RESERVE BANK SHOULD INTERVENE TO PUSH DOWN THE AUSTRALIAN DOLLAR

Reserve Bank should intervene to push down the Australian dollar

There is something to be said for conventional wisdom. Since it is widely shared, a government can win support for sensible action by appealing to it. We can't live beyond our means. Australia has to be a country that makes things. Markets, not governments, should decide what the dollar is worth.

Conventional wisdom can build fiscal self-discipline. It is important that budgets are in balance over the cycle. It is desirable that services are financed by tax revenues, and that, in normal times, governments borrow only to invest in new infrastructure.

But conventional wisdom can work against us in unconventional times. Its rules can become like blinkers on a horse, preventing us seeing that we are in new terrain where the old axioms no longer work. We mistake policy principles that worked in the past for eternal truths, and refuse to think seriously about new ways to solve new problems.

If there's one thing life has taught me, it is that human behaviour has few eternal truths. Some rules work in some situations but fail in others. Ministers, officials, managers and ordinary folk like us need diverse tool kits from which we can pick the best solution for each problem.

Advertisement Yet in public debate, the need for flexibility is scorned. When J.K.Galbraith introduced the concept of conventional wisdom in The Affluent Society, he noted that politicians in particular had little choice but to follow it: ''People like to hear articulated that which they approve''. To follow a new course is politically risky. To follow a conventional course, even if it's wrong, ensures you are seen as a sound thinker.

Conventional ideas often fail to match it with new challenges. We have seen that here, as the markets have pushed up the value of our dollar to post-float highs, making overseas trips incredibly cheap, but Australian-made goods and services incredibly expensive in global markets.

In many countries, central banks intervene or governments change laws to hold their currencies down, and ensure that producers remain competitive. But in Australia, it is conventional wisdom that the Reserve Bank and the governments must let the dollar float freely (apart from occasional raids to stop it falling too low). The only action Reserve governor Glenn Stevens has taken in this crisis has been to argue that the dollar is overvalued. And governments, Labor or Liberal, have done nothing.

This is orthodox policy, in unorthodox times. It has made Australian producers uncompetitive. It is forcing jobs overseas. Whether it's Qantas shutting its airport maintenance base at Avalon, Simplot downsizing its food processing plants, or Holden weighing up an exit that would bring most of our car industry down with it, these are all casualties of the high dollar - casualties we can't afford.

The high dollar cannot last forever. But there is a limit to how long companies can go on losing money while waiting for the dollar to fall. We are allowing a temporary over-valuation to shut down economic capacity permanently. This is not how the successful Asian economies operate.

The car industry is the most important battlefront. It has been hammered since the dollar began climbing, and consumer tastes switched from Holdens and Falcons to imported SUVs. Since 2005, the local manufacturers' share of Australian vehicle sales has shrunk from 25 per cent to just 10 per cent.

Even so, in 2013 the Commodore is still Australia's third-biggest selling car, with the Camry/Aurion sixth and the Cruze seventh. The industry still employs 42,000 workers and produces $4 billion a year of net output. But it's not making money, and the overvalued dollar makes it unprofitable to export.

Industry Minister Ian Macfarlane is working flat out to try to persuade the manufacturers to stay, but his leader radiates indifference. The Coalition's policy is to withdraw $500 million of promised funding from the industry, a clear breach of faith, and to ask the Productivity Commission to advise on future aid - after the South Australian election. That all implies that Tony Abbott and Joe Hockey have decided to let the industry fold.

It is a huge price to pay for our failure to bring down the dollar. The Allen Consulting Group estimates that in Melbourne, closure of the industry would cost 33,000 jobs; nationally, the economy would be set back by $7.3 billion a year. It would certainly set the budget back, with lost taxes alone exceeding the $400 million a year we pay in industry assistance.

It makes far more sense to bring the dollar down. Stevens has tried to talk it down, in vain. Even interest rate cuts are doing more to inflate house prices than to deflate the dollar. It's time to try new policies.

First, the Reserve should intervene in the market - either by pushing back against the currency traders as they push the dollar up, or by setting a ceiling for the exchange rate, as the Swiss do, and selling dollars to keep it down.

The Reserve has only limited ability to push the dollar up; that requires foreign exchange. But it is much simpler to push the dollar down; it just requires lots of Australian dollars, which the Reserve can create at will.

The government should remove the $2 billion a year tax break Wayne Swan gave to foreign buyers of Australian bonds in 2009 when he thought we needed incentives to attract them. There are other options, but that would benefit the budget and the economy.