What sort of economy should be the goal of public policy?
Productivity growth has been responsible for almost all the increase in Australian living standards since Federation. But it has now slowed to a crawl, writes economist Craig Emerson.
Thirty-six forward thinkers recently gathered at a private symposium hosted by the Melbourne Economic Forum and re-questioned the purpose of government policy as we move into the second quarter of the 21st century.
Tom Bentley, a vice-president at RMIT University, pointed out that for an entire generation from the 1980s, a highly successful policy consensus dominated Australia’s economic decision-making, achieving sustained growth in living standards.
This consensus was built around a floating exchange rate, free trade, privatisation of selected government business enterprises, and enterprise-level bargaining for wage increases.
Sharing the gains of productivity growth widely across the Australian community was achieved through social investment in policies such as Medicare, a leap in the proportion of school students going onto university, superannuation for all workers, and paid parental leave.
But the symposium observed that in the mid-2020s there are clear signs that this consensus has run its course.
Productivity growth has been responsible for almost all the increase in Australian living standards since Federation. But it has now slowed to a crawl. Worse, Australia is failing to keep up in the newest source of productivity growth – the development and adoption of artificial intelligence.
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As the resulting growth in prosperity slows, a commitment to institutions and policy settings devoted to sharing economic growth and prosperity fairly is more important than ever.
What now? New methods and institutions are needed to achieve productivity growth, economic resilience and environmental sustainability in a landscape shaped by an ageing population, climate change, deep technological innovation involving AI, and geostrategic instability.
Professor Beth Webster, director of the Melbourne Institute, argued that the new economic consensus must be based on creating or at least enabling the creation of new sources of innovation and wider capability for Australia. Yet the necessary capabilities typically lie beyond individual firms, such that the task cannot be left to the free market.
Webster asked whether innovation districts, covering substantial parts of major cities, or economy-wide agglomerations, might be the sorts of initiatives needed to enable the development and utilisation of new capabilities.
This has been happening in other advanced economies such as the EU, Britain, the US and Canada, but not yet in Australia.
Professor Peter Dawkins at Victoria University’s Mitchell Institute argued that achieving these reforms would require further harmonisation of universities, vocational education institutions and industry to work more effectively together.
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Beyond this, it would require a harmonised lifelong learning system to develop, replenish and continually adapt knowledge from early childhood education, through schools, VET and higher education, and workplace learning. A national jobs and skills agenda would need to be supported by regional and metropolitan jobs and skills plans.
The Melbourne Economic Forum sought to begin defining a new consensus of creating contemporary sources of comparative advantage for Australia, such as city design and university clusters, instead of relying on further market deregulation and company tax cuts while pulling back the social safety net.
Professor Janine Dixon, director of the Centre of Policy Studies at Victoria University, explained the centre’s modelling that showed company tax rate cuts would be poor public policy, delivering a windfall gain to all companies that had invested at the existing tax rate.
These economists and the wider Melbourne Economic Forum acknowledged the power of markets and productivity in creating prosperity, but they saw a role for government when markets fail and monopolies and oligopolies stifle competition.
They also acknowledged the inability of markets to distribute prosperity fairly, necessitating taxation of the better off and redistribution in the forms of health care, education and income support.
This symposium was a conversation about the best model for the economy and society in the digital age, one that engaged as much of the citizenry as possible in a world dominated by AI while ensuring those who could not participate were not left behind.
Applying the economic thinking and models of the last century risks leaving Australia in that same century.
New thinking, such as that aired at the Melbourne Economic Forum’s symposium, will be needed if Australia is to be economically and socially successful in the second quarter of the 21st century.
Craig Emerson was a co-founder of the Melbourne Economic Forum in 2014. He is a former minister for trade and was an economic adviser to prime minister Bob Hawke.
