The time for moderation
With just a week to go until Christmas there's one question being asked in offices around the country. It's a question on which careers hinge. "What should I get my boss for Christmas?" Whisky or golf balls are reliable stand-bys but they suffer from a certain lack of imagination.
Books are good presents. Giving a book has the benefit of flattering the ego of the recipient. There's the implication that the giver assumes the recipient would prefer a book to a 12-year-old single malt.
The biggest benefit of books as gifts is that you might learn something from reading them. Anyone lucky enough to receive The Search for Stability for Christmas will learn a lot. At just over 100 pages of text, it's short. It can be comfortably read from cover to cover in a couple of lunch breaks during the Boxing Day Test.
The Search for Stability is one of the best and most important works on Australian politics and economics of recent years. The book is the text of this year's ABC Boyer Lectures delivered by the recently retired governor of the Reserve Bank, Ian Macfarlane.
Put very briefly, the series traces the development of Australia's post-war economic policy. The sixth and final lecture will be broadcast on Radio National this Sunday.
Central bankers are paid to be boring. However, these lectures are anything but boring. They are interesting, challenging, and provocative. Macfarlane has the facility possessed by the best economists (both Keynes and Friedman had it) of being able to communicate an idea in one sentence rather than 10.
A good example is his discussion of the definition of "economic rationalism". He says, very simply, "As far as I can tell, economic rationalism basically means no more than mainstream economics . . ." Never have truer words been spoken.
A valuable service is performed when he punctures the myths of the so-called Golden Age. If the effects of population growth are discounted, then during the 1950s Australia's gross domestic product grew annually by 1.7 per cent compared with an Organisation for Economic Co-operation and Development average of 3.3 per cent. Australia "managed" despite centralised wage fixation and tariff protection, not because of it. Kevin Rudd might remember this when he next talks about having an industry policy for manufacturing.
The controversial parts of The Search for Stability deal with "the recession we had to have". According to Macfarlane, the interest rate policy of the time was not a mistake, and it was the only instrument available that could have broken inflationary expectations.
Paul Keating is absolved a little disingenuously for the policy blame by Macfarlane claiming that in the late 1980s and early 1990s, the coalition in opposition advocated monetarist policies no less harsh than were being implemented by Labor. This is true - but it is only half the story. The coalition was also advocating tax and industrial relations reform, which would have smoothed the transition to a low inflation economy. These were measures that Keating could not, or would not, undertake.
Those who have no curiosity at all about history can go straight to the final chapter, in which Macfarlane distills his 27 years of experience at the Reserve Bank. Quietly, but firmly, he states that he is "not so optimistic" as to believe that the business cycle is dead.
More ominously he identifies rapidly increasing prices in asset markets as potentially the biggest threat to economic stability. He echoes the comments made earlier this week by his successor at the Reserve Bank, Glenn Stevens, that highly leveraged households and companies are now particularly susceptible to any economic downturn.
While inflation has been low we've been lulled into a false sense of security, and we've forgotten that "the broader evidence does not support the view that low inflation will prevent booms and busts developing in asset markets".
A bust in asset markets would not just be a disaster for everyone with a big home mortgage who has banked on the value of their house increasing in perpetuity. Because of our superannuation system, retirement incomes are now inextricably linked to asset prices in a way the traditional government-funded aged pension was not.
A general rule of thumb for Christmas festivities is to enjoy everything in moderation. The lesson from The Search for Stability is that we could apply this same rule to our current good economic fortune.