea of social solidarity, and aims to "strangle the capacity" of government to invest in education, health and infrastructure. He's attacking something that's never really existed outside the theorising of the academic Right and the fantasising of the academic Left. John Howard, for instance, was often criticised for being a "big government conservative". Even so, insists Rudd, the "challenge for social democrats is to recast the role of the state ... as a comprehensive philosophical framework for the future". This is actually a repudiation of the economic policies of the Hawke government no less than those of Howard.

During the last election campaign, Rudd scoffed at former treasurer Peter Costello's warnings of the impending economic tsunami as politically motivated crisis-mongering. Now, Rudd sees "a truly seismic event", "a turning point between one epoch and the next" and "the greatest regulatory failure in modern history". By contrast, Rudd's Deregulation Minister, Craig Emerson, said in a paper delivered in December but published, embarrassingly, this week: "Before we pronounce free markets dead and 2009 the year of re-regulation, let's analyse what went wrong. For Australia, the short answer is nothing." At the Davos Conference this week, Deputy Prime Minister Julia Gillard, said Australia had a "better than world class" regulatory regime. They can't all be right.

It is logically impossible to contend that Australia has been in the grip of a 30-year mania for de-regulation and, in the same week, to claim that our regulatory systems are the equal of the best in the world. It is logically impossible to claim that the Howard government was consumed by free-market fundamentalism yet to laud the institutional framework that the former government created; unless, of course, Rudd is making the implicit claim that Australia's financial and regulatory system has been transformed in just 12 months. Perhaps, deep down, he really does think that he has performed the governmental version of the miracle at Cana.

If social democratic parties are uniquely gifted to understand the present problems and how to solve them, why, after 11 years of "third way" Labour government, is Britain the advanced economy most exposed to the slump? If conservative parties are incorrigibly tainted with neo-liberalism, why did the hated Bush administration effectively nationalise at-risk banks and insurance companies and announce the first hitherto unimaginably large rescue package?

Rudd doesn't try to explain this because he can't. He's appealing to economic prejudice, not reason. It's a thinly disguised exercise in labelling to establish the moral superiority of Rudd and his Government. As analysis, it's an only slightly more sophisticated version of playground name-calling.

Under the pressure of a looming slump, Rudd has returned to Labor's comfort zone of "government knows best". "Decisive action" has been taken in response to every piece of bad news. Each action, though, has been essentially the same: to spend government money and to put in place new rules. Decisions of the utmost consequence have been taken with very little study, sometimes almost overnight (as with the bank depositors' guarantee), often with little or no input from expert advisers. Careful weighing of consequences has been dismissed as akin to fiddling while Rome burns. Because the principal decision-maker seems to think that none of the old rules matters any more, these decisions are almost certain to make bad situations worse.

What in fact should the Government have been considering in place of this week's multitude of small infrastructure grants and one-off personal handouts?

First, there is almost nothing in the present situation that's truly unique. Since 1973, the stock market has dropped by more than 20 per cent in four other years apart from 2008. Governments have had to rescue financial institutions before, such as the State Bank of Victoria and HIH. Slowdowns, sometimes even recessions, are a regrettable but almost-impossible-always-to-avoid feature of a market economy. Their severity can be ameliorated by good policy (witness the way Australia avoided the Asian economic meltdown and the tech-wreck recession) or exacerbated by bad (such as the Whitlam government's in 1973 or America's New Deal protectionism).

Second, real leaders don't pander to millennial dreams of perfecting human nature. Of course, greed is reprehensible but at what point does wealth become obscene or profit become a dirty word? Toleration for risk-taking and for the pursuit of self-interest (sometimes to excess) is unavoidable if markets are to work. Costly mistakes in which, sadly, innocent people sometimes suffer can't always be avoided if freedom is to be preserved.

Third, the best way to tackle a business slowdown is to reduce the obstacles to doing business. This means lowering interest rates, reducing taxes and cutting regulation, not increasing it. This is why the Government should reconsider, in the light of the new pressures on business, how far unions should be able to interfere in the way they are run. It should also reconsider the timing of a new tax flowing into every aspect of the economy through an emissions trading scheme.

Fourth, don't pretend that a new social program is really an economic stimulus. Building school halls and dwellings for the housing commission is not the best way to strengthen the economy. Most of it is to rectify state government neglect. Of course, every school without a hall wants one but the Government would build social capital (as well as provide better-equipped schools) if local communities had to make a contribution too. Similarly, given their subsequent savings, householders should make a contribution to the cost of insulating their homes.

Fifth and finally, the looming recession doesn't suddenly make government a better judge of people's best interests than they are. It doesn't mean that government is a more effective generator of wealth than business. One-off handouts are much more likely to be saved than an ongoing tax cut. In any event, why is spending suddenly the height of patriotism given that excessive debt-fuelled spending so contributed to the present problem? As well, a permanent tax cut is more likely to encourage the initiative culture that will soonest restore strong economic growth.

For the past year, out of respect for the election result, the Opposition has felt constrained to acquiesce in questionable policy. In straightforwardly exposing the flaws in Rudd's latest spending package and in pledging to oppose bad policy, Malcolm Turnbull has found an authentic and distinctive alternative position. Capitalism is not perfect but it is by far the best engine of prosperity. At heart, it is ordinary human freedom played out in the economic sphere.

Tony Abbott is federal Coalition spokesman for families, community services, indigenous affairs and the voluntary sector. He was minister for health and ageing and employment and workplace relations in the Howard government.

Source: THE WEEKEND AUSTRALIAN