Julie Bishop - Member for Curtin

Address to the Sydney Institute - "Freedom and prosperity - Liberal Party legacy"

Monday, 02 March 2009

Sixty years ago, during the 1949 Federal election campaign, as Australia and the world continued the struggle to rebuild after the bleak years of the Great Depression and the Second World War, the leader of the Liberal Party Robert Menzies, defined the choice the Australian people had to make at that critical election. In his policy speech[1], Menzies said,  

“We must choose our road. Upon our decision will depend the future and fate of this nation. Every extension of Government power and control means less freedom of choice for the citizen. Government activities are monopolist. Monopolies exclude choice. No choice for the producer. No choice for the employee. No choice for the customer. The abolition of choice is the death of freedom. And in the end, what happens? Having chosen the Socialist Road, to what journey's end do we come? To the master State, the one employer, the one planner, the one controller. In that State, as in the monstrous totalitarian States which have disfigured the history of the twentieth century, all free choice will have gone. The case against Socialism is a deadly one.”

It will be my contention this evening that Australians face again one of the most important ideological choices in 60 years.

Tonight, I invite you to ‘choose our road’.

The world is facing a global economic shock, and comparisons are being made with the Great Depression. Only time will tell whether the current global economic challenges are anywhere near the scale and magnitude of the 1930s. The IMF has said global economic conditions are the worst since the Great Depression and that many advanced economies will suffer deep recession for the first time in 60 years – with predictions of the ranks of the unemployed swelling by the millions throughout the developed and developing world. In the United States, the world's largest economy, GDP fell by a startling 6.2% annual rate in the 4th quarter of 2008, the Dow Jones has fallen by almost 50% from its October 2007 peak, 44 banks have failed since 2007, unemployment is growing by 150,000 per week and the US deficit is now measured in trillions. Japan is in one of its worst recessions ever, with its economy shrinking by an annual rate of 12.7% in the fourth quarter of 2008 and the nation's trade deficit is now the largest on record. In the United Kingdom, the national debt now exceeds £2 trillion, over half of which has come from the nationalisation of Lloyds Bank and the Royal Bank of Scotland. Analysts suggest this increase in UK debt to 150% of national income is a level not seen since the darkest hours of World War II. With growth stalling in China, there are predictions that up to 50 million people could lose their jobs this year alone, raising concerns about increasing social unrest. Given that the US, UK, China and Japan are among our biggest trade and investment partners, this is grim news for Australia.

While there are obvious dangers in seeking to draw parallels between the challenges of today and the catastrophic events of the 1930s and 1940s it is nonetheless worth recalling that the Great Depression unleashed a wave of global crises and some are suggesting there is reason to fear that the current financial crisis could also lead to a period of global instability. Renowned historian and Harvard Professor, Niall Ferguson argued in his 2006 book The War of the World, that his study of the events of the 20thC had shown that there were three preconditions for widespread conflict in that century:

1. ethnic disintegration – violence was worse in areas of mounting ethnic tension
2. economic volatility; - the greater the magnitude of economic shocks, the more likely conflict was; and
3. empires in decline – when structures of imperial rule crumbled, battles for political power were most bloody.

In his recent article titled The Axis of Upheaval[2] Ferguson again draws on his conclusions to argue that those three preconditions are now being met:

“Economic volatility plus ethnic disintegration, plus an empire in decline: that combination is about the most lethal in geopolitics. We now have all three. The age of upheaval starts now.”

It is clear that the economic empire of the United States is facing serious decline and if that impacts on its military capabilities there is obvious potential for a power vacuum to develop in many regions of the world. Long dormant border and territorial disputes could suddenly be revitalised in the absence of a dominant world power. A resurgent Russia and its allies would undoubtedly seek to extend its regional influence, while countries with large cash reserves, such as China and some Middle Eastern countries, are extending their influence through strategic investments internationally. There will be a clash of national interests in the years ahead, as part of the world’s economic power shifts from the United States and Europe to nations such as China, India, the Middle East and possibly Russia. As Ferguson concludes in his article:

“The problem is that, as in the 1930s, most countries are looking inward grappling with the domestic consequences of the economic crisis and paying little attention to the wider world crisis. This is true even of the United States, which is now so preoccupied with its own economic problems that countering global upheaval looks like an expensive luxury.”

History tells us that in times of crisis, our choices as a nation are more critical and any mistakes are more profound in their impact. With world financial markets in turmoil, the banking sector freezing credit and stifling global economic activity, and economies in recession, governments around the world are seeking solutions.

Let us turn to Australia.

After 16 years of unprecedented growth and a decade of wide ranging reforms in our economy, Australia is better placed than most other countries to weather the storm. There are many more options available to the Rudd Government to respond to an economic downturn than most other countries because the Rudd Government inherited not only decades of reform but also the strongest set of economic indicators of virtually any incoming federal government in Australia's history. The Australian economy had been dubbed internationally as the miracle economy[3] ’the wonder down under’. But that was no accident. It came from a decade of hard decisions and prudent fiscal management of the economy.

Recall how on his first day as Treasurer Peter Costello found the national accounts in disarray? There was a commonwealth government debt of $96 billion and a budget deficit of $10 billion at a time when the total budget was $150 billion. The interest payment on the huge debt was approaching $10 billion a year and was a heavy drag on the ability of the government to fund essential services. Inflation was running at 3.7% - after averaging over 5% under Labor, the Reserve Bank cash rate was 7.5% coming off a 17% high, unemployment was 8.4% having hit 11% (or 1 million people) under Labor. In contrast, on the day Mr Rudd and Mr Swan took office 11 years later, there was zero commonwealth public sector debt (although it had taken the Howard Government 10 years to pay off the entire $96 billion), a $20 billion budget surplus and national savings of over $70 billion . Inflation was at 3%, interest rates at 6.75%, unemployment at 4.4% heading south.

So Mr Rudd was handed an economy free of commonwealth debt and with a healthy surplus, where over 2 million jobs had been created during the Howard years, where net household wealth had grown fourfold and average real wages – minus 1.8% during the 13 years of Labor, were 21.5% under Howard. Our credit rating – downgraded twice under Labor - was upgraded twice under Howard to Triple A. Yet rather than build on the economic legacy it had inherited, the Rudd Government went into overdrive in seeking to blacken the economic credentials of the previous government.

I have previously likened Mr Rudd to a latter day Winston Smith – the Ministry of Truth bureaucrat in Orwell”s 1984 - for Mr Rudd set about busily rewriting the past to support Labor's propaganda about the state of the economy. Whenever Winston Smith rewrote history, the truth was shunted down a memory hole to be incinerated. Mr Rudd, in trying to shove the national accounts down the memory hole, was pursuing a cheap and trivial short term political boost, by talking down the economy and talking up inflation and interest rates. He urged a tightening of monetary policy, apparently oblivious to the fact that a financial crisis had been under way in the US since mid to late 2007 and the rest of the world was doing precisely the opposite and easing monetary policy.

Having misread the looming downturn in the first half of 2008 by chasing an inflation monster that failed to materialise, the Rudd Government was stunned by the events in September 2008 after the collapse of Lehman Brothers. Ever since it has been telling the Australian people that it is taking “decisive action”. However, it is becoming alarmingly apparent that the Rudd Government simply does not know what to do. Judging by its ill considered, contradictory and panicked reactions to date it is clear that the government has had no consistent guiding philosophy underpinning its decisions.

Until now.

The Government now has a philosophy that can guide it, courtesy of an essay written by Prime Minister Rudd, published in the February edition of The Monthly. The Prime Minister’s essay should be mandatory reading for every concerned citizen. As tedious and confused as the overblown socialist-leaning rhetoric is, it represents an all out attack on the principles that have underpinned Australia's economic success and on the very policies embraced and understood by governments of a centre left and centre right leaning across the world over the past 30 years - policies that have taken millions of people out of poverty around the world and built dynamic economies in developed and developing nations.

Mr Rudd rails against what he calls “neo-liberalism” blaming it and the political home of neo- liberalism in Australia - the Liberal Party - for the current global financial crisis and the challenges facing Australia, deliberately, I assume, overlooking the fact that principles of free markets, open economies, deregulation and liberalised labour markets have been a feature of governments of both persuasions around the world, including in Britain, France and New Zealand even China, and of course closer to home, the governments of Hawke and Keating.

As John Howard himself noted in the inaugural John Howard lecture to the Menzies Research Centre on 19 February 2009, almost 30 years ago there were 5 great reforms that Australia needed to undertake:

“We needed to deregulate our financial system, fundamentally change our tax system, make our labour markets freer, reduce excessively high levels of protection and rid the government of ownership of commercial enterprises.... By 2007 these five great reforms had been achieved.”

All these reforms are now slammed by Mr Rudd as part of the neo- liberal experiment of the past 30 years that he claims has failed our nation. But what makes Mr Rudd's essay all the more startling is the 180 degree about face that it represents for him - in just a matter of 15 months.

You will recall that prior to the 2007 election, Mr Rudd promoted himself, through an expensive advertising campaign, as an economic conservative, draped in virtually all the policies of John Howard. Mr Rudd shamelessly adopted a me-too approach to all but a handful of election promises, as well as a commitment to tax cuts, budget surpluses and zero government debt. The jibe that he was “John Howard-lite” was utterly believable for many Australians. Importantly, this was a tacit acknowledgement and recognition by Mr Rudd of the success of the Howard years.

For the first 10 months of the new Rudd Government, it was an orgy of reviews, summits, inquiries, green papers and white papers. As one of my colleagues said: ‘Rudd hit the ground – reviewing’ but the lack of decisions and policies made it almost impossible to test the credentials of this self proclaimed economic conservative Government or to ascertain what this Government or this Prime Minister really stood for.

After all, the Prime Minister had apparently forgiven the Member for Melbourne Lindsay Tanner's declaration in his maiden speech: “I am a socialist” and appointed him the Minister for Deregulation. A classic case of Orwellian double-think if ever there was one. But the signs of the economic conservatism facade began to slip, with the Government's reckless attack on the Howard economic legacy, that destroyed business and consumer confidence from early 2008, as they talked down the economy scaring people about inflation and interest rates. The consequences of this ill-considered attack are still being felt, because consumer and business confidence have never recovered.

But now the camouflage has been dropped and Mr Rudd has revealed himself, not as an economic conservative, but as an old-style interventionist, prepared to take us back to the dreary doctrines of socialism. The Deputy Prime Minister is reported[4] to have boasted recently to the World Economic Forum in Switzerland that other countries could learn from Australia's regulations which are among the best in the world and, with our well regulated banking sector, had protected Australia from experiencing the kind of problems in its housing market that had been seen in the US. The Prime Minister cannot sustain an argument that neo-liberalism was simultaneously responsible for problems in the Australian economy, while also protecting Australia from the worst of the global financial downturn.

The Liberal Party believes that the way ahead for Australia is a path well trodden – for it is the legacy of the Liberal Party to the Australian people over the past 60 years – and its consistent policy positions that have underpinned freedom and prosperity. The battle of ideas between Mr Rudd's new left wing ideology, some yet to be defined form of socialist democracy with government intervention as the answer to all economic and social ills, and the Liberal Party's continued focus on individual rights, personal freedom and economic choice, will become far more acute as Australia is buffeted by the winds of this economic downturn blowing from the cyclone of the global recession. By promoting some form of democratic socialism or social democracy as the new regime to emerge from the financial crisis, Mr Rudd invites a critique of those countries and governments that in the past pursued the path of socialism in response to economic crisis.

Mr Rudd has reignited the great debates of the past. Socialism versus Capitalism. Regulation versus deregulation. Protectionism versus free trade. During the dark years of the Depression, many people called for a more socialist approach of greater government regulation and greater involvement in people’s daily lives. The claim was that markets had failed and therefore governments were the answer – governments were best placed to decide on the choices confronting individuals. Liberals have always rejected this notion of greater government intervention believing that Individuals are better placed to decide what is best for them in any given circumstance. When individuals are empowered to be innovative, enterprising and to use their initiative to pursue greater rewards, society as a whole benefits through increased employment and opportunity for others.

There is a credible school of thought, that President Roosevelt's “New Deal” and the policies of John Maynard Keynes and his followers now enthusiastically embraced by Mr Rudd, actually prolonged the Great Depression by undermining confidence in the efficacy of markets and the capitalist system. Historian and author Paul Johnson noted in his introduction to Murray Rothbard's book America's Great Depression;

“It could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of the 1980s when the Soviet collectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the market.”

In that book America's Great Depression, the 5th edition released in 2000,Rothbard argued that the Great Depression was a failure not of capitalism but of a hyperactive State, and that Roosevelt's interventionist policies made the slump more severe, and prolonged it until the Second World War. After the Great Depression and the horrors of World War II, many nations around the world found themselves at a crossroads, faced with a choice of socialism or capitalism. In 1944, economist Friedrich Hayek published The Road to Serfdom in which he warned of the dangers that centralised planning posed to liberty. At the time he believed that England would nationalise its industries and warned that private ownership was essential to freedom and democracy. Hayek argued that free market capitalism was essential to the maintenance of democracy, for in a socialist economy the interests of the individual were secondary to the interests of the collective.

Here in Australia in 1942, Robert Menzies addressed the question of whether capitalism had failed. His answer was;

“on the contrary, I think it has been, all things considered, an extraordinary success”. “In envisaging the future world after the War, we should not seek to destroy this driving progressive element, which really represents one of the deep seated instincts of man, but should seek to control and direct it in the interests of the people as a whole. In other words, the choice is not between an unrestricted capitalism and universal socialism. We shall do much better if we keep the good elements of the capitalist system while at the same time imposing upon capital the most stringent obligations to discharge its social and industrial duty.”

Those words became Liberal Party philosophy and hold true today.

I contend that the solution to many of the problems currently facing our economy lie in the principles, philosophy and policies of the Liberal Party.

If our goal is –as it must be - to emerge from the current economic downturn with the capacity to build a stronger economy while maintaining the fundamental, essential and enduring freedoms that our people currently enjoy, then is it the Liberal Party commitment to freedom and prosperity to which we must turn for guidance.

The global financial crisis has resulted in calls for governments all around the world to increase their efforts to protect the interests of their citizens.

As governments respond, it is vital they remember there can be far-reaching international and domestic consequences of their actions.

One of the many consequences of governments providing massive cash handouts to supposedly stimulate their economies, is that people buy imported goods. Political pressure builds to better target spending on domestically produced goods and services.

The United States, as part of its most recent $800 billion stimulus package, included a “Buy America” provision that means infrastructure spending from the package must be used to buy goods manufactured in the United States. This has caused an outcry in countries such as China[5] where this provision has been described as trade protectionist “poison” which will have catastrophic effects on developing countries - let alone spark retaliatory trade wars. We are hopeful that the US-Australia Free Trade Agreement will protect Australian business and industry from the provisions of the “Buy America” clause.

In 2003 I chaired the joint Standing Committee on Treaties and I well recall the scepticism of the Labor Party muttering darkly about the benefits of multilateralism rather than bilateralism in trade negotiations Indeed, Mr Rudd in opposition was highly critical of bilateral free trade agreements, even contending that bilateral free trade agreements had worsened Australia's export performance[6].

Rising protectionism is often blamed for exacerbating the Great Depression and if governments adopt similar inward looking protectionist policies those free trade agreements negotiated by the Howard Government will prove to be of enormous benefit to our trade position.

As Australia’s growth slows we must strive to increase trade by promoting the quality of Australian goods and services both to our existing customers and to new markets with which we can establish trade agreements.

The Government's stated preference for multilateral agreements at the expense of bilateral agreements, as articulated in its 2007 election platform must give way to reality.

Multilateral agreements, through the complexity of gaining the agreement of a number of nations, require the investment of more time and more compromises than Australia can afford at present.

Address to the Sydney Institute on Monday, 2 March 2009