Australia is now at a point of economic devastation with little prospect of recovery unless dramatic policy action is taken.
As outlined recently in my article, Australia has been economically destroyed within 4 weeks[1], the Morrison Government coupled with all State and Territory Governments have, in March-April 2020, unleashed the largest set of monetary and fiscal stimulus packages in Australian history resulting from their decision to lockdown the Australian economy in the wake of the COVID-19 public health crisis.
As noted in this recent article, the combined stimulus packages, which stands in excess of $AUD 417 billion, have resulted in significant damage to the purchasing power of the Australian dollar and the fiscal balance sheet of all governments in Australia, especially the Federal Government.
Only a program of economic austerity and structural economic reform that includes:
running a prudent monetary policy (ending QE and raising interest rates);
producing continual and large budget surpluses through significant reductions in federal as well as state and territory government spending; as well as
restructuring the Australian banking system that encourages lending to productive businesses rather than fuelling asset speculation
among other reforms, can ensure that Australia experiences robust economic growth, a stable and trusted currency, a more diverse, productive and internationally competitive economy with reduced and sustainable public and private sector debt levels.
In the absence of such a program, Australia risks facing an economic catastrophe of ever-increasing debt and monetary inflationism resulting in either:
a sovereign debt crisis resulting in debt restructuring or an outright default of government debt;
hyperinflation; and/or
increased tax confiscation and wealth confiscation (with superannuation being the prime candidate).
The political dilemma of implementing economic austerity
Implementing economic austerity within a democratic political system is no easy task.
Given Australia’s record levels of household debt and foreign debt, economic austerity requires individual Australian households and businesses to experience significant financial pain which, given the extent (both size and breadth) of the debt bubble, will include:
insolvencies/bankruptcies for businesses;
loss of wealth with sharp falls in asset prices such as real estate, bonds, fixed-income securities and shares;
loss of income for investors as company dividends are cut or suspended and as commercial and/or residential property rents are reduced and vacancy rates increase;
unemployment for households; and
significant social costs which may in some cases include relationship breakdown, temporary homelessness, rising crime rates, increased substance abuse and/or emotional and mental distress.
These costs are unavoidable and are indeed necessary given that in a debt laden speculative asset bubble economy, real resources (capital, land, labour and entrepreneurs) are tied up in industries associated with speculative asset bubbles and debt fuelled consumption such as:
finance;
real estate;
property construction;
retail; and
entertainment;
which need to be redeployed to other profitable businesses and industries that can produce goods and services at prices that are wanted by both the Australian and international markets.
Given these economic and social costs, some, such as Alexander Tytler (1854)[2], have argued that implementing a long-term program of economic austerity is virtually impossible in a democratic system given the expected resistance to such a program from free-riding voters.
According to Tytler:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”
Who Can Economically Save Australia?
The question which results from this political dilemma is who within Australia is able to politically convince a majority of Australians to absorb a significant amount of personal financial pain and social costs while the economy restructures.
If recent events within the Federal as well as State and Territory parliaments and legislative assemblies are any guide, it would appear there are no contemporary politicians who are capable of such as feat given that they all either explicitly or implicitly endorsed:
the national approach to dealing with COVID-19 including the lockdown of the Australian economy; and
the stimulus packages that their respective parliament or legislative assembly implemented.
Rather if Australian history is reviewed, it would appear that only Joseph Lyons, Australia’s 10th Prime Minister and the man who led Australia through the Great Depression, has the capacity, the conviction and the track record to lead Australia out of the current economic abyss.
Lyons, who served as Prime Minister from 1932 until his death in office on Good Friday in 1939 remains one of the most remarkable figures in Australian political history given that:
Upon becoming Tasmanian Premier in October 1923, Lyons took decisive action to restore the financial health of the Tasmanian Government by producing a string of budget surpluses after inheriting a government which was experiencing crippling budget deficits and chronic public sector debt incurred by the predecessor Government of Sir Walter Henry Lee;
Lyons as acting Treasurer in the Scullin Federal Government in 1930 advocated for a policy prescription of economic austerity that included balanced governments budgets, sound money, debt reduction and microeconomic reform that reduced business costs. Lyons’ advocacy manifested itself into an economic austerity proposal known as the ‘Premiers Plan’ which he put forward and was agreed to at the August 1930 Melbourne Premiers’ Conference;
Lyons, as a lifelong member of the Australian Labor Party (ALP) (Lyons served as a Tasmanian ALP Premier (1923 – 1927) and Cabinet Minister in the ALP Scullin Government from 1929), resigned from Cabinet in January 1931 and then from the ALP in March 1931 (going to the crossbench) given his opposition to Treasurer Ted Theodore’s economic prescriptions of monetary and fiscal stimulus including money printing, quantitative easing, low interest rates and budget deficits through additional government spending[3];
Lyons went on to join the opposition within the Federal House of Representatives as their leader under a new political party called the United Australia Party (UAP) in May 1931 (the UAP was the predecessor to the modern-day Liberal Party[4]) and therefore officially became the Leader of the Opposition. Lyons went on to contest the December 1931 federal election as the alternative Prime Minister;
Lyons’ victory at the December 1931 election was the largest election victory in Australian history[5] and was won on a platform of economic austerity;
as Prime Minister, Lyons achieved one of the highest rates of economic growth in the developed world (as measured by real Gross Domestic Product) of 16.6% between 1929 to 1940 compared to the United States of only 1.6%[6];
Lyons’ leadership ensured that Australia maintained political and social cohesion, whereas many other countries descended into political extremism and social unrest[11].
It is for these reasons, among others, that I ranked Lyons as Australia’s greatest of all-time political figure in an article published by news.com.au in June 2017[12] ahead of more notable political figures such as Menzies, Hawke and Howard.
1931 Economic Austerity vs 2020 Monetary Inflationism and Budget Deficit Financing
What the Lyons prime ministerial record demonstrates is that the economic policies selected and implemented in 1931 versus those now being implemented in 2020 could not be starker.
During the 1920s, the Australian Federal Government (especially the Government of Stanley Bruce) and various State Governments had racked up breathtaking debts, borrowing vast sums from London’s financial institutions to finance significant infrastructure and public works projects following the collapse of commodity prices in 1921. These debts were in addition to the debts incurred during World War 1. According to Gerald Stone[13]:
“The [Australian] federation owed more to the financial houses of London than all of the governments of Europe, Africa the Far East, Middle East and South America combined… It ranked as the most credit addicted debt-ridden country on earth next only to Germany”.
At the commencement of the Great Depression, with the New York stock market collapse in October 1929, Australia faced a sovereign debt crisis with the prices of wool and wheat collapsing thus triggering a sharp loss of economic income (especially export income).
This crisis transformed itself into a balance of payment crisis as financial institutions in London (i.e. Australia’s creditors) rapidly lost confidence in Australia’s ability to meet their debt obligations.
In response, according to the Hon. Chris Bowen MP[14], Treasurer Ted Theodore sought to expand the money supply through quantitative easing via the Fiduciary Notes Bill 1931. This proposed legislation sought to create 18 million new Australian pounds of which 1 million pounds would be used for employment creation schemes and 6 million would be made available for farm finance.
Moreover, at the February 1931 Premiers’ Conference Treasurer Theodore argued for:
a reduction in interest rates;
a halt to falling wages;
the devaluation of the Australian pound;
active intervention by the Commonwealth Bank (Australia’s central bank at that time) to increase the money supply.
These proposals were met with fierce opposition especially as they were the polar opposite to the agreed economic plan of the August 1930 Premiers’ Conference. The opposition to Theodore’s plans were widespread and included:
elements of the Scullin Government (including Lyons who, as noted above, resigned from the ALP in March 1931);
the Federal Opposition within the House of Representatives,
the Commonwealth Bank[15];
Australia’s creditors in London;
the mainstream media; and
a majority of the Australian people.
The Theodore economic prescription was roundly defeated at the December 1931 election by Joseph Lyons (as the head of the UAP) in the largest election victory in Australian history securing 76% of the seats within the House of Representatives.
On that occasion, Australians chose not to head down the path of monetary inflationism, rampant budget deficits and soaring public debts. While the immediate economic pain was severe for a large minority of the Australian people, the economy was able to be reset upon a solid foundation which facilitated a fast recovery.
In 2020 however, as noted in ‘Australia has been economically destroyed within 4 weeks’, the governments of Australia have adopted the polar opposite policy prescription encompassing:
monetary inflationism via ultra-low interest rates, quantitative easing and repo liquidity operations;
financial bailout packages through expansionary fiscal deficits that includes support for employers, employees and those already on social security payments; and
the accumulation of ever greater amounts of private and public sector debt.
Neither contemporary nor historical empirical economic evidence suggest that the Australian economy will enjoy a robust and sustainable recovery into the 2020s with rising real living standards once the economic lockdown is lifted.
Conclusion
In the history of Australian Parliamentary democracy, no individual Member or Senator has shown the principled economic leadership which was displayed by Joseph Lyons in the 1930s.
No political figure in Australian history has:
quit both cabinet and their political party on the account of a high principle of public policy;
convinced the nation of the virtues of their public policy position;
became the alternative leader and won a landslide election victory; and
then gone to successfully lead the nation (or even a part of the nation) through a crisis back to recovery.
This phenomenal feat on top of his achievement of financially rescuing the Tasmanian Government as Premier is simply extraordinary.
To many Australians, Joseph Lyons has been lost in the sands of time and his achievements have largely been forgotten. However, no political leader other than Lyons can boast of such a record while simultaneously uniting the majority of Australians and avoiding major political and social unrest and turmoil.
If Australia is ever going to recover from the disastrous economic policies of the Morrison, State and Territory Governments in the wake of the COVID-19 crisis, principled economic leadership that is focused on:
a strong and stable currency;
balanced government budgets and low levels of public sector debt;
non-speculative lending by banks and financial institutions; and
microeconomic reform that reduces the cost of production and enhances multifactor productivity and international competitiveness
will be required.
Never since his death in 1939, have Australians needed Joseph Lyons like we do now.
John Adams is the Chief Economist for As Good As Gold Australia
[1] https://www.adamseconomics.com/post/australia-has-been-economically-destroyed-within-4-weeks [2] https://en.wikiquote.org/wiki/Alexander_Fraser_Tytler [3] Ted Theodore was returned as the substantive Federal Treasurer by the Federal Labor Caucus in January 1931. Joseph Lyons resigned from Cabinet immediately as Theodore had made it known that his intent was to overturn the economic prescription as outlined in the Premiers’ Plan. [4] Note that when Robert Menzies entered Federal Parliament at the 1934 election he did so as a UAP candidate. Menzies continued to be a member of the UAP throughout its political existence, including as Prime Minister between 1939 - 1941. Menzies went on to formally establish the modern-day Liberal Party in 1944 after the heavy defeat experienced by the UAP – Country Party coalition at the 1943 federal election. The UAP was formally wound up in January 1945 as its members switched across to the newly formed Liberal Party. Menzies was elected as the inaugural leader of the Liberal Party in August 1945. [5] As noted by Anne Henderson in her 2011 book (see footnote 6 for the formal book reference), ‘Joseph Lyons – The People’s Prime Minister’: “With 34 UAP seats, Lyons could also count the six Emergency Committee seats in South Australia (UAP by another name), the sixteen Country Party seats and the support of Independent Moses Gabb. This made up 76% of the House. It was a record win, even better than Malcolm Fraser’s Liberal/National Country Party landslide of 71% of House seats in 1975.” [6] Henderson, A., (2011), “‘Joseph Lyons – The People’s Prime Minister’, NewSouth Publishing, University of New South Wales Press Ltd, Sydney, Australia [7] https://www.nma.gov.au/defining-moments/resources/great-depression [8] See Stone, G., (2005), “1932”, Pan Macmillan Australia Pty Limited, Sydney, Australia [9] See footnote 6. [10] This statistic is seasonally adjusted data from the St Louis Federal Reserve’s - FRED data series: https://fred.stlouisfed.org/series/M0892AUSM156SNBR [11] This does not only include Germany, Italy, Hungary, Czechoslovakia, Belgium, Finland, Sweden, Romania and Spain, but Australia largely escaped radical political movements that existed in the United Kingdom such as the British Union of Fascists or the Communist Party of Great Britain. For additional statistics on extreme political movements during the 1930s, please see Bromhead, Eichengreen and O’Rourke (2011), “Right-Wing Political Extremism in the Great Depression” at the following link: https://www.nber.org/papers/w17871.pdf [12] https://www.news.com.au/finance/work/leaders/assange-keating-named-among-australias-top-10-figures-of-all-time/news-story/5152c5c6dc20c0382d5246b97514cb17 [13] See footnote 8. [14] Bowen, C., (2015), “The Money Men – Australia’s 12 Most Notable Treasurers”, Melbourne University Press, Carlton, Victoria [15] By April 1931, the Commonwealth Bank refused to cooperate with the economic prescriptions of the Scullin Government.
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