When Treasurer Paul Keating told John Laws in a radio interview in May 1986 that Australia risked becoming a ‘banana republic’ now that its current account deficit had reached 6 per cent of GDP, he might not have intended it to become one of the legendary moments of Australian politics. But he was certainly trying to generate a sense of crisis, and as we know, succeeded all too well. Politically it meant Australia was “living beyond its means”, and the fat had to be trimmed. A younger Keating thought the solution to “real wage overhang” was to “hit the unions on the head”. By 1986, though, he had the corporatist Accord, and no hit was necessary. If the economy was in such grave danger, the unions were happy to oblige with real pay cuts. Likewise, it justified moves to balance the budget and another ramp up of interest rates.
More than twenty years have now passed. The balance-of-payments figures were released yesterday and it was another chance for the media to revisit the “banana republic”. Because the current account deficit has been floating around those mid-1980s levels for the last few years, despite the ‘resource boom’. Funnily enough, no-one is making a big fuss about it these days. The deficit is just the collective consequence of business decisions made by ‘consenting adults’.
There’s no firm limit to a balance-of-payments deficit like there was in the days when the government fixed the exchange rate and therefore faced foreign exchange exhaustion from a persistent outflow of funds. Also, there is no equilibrating mechanism to pull a national imbalance back into balance. National balances are a statistical figment. The exchange rate of the Australian dollar is quite real, but there are financial forces involved that outweigh monetary flows for trade and direct investment.
There is an understandable temptation for some to use these figures as a stick to beat Howard with. Superficially, it’s a chink in the economic armour, and if the Coalition can get away with interest rate scare… But that’s a mistake. No good for the working class will come from state action to reverse the current account deficit, and it’s not clear the state can do much about it anyway. Keating was a true believer when he made his remarks to Laws. But by the end of the decade, when he saw the negligible effect of all his Herculean policy efforts on the current account deficit:
It makes the twin deficits theory look like bullshit. By the end of the year under forecast (1989–90) the govt will have presided over an 8 percentage point shift in the PSBR [Public Sector Borrowing Requirement]. It must be a world wide post-war record. 8 percentage points since 1985–86 (6 per cent public and 2 per cent private savings). Yet the current account will, according to these forecasts, be still 5 per cent of GDP. At least I can’t be burdened with any more talk about re-weighting the instruments of policy. We now all know what utter crap that is.
The real lesson is to be suspicious of official crisis talk about the ‘national economy’, because it is invariably used as a call for discipline, for all hands to come on deck ‘in the national interest’. Is your pay claim undermining the nation’s current account balance? Are you sure you want time out to bring up your kids when the country is suffering from a skills shortage?
Capitalist economic policy will often find itself between a rock and a hard place in a crisis. It has been a huge mistake for labour and the left to stop being the hard place.