Another Perspective

An Australian Lesson

Australia got out of the Depression in the 1930s by doing the opposite of what Obama is doing now.

By 3.16.09

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I don't suppose many Americans know this, but they ought to: Australia recovered from the Great Depression much more quickly than did America by doing the opposite of what America is doing today.

This was despite the fact that relative to America it had huge disadvantages: with a population of less than eight million at the time, its economy, and of course its domestic market, was a fraction of the size of America's.

It had a very small industrial and manufacturing base, was chronically short of investment capital, and was dependent on agricultural and some mining exports. It had a bloody-minded and strike-prone workforce (just before the Depression struck, one of its biggest manufacturers, Sunshine Harvesters, moved to Canada where wages were higher but strikes fewer). To make matters worse, it had first a left-of-center Labor federal government under Prime Minister Scullin and then a right-of-center United Australia Party federal government under Prime Minister Lyons, neither of which were marked by great economic competence and which were committed to counter-productive protectionist policies -- even, crazily, putting high tariffs on importing the equipment its own farmers and miners needed to get it some export income.

It did, however, have one thing going for it which more than made up for the rest: it did not have pseudo-Keynesian "stimulus" policies to any significant degree, or their equivalent, the New Deal. Apart from undertaking some relatively minor public works it did not attempt to spend and tax its way out of recession.

Writing in the Australian journal Quadrant for March, 2009, economist Steven Kates of the Royal Melbourne Institute of Technology has provided approximate unemployment rates for the USA, Britain and Australia from 1929 to 1938. The figures are quite astonishing, including respective rates of 23.6%, 22.1% and 23.0% in 1932 and 19.0%, 12.9%, and 8.9% for the three in 1938. (For the full table, scroll down here.)

What saved Australia was that the Scullin Labor government, which had been slow to recognize the onset of the Depression, in 1931 adopted the so-called "Premiers' Plan" which had been put forward by a number of the States. This had none of the sophistication of Keynes. On the contrary, it advocated some very simple and old-fashioned nostrums: to cut public spending by a whopping 20%, to return to budget surpluses, and to cut wages. This wage cut went through the public as well as the private sector.   

My father, Sir Hal Colebatch, the West Australian government representative in London, had his salary halved. Previously, in the Senate, he had spoken for economic stringency and against stimulus spending with somewhat colorful imagery which, when first I read his old speeches, made decades before I was born, I never dreamed I would be quoting as relevant now:

"To the outside world we present the sorry spectacle of a rudderless ship … drifting in a storm-tossed sea along a rock-bound coast … In discordant voices the crew yells for the broaching of the last barrel of biscuits and the final keg of rum." The phrases "pork-barrel" and "ear-marks" were not around then, but the general picture is pretty clear in 2009.

There were some dangerous corners cut: the Australian Navy, for example, was reduced to four ships in commission at its lowest point, but the plan, aimed at reviving business confidence, did have one advantage over the New Deal: it worked.These figures also show, of course, that Britain recovered far ahead of America without the benefit of anything like a New Deal or a stimulus package, and despite various structural problems unemployment was falling dramatically there even before British re-armament got under way.

What saved Australia, pulled it back from an abyss that might have meant actual starvation, and gave it an economy strong enough to meet the challenge of the Second World War, was simply the application of classical economic theory, which was more or less the exact opposite of what Keynesianism prescribed, the opposite of the New Deal, and the opposite of the stimulus package.

Indeed, Kates points out that in a posthumously-published article, "The Balance of Payments of the United States," in the Economic Journal in 1946, Keynes virtually admitted that he had been wrong in undermining classical economic theory, and that he now felt a duty to remind his own disciples that classical theory "embodied some permanent truths of great significance." He lamented the fact that "much modernist stuff, gone wrong and turned sour and silly, is circulating in our system, also incongruously mixed, it seems with age-old poisons …"

The present prime minister of Australia, Kevin Rudd, appears at present intent on proving himself a far worse and more damaging economic ignoramus than his predecessors Scullin and Lyons. He has adopted a smaller version of the U.S. stimulus package and spent some time, not listening to and ranking the advice of economic experts as he is paid to do, but writing a cranky, embarrassing, 8,000-word essay on the need for "social democracy" to "save capitalism from itself." On the world scale Mr. Rudd and his essay and his stimulus package and disregard for classic economic theory probably don't matter much. But the US stimulus package does.

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About the Author
Hal G.P. Colebatch's "Immram," Counterstrike, is being published by Australian publisher Imaginites.