I’ve just returned from a few days in Sydney, Australia, where it is more or less the dead of winter, which means sunshine, highs in the upper 60s, and lows in the 50s. Not a snowplow in sight. Leaving aside the World Cup and Aussie Rules football and the odd murder and sex scandal, the main news story is the precipitous loss of confidence in Kevin Rudd, the Labor Party leader who became Prime Minister in 2007, soundly defeating John Howard and his center-right Liberal Party, who had been in power for the previous eleven years. Rudd, a former civil servant in the Foreign Office known mainly for his fluency in Mandarin Chinese and his geekish, technocratic look, was meant to be the antidote to Howard’s proud pro-Americanism and belligerent attitude towards darker-skinned folks seeking political asylum in the Land of Oz. Rudd was the new internationalist, prepared to identify Australia as an Asian country and to place Australia in the vanguard on such cutting global issues as climate change. Barely three years later, and with the next election no more than 10 months away, Rudd appears to be hanging on by his fingernails, facing his lowest poll ratings ever as well as grumblings within his own party that he might have to be replaced by another politician – Deputy Prime Minister Julia Gillard, for example – if Labor is to have any chance of staying in power. What went wrong?
Quite a few things. The Rudd Government, without consulting other countries, made a commitment in advance of last December’s Copenhagen climate conference to bind Australia to a 15% to 20% reduction in carbon emissions by 2020, and to introduce a stringent cap and trade emissions control scheme. What had at first looked like bold leadership came to look amateurish and poorly considered as soon as it became apparent that none of the other big players at the conference had any intention to follow Australia’s example. Rudd, speaking to a group of politicians and journalists after a particularly intense negotiating session with the Chinese, was recorded saying, “Those Chinese f***ers are trying to rat-f*** us.” In the normal rough and tumble of Australia’s political discourse this is fairly anodyne – Rudd’s effort to inject some passion and machismo into his bland and technocratic persona and the rough equivalent of Barack Obama’s statement that he is “looking for someone’s ass to kick” in connection with the BP oil spill – but the Chinese and most other countries no doubt interpret it differently. The Australians took it as a sign that Rudd had become rudderless and unhinged. In April of this year, the Rudd government announced deferral of its climate change program – including an emissions-trading scheme – from 2011 to at least 2013, causing the Green Party and many in his own party to brand him a traitor. Labor’s approval ratings dropped from 52% to 35% in the month that followed.
The Prime Minister’s biggest misstep, however, is his attack on the mining industry, one of the mainstays of the Australian economy, which is credited with helping Australia avoid the worst effects of the global financial crisis and recession.
In what may have been an attempt to shore up his left flank, Mr. Rudd in early May introduced what he called a “super-profits” tax on mining companies, which would impose a 40% tax on all income in excess of a “normal” rate of return of six percent, the rate paid on long-term Australian Government bonds. The government justified the move partly on the basis of a study carried out by the Treasury, which claimed that mining companies paid an effective income tax rate of only 17%, far less than the “headline” corporate income tax rate of 30%. This claim may have been true in a very narrow sense, but what the report failed to mention was that the 17% figure represented only the federal corporate income tax paid by mining companies, ignoring the substantial mineral royalties, surface rents, and other charges paid by mining companies to the federal and state governments, which jack up the average effective tax to 40% of earnings. The new tax would increase that average effective rate to 60%.
Now some people, Mr. Rudd and his Treasurer (Finance Minister) Wayne Swan among them, seem to think that 60% is not only not excessive, but may not be enough. They are in a minority. Though there is some support from the measure from the unions, the Green Party, and others on the Left, popular sentiment runs against it, and some 2,000 mining workers recently turned out in protest, chanting the slogan, “Super Tax, Super Stupid.”
Australian mining giant Rio Tinto has announced it is reviewing all investment decisions in light of the proposed tax, including a big uranium project in Western Australia. Xstrata, a huge Anglo-Swiss mining company, has placed two major investments, worth A$6.6 billion, on hold, putting more than 3,000 new jobs at risk. As much as $20 billion in other investments may be at risk, including a $2.5 billion Chinese aluminum project. Rio Tinto Chief Executive Tom Albanese last week told reporters that Australia is now his “number one sovereign risk issue globally,” strong words in view of Rio Tinto’s operations in more than 50 other countries, including Guinea, Cameroon, Madagascar, and Zimbabwe, none of which has anything close to Australia’s AAA sovereign risk rating from Standard & Poor’s.
In spite of a rumored compromise with the mining industry, which might raise the “normal” rate of return to 11%, the Labor Government insists it will not budge. “We are not going to be diverted from our core objective, to get a good deal for the Australian people for the extraction of resources that can only be extracted and used once,” said Lindsay Tanner, Australia’s Finance Minister (a post junior to that of Treasurer). Given that the Green Party strenuously opposes any such compromise and could scupper Labor’s chance of winning the next election, Rudd has painted himself into a corner from which he will emerge with difficulty, if at all.
It all seems to be equal parts ineptitude and misbegotten ideology. Mr. Tanner’s remarks, and other, similar statements from other members of the Rudd Cabinet, betray an instinctive mistrust, not to say hostility, towards business. In government’s view, mining companies may have to be tolerated, but toleration is as far as it goes. The mining companies (and, by extension, many other businesses) can produce some goods and services governments cannot, so they must be allowed to operate – though on a very short leash. Rudd, a career bureaucrat, sees the mining companies as despoilers, raping the environment, mistreating their workers, evading taxes, and stealing riches that rightfully belong to the nation. Never mind that mining companies everywhere are required to pay hefty amounts into rehabilitation funds to cover the cost of repairing any environmental damage once the mine reaches the end of its useful life. Never mind that miners everywhere are the highly-paid aristocrats of manual workers and that mine accidents are called accidents because they are, well, accidental, occurring in spite of most mining companies’ strenuous efforts to assure worker safety. Never mind that gold or iron or copper or any other mineral under the ground is worth nothing at all until someone digs ups and processes the ore, a hugely expensive and risky undertaking for which investors require a higher return than the yield on a risk-free Treasury bond. And never mind that in Australia miners pay royalties ranging from 2.7% to 18% of the value of the minerals they extract, which are among the highest rates in the world and pretty generous compensation to the Australian people for use of its resources. To the extent that you believe business is, at best, a necessary evil, you subscribe to the Rudd-Labor worldview, which holds that it’s fine to seek government revenue and political mileage from bashing business, which deserves far worse than it gets..
It’s to the credit of the Australian people that they see through this warped view and are prepared to vote against it at the polls. Unfortunately, this view seems to be gaining traction around the world. The Economist of June 10 says that President Obama has “all too often given the impression that capitalism is something unpleasant he found on the sole of his sneaker.” Governments around the world, ranging from the loony (Venezuela, Iran) to the merely confused (Bolivia, Brazil, China, Mongolia, and scores of others) echo these views, reserving huge swathes of their economies for the state, providing barely-disguised preferences and subsidies for state-owned enterprises, and subjecting private businesses to punitive taxes or worse.
General Motors CEO Charles Wilson’s statement in 1953 that “what is good for the country is good for General Motors and vice versa” may be a touch hubristic, but it would not be inappropriate for governments explicitly to recognize that business, not government, creates the jobs, income, and prosperity on which all else depends.
Some degree of tension between business and government is a good thing. I am suspicious when the interests of government and business appear perfectly aligned: it usually means that the business in question has bought the policy and regulatory decisions that best suit it. When a country announces that it is “open for business” it usually means that its politicians and policies are for sale to the highest bidder. Nevertheless, when a government acts with such overt hostility to business as the Australian government has done, it is usually attributable to a toxic combination of ideology, ignorance, and self-interest.
It is hard to know to what extent Labor’s anti-business stance is a cynical and populist political gambit that has backfired badly, or a reflection of deeply held beliefs. In either case it is a sure sign – and one that voters will be quick to act on – that 11 years in the political wilderness were not enough to transform Labor into a party capable of governing responsibly. In Britain it took Labour 18 years in opposition to turn itself into a credible governing party and it took the Conservatives 13 years in opposition to New Labour to do the same. Not ready for prime time, Australia’s Labor Party needs to go back to the woodshed for more practice. I don’t even want to think what this implies for the Republicans in the United States.
Disclosure: No positions