Australia’s dismal economic future

The front page story in the AFR today is: Weak incomes for years to come, International Monetary Fund warns. A bit of the story, all depressing:

Real incomes are poised to barely grow over the next six years and living standards are destined for a slowdown, unless a wave of major economic reforms and technology innovation by business can unleash a productivity boom like in the 1990s.

The International Monetary Fund has projected that incomes adjusted for inflation would average just 0.3 per cent growth a year through to 2024, well below the long-term average of 1.8 per cent since the 1960s.

We are still suffering from the effects of the GFC, not the actual financial meltdown which disappeared a decade ago, but from the massive incompetence of the stimulus program put in place at the time. Keynesian economic management – that is, the kinds of stupid ideas that remain au courant within Treasury and the RBA even now – have spiked our ability to grow, with these people unable to work out why wasteful public spending and ridiculously low rates of interest have caused the damage they have. A reminder of the words of our departing former Treasurer on the massive damage he has caused.

“In short, you don’t feel the bullets you dodge. And we dodged a huge one,” Mr Swan, who will not contest the next election, expected to be held in May, said this afternoon.

Mr Swan said the enormous stimulus package devised by the Kevin Rudd Government had worked.

“Ten years ago, there was a deeply weird attraction in some quarters to the idea that a ‘cleansing fire of recession’ wouldn’t be such a bad thing for Australia,” he said.

“I rejected it then and I reject it even more forcefully now, precisely because of the potentially terrible human consequences.

“We did all this knowing full well that our opponents would hound us with slogans about ‘debt and deficit’.

“In departing this place, I have a perspective I didn’t in the heat of battle, and can honestly say I’m happy to wear that criticism as the price of saving Australia from much worse.”

Really, he wouldn’t know which way was up if he didn’t have the words “it’s the other way, stupid” painted on his shoes. It is his advisors in Treasury and the RBA who are responsible and who are still there directing traffic. It really is a tragedy.

If they’re so smart why are they socialists?

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.

Rebalancing the news

I’d have been happier if the AFR had been pouring out on its front page how hopeless the Rudd-Gillard-Rudd Government had been if they had done it at the time. The front page headline across the page yesterday, under a picture of the four top members of the new Government, read as follows:

Poll confidence rebound stalls

Then above the headline it says, “RBA worried about business investment”.

Does the AFR not know that all this is Labor’s handiwork? That what you see is what they did? That trying to fix this mess is the work of years and will require patient persistence. These are page 10 stories. It is not about “the Coalition’s post-election economic honeymoon is already fading” which is the opening phrase of the article.

What they did not do is place these words at the front which are instead found in para 5:

Reserve Bank of Australia deputy governor Phillip Lowe reassured Australians that all the ingredients are in place for a broad economic rebound.

Might have changed the sense of where things are going, specially since consumer sentiment is the worst of all economic indicators. It’s not a Labor government however so all the news but perhaps a different balance. But what got me was why the deputy governor thought things were about to improve:

Record low interest rates and a weaker dollar meant that Australia was well placed to weather the end of the resources investment boom, he said.

What can I say. Record low interest rates will slow recovery not speed it up but in the low state in which economics has fallen, how is anyone to know.

A few scattered thoughts and questions

On Wednesday this week there was a small article on the editorial page of the AFR under the heading, “Sell Assets and Spend up Big”.

I wouldn’t normally have paid much attention to it except that it’s by Tony Shepherd who is about to head up the Commission of Audit. The headline is not a bad summary of the contents so let me do a bit of a review.

Governments and business and community leaders are increasingly united in recognising the merits of selling publicly owned assets to unlock funding for badly needed new infrastructure.

Here’s the problem which I will start with a question. How does the sale of assets translate into an addition to our resource base to allow us to undertake these projects? Looking separately at the financial side and the real resources side allows plenty of room for conceptual misjudgment. Sell up Medibank and Medibank is still there and operating. What resources have now been freed up? The Government now has more money to spend but has this sale increased the real level of national savings? I don’t see it but am willing to be convinced. But what must be done is to demonstrate that wherever these resources come from they are not crowding out other even more urgently needed and value adding investments. Selling assets won’t ensure that in any way.

Contributing to a rethinking of privatisation is the opportunity to draw on superannuation funds as an alternative source of infrastructure investment.

Those superannuation funds are not presently idle. They are not just sitting around doing nothing. They are invested somewhere, in whatever places the various trustees see as the place where the highest returns can be found. What will be different now? How will these funds become available to governments? What will happen to the projects that are currently being funded by superannuation? There is nothing new here, and if the government is in any way intending to divert these funds using some kind of guarantee or what will appear to provide a more certain monetary return, we are going to see our resources being used less efficiently and our growth rates diminish. Infrastructure is not a magic word that guarantees the money will provide a positive return or the resources used productively. See the NBN for a reality check.

The private sector can shoulder the lion’s share but governments will continue to have a substantial funding role when it comes to non-commercial or social projects.

There’s no doubt about that. No business will go anywhere near this kind of thing. The one certain province for governments is to invest in loss making projects. They do it all the time whether they intend it or not. But if it is loss making then it is slowing the economy and lowering our living standards. There may be equity and other considerations but do not confuse any of these with economic growth. This is four percent of GDP we are talking about, $760 billion on their own reckoning. Bad news to start wasting so much on government projects with no positive return.

We should be seeing a virtuous circle where governments funds get good projects started and, once the asset is mature, it is then sold.

Whatever this is, virtuous is not the word I would use. Governments have NO ability at picking value adding projects, none whatsoever. Before you start on something new, give us the list of previous projects, over the past fifty years let us say, where government money has built some kind of value adding profitable investment. There is no history this side of the Snowy River which may well have been done by the private sector had it been given the opportunity. Governments should never be allowed to choose projects and where they do they should start by admitting that the project will never be profitable but is being done for some other reason. Governments should stick to national defence and road building. Maybe schools and hospitals, maybe. But for the rest, they should leave alone. They have no history of getting it right and there is no reason to think this will change and every reason to think they will get it wrong.

Governments should be encouraging more private investment in green field projects by properly dealing with the problem of early market risk. There are ways to use the government balance sheet to do this.

Danger, danger, danger! The way to deal with early market risk is to leave it to the market. It is the only way. Every business would love to have its risks covered by some kind of government bail-out guarantee. That is the certain way to end up with sub-optimal projects, misdirected investment, slower growth and lower living standards.

But in the end, this is only one man’s view although it is the particular man who will be chairing the Commission of Audit. Hopefully by the time he has come to the end of this process and released his report he will see things in a completely different way.

Where have all the workers gone?

participation rate us 2013

That’s in the US. I hadn’t seen this before but it comes as quite a shock. It is certainly lucky for the President that there’s a D after his party affiliation or else the media would have roasted him alive. Meanwhile back in Australia:

ELECTION of the Abbott government in September might have lifted businesses’ spirits but it failed to spark a hiring spree, with unexpectedly weak jobs growth in September and a further drop in the number of people looking for work.

The unemployment rate fell to 5.6 per cent in September from 5.8 per cent in August but only 9100 new jobs were created, not enough to keep the unemployment rate stable given population growth.

The participation rate – the share of the working-age population in or looking for work – fell to 64.9 per cent, the fourth consecutive monthly fall and the lowest level since 2006.

The total number of people actively seeking work fell a little to 697,000, while full-time employment grew 5000 to 8.1 million and part-time work expanded by 4100 jobs to 3.5 million, according to today’s release from the Australian Bureau of Statistics.

It is a bit early to expect any turnaround from an election that was only a month ago when these data were being collected. Not good figures at all, but they are part of the legacy our new government has inherited, exactly the kind of thing all Coalition governments inherit from their Labor predecessors.

Keynesian claptrap

‘We support genuinely liberal policies based on “Austrian economics” in contrast to the Keynesian claptrap routinely espoused,’ Day explains.

This is a quote from Bob Day, Senator Elect from South Australia in today’s Australian.

He thinks of it as Austrian economics but it is much older and broader than that. It is the economics of the entire economics profession during the entire pre-Keynesian era prior to 1936 starting from about 1776. Today’s macro, as I am fond of pointing out, is a classical economic fallacy. Until 1936, the economics of Y=C+I+G was seen as an absurd fallacy, obviously and unmistakeable nonsense. Now it is universally taught at all levels of economics as the fundamental truth.

Here is the issue. Y=C+I+G means total output in the domestic economy is determined by the total of consumption (C), private investment (I) and government spending (G). And thus, so far as this model is concerned, an increase in government spending is absolutely and in every way equivalent to an increase in private investment. If a mining company develops a new mine, according to macro theory, it is identical in every way in its effect on output and employment as increased spending on school halls. This is the economics taught in every mainstream first year macro course in the world. Claptrap doesn’t even get near how idiotic it is nor how destructive.

Welcome Senator Bob Day.