Free Dog Days: Australia After the Boom (Redback) by Ross Garnaut

resources sector and the commonwealth budget.
    After the Great Crash, household savings returned to the higher levels of the Reform Era, at around 10 per cent of income. This helped to hold external debt at merely high levels as resources investment attained great momentum in 2010. As it became clear that Australia had escaped the severe economic problems of most of the developed world, boom-time seemed to have become permanent. It was unnecessary to heed the caution of a few economists about the problem of competitiveness.
    CHALLENGES TO THE LEGITIMACY OF REFORM
    The strong growth in jobs in the early years of the Reform Era had conferred legitimacy on reform. More people accepted at face value statements about the effects of further reform by Prime Minister Bob Hawke and Treasurer Paul Keating.
    This source of legitimacy disappeared with the recession in 1990–91. While recession should be expected when short-term interest rates approach 20 per cent and the terms of trade are falling, its arrival surprised the government and was hardly anticipated in the media or by big business. Forewarned is forearmed, and Australians walked into the worst downturn since the Great Depression without protection. Surprise and the absence of an official explanation made the recession especially damaging to the government’s reputation for good economic management.
    Many people who had been uneasy about reform but silent or ineffective while the new policies seemed to be delivering good outcomes were quick to blame reform for recession. ‘Economic rationalism’ became a widely used term of abuse. The Labor government, in its last few years, stopped contesting the critique. Government spokespeople would explain to outsiders that this was not an ‘economic rationalist’ government. The apparent retreat from the application of economic analysis to policy increased the vulnerability of good policy to pressure from populist as well as vested interests.
    There is a strand of modern economics that is extreme in its assertion that markets should not be subject to regulation and, as a corollary, that there is no place for concern for equity in policy. This strand, accurately described as libertarian, has a much smaller place in the professional study of economics than in the popular discourse, but nevertheless has proponents in the discipline.
    Libertarian views played a role in the extreme financial deregulation of the United States and United Kingdom that contributed to the global financial crisis in 2008. But libertarianism has never had a significant place in Australian economic analysis, and was not influential in policymaking during the Reform Era. (Senior figures at the Institute of Public Affairs have recently been describing themselves as libertarian, and may be a vehicle through which extreme views about the role of government become influential for the first time.)
    Australian financial reform was characterised by a strong focus on prudential regulation of a kind that was rejected in the United States and the United Kingdom. This contributed to the Australian financial system’s relatively strong position through the global financial crisis.
    The reaction against the application of economic analysis to policy was assisted by two developments within the economics profession itself. From its earliest days, Australian economists had seen the discipline as a social science, the value of which was measured by its capacity to illuminate developments in the world and be relevant to policy. Over recent decades there has been a large movement away from this tradition. Indeed, relevance to Australian reality and policy has become a drawback for professional advancement. A focus on being published in high-impact ‘international’ journals – in practice mostly US publications – led to a low professional value being placed on contributions to understanding Australian reality. This discouraged younger academic economists in Australia from