Most university students of government and "political science", as it sometimes tries to call itself, end up studying a subject called "political economy". It means roughly what it sounds like: the politics of economics, or the economics of democratic politics.
There is, of course, a fundamental tension between the two terms, as those who have been observing Federal politics over the past fortnight can attest. What makes for good politics often makes for very bad economics – and vice-versa.
We’re seeing that tension right now with the politics of energy prices.
Kevin Rudd and his Industry Minister Kim Carr are flying all over the world showering money on giant auto companies in order to convince them to make a hybrid car in Australia, while Brendan Nelson is getting emotional with solar panel small businesses. Meanwhile the media is awash with stories of the coming peak oil crunch.
How did we get here? The story is one of wrenching economic transformation and classic political expediency.
Adrift in the polls and demoralised after their 2007 defeat, the Liberal Party under Brendan Nelson spent its first six months casting around for a topic with which to attack the extraordinarily popular Rudd Government. Nothing worked, save for a brief moment of "cut through" over possible cuts to the Carer’s Allowance.
Desperate for a weapon – any weapon – to blunt Labor’s ascendancy, Nelson picked up on petrol prices in his reply speech to Wayne Swan’s first Federal Budget. The Coalition, he declared with breath-taking cynicism, would slash the federal petrol excise by 10 cents a litre if in government.
Never mind the fiscal or environmental consequences of such a decision – both potentially quite negative. And never mind the internal dissent that threatened to overshadow the announcement, as the Liberal Party fought itself with leaks in a proxy war over the leadership.
Nelson’s focus on petrol prices worked, because for the first time since winning government it forced Kevin Rudd and his team to engage on the Coalition’s terms. Economic populism became the order of the day.
And Kevin Rudd has been playing the populism card ever since. Stung by a very minor blip in the polls on the issue, and certainly aware that the issue of rising petrol prices was hurting the Labor heartland, Rudd and his ministers went out and sold a message that they were indeed "doing something" about it. First, we had the rushed introduction of legislation for "FuelWatch". Then some of his senior ministers foreshadowed a possible cut to the GST on federal fuel excise. Now comes the fabulous green car initiative with Toyota.
Who wouldn’t like to be an Australian car maker? Even if you’re making a product no one wants, like Mitsubishi’s ill-fated 380 sedan, the simple fact that you’re making a passenger vehicle "in Australia" means politicians of all stripes can’t wait to shower public subsidies on you. It’s the worst kind of industry policy – the type that neoclassical economists such as those from the Productivity Commission have long opposed.
The Commission released a report last week making exactly this point: that the cheapest way to encourage consumer take-up of hybrid vehicles would be to cut tariffs and taxes on cars imported to the country. That report was summarily ignored by Kevin Rudd and Kim Carr. The Commission may well be on its last legs in this government. Recall that under Hawke and Keating it used to be called the Industry Commission, before Peter Costello renamed it on taking office in 1996. Rather than rename it again, Rudd’s strategy seems to be to bypass it altogether.
Why are economists so scornful of industry subsidies? The reason is fairly simple: cost. By propping up an uneconomic business or industry with subsidies or tariffs, governments can indeed sometimes "save" the business and keep those workers temporarily in jobs. But the cost to the broader economy is much larger than the benefit gained. Efficient industries that can make a profit without government help are unfairly penalised, and governments can end up hostage to the very companies they are trying to support – as South Australia repeatedly found with Mitsubishi.
As Climate Review boss Ross Garnaut pointed out in a major speech on World Environment Day, the more extensive our final emissions trading system is, the lower the costs. Garnaut also made the point that "the costs of mitigation will be lower the higher are the market prices of petroleum, coal and natural gas". The reason is obvious: expensive petrol means we use less of it.
We haven’t heard Kevin Rudd saying that yet. As Garnaut observed in his speech, the debate has become "pretty ragged" in recent weeks.
Indeed it has. Some of the things Kim Carr has been saying are truly silly: my favourite quote so far has our Industry and Science Minister claiming, in a remark that will astonish the RAAF, that "building a skills base for automotive also means we have the skills capacity to build a fighter aircraft". Look for an announcement on hybrid Joint Strike Fighters any day now.
No wonder commentators are lining up to express their skepticism at Kevin Rudd and Kim Carr’s green car push. The normally calm Ross Gittins seems at his wits end over the issue. Sean Carney sees it as an issue of holding Labor’s electoral coalition of outer suburban voters together. Meanwhile, the Canberra Times leads with an article on Holden’s forgotten eCommodore, developed with millions of dollars of CSIRO money and then abandoned after a lack of follow-up investment from both Holden and the Federal government.
That’s the problem with the political economy: what makes good economics is often bad politics, and as we are currently seeing, what makes good politics is very bad economics.
Thomas Homer-Dixon, in his book The Upside of Down has a chapter on dwindling fossil fuels called "So Long, Cheap Slaves." His point? Cheap energy makes all sorts of things possible. Now that it’s running out, we’re going to have make some tough decisions. And there’s nothing a politician hates more than a tough decision. If you take enough of them, you risk losing the next election.
Kevin Rudd is absolutely determined to win the next election. Will he be prepared to ditch the Emissions Trading Scheme in order to do so?
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