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global economic governance « Previous | |Next »
November 10, 2008

The disordered international response to the current financial crisis, with the IMF standing on the sidelines watching, has resulted in calls for a new global financial system. Talks are proceeding, as they say, on the need for co-ordinated action. And regulation? Will there be an international response to the global economic downturn?; a downturn evident in Europe, America and the decline in Chinese exports.

The consensus is that by itself monetary policy----cutting interest rates---is not sufficient to counter the contraction in global economic growth. The gradual improvement in money market conditions is not sufficient to stop the downturn in global economic activity. Wolfgang Münchau says in the Financial Times:

The reason is that the channels through which monetary policy affects the real economy are still clogged. There are several such channels, including ones for bank lending. But most of them go through the money market, as neither companies nor households have direct access to central bank money. To the extent that the money markets are not working properly, monetary policy is correspondingly ineffective....At this juncture, monetary policy is playing little more than a supporting role during this crisis.The most potent policy instrument we currently have at our disposal is fiscal policy.

Fiscal policy here means a stimulus package by governments. The International Monetary Fund called for governments to use fiscal stimulus to help their economies weather the slowing global economy. However, in the absence of a co-ordinated international approach nation states must do their own thing.

As the estimates of Australia's growth keep going lower, Australia, which is heavily reliant on raw material exports, is still hoping that Chinese demand for Australian raw materials will continue due to China's strong growth. Alistair Davidson observes in The Age that Australia cannot expect simply to ride in the slipstream of the two major economies, the US and China.

How well Australia weathers the storm and how shipshape it is when the storm abates will depend on how well the Australian Government manages monetary and fiscal policy and marries these policies to structural policies aimed at dealing with the even larger challenge of climate change and the related issue of peak oil....The best way to get the economy going is to undertake a program of infrastructure spending to fill the gap left by the drop in private spending.

Government is the spender of last resort. Davidson goes onto say that:
The argument put by state governments and the Federal Government, that government infrastructure projects must be pruned because the budget surplus is reduced, is one of the silliest arguments to have come out of this crisis. They are a throwback to the primitive arguments for procyclical balanced budgets made during the 1930s, which prolonged the depression until the threat of total war led to a huge increase in government spending financed by borrowing.

It is the content of a stimulus package that is contested. Many---including Münchau---- suggest that it means tax cuts. For others---Australia--- that means tax cuts and cash for working families and rescuing the ailing car manufacturers. For others ---China---means spending big on infrastructure investment.

China's stimulus package is huge--$850 billion, which amounts to almost 20 per cent of GD---and it is targeted at low-rent housing, roads, rail and airports and rural infrastructure. There are also measures designed to lift investment in plant and machinery, increased farm subsidies and the lifting of restrictions on bank lending. Will the stimulus help tilt China's economy away from exports and towards domestic demand?

| Posted by Gary Sauer-Thompson at 6:35 AM | | Comments (12)
Comments

Comments

Decisive action----A big subsidy ($6.2billion over 10 years) to the car companies in Australia by the Rudd Government ---the industry is the backbone of manufacturing and employment in Australia.

The subsidy is premised on the industry bringing new fuel efficient technologies coming on stream and investments to produce new models for consumers ----how can the US industry invest when they are in the process of going bankrupt in the US?

Its decisive action'----that must be the new buzz word or message point---no matter what happens in the US.

Referring to the US Robert Reich says that:

First, understand that the main problem right now is not the supply of credit.... The real problem is on the demand side of the economy. Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping... they're deeply in debt, and they're afraid of losing their jobs.

In the absence of consumer spending, businesses are not going to invest even if the banks are willing to lend. Monetary policy won't work if there's inadequate demand.

This at VoxEU (or the 44pp PDF)is worth reading in detail .

The "odd spot" in it was that Switzerland will need massive foreign aid, as the liabilities of Swiss banks are "multiples" of Swiss GDP.

Any bets that any such aid will be conditional on the Swiss letting non-Swiss law/tax enforcement agencies go through the books: global financial governance might be about to get a LOT better.

Being snarky, going through Swiss bank accounts might even find most of the "assets" that have gone "missing".

Will the most significant developments over the next five to 10 years be industrialisation in China and India, not the US-driven cyclical slowdown?

Nan,
Tim Colebatch in The Age reckons so

The new Australian car plan is just the latest in a long line of support packages for this industry to provide long-term certainty that is needed to underpin future investment etc etc. This industry has always been subsidised, and it is still not providing consumers with access to low emissions vehicles at the cheapest possible price.

The Rudd Government argues that things will be different this time, with "a high level of support at the beginning eventually tapering down to zero". There's was a bold plan to make the industry more competitive, responsive to consumer preferences and better equipped to deal with climate change. Rudd says:

Australia needs a green car industry that manufactures the fuel-efficient, low-emissions vehicles of the future and creates the well-paid, high-skilled green jobs of the future."

We may need this but that doesn't mean the car industry will build it or provide these jobs.

Peter,
yes a solar power industry would also provide the well-paid, high-skilled green jobs of the future. They could built this through a gross feed-in tariff - which pays people for all the power they generate, including what they use themselves and what they return to the grid.

It is this kind of scheme which is favoured by the solar industry.It prefers the feed-in tariff instead of the existing rebate system, which pays $8000 to households on incomes of up to $100,000 to install solar panels. The money has run out on the subsidy.

Canberra moves on car manufacturing but not on a national system for solar manufacturing and installation.

Lots of money for car manufacturers but nothing about mandatory fuel emission standards. It is all carrot and no stick. We are left with gas guzzlers. The local car manufacturers have failed to read consumer trends and to reposition themselves with low-emissions technology.

China's vast foreign currency reserves are currently being used to underwrite US debt through its ongoing investment in US Treasury bonds. Why would China continue to tie up its capital in America's debt-consumption economy instead of investing it in developing China the health, education and environmental well being of the Chinese people?

The Chinese must be starting to ask these kinds of questions, given the poverty in rural China.

Nan,
Shaun Carney in The Age says that there is a powerful fashion, in the federal Treasury, within university business schools, and among many media and political commentators, to deride the car industry.

He does acknowledge that these critics are right when they say that the industry is not efficient and is not productive enough, that it is too reliant on government assistance. His response is that:

The notion that Australia's car industry is somehow uniquely cosseted is a nonsense, as is the idea that governments of either political stripe are passive actors sitting on the sidelines when it comes to economic activity.

True, but we don't get a good product for the money that is put in---no fuel efficient cars. No green cars. What we get are gas guzzlers.


Robert Gottliebsen has a good article in Business Spectator on the car industry in Australia. Entitled Turbo-charged losses he argues that the changes coming in the motor industry are more profound than anyone has so far conceived.

They will affect every car owner, every motor dealer and every motor maker/or importer. Automotive will be the first industry outside property to be fundamentally changed by the banking and finance revolution.....any dealers will go to the wall or sell their business at low prices. Those that survive will do so because their financiers backed them.

They need finance to buy their stock and GE provides between one third and a half of the total finance, and GMAC which has about 10 to 15 per cent of the market, are pulling out around Xmas.

Peter.
Kenneth Davidson in The Age says that despite the promised $6.2 billion assistance, Australia could still end up with a car industry that assembles imported components. Assistance should be conditional on manufacturers agreeing to source transmissions, axles and engines in Australia. Detroit is in no position to argue.