Just hang in until we get the exchange rate right

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.

The manifest ignorance of Joe Stiglitz

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

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.

Leave the economy to find its way

The economy continues to sink. Even as the new Abbott government begins to clean out the stables, there is this report which I hope more will be made of. Via The Australian we are led to this report prepared by Australian Development Strategies Pty Ltd which is run by a former ALP Senator. This is how it starts:

The Australian economy has been generating jobs for only half the new entrants to the Labor market since early 2012.

The Labour underutilisation rate is now at 13.5 percent, virtually the same as the 13.6 percent we saw during the worst of the GFC in mid-2009.

While blue collar jobs in manufacturing continued to contract during the past six years of Labor Governments, jobs which were either funded or regulated by Government rose to unprecedented levels. [Bolding added]

They attribute this deterioration in the labour market to the new industrial relations laws which is, of course, a major part of the story. But what they do not attribute this to is the “stimulus” which re-directed our resources away from value-adding production towards the useless junk Labor is famous for funding. The last of the three points made above ought to drive home where the problems lie.

Leave the economy to find its way. Just cut spending and balance the budget as soon as you can. The rest will take care of itself.