This shift, highlighted by AMP’s Dr Shane Oliver, reflects a post-Global Financial Crisis (GFC) and COVID-19 landscape where memories of 1970s government challenges have faded, fuelling support for central government roles in regulation, taxation, spending, and education to address societal issues.
Oliver, speaking to InvestorDaily, explained how this shift towards “bigger” governments has contributed to current global tensions.
He noted: “It’s something that sort of got underway after the GFC that led to a loss of faith in free markets, particularly by China and Russia and others. So, they sort of start pedalling rapidly. And then we’ve ended up with the more authoritarian governments in both. But it’s also been evident in the West with more government intervention.”
He cautioned that while there may be an initial sense of security with “bigger” government, long-term implications include less productive economies, lower living standards, and reduced personal freedoms, exacerbated by higher public debt post-events like the COVID-19 pandemic, constraining fiscal manoeuvrability, and increasing inflationary risks.
“A bigger government, in theory, is probably going to result in less productive economies. Because if you’re allocating more money to tax revenue and government, then it’s less going into private investment and private sector activity, which tends to drive growth and living standards.”
Oliver highlighted that government intervention slows down business operations, leading to less productive activity and lower economic growth, ultimately affecting share market returns.
Simultaneously, global trends point towards reduced globalisation and heightened geopolitical tensions, evident in the rise of nationalist leaders, contributing to a more protectionist environment with added implications for economic growth, productivity, and inflation dynamics.
What this shift represents, Oliver said, is a departure from the peace dividend of the post-Cold War period, which was characterised by growth-driving factors like free trade, deregulation, globalisation, and the emergence of smaller governments led by figures like Thatcher, Reagan, Hawke, and Keating.
Amid this climate, there’s a growing momentum towards onshore production. However, Oliver, acknowledging the “feel good factor” associated with this trend, cautioned that it comes at a considerable cost.
“It can be very costly to set up manufacturing again after having closed a lot of it down,” the chief economist said.
“I suspect that’s what the Australian Treasurer refers to when he says he wants to build an anti-fragile economy, which is a fancy way of saying we want to build a robust and strong economy … But that usually involves government in partnership with business in some way, trying to pick industries that will be of the future.
“The danger in that is, the former commissioner of the Productivity Commission pointed out that 20 years ago, there was a big push on to set-up production of semiconductor chips in Australia, computer chips in Australia, but if we had done that, then it probably would have led to far more expensive chips than we could import. And we would have, in theory, misallocated resources and made it more difficult for BHP and Fortescue, and Rio and others to expand their iron ore production.”
Oliver acknowledged the challenge that the true cost of decisions may not become apparent until two decades into the future.
“At the time, everyone’s really excited. When we started making our own Holdens in 1948, there was a lot of national excitement around that. But then, after a while, Australians started to realise … everyone talked about their love for Holdens, but they were actually buying Japanese cars.
“The Australian manufacturers lost market share, and then to the point when they had to close down … So, it is going to be difficult to set these things up. The buzzword of the government is making things here, but it will be quite difficult and you won’t realise the cost involved until a few decades down the track.”
Moreover, deglobalisation, combined with increased geopolitical tensions, is resulting in more defence spending, which again serves to propel inflation higher.
“It is a bit of an economic loss, when you’re just putting money into things that will be destroyed in war or depreciated over time,” Oliver said.
“There is an argument that if you spend money on defence research, as was the case in the Cold War, that can lead to technologies which benefit private sector activity. So, the trouble is, we’re not spending money on defence research, we’re just buying the stuff usually made by other people.”
Oliver concluded that the evolving global landscape is leading to a more inflation-prone environment, making a return to pre-pandemic ultra-low inflation and interest rates seem unlikely from his perspective.
While this is not necessarily a disaster for investors, it does mean that the backdrop is somewhat less positive than it used to be.
