Liberal Democracies: Challenge and Response

An address by the Rt. Hon. Malcolm Fraser, C. H., Prime Minister of Australia: 1975-1983

Delivered at Beyond '84: The 1985 London Conference on Communism and Liberal Democracy at the Royal Garden Hotel, London - Wednesday 20 March 1985

I will mention three challenges in front of Liberal Democracies.

The first concerns the need to get advanced industrial countries, and hence the whole trading world, back onto a stable growth path.

The second concerns the ability of Liberal Democracies to maintain the internal resolution to do what they must do to maintain their values.

And the third concerns the need of Western societies in general to understand the Soviet Union and take actions necessary for their continued security and survival.

Let me take the first of these subjects.

If you speak to Americans today, many of them would say 'You Europeans or Australians could have good, powerful economies if you did what had to be done. You would have tremendous growth and a significant fall in unemployment, and there would be no inflation'.

That in fact is what the United States is saying to Europe right now, and to Europeans grumbling about the harmful affects of the rising dollar. The U.S. attitude is simple. 'Your currencies are weak because you have mishandled your affairs. Ours is strong because we have done it right'.

I don't want to be churlish about this but, in fact, I believe a number of European countries are handling their economies a good deal better than the United States right at this time. They have adopted tight monetary and fiscal policies, they are seeking to live within their means. But their development is held back generally by very high rates of interest which are underpinned by the United States' deficit which draws in savings from around the world. The U.S. deficit would be its own affair if the savings of the American people were high enough to pay for it, but they are not. The United States generally has a low commitment to savings and hence it needs to draw on savings from countries all around the world.

The United States is, in fact, turning the world's capital into today's consumption to maintain her current living standards.

90% of American Government expenditure goes on consumption, hence 90%of their expenditure on the deficit is for consumption, and 90% of the capital the United States draws in from abroad to fund that deficit goes to support current consumption in the United States . It is a simple equation.

I have heard some people in the United States say there is a moral factor in the picture of the wealthiest country in the world drawing vast sums to support current living standards.

Let me put that entirely aside – I am only concerned with the practical consequences of present policies.

A very peculiar conjunction of events has enabled the United States to get away with massive deficits without inflation up to the present time, but that conjunction of events is fortuitous, it is beyond the control of the American Government, and it will not last forever.

American growth has been strong because in the emergence from the last recession money supplies ran at about 14% instead of the customary 8% in the emergence from previous recessions. The United States Government deficit is larger than it has ever been. In the emergence from this last recession it was running at about 6% of GNP, it still runs at about 5%, whereas normally it would have been less than1% of GNP. No matter how you adjust these figures for state government surpluses, there has obviously been an enormous fiscal stimulus. Lower taxes have also helped, but they are not the major influence.

It is not surprising with loose money and high government spending that the growth figures of the economy are robust. What is surprising is that this has not led to a resurgence on inflation.

I suggest there are three reasons for this.

First, labour in the United States does seem to have a much more realistic view of what is possible.

Second, and perhaps more importantly, commodity and farm prices have been falling, resulting in a significant deflationary impact on the American price indexes.

Third, the need to import funds from abroad postulates a high or rising American Dollar. That has meant that on top of generally falling commodity prices, the prices of all imports have been falling.

It is these three factors – wage rates, commodity and farm prices, and a rising dollar – that have kept inflation low in the United States . When the inevitable change of direction of the Dollar comes, America will really be tested about inflation.

If the United States continues on her present path, at some point the down-side risk in holding Dollars will become too great and many people will make a decision to move out into Yen, or Sterling, or Deutschmarks, or Swiss Francs, or whatever, and that could be a very hard landing indeed.

There are other factors that our friends in the United States would do well to note.

There has been a view that people have just queued up to invest in the United States because it is a safe haven. By and large that is not correct. There are many safe havens around the world for investment. To the extent that people have invested in the United States, it has mostly been because the real rate of interest has been much higher. But in fact over the last couple of years foreigners have not invested in the United States much more than they have in earlier times. Very large funds have been repatriated by American banks. United States lending abroad has virtually ceased. It is this change which has done more to fund the United States deficit than anything else.

That process has to come to a finite end at some point. For those with the resources to do so it would be interesting to work out when it might be. At that point a number of interesting things might occur.

It is fair enough for us to ask, since President Reagan was elected on a platform of reducing the deficit, and since nearly everyone on Wall Street and in Washington was saying until recently that the deficit must be significantly diminished, how is it that nothing happens? We know the President wants to go about it one way, Congress another, and the two don't meet. But I suspect also that there has been a growing view in the United States that the deficit doesn't matter, or that they can live with it and enjoy the present, and thus the will to do something about it has been seriously diminished. Certainly, action which merely prevents the deficit getting higher is not action to reduce the deficit.

What is the position of other countries while the United States follows its present path?

What can they do?

The United States is saying that European countries should adopt similar policies to her own - she is in fact saying that they should all increase their government deficits enormously It really is an absurd suggestion which totally overlooks the simple rules of supply and demand. I do not accept the supply siders' contention that a high domestic deficit has no impact on interest rates. Its real impact on interest rates is probably 3/4%.If there is significant additional demands for funds, the price of those funds must rise, and for the United States to suggest that Europe should follow her own path to high government deficit is an absolute absurdity. If it happened, advanced economies would blow apart rapidly.

What in fact is happening now is that Western countries, highly industrialised countries other than the United States, are gritting their teeth and hanging on for the day when the American deficit falls, the dollar falls, and interest rates fall, so that investment can be promoted in their countries and growth resume at an adequate rate.

Unless the United States sees that it is necessary for her to take some action, this is unlikely to occur. The world economies will not move into a stable growth path until the enormous imbalances in the American economy are put in order. If the United States acts, there is still time for a smooth landing, for a fall in the value of the Dollar, for a fall in interest rates, and for stable growth.

Overcoming these problems – they are real and fundamental – represents in my view the highest priority challenge for Western Democracies. The consequences of inaction or failure will devastate those buoyant optimists of today.

The second challenge which I mentioned is internal. It relates to the determination of a democracy to do what it must to defend itself against internal danger.

In the United Kingdom you have had a strange judgement with a public servant being acquitted because he had released secrets because he thought it a good idea. The judgement seems to be a cast iron defence for any future spy.

In my own country, I can remember a case when a Communist appealed to be given access to highly classified security documents. Under the Security Appeals system prevailing internally at the time, it was determined that he be given access, and that being a Communist was not sufficient grounds to bar him.

There is often a great deal of muddle headed thinking within democracies. Our countries are, of course, the champions of freedom and liberty, but sometimes we need to draw a distinction between liberty and licence. Licence will damage a country and destroy its internal fabric just as plainly as outright subversion. We need to be much more robust than we have been in taking those actions which are necessary to defend the basic rights of democracies.

I have given an example from Britain and an example from Australia of how muddle headed we have become. It is a result of unwillingness to take apparently tough action to defend the fabric of one's own society, especially against the barrage of voices demanding civil liberties for every minority group and for every odd action – demanding that civil liberties be extended almost beyond the bounds or reason.

Legislators and politicians have quailed before the demands of those who ask for things in the name of civil rights and have almost felt it immoral to stand against their demands. That weakness has obviously been mistaken. Many of the demands of those who fight for civil rights go beyond that which any state which wants to survive can reasonably tolerate Perhaps it is time we reminded all our citizens that membership of our society carries obligations and responsibilities as well as rights.

The third challenge relates to another aspect of the same attitude which has international dimensions. It is often manifest in those who wish unilaterally to disarm, or who wish, like Mr. Lange in New Zealand , unilaterally to get rid of nuclear weapons and leave the Soviet Union holding the lot. Because Mr. Lange must accept that this is the logical consequence of what he has caused New Zealand to do. He is in no position to argue that if Australia followed suit, and if one by one the countries of Europe followed suit, that he was right and the others were wrong The force of his own logic would compel him to argue that other countries were also right to take a similar path, and that being so, it is plain that he is arguing for unilateral disarmament of the West - and that of course means acquiescence and a Soviet victory without even bothering to fight.

A short while ago I was asked to review a video film on the life of Andrei Sakharov, and there was a central message in that film. It was a simple message – that suppression within the Soviet Union, the nature of her police state, the use of the whole fabric of the law to enforce conformity, is inconsistent with a real capacity for peace with the West.

Sakharov was arguing that until the Soviet Union changes internally there would be no real and unarmed peace with the West - that detente was a fraud, and that if the West put down its guard it would be overcome.

It is a powerful argument and one which many people in the West would do well to heed. It is almost certainly correct. The nature of Soviet society does not allow any internal freedom, any divergence at all from the whims, the directions the arbitrariness of the State, if there is divergence, as is manifest in the dissidents, then it leads to merciless persecution and often torture.

How do we make sure that for as long as it is necessary people in Britain, Europe, America, and Australia, understand that the Soviet Union is a totally different kind of society? The argument that they are people and therefore in all respects the same as ourselves can lead us into false analogies which can be very dangerous for our own attitudes and for our own determination.

What actions do we need to take to make sure that young generations in all our countries understand the nature of the Soviet Union, and the hard choices which must be made if freedom is to survive?

I happen to believe that it is possible to come to some arrangement with the Soviet Union that will make the world a safer place, but only if certain conditions are met on the part of the West. There needs to be determination and consistency of action and of policy in approaching the Soviet Union. Reasonableness and strength are the pre-requisites of success.

The West needs to be strong, as President Reagan seeks to make it strong. It needs to be as determined as the President. Only if we demonstrate strength, and determination, and consistency over time, will the Soviets come to the view that some accommodation might be in their interests.

In these things the President is entirely right.

Three challenges then:

  1. To return major economies to stable economic growth, and diminish the worst unemployment that the world has seen since the 30s.
  2. To stop the morale of our people being internally destroyed, and
  3. To maintain an understanding and attitude in relation to the Soviet Union which will secure our own futures.

They can be overcome.

But there must be enlightenment and consistent policy from free world governments, there must be determination and resolve from free world leaders, and there must be responsibility and realistic understanding on the part of free world peoples.