The new market monetarists argue Australia was a poster child for NGDP stabilisation during the financial crisis, but I interpret things differently. Prior to the onset of the financial crisis, inflation was out of control (CPI inflation running at 5%) and nominal GDP growth was running in the double-digits. The financial crisis saved the RBA from having to induce a domestic recession to bring inflation under control. The RBA was most successful when international conditions were doing the work for them.

Lest this look like the luxury of hindsight, I was arguing much the same thing in August 2008.

The Productivity Commission argued that ‘the highest priority for reform of Australia’s anti-dumping system is to introduce consideration of the broader public interest.’  The commission (under its previous names) has been arguing for this position since at least 1985.  This multi-decade failure to incorporate public interest considerations into Australian anti-dumping and countervailing law suggests the system is unlikely ever to serve the public rather than private producer interests. The government’s rejection of the commission’s proposal for even a bounded public interest test ensures that Australia’s anti-dumping system will continue to serve the interests of a small number of Australian producers at the expense of other Australian businesses and consumers. The ‘reforms’ implemented by the federal government and supported by the federal opposition set the stage for creeping protectionism via anti-dumping actions that will impose growing costs on the Australian economy. This is part of a broader trend on the part of the federal government to extend assistance to Australian industry at the expense of consumers and taxpayers, and to stand in the way of a structural adjustment in the Australian economy.

The public interest will be best served by repealing the anti-dumping and countervailing provisions of Australian law and dismantling the associated bureaucracy within Customs. This was a recommendation of the 1989 Garnaut review that remains un-implemented nearly a quarter of a century later. Doing so would send a powerful signal to Australian industry that it must adapt to the structural changes in the world and domestic economies rather than going cap-in-hand to the federal government for assistance at the expense of consumers and taxpayers.

Australia can also set a powerful example on the world stage as a country that prospers because it has abandoned recourse to these protectionist measures.

Now I put aside $60 billion in the Future Fund. People say “oh well you could have put aside 70 or $80 billion or something like that.” But I make this point. If we’d put aside more they’d probably just have borrowed more.

It has been argued that Australia is somehow a victim of a ‘currency war’ being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.

Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).

In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.

The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.

In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.

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A model of inward foreign direct investment for Australia is estimated. Foreign direct investment is found to be positively related to economic and productivity growth and negatively related to foreign portfolio investment, trade openness, the exchange rate and the foreign real interest rate. Foreign direct investment is found to be a substitute for both portfolio investment and trade in goods and services. The exchange rate and the US bond rate affect foreign direct investment through the relative attractiveness of domestic assets. Actual foreign direct investment outperforms a model-derived forecast in recent years, consistent with the liberalisation of foreign investment screening rules following the Australia–US Free Trade Agreement.

An ungated version can be found here.

If the Garnaut recommendations could not be fully implemented in the reform era of the 1990s, it would seem unlikely that our contemporary political culture will make much progress in implementing the few substantive recommendations contained in the ACWP.

The ACWP will join the Henry review and the Rudd defence white paper as monuments to a failed process for public policy development and implementation.