Category Archives: Australian economy

For goodness sake, do not introduce an effects test

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There I was, minding my own business, quietly reading the AFR at lunch when I came across a column by Chris Bowen that I agreed with. And not just a little, and not just a lot, but 100%. I cannot even believe this long-dead idea has been resurrected and brought to life by the Harper Review. My advice is to bring out the garlic, the silver bullet or whatever else it takes, and despatch this back into the nether worlds from whence it came.

This is the post but it is locked away inside the AFR, but the title tells you all you need to know: Government must steer clear of effects test recommendation. How it got through the Harper process you will have to ask them. One quote from the story:

Former ACCC chairman Graeme Samuel described the directions recommended as ‘bewildering’. Expensive and extended processes will no doubt ensue if the effects test is introduced.

An effects test is always sold as a friend to small business. It isn’t. But what it does do is make the economy run far less efficiently with no benefit to anyone at all. Why throw sand into the crankcase? This is stupid policy which no one should go anywhere near.

Do NOT raise taxes and do NOT lower rates

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If the Government’s suicidal tendencies continue, there will be no saving them from their own idiocies. It’s not even that raising taxes is politically popular. It is absolute voter poison. Raising taxes is guaranteed to lose you the next election.

But what makes it worse, is that raising taxes is also economic poison. The Treasurer has his eyes firmly fixed on 2055, forty years from now. I wish he would occasionally also glance at 2016 and 2017, which also happens to be when they will be trying to get re-elected.

It is bad economic management to raise taxes in a recession. Let me say this again with emphasis: It is bad economic management to raise taxes in a recession.

You have to stop looking at things from the perspective of those dunces in Treasury. All they can think of is how are they going to find the money for all of those programs you and Labor have committed us to?

If you really do think that recovery is in any way promoted by government spending, other than in a very very narrow and select range of areas, then you have not even got to first base in understanding how an economy works. Stop listening to these people and start thinking about who you really want to put purchasing power in the hands of.

It is business and the private sector that will give you growth and lower unemployment. It cannot come from any other source. And if you think that business will be encouraged by hearing that the budget deficit is fractionally lower, then you are so far off the beam that I don’t know where you think you are. Business is encouraged by making money. The economy grows through productive investment. Jobs and real increases in income are based on faster rates of private sector growth. If you think private sector growth driven by some form of government-financed activity is the same, then your whole basis of thinking about these issues is a FAIL.

And then there are the supposedly popular cuts to interest rates. Here’s a small test. Suppose interest rates went up by a quarter of a percent (which is what they should do, but won’t). You tell me: what would happen to the housing market? It would stall and possibly crash. Housing is already unaffordable. Why would you want to continue to finance a bubble that has now trapped every government so deeply, that it seems almost impossible to imagine rates going up any time soon. Although given past history, they will, in the month before the next election.

Just hang in until we get the exchange rate right

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You want evidence that we are being driven into a lower standard of living? Try this:

Mr Stevens, who has consistently maintained the currency is materially overvalued, said a number in the vicinity of US75c seemed an appropriate valuation, which means the currency would need to fall a further 9 per cent from current level.

“I think it’s quite likely that it will, a year from now, be lower than it is today,” Mr Stevens told The Australian Financial Review.

“A year ago I said probably 85 US cents was better than 95. And if I had to pick a figure now, I would say probably 75 is better than 85.”

The Treasurer’s parliamentary secretary, Steven Ciobo, said the Australian dollar was “still at historically high levels”.

“Over the longer term we do need the Australian dollar to come down further,” he told ABC Radio.

“By doing that, it will help the Australian economy to transition from being focused too heavily on mining, to being refocused again more broadly on the services side of the economy, which of course accounts for the vast bulk of the Australian economy.”

We are looking at a major drop in living standards that no one is doing a thing to resist. Fire sale prices on what we sell with major increases in the prices of what we buy. This is all round bad advice, but if the RBA intends to engineer us into this loss of wealth and income, at least the government could do something about its own level of spending, our bizarre industrial relations straight jacket and the regulations that are preventing expansion by those firms still willing to give it a go.

Meanwhile, how will anyone thinking about what to do react to hearing that the dollar might be falling another ten or so percent. The instability of such kind of talk will freeze this economy up so that no one will do a thing until the air has finally cleared.

We need a Parliament Act of our own

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Let us take it as read that the Government has to get its budget in order, not because it is good for the Government, but because it is good for the country.

The level of public outlays is too large and the revenue base, as large as it is, is still too low to cover all expenditure. If we don’t fix it, as everyone knows, Australia will have a diminished future. All this is agreed by everyone (see W. Swan for confirmation).

So the Government brought down a budget that was designed to limit public spending and allow some fiscal repair. Since everyone might have gone about it in a different way, let us again state for the record that the one particular way chosen by the Treasurer is different from the one each of us might have chosen ourselves. But that is mere detail. It is the Government and it was elected to find a way to get these things right.

But we are blessed with the Senate from Hell. A series of people of such comprehensive economic ignorance matched with a bizarrely wilful malevolence will allow nothing through. And it will ruin us, let there be no doubt about that. Not fixing the budget will leave just about everyone less well off. The economy will shrink and take us down with it.

Since we are in the mood for constitutional amendments, let’s at least do something useful. What we need is a constitutional amendment that will prevent the Senate from rejecting money bills. Here is the story from the UK:

The Parliament Act 1911 is an Act of the Parliament of the United Kingdom. It is constitutionally important and partly governs the relationship between the House of Commons and the House of Lords which make up the Houses of Parliament. This Act must be construed as one with the Parliament Act 1949. The two Acts may be cited together as the Parliament Acts 1911 and 1949.[1]

Following the rejection of the 1909 budget, the House of Commons sought to establish its formal dominance over the House of Lords, who had broken convention in opposing the Bill. The budget was eventually passed by the Lords after the Commons’ democratic mandate was confirmed by holding elections in January 1910. The following Parliament Act, which looked to prevent a recurrence of the budget problems, was also widely opposed in the Lords and cross-party discussion failed, particularly because of the proposed Act’s applicability to passing an Irish home rule bill. After a second general election in December, the Act was passed with the support of the monarch, George V, who threatened to create sufficient Liberal peers to overcome the present Conservative majority.

The Act effectively removed the right of the Lords to veto money bills completely, and replaced a right of veto over other public bills with a maximum delay of two years.

The Senate is our House of Lords, although the name could not be more inappropriate given many of the present incumbents. Its ability to interfere with the proper management of the country is unacceptable. It should become, like the Canadian Senate, a house of review and advice, but the government should be run from the House of Reps.

This is the constitutional amendment we need. The Senate represents little more than egocentric grandstanding. Let us keep the Senate, by all means, but let us restrict the damage it can do to good governance and sound management of the economy.

The Australian Democrats once held the balance in the Senate for many years based on its promise not to block supply. This should now become an obligation imposed on the Senate by the Constitution.

Business conditions jumped by a record amount in October

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You never know what surprises are in store if you get the budget under control and encourage the private sector. Merely a straw in the wind but the direction is right. These are the results from the latest National Bank monthly survey.

BUSINESS conditions jumped by a record amount in October, hitting their highest level since early 2008 on the back of a strong start to the fourth quarter, according to a private survey.

National Australia Bank’s monthly business survey showed a sharp jump in business conditions — the largest monthly increase in the history of the survey — up 12 points on the index, to a reading of 13.

But NAB chief economist Alan Oster said the improvement may still be an aberration, considering the downward trend in business confidence.

The survey showed business confidence continuing to erode, as firms remain uncertain over near-term demand. The index dropped 1 point to a reading of 4, its lowest level since a pre-election jump in mid-2013.

But looking beyond monthly volatility, business conditions still came in with a reading above the long-term trend, Mr Oster said.

While confidence levels vary greatly across industries, the services sector has been the most consistently optimistic.

Mr Oster said despite consumer caution and rising unemployment, it was particularly surprising to see retail conditions lift strongly, up 15 points, albeit to still low levels.

The mining sector also saw an improvement in both confidence and conditions, recording the largest jumps in both, but still remained the sector with the lowest overall conditions reading.

The large jump in business conditions pointed to a strong start to the fourth quarter, Mr Oster said.

We’re the richest people in the world!

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Picked it up on Drudge but it’s from The Sydney Morning Herald:

Thanks to their houses, Australians are the richest people in the world, according to the investment bank Credit Suisse.

The fifth annual study by the Swiss bank of global wealth trends found the median Australian adult was worth more than $US225,000 ($258,000) in June, well ahead of the second wealthiest population on this measure, the ­Belgians, at $US173,000.

They were followed by the Italians, French and British, all at around $US110,000.

Only 6 per cent of Australians have wealth below $US10,000, compared with 29 per cent in the United States and 70 per cent for the world as a whole.

Of course, if our wealth is tied up in our over-priced houses – all thanks to the foreign money pouring into the housing market – it’s not exactly letting us live high on hog. But on paper we are really doing well. Just one more way amongst many in which how we collect statistics provides one misleading indicator after another.

ACCI and deficit spending

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I did manage to get through Q&A last night but what caught me right from the start was where Wayne Swan, former Treasurer, said to Kate Carnell, the newly installed CEO of the Australian Chamber of Commerce, that ACCI had NEVER sought balanced budgets. Never is a long time and having been the ACCI Chief Economist up until a decade ago, I can say with perfect assurance that at least in my time, ACCI, previously known as the CAI, had never sought anything other than balanced budgets.

Way back, as far back as the days of Bob Hawke as Prime Minister, I wrote an article for our newsletter titled, “An Australian Economic Miracle?” Not many things on the net from the late 1980s, but I did find this:

“An Australian economic miracle, a truly Lazarus-like recovery is now a clear possibility,” says the Confederation of Australian Industry (CAI) in a newsletter this month.

Following the 1987 share market collapse, everyone across the world got religion and more especially Paul Keating here in Australia who balanced the budget in 1988. This was then – and always was while I was there – CAI/ACCI policy. Balancing the budget by lowering expenditure was a near-on certain cure-all for me and so it proved. What then wrecked it all was the almost immediate concern that the economy was overheating that then required the administration of a ridiculously high interest rate regime which brought on the “recession we had to have”. I had to spend the next five years shouting at the government for ruining it all with its monetary policies but it was by then too late.

But in that brave moment in 1988, Australia was set for the most remarkable recovery you ever saw. The flack I took for saying what I said, along with the organisation, was prodigious. But the then Labor Government, having balanced the budget, was indeed overseeing an economic resurrection that at the time no one had noticed was in place. So I wrote the article, signed off by my CEO, and once the recovery became common knowledge, had to endure the idiocies involved in cooling down what had only just picked up.

Balanced budgets work, and deficits do only harm. The evidence that the policies of the classical economists were overwhelmingly better than the policies of every mainstream text of the time, and of today as well, was demonstrated to me, just as it would be demonstrated again when Peter Costello balanced the budgets in the period after 1996. I am therefore pleased to see that Kate Carnell has reiterated the long-term policy of the Chamber.

And if you would like to have a better understanding of the underlying theory, you could not do any better than have a look at my Free Market Economics. Strange to relate, it is to my knowledge the only book of its kind.

Selling off the farm, literally

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Yesterday it was merely the price of houses (discussed in the AFR today). Now it is our dairy farms that will have, so far as I can tell, absolutely no Australian content or input other than the physical existence on this continent.

ONE of China’s biggest milk companies is buying up dairy farms in Australia, convinced it can generate higher milk production and bigger profits here than most local dairy farmers are achieving.

The Ningbo Dairy Group says that to produce as much fresh milk as it would like to fly to China from its Victorian farms, profitably and rapidly, it needs to bring in Chinese employees, fast-track construction of a new milk processing plant and cut through government red tape. . . .

Ningbo Dairy vice-president Harry Wang said the key to its profitable Australian dairy investment lay in vertically integrating the group’s Australian operations, with it owning and controlling all parts of the supply chain.

They come here, bring their own workers, build their own infrastructure and export the produce back home. What’s in it for us I am not at all sure. He does, of course, put his finger on the problem faced by our own domestic producers:

The downside of Australian dairying to the Chinese newcomers is the low milk price paid by Australian processors to farmers, high labour costs, excessive red tape, a slowness to innovate and the lack of good young workers.

I will just repeat my conclusion from yesterday’s post. We used to pay for our balance of payments deficits through increased investment and the revenues that previous investments had brought about. Now we pay for our imports by selling off the farm. The first could go on for ever and made us prosperous. The second will be a disaster but no one is willing to stop the inbound flow of funds.

The manifest ignorance of Joe Stiglitz

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I have just caught up with the article written by Joe Stiglitz on the Australian economy, American Delusions Down Under. I have had serious doubts whether he understands his own economy given his Keynesian orientation, but that he has no idea about Australia is manifest.

What matters more for long-term growth are investments in the future – including crucial public investments in education, technology, and infrastructure. Such investments ensure that all citizens, no matter how poor their parents, can live up to their potential. . . .

To be sure, given its abundance of natural resources, Australia should have far greater equality than it does. After all, a country’s natural resources should belong to all of its people, and the “rents” that they generate provide a source of revenue that could be used to reduce inequality. And taxing natural-resource rents at high rates does not cause the adverse consequences that follow from taxing savings or work (reserves of iron ore and natural gas cannot move to another country to avoid taxation). But Australia’s Gini coefficient, a standard measure of inequality, is one-third higher than that of Norway, a resource-rich country that has done a particularly good job of managing its wealth for the benefit of all citizens.

Well I see fit to comment on the American economy although I live here, so he is welcome to comment on ours even though he is out of his depth on everything he says. But it is a wonder that he doesn’t stop to think about his own empty rhetoric when we find in between the above two paras these two paras:

There is something deeply ironic about Abbott’s reverence for the American model in defending many of his government’s proposed “reforms.” After all, America’s economic model has not been working for most Americans. Median income in the US is lower today than it was a quarter-century ago – not because productivity has been stagnating, but because wages have.

The Australian model has performed far better. Indeed, Australia is one of the few commodity-based economies that has not suffered from the natural-resource curse. Prosperity has been relatively widely shared. Median household income has grown at an average annual rate above 3% in the last decades – almost twice the OECD average.

Most of that growth he discusses was under a Coalition government that made it a matter of policy to balance the budget and contain its spending. That is the Australian model from which the US, and Joe Stiglitz, might learn something he is apparently clueless about.

The $A and a Double D election

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What has struck me almost daily when in Canada and the United States was how strong the Australian dollar is compared with the local currencies. We are not so productive relative to them that things should look so cheap to me. I think the $A is heading for a fall, and so does Glenn Stevens:

RESERVE Bank governor Glenn Stevens has warned investors to brace for a slump in the Australian dollar when the US Federal Reserve starts to lift interest rates and questioned whether ultra-loose monetary policy was fostering the right kind of risk-taking.

There are so many ways the Australian economy might unravel. I watch from this distance the Opposition and non-Coalition Senators playing Russian roulette with the Australian economy. It’s one thing to have a different policy view but to let the many economic problems Australia has fester so that they can take over an economy that has been devastated by the fiscal measures they introduced is no small worry.

There will almost surely be a double dissolution in which the question will be whether the country wishes to live in a fool’s paradise or whether it wishes to deal with the problems that are clearly visible. I think Australia may still be able to work it through and come to the right decision in a vote. Or perhaps not, but that will likely be the kind of election we will be having in the next year or two. Because whatever else, things cannot go on as they are.