From out of nowhere there was a column on the editorial page of The Australian on Friday by Angus Taylor of whom I had never heard, but for whom I now have great expectations. He is the Liberal Member for Hume. The headline is a bit misleading – Andrew Leigh shows little is left of Labor’s Hawke-Keating legacy – but how often do you see such sense leap off the page. Yes, the aim of the article was to refute the leftist nonsense that had been trotted out by Andrew Leigh in an article the day before, but there are ways to think about these things of which some are better and others are worse. This was in the category of much better. This is what I especially liked:
New Labor’s central economic assumption is that you can cut the pie differently and it won’t shrink. Tax productive businesses, tax hardworking people, crowd out private sector spending and middle Australia will keep working just as hard and as smart. Like Boxer in George Orwell’s Animal Farm, the aspirational middle class is too busy to realise what is happening to it. Boxer finished up at the knackery. This is lunacy. The economy is not a draught horse that keeps working regardless of the weight saddled on it.
Australia’s long-term prosperity, characterised by high real wages and low inequality, has come from rewarding great people and great businesses, not taking the rewards of hard work and squandering them on harebrained schemes — pink bats, cash for clunkers, school halls and cash handouts to the deceased.
Our success as a nation has come from rewarding clever investment, innovation and ideas. We have sustained high real wages throughout our history by encouraging growth and avoiding a flood of unskilled immigrants which fuels rampant inequality. This is in stark contrast to the US with its early history of slavery and its more recent influx of Hispanic immigrants.
It also says that Angus Taylor “was a partner at McKinsey and Port Jackson Partners and studied postgraduate economics at Oxford as a Rhodes scholar”. Let me tell you, it shows. So let me add just this to add to what he wrote.
One of the keys to following economic events is to separate out the stocks from the flows. We have a massive capital structure (a stock of assets) to which we add a small increment each year (the flow of newly produced goods and services, badly measured by GDP). It’s not spending that makes an economy richer, but first how much capital you already have and then, second, what you end up spending on. The problem at the heart of pink bats, cash for clunkers, school halls and cash handouts to the deceased – and please don’t forget the NBN and the billions blown on green energy – is that you draw down on your capital but, unlike with genuine value adding activity, do not replace what you have used up. Once you make the question whether some expenditure is value adding, that is, whether it will add more to the economy than it uses up, a great deal of clarity is added to the policy process. Welfare draws down with no intention of replacement which is fine if you can afford it; capital outlays are needed to maintain our ability to provide that welfare along with allowing each one of us to make our own individual way in the world.