Ross Garnaut has been highly critical of the FTA with the US and the way it has been debated. He has now broadened this criticism into a more generally pessimistic view of the Australian economy. Since Ross has historically been an optimist, this is quite a shift. He points to excessive domestic demand, the current account deficit and signs of incipient inflation, masked by favorable movements in terms of trade.
Garnaut argues that our impending decline is due to the abandonment of microeconomic reform. In my discussion of the Howard government in Robert Manne’s book of the same title, I also observed that microeconomic reform has slowed down substantially under Howard. However, I’m much less of a fan of microeconomic reform than Garnaut – the Kiwis had reform in spades, and it didn’t do them any good. In diagnosing the same imbalances, I’d point to causes such as the deliberate promotion of a boom, then a bubble in the housing market.
In addition, while I don’t believe in mechanistic business cycle models, I think there is some truth to the idea that, the longer an expansion goes on, the more fragile it becomes. A good run of luck breeds complacency, which encourages unsound investments and unwise consumption, and thereby brings about its own downfall. Garnaut rejects this view, saying “no economic expansion is doomed simply on account of its longevity”.