Category Archives: Australian economy

A deeper shade of economic ignorance

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The greatest political disaster of Keynesian economics was to shift the political focus away from how to raise living standards to how to increase the number of jobs. And the Keynesian answer of increased public spending has been the wrong answer on both counts, it neither increases real incomes nor adds to the number of jobs. For an example of the profoundest idiocy, I have been sent this article on Jobs to flow from NDIS in SA. I won’t mention names, but the article came with a note which read, “Reference your article on the electricity woes in our state, please read what Mr Weatherill said yesterday about NDIS being the future for jobs in our long-suffering state. Someone needs to save us!” Someone needs to save us all since these are the same beliefs that are found everywhere across the political void, with Malcolm a serious carrier of the disease. This is what that article said:

More than 6000 jobs will be created by the full rollout of the National Disability Insurance Scheme (NDIS) in SA, Premier Jay Weatherill says.

The increased workforce will provide support for 32,000 people when the scheme is fully operational from July 2018.

Many of the new jobs will go to people in the northern suburbs who will be hit hard by the closure of car maker Holden in 2017, the premier says.

“This scheme is important because for too long people with disabilities have not been included in all of the benefits of our society,” Mr Weatherill told reporters on Wednesday.

“For too often they have been second-class citizens in our community.”

The premier said the disability scheme would also provide the biggest boost to job creation in SA over the next few years.

Job opportunities will include 1600 positions for support workers, 1500 for personal assistants, 900 for therapists and more than 500 for mental health nurses.

Mr Weatherill said more than 1700 of those were expected to go to workers in the northern suburbs, hopefully to those who face losing their jobs with the decline of the car manufacturing sector.

“Some people have already transitioned into disability care and the NDIS will provide many more opportunities for those who work in declining industries,” he said.

JOBS EXPECTED TO FLOW FROM THE NDIS IN SA:

1600 organisational support workers

1500 personal assistants

900 allied health therapists

800 case managers

600 local area co-ordinators

550 mental health nurses

400 direct care workers

Either a job pays its own way or it does not. There are lots of worthy and important tasks that we should undertake if we can afford them. But if you are of the view that these kinds of things will create growth and prosperity, you could not be more in the dark about what actually makes a community prosperous. This is such deep set ignorance that unfortunately only insolvency may be able to cure.

The wages of economic sin

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The disconnect between the stimulus and our subsequent problems seems ever-present. You spend money on waste – school halls, pink batts, NBN, green technologies – and the result is a draining of productivity into the swamp. Real wages cannot rise if you do not increase our ability to produce the goods and services those wages are intended to buy. Here’s the latest news:

The growth in wages in the private sector is at a record low and is forcing workers to lower their expectations.

The 2.2 per cent increase over the past year recorded by the Australian Bureau of Statistics will not surprise those workers experiencing real wage cuts because employers have imposed temporary pay freezes or granted below-inflation salary rises.

The funny bit about wages is that no one has to do anything in a market economy to raise real earnings when the economy is going well. The competition for good employees does all the work for them. Unions can raise wages in some areas by killing off parts of an expanding industry, but overall wage rates remain almost entirely untouched. It is national productivity that matters, and we haven’t seen it grow in a while.

It may make everyone warm and fuzzy to pretend to be doing something about unemployment by some kind of Keynesian stimulus or helping the environment by promoting green (ie very expensive) energy. But reality is all too real. We have squandered billions and now cannot afford the incomes we once did.

If they’re so smart why are they socialists?

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I know what he means, but I wish the Treasurer would save the hubris for more certain times. Still, he does have a point:

Treasurer Joe Hockey has ramped up his criticism of “complete fools” doubting the strength of the nation’s economy as he declared Australia was a “long way off” from a housing bubble burst.

Mr Hockey yesterday slammed economic doomsday sayers as “clowns” after soaring resource exports and the housing boom delivered the best GDP growth in a year.

Asked today who the clowns and fools were, Mr Hockey replied: “You can just have a look around, just have a look around.

A market economy just runs itself if you let it. There’s not nothing to do, but there’s a lot less than our textbooks and regulators seem to understand. We are far from out of troubled times, but the trends so far look good.

AND NOW THAT I HAVE READ THE AFR: They are a bit more negative, like a whole lot more. I’m not a fan of GDP for many reasons – see Chapter 9 – but the adjustment process towards lower real incomes is part of what is required.

“Australia’s living standards are falling on a sustained basis for the first time in 50 years – this is not a short-term trend,” says Andrew Charlton . . . an ex-advisor to former prime minister Kevin Rudd.

How he knows what will turn into a long-term trend from a data point or two I will leave to him. But anyone who thought there would be no aftershocks following the stimulus and the NBN and all of the other useless value-negative projects backed by Labor should really keep their opinions to themselves.

Please, Joe, stop looking for consumer demand to lead the recovery

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Joe was Great! There was not a moment in the whole of Q&A tonight that I thought he was behind, and this is enemy territory. But most importantly, this was even when the one-eyed Labor Party stooge, Tony Jones, tried to sandbag the Treasurer with a NATSEM study that had not been released EXCEPT TO THE ABC!!! And without showing the level of disgust he no doubt felt at such obvious ALP-ABC gotcha attempts to undermine the Treasurer, he simply turned it aside. He embarrassed the ABC for its obvious duplicity.

But I would have left this alone, except that there is one thing I think the Treasurer needs to tighten up on. He is trying to get there, in fact he is almost there, but his Keynesian minders or whoever it is that surrounds him, don’t quite let him see through to the point he is obviously trying to make. But if he gets there, he will be impregnable.

He was asked something like this, which I almost thought of as a friendly question, from Gai I think it was:

Why is household debt good but public debt bad?

Why are you encouraging people to borrow and spend at low interest rates when they may end up in serious trouble when interest rates go up?

Spending is not what you want. Joe, listen to me. Spending is not what you want to encourage. Growth and employment is not a the result of spending. Growth and employment are the result of VALUE ADDING production. That is, the result of production where the value of what is produced will, within a reasonably short period of time, create an income flow even greater in value than the value of the resources used up. That is the meaning of value adding.

Private households do not create value ever. A household uses up value, but it is not from households that economic growth occurs (except for the occasional plumber that gets called in). Growth comes from business. If you confuse personal spending with business spending you will never get these things clear in your head. There is personal consumption, which is the point of economic activity. And there is business activity which is continually trying to add value to the resources they use up. Please, Joe, stop looking for consumer demand to lead the recovery. It cannot be done.

One more reminder in the video below about the difference between those bad Keynesians, who used to be in government, and who thought about spending, versus you supply-siders, bless your hearts, who have replaced them, who are concentrating on value adding production.

Australia’s supply side revolution

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I don’t mean to be pedantic – well I guess I do mean to be pedantic – but the problem with bracket creep has nothing to do with whether the economy will recover. The increases in personal taxes are the necessary requirement to pay for all of the expenditures loaded on the economy by Labor. As the story says, Employees lose $25bn to creep as Labor blamed for blocking savings. Everyone will have to chip in to pay for Labor’s waste, and so, those annual personal tax cuts that Peter Costello used to deliver, are for the future. But here is where I wish to differ:

Treasury secretary John Fraser­ warned last night that fiscal drag was “a worry” that needed to be addressed and higher taxes would hurt growth.

The one thing that won’t be hurt by a gently rising personal tax burden is growth. The pervasive Keynesian mindset where the economy is looked at from the demand side, and that it is consumer demand that drives 60% of the economy, and et cetera, is just plain wrong. Just keep reducing public service waste, get that budget back into surplus, do everything you can to make the private sector grow, and it will all take care of itself. And under no circumstances let “aggregate demand” enter into any part of the policy matrix. It is value

The budget – even better one day later

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As I was picking up the paper this morning, my wife said to me, it’s just like reading The Age. You may be sure she did not intend that as an encouraging sign of the times. I fear I have to agree, at least to some extent. But there were areas of redemption. The truest words on the budget commentary were by Mark Latham:

It’s all about dickheads talking about stuff they know nothing about — that’s what it’s about.

Certainly when I read (well, glanced through) the diatribe from Niki Sava, it was discouraging. Seriously, she is moving into the spot vacated by Michelle Grattan. It did take the government, and not just Joe Hockey, a year to work out that the only way to get the deficit down is to grow the private sector around it. And they finally removed the Keynesian head of Treasury and brought in John Fraser which probably has made a world of difference. I don’t know why she focuses on personalities, but with her Malcolm Turnbull fandom, nothing will satisfy her blood lusts, it seems, not even a really together budget that works economically and politically.

More to my taste was the article by the CEO of the Council of Small Business of Australia, Hockey’s ‘small-business budget’ perfect for the sector. Here is someone who know that perfection nowadays almost entirely consists of “didn’t make things worse, and perhaps made them a bit better”. I’ll give you his last two paras and you can read the rest for yourself:

The depth of announcements in the budget shows the government understands it is the little changes that make a difference. The small-business person’s capacity to start up, operate and, if desired, expand their business has been enhanced. The whole business life cycle seems to have been covered.

Overall this has been a great budget for small business and for the economy.

This is not some side-line observer but a representative of the people who are going to make the difference in how the economy goes. There is a terms-of-trade shift putting money into the hands of business. Keynesian theory also pretends that it is doing the same, except that to get the money, businesses must hand over the things they produced to people who are busy digging holes so they can be refilled. The net is not all that large for any firm nor is there any net addition to the economy. What the government has done is inject after-tax cash flow straight into the hands of producers. If you go to my second edition, right there on page 359-361 is the list of what a government should do to revive and economy. Number one reads: “priority should be to lower taxes, especially on business.”

As for the coverage by the ABC, I have only Andrew Bolt’s word for it since I never watch myself, but if his observations are anything like the reality, and I have no reason to doubt it, there are huge savings to be made on the budget bottom line that are begging to be made. If there is anyone at Cabinet level still protecting this hopeless bunch of leftists from a day of reckoning, they should be taken out, have their epaulettes removed, and sent off to be ambassador somewhere properly remote.

Nice budget

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It’s none of my business, really, but I quite like the budget. I teach Tuesday nights and don’t get home till too late so only get a vague sense on the night. Today the stories are filtered through the media so I have to decide whose judgements I will trust. Fact is, I don’t trust any of them, but this was my favourite. From Ross Gittens:

This is the budget of a badly rattled government that has put self preservation ahead of economic responsibility.

So what does this economic guru think is missing?

The biggest miss is increased spending on infrastructure, mainly because the Reserve Bank’s interest rate cuts are becoming ever less effective in getting the economy moving. Increased infrastructure spending would not affect the main medium-term objective of eliminating the recurrent budget deficit.

Such Keynesian mind-swill! The economy will turn around, ever so slowly. But to be surprised that lower interest rates provide no momentum to an economy is merely to demonstrate a lack of understanding how an economy works. And then to think that more infrastructure spending – NBN? pink batts? BER? – is needed makes me wonder whether it is ever possible to learn from the failings of the past.

To be surprised that the budget is a political document designed to get a government re-elected is kind of odd, a perspective shared by Paul Kelly, Budget 2015: Real aim is to save the Coalition. I’m all for budgets that edge the economy towards improvement. We are getting closer to the next election, and personally, I don’t want our economic problems solved before then. Costello left behind an economy of such golden prospects that it required all the ingenuity of Rudd-Gillard-Swan to ruin it. But they did. Why fix it right away so that the Shorten-Plibersek hammers can be applied. Let them fight the next election about how they would fix what is wrong, specially if they try to complain about the deficits they created and would not allow to be fixed.

Everything about the budget was aimed towards value adding. Almost no freebies for the non-working, non-productive. Almost everything is designed to encourage businesses to produce and invest, and for individuals to work and earn. The deficits can wait for after 2016.

And I just might mention this story from The Age which I also think is a portend in the right direction: Wages grow at slowest pace since ABS began quarterly records. It’s still 2.3% so not nothing, but also not rising as we would like. But it requires productivity to rise for real wages to rise. That is being nurtured. A very well structured budget that deserves the success that I am hopeful it will have.

Rewarding hard-working families

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It is something I don’t do often – I probably haven’t done it in more than a year – but I happened to be in the room when the Seven-Thirty Report was interviewing Mark Textor. He, in case you didn’t know, ran David Cameron’s polling during the election. The pleasure in watching him bat away everything asked by the interviewer was astonishing, since he is not a political person as such.

I actually think the Libs have got it, but we won’t really know until tomorrow night. He talked about the need to “reward hard-working families”. He talked about the need to raise productivity. He dismissed the “politics of envy” as a sure loser.

If the government can work it out that only the private sector, on its own without government subsidy, can cause the economy to grow, they will do well. If they think that ridiculous infrastructure spending adventures – crony capitalism plus new versions of the NBN – will pull the economy forward, then they still don’t get it and they will not do well.

This morning in the papers it was all about chopping back the public sector. And then, if the ALP decides to stop these changes, there should be one continuous campaign against the wreckage left by Labor, a series of problems they caused which they now get in the way of allowing others to fix up.

It really shouldn’t be so hard

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Here’s the strategy:

Arthur Laffer has a simple theory of politics. It’s about as simple as his theory of economics. . . . The economic theory says that the lowest, simplest tax code will produce the most growth. The political theory goes like this: Politicians crave love from voters. So if you want to get a politician to do what you think is right, give him a plan he can easily sell, and make sure that plan will deliver a lot of crowd-pleasing economic growth.

George Bush Snr sat in the Reagan White House for eight years and didn’t learn a thing. Nor did the voters who elected Obama. Even here, we had a government that brought us lower taxes and ongoing prosperity, so we rewarded them by bringing in the other side. There is, of course, more to the theory than we see at the final upper stage. And it is even possible he is right about what might happen in the US next, assuming someone can be induced to actually take those crucial first steps.

His economic calculations have led him to believe that the U.S. economy is primed, after a decade of slow growth and middle-class income stagnation, to grow rapidly – it just needs a big tax reform bill that would lower rates and eliminate most deductions. . . .

This is Laffer’s unshakeable belief: that once voters elect a supply-side acolyte to the White House, massive growth will follow. That growth will please voters. Voters will reward the president’s party. And Republicans, he predicts, will go on to enjoy a generation-long lock on Washington – until, he says, voters forget the power of supply-side economics, and the cycle begins again.

Here, alas, we are still trying to unwind from the old cycle never mind starting a new one.

MORE ALONG THE SAME LINES BUT FROM AUSTRALIA: Peter Costello’s taxing truths. Here is what you need to know but do read the rest:

The government has been hurt by the former treasurer’s claim that it is leaning too heavily on tax increases and not enough on spending cuts to repair the budget.

Raising taxes is bad economics and will repel votes. Other than that, it’s a great idea.

Peter Walsh and Richie Benaud on the same day

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This is quite a tragic day. I only knew Benaud from his commentary days for which he was exemplary. It was Peter Walsh I knew – he would not have known that he had known me, however. This on Peter Walsh from the AFR, picked up at Andrew Bolt, is exactly how I remember him. They really don’t make ’em like that any more.

[He] came to despise the hand-out, protectionist and regulatory populism of the then Country Party and the sway it held over the fate of the Australian economy in the post-war decades.

But Walsh was not selective in his hatred of rent-seekers and protectionists: He despised trade union leaders as much as he despised farm and business leaders for their special interest pleading. And he was just as withering in his critiques of the environmental movement’s anti-growth agenda.

His contempt for the Green movement remained with him after he left politics and motivated him to be a founding member of the climate change sceptic lobby. He was a founding member of the Lavoisier Group which disputes the scientific basis on which climate change forecasts are based.

Walsh described global warming as “highly speculative science” and argued that those most active in proposing legally binding greenhouse emissions limits as “self-serving propagandists and bureaucrats”.

He abhorred the rising influence of the environmental movement on the Labor Party and wrote that “since the 1980s Australian Labor Party policy has been incrementally hijacked by well-heeled, self-indulgent, morally vain and would-be authoritarian activists whom the media often describes as the intelligentsia”.

Walsh became increasingly disillusioned by what he saw as modern Labor’s infiltration by “the chattering classes”.

And let me add a quote from the article which has a certain resonance today:

Walsh hated wasteful spending, especially on politically fashionable causes. And he hated the rent seekers who cruised (and still do today, in greater numbers than ever) the corridors of Parliament House trying to convince ministers that their cause is the one that really deserves support.

Because of this, Walsh played a critical role in the transformation of Labor’s economic policy reputation during the Hawke and Keating era.

Mathias Cormann, please take note.