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Economic control

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Politicians (particularly Donald Trump) do a lot of huffing and puffing about their economic credentials and claim to be able to control the economy. In reality, governments have some influence and therefore only some impact on economic activity, but it matters a lot less than people think.

The global economy can be likened to a vast ocean. Each nation-state is free to steer its own ship and set its own course in open waters. But each vessel must deal with similar headwinds - like the global financial crisis - which cross national borders.

The fate of domestic economies is impacted significantly by what blows in from offshore. No economy is immune from higher oil prices, movements in exchange rates and other seismic changes. Which is why the fate of most economies is largely determined by global conditions, not domestic ones.

In Australia’s case, our resources sector boom led to a surge in national income from exports. But the government can’t take credit for this boom cycle as it was driven by the voracious demand from developing nations in Asia, particularly China, for our raw materials.

Our central bank has more influence over the economy than the government. The Reserve Bank of Australia is independent of the government and has total autonomy over interest rate setting. Monetary policy directly impacts demand for credit and consumer sentiment.

Interest rates go down when times are tough and go up when things are overheating. It is ironic, therefore, that glory-seeking governments take the credit when interest rates fall (a sign of a weak economy) and nit-picking oppositions are critical when interest rates rise (a sign of a strong economy).

Politicians have no say in the rise and fall of interest rates, nor can they create jobs in the private sector. Moreover, they are unable to force companies to invest in declining industries or micro-manage Australian workers in order to increase productivity.

Consumption by consumers, investment by businesses and government spending are the three major parts of an economy. In Australia, personal consumption is the main driver of the Australian economy and represents more than 50 per cent of our nation’s GDP.

Personal consumption represents you and me. Collectively, we have more influence on the economy than the government. Ronald Reagan quite rightly noted that “a government can’t control the economy without controlling people” and no democratic government seeks to control the populace.

The Australian Government does not interfere in personal economic choices. We are best placed to decide our wants and needs. So, the government can’t stop us living beyond our means. Nor can it force us to spend or compel us to save (except superannuation savings).

We operate an open market economy where people are free, within the bounds of the law, to engage in commerce at their will and their peril. All markets have rules (the term “free market” is an oxymoron) and governments play an important role in setting industry standards.

With regard to economic competition, the Federal Government is the rule-maker, the referee and the umpire - it regulates markets, ensures a fair playing field and enforces the law. Importantly, it also invests in infrastructure.

In short, the government’s job is to improve the functioning of the marketplace and not play a direct role in markets. While government interventions to improve market infrastructure - such as roads - are necessary and welcomed, over-regulation is not and can be counter-productive to the workings of a capitalist society.

It is axiomatic that our economy is based on the market forces of supply and demand and the economic interactions between millions of people. Our politicians have little control over most things that affect the economy. Yet we unfairly hold them responsible for short-run ups and downs.

The way forward is clear: We should stop blaming politicians for our financial woes and our elected leaders should cease grabbing credit for things beyond their control. Let’s all be honest about the respective roles we play in the functioning of our economy.

Regards,
Paul J. Thomas, CEO

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CEO Paul Thomas