Category Archives: Australian economy

Understanding the high dollar and rising house prices

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The Australian ran an above-the-fold front page story today on Pitch to foreigners locks out locals before ‘for sale’ sign goes up. It is a pretty disturbing story, specially when it goes with this one on Our housing costs are out of whack, says IMF and this one, IMF warns over Australian house prices. Let me start with the last one:

HOUSING is less affordable in Australia than in any other country except Belgium, the International Monetary Fund says, warning that rising prices might point to an unsustainable boom.

The IMF is stepping up its analysis of housing markets around the world, having concluded that property booms and busts were implicated in two-thirds of the past 50 banking crises. “The era of benign neglect of housing booms is over,” deputy managing director Min Zhu said.

House prices, rents and incomes should, in theory, all move in tandem.

On this basis, the Australian real estate market is one of the most exposed in the world.

Let’s see if we can work out what’s happening in the property market. Back to that first story about locking out locals:

AUSTRALIAN real estate is being marketed and sold exclusively to foreign investors — including Chinese millionaires — with local buyers not even aware the properties in question are up for sale.

More than 100 real estate firms have sprung up in mainland China, exclusively selling Australian real estate — both fixed and off-the-plan — directly to wealthy Chinese investors, bypassing Australian buyers.

At the upper end of the fixed-home market, prestige Sydney property agency Simeon Manners — which says it has sold more than $100 million of Sydney property to “China’s most astute buyers and investors” — operates a sales site that cannot be accessed from within Australia.

Director Mark Manners said many of the listings on the site — sydneyluxuryproperty.com — could only be accessed from a foreign IP address and were private or off-market listings placed on behalf of owners who wanted a discreet sale to a foreign purchaser.

Even those geniuses at the IMF should be able to work out from this why Australian property prices are so high and perhaps also why the dollar is so high. Our locals are being driven out by money that is flowing into Australian property from overseas. I had a student in my class this year – it’s a graduate class so he was not young young but in his early twenties. And he was telling us about his experience in trying to arrange a loan for more than a million to buy a house. If you are trying to compete for houses with Chinese millionaires trying to park their American dollars, you will have your problems.

This is a genuine issue and it genuinely needs attention. Especially when you combine it with this from The Age a couple of days ago, Melbourne’s tiny flats would be illegal in other cities:

Melbourne is becoming a city of “super-dense” towers, packed with tiny apartments that would be banned in Hong Kong, New York and London.

A scathing report from Melbourne City Council shows some of the city’s newest developments are up to 10 times as dense as permitted by law in some of the world’s most urbanised centres.

Sydney, London and Adelaide all have rules that ban new one-bedroom apartments smaller than 50 square metres. But in Melbourne, 40 per cent of the city’s newest apartments are smaller than this.
The boom in shrinking homes is being driven by a market that satisfies the needs of overseas investors at the expense of residents, according to the Melbourne City Council’s draft housing strategy.

The report warns Victoria’s capital “is in danger of leaving a lasting legacy of poor-quality housing”, because of a lack of enforceable density or height controls.

Bang ’em up and put ’em out, specially since no one cares. They are buying off the plan, sight unseen. This lasting legacy of such poor quality housing is a catastrophe. The trouble with so many in politics is they think all investment is to the good. Their ignorance of what makes a great city great is going to leave this country with a legacy of very poor quality but high priced housing that will remain a blight for decades to come.

Following the path of most resistance

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Whenever I worry about the Government only getting it right about three-quarters of the time, I am reminded of just how bad things could be if the other mob took over again. As is said, for every problem there is a solution that is neat, plausible and wrong. Labor seems to have a lock on every one of these solutions as does its cheer squad in the media.

GDP rises more rapidly than expected. Good news, yes? Don’t you worry about that, there’s always a leaden cloud around on even the sunniest days. The first para from the Business Editor of the SMH:

The imbalance in the Australian economy was highlighted further on Wednesday, with the mining industry contributing around 80 per cent of the jump in growth.

Well if it’s imbalances you’re after, let me then suggest this:

The new national minimum will be $640.90 per week, or $16.87 per hour. It amounts to a 50 cents per hour increase to the hourly rate.

The 50 cents per hour is there no doubt to trivialise the amount. I-spit-on-your-50-cents-an-hour kind of thing. Really, why mention it unless you are trying to show how minimal the increase actually was. But 50 cents an hour or not, it comes to $33,333 per year. Do you see that? No one in this country, no matter how minimal their skills and experience, may by law be paid less that $33,333 per year. And then try to employ someone for the weekend or nights. Don’t forget the super and workers’ comp. We are a high wage economy trying to deal with low productivity growth.

This is a hard row to hoe for business. It’s not easy to find that kind of money. If you are running a coffee shop, you need to sell 9523 cups of coffee over the course of a year at $3.50 and that’s before the on-costs get counted in. What a good idea it must also have been to raise the cost of energy as well through the carbon tax.

Labor, and its Labor-lite supporters you can find in the oddest places, love the populist bits. But the reason Labor is not the permanent government of this country, in spite of all of the populist stuff they peddle, is because they drain the country of its economic energy. Tony and company are doing what they can in the face of massive resistance since in each person’s own world, there is no reason they can see why they can’t have more of what’s going for less effort in actually helping to produce.

I can only say I wish them well in trying to fix things up, because there really is a lot to fix.

What comes from listening to your enemies and not your friends

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Given the star studded cast here at Catallaxy, I am almost embarrassed to mention that I found my way into The Australian this morning, but there you are. It’s a story by Christian Kerr on the various kites that were flown in advance of the budget [mixed metaphor alert] to test the waters. Here is the relevant passage from the complete story:

An obsession with kite-flying and budget cosmetics has left the government reeling in the wake of the worst received economic statement in two decades, experts say. . . .

RMIT University economist Steve Kates said that hit was harder than it could have been because of “strangely muted” messaging from the government in its first months in power.

“What they needed to do was sit down and talk about the structure of the budget and the looming deficits right away,” Dr Kates said.

He said voters would have understood the need for cuts if they knew about “landmines” left behind by the Gillard government.

“They didn’t make the case about the state of the economy,” he said. “They left themselves ­extremely vulnerable.”

He said the release of the audit commission report was left too late, meaning its recommen­dations were lost among budget speculation.

The thing about the budget is that not one person came out and said, “that’s nailed it; just what we needed”. It has been disappointment all round, a gift to Labor. It is a major question where to lay blame for this screw up of a budget. It didn’t go anywhere near addressing the problems that needed to be addressed, it’s a mish mash of policies that are defensible but only barely, and the political side has been atrocious. Reading Martin Parkinson’s comments both yesterday on the budget and today on superannuation reminds me the extent to which Joe Hockey was led around by Treasury. This was Martin Parkinson yesterday:

The Australian public needs to know that the nation faces a challenge and a tough budget was necessary, Treasury Secretary Martin Parkinson says.

Dr Parkinson said while it was not his role to comment on specific government policies, Australians “deserve” to know there is a challenge ahead.

“It’s within my responsibility as Treasury secretary to say to the community we do have to actually take this seriously to start to address the issue,” Dr Parkinson told a business lunch in Sydney on Tuesday.

“It is (a challenge) that if we start today to take sensible decisions, particularly those that are essentially structural policy changes that take place over time, we’ll be in a much better situation.

“Otherwise we’re banking the house on 33 years of uninterrupted economic growth and there’s no precedent for that.

“We’re banking on another 10 years of fiscal drag and … that has quite significant regressive impacts.”

Parkinson should have gone on Day One. Instead, a Labor man to his back teeth, he has led this government down a primrose path and into a wilderness of policies only a Keynesian could think would make a significant difference and even then, ones no Labor government would touch. Where were Hockey’s political instincts, never mind his economic judgment, when all this advice was being put to him? Doesn’t Joe read Catallaxy, and if not, why not?

You must control debt before it controls you

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If a country goes into debt, no one gets sent to debtors’ prison, no one is declared bankrupt, the furniture is not sold off to recover the money. It’s more subtle, but in the end the country is forced to draw down on its capital and over time living standards fall. If you have debts you want to pay off you divert income into repayment and cut expenditure. One way or the other, those are the choices.

The picture below is not Australia’s debt, it is the timeline for American debt stretched out to 2024. It’s the same kind of picture we have here but in Australia we have a government that is intending to do something. And the picture comes with a story about Janet Yellen, the new Chair of the Fed in the United States.

yellin us federal debt

The only bit that is ridiculous in the story is that the timeframe is projected into the future, Fed Chair: ‘Deficits Will Rise to Unsustainable Levels’. What do they think happens when the government diverts output down various plug holes, that the entire country disappears into thin air? What happens is that over so slowly real incomes begin to fall and the communal environment begins to crumble. There will certainly still be many wealthy people, but the average will move in only one direction. Detroit becomes the national future.

In the US they pretend that time is on their side but it isn’t. Things are long past being just line ball. There will be a fall in living standards, in fact, it is already happening. The only question is whether there will be a recovery and if so when. Personally I do not see the slightest evidence of a will to change things around in the US.

But at least here we do have just that chance. We are dealing with a junior version of just this debt problem ourselves. The ALP talks about what geniuses they had been since debt-to-GDP was only about 37% when they left office. They never dwell on the figure when they came into office – ZERO – nor where debt levels are likely to go if nothing is done about the legacy they left.

This stuff is hard and generally uninteresting for most people. Just gimmee the loot or I’ll bring in the other mob who will. We here may not quite be at that stage but perhaps we are. What Janet really would like to say is what Joe Hockey’s been saying: THE HOUSE IS ON FIRE! THE HOUSE IS ON FIRE! but she can’t because she does not wish to bite the hand that fed her. But she knows. Keynesian though she is, she knows perfectly well that debt is a problem, and it is pure sophistry to argue that it’s not a problem because we owe it to ourselves. And when it comes to Australia, I can only hope that enough of us here know it as well. And looking at our own debt projections, it is certainly not an argument to say that that fire’s not all that big at the moment so why worry?

Going through the books program by program

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Let’s suppose we had what we need: some form of balanced budget amendment. What would the Government then do? Labor left the hole in the revenue stream relative to the expenditures it chose. So this government is going to fix it if it can and subject to the detail, I’m all for it. From The Australian, Joe Hockey to swing axe on public sector:

MORE than 200 spending programs will be slashed in next week’s federal budget as Joe Hockey vows to shrink the size of government in a “big, structural change” to save billions of dollars.

Agencies will be closed and thousands of staff retrenched over the coming months in a drastic overhaul that will start with the loss of 3000 positions in the Treasurer’s own portfolio.

The axe will fall in major portfolios including environment, transport, industry, agriculture and indigenous affairs.

Mr Hockey told The Australian that spending cuts would do the “heavy lifting” in fixing the deficit, despite growing criticism of looming tax hikes including a lift in fuel excise.

“Revenue is not doing the heavy lifting in this budget,” Mr Hockey said.

The question will end up being whether there is a constituency for a government that lives within its means. Watching Anna “I’m a Socialist” Burke the other night on Q&A was too much of a reminder of the kinds of idiocy we are up against. Labor has not learned a thing from the problems it created. If anything, it is more proud of itself than ever for its waste and misdirection. What we are going to find out over the next few months, it seems, is whether there is or is not a constituency for a genuinely smaller, more efficient government. And since it is impossible to rid ourselves of the NBN and everyone is signed up for the NDIS, the rest is now a process of going through the books program by program. I only wish they did the politics better.

Getting with the program

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Well, here we are heading for the fiscal falls. The Government has locked in their strategy, not one I would have chosen but they have made the decision so over the falls we will go.

Let us try to be positive. First and foremost, it is better than anything that Labor might have done. For all their maunderings about balancing the budget and getting their house in order, there was never the slightest chance they would. The Swan-Wong team of economic managers had no will at all to stop the fiscal rot. The spending ministers overwhelmed those who thought about prudential outcomes, assuming any thought that way at all.

Second, the budget will be a tough sell but it can be done. Abbott has credibility. No one will be in any doubt that the fiscal horrors left by Labor are an Augean stable that were not the Coalition’s doing. I don’t think they have set this narrative up anyway near well enough but even at this late stage they might be able to convince the country (or at least 50.1%) that these are steps that must with absolute necessity be taken.

Third, the steps to be taken are decided by cabinet so no point in dwelling on what I would have done. That’s a lot of people amongst whom the right compromises must be found. No doubt the PM and Treasurer are leading the way, neither of whom is an economist but there have been other hands on the tiller as well. Everyone in the Ministry is frightened by the size of the deficit they must deal with and are thinking about how this is to be done. They cannot see economic growth as the road to balance, and in fact, don’t really seem to have much idea about how to generate that growth. This must be looked at as a distant second best solution but with Treasury a dead zone for economic thinking, maybe that’s all that can be done. I imagine very few in Cabinet think that a program of cuts to public spending, pulling down regulation, and freeing up industrial relations would do the trick. So this is the way they have chosen to go forward.

Fourth, the major issue is the politics. If there weren’t an election to come in 2016, for which these decisions will be anthrax and strychnine for a large proportion of the voting public, it would not be all that hard to accept that this is how it will have to be. Since this seems to me like a poor approach to the economics and a very dangerous approach to the politics these decisions fill me with dread. If they lose office on the back of these decisions, they will be deposited in the very lowest depths of our political inferno. To have misjudged the politics will be unforgivable. Three and out would repel me and anyone who seeks good governance into the long term. If it brings Labor back to office after three years and not six or nine, there is nothing they can do or will have done that would be anywhere near fair compensation. All they will have done is hand over a more solid foundation for future Labor Party waste. Bill Shorten is far and away the strongest supporter of these policies in the country.

Nevertheless, this is their call and they may pull it out. Economic policy is not the only thing that affects the direction of an economy so there might really be a strong economy leading into the next election. Even more impressively, the country might even appreciate someone taking responsibility for the horrors that the ALP left behind. There may be a constituency for people saying that we must pull together for the national good. The media won’t help them but the Government does have its friends. The die is obviously cast so there’s no point in going on about it. So for me, I will hope things work out for the best.

When the Money Runs Out – the government’s guide to policy

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Simultaneously reading today’s papers on the Commission of Audit report and the Economist and The Financial Times 2013 book of the year, Stephen D. King’s When the Money Runs Out: the End of Western Affluence, I can see what the latest fashion in economic policy has become. Here I heave a sigh of despair. This from page 54 sums it up:

With poorly performing asset markets and much lower prospective economic growth, our entitlements are about to take a hammering. On current plans, only wishful thinking on economic growth stops government debt from spiralling out of control in the decades ahead. If the wishful thinking proves to be wrong, we will be in serious trouble.

And if you doubt that the wise heads of Treasury and the Government have not been reading this book, this is how it is described by the publisher:

It’s not just the end of an age of affluence, he shows. We have made promises to ourselves that are achievable only through ongoing economic expansion. The future benefits we expect—pensions, healthcare, and social security, for example—may be larger than tomorrow’s resources. And if we reach that point, which promises will be broken and who will lose out? The lessons of history offer compelling evidence that political and social upheaval are often born of economic stagnation. King addresses these lessons with a multifaceted plan that involves painful—but necessary—steps toward a stable and just economic future.

And so here we are.

I am the last person in the world to argue that wasteful and unproductive spending can go on forever. Cut waste. Live within your means. Do what is required to cut non-value-adding expenditure. But this book is half the story of what needs doing or possibly even less, just as the Commission of Audit doesn’t to my mind get there either. So far I have not come across a single sentence in the book that indicates the importance of the “private sector”, “the role of business” or “entrepreneurial activity”. The words don’t show up in the index and nothing in the contents goes anywhere near these issues. It is all about government policy, the financial system, the level of entitlements and containing outlays on entitlements. Nothing about what is needed for growth, and as the subtitle suggests, “The End of Affluence”, is entirely pessimistic about our economic possibilities.

And if you follow the guidelines found in the book, you would have to agree. We can no longer afford our way of life, our living standards must contract and therefore the only thing governments can do is cut various entitlement programs but strangely leave public sector infrastructure spending more or less as it is. No discussion of cuts to public waste, those useless money-losing operations that are everywhere absorbing our scarce savings for a negative return. If the real economy is discussed at any point along the way, I have not come across it. It’s all money, finance and interest rates. Encouraging business investment, cost containment, reducing government regulation – of these there’s not a word.

You want growth, cut back on government take up of resources. I love the headline on this story because of its cluelessness: UK AUSTERITY TO STAY DESPITE GROWTH PICK-UP. This is re-stated in the first para:

Austerity will remain the U.K. government’s mantra, Treasury chief George Osborne said Wednesday — even as he lauded the stronger than expected economic recovery.

The people who write such stories think “austerity”, the name its enemies give to cutting back on public sector waste, is bad for the economy, and because of their Keynesian mindset can only be harmful. They have no idea that it is the austerity itself that has led to the higher than expected growth. They cannot even understand what possible connection there could be. Moreover, a return to a stronger economy is not a warrant for higher public spending. The lesson that ought to learned and understood is that non-value-adding outlays slow an economy down. Reducing those outlays allow the economy to re-adjust towards faster growth. And already the Treasurer is talking about personal tax cuts in the lead-up to the next UK election. If only the same would happen here.

What’s the matter with our own economic managers in this country? If they really do want to take Australia down into some kind of American never-ending recession, then maintain or possibly even increase public sector outlays, raise taxes and do next nothing to encourage private sector growth. That way, the money most surely will run out but it didn’t have to be that way at all.

A hairshirt budget

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Well, get ready for it, an experiment in democratic politics, an unpopular budget aimed at no constituency at all:

Radical reforms to health and education will be outlined today in a searing assessment of federal finances that also calls for the family home to be included in the asset test for the age pension.

Action on the asset test is a key recommendation in a far-reaching review that identifies huge cuts to “middle-class welfare” to prevent budget spending climbing to $690 billion within a ­decade.

Tony Abbott will also be urged to scrap federal agencies and ­delegate more services to the states as part of a blueprint from his commission of audit that is ­already sparking resistance from key cabinet ministers.

The closely held report stops short of calling for the dismantling of federal health and education departments but warns of a massive cost to taxpayers from the duplicated effort between Canberra and the states.

In a deeply controversial finding, the commission identifies billions of dollars in savings from including the family home in the eligibility test for the age pension, arguing it is unfair for ordinary workers to subsidise pensions for the wealthy.

Pre-budget nerves – my list of dos and don’ts

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I am getting a bit nervous about the budget that’s brewing, no longer behind the scenes but with a few strategic leaks breaking into the news. As you may know, I am no Keynesian but I went back and took a look at my own Free Market Economics text since I could not remember whether I even mention the word “deficit”. The index has it listed once, three pages from the end on page 332.

Here are my thoughts on things. Why they left a Labor-supporting Keynesian to manage Treasury in the single most important budget they will ever introduce is beyond me. Anyway, here are my thoughts.

It’s not the deficit per se that matter but the level of public spending.

If you want to fix the economy, resources must migrate from being under the direction of the public sector and into the hands of the private sector. Therefore, the focus should be on cuts to non-value-adding forms of public spending. If it doesn’t show a positive return within a reasonable period of time, cut it off. This, by the way, is not an anti-welfare message although welfare too must be affordable. I am talking about infrastructure and the many forms of waste and mis-regulation that are found at every turn.

The economy will grow, employment will grow, real wages will grow if and only if economic activity is directed by private sector entrepreneurs. It will shrivel under the direction of government. Do not even imagine anything much beyond the first 10 percent of what you are already spending will create economic growth. Cutting public spending will create growth, not maintaining existing levels.

Raising taxes to fund public spending is a deadly mistake and wrong twice over:

. Higher taxes will allow you to maintain the level of public sector direction of our scarce economic resources.

. Higher taxes will reduce activity in the private sector.

The core aim must be to encourage entrepreneurial activity. There is no budget problem that cannot be fixed by:

. Reducing the level of unproductive public spending

. Fostering private sector growth (where unproductive spending has its own very brutal cure).

If the strategy is to balance the budget in ways that will diminish private sector investment and entrepreneurial activity, it will make things worse, not better. Economic conditions have been improving since the change of government with nothing much at all having been done. Leaving things alone is better than introducing new programs or raising taxes to fund existing forms of waste. Step back, get out of the way, cut your own take up of resources. But for heaven’s sake, don’t apply some bizarre Keynesian budget-surplus strategy by funding the existing level of public spending at the expense of the private sector.

It’s absolutely and completely true, Tony

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This is special, found at Andrew Bolt. Government spending is always related to some social good which often seems to make it beyond criticism, and certainly there are vast numbers who will not listen. But the NBN is almost unto itself in its vast oceans of waste. Here is the Minister for Communications discussing said NBN with Tony Jones.

MALCOLM TURNBULL: No. Look, this – the NBN is not a commercial project. It is the most – the single most expensive, irrational project of the Labor government. It should never have been undertaken in the way it is. It is completely non-commercial.

TONY JONES: “So let’s keep it going,” says Malcolm Turnbull.

MALCOLM TURNBULL: No, no – well the problem that we’ve got – the problem that we’ve got is is that if we were to pull the pin on it completely, we would lose at least – we’d write off at least $15 billion, probably more and have nothing to show for it. So, Labor has left us with a shocking mess. The best thing we can do is to complete the project as quickly and cost effectively as possible.

TONY JONES: Alright. If you can …

MALCOLM TURNBULL: And that’s the – and that is the – you know, now, can I just say this to you?: the way Labor went about the NBN was unique in the world. No other country did anything as mad as this. And …

TONY JONES: Yes, but we have heard this argument before (inaudible) …

MALCOLM TURNBULL: Yeah, but you don’t care about it because it’s the taxpayers’ money. – that’s the thing.

TONY JONES: That’s not at all true.

Ah, Tony, I’m afraid that it is entirely true and it takes a special ability to be unable to see this expenditure for what it is.