The anger in Australia over the behaviour of the natural gas cartel, described in infuriating detail this week by the ACCC, is another symptom of the growing global disillusionment with free markets.
The global energy crisis caused by the Russian invasion of Ukraine on top of the growing evidence of the impact of global warming is leading to more and more calls for much greater government intervention.
In Europe, where gas prices have already increased 52 per cent with more rises certain, politicians are under pressure to find solutions that the market is unable to provide.
This week I spoke to Kevin Bailey, Australian chairman of a small locally listed company called Po Valley Energy, which own gas fields in the north of Italy and the Adriatic Sea. After years of fighting environmentalists and the Italian bureaucracy to start producing gas, suddenly the government in Italy, egged on by Germany, is falling over itself to help Bailey get production going.
In Australia, the ACCC’s gas inquiry interim report is a devastating critique of what happens when a private cartel gets control of an essential product, any product for that matter.
ACCC chair Gina Cass-Gottlieb is calling on the federal government to trigger what’s called the Australian Domestic Gas Security Mechanism (ADGSM), having found that the five LNG exporters that control 90 per cent of Australia’s gas will leave Australians 56 petajoules short next year, while at the same time enjoying a huge lift in profit margins as a result of a crippling rise in gas prices.
The context for Australia’s struggle with the gas cartel is global, and wider than energy: The war in Ukraine has once again exposed frailties in the global economy caused by the rolling back of government regulation over the past 40 years.
The dangers of weak regulation
The first demonstration of this was the GFC, when the world’s private banks came unglued and would have brought down the global economy entirely if it hadn’t been for massive state intervention and fiscal support.
That led to some extra regulation of banks, but no broader reordering of priorities or fundamental change in the philosophy of governing, and now the world’s private energy firms are at it.
One thing that did happen as a result of the GFC was that central banks became completely unconstrained.
They had been given independence a decade or more before that, but after 2008 they started generating “free money” through quantitative easing.
Governments that were weighed down by huge deficits as a result of the banks’ self-destruction in 2008 were only too happy to let their own central banks take the running and print trillions of dollars to keep economic growth going in the absence of either fiscal support or productivity growth.
The result is that most economies now require $US3-$US5 of debt for every incremental dollar of GDP, versus $US1.50 in the 1950s, ’60s and ’70s. Overall global debt has grown to 350 per cent of GDP, from 152 per cent in 1990.
Today’s total freedom of central banks to adjust interest rates and print money is actually another expression of the distrust of politicians that began with Friedrich Hayek and Milton Friedman, and led to 40 years of trust in free markets and private ownership, along with lower taxation.
In a way, central bank freedom to create money has replaced the spending of tax-cutting, deficit-burdened governments, except that rather than support the welfare state and better government services, it has pushed up asset prices and benefitted the already rich.
As discussed in this column a couple of weeks ago, it’s hard to work out whether tax cuts have been ideologically designed to curtail the size of the state, or are simply the greed of plutocrats wanting to cut their own taxes, but lower taxes is definitely what happened, especially at the highest-income tax brackets:
AUSTRALIAN TOP MARGINAL INCOME TAX RATE
Eroding social cohesion
Australia’s top marginal rate is now 45 per cent (plus a Medicare levy of 2 per cent), and while that is set to remain when the Stage 3 tax cuts are implemented in 2024, the income at which it cuts in will be increased to $200,000, and the 37 per cent tax rate is to be removed entirely so that most people will pay a flat income tax of 30 per cent, making the tax system much more regressive.
Taxes have become steadily less progressive, more regressive around the world over the past 40 years, dramatically worsening inequality.
Research by Thomas Piketty for his book A Brief History of Equality shows that in the US, the top 1 per cent have gone from 9 per cent of total income in 1970 to 22 per cent today, while the share of the bottom 50 per cent has gone from 21.2 per cent to 13.2 per cent. No wonder they’re not happy.
All governments now face two great challenges, one easier than the other: First, how to re-engage in the regulation of private firms and even nationalisation, and second, how to pay for the expansion of the state that is now demanded.
Continuing to rely on central banks to support growth by printing money, while constraining taxes and government spending, is clearly not viable because of what that does to inequality and social cohesion.
Viktor Shvets of Macquarie Research in New York believes that central bank independence will not survive: “… rather central banks will be probably rolled back into departments of finance and treasury, where most of them belonged back in the 1950s-’60s”.
He wrote recently: “It is a question of choosing between two evils: Pursuing hyper-aggressive monetary policies coupled with regressive taxes, [which] will likely cause even greater polarisation, social, political, and geopolitical dislocations, [or] altering today’s policies, [which] is not only hard but also risks “throwing [out] the baby with [the] bathwater.”
Shvets may be right, but in the meantime the simpler solution in this country at least is to abandon the Stage 3 tax cuts and to prepare Australians for higher taxes and a larger, more hands-on government.
Climate change and the prospect of a long, drawn-out conflict in Ukraine will mean there is no alternative: The private sector cannot sort those things out.
Catastrophe and war are matters for government.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news