October 29, 2012

the Asian century?

The Australian Government’s Australia in the Asian Century White Paper comes at a time when the mining boom is over and Australia needs to shift beyond being Asia's quarry, or Australia's traditional 'rocks and crops' engagement with Asia. It's a picture of Australia after the mining boom.

RoweD3p[oductivty.jpg David Rowe

The White Paper recognizes, it's own words, that:

The Asian century is an Australian opportunity. As the global centre of gravity shifts to our region, the tyranny of distance is being replaced by the prospects of proximity. Australia is located in the right place at the right time—in the Asian region in the Asian century....An increasingly wealthy and mobile middle class is emerging in the region, creating new opportunities. They are demanding a diverse range of goods and services, from health and aged care to education to household goods, and tourism, banking and financial services, as well as high‑quality food products.

It argues that it is in the interests of all Australians—and therefore in the national interest—to develop the capabilities and connections that Australia will need, so that we can contribute to, and learn from, the region, and take full advantage of these opportunities.

It's a good and familiar roadmap, as it one that we know quite well: Australia needs to lift productivity, be fairer, be smarter, be better educated etc. It is a more realistic road map than the Queenland's dinosaur one of coal being the future based on the coal industry's carbon capture scenario. Treasury secretary Martin Parkinson shows why.

He talks about three phases of Australia’s Asian Century boom: Asia’s extraordinary demand for our minerals and energy; then, as incomes rise, its demand for high-quality food; and finally, with the rise of Asia’s middle class, its demand for professional and tourism services and niche manufacturing.

However, the roadmap assumes that Asia is out there which Australia needs to adapt to. It does not see Australia as being within Asian, nor does it address the fear of Asia held by many Australians.

The puzzle is: how are we going to get to this kind of high skill future? The road map states that with the right plan, we can make the new middle-class Asia a new market for a high-wage, high-skill Australia. What is the right plan? For instance, how would the NBN facilitate this? If so, how?

Will it be through high-growth tech companies? Creating a world-leading technology city to rival Silicon Valley? Does Australia's Tech City---the Digital Harbor in Melbourne's Docklands---have a global profile? Are the majority of serious tech people in Asia and around the world now aware of "Tech City"? Does Australia even have entrepreneur visas' [a fast-track visa scheme for entrepreneurs]? Does Australia have a world-class computer science university near "Tech City"?

Unfortunately, there is no plan to implement the vision other an increase in schools studying an Asian language by 2025 and engaging with the history and culture of the nation states in the region. This "Asian literacy' covers over the probability that in a high-wage, high-skill Australia the wages of semi-skilled and unskilled workers in declining industries will continue to fall further behind those of skilled Australians. The gap between high and low-income earners will widen because unskilled workers will struggle to gain a foothold in the expanding skill-intensive sectors.

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October 26, 2012

Canberra Gaze: clean energy

Gillard Labor's economic plan is to scrabble and scratch to get out of, and stay out of, deficit in the face of a collapsing revenue base resulting from the after math of the global financial crisis. For many in the Canberra Press Gallery Labor’s credibility rests on it being able to present a half credible explanation of how it will fund the Gonski education reforms and the National Disability Insurance Scheme (NDIS) if revenue falls further. The surplus is their policy issue for the week.

RoweDminingtax.jpg David Rowe

For these political journalists economics has nothing to do with the transition to low carbon economy, even though the objective of the Mandatory Renewable Energy Target (MRET) is to encourage additional investment in renewable energy generation and to reduce emissions of greenhouse gases in the electricity sector.

There had been a concerted push to cutback the scheme, led by Origin Energy, TRUenergy (Energy Australia) and eastern state governments, particularly New South Wales and Queensland.

They were backed by lobbying from heavy industry, the Business Council of Australia), miners (the Minerals Council), the Australian Coal Association and farmers, and even some pricing regulators. Their aim was to stop the declining wholesale prices of electricity for the coal-fired power generators and utilities and to protect the future of their fossil fuel assets.

That has nothing to do with the economy either. What matters is economic growth and prosperity and the shift to green energy indicates the anti-business and anti-growth attitude of the Gillard Government.

The Climate Change Authority (CCA) in its Discussions Paper on the Renewable Energy Target (RET) scheme has rejected this push by the major energy players to reduce the 20 per cent renewable energy target. The paper says:

The Authority’s preliminary view is that the existing LRET target should not be changed, and that the benefits of any change at this time (either an increase or decrease) would be outweighed by the costs of increased regulatory uncertainty.....The Authority considers that the projected resource cost savings to society overall that might be achieved by reducing the target would not be large enough to offset the damage to investor confidence that such a change could entail.

This represents a defeat for the incumbent generators, state-owned electricity networks and other vested interests. The CCA has cut through their threats and the scare-mongering that were used to slow down Australia's transition to a clean energy future.

A clean energy future has nothing to do withe economy either. That's environmental stuff. They fail to see that the fossil fuel industry will only continue in the medium term as a form of back-up to renewable energy.

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October 22, 2012

fiscal discipline

The consensus is that today's Mid Year Economic and Fiscal Outlook (MYEFO) is driven by political imperatives rather than economic ones. The surplus itself is a political figure as it is really to show that the Labor government can manage the economy.

Today's MYEFO statement seeks to replace $4 billion in lost tax revenue this financial year, and $21 billion over four years through savings and increases in charges. Swan has made good on his 2012-13 promise to return the budget to surplus, even if it does involve accounting illusions of shuffling money in the way that company tax is collected.

RoweDbudgetsurplus.jpg David Rowe

Gillard Labor continues to slowly dismantle the Howard-era policy of middle class welfare and subsidies for private health insurance. Rightly, as I cannot see the importance of the baby bonus--it strikes me as bad public policy. No doubt the conservative's rhetoric will be along the lines of " cooking the books" to achieve an "imaginary surplus", but the Coalition do have a track record of opposing the means testing of the Private Health Rebate and reducing the amount of taxpayer subsidies going to big business.

Today’s rather predictable MYEFO confirms that government spending, in real terms, will fall by a record 4.4 per cent in 2012-13 with government spending being 23.8 per cent of GDP. So we have fiscal discipline and loosening monetary policy from the Reserve Bank of Australia in a slowing economy that is due to the low growth of the global economy. The fall-off in revenues is largely due to the fall in our terms of trade — that is, the global prices of our exports have come off the boil. The Australian dollar continues to remain high.

In this context Labor's commitment to the knowledge nation takes another battering with cutting skills training and investment in research spending and higher education. Half a billion dollars will be cut over four years from a program that helps pay overhead costs for Australia’s researchers. How does that kind of cost cutting help to develop the future of Australia beyond digging up, and exporting minerals?

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October 15, 2012

contradictory policies

Ross Gittens has a succinct account of the way that Australia's economy has been hit by two powerful, but opposing economic shocks: the expansionary shock from the resources boom and the contractionary shock from its accompanying very high exchange rate:

It's reasonable to attribute the Aussie's remarkable strength since the start of the resources boom predominantly to our high commodity export prices and vastly improved terms of trade.That makes it reasonable to expect the fall in export prices would lead to a commensurate fall in the Aussie, thus reducing its contractionary effect on our export and import-competing industries. But the historical correlation between our terms of trade and our exchange rate, while strong, can also be quite loose for fairly long periods. So it's not surprising the Aussie has held up so well.

Gittens says that is the Australian dollar could stay much where it is for years to come because those countries with the best growth prospects tend to have strong exchange rates whereas those with poor prospects tend to have weak exchange rates.

MoirAbudgetsurplus.jpg Alan Moir

Australia has a changing economy in a low growth global economy and the latter means lower economic growth for Australia. So the Reserve Bank lowers interest rates to stimulate the economy whilst the Gillard Government's attempts to save the budget surplus will contract the economy.

That contraction will provide more grist to the mill of the conservative populist movement as this movement stems largely from a decline in the economic and social status of the white lower middle classes and working classes which has been gathering pace sharply over the past five years.

Globalization has seen the squeeze on the middle class economic that is helping drive the conservative populist movement and increasing its volatility. Each right-wing populist wave--eg., Pauline Hanson--- as it recedes, leaves the Coalition Party several notches to the right from where it had been previously. Their rhetoric is built around a desire for a return to an idealized past, of a culturally and ethnically purer nation, a stable, traditional society, and a “moral economy” in which decent, hardworking people are guaranteed a decent job.

The white middle class feels embattled and threatened both economically and culturally with respect to the cultural world of conservative Christianity (both Protestantism and Catholicism). This culture is, to a very great extent anti-Enlightenment, and for convinced adherents of this tradition, much of modern Australian mass culture is a form of daily assault on their passionately held values.

The class resentments on the part of lower middle class and working class whites have largely been channelled into cultural hatred of the “liberal elites” and the increasing contempt for scientists and experts of every kind.

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September 25, 2012

The AFR's blind spots

The AFR's weekend editorial ---Federal election: finally, a fight is on----opens with the remark that the next federal election now appears to be contestable for the first time in quite some time. Many would disagree, but lets put that to one side for another time and use the editorial to examine what the AFR thinks the political context should be about.

RoweDDeficit.jpg David Rowe

The AFR consistently refers back to the clear rationalist policies Australia adopted after the mid-1980s currency and debt crisis and the bipartisan support for policy reform that helped open up the Australian economy in the 1980s and 1990s. It's advice, with respect to the present, is that:

This political struggle must hinge on a genuine contest of ideas and policies for managing the economy through a period of challenging structural change. But with strategists on both sides saying the economy will decide the next election, Labor and the Coalition need to do more to recognise and articulate the risks and opportunities ahead.Genuine policy debate has been eroded in recent years by what Business Council of Australia chief executive Jennifer Westacott this week described as political “short-termism” driven by ministerial staffers riding roughshod over the public service and the tactics of the 24-hour media cycle.

These are good substantive points. Policy matters because when then the mining boom ends, it leaves a weak, hollowed out economy. Hence the importance of how to address the Dutch disease.

However, the editorial immediately contradicts this policy position when it says that Abbott has been justified in calling Gillard out for breaking her promise not to introduce a carbon tax. That is politics not policy. The policy is about pricing carbon pollution, an emissions trading scheme, and shifting the economy from fossil fuel to renewable energy. The AFR simply ignores the policy.

The editorial says that the Australian Financial Review has been at the forefront of public debate about what needs to be done to make the economy more competitive and innovative as the mining boom moves into its next and more challenging stage. But there is no mention of the failures of energy market reform to incorporate the consideration of social and environmental policy issues, even though this has its roots in the 1990s framework of competition policy. Or the gold plating of electricity networks. Or the "Dutch disease" which occurs when a resource boom pushes the dollar up, hurting other industries which can’t compete internationally.

What then are the policies that the AFR reckons need to be in place to ensure economic growth post the mining boom? The AFR editorial says:

Our nation’s first priority should be to tackle the chronic underlying problems afflicting the federal budget, caused by governments on both sides squandering the wealth created by the biggest resources boom in more than a century. Labor seems to see just about everything through an equity prism framed by a redistributive ideology and its political opportunism. But now is not the time to kick off unfunded welfare schemes such as the costly National Disability Insurance Scheme and national dental care program, unless we have a clear handle on how to pay for them over the next decade.

Nothing about shifting to renewable energy, investing in digital infrastructure, or the information economy there. It's all about the politics of austerity.

There is a growing disquiet about disquiet about the growing gap between revenue and spending pledges. There is a structural problem in the commonwealth's revenue base in that that tax revenue isn't going to bounce back as they once did. So why highlight welfare reform and ignore the subsidies to the fossil fuel industry and the big miners?

The AFR's concern is with the high cost and low productivity economy:

The other key issue raised by the companies trying to generate wealth for Australia is our nation’s lacklustre productivity. Tackling this challenge means we have to recognise our industrial relations system is imposing high labour costs at a time when lower-cost mining competitors are increasing output to meet Chinese demand.

So we need lower wages and working conditions. There is nothing about investing in skills and education to improve productivity in a high tech economy.

The AFR reckons that it is focusing squarely on the quality of debate, analysis and advice that informs decision-making about public policy issues that are of vital importance to Australia’s prosperity, competitiveness and the living standards of its citizens. However, the issues it highlights are simply those of big business opposed to reform. It is about budget deficits, increasing and broadening the GST and reducing the power of unions whilst ignoring the other issues.

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September 11, 2012

Soros on Euro crisis

Many heavily indebted European governments are reducing their budget deficits at the same time as their economies shrink so that the debt burden as a percentage of GDP actually increases and they are forced to pay hefty risk premiums for access to funds. The real economy of the eurozone is in decline, Germany is doing relatively well, and the political and social dynamics are working toward disintegration.

In his The Tragedy of the European Union and How to Resolve It in the New York Review of Books George Soros says that:

The policies pursued under German leadership will likely hold the euro together for an indefinite period, but not forever. The permanent division of the European Union into creditor and debtor countries with the creditors dictating terms is politically unacceptable for many Europeans. If and when the euro eventually breaks up it will destroy the common market and the European Union. Europe will be worse off than it was when the effort to unite it began, because the breakup will leave a legacy of mutual mistrust and hostility. The later it happens, the worse the ultimate outcome. That is such a dismal prospect that it is time to consider alternatives that would have been inconceivable until recently.

In his judgement the best course of action is to persuade Germany to choose between becoming a more benevolent hegemon, or leading nation, or leaving the euro. In other words, Germany must lead or leave.

Soros argues that Germany has been thrust into a position where its attitude determines European policy. The primary responsibility for a policy of austerity pushing Europe into depression lies with Germany. As time passes, there are increasing grounds for blaming Germany for the policies it is imposing on Europe. Soros adds that the European Union that will emerge from this process of resolving the crisis :

will be diametrically opposed to the idea of a European Union that is the embodiment of an open society. It will be a hierarchical system built on debt obligations instead of a voluntary association of equals. There will be two classes of states, creditors and debtors, and the creditors will be in charge. As the strongest creditor country, Germany will emerge as the hegemon. The class differentiation will become permanent because the debtor countries will have to pay significant risk premiums for access to capital and it will become impossible for them to catch up with the creditor countries.

The prospect of a prolonged depression and a permanent division into debtor and creditor countries will result in the periphery seething with resentment, anger and hostility.

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September 10, 2012

that eternal Chinese boom

One major mega economic trend is the world economy shifting from west to east. Australia is potentially well-positioned to take advantage of the new world economy.

Today we have a mining bust in iron ore prices (55%) that few predicted in the mining industry, Treasury or the Gillard Government. Those in the mining industry saw sky high iron ore prices, and they believed these would continue, and they geared up their expansion plans for the ongoing boom.

They held to this belief even though post the global financial crisis Europe was in a depression and the US in a recession; and so the demand for Chinese manufactured export goods would fall, and there would be a decline in the Chinese steel mills demand for Australia's iron ore.

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Pat Campbell

What we were feed by the mining boosters was the eternal Chinese boom story:----ongoing Chinese urbanisation will effectively guarantee strong demand for commodities such as iron ore for the next couple of decades, while Beijing has several economic tools with which to arrest any immediate dramatic slowdown. Things are otherwise to this booster narrative.

In the AFR Elena Douglas points out that:

the terms of trade dividend delivered by the Chinese hunger for our commodities was returned to Australians as family payments A and B; royalties and tax receipts which could have been invested in productivity improving reform of all levels of education.... Real income growth that lasts comes from productivity improvement, and education is one of the biggest productivity levers governments have access to. It’s the education system, stupid, and it always will be.

Education is crucial for the development of high-tech manufacturing in Australia.

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September 9, 2012

the great free market

Neo-liberals say that state planners don’t know what people want. People know what people want, and entrepreneurs will invest and compete to supply those wants. If the product or service supplied is underused, useless or too expensive, it’s the entrepreneur who loses out, not the customers. That is the beauty of the free market and opening up the electricity system to competition.

In Australia in the mid-nineties State Government’s agreed to privatise their electricity public infrastructure under pressure from the then Howard Government. Privatization occurred in Victoria and South Australia.

James Meek in How We Happened to Sell Off Our Electricity in the London Review of Books makes a good point about the realities of privatising essential services such as electricity.

If you define the problem as the lights not going out... you misunderstand everything about the way the new world of electricity markets works. The ideal situation for private electricity firms is one where there is only just enough electricity to go round. Then they can charge as much as they like, and people will have to pay.

Though people think insecurity of supply means will the lights go off or not, that is not the issue. It is what happens just before the lights go off. For instance, the global electricity company takes a coal fired power station off line for "maintenance". This drives up the price of electricity, which meant more money for the global power company (eg., International Power and TRUenergy) for the other owners of coal-fired power stations. The customers pay the price.

In Australia despite the fall in wholesale electricity prices, customers have seen big increases in their electricity bills. The beneficiaries are the firms that distribute and sell the power. The inevitable next stage is for the companies that distributed electricity to merge with the companies that generated it--ie., the companies t sell customers electricity that they’ve ‘bought’ wholesale from themselves. This is ‘vertical integration’ with all its with all its potential for price-fixing and abuse of market dominance.

In Australia the international power companies have convinced the regulator and government that they have the right to be compensated for decommissioning electricity generation plants that are among the most polluting in the OECD. When they bought the Hazelwood and Yallourn power plants through the Kennet Governments privatizing process they knew that their emissions would be capped, a price paid for the right to pollute, and that a system of regulating emissions would be adopted and would affect the value of their power-plant assets.

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August 30, 2012

dental reform, finally

The $4 billion dental care scheme targeted at low and middle income people is an excellent idea and long overdue. The government will provide Medicare funded dental services to children and an expanded public dental service for low-income adults and those in rural and regional areas, as well as an additional investment in dental infrastructure and workforce.

It is good public health policy as it is preventative and maintenance oral care in the community, even though it depends upon there being a private provider being willing to offer services in one's area at a price one can afford.

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Outside health policy circles the reaction was more along the lines of the Gillard Government being on a spending spree, budget surpluses being blown out of the water, and the budget surplus for 2012-13 being a mirage.

The gigantic budget black hole scenario gives little acknowledgement of the Gillard Government making spending cuts in low priority areas to cover the budget surplus that is under pressure.

In the longer term there is the cost of the new higher priority programs ( the National Disability Insurance Scheme, which is expected to require an extra $10.5 billion a year within six years, the $4 billion dental care scheme, and the $5 billion a year for education recommended by the Gonski schools review) in the context of a mining boom that is winding down.

The argument is that China’s economic boom is showing signs of cooling, potentially torpedoing the federal government’s revenue projections. Iron ore prices, a main ­generator of government revenue, have tumbled below the level forecast by Treasury. The inference is that the days of the large surpluses being delivered by buoyant tax receipts are behind us and that the tax system will be unable to cope with new spending promises.

The political inference is the lack of fiscal discipline means new taxes to cover the budget deficit. That is, the Gillard Government is firmly in the tradition of big spending, high taxing Labor governments. They are bad economic managers--the familiar right wing riff.

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August 29, 2012

something rotten in free market economics

The free market economists are a strange lot. They have been, and continue to be, silent about the global financial crisis and they opposed to the use of market mechanisms (an emissions trading scheme) to deal with carbon dioxide pollution from coal fired power stations.

With respect to the latter, the Australian design is one of a fixed price period followed by Australia’s carbon price being linked to, and largely set by, the European price. Australia becomes a part of an international carbon market. The transition from a small standalone carbon market to a much larger international market will greatly increase market efficiency, providing Australian businesses with improved liquidity, reduced volatility, lower marginal costs of abatement and lower transaction costs.

The free market economists at the IPA, who are hostile to subsidies for green energy schemes, are also opposed to the carbon market setting the carbon floor price. In emissions trading the government merely sets the target; it is the market that sets the price. Alan Moran, for instance, talks of a humiliating backdown in the AFR:

In now saying the tax will be linked to that of the European price by allowing Australian carbon dioxide emitters to buy emission indulgences from the EU, the government has conducted four somersaults and a belly-flop...It is time to recognise that the carbon tax is a total failure of policy and to dismantle it before it does further damage to the economy in general and to consumers in their power bills.

The opposition is really a hostility to a transition to a low carbon economy, and the free market economists hunt around for arguments to justify their opposition.

The opposition to a transition to a low carbon economy is premised on a denial of the existence of global warming. If we set free market economics in a broader political context, with greater emphasis on the role of institutions, then behind the denial of the existence of global warming lies the fossil fuel industry and its opposition to the transition to a low carbon economy.

Tristan Edis in Climate Spectator says that:

The base case scenario, assuming no change to European policy settings, is that rather than having the Australian carbon price plummet from $25.35 in the last year of the fixed price period to the $15 floor on July 2015; they instead drop to around $10-$15 – the forecast price for European carbon allowances (EUAs). Such a price would be insufficient to drive much fuel switching in the electricity sector, nor support serious amounts of tree planting, nor notably improve the economics of energy efficiency initiatives....it’s not anything close to a level that would stimulate a clean energy transformation.

The upside is that Europe digs itself out of its current economic morass with deeply indebted governments and this lifts the forecast price for European carbon allowances (EUAs).

These low prices aren't enough to substantially reduce emissions and drive investment in clean energy today. This is why additional policies, such as the Renewable Energy Target and the proposed national Energy Savings Initiative, are required to ensure we transform Australia's high carbon economy.

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August 24, 2012

after the mining boom

BHP Billiton’s news about falling profits and that it was shelving the planned $20 billion expansion of Olympic Dam (a uranium, copper and gold mine) is a clear indication that the mining boom is winding down. It was subdued commodity prices, declining terms of trade, and higher capital costs associated with removing billions of tonnes of overburden at Olympic Dam that was the basis of BHP Billiton’s decision.

Mining booms collapse in the face of global economic crises--China’s economy has slowed in response to the economic crisis within the eurozone and the sluggish state of the US economy. The peak in investment in Australia is close. The temporary boom doesn't do that much for increased employment and income within Australia, given the hollowing out of the manufacturing sector.

MoirAMiningboom.jpg

So where to now for Australia? We do need to start thinking about a "post-resource" Australia. Will it be a transition to a low-carbon economy? A deeper engagement with an information and /or digital economy? Will the focus be on brains and high-quality products---a brains-knowledge-information-skills based society that protects the environment?

We have probably seen the the last gasp in the expansion of the coal, oil and gas industries as tge economic transformation is underway with the fossil fuel industry on the defensive.

Will there now be a massive investment in education and training now that we realize that the future of Australia is not in the resource-based industries. Nor is it in manufacturing at the low grade product low-skilled end. It is more in the high IT end.

The Liberal Party have reversed their position from smashing and tearing down the NBN anymore to accepting that the NBN is there to stay. They propose to build a cheaper NBN---a Fibre-to-the-Node (FttN) instead of Fibre to the Premises (FttP) --its short term thinking.

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August 2, 2012

John B. Cobb on economics

In this interview in Eurozone John B. Cobb, the co-author of For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future, says that:

the academic discipline of economics is based on the idea of Homo economicus. This assumes and reaffirms extreme individualism. Members of the species Homo economics compete with one another for scarce resources. Policies based on this understanding of human beings typically result in the destruction of human community. Even if the result is also that there is more consumption of goods and resources per capita, the people involved are, for the most part, not happier or better off.

If the neo-liberal system of governance is arguably in free fall, then what currently exists in opposition to neo-classical economics is an ecological economics that is premised on the interdependence and coevolution of human economies and natural ecosystems over time and space. It was largely a response to a real or perceived lack of physical and biological underpinnings in neoclassical economics.

Cobb adds that the idea of the common good is oppositional to market fundamentalism because it depends on an understanding of community:

If we approach matters individualistically, as standard economic theory does, then the good of a group of people is simply the addition of the good of individuals. But we believe that each persona is largely constituted by her or his relations with other members of their social group, and by the way the group as a whole is structured and relates to other societies. Individuals are much better off if some of the societies to which they inevitably belong are communities in which all feel some responsibility for all.

He adds that the good of the community involves a pattern of relationships among its members and a concern on their part for how the community as a whole is doing.

The wellbeing of the community directly improves the wellbeing of its members. Why cannot the ALP talk that language? Is it too beholden to economism to be able to do so?

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August 1, 2012

Wayne Swan's John Button lecture

In his 2012 John Button lecture entitled entitled Land of Hope and Dreams Wayne Swan talked about the ends of economic policy, by which he means what sort of society we want, and the sorts of lives we each aspire to lead. In this he follows John Button who, Swan says, put economics to work for the betterment of the country.

RoweDALPraft.jpg Swan refers back to, and comments upon, his essay in the March issue of The Monthly. He says his claim then was that:
the rising influence of vested interests is threatening Australia's egalitarian social contract. I argued that a handful of powerful people not only think they have the right to a disproportionate share of the nation's economic success, they think they have the right to manipulate our democracy and our national conversation to gain an even bigger slice of the pie.In the wake of the debate my essay unleashed, let me make one further charge: there is an equally concerning view emerging that such vested interests should somehow be immune from criticism. They should not. They think the rest of us should fear them. We do not. I certainly do not.
He adds that he was accused of preaching class warfare, and called unfit to be Treasurer of Australia.

I was told that I was siding with the wealth consumers not the wealth creators; that I wanted to slice the pie not grow it; and that my day job was simply to shut up and to make the wealthiest Australians wealthier still. In short, the idea was promulgated that I had transgressed some new, unwritten Australian law that limits the scope of our democratic debates in this country with this command: don't criticise the powerful, don't argue for equality.

He adds that rather than risking a stagnant and widely divided society, we should be – and are – building a society with a vast middle class and a high degree of social mobility. That's the meaning of economic equality in the 21st Century and it's the central and abiding purpose of the Labor cause today.

Swan is right to say that inequality in Australia is increasing --it has been since the 1980s. Sadly though, Swan doesn't go on to say that the ends of economic policy are happiness, the well-being of the population, or the good life. Equality is a good because it is a necessary pre-condition for the well being of the population.

That point needs to be made because those on the Right are opposed to equality and favour inequality - because it produces wealth creation---so you need an argument to show why equality is better than inequality. Swan doesn't provide that, other than appealling to the fair go.

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July 25, 2012

educational reform

Educational reform in Australia is now primarily seen in terms of increasing labour productivity and workforce participation rates in order to increase economic growth. It is usually discussed in terms of funding with the subtext being that of class rather than the quality of the education or encouraging critical thinking. Despite this, teacher quality is commonly held to be the key to improving the required neo-liberal educational outcomes.

In Gonski Takes Labor Back To Schools in New Matilda Ben Eltham reminds us that it was the Howard Government that broke with the 25-year settlement in Australian schools funding, in which the states funded the government schools, the Commonwealth funded the universities, and parents and churches funded private schools with some residual support from the feds.

The settlement was overturned by Howard and Kemp when they poured billions into private school education, with the result that Canberra now gives more money to private schools than it does to universities: more than $36 billion in federal funds will flow to non-government schools in the period 2009-2013.

According to Eltham the recent policy review of the schools system by David Gonski established the following:

One was that Australia’s school standards were dropping compared to international benchmarks. Another was that big gaps in quality had opened up in the Australian system — between top private schools and run-of-the-mill government schools, between capital cities and remote regions, and between indigenous and non-indigenous students. Finally, the Gonski report restated what everyone knew, but some were trying to deny. Schools funding is a dog’s breakfast — a complex and confused mish-mash of Commonwealth, state and territory funding systems and socio-economic formulas that were neither sustainable nor adequate.

Gonski recommended that the entire system of schools funding be reformed, with the eight state and territory standards and the alphabet soup of SES and AGSRC replaced by a single, national standard for funding per student that would apply across all the education systems of the land, public and private.

Will the Gillard Government bite the bullet?

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July 19, 2012

Will Ford be next?

Ford Australia's recent firing of 440 staff from its manufacturing operations in Melbourne and Geelong primarily comes from its bad corporate governance. It is a failure to adapt to a changing market--rising fuel costs, the shift in consumer preferences for smaller, more fuel efficient cars, and the emergence of electric cars. Unsurprisingly, the Ford Falcon has had poor sales.

Why would you provide protection and subsidies for such a company? The shift noted above has been coming for many years and Ford Australia has been a dumping ground for second-hand technology by Detroit, which has not allowed its local subsidiary to be innovative. So Ford Australia continue to produce large, fuel inefficient motor vehicles, and they sell fewer and fewer vehicles.

Australian governments have compounded the problem because they have refused to introduce emission standards on Australian cars that have been in place for five to ten years in other developed countries. Secondly, the Australian car industry persists only because of industry protection and government subsidies designed to prevent industry collapse.

The Australian market is too small for car manufacturing. Nissan has gone. Followed by Mitsubishi. Is Ford next? Those that remain must innovate and export if Australia is to have a car industry.

The global market shift to low-emitting, fuel-efficient vehicles is going to make it difficult for the local car industry--- which produces predominantly large, high-emitting vehicles – to compete internationally. High emission standards mean Europe and parts of Asia no longer want locally produced cars.

Anna Mortimore rightly says:

Simply throwing money at the local car industry will not necessarily increase sales and save jobs. Funding should not be supported if the local car industry fails to make the necessary technological changes to significantly reduce emissions of its large vehicles to meet the government’s proposed targets. The industry must also introduce new fuel-efficient vehicles that consumers would rather buy.

Australia doesn't need an backward looking industry dependent on corporate welfare to survive. In a global market Australia needs an industry that expands the technology base--eg., ensuring that Australia is not left just with internal combustion production and R&D, but that it is centrally involved in designing and making alternative car power plants.

Update
An editorial in the Australian Financial Review entitled Car industry is not worth the price argues thus:

the problems of the domestic car industry are likely to become worse, with local car plants already operating at below optimal scale. ....Multinational car manufacturers are too accustomed to working the old political economy of Australian protectionism that delivers handouts from the government when they run into trouble, rather than becoming efficient enough to stand on their own two feet.....A fully fledged car industry capable of designing and producing a new model from concept through to on-road testing confers prestige, and has an innate appeal.....But that prestige is unlikely to be worth the annual price tag, estimated by the Productivity Commission at $1.6 billion a year in industry subsidies.

It concludes by saying that in the midst of a mining boom that is generating severe skill shortages, those funds would be better directed to pursuing our comparative advantage in resources and mining-related services, rather than throwing subsidies at an industry that is not market focused and does not deliver on promises it makes.

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July 16, 2012

Ken Henry on Australia's two speed economy

In his speech to the Australian Conference of Economists at Victoria University, Melbourne on 12 July 2012 Ken Henry argued that Australian businesses outside the booming resources sector will continue to face falling international competitiveness and options such as “offshoring” will need to be considered.The implication is that Australia is in for some potentially turbulent times despite our strong resource-led economy.

He also argued that the debate around lifting Australia’s productivity and our international competitiveness has become confused, with a common but incorrect belief that growth in the resources sector can off-set weakness in the non-resources sector:

there is simply no feasible set of such adjustments that would reverse all, or even a large proportion, of the loss of international competitiveness that is presently being experienced by Australia’s trade exposed non-resources industries. The shock to resources prices has simply been so large that a considerable structural adjustment, including a reallocation of labour, is required. It will happen.

He adds that though it is true that Australia is not the only economy experiencing substantial structural adjustment because of the re-emergence of the major Asian economies, that is not the same thing as saying that Australia will avoid substantial structural adjustment.

He finishes thus:

It is no exaggeration to say that, if Australia is going to navigate successfully the structural adjustment to the terms of trade shock presented by the extraordinary growth of China and others in the region, a new mindset will be required: a new mindset in government, certainly; but a new mindset in business and the broader community also.

While the mining industry has surged ahead in terms of employment growth, areas such as manufacturing, transport and warehousing, agriculture and retailing have gone backwards. Hence Australia's two-speed economy and why many Australian’s seem so pessimistic despite the apparent strength of the nation’s economic performance at the macro-level.

Hence a future of constant change, structural unemployment, labour disputes and political divisions between perceived winners and losers in Australia’s non-mining and resources firms as they struggle to reinvent their business models.

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June 18, 2012

Greece: its going to get tougher

Greek voters failed to conclusively back a new government on May 6 to lead them out of a debt crisis that has seen the nation consider default on their debt repayments and shake the euro zone to the core.That failure, which resulted in days of painstaking negotiations as the nation’s main parties scrambled unsuccessfully to form a coalition government, set the stage for the Greeks return to the polls votes on Sunday.

AdelaidePosterGreece.jpg Gary Sauer-Thompson, travel poster, Adelaide, 2012

The vote on Sunday is seen as referendum on Greece’s current bailout and its strict austerity measures.This election could prove just as inconclusive as the last; or more likely, a coalition will be reached following Sunday’s election because the situation in Greece is now more desperate than it was in May. It is more than likely that the right---ie., New Democracy--- will gain the most votes, forms a coalition, and Syriza becomes the opposition.

Meanwhile the social security system is collapsing, hospitals are suffering dire shortages, one in four workers is unemployed and the rest fear that their turn is coming. Women have been hit hard: not only have they been disproportionately affected by public sector cuts but are also still expected to do the lion's share of care work. People remain unpaid.

Its going to get tougher for Greece. It stays in the eurozone with a weak coalition government mandated to go along with a long and brutal process of austerity that reduces the cost base of a weak Greece. From Berlin's perspective Greece is a lost cause, but the sole reason for it not being abandoned is that it may make a bad situation a lot worse.

The harsh economic reality is that the drivers of the global economy have shifted to Asia (eg. India and China) and that Europe faces a decade of low growth. The 21st century is an Asian century.

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June 14, 2012

getting debt down

Glenn Stevens, the Governor of the Reserve Bank, Glenn Stevens, in a speech titled, "Glass Half-full" last week has observed that the nature of public discussion is unrelentingly gloomy despite reasonable growth, low inflation and unemployment.

This gloom and negativity has intensified over the past six months. even before the recent turn of events in Europe and their effects on global markets, Australian's were grimly determined to see their glass as half empty. This is in the context of the multi-speed economy undergoing structural change due to the mining boom.

PopeD hell.jpg David Pope

Why the gloom? Steven's says that one reason is that the period of real household assets per person rising at 6 per cent or more per annum and households actually to withdraw equity from their houses, to use for other purposes came to an end in 2007. Households began to save to reduce debt levels and their consumption patterns have shifted from goods to services. That impacts on the retail industry.

Stevens adds:

the key message for today is that the multi-speed economy is not just about the mining sector squeezing other sectors by drawing away labour and capital and pushing up the exchange rate. It is doing that, but slower growth in sectors that had earlier done well from unusually strong gains in household spending would have been occurring anyway, even if the mining boom had never come along. It is these changes in behaviour by households, in asset markets and in credit demand, that I think lie behind much of the disquiet – dissatisfaction even – that so many seem to have been expressing.

This post-boom depressive public mood is in flight from the structural adjustment currently happening behind our backs in the sense that is expresses an unwillingness to adapt to the changes.

You can see the negativity in the fears that fears that widespread deployment of solar PV and wind could not be supported by the national electricity grid. Behind the fear of fluctuations is the resistance to the development of a highly flexible electricity grid and one that is designed or adapted for renewable energy sources. Behind that resistance stands a refusal to change, let alone end, the dependence on centralised fossil fuel generation (ie coal) and shift to to renewable energy based society.

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June 13, 2012

Eurozone: beyond bank bailouts?

The eurocrisis as Paul Krugman points out now has a familiar pattern. The economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed.

The European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve. So a crisis of the market has been transformed by free market ideologues into a crisis of public spending.

Across Europe, the biggest slump since the 1930s has been used to push through policies straight out of some neo-liberal playbook: the slashing of taxes on the rich and major corporations; the selling off of public services; and a bonfire of workers' rights.

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So a crisis of the market was cleverly transformed by free market ideologues into a crisis of public spending. Across Europe, the biggest slump since the 1930s has been used to push through policies straight out of some right-wing dream: the slashing of taxes on the rich and major corporations; the selling off of public services; and a bonfire of workers' rights.

Will there be any real policy action that goes beyond bank bailouts?

Charles Grant in Germans, the Euro and the Painful Truth in the New York Times says that:

German officials know that a healthy euro requires deeper euro-zone integration. They recognize the need for some sort of “banking union.” They accept that they will have to talk about “euro bonds” — pooled borrowing for the euro zone — but say that a fiscal union enforcing budgetary discipline must come first. They want an “economic union” that would push the euro zone’s weaker members to become more competitive. That would mean giving the European Commission the means to cajole governments to alter policies in areas such as pensions, labor markets, privatization and company taxation.

Meanwhile the backlash against austerity is emerging for good reason: the politics of austerity has sucked growth out of the economies in Greece , Ireland, Spain failed to tackle debt, dramatically increased unemployment, and devastated living standards.

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June 8, 2012

doing it tough

The link between "the end is nigh" scenario and the booming economy is less the bad economic news from Europe or China's economic growth stalling. It is more the declining house prices in Australia.

Jessica Irvine in the Sydney Morning Herald points out that:

After falls of about 5 per cent last year, figures from RP Data-Rismark show home prices fell 1.4 per cent last month alone across five capital cities - Sydney, Melbourne, Brisbane, Adelaide and Perth. Over the year ended May, the falls range from 8.5 per cent in Melbourne, to 6.5 per cent in Brisbane, with Sydney down by a smaller 3.5 per cent. Sydney's housing boom went bust nearly a decade ago now, giving it a head start on price pain .... Turnover has slumped, with families preferring to withhold properties and not sell into a weak market.

She adds that after a decade long debt binge, spurred by lower interest rates and freer availability of credit, households remain financially stretched.

RoweDspeedster.jpg David Rowe

Australia had enjoyed housing and consumption booms on the back of cheap credit. The period of asset price inflation has come to an end and Australia's debt-fuelled housing boom is over. Households are paying off the debt on their massive mortgage bill and a markedly reduced rate of home ownership among young Australians.

The recession in Europe doesn't help because Europe faces a lost decade as creditors continue to shift the entire burden of debt adjustment onto debtors. The division between debtor and creditor countries looks to become permanent, with Germany dominating and the periphery (Greece) becoming a depressed hinterland.

Proposals from the Grattan Institute to broaden the GST to include the 40 per cent of spending devoted to things like education, health and fresh food--it would add about $20 billion to GDP and allow significant lower personal and corporate tax rates ---aren't going to help restore consumer confidence. It would be politically difficult--eg., it would be seen as squeezing working Australians to benefit the Big Miners who oppose carbon price and the renewable energy .

This is especially so with a couple of decades of an aging population in front of us and Australian corporations claims that the carbon price will cause huge economic damage---"a carbon tax would be "disastrous" for jobs and industry" and saying that Australia will suffer some kind of investment strike as a result of the carbon tax.

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May 29, 2012

strange times indeed

It's strange times that we live in. Australia's economy is booming compared to Europe and the US and yet most Australians have been persuaded by the Liberal Opposition's doom and gloom narrative that we are all going to hell in a bucket. The world is going to end in the sense that Australia is becoming like Greece or Spain.

We live in an inverted world in Australia and few notice the inversion. Even though young Greek and Spanish professionals are coming to Australia to look for work and to brush up on their English, or the rest of the world sees Australia as a winner from globalisation because of mining, Australian's are miserable and unhappy. They are angry and full of sob stories, even though the interest rate, the unemployment rate and the inflation rate are all less than 5 per cent.

PettyBAustralia.jpg Bruce Petty

What is causing the ruination, decline or unhappiness? Why the mining tax. And the carbon "tax". Bad industrial relations. And a minority government. Too much red and green tape. Expensive housing. These are damaging our economy big time.

The arguments in support of the doom and gloom thesis are thin. One popular one is that Greece went downhill because of government debt, Australia has government debt, therefore Australia is going bad. The evidence? These are the worst economic conditions in decades, nay in living memory. How so? We are in debt. The credit cards are maxed; mortgaged repayments are high; house prices are flat; consumers aren't spending; too much money is being spent on the welfare state rather than reducing taxes.

The Coalition is asking for a mandate to undo all the Rudd/Gillard policies that have bought about Australia's "decline". They seek their mandate through a campaign of unremitting negativity designed to show the minority government is causing all the chaos through its reforms. Chaos means political uncertainty--a government lurching from crisis to crisis exemplified in backbench rebellion. The impression is that everything is a crisis.

Big Business says it lacks confidence and can't invest. It won't until there is a majority government from an early election.

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May 20, 2012

Greece: a hard road ahead

The Greek economy has problems over and above a high level of indebtedness resulting from the Greek government being spectacularly spendthrift.

Nikos Chrysoloras lists them for us.There are the problems of public finance mismanagement, over-reliance on public and private consumption, lack of medium and large export-oriented enterprises, low competitiveness, tax evasion, and weak administrative capacity. In the absence of any export capacity (eg., raw materials) restoring the competitiveness of the Greek economy and changing its structure is the only way for the country to survive in the absence of cheap credit.

RowsonG8.jpg Martin Rowson

It's a hard road ahead for Greece as the hard landing cannot be avoided, even if there is a relaxing of the timetable of Greece's deficit reduction and budget cuts.

Posted by Gary Sauer-Thompson at 10:37 PM | Comments (1) | TrackBack

May 7, 2012

left + right policy hands

So the Reserve Bank reduces interest rates last week, while a week later, fiscal policy is set to be tightened in an attempt to bring in a budget surplus. That are two policy arms working at cross purposes. The implication of the former is that because the economy is sluggish, the RBA has cut rates to provide a stimulus.

The budget surplus, on the other hand, is contractory in that the fiscal austerity weakens the economy slows economic growth and increases the potential rising unemployment. That would mean the RBA would have to reduce interest rates even further to compensate for a slowing economy.

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If the economics doesn't make sense the politics does. The Gillard Government is in such a weakened position that it is forced to prove its credentials as good economic managers. The underlying current is that the Gillard Government can’t be trusted to use our money appropriately and so we should be giving them less of it. The best way to do this is to end the waste and curtail government spending.The rhetoric here is one of 'bloated' or 'inefficient' public services.

Deficits generate debt and the optimum amount of public debt is zero is the position of corner-shop economics or household budget economics. Therefore achieving a surplus or balance the budget is taken as a measure of fiscal responsibility. This is cast in stone, and holds even when Australia doesn't have a fiscal sustainability problem, and that the scenario is one in which fiscal policy will make economic slowdowns even more severe.

The politics of budget surplus in a period of economic slowdown is a political goal with no economic rationale. Will the politics work for the Gillard Government? Or will they be accused in The Australian of fooling around with dodgy figures, constructing surplus mirages and playing around with smoke and mirrors?

Posted by Gary Sauer-Thompson at 10:56 AM | Comments (1) | TrackBack

April 30, 2012

e-publishing

As we know the digital revolution is disrupting the music industry, photography, newspapers, television and book publishing. With respect to the latter the e-book looks to become the publishing market's primary engine. Authors will go digital-first and the most successful will land a traditional book deal with legacy publishers.

Jason Epstein, in an interesting post on the US government's Justice Department’s suit against Apple and several major book publishers for conspiring to fix retail prices of e-books on the New York Book Review blog, highlights how digital technology is a disruptive technology for book publishers. His succinct observation is that:

The revolutionary process by which all books, old and new, in all languages, will soon be available digitally, at practically no cost for storage and delivery, to a radically decentralized world-wide market at the click of a mouse is irreversible. The technologically obsolete system, in which physical inventory is stored in publishers’ warehouses and trucked to fixed retail locations, will sooner or later be replaced by the more efficient digital alternative.

Amazon is leading the way. It set out to charge $9.99 per e-book download, considerably less than it was paying publishers for their e-book inventory. Amazon’s own pricing strategy—which, unlike Apple’s and the publishers’--- is to sell e-books below cost to achieve market share and perhaps a monopoly.

Amazon’s competitors could not afford such a costly strategy. Publishers wanted to be able to set the price of titles for sale on the site, not Amazon and ensure DRM to prevent piracy. Publishers have countered Amazon’s pricing policy by adopting the agency pricing model, in which inventory is not sold to retailers, but consigned to them as agents who are compensated by a fee. The retailer in this model does not purchase content but acts only as the publishers’ representative, and so they has no right to determine the retail price.

The publishers’ move has triggered ongoing antitrust investigations in Europe and Washington, D.C., over whether book publishers and Apple illegally colluded to raise e-book prices. We have shifted t from the near-monopoly we had before the agency model, via the oligopoly we have today. What we don't have is a truly competitive retail market that also supports midlist sales.

There have been are lots casualties on the information highways, and no doubt, there will more. The traditional music industry, for instance, was devastated by the onslaught of the digital economy and also refused to adapt and went into all sorts of legal battles trying to protect their traditional market. Ultimately they failed. Apple then became one of the largest players in the digital music market with 220 million iTune users.

Posted by Gary Sauer-Thompson at 9:32 AM | TrackBack

April 19, 2012

neo-liberalism on the attack

Joe Hockey goes to London and the Institute of Economic Affairs --"the UK’s original free-market think-tank” to call for the end of the welfare state in western democracies. Entitled The End of the Age of Entitlement Hockey says that for western democracies the party is over. The "party" is wanting a lifestyle we cannot afford but are quite happy to borrow from others to pay for.

RoweD.jpg David Rowe

The strategy is to reduce the size of government, because we need to give people, individuals, families, small businesses more control over their lives to be able to compete with our nearest neighbours in Asia. Hockey says:

Despite an ageing population and a higher standard of living than that enjoyed by our children, western democracies in particular have been reluctant to wind back universal access to payments and entitlements from the state....It is ironic that the entitlement system seems to be most obvious and prevalent in some of the most democratic societies...So, ultimately the fiscal impact of popular programs must be brought to account no matter what the political values of the government are or how popular a spending program may be.

Whose entitlements is Hockey referring to? Corporate welfare? The diesel fuel rebate? The welfare state? Or middle class subsidies--such as those for private health insurance and wealthy private schools? It's the welfare state of course.

Hockey was primarily referring mostly to Europe, Britain and the US, but Australia is placed in the context of its Asian competitors. He says that in contrast to Hong Kong with its low taxes and no safety net Western democracies:

have enormous entitlement systems spanning education, health, income support, retirement benefits, unemployment benefits and so on...In all these areas people are enjoying benefits which are not paid for by them, but paid for by someone else – either the taxes of those who are working and producing income, or future generations who are going to be left to pay the debt used to pay for these services.

Government revenue in these western economies still falls well short of meeting current government spending initiatives.The difference is made up by the public sector borrowing money. These entitlements have now begun to hang like a millstone around the neck of governments, mortgaging the economic future of many Western nations and their enterprises for generations to come.

What strikes me is not Hockey's candour in speaking out or his courage about cutting back on the entitlement culture in Australia. It is the hypocrisy. Few have done more to promote such a culture than the Coalition Government under John Winston Howard.

Secondly, whilst in opposition the Coalition has fought almost every effort by Labor to means-test or otherwise curb welfare entitlements. True, it has supported budget crackdowns on the proliferation of such benefits as the disability support pension, but it has opposed any move by the government to go after so-called middle-class welfare, such as the private health insurance rebate, the baby bonus or the family tax benefit. It has opposed paring back of subsidies to big miners and the fossil fuel industry, whilst attacking further subsidies for the automotive industry.

Hockey's neo-liberal policy is very clear: increase the incentives and support for business to get growth and profits back (ie., shoring up the private sector) and take a hard look at the welfare entitlements of the people. Some entitlements are better than others and those of the working people who depend on the welfare state for their well being will be subject to the pruning knife.

It is the continuation of the backlash against the welfare state and the push for a new political economic order in the 1970s; a backlash whose fundamental feature is fundamental feature is the disciplining and disempowerment of the working class.

Anytime there is a crisis in a nation state the neoliberals say the problem is the strength of the welfare state, it's the huge expenditures of the welfare state. Their practical aim is to redistribute wealth towards the upper classes. and ensure that it is concentrated there by restoring class power in a very narrow band of the political economic elite.

Posted by Gary Sauer-Thompson at 6:54 PM | Comments (13) | TrackBack

April 16, 2012

rethinking economics

Most of the commentary in the mainstream media around Bob Brown's resignation as leader of The Greens and his retirement from federal politics- doesn't critically address the philosophy behind The Green's politics. The strong emphasis on the politics is somewhat surprising given The Green's claim that they, unlike the others, are a values based political party.

PopeBBrown.jpg David Pope

The Greens reject GDP as the dominant measure of human progress as they are in favour of a more integrated set of ecological, social and economic goals and measures because they consistently highlight the social and environmental costs of the continuation and expansion of capitalism at all costs. They argue that the current economic model or paradigm based on the limitless exploitation of the earth’s limited resources has reached its use by date.

It is surprising given the UN's recent recent conference on a new wellbeing and sustainability based economic paradigm that effectively integrates economic, social, and environmental objectives.

It is a counter paradigm to the neo-liberal one, which as Susan George pointed out, is premised on the idea:

that the market should be allowed to make major social and political decisions; the idea that the State should voluntarily reduce its role in the economy, or that corporations should be given total freedom, that trade unions should be curbed and citizens given much less rather than more social protection. In this model the market mechanism is the sole director of the fate of human beings and their natural environment... the economy should dictate its rules to society not the other way around.

There is little questioning of the neo-liberal economic in the mainstream Australian media because it is culturally hegemonic and it appears to be the only possible economic and social order available to us. It is natural and inevitable. Democracy is an encumbrance.

It is the Australian Greens who challenge and question this economic model. Hence the ideological attacks from those commentators in the mainstream media who support the neo-liberal agenda of flexible labour markets, deregulation of financial markets, removal of protective tariffs and subsidies on essential goods, privatisation of state-owned industries and utilities, commodification of services once provided free at the point of use, and the shift from direct and progressive to indirect and regressive taxation.

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April 15, 2012

rolling back environmental legislation

The neo-liberal mantra of removing red tape on business is basically a cover for the rolling back environmental legislation and regulation. An example.

This softening of environmental protection laws currently involves blocking solar power, dumping greenhouse targets, cutting the solar feed-in tariff by more than half, opposition to water reform in the Murray-Darling Basin.

RoweDGreentape.jpg David Rowe

As Bob Brown pointed out Australia's environmental laws are weak and inadequately policed and big business is proposing whole areas be quarantined for their own business interests in seeking profits. An example is allowing six mega coal ports inside the Great Barrier Reef and proposals for this world heritage area as a dumping ground for dredging spoil.

The Coalition states want more power to approve developments and they reject the idea of cooperative federalism.

The default neo-liberal position is antagonism to The Greens' questioning of boundless economic growth, industrial progress and free-market economics in the name of greater sustainability and the need for a shift to a low carbon economy. Hence the neo-liberal hostility to substantive action on climate change and the anger, nay hatred, towards a party which is pro-environment.

Posted by Gary Sauer-Thompson at 11:12 PM | Comments (6) | TrackBack

April 5, 2012

budget surplus fetish

Will the Gillard government stick to its guns, make some tough decisions, deliver cuts, defy reduced tax revenues and accede to the neo-liberal budget surplus mode of governance? A budget surplus is deemed to be good fiscal policy and is akin to austere (and rather fundamentalist) household budgeting even though , federal tax revenue since the global financial crisis has fallen by the equivalent of 4 percentage points of gross domestic product [about $60 billion a year].

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Apparently a budget surplus is a political imperative not a economic one. Debt must be paid off and budgets balanced. If not, then the Gillard Government can be accused of government of profligacy. Look what happened to Greece and Ireland. So argue the fiscal conservatives with respect to the ALP's economic management.

Since the prevailing view in the electorate that the ALP"s Coalition opponents are superior economic managers, the notion of economic management is a fundamental political issue confronting the ALP.

Labor has allowed itself to be locked into the current economic orthodoxy on a permanent basis thereby consigning itself to a very narrow range of economic and social policy choices. In the context of falling government revenue budget surplus means cost cutting. Since the $32 billion military budget remains as sacrosanct as the budget surplus, neo-liberal idea of budget surplus means cuts to schools, universities and hospitals.

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March 23, 2012

dump the subsidies to the big miners

So Holden will only stay in Australia and produce cars if it is subsidized by the federal and state governments. These days the subsidy is badged as co-investment---a strategic co-investment, not a handout says the PM.

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From what I can gather manufacturing is being hammered by the high dollar, and Holden General Motors would have left town without government subsidy. Its a strange old world isn't it when governments pay the big miners making super profits from the mining boom a diesel fuel tax rebate that now costs the federal government about $2 billion a year.

Pulling the plug on that rebate to the big miners--not just tighten it---would be a good way to address the ongoing problem with revenue shortfalls and help bring the budget back to surplus. It represents spending cut which is what will be needed to get the budget back to surplus.

In The Australian Judith Sloan critiques the propping up of the car industry from a neo-liberal perspective. She says:

let the car firms get into shape and, if they want to quit Australia, let this happen. We can then devote resources to assisting the displaced workers. With unemployment close to 5 per cent and structural adjustment creating jobs in other sectors, the timing is close to perfect. Alas, the government has come to a fork in the road and taken the wrong path. By propping up an uncompetitive industry and sucking resources from elsewhere, we are all poorer and less equipped to meet future challenges.

She doesn't mention the subsidies to the miners or the aluminum or coal industry. Presumably these are competitive industries, whilst the car industry isn't? So the issue isn't government intervention per se that is the problem----it's the protection of uncompetitive industries.

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March 21, 2012

Australian forest industry

Tasmania is still caught up in the conflict over logging native forests for export woodchip, even though Gunns is on its last legs, half of Australia's chip exports now are plantation-based, and the native forest industry is on life support through government subsidy.

Lyndon Schneiders in The Age reminds us that it was in the 1960s and '70s that export wood chipping of native forests became entrenched:

Export wood chipping was portrayed to sceptical Australians as a sensible way of finding a market for those parts of a logged tree that could not be processed by a sawmill. But within a few years wood chipping became the only economic reason for logging native forests. By the 1990s, millions of tonnes per year of native forest woodchips were exported as sawmills quietly closed across the country. Now, with changing market expectations, the world has lost its taste for woodchips from Australia's ancient forests.

Demand has dropped and the native forest industry is dying. Without considerable government input the forestry industry could not survive.The time is opportune for governments in Australia to shift virtually all of the wood production out of native forests and into the plantation area.

Judith Ajani says that commodity wood production becoming a part of agriculture would allow native forests are valued primarily for their contribution to biodiversity conservation, climate change mitigation and water conservation. She argues that the forestry industry:

should be a plantation-based industry. That’s where the industry is actually heading to. I mean it’s struggled, of course, to get there, but it is getting there. And if we overlay the plantation resource with a processing [industry] policy which we all know has got the wealth and the jobs, and much more in the processing levels than exporting raw materials. Then we have got the potential to have a very vibrant and very prosperous and jobs-rich forestry industry.

I'm not sure what has happened to the ‘peace deal’ between the forestry industry and the environmental groups over 430,000 hectares of old growth native forest in Tasmania.

Posted by Gary Sauer-Thompson at 9:28 AM | Comments (4) | TrackBack

March 20, 2012

a different narrative

The Gillard Government is hardly adrift or marooned in the sense of its capacity to pass legislation. It is actually is being very successful at doing this. Gillard has now passed the second of the three agenda items she promised to fix when she assumed the prime ministership nearly two years ago.

Yet the tendency in the mainstream media is interpret the country through our leaders. The argument---if there is one ---goes something like this. Gillard is unliked by ordinary Australians. She has a credibility problem. Her speeches are flat and dull. Therefore Labor is increasingly on the nose. Most voters oppose key policies. That is why the Opposition would win an election hands down. Australia is a conservative nation.

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The hard reality is that Australia's economic fortunes and well being primarily depend on the sustained demand for commodities from the major five Asian countries (China, India, Indonesia, Japan and Korea) not on Gillard's personality or lack of it.

Unless there is continual economic growth in the economies of the US and the developed world and therefore the Asian countries, then the demand for Australian mineral resources will fall. Australia's economic growth will then flatten.

Posted by Gary Sauer-Thompson at 9:12 PM | Comments (14) | TrackBack

March 19, 2012

out of sync

I've been photographing in and around Queenstown Tasmania for the past week or so and the postings on junk code have been non-existent. As I haven't had time to read the newspapers online because I've mostly been out on location, I'm kinda out of touch with the various events in the Canberra beltway.

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Queenstown, and the south-west of Tasmania in general, is still about mining. Development is mining. Despite the growing tourism, the world from Queenstown is seen through the eyes of the mining industry. Hence the mining tax becoming law is what is significant.

It is taken for granted that the mineral resources rent tax would dent investment in resource development and damage the mining industry. What is is interesting is that the resources boom appears to have little economic impact on Queenstown---the wealth is not being spread around.

The town remains depressed. It desperately needs investment in regional development and skills. There is little investment coming from the state government. So the way the proceeds from minerals resource rent tax (MRRT) will be used with respect to infrastructure investment is crucially important.

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March 13, 2012

taxing the miners

The mining magnates or the chief executives in the mining industry sure complain a lot as they go on about an outrageous assault on their industry by the state.The way they act and speak its almost as if they own all the gold, iron ore, coal and uranium that is in the ground and the state is a mere rentier.

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The reality was stated clearly by Ken Henry's 2010 tax report:

The community, through the Australian and state governments, owns rights to Australia's non-renewable resources and should seek an appropriate return from allowing private firms to exploit these resources.....'Current charging arrangements fail to collect a sufficient return for the community because they are unresponsive to changes in profits.

The Liberal/National Coalition has fallen in line with the Big Miners---ya gotta ease the tax burden on the miners because they are carrying the country on their back and the load sure is real heavy. Or something like that.

What's even worse than their moaning and groaning is their charade about clean coal---its just a public relations tool to stop meaningful policies to reduce greenhouse gas emissions--- even though Australia’s land and oceans have continued to warm in response to rising CO2 emissions from the burning of fossil fuels.

The huge resources projects going ahead in Queensland and Western Australia are proving to to mean real pain ahead for the many workers and small businesses caught in the cross-fire of a soaring dollar and uncompetitive local industries.

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February 22, 2012

the digital economy

Paul Buddle observes that people are shifting from the view that the National Broadband Network (NBN) means more than just fast internet access. It is part of the transformation of the Australian economy into a digital economy:

Those who are still talking about broadband as an end in itself do not understand the situation. Broadband is simply the tool that will further enable and advance the digital economy. So those who are looking at broadband in isolation are totally missing the point.....Included in this group is the Liberal opposition in Australia...To them broadband is ‘it’ – they are completely missing the point of the digital economy.

Over at The Drum Nick Ross agrees. He says that healthcare, education, business innovation and, in many quarters, society in general will be revolutionized for all Australians-- - particularly for those in rural areas plus the elderly. The NBN is an infrastructure which provides a platform for business, services and innovation.

You can see the emergence of the digital economy with the effects the internet is having on the music industry, the publishing industry, the retail industry, the media, the commercialisation of web 2.0 space by Facebook, Google; and more subtly with e-education, e-government, e-banking and e-health.

In this newly emerging economy information in digital form is facilitated by the digital devices that allow the free movement of vast amounts of information in the shortest time possible between people in different parts of the world. We are becoming aware that a digital economy and knowledge is increasingly becoming a substantial driver of economic growth and that it will underpin the majority of future job creation in Australia.

When the mining boom is over it is the national broadband network which will provide Australia with the opportunity to become a global hub for digital talent, and for the high value technology-enabled and content-driven businesses that depend on that talent.

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February 14, 2012

policy contradictions

In his Labor's Policy Confusion in the Australian Financial Review Luke Malpass argues that the current situation of Alcoa (reviewing the viability of its Point Henry smelter) highlights the divisions within the Labor Government.

Last week the plight of Alcoa highlighted the mutual incompatibility of new Labor and old Labor. One Labor Party is trying to save jobs and manufacturing in Australia, and the other is enacting a carbon tax that is designed, over time, to destroy many of these jobs ... Prime Minister Julia Gillard’s “new economy” of green jobs will supersede the “old economy” of presumably dirty jobs.

His argument is that over the medium term, the two policy objectives – loosely defined as jobs and carbon reduction – are fundamentally in conflict. Whilst the government claims it is in the Hawke/Keating tradition of reform, trade policy aside, its policy settings look like a mixture of 1970s fortress Australia remedies at one end, and postmodern green fixes at the other, with Hawke and Keating nowhere to be seen.

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Malpass, who is a Policy Analyst with the New Zealand policy unit at The Centre for Independent Studies, interprets this to be a confusion about ends and means. The government has conflicting objectives, and employs means that work against each other. The so-called new economy cannot work without an artificial price to see out the old, and the old economy is being propped up and encouraged through subsidies and “transitional assistance”.

Malpass is not a free market economist who denies the existence of market failure. He is opposed to Australia's emissions trading scheme--Australia should reconsider its ill-fated scheme--- because he judges it to be poor policy. He is in favour of an emissions tax that could be linked to corporate tax cuts.

What he overlooks with Alcoa's current situation is that the Point Henry operations is caused by a high dollar and falling prices for aluminum. He also ignores the corporate welfare--the huge subsidies--- given to this multinational firm by state and federal government have been there from the beginning. It is estimated that Alcoa Australia has received a total of $4.5 billion in subsidies for its plants at Point Henry and Portland.

The old economy has been propped up from the very beginning--and not just by Labor Governments. The industrial policy of the newly federated nation state was to use the protectionist recipes of the mercantilists to industrialize and to defend its defend the nascent manufacturing industries against British and American predominance.

Manufacturing is now in long term decline as Australia goes through long term structural change driven by the global economy. It is an economy in transition. The current electricity subsidy arrangements are coming to an end in 2014. There are no reasons why aluminium smelting should continue in Victoria. It is not part of the new economy and it is definitely not clean and green. The workers in the old smelter plant---the 30 year old Point Henry smelter is out of date and inefficient---should be assisted in the processes of retraining and job search.

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January 31, 2012

sacrifice, and more sacrifice

Giovanni Tiso, who runs the Bat Bean Beam weblog, has an interesting article in Overland entitled Europe’s perfect ruins. In it he addresses the neo-liberal narrative of the Euro sovereign debt crisis.

Tiso says that this narrative pits:

the profligate south versus the hard-working, virtuous, nose-to-the-grindstone north...the brutal austerity measures enacted in Portugal, Greece and Ireland (and, to a lesser extent so far, Spain and Italy) are a fitting punishment. The sin of profligacy, of living beyond one’s means, needs to be castigated: .. if [Greece] were relieved painlessly of its debt, then other economies in similar strife would have no incentive to cut expenditure and improve their fiscal position.

So Greece, and Italy, are forced adopt draconian measures that increased unemployment while benefits, services and public sector salaries were slashed in exchange for some relief for its creditors. If every country were as industrious and hard-working as Germany, then the entire euro- system could sustain itself indefinitely along a virtuous and prosperous path.
The flaw with this narrative says Tiso is the lack of automatic internal balancing mechanisms within the economic and monetary union.

As economist Michael Burke, and others, have noted, a region undergoing economic problems within a nation state, even a federated one, would automatically pay less tax on its reduced income and receive a larger slice of the overall state revenue in the form of increased social services and benefits. But the eurozone has no such facilities, leaving governments hit by the crisis powerless and their populations exposed to the repercussions.
Apparently the architects of the monetary union, aware that no governance provisions had been made to enable the centralised political control of fiscal policy necessary in a crisis, rested their hopes on an expectation that such provisions would be created in response to a crisis.

The response to the crisis is that the core economies possessing the money for a bailout (ie. France and Germany) are free to dictate its conditions without being subject to a union-wide democratic process. The real enforcers of the draconian measures that policy-makers advocate are the financial markets.

For Italy or Greece to service their large debt requires a sufficient pool of creditors who trust in your capacity to keep up with the repayments. If the pool shrinks, the interest rates go up and lo!, suddenly you find that you really can’t pay back the money. Loss of confidence. Another round of austerity measures is required. More sacrifice to prevent the interest rates from climbing to 7% levels on its bonds, which would put Italy and Greece on the brink of bankruptcy.

More sacrifice is required for those on mid to low incomes: doing without modern hospitals, having to work longer, abolishing the indexation of pensions; less protection from arbitrary dismissal; tax on home ownership; increase in value-added tax. If interest rates on the bonds climb, then that means the financial markets have judged the austerity measures are not harsh enough.

The problem with the austerity measures is that it leads in the short and medium terms to shrinking output, less government revenue and therefore debt burdens that become unsustainable. That increases the probability of governments defaulting, thus threatening the solvency of banks across Europe.

Posted by Gary Sauer-Thompson at 10:19 AM | Comments (4) | TrackBack

January 13, 2012

South Australia: a new era?

Mike Rann and Kevin Foley have finally gone after a decade of running South Australia. The achievements of their Labor Government for the state during this period have been mostly buried beneath media spin including all the nonsense about having to maintain the state's Triple A rating. There was so much spin during this period that it came to define the Labor government itself; so much so that it lost credibility and public trust.

Can the Labor Government under Jay Weatherill reinvent itself whilst ensuring that car manufacturing (Holden) stays in SA? The argument for ongoing subsidies and government bailouts to a global car industry is that a manufacturing base prevents Australia from being the quarry for the Asia Pacific.

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The car is a big issue in SA politics---and it is not limited to General Motors Holden's plans to pull up stakes. Adelaide is car centric. For instance, the lack of comprehensive, long-term public transport plan for the state means that Adelaide City Council vision of an open, liveable city frequented by bikes, pedestrians and public transport commuters not swamped by slow-moving cars remains just a vision.

Business---ie Rundle Mall--- resist the reduction of on-street parking so as to allow footpaths to be widened and enhance pedestrian activity. Why? Shoppers will be slugged an extra cost to use multistory car parks. So they shop in the suburbs. The overheated rhetoric from the car owners is that a reduction in on-street parking means bleeding consumers dry and closing Adelaide down. The car is sacred.

One of the reasons the car is sacred is because of the low density suburbia built on the urban fringe, thereby forcing people into cars on on our now congested roads.

So I don't expect much to change with the e Labor government apart the style.The most we can expect is competent administration.

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December 27, 2011

Boxing Day consumption

Apparently Xmas sales have been sluggishthis year. There has has been none of the mad frenzy of crowds of eager shoppers elbowing one another to grab a bargain. Retail is doing it tough but the sector remains optimistic that the consumers will dig deep.

Why bother to rush into the sales when 'the sales' are the new normal; when everything is discounted all year round to counter the low consumer confidence:

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This is the biggest shopping weekend of the year and it will be make or break time for many retailers. The challenge for the store chains is to turn browsers into buyers at a time when the bricks and mortar retailers are in economic trouble.

It's worse in Europe, of course, with the increase in unemployment, a squeeze on family budgets and government spending cuts as the euro crisis deepens. There its economies and institutions that are crumbling.

No doubt the neo-classical economists will continue to posit that market economies efficiently work towards equilibrium and harmony at a time in Europe when where no such harmony exists ie., the "Market" looks to be inherently destabilising. So the market, contrary to neoliberal belief in the superior power of The Market to efficiently fix any problem, may actually be incapable of fixing every problem. The reason? Capitalism is inherently unstable and lacking in equilibrium.

If you recall, the economic profession's response to the great financial crisis in 2008 was that it was a rabid outbreak of ‘irrational exuberance’. What happened to the economic assumption of rationality (maximization of a utility function) of ‘rational’ economic agents? Apparently they were caught up in their 'animal spirits', meaning that people get a little irrational from time to time. The inference in that irrational decision-making helped cause the housing bubble in the US not market failures in financial markets, externalities or disinformation to consumers.

As Philip Mirowski points out:

The problems with the financial system in 2007 had nothing to do with participants lacking correct incentives to purchase enough ‘information’ which would have revealed the dodgy nature of the collateralized debt obligations (CDOs) and other baroque assets which clogged the balance sheets of the financial sector. Rather, the reams of information that they did purchase, from ratings agency evaluations to accounting audits to investment advice, was all deeply corrupted by being consciously skewed to mislead hapless clients and evade the letter of the law.

What resulted was financial system collapse and so any economic analysis based on equilibrium and harmony is inherently flawed.

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December 15, 2011

'the market'

Isn't it strange how an abstract entity (the market) is personalised (the market feels) and that this person is driven by a desire for confidence -or ephemeral intensities. If there is no confidence there is chaos. What is supposed to be stable and self-regulating becomes chaotic. "The market" we are reliably informed doesn't like chaos, even though the stock market is chaotic.

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Governments must intervene to prevent the descent into chaos, yet we are also told that "the market" has a deep antipathy to government intervention, since it represents the road to serfdom. "The market" expects that further fiscal belt-tightening to address the structural deficit is needed in order to better enable the economy to meet any future economic challenges, whatever they may be.

Media commentators just repeat the lines without bothering to think about what they are saying, and that is a good illustration of t the hegemony of neoliberalism and its axioms of self-regulated and efficient markets. Neoclassical economics then plays the role of a meta-ideology as it legitimized, mathematically and "scientifically," neoliberal ideology and deregulation.

Behind this sits the political coalition of capitalist rentiers and financists who mostly benefited from the neoliberal hegemony and from the process of financialization in which the financial system finances speculation not productive investments.

Posted by Gary Sauer-Thompson at 3:59 PM | TrackBack

December 12, 2011

financial instability

Public discussion of the roots of the financial crisis has faded into the background whilst the political moment for restructuring the financial system and its institutions has passed. However, it is important to remember that the global financial emerged in the US, and that its form of capitalism has changed: greater financialization, declining manufacturing (Americans stopped making the products they continued to buy: clothing, computers, consumer electronics, flat-screen TVs, household items, and millions of automobiles.) rising inequality and stagnant wages. This has transformed its economy.

The financialization phenomenon, which has lead to the dominance of the financial capital in the economy, came about because of the financial deregulation wave that started in the 1980s.This financial deregulation stimulated the emergence and/or growth of more sophisticated financial instruments and institutions. It enlarged both the maneuvering power of private financial agents and the magnitude of the money multipliers, in such a way that total liquidity ended up being basically independent of the monetary base.

So we have debt piled upon debt, more and more complex linkages between financial institutions, and an explosion of financial layering in which financial institutions borrow from one another to lend. So we have a stage or form of capitalism that is marked by the potential for deep instability, with massive pools of funds, directed by professionals seeking the highest possible returns, generating successive speculative bubbles in stocks, real estate, and commodities. Examples include pension funds, sovereign wealth funds, mutual funds, and insurance funds.

These large pools of managed money were (1) for the most part unregulated and (2) able to compete with regulated banks. Speculative trading became the norm and a debt financial bubble ensured.

Hyman P. Minsky argued that the transformation of the economy and its financial structure from robust to fragile is due, not to external market factors like government intervention and regulation, but to the “normal” operations and incentives of financial capitalism. Minsky argued that the very “success” of this financial economy—its upward euphoric booms—accounts for its dangerous instability.

The instability emerges when the banks had an insufficient supply of good assets to offer as collateral against loans—just trashy real estate derivatives plus loans to one another, all backed by nothing other than a fog of deceit. As default rates rose, banks realized not only that they held shoddy mortgage products but that other banks and financial institutions did as well.

It was a house of cards. After the crash -the debt-financed bubble burst--asset prices collapse while liabilities remain, leaving millions of private sector balance sheets underwater. In order to regain their financial health and credit ratings, households and businesses are forced to repair their balance sheets by increasing savings or paying down debt. This act of deleveraging reduces aggregate demand and throws the economy into a very special type of recession.

Borrowers are disappearing, banks are reluctant to lend, and governments in the US and Europe have adopted a policy fiscal consolidation when a sick private sector is minimizing debt. A lost decade looms.

Posted by Gary Sauer-Thompson at 9:10 PM | Comments (3) | TrackBack

October 1, 2011

GST: no longer a growth tax

George Megalogenis is one of the better columnists in the News Ltd stable. He discusses policy issues instead of politics, and he does research instead of the polemics against, and yelling slogans about, the Gillard Government. It makes a welcome change from the superficial nonsense that is routinely peddled by the mainstream media.

His Swan needs to read the bottom line; the GST is burning a hole in his budget column in The Australian is a good example as it highlights one of the issues that needs to be addressed in tax reform. The Australian tax system does require an overhaul to facilitate a more productive economy.

In his column Megalogenis raises an important issue:

The GST was supposed to abolish inefficient indirect taxes and take the weight off income taxes. It was also meant to leave the states better off, because the GST replaced the annual begging-bowl festival of the premiers' conference. The GST achieved all three goals for a while, but the past few years have seen John Howard's proudest reform lose its value to the nation.

The temptation on the Coalition side is to blame every red mark on fiscal policy since 2007 on Labor, but the GST is unarguably the Coalition's baby. At the peak of its revenue-raising powers in 2002-03, GST collections were worth 3.9 per cent of gross domestic product. The final Peter Costello budget in 2007-08 left them at 3.7 per cent. Next financial year, they will be 3.4 per cent. The gap of 0.5 per cent of GDP may well be the difference between federal surplus and deficit in 2012-13.

Simply and directly stated: the GST is no longer a growth tax. That has implications for the states since they depend on the commonwealth for nearly a half of their revenue.

It cannot be laid at the door of the Gillard Government because the GST was the Coalition's baby and three of the nation's four biggest states - NSW, Victoria and Western Australia - are already in conservative hands. Every dollar Canberra doesn't raise from the GST is one more dollar the states have to find elsewhere in their own budgets.

Megalogenis also give us an explanation for why the GST is no longer a growth tax. The advice in this year's budget is that the GST is losing ground because the items not in the base - food, rent, health and education - have experienced faster price rises than the goods and services that are taxed.

Megalogenis also highlights the significance of the GST 's decline for the federal government and states:

Swan and the conservative states have a mutual reform interest in the GST. Swan needs to restore federal revenue as a share of GDP, while the states know they have to secure their budgets beyond the phony accounting of property and gambling booms. Voters in NSW and Victoria, in particular, dismissed their Labor governments because they had not spent enough on public infrastructure. If Barry O'Farrell and Ted Baillieu want to avoid history's stain of being do-nothing premiers, they need more revenue from Canberra so they can open their wallets on behalf of their states.

So Australia has a policy problem that rises above the current right left polemics hostilities. Should there be a 12.5 per cent GST? Or a GST with an expanded base? What should be done with the inefficient indirect taxes (eg., stamp duties) of the states? Should the GST continue to be used to take the weight off income tax?

These are issues that should be included for discussion amongst others in the two-day tax forum this month. A tax forum discussion paper has been released.

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September 24, 2011

US: a double dip

Paul Krugman's argument about the “fiscalization” of economic discourse in America is one that refers to the way in which a premature focus on budget deficits--ie., slashing spending and reducing deficits so as to restore confidence and drive economic revival----has turned Washington’s policy attention away from the ongoing jobs disaster.

Growth-oriented policies--not trickle down economics--- are what is required to address the issue of long-term unemployment. The US economy is in crisis. People are hurting. So government must act, and it needs to act quickly.

As Robert Reich puts it this way:

When consumers can’t spend and businesses won’t spend without additional consumers, government must be the spender of last resort. Juicing the economy back to health ... will require at least $700 billion in additional federal spending this year and next. But this magnitude of additional spending isn’t feasible in the face of Tea Party Republican intransigence. Hell, Republicans won’t even spend additional money on flood and hurricane relief. The Tea Party obsession about the federal deficit and the size of the government is prevailing.

The Republicans are determined to keep the US economy in the doldrums. Their goal is to get Obama out of the White House and that’s more likely to happen if the economy is in recession come Election Day 2012. They'll trash the political and economic institutions--the government is the problem; make the whole process of governing bitterly partisan and rancorous --- to do it.

Since monetary policy will probably not ride to the rescue--the Republicans have effectively put an end to fiscal stimulus, and now hope to derail monetary stimulus as well. So poverty and unemployment will almost surely increase, wages will stagnate or continue to fall, and inequality will widen and Wall Street will win the battle against regulation.

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September 8, 2011

with friends like these

Here we go again. Another ex-Labor bully boy trashing the federal Labor Government and recycling conservative talking points in the attack. It's Michael Costa in The Australian. In his Trashing the Hawke-Keating legacy where he lays the boot into Keynesian economics from a neo-liberal perspective:

It was Rudd who undermined Labor's economic credentials with his overblown anti-capitalist rhetoric and overcooked policy response to the global financial crisis. So desperate was he to avoid a small technical recession that he unleashed an undisciplined spending spree that, despite its Orwellian marketing, provided little in quality economic infrastructure. Rudd was able to manipulate the short-term quarterly aggregate economic data sufficiently to avoid a technical recession, but this manipulation has left Labor with the political legacy of programs such as Building the Education Revolution, the pink batts installation and the cash for clunkers scheme, which have become synonymous (rightly or wrongly) in the public mind with government incompetence and mismanagement.

He adds that massive spending programs, such as the National Broadband Network, have added to the perception of a clueless administration spending recklessly on frivolous luxuries that are high risk and of no immediate consequence to the real day-to-day concerns of people struggling with cost-of-living pressures and urban congestion.

I'm surprised that Costa makes no mention of "the carbon tax destroying Australia's economy" talking point, but he does add for good measure that Gillard's real NSW disease is her alliance with the Greens.

Costa's home is The Australian, the mouth piece of Australian conservatism, as he works within Murdoch's political beliefs and the ideology of News Ltd, which is conducting a high-volume and unbalanced campaign directed against the Gillard Labor government. There is a vindictive streak running through this--- Costa appears to be settling old scores?-- and this fits in with the way News Ltd routinely acts in a vindictive manner to those it designates as the enemy within. News Ltd profits from its vindictiveness.

As a result of the bully boys in the Coalition, the Murdoch press and the shock jocks there is has been an increase in the level of venom and aggression in the public discourse to the point of toxicity.

Posted by Gary Sauer-Thompson at 9:35 AM | Comments (4) | TrackBack

August 24, 2011

Australia + the 'Dutch disease'

As we know, the high Australian dollar is caused by the mining boom and it means decline for manufacturing. This relationship is known as the "Dutch disease" and the symptoms of the "disease" are mass job cuts and the loss of skilled and semi-skilled employment in manufacturing and other industries to the booming resource sector.

Conventional economics holds that a country ought to specialise in industries in which it has a comparative advantage, so a country rich in natural resources would be better off specialising in the extraction of natural resources. Thus Treasury, in its submission to the Inquiry into the state of Australia's manufactured export and import competing base now and beyond the resources boom, explicitly says:

Governments are no better placed than firms and investors, responding to signals in the market, to determine whether a shock is temporary. Instead, the government can more effectively help the economy achieve its productive potential by allowing the market to operate unimpeded and allow resources to flow to their most efficient use. This will achieve improved productivity, economic growth and expanded national income in the long term.

The wisdom is that attempting to resist this natural decline in manufacturing’s share of the economy would be a mistake, just as it would have been a mistake to try to have preserved Australia as a predominantly agricultural country. Australia's economy is primarily a services economy.

In the short term that means firstly, the money that we earn from the rivers of cash flowing from the mining boom can be spent on cheaper imports of steel, cars, solar panels--ie., the tradable goods sector; and secondly, that we don't need to continue to make things.

It's called structural adjustment as mining the mining industry becomes a larger share of the economy. and there is a decline in manufacturing, tourism and education exports. Australia's place in the global economy is to be a quarry, and that means ever greater dependence on China and commodities.

What is increasingly clear is that the benefits of the mining boom are not being shared across the population. So what happens to the displaced workers who cannot relocate to work in the mining operations in Western Australia?

What is not being suggested yet are measures to sterilize the boom revenues into a sovereign fund, or investment to boost the competitiveness of the manufacturing sector. What is surfacing is a rise in protectionism in manufacturing along with the expansion in the mining industry. Secondly, Australia is not investing in developing the skills and knowledge base that would help Australia to make makes things that are different tomorrow than the tradeable goods made yesterday.

So the non-mining parts of the economy are being run down, or hollowed out , by the mining industry that only employs around 3% of working Australians. This puts the breaks on the reform programmes because of slower growth in productivity and the economy's growth driving up inflation.

Posted by Gary Sauer-Thompson at 3:07 PM | Comments (16) | TrackBack

August 18, 2011

killer blows?

I have to agree with Giles Parkinson's judgement in Climate Spectator that the conservative's political strategy in Australia is one of opposing a carbon tax and a cap-and-trade scheme, undermining a clean energy policy, and attacking piece by piece, state-based incentives for to encourage the emergence of a renewable energy industry .

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This strategy is expressed very clearly around solar energy. Though Australia has more sun than any other country there is a deep seated opposition to solar power. There is also a determination to scale back any support for renewable energy (including wind energy) in WA, NSW and Victoria. The impression that is given is that the conservative's energy policy is that electricity is, and should be, produced from coal fired power stations.

That is Australia's future. So the renewable energy industry has to be strangled at birth by creating a variety of log jams despite all the talk about the transition from coal to gas to ensure that Australia achieve its 2020 targets. In WA, where mass deception about global warming is widespread in the media, that rhetoric looks more like talking up the North-West Shelf gas as Australia's next big thing.

The economic justification for conservative's conception of Australia's future is the neo-liberalism antagonism to strong environmental mitigation targets because it is defined as a big constraint on economic and political autonomy of corporations and a broad regulation of the market. This antagonism results in a deep-seated anti-ecological and anti-social bias because it favours the profits of the corporations now, not the long term public interest. The result is a degradation of the physical and biological environment.

Thus the flow of pollutants into the underground water tables or aquifers created by the 'fracking' process of extraction for coal seam gas (CSG) is held to be a cost that, with the right discount rate applied, is almost negligible alongside the immense benefit of the energy we extract from CSG. If the tactic is to keep economics and ecology separate, the result is that governments are no longer trusted on the issue.

As Jeff Sparrow highlights that:

what makes neoliberalism distinctive is its virulent hostility to any authority or values other than the market... In neoliberal theory, the laws of supply and demand regulate morality and aesthetics just as surely as they regulate everything else. What sells is, by definition, good, and vice versa.

That means neo-liberalism is hostile to neo-conservatism and the latter's emphasis on religion, tradition, nuclear family, and culture and it trashes everything the neo-conservatives hold dear. So the hostility to the left (renewable energy is used to hold the free marketeer's and neocon's alliance together.

Posted by Gary Sauer-Thompson at 11:20 AM | Comments (8) | TrackBack

August 15, 2011

Tasmania in transition

The Tasmanian Forests Intergovernmental Agreement (IGA) is a step away from the the old Tasmania that gnerated its wealth from resource extraction.The deal will protect 430,000ha of wild forests in the Styx, Tarkine and Huon while refocusing industry on plantations and investing $120m in regional development, with the latter dependent on the state passing legislation to protect the 430,000ha of high-conservation-value (HCV) forests.

It is a step being resisted by the Forest Industries Association of Tasmania on the grounds that it is a "crippling blow" to the forestry sector. They are prepared to scuttle the regional development funds to help diversifying the economies of affected towns.

So the Forest Industries Association of Tasmania stand opposed to the transition of the Tasmanian economy away from logging old growth forests, that has been done since early settlement in Tasmania, to a diversification of its economic activity. Their defensive strategy means that they refuse to take advantage of the current push for regional development to a Tasmania that is clean, green and clever.

The forest industry, especially its native logging sector, is in decline as the IGA is basically about transitioning native forest logging to plantation. The forest industry has historically relied on government subsidies to keep going and refuses to restructure given the shifts in the global woodchip market away from native- based products and towards plantations.

They are determined to keep hostilities going and are aiming to bring down the Giddings Government, replace it with a minority Liberal Government, and continue the forest conflict for another ten years.

We are moving to the endgame of the Gunns Pulp Mill saga when a devalued Gunns sold its strategic Triabunna woodchip mill to wealthy environmentalists Graeme Wood, of Wotif.com, and Kathmandu founder Jan Cameron to be run by Alec Marr, the long-time Wilderness Society boss.

A smart Tasmania is one that would invests in the education and health of its workforce and facilitates a cluster of computer based companies based around the NBN in addition to extending current industries like wine making, tourism or fish farming.

Posted by Gary Sauer-Thompson at 12:05 PM | TrackBack

August 14, 2011

criminalizing the working poor?

For the British Conservatives the reaction to the street riots can only be one of law and order. If the police can contain the violence and the government is able to portray the riots as a simple matter of law and order, then the prime minister may avoid any long term political damage. It's a question of zero tolerance, tough on crime (eg., curfew's, water cannons, prison), restricting social media and both evicting families from council houses and cutting the benefits of those who have been caught up in the rioting.

On the other hand, if the violence continues and Labour succeeds in creating the impression that government cuts have – at the very least – created an unhelpful climate, then Cameron's Conservatives may be damaged.

Rowsonm Defendingthestreets.jpg Martin Rowson

Tariq Ali makes an interesting point about the destruction and violence on the streets of London:

The young unemployed or semi-employed blacks in Tottenham and Hackney, Enfield and Brixton know full well that the system is stacked against them. The politicians’ braying has no real impact on most people, let alone those lighting the fires in the streets. The fires will be put out. There will be some pathetic inquiry or other to ascertain why Mark Duggan was shot dead, regrets will be expressed, there will be flowers from the police at the funeral. The arrested protesters will be punished and everyone will heave a sigh of relief and move on till it happens again

Britain is a country that is economically stagnating wages and employment prospects at the bottom have collapsed while those at the top have gone through the roof.

That implies a redistribution of wealth and supporting local communities by offering opportunities as opposed to slashing help from the state and cutting taxes for the rich.

The logic of the latter approach--the neo-liberal one--- in a declining economy is to kick people when they are down. This involves cutting back on the government safety net that is meant to save the poor from spiralling down all the way to destitution, criminalizing the working poor (a feral underclass) and poverty. So there will be laws to drive the destitute off the streets by outlawing such necessary activities of daily life as sitting, loitering, sleeping, or lying down.

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August 13, 2011

a dangerous place

Markets go up, markets go down, markets go up, markets go down. Volatility, or rather rounds of volatility, is normal for the stock market. Some roller coaster rides are wilder than others due to the intensity of rumour, fear, greed, panic and speculation by spooked gamblers always on the lookout to make a quick buck by betting against some trend in the repricing process.

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To play the market successfully you have to know what you are doing especially when economic conditions are in the global economy are rough --as they are now due to the prospects of low growth and the limited capacity of governments in the US and Europe to provide any form of stimulus.

So there can be periods of negative returns due to savage declines and hopeful rallies. The talking heads in the finance industry--'investment strategists'--- are always so hopeful and optimistic. Stock markets always over shoot, It's just a bit of a downturn at the moment, the natural cycle of growth will soon kick in. Boom times are just around the corner.

Well, the whingeing retailers in Australia don't happen to think along the lines of the investment strategists. They reserve their deep felt angst for the customer with a bad attitude--those who save rather than spend, demand heavy discounting, and buy goods online overseas rather than in Australia; all during a mining boom that is stretching the capacity of economy, stoking inflation and threatening interest rate rises.

Still, you sure had to be fast last week to grab the bargains that sprang up when the stock market nosedived (I just love all the metaphors for the stock market).You would have to be sitting a the computer screen trading stocks all day out thinking the high-frequency trading systems programmed to get in and out of the market in the blink of an eye.

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August 12, 2011

The Coalition's slash + burn

So the Coalition is finally starting to come clean on its claims about returning the budget to surplus.

It needs to cut the budget by $70 billion in budget savings to fund its promises. Dumping Labor's carbon tax would cost $27bn over four years; scrapping Labor's new mineral resources rent tax would cost $11bn; $8 billion in tax cuts and $37 billion in existing Coalition policy commitments.

Whole government departments would need to be dismantled. You can bet what would be targeted----anything to do with a Green agenda along with health, education and the NBN. That politics of austerity will give substance to the tabloid media and the shock jocks on commercial radio claims that Australian's are doing it tough and that it is all the fault of the government. The journalists working in the tabloid media and the shock jocks can then comfortably say to the electorate ''we feel your pain".

It's sticking the boot into the welfare state but it is called 'Australia putting its financial house in order.' The progressive vision of a social democracy funded by high levels of taxation on the productive private sector is simply unaffordable. It leads to national insolvency. So the entitlement culture must be attacked and rolled back.

Apparently, less welfare for the working class--the end of entitlement -- will lead to better social cohesion in spite of the increased joblessness, poverty, and income inequality. Austerity is it’s going to shrink the economy; a weaker economy means less revenue; unemployment; a depressed economy means less business investment; there's the waste of talent because young people have their lifetime careers derailed. If the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity.

What we have here is an irrational debt and deficit phobia fabricated by the Coalition and its conservative economic supports proclaiming the virtues of austerity and deregulation. What we have is public funds being used to bail out exposed creditors and shore up asset values, while the "crisis" is going to be used to suppress wages, postpone meaningful regulatory reform and expenditure on the welfare state (i.e. the losers and chiselers) is slashed.

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August 10, 2011

UK: urban riots

The urban riots in the UK, with their images of burning buildings, cars aflame, looting, kids in hoodies and stripped-out shops, are an indication of what happens when young people from the low income estates have no jobs, cannot afford education, are not part of local communities, live in poverty, and are constantly harassed by the police.

The backdrop to London burning is one of great inequality, large cuts to public services, and enforced austerity measures. Hence the rioters concentration on shopping and consumer goods? Their world is increasingly one of drugs, weapons, gangs--the world of The Wire.

RowsonMriots.jpg Martin Rowson

People reduce the stock market to the market, the market to the economy, and then represent the market as independent of politics. The urban riots indicate that it is impossible to understand politics without economics or economics without politics, and so we need to think in terms of political economy. This is to think in terms of whether the political system is capable of resolving the financial and economic crisis and making the financial elite, who caused the financial crisis, accountable.

What has happened is that the political class has spent large sums of money to stabilize the financial system, generating massive debt in the process, and they have continued to allow the financial elite to manage the system to its benefit. So we have a political crisis generated by an economic one; a political crisis over the manner in which the political elite has managed the financial crisis and the subsequent recession. This, in turn, makes the economic crisis worse.

Ironically the judgement of the markets is that democratic elected governments cannot do what needs to be done, leaving it unclear what it is that needs to be done by the political class. More austerity? Cut large swathes through civil society, third sector bodies and community services? Britain becomes a less civil and more unequal place to live.

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July 28, 2011

America today

Columbia University's Jeffrey Sachs has an excellent assessment of the role both political parties are playing in America's decline, along with their competition as to who can be more subservient to Wall Street.

RowsonRdebt.jpg Martin Rowson

It is the background to the current political theatre in Washington over the politics of raising the debt ceiling; a background of economic decline that is not being addressed by the conflicts within the Republican Party and between the House Republicans and the Senate Democrats

Sachs says:

The truth is that we need more federal spending to create good jobs and remain globally competitive, not as some kind of short-term "stimulus" but as a long-term investment in education, job skills, science, technology, energy security, and modern infrastructure. I travel around the world as part of my job, and I can say without doubt that America has failed to modernize the economy and is steadily losing its international competitiveness. No wonder the good jobs are disappearing and the pay is stagnant.

In No end in sight for America's debt heatwave Michael Brissenden, travelling on a train, decribes the appearances of an economy with unemployment still hovering above 9 per cent, house prices in a never-ending slump and foreclosures still rolling up many streets at record speed.
The urban wasteland of the depressed neighbourhoods of Baltimore scroll by. Block after block of crumbling neglect. This is the real Wire. Black neighbourhoods hollowed out by drugs and crime where the unemployment rate is above 50 per cent.... Beyond Baltimore we flash through pretty clapboard towns with their houses all standing in neat manicured rows - American flags flying from the stoops..There are trailer parks and rusting car wreckers yards interspersed between pockets of lush green farmland; gas stations with petrol advertised for $US3.63 a gallon; a second-hand car yard that calls itself Mirage Auto Sales flashes by. The auto repair shops and tire yards are often the only signs of life in the old industrial suburbs of the bigger towns that like to remind us they were once important industrial centres in their own right. A sign on the bridge as we enter Trenton says 'Trenton makes - the world takes'. The old warehouses and factories are smashed up and empty.

This is a picture of a country in economic decline. A country with 9% unemployment, essentially no job growth, widening inequality, falling real wages, and an economy that’s almost dead in the water that is locked in a political battle over how to cut the budget deficit.

Sachs says that Obama's campaign promise to "change Washington" looks like pure bait and switch. There has been no change, but rather more of the same: the Wall-Street-owned Democratic Party as we have come to know it. The idea that the Republicans are for the billionaires and the Democrats are for the common man is quaint but outdated. It's more accurate to say that the Republicans are for Big Oil while the Democrats are for Big Banks.

He adds that:

at every crucial opportunity, Obama has failed to stand up for the poor and middle class. He refused to tax the banks and hedge funds properly on their outlandish profits; he refused to limit in a serious way the bankers' mega-bonuses even when the bonuses were financed by taxpayer bailouts; and he even refused to stand up against extending the Bush tax cuts for the rich last December, though 60 percent of the electorate repeatedly and consistently demanded that the Bush tax cuts at the top should be ended. It's not hard to understand why. Obama and Democratic Party politicians rely on Wall Street and the super-rich for campaign contributions the same way that the Republicans rely on oil and coal. In America today, only the rich have political power.

Obama is on the verge of abandoning the poor and middle class, by agreeing with the plutocrats in Congress to cut spending on Medicaid, Medicare, Social Security, and discretionary civilian spending, while protecting the military and the low tax rates on the rich.

It was only yesterday that one of the pillars of the global economy was that Americans were the consumers of the last resort and the dollar was the safe haven for the planet’s hoarded surplus value. Now the US is facing a future of a bloodbath in the public sector; an abrupt shutoff of unemployment benefits which will negatively multiply through the demand side of the economy; and joblessness reaching double digit figures. It is a future of a great increase in poverty and hardship for the American people.

The politics and theatre is all about re-election for Obama and a Republican takeover of the Senate.They both emphasize budget cuts over growth and investment. As things stand now the US administration

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July 27, 2011

big whingeing retailers

Australian retailers are a tiresome lot. Sales are down in a two speed economy because consumers are not spending, even though national income is rising from the mining boom in iron ore, coal and gold. Savings are going up and consumer spending is subdued.

The retailers are blaming the high Australian dollar, the GST-free zone for Australians buying goods worth less than $1,000 on international websites; the carbon tax (its not even been introduced) and Julia Gillard herself. It's basically all the governments fault. Bash the Labor government and woe is me is the new corporate game. They're big whingers.

What the Australian retailers refuse to do is to look at themselves. They both missed the online retail opportunity, refused to re-invent the way they do business, and the tried to block it so they could continue with their bricks and mortar business of price gouging the Australian consumers with their huge markups. Australians shopping on overseas websites can be traced to the refusal of importers, distributors and retailers to pass reduced costs on.

The whingeing retailers turned their back on the Internet 10 years ago We are now starting to see the consequences of the internet becoming a shopping mall: the steady demise of the bricks and mortar retail chains with high priced goods (Borders, Angus and Roberston, the rag trade, eg. the Colorado chain). The big retailers--eg., Harvey Norman--- will eventually be forced online kicking and screaming.

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July 11, 2011

carbon tax: going slow

The various Australian industry lobby groups (Australian Chamber of Commerce and Industry or ACCI, the Australian Coal Association and the Australian Industry Group) some free market economists and conservative politicians have beaten up the carbon tax big time as a radical and painful measure that would lay waste to the economy.

Australia's media bears some responsibility for perpetrating this deception in that they failed to investigate and critique the cartoon doom and gloom images about economic ruin:

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Despite Australia being the world's 10th biggest aggregate emitter, with the world's highest per capita emissions, our mitigation effort and short-term target (a cut of minus 5 per cent below 2000 levels by 2020) are among the weakest among all industrialised and major industrialising nations.

And there are heaps of subsidies and compensation to ease the political fallout on the Gillard Government by showing that Abbott’s big scare campaign about the cost of living has been wrong and to deprive him of the chance to offer his own tax cuts.

The economic reality is otherwise and the ground underneath the Australian industry lobby groups and the conservative politicians has been effectively undercut. Their lines of "a toxic tax ", "socialism masquerading as environmentalism", economic ruin, recklessly shooting our wealth-creating industries in the foot etc etc now sound decidedly hollow.

It is the free market economists who are quick of the mark to create doubt about this first step to a low carbonb economy. For instance, Sinclair Davidson says at The Drum that Treasury modelling relies very heavily on assumptions about technology. Consequently,

Electricity generation is expected to move from being predominately coal-generated to renewable energy with some coal being used in combination with carbon capture and storage technology. Right now that technology is not viable; Treasury assumes it will be viable after 2021. Renewables are expensive and unreliable. Treasury imagines the greatest growth will be in geothermal energy – again a technology that is unproven.

Davidson comments:
Of course technological improvements occur all the time and these technologies may well be viable in future. Yet the Government is betting our economic prosperity on these technologies becoming viable in the very near future. If those assumptions do not work out, electricity prices will be very high and very likely Australians will experience rolling black-outs. This is a policy that undermines our domestic energy certainty.

The message? It's too risky. The lights will go out. So the deal fails. What has happened to the Hayekian idea of markets and innovation? What has happened to an analysis of the public policy that addresses this risk--eg., the investment fund to facilitate innovation ion the renewable industry?

Judith Sloan's response is that to the target of a reduction of 5 per cent by 2020:

the wildly inefficient schemes – particularly the subsidisation of small-scale renewable energy and the appalling Mandatory Renewable Energy Target – will be required to do the heavy lifting in order for the target to be met..Indeed, it is a case of a major opportunity foregone – to replace the melange of inefficient schemes with a carbon tax...The explanation, of course, is politics. The only way to get the Greens across the line with a 'low and slow' approach to the introduction of a carbon tax was to continue, indeed bolster, the concoction of visible, feel-good but costly schemes.

Her judgment is that it is:
Better to feel you are doing good rather than actually do good, seems to be the message. And when billions of dollars of other people's money can be directed to your mates in the renewable energy industry and the research community, the package all of a sudden makes sense. Hence the creation of ARENA – the Australian Renewable Energy Agency – clinched the deal.

The inference? Corruption!

Sloan does not mention that Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation with its $10 billion for innovation in renewable and clean energy--- will be placed out of the hands of politicians. They are independent and will sit beyond ministerial interference.

The unspoken assumption of Davidson and Sloan economics is that the governments have the ability to destroy economies and that interventionist politics undermine economic prosperity. There ought to be less not more regulation with respect to energy markets. Heavy-handed regulation by hands-on apparatchiks, undermines investment and the rewards for risk taking in business.

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June 25, 2011

green growth

Those on the political right who both deny the science that informs us that the greenhouse emissions are produced by economic activity have caused global warming, and who oppose using market mechanism to help reduce greenhouse gas emissions, basically argue that saving the planet will destroy the economy.

It's a simple message or slogan, that is endlessly repeated in News Ltd's newspapers, and it overlooks, misrepresents, or refuses, to acknowledge the emergence of what the UN calls a green economy or the OECD calls green growth. This concept has moved into the mainstream of policy discourse.

As Michael Jacobs in An idea whose time has come at Inside Story observes:

these terms – green growth, low-carbon growth, the green economy, green development – are being used to convey a simple but potentially radical idea: that environmental protection and the reduction of carbon emissions need not be at the expense of economic growth but can actually contribute to it. ago ....At its most basic it derives from the recognition that a key route to protecting the environment is to use resources – energy, land, water or whatever – more efficiently. This is essentially a form of productivity improvement: getting more output for less input. So long as this is done at a relatively low cost – particularly by using market mechanisms to encourage firms and consumers to change their behaviour – it should help growth not hinder it. It’s true that the growth generated by raising resource productivity can lead to new emissions and more environmental impact, but the evidence shows that the total impact almost always remains environmentally beneficial.

The more informed business-as-usual News Ltd journalists basically argue that though green spending can stimulate growth, it just stimulates less growth than the brown alternative. Low-carbon energy is more expensive, so the costs will be higher and the returns less. More economic growth is better than less growth.

The problem here is with business-as-usual. What if there is no “business as usual”? Jacobs says that:

If – as is now widely expected, and indeed may already be happening – failure to take action on climate and the environment in practice leads to effects such as rising oil and fossil fuel prices, greater water scarcity, lower agricultural productivity, declining fish stocks, more frequent extreme weather events, and so on, then the base case against which the green growth path needs to be compared may be rather different from what has generally been assumed.

he says the modelling shows that the “green investment” scenario starts off generating slower growth than the base case. But by the second half of this decade this has reversed, as growth rates in the base case start to decline under the impact of environmental pressures. By 2030 and beyond, the “growth dividend” of the green investment scenario becomes quite marked.

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June 10, 2011

SA: 2011 Budget

Jack Snelling, the new SA Treasurer, delivered a steady as she goes neo-liberal budget designed to retain the AAA credit rating whilst lauding his right wing credentials about protecting families. He framed the rhetoric of state budget's looking after families in terms of the household budget--limited debt, credit cards, balancing---whilst taking from families by substantially increasing government charges (water charges increase by 40% for instance), getting rid of 400 more public servants and delaying key health and transport infrastructure projects.

It's called debt reduction ---paying off the credit card or mortgage in kitchen table economics --- thereby denying the Keynesian benefits of infrastructure spending when the economy shrinks and there is low population growth. It's neo-liberal economics. Snelling says he's restoring restoring the balance between social compassion and economic frugality, but that he could not provide cost-of-living relief for families because his priority was keeping the AAA rating.

And so the Catholic right continues its embrace of both neo-liberal economics and caring working class values that uses the spin of the human face of capitalism to cover up both the politics of austerity and the ongoing fracturing within the Rann Labor Government. They are pretty divided these days due to the factions and power brokers who have taken over in the party's structure and who are like a cancer in the party.

But the Rann's Government's future is full of hope because BHP's expansion of the Olympic Dam mine (the copper, uranium, silver and gold mine at Roxby Downs) is due next year. Forever hopeful. The mining boom is always just around the corner. This means that it is a "budget for the future of mums and dads who want to raise their families in SA".

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June 7, 2011

austerity economics

Trickle down economics is the implicit theory of economics held by the Coalition' underpinning its 'reduce the debt' rhetoric. This assumes that raising interest rates and slashing government spending in the face of unemployment will somehow make things better instead of worse.

The reason given for the above view is that austerity is actually about growth: ie., slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.

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The Coalition's response to objections that fiscal austerity would be self-defeating — not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues — is to wave them away. Austerity would actually be expansionary because it would improve confidence. Government deficits are assumed to crowd out private sector borrowing, thus discouraging business investment.

Underpinning this rhetoric are an anti-government assumptions that regards the dangers of deficit spending as an unimpeachable fact or axiom, and that all government spending is deadweight waste and only private investment is productive. It tries to justify these assumption by pointing to regulatory excess and the waste and inefficiency that exists with many government programs. To pretend that austerity helps economies rather than destroys them, bank lobbyists claim that shrinking markets will lower wage rates and “make the economy more competitive” by “squeezing out the fat.”

The economic reality is that an economic crisis is the method by which a capitalist economy partially purges itself of the effects of past mistakes while imposing pain and misery on ordinary people. Anything that stands in the way of profit maximization, whether unions, regulation, or taxes, has to be swept away. The stand is under the banner of “free markets”, defined as economies free from public price regulation and oversight, free from consumer and environmental protection, and free from taxes on the rich.

This is the economics advocated by the mining industry that, like the banks, has not shown much interest in economy-wide wellbeing.

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June 2, 2011

rumbles in the Eurozone

The politics of austerity in the Eurozone currently means that Germany has to bail out the periphery in order to save its own banking system. Greece is required to restructure its debts rather than pay them back in full through spending cuts and privatisations, which could leave the country with declining GDP and rising unemployment for more than a decade.

Instead of this old, destructive IMF playbook Greece could restructure its debts rather than pay them back in full. Greece is an embattled nation and its people are near revolt. Ireland and Portugal are also embattled.Martin Wolf in Intolerable choices for the eurozone in The Financial Times says:

The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. This is what is at stake. ...The eurozone confronts a choice between two intolerable options: either default and partial dissolution or open-ended official support. The existence of this choice proves that an enduring union will at the very least need deeper financial integration and greater fiscal support than was originally envisaged. How will the politics of these choices now play out? I truly have no idea. I wonder whether anybody does.

What we do know is that both the IMF and European Central Bank (ECB ) have imposed pro-cyclical policies that make recessions worse.

William K. Black in his post Bad Cop; Crazed Cop – the IMF and the ECB in New Economic Perspectives says:

A nation that gives up its sovereign currency by joining the euro gives up the three most effective means of responding to a recession. It cannot devalue its currency to make its exports more competitive. It cannot undertake an expansive monetary policy. It does not have any monetary policy and the EU periphery nations have no meaningful influence on the ECB’s monetary policies. It cannot mount an appropriately expansive fiscal policy because of the restrictions of the EU’s growth and stability pact.

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May 17, 2011

poor Greece

European governments are wrestling with the prospect of a fresh bailout for Greece a year after they committed €110bn to Athens, under pressure from Washington and Beijing to calm the markets, stabilise the euro and ensure the capital flows in global financial system. Greece is insolvent.

It is deeply indebted (nearing 166% of GDP) to the European (German, French) banks and the markets are demanding that Greece take a big haircut (ie. tackle its fiscal deficit and ramp up its privatisations). That means more Greeks lose their jobs ---currently, unemployment is near 14% and amongst young Greeks it is 35%.

RowsonMIMF.jpg Martin Rowson

Far from the bailout improving its access to the financial markets, Greece faces record borrowing costs, as it can only tap into the capital markets on prohibitively expensive terms. Greece has huge budget deficits, low economic growth, depressed demand, and is unable to generate exports to offset the effects of continued austerity. This is a sovereign debt crisis.

Greece is dependent on foreign borrowing to bridge the gap between its spending and revenue. The conviction in financial markets that Greece's debts are unsustainable and will ultimately have to be restructured. However, eurozone ministers appear determined to top up last year's €110bn rescue package while forcing the beleaguered country into an ever tighter fiscal squeeze.

As with Argentina in 2001 Greek debt restructuring appears to be inevitable, as piling on more debt (through another bailout) on top of unsustainable levels makes little sense. The European banks will just have to absorb the losses--- debt write-downs of 50 per cent or more.

In How to ease the eurozone’s solvency crisis in the Financial Times Paul Achleitner says that the Greek crisis indicates that:

It is clear that private capital is not willing to fund some sovereign issuers on acceptable and sustainable terms. The uncertainty about a potential default is simply too high. To defuse the sovereign debt crisis, eurozone governments have set up joint funding mechanisms – the European financial stability facility and European stability mechanism – that act as surrogate capital pools. That was crucial to stabilise the situation. But these are emergency safety nets meant to address liquidity problems, not fundamental solvency issues.

Like Ireland and Portugal Greece is in a pickle. Something has to give. Will Greece be the first country on the EU periphery to leave the single currency--the Euro?

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May 9, 2011

NBN + cost benefit analyses

William K. Black in a post on formal cost benefit analyses to decide regulatory policy at New Economics. This has often been used as part of a frontal attack on Australia's national broadband network (NBN). Black says:

Benefit-cost tests are used as a device to give theoclassical economists extraordinary power to block regulations disfavored by the ruling administration. A regulation on pollution, for example, is typically shaped by scientists and engineers because they have the relevant expertise and they use that expertise and experience to reach a judgment that the policy they are recommending will benefit the nation. Economists, however, are the purported experts on formal benefit-cost analyses and they can and do use that expertise to kill rules the scientists believe to be vital. The neoclassical economists are implacably hostile to regulation, so benefit-costs reviews could serve as a “choke point” to protect their dogmas – no matter how irrational and anti-empirical those dogmas prove.

He adds that the core, defining dogma of theoclassical economists is that government is the problem, not part of the solution. They believe government is rarely necessary, that it proves a grave danger to personal liberty, and that virtually all governmental programs are economically illiterate and harm the intended beneficiaries as well as the economy.

The implicit intellectual proposition underlying this choke point is that the neo-classical economists assumption that have a universal, superior methodology for judging the desirability of public policies even in fields in which they are hopelessly ignorant. That universal, superior methodology is that economists are engaged in a value-free, objective, and scientific exercise. Hence the cost-benefit process is objective.

This is hard to accept since behind this assumption sits another one, which continually surfaces around the NBN. It is that private enterprise or the free market is the best and only way to build the NBN--in spite of the marked failure of private enterprise to do so in the past. That failure is an example of a negative externality that a competitive free market economy has produced and could not address successfully. Hence the need for government intervention with the NBN designed to create a level playing field.

What usually happens is the free market economists deny the harms caused by a broadband network that has been built by the private enterprise. They deny the negative externality; or say that if laissez-faire—that is, no government intervention—provides too little high speed broadband to regional Australia, the the straightforward solution is some form of subsidy to private enterprise, not the government production of a broadband network.

Other responses are that within a system of a system of voluntary exchange the individuals involved in these situations can always negotiate a solution that internalizes any externality. Or the traditional distinction between public goods, which must be produced collectively because of the positive externalities they create, and private goods, the production of which may be left to the market can be challenged.

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May 1, 2011

Budget politics

I guess that Gillard's speech at the Sydney Institute on April 13 set the scene for the 2011 budget. It warned us that the forthcoming budget would see a tight rein on spending to return the Budget to surplus in order to make the boom last.

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Will this austerity budget in the context of revenue shortfalls counter Abbott's key message that Labor's policies are failing and that they constitute a betrayal of ordinary people?

A strong theme of Gillard's speech was welfare-dependency and extensive welfare reform, by which she meant:

Income management, improving school enrolment and attendance, tighter eligibility and smarter employment services for adults with some disability. Restructured employment services, investing more resources in those with more complex problems.

The subtext is that passive welfare is a malaise that must be tackled. Welfare reform and workforce participation go together; linked by the dignity of hard work.

In the speech Gillard claims that there are 230,000 people who have been unemployed for more than two years and 250,000 families where no adult has been working for at least one year. Gillard says:

Relying on welfare to provide opportunity is no longer the right focus for our times. Our strong economy gives us a real chance to create opportunity from the cradle to the grave.The problem of long term welfare dependency has been long discussed but the new realities of our economy create quite a different policy environment from the recovery of the 1990s or the growth of the last decade. Because we have unprecedented demand for skills and labour, this is possible. In today’s economy, inclusion through participation must be our central focus. It’s not right to leave people on welfare and deny them access to opportunity.And every Australian should pull his or her own weight. It’s not fair for taxpayers to pay for someone who can support themselves.

Will this appeal to Labor's heartland and help to stop the drift to the Abbott Liberals? Is that the politics of the 2011 Budget?

There is next to nothing in Gillard's speech about productivity, ie., working smarter rather than working harder or longer. Working smarter means better education for those whose work skills have deteriorated, or never existed in the first place.

Posted by Gary Sauer-Thompson at 11:19 PM | Comments (3) | TrackBack

March 8, 2011

can a rustbelt Adelaide reinvent itself?

Can a rustbelt Adelaide reinvent itself with the decline in its manufacturing industry? Boston did. It was able to boost its economic growth by becoming a center of the information economy in the late 20th century. Human capital---a strong base of skilled workers---was the key to urban growth. The policy message is that as ideas and knowledge became more important in capitalism cities with skilled populations began to thrive.

Can Adelaide look like the future and not the past? Can Adelaide transform itself from a dying factory town to a thriving information city? In Reinventing Boston: 1630–2003 the American economist Edward L. Glaeser, the author of Triumph of the City, states that the story of Boston’s history yields the following implications about urban dynamics.

First, long run urban success does not mean perpetual growth. Long run urban success means successfully responding to challenges. The basic pattern of Boston’s history is that the city specializes in one area and inevitably either this area declines or their dominance in the area is challenged. The survival of the city hinges on re-orientation.

Second, Boston’s ability to re-orient itself hinged on industrial diversity.

Boston had never been just a port and from the beginning, artisans in the town had manufactured goods which were then taken on Bostonian ships abroad. As such, the switch from seaport to factory town required a large re-emphasis, but not inventing industry from scratch. Likewise, Boston’s seafaring commerce had always needed financial services, and as a result, the city had always had banks, brokers, and insurers. As Boston’s manufacturing declined, finance was able to take up its slack.
Third, Boston’s ability to regenerate itself hinged upon its ability to attract residents, not just firms:
The American cities that grew because of proximity to productive natural resources, such as coal, have suffered tremendously over the past 50 years. When the demand for the key natural resource declined, no one saw any reason to remain in the city and they left. By contrast, from its earliest days, Boston existed not only as a productive center but as a place that people wanted to live: a consumer city. Because people wanted to live there, as well as work there, during times of economic trouble, residents innovated and stayed. In the coal towns of central Pennsylvania exodus, not innovation, was a more common response.
Fourth, in all of its period of reinvention, Boston’s human capital has been critical:
today more than ever, Boston’s skills provide the impetus for economic success in technology, professional services, and higher education. Boston’s experience certainly suggests that human capital is most valuable to a city during transition periods when skills create flexibility and the ability to reorient towards a new urban focus.
Educated cities grow more quickly than comparable cities with less human capital because they become more economically productive.

Lastly, city government has played an important role in Boston’s periods of both success and failure.

Glaeser's argument is that geography is especially important to the growth of post-industrial economies and so it is much better to push development in places where people and businesses actually want to move to or set up shop. Declining or struggling towns and cities where people and firms don't want to live should be encouraged to decline further.

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February 22, 2011

junk economics

In Policy fails to keep up with boom Michael Stutchbury, The Australian's economics editor, says that:

Tighter fiscal policy is needed both to make room for the mining investment boom and to build a reserve fund for when the commodity cycle turns down. Labor should be making the case for an explicit surplus reserve fund to bolster community support for painful decisions....The rhetoric should be pro-enterprise. Taxes on consumption need to increase to help finance sharper incentives to promote working and saving, bolstered by pro-work welfare reform. Tax breaks on saving need to be rationalised to reduce the bias towards housing speculation.

We are in the midst of a resource boom and Stutchbury wants to increase consumption taxes, liberalise the job market, and get people (the disabled?) off welfare.

Though he doesn't say that company tax should be reduced or that the resources tax on Big Mining should be eliminated, we get the message. Give companies a big break and slash into the welfare state. What we cannot have is a tax on profit, as that is an attack on success and prosperity that is fueled by the politics of envy and class warfare. And so on and so on.

And so on and so on--its always the same neo-liberal catechism from The Australian.

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February 9, 2011

make the polluters pay for the harm they cause

Probably Gillard's big test of leadership in 2011 is her capacity to make headway on a carbon price – a job looking increasingly difficult as the Greens dig in on scrapping the Rudd-designed compensation packages for trade-exposed carbon polluters. Failure on this issue will damage her, badly, even though politics is now a spectacle.

At this stage Gillard is indicating that she plans to continue to subsidize the trade exposed industries big time. Is that what she means by achieving consensus?

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Gillard's climate change policies are increasingly being reduced to putting a (low?) price on carbon and allowing the market to drive the changes in behaviour in response to changes in the prices we pay.

Without a price on carbon more new coal-fired power stations will be built and that will send the country’s emissions account higher ---and make it difficult for Australia to even meet its pledge to the Copenhagen Accord. That is a lowly 5% reduction from 1990 levels by 2020.

I find this reduction problematic, even though it with address the externality whereby coal fired power stations can dump hundreds of millions of tonnes of carbon dioxide into the atmosphere (thereby making makes coal fired electricity far cheaper than it would otherwise be). Making the polluters pay for the harm caused by pollution is the right principle, and it will also raise lots of money to compensate households.

However, nothing is being said about removing the wide range of existing subsidies and tax concessions that work to artificially reduce the price paid for fossil fuels in Australia. The reduction, in other words, Gillard is displacing the complimentary polices that would help reduce greenhouse gas emissions.

The argument of Richard Denniss and Andrew Macintosh from the Australia Institute in their Complementary or contradictory? An analysis of the design of climate policies in Australia is that:

Even if all of the contradictory policies that encourage fossil fuel use were removed, and a carbon price consistent with the harm that greenhouse gas emissions cause was introduced, a significant role for complementary policies would still be required.

What we have with the Gillard Government is the creeping cuts to the complementary measures - will this continue with the targeted energy efficiency and renewable energy target policies?

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February 6, 2011

economic crises: why?

In How Much Is Too Much? in the London Review of Books Benjamin Kunkel says that Paul Krugman, discussing Roubini’s book in the New York Review of Books, agreed with him that what Ben Bernanke called the ‘global savings glut’ lay at the heart of the crisis, behind the proximate follies of deregulation, mortgage-securitisation, excessive leverage and so on.

Kunkel adds:

Originating in the current account surpluses of net-exporting countries such as Germany, Japan and China, this great tide of money flooded markets in the US and Western Europe, and floated property and asset values unsustainably. Why was so much capital so badly misallocated? In the LRB of 22 April 2010, Joseph Stiglitz observed that the savings glut ‘could equally well be described as an “investment dearth”’, reflecting a scarcity of attractive investment opportunities. Stiglitz suggests that global warming mitigation or poverty reduction offers new ‘opportunities for investments with high social returns’.

Kunkel adds that the neo-Keynesians’ ‘savings glut’ can readily be seen as a case of what a more radical tradition calls overaccumulated capital---it is the broader and more systematic Marxist perspective that ultimately and properly contains Keynesianism within it.

The Marxist account of crisis is that it is caused by the over accummulation capital which, means by definition, that it can’t easily find a profitable outlet in increased production. Capital overaccumulated in one place can flow to another which appears to boast better ultimate prospects of profit.

Overaccumulated capital, whether originating as income from production or as the bank overdrafts that unleash fictitious values, can postpone any immediate crisis of profitability by being drawn off into long-term infrastructural projects, in an operation David Harvey calls a ‘spatio-temporal fix’.Not only Americans and Britons but the Irish, Spanish and Emiratis live today among the ruins of a broken spatial fix. They are experiencing what David Harvey calls a switching crisis.

Harvey argues that the resulting temptation to the overaccumulation of capital, will be for capital to sidestep production altogether and attempt to increase itself through the multiplication of paper (or digital) assets alone. Kunkel says:

Both the new factories at home (China) turning out exports for the US, and the deliriously appreciating houses abroad rested on the premise of continuously rising American incomes. But among Americans, wage growth had ceased and household incomes could no longer be supplemented by the mass entry of women into the workforce, something already accomplished. The issuance and securitisation of debt alone could substitute for present income. But in the end so much fictitious capital could not be redeemed. Whatever the destination of future Chinese savings gluts, they can no longer sponsor American consumption in the same way.

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January 30, 2011

Obama: anti-government Democrat?

In Obama, Incorporated in the New York Review of Books blog David Bromwich says that Obama’s 2011 State of the Union address was notable for:

the warmth with which he has embraced the premises of his opponents: in matters affecting public life and the economy, government is now said to be the problem, and private enterprise the solution; and far from deregulation having been a major cause of the financial collapse, the way to a healthy economy now lies through further deregulation. This rhetorical concession, adopted as a tactic, will turn against Obama as a strategy. The enormous budget cuts, for example, which he volunteered to make yet steeper will work against the ventures in job-creation which he has asked for without giving particulars.

Bromwhich adds that all Obama's general pledges now bear the stamp of the corporate ideology. This ideology assumes that the energy, initiative, and technical knowhow that contribute to our society the objects and experiences most valued by Americans originate in the private sector and are generally stunted, impaired, adulterated, or degraded by public supervision.

America, according to Obama “out-innovate, out-educate, and out-build the rest of the world” through “free enterprise” in the private sector and by cuts—“taking responsibility for our deficit”—in government.

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January 25, 2011

The Australian's advice to Tasmania

The Australian has delivered its judgement on Tasmanian politics. The new premier, Lara Giddings, must go for growth with practical plans, reduce government outlays and get the state back into surplus. Tasmania sorely needs to reduce its dependence on government spending.

How is this growth to be achieved? By standing up to The Greens of course. What else.

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The editorial says:

The challenge for Ms Giddings is to demonstrate she has a plan to expand the economy, not just schemes to please the Greens. Her challenge is to manage the state in the interests of all Tasmanians, which inevitably means standing up to the Greens, first across the cabinet table and then on the hustings.

The implication is that going for growth is through austerity politics, privatization (selling Hydro Tasmania and Forestry Tasmania?), and allowing the private sector to do its magic, once the government gets out of the way with some good old slash and burn.

The implication is that the old style resource based growth is the way to go ---not the new fangled way of developing an information economy by installing the National Broadband Network and investing in education to improve school retention rates, as argued for the previous premier David Bartlett. Or turning Tasmania into a food bowl in the context of climate change.

Greg Barnes in State of crisis at the ABC'S Unleashed makes explicit what is implicit in The Australian's editorial. He says that Tasmania is in a mess:

Tasmania is again in crisis, as it was in 1989. Then Labor Premier Michael Field, ironically a long time mentor to Bartlett, slashed, restructured and reformed the role of government in his two and a half years of premier. If he had not done this, then it is unlikely that Tasmania would have survived as anything more than a Canberra dependant outpost. Giddings will have to look to Field’s example and she will have to bring the Greens with her. Tasmanians might not like the tough medicine but they cannot be spared it any longer.

Nothing is said about the reducing the corporate dependence on the public purse, a characteristic of Tasmanian style of corporatism.

An austerity politics is designed to derive a wedge into the Labor-Green alliance in a political context where the Liberal refuse to work with the Greens. I do not see how this kind of austerity politics will make the ALP more electorally popular.

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January 20, 2011

flood insurance

I think that it a national disgrace that the inadequacy of insurance for floods means that many people are ruined, either because flood insurance is to expensive, the insurance companies avoid flood insurance; or they limit the coverage. It's a classic example of market failure. Many Queenslanders----40- 60 per cent-- for instance, were uninsured because they could not get the coverage where they lived.

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It is an issue that needs to be addressed because people return to rebuild their homes on the flood plain that has inadequate protection from future floods. Given that the one in a hundred years flood no longer makes much sense, there is a need for some form of affordable national insurance for natural disasters (water damage, bush fires and earthquakes etc).

Such a low cost coverage scheme is what the Insurance Council opposes--in spite of the obvious market failure. What local insurers will more than likely do is use the floods to pass on double digit rises in premiums to consumers. The market will not address this issue nor will they do the necessary flood mapping (public information) or mitigation works.

This is an obvious example for government intervention into the market. Will the Gillard Labor Government have the courage to intervene?

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January 14, 2011

Eurozone: in crisis

Paul Krugman has a long and interesting article on the Eurozone in the New York Times magazine that questions the viability of the Euro project. Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger.

Krugman's argument is that Europe lacks the institutions needed to make a common currency workable. He says:

when the single European currency was first proposed, an obvious question was whether it would work as well as the dollar does here in America. And the answer, clearly, was no — for exactly the reasons the Ireland-Nevada comparison illustrates. Europe isn’t fiscally integrated: German taxpayers don’t automatically pick up part of the tab for Greek pensions or Irish bank bailouts. And while Europeans have the legal right to move freely in search of jobs, in practice imperfect cultural integration — above all, the lack of a common language — makes workers less geographically mobile than their American counterparts.

As in the US the bubble burst in 2008.The peripheral economies of Europe---Greece, Ireland, Portugal --- had borrowed much more than they could really afford to pay back. First Greece, then Ireland, became caught up in a vicious financial circle: as potential lenders lost confidence, the interest rates that they had to pay on the debt rose, undermining future prospects, leading to a further loss of confidence and even higher interest rates.

Krugman says:

it’s the euro itself that makes Spain and Ireland so vulnerable. For membership in the euro means that these countries have to deflate their way back to competitiveness, with all the pain that implies.The trouble with deflation isn’t just the coordination problem Milton Friedman highlighted, in which it’s hard to get wages and prices down when everyone wants someone else to move first. Even when countries successfully drive down wages, which is now happening in all the euro-crisis countries, they run into another problem: incomes are falling, but debt is not... so debtors have to meet the same obligations with a smaller income; to do this, they have to cut spending even more, further depressing the economy.

The policy solution has not been one of Greece or Ireland leaving the Eurozone and returning to their own currencies. It has been one of harsh fiscal austerity in an effort to regain the market’s confidence, backed in Greece and Ireland by official loans intended to buy time until private lenders regain confidence.

The markets don’t expect Greece and Ireland to pay their debts in full. They are expecting some kind of debt restructuring, that could bring the vicious circle of falling confidence and rising interest costs to an end, potentially making internal devaluation a workable if brutal strategy. The austerity strategy demanded by the Germans is for Greece, Ireland, Portugal and Spain to tough it out:

Governments that can’t borrow on the private market will receive loans from the rest of Europe — but only on stiff terms: people talk about Ireland getting a “bailout,” but it has to pay almost 6 percent interest on that emergency loan. There will be no E-bonds; there will be no transfer union...it will be an ugly process, leaving much of Europe deeply depressed for years to come. There will be political repercussions too, as the European public sees the continent’s institutions as being — depending on where they sit — either in the business of bailing out deadbeats or acting as agents of heartless bill collectors.

Krugman's judgement is that the odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later.

At that point, Europe’s stronger nations---France and Germany--- will have to make a choice: saving the Euro-project or allowing Greece, Ireland, Portugal and Spain to default on their debts and the French and German banks take a haircut.

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December 19, 2010

US: economic recovery?

Currently, in the US unemployment is rising, stores are closing and the economy is succumbing to debt deflation. The upshot of the Federal Reserve trying save the banks from negative equity through liquidity (ie., quantitative easing to help U.S. banks earn their way out of negative equity) is flooding the global economy with a glut of U.S. dollar credit, destabilizing the global financial system in the process.

In How Can the Economy Recover? in the New York Times Jeff Madrick says that optimism about the recovery of the US is not warranted:

What makes this recovery different is clear. Consumers have record levels of debt compared to income and some $12 trillion in losses on their houses and financial investments. They are not going to spend money as they usually do—perhaps not for a long time. A damaged financial system is also not lending significantly, partly because business clients aren’t seeking loans unless they directly generate more sales, and consumer demand is low. Business investment, propelled by piles of cash on the balance sheets, is nevertheless slowing after rising strongly from low levels for the past year.

He goes on to add that what is rarely recognized is that even if the US can emerge from a weak economy within a few years, the economic foundation that existed before the cataclysm of 2007 and 2008 may not be adequate to restore the widely shared prosperity the US needs.

Those on the right rely on the ingenuity of capitalism as an adaptive mechanism which rely on the arguments about the self-organizing dynamics of the capitalist economy.The politics of their laissez-faire economics holds that cutting social programs and limiting aid to workers are exactly what will revitalize the nation’s economy by demanding that people be responsible for themselves. In sum, markets should be as free of government interference as possible, and must become the efficient distributors of social goods.

The fiction is that bailing Wall Street banks out of their losses is a precondition for reviving employment and consumer spending – as if the giveaway to the financial sector will get the economy moving again.

Cutting taxes is the key to future jobs for those who seek to reduce government intervention and have faith in free markets are the Republican answers to rebuilding the nation. They assume that assume that the policy objective is to return to the stable economic growth that preceded the crisis of 2007 and 2008, even the austerity economics could well leave the nation with a lost decade of slow growth and high unemployment.

The policy of the Obama administration has been to bail out the banks by re-inflating U.S. real estate, stock and bond markets at least to their former Bubble Economy levels. The aim is to restore the flow of credit--a euphemism for keeping the historically high debt levels in place, and indeed adding yet more debt (“credit”) to enable home buyers, stock market investors and others to bid asset prices back up to rescue the banking system from the negative equity into which it has fallen.

The “recovery” that is envisioned is one of new debt creation. This would rescue the biggest and most risk-taking banks from their negative equity, by pulling homeowners out of theirs. Housing prices could begin to soar again.Unfortunately, instead of the banks lending more to U.S. homeowners, consumers and businesses, they have been tightening their loan standards; and are engaged in interest-rate arbitrage (the carry trade), currency speculation (forcing up targeted currencies) commodity speculation and buying into companies in Asia and raw materials exporters.

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December 15, 2010

The Australian: our future is conservatism

In No time to rest on our laurels in The Australian Paul Kelly says that Australia needs more reform, if economic growth is to continue. This is yet another variation of Murdoch's message to Australia that the Gillard Government stands for nothing and it is weak. The general argument is put by Chris Berg at the ABC's Unleashed:

the era of reform is over. Our boldness has gone. No longer are we able to push through major economic changes. We have no appetite for challenge. Australian politicians are hesitant to take risks, intimidated by polls, and the Government is cripplingly scared of focus groups and opposition.

What Kelly adds to this is that the result is complacency and blandness.

Kelly states that rarely has the gulf between the power centres of the "insider" culture of the political-media class, which sees the need for more reform, and the "outsider" perspective, which is in a sullen mood, been greater. According to Kelly:

the Labor Party seems confused and divided about the fundamentals; that is, about the sort of society and nation it wants Australia to be. Such economic, social and educational challenges penetrate policy and values. What are Labor's core values? Julia Gillard talks the language of economic reform and educational standards, yet the gap between talk and delivery is vast.

What sort of reform are those in the power centres of the political-media class talking about then? A more sustainable Australia? Shifting to a low carbon economy by investing in renewable energy like China? No way. That is definitely not what is meant.

Reform is economic reform as understood by the Business Council of Australia. That reform is pro-market reform to ensure more labour mobility, less industry assistance, less red tape etc and increasing productivity. Nothing about the Murray-Darling basin or health reform.

Kelly's argument in support of this kind of pro-business reform is that:

The GFC has delivered a shattering intellectual and moral message to the world: while the US is wounded, the European model is crippled. Europe's system of government debt, entrenched welfare, extensive regulation and mushy "tolerance towards all" as its unifying value is broken. Does Labor not see the obvious?

Gee I thought that the global financial crisis dealt a death knell to a neo-liberal mode of governance structured around free market economics, not the crippling of social democracy and Green progressivism. Two years ago governments saved the necks of the world’s financial markets who were begging for help. Now the market is back to intimidating governments and there is a deep resentment against markets and financiers.

The obvious for Kelly is that a declining Europe and a rising Asia means that Australia should embrace the values of personal improvement, economic competition, educational excellence, national pride, strong family ties, cultural traditionalism and rising religious faith. The obvious is that the future lies with conservatism, not the Green progressive social democracy that shapes Labor thinking; a social democracy premised on reducing inequality.

Chris Berg sees little connection between emissions trading and the pro-market reforms of the 1980s:

The reform of the 1980s had one clear and unambiguous goal: to clear up a century of accumulated, unnecessary or entirely counterproductive regulatory burdens. These burdens were holding back Australia’s economic growth, limiting personal income, and entrenching private interests at the public expense.The goal of an emissions trading scheme is very different: to impose burdens on the Australian economy...the great reforms of the 1980s ... were designed to boost, not restrain, economic growth.

Well no. The goal of an emissions trading scheme is to use a market mechanism to facilitate a shift to renewable energies, and away from coal, so as to reduce greenhouse emissions produced by the coal-fired power stations.

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December 6, 2010

Swan: “banking competition”

Wayne Swan will soon make public his “banking competition” package to address the problem of the "too-big-to-fail" banking cartel in the context of the politics of "populist" bank basing", a Senate banking inquiry, and probability that they’re going to be exempted from the tougher capital rules that Basel III will impose on the 25 most ‘systematically important’ banks in the world.

Early leaks to the press suggest that Swan's “banking competition” package:

(1) will give assistance to the smaller banks, building societies and credit unions, most likely by extending a government guarantee to their borrowings and also by guaranteeing their deposits even after a government guarantee on all deposits expires late next year.

(2) ensure consumers get better information at the point of sale, with mortgage and credit card providers required to present accurate information as to the likely costs.

(3) give a greater role to the ACCC to oversee the banks, to ensure that their fees are justified by costs and to regulate ‘‘price signalling’’ by the banks.

The problem here is that better informed and empowered consumers does not lead to "shopping around" because the banking cartel is able to because put in place impediments to those who want to move their business elsewhere. So much for competition.

We still have the problems left over the global financial crisis-the banks are still not lending to small business and property development.

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November 22, 2010

the warp + weave of a digital economy

Alan Kohler makes an excellent point in his Added value needed for online media survival on the ABC's The Drum with respect to the future of the fourth estate.

His general point is that industries are being disintermediated by the digital economy and are having to reinvent themselves to stay afloat:

The most urgent of these is retailing. For thousands of years we have had to travel to a shop to buy goods because the shopkeepers have controlled their distribution, just as media companies have controlled information.Now we can go direct to the source of the goods, wherever they are in the world. The volume of shopping online is now ballooning and just about everything is now being bought on the internet and delivered to homes in packages - books, shoes, clothing, food, household items.Traditional retailers sitting behind the counters in their stores in shopping malls and strips are now facing huge challenges; many won't survive. Those that do will provide something extra that can't be bought online, some sort of added value or service.

An example. Black and white sheet film for my 8x10 monorail view camera costs $140 a box (of 25 sheets) in Adelaide and $80 from B+ H in New York. Sure, I have to pay the freight, but I can use the internet to place a bulk order for several types of film for several different film cameras, thereby spreading the cost of freight. The film is then stored in the fridge until I need it.

So why would I buy from the local camera shop withe outrageous markups charged by the importers? I would only visit them if they provided added value--ie;, to help me solve the problems I'm encountering with cameras (repairs) and photography.

Journalists working in the mainstream or corporate media are no different. Their model is one person speaking to many in a digital world of Web 2. that provides the mass ability to communicate with each other, without having to go through a traditional intermediary. As Kohler points out:

It is now possible for anyone to find out almost anything. Someone sitting at home can now read any press release, watch any press conference, or read its transcript, and examine any document anywhere in the world.The lowest paid jobs in society are those that anyone can do, but can't be bothered or don't have the time, like cleaning or driving. The danger for plain reporting is that it will be increasingly seen in that light - as a service that anyone can do but can't be bothered or haven't the time. No-one is going to pay much for that, if anything, and advertisers have already discovered that they are in the driver's seat with online media because there is a glut of inventory and it's all measurable and accountable, unlike newspaper advertising.

The digital revolution shifts us from the traditional transmission model to a communication model in an open space of publicly available information with the emergence of greater convergence of text, data and moving pictures.

Kohler's solution rejects both Murdoch's paywalls for transmission and the Guardian's free, open and collaborative journalism that loses money that Alan Rusbridger outlined in the 2010 Andrew Olle Media lecture. Kolher says that in order to survive in both cases journalism must add value - "specifically it must impart meaning. It must do what its customers cannot do themselves, which is to explain what events mean, not just report them."

Well, good bloggers in a post-Gutenberg world are already explaining what events mean ---isn't that the point of commentary? What was one a passive audience has become critics, commentators and photographers. So journalists in the corporate media have competitors and people will only read them if they have something valuable and worthwhile to say.

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November 16, 2010

a 'post-peak' world?

What will define the 21st century? Is it the end of cheap oil?

The concept of 'peak oil’ holds that the peak occurs when world oil production reaches its maximum level at the point when half the world’s reserves of cheap oil have been depleted, after which it becomes geophysically increasingly difficult to extract it. This means that passed the half-way point, world production can never reach its maximum level again, and thus continuously declines until reserves are depleted.

Has this point been reached? It is not a sensible question for neo-classical economics, which the obvious reality of the embeddedness of the economy in the natural environment. Sure, they understand that for the economy to grow requires increasing inputs of energy, obtained from exploitation of natural resources – currently, for the most part, fossil fuels such as oil, gas and coal.

Orthodox, neo-classical economists generally argue that capitalism can solve the energy-dependence problem by maximizing efficiency, so that the greater the economic growth, the more efficient the use of resources, and thus the less actual energy is required. This sort of argument underpins government support for the oxymoron of ‘high growth, low carbon’ societies.

It does appear that we are entering into a post peak period characterized by a gradual but increasing decline in production. The IEA concludes its World Energy Outlook 2010 with the judgement that that total growth in liquid fuels from other unconventional sources - such as tar sands, oil shale and natural gas liquids - will continue to make-up for the short-fall in crude until around 2035.

While this means there will be no imminent fuel shortages as such, it also means, that the age of cheap oil is over. In previous years, the IEA had predicted that crude oil production would continue to rise for at least another couple of decades. The report says that though oil production might rise marginally under the "business-as-usual" scenario (without efforts to cut fossil fuel pollution) supplies would be short enough to send oil prices soaring to double today’s level.

The neoliberal doctrine of unlimited growth, which overlooks the finite reality of the earth’s resources, ignores that the traditional resource-base for continued exponential industrial growth simply no longer exists.

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November 15, 2010

OECD Economic Survey of Australia 2010

I cannot find the OCED's Economic Survey on Australia 2010 online apart from this brief chapter summaries. Behind it sits this overview which, surprisingly says little about the national broadband network (NBN). The Australian interpreted it as a critique of the NBN---as a rejection of Labor's broadband monopoly.

So what does the OECD say? Unfortunately, the overview doesn't say that much. It says:

In the telecommunication sector, the government’s project of building a new fibre network, the National Broadband Network (NBN), holds the promise of delivering potentially large benefits. However, as the cost amounts to 31⁄4 per cent of GDP, it also entails substantial financial uncertainties. The authorities’ strategy will improve Internet services for the entire population and promote a fairer competition between private firms on retail services. Part of the plan is to shut down the existing copper network and the country’s main cable network. While establishing a monopoly in this way would protect the viability of the government’s investment project, it may not be optimal for cost efficiency and innovation. Empirical studies have stressed the value of competition between technological platforms for the dissemination of broadband services. It would therefore be preferable to maintain competition between technologies in the broadband sector and, within each technology, between Internet service providers.

I find this glib. There will be competition between Internet service providers (ISP) in terms of them selling consumers retail services from an wholesale network that they can openly access. Just like the national electricity grid.

Secondly, there is competition between technological platforms for the dissemination of broadband services---between fibre, wireless and satellite.

On the monopoly question that is raised by the OECD the national electricity grid is a monopoly just like the NBN--but there is no argument that we should have two national electricity grids competing against one another. We have competing national highways. So why do we need competing national broadband networks?

Apparently in the 160 pages of the 2010 Economic Survey (not online) there is more detail on the NBN. According to Alan Kohler at Business Spectator:

Essentially the Paris-based organisation is concerned that an NBN monopoly “could forestall the development of, as yet unknown, superior technological alternatives”. It complains that the agreement with Telstra removes competition between the new fibre network and the existing copper and cable networks, calling it a “picking-the-winner strategy”, and says it would be better to maintain competition between technologies.

This is confused. The assumption is that the copper network — if we just give it a few nips and tucks — is good enough to keep us basking in 12Mbps glory for many years to come.

The copper network will be closed down over the next 8 years because it has reached its limits. It will be replaced a fibre network which consumers can choose to use or to rely on wireless or utilize both. Secondly, the hybrid-fibre coaxial network (a good historical example of telecommunications market failure) only covers a small and carefully defined part of Australia's geography. Their networks are closed to competitors, under-subscribed and hardly at risk of being upgraded after they haven't been voluntarily extended in the past 10 years.

Presumably, replacing the old copper network and the hybrid-fibre coaxial network will not prevent further technological developments in both fibre and wireless.

Posted by Gary Sauer-Thompson at 12:00 PM | Comments (3) | TrackBack

November 2, 2010

Robert Reich on the US's economic woes

In this review of Robert Reich's After Shock: The Next Economy and America’s Future in the New York Times Sebastian Mallaby summarizes Rich's main argument about the stagnation of middle-class incomes and exploding inequality in the USA in the context of the global financial crisis.

Reich addresses the wide, glaring disparity of income between the rich and the middle and working classes and the way that Wall Street blames a reckless, overspending working class (and the poor) for bringing on the recession. His is a Keynesian narrative.

Mallaby says:

Caught between rising aspirations and stagnant wages, Reich says, middle-class Americans have gone through a series of coping mechanisms. First, women joined the workforce, giving families a second income. Then husbands and wives put in longer shifts, creating a species of family called DINS — “double income, no sex.” Finally, families went into debt. In this sense, inequality helped to stoke the credit bubble. Now that the bubble has burst, these coping mechanisms are exhausted...

As a consequence:
Americans will “face a necessity they have managed to avoid for decades: They have to make do with less.”The belt-tightening is not likely to be popular, and Reich goes so far as to suggest that it could trigger a political convulsion. People are very likely to resent material losses bitterly if these are not broadly and fairly shared. And in the wake of the financial crisis, fairness has gone by the wayside: millions of Americans have lost jobs, but the financial sector has bounced back; eye-popping bonuses have returned;

The Great Recession that started at the end of 2007 has seen the Obama administration step in quickly with enough money to contain the downward slide.

However, little has been done to reduce the underlying, cumulative problem of widening inequality. Reich argues that:

After the stimulus and loose money wear off, therefore, it is unlikely that growth can be sustained. . . . . . This will constitute the Great Recession’s aftershock. From it will emerge either a political backlash—against trade, immigration, foreign investment, big business, Wall Street, and government itself—or large-scale reforms that reverse the underlying trend.

So the fundamental problem is that too much money has ended up in the hands of too few people. Therefore, Americans no longer have the purchasing power to buy what the U.S. economy is capable of producing. The nativist Tea Party movement is the political backlash to this growing inequality.

The political violence and its various hatreds is being drummed up now is coming from the astroturf groups funded by big business, the Republican leadership itself and from right-wing hate-talk radio. These are people who understand full well what they're doing and just don't care about the repercussions.

Reich's proposal is to face head-on the currently existing inequities and to remedy them through legislative and executive action to restore the bargain that working and middle-class Americans would share with the wealthy in the prosperity created by their own increases in productivity and profits.

Reich's nine steps to do this are:

(1) a reverse income tax. Instead of money being withheld from workers paychecks to pay taxes to the government, money would be added to their paychecks by the government, according to a graduated or progressive formula;
(2) a carbon tax;
(3) higher marginal tax rates on the wealthy—up to 55%--and elimination of the capital gains exemption;
(4) a reemployment system rather than an unemployment system, including wage insurance;
(5) school vouchers based on family income;
(6) college loans linked to subsequent earnings, to be repaid during the first ten years of a student’s gainful employment;
(7) Medicare for all;
(8) a sizeable increase in public goods such as transportation, public parks, recreational facilities, public museums and libraries, with free public transportation, including high speed rail; and,
(9) the removal of money from politics.

I cannot see this kind of social democrat reform happening in the US, which is rapidly becoming a plutocracy. It is more likely that working and middle-class Americans will be squeezed further.

Posted by Gary Sauer-Thompson at 10:59 AM | TrackBack

October 26, 2010

Liberals call for a financial inquiry

Credit where credit is due.

Joe Hockey is calling for a financial inquiry into our financial system and for banking reform. It's about time we moved away from bashing the banks to policy; moved away from concentrating on the Reserve Bank of Australia to the inherent flaws in the financial system itself. Where is the ALP?

RowsonMfatcats.jpg Martin Rowson

The international context of Hockey's proposal is the high degree of instability of the international financial system and the lack of capacity to both prevent and manage financial crises. There are calls for fundamental reforms in the global financial system, given that the IMF is the principal institution of global economic governance positioned to help deal with the current economic and financial crisis and the Fund’s legitimacy and relevance has been undermined in recent years.

The IMF no longer has a major role to play as a lender, helping to guide the global economy and financial system, and protecting the international financial system.

The global economy and financial system are in the midst of a massive deleveraging process. The increased globalization of the world economy and, more important, of the world financial system in recent decades means that countries can run, but not hide, from this crisis or future crises. European countries are facing sovereign debt crises from bailing their junk financiers.

Secondly, the finance industry has effectively captured our government and its policy prescriptions are consistent: finance unleashed would propel the economy to greater economic growth; and countries need to learn to live within their means after a period of excess—exports must be increased, and imports cut. The global financial crisis indicated that financiers or Wall Street in the case of the U.S. played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.

The Big banks have only gained political strength after the global financial crisis. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The Obama administration seems helpless, or unwilling, to act against them. As in America, the state's velvet-glove approach with the banks in Australia is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.

Hockey backed away from any suggestions that the Coalition advocates the re-regulation of interest rates. He says that the big four banks were now too big to be allowed to fail, that the four major banks have largely become the Australian financial system and that the major banks are using their newfound market power to collusively signal pricing intentions. He also argues for greater competition as the smaller banks are are finding it hard to get funding.

His policy suggestions are:

1. Let’s give the ACCC power to investigate collusive price signalling (that is, oligopolistic behaviour), which is exactly what Graeme Samuel has called for;

2. Let’s encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers;

3. Let’s formally mandate the RBA to publish regular—rather than irregular—reporting on bank net interest margins, returns on equity, and profitability so that we can all determine whether the major banks are extracting monopolistic profits; that is, whether taxpayers are effectively subsidising supernormal returns;

4. Let’s investigate David Murray’s proposal for Aussie Post to make its 3,800 branches available as distribution channels for smaller lenders. To be clear, the Coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself;

5. Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the Government’s credit rating to AAA rated commercial paper in those markets to improve liquidity;

6. Let’s explore further simplification of my beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler;

7. Let’s direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive. Many small businesses tell me that they do not receive sufficient financial benefit from pledging their family home to secure their borrowings;

8. Let’s commission a resolution to the debate about whether the banks should be able to issue “covered bonds”, in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit;

9. And let’s wrap up all of this work into a full review of the financial system—a Son of Wallis, or Grandaughter of Campbell, whatever you will.

Hockey advocates stopping collusion and increasing competition in addressing the core question: How to regulate banks that are regarded as too big to fail. Is this the beginning of a critical look at the the cult of finance that has seeped into the culture at large?

We now have a situation in which in our society, which celebrates the idea of making money, it is inferred that the interests of the financial sector are the same as the interests of the country. The implication is that the winners in the financial sector know better what was good for Australia than did the politicians and public servants in Canberra.

It's time to address the power of the banking oligarchy. The major banks draw much of their power from being too big to fail. It's time to break the oligarchy through anti-trust legislation in greater competition. What will the ALP do?

Posted by Gary Sauer-Thompson at 11:09 AM | Comments (14) | TrackBack

October 23, 2010

'starving the beast'

The global credit crunch and economic downturn continues to work it s way through the national economies of Europe and the Americas. Global financial markets remain unsettled, and the recovery that started so vigorously in 2009 seems to be stalling. There has been swelling the ranks of both the working poor and those seeking out social services for the first time. Inequality is increasing due to the politics of austerity from the moves to roll back public spending programs introduced to help shield their economies from recession.

If slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis, then the future of the world economy is one of long period of low growth:

SchankUKgrowth.jpg

Devaluation is not available to individual countries within the euro monetary union. They have to adjust to bad shocks to their individual economies either through increased unemployment, reduced wages, or migration of some unemployed workers to countries that are doing better. These adjustments are difficult for Greece, Italy, Spain and other weak members of the EU because their labor markets are inflexible, and because many workers in these countries are reluctant to migrate elsewhere, partly because they would give up generous benefits.

Behind the politics of austerity lies the well-known “set of ideas, beliefs and attitudes” of the free market economics: they strongly believe in the virtues of markets because of their efficiency properties but also for moral-ethical reasons; they believe in the self-adjusting or self-correcting economy and therefore abhor government interventions of all sorts. Along with this core set of beliefs there goes a penumbra of vaguer attitudes with respect to private property rights, the legal system, the overarching value of (particularly) economic freedom, etc. The defense of “the market” involves “starving the beast”, which means pressing for reduction in government by creating binding constraints.

Like Southern Europe, the US economy needs to move away from the consumption/housing-led growth model of the last decade. President Obama has encapsulated this challenge by setting the goal of doubling US exports over the next decade. Daniel Gros points out that this is easier said than done:

Post-bubble economies face a fundamental mismatch between the skills available in the existing work force and the requirements of a modern export-oriented manufacturing sector.Unfortunately, there is very little that economic policy can do to create a strong exporting sector in the short run, except alleviate the social pain. Labor-market flexibility is always touted as a panacea, but even the highest degree of it cannot transform unemployed realtors or construction workers into skilled manufacturing specialists.

Long-run economic growth is determined mainly by improving productivity. This is difficult given America's dire debt situation and it being the heart of the world’s financial and monetary system. George Soros observes:
The US economy badly needs investments that enhance productivity but the private sector is unwilling or unable to provide them. US corporations operate very profitably but instead of investing their profits they are building up their liquidity—accumulating money, not investing it.In these circumstances there is a strong case for government intervention. Admittedly, consumption cannot be sustained indefinitely by running up the national debt. But to cut back on government spending at a time of large-scale unemployment would ignore all the lessons learned from the Great Depression.

The Republicans are campaigning against any further stimulus and they seem to have gained the upper hand by stigmatizing big government. The Obama administration is pushed into the wrong policies by political pressures.

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October 12, 2010

Judith Sloan on the Murray-Darling basin plan

In her Basin plan forced to put environment above people in The Australian Judith Sloan criticizes the plan without mentioning 'food security' or running a scare campaign on food prices and thereby condemn the Murray-Darling Basin to death by political paralysis. Her concern appears to be the overall exercise of power around water is modeled on the principles of a market economy and the reordering of society to ensure economic growth.

She says that by any measure, the guide to the Murray-Darling Basin plan represents a clear case of overshoot in which the environmental gains may be achieved, but with unnecessarily high social and economic costs. She argues thus:

By any measure, the proposed cuts to water use are extreme. But the recommendations of the MDBA [Murray Darling Basin Authority] confirm, and are derived from, the fundamental weakness of the commonwealth Water Act, a weakness that has been known by the government as well as all other interested parties for quite some time...The objects of the act talk about promoting "the use and management of the basin water resources in a way that optimises economic, social and environmental outcomes.But when it comes to the principles guiding the determination of the SDLs, the environment has primacy, with residual flows available for other uses. In other words, the trade-off framework envisaged in the objects of the act is lost when it comes to the vital task of the MDBA determining the split of water resources between the environment and consumptive uses. Calculated this way, the SDLs over-allocate water to the environment and under-allocate water to irrigators.

She adds that the hands of the Murray-Darling Basin Authority are essentially tied: the legislation does not permit consideration of issues other than environmental needs when determining the cuts. The only scope to take into account other issues, such as the impact on local communities, is how the cuts are distributed within individual catchments.

Sloan's advice is that:

The government must act quickly to amend the legislation to achieve sensible water recovery targets that will improve the environmental health of the basin as well as underpin irrigation and the prosperity of the communities. Perhaps there is a role for the independents in initiating the required amendments?

Nowhere in the op-ed does Sloan address the ecological implications of an over allocated water system and the failure to address this over the last decade or more when she claims of environmental overshoot in which the environmental gains outweigh unnecessarily high social and economic costs. How does Sloan know this to be so? What is the basis for her cost benefit analysis?

Secondly, Sloan is unclear on what she means by making the Murray-Darling Basin sustainable, what cuts in allocations are required to do this, and how she would address the cost to the regional economies of these cutbacks.

Thirdly, Sloan does not address the costs of that over-allocation to ensure economic development that is borne by the environment and diffused among communities downstream. Those costs are market negative externalities related to the environmental consequences of production and use. Sloan does not mention these consequences at all.

The fixed truth underpinning Sloan's article is that economic growth ensures the prosperity of the greatest number and that it is not the economic system that fails. Failure is attributed to individuals or to the 'rogue state'. Sloan, in other words, does not understand water in the Australian economy and little understanding of water management in Australia.

Posted by Gary Sauer-Thompson at 12:32 PM | Comments (13) | TrackBack

October 4, 2010

Labor's free trade hypocrisy

I see that the Craig Emerson, the Minister for Trade, is banging the anti-protection free trade drum and he is manning the barricades to oppose inserting environmental and labour standards into trade deals. Emerson structures Labor's hard edged free trade position in opposition to the Green's fair trade position.

I presume that by free trade Emerson means something like we won't put quotas or tariffs on your products if you won't put quotas or tariffs on our products. The major premise is that by removing trade barriers, consumers will benefit from the comparative advantages that different nations have in producing goods. Those nations that have a resource, technological, labor, or other type of advantage will be able to produce a better product at a lower cost to the consumer if artificial barriers protecting domestic producers are removed.

Emerson says that:

the [Gillard] government would fight European threats to erect trade barriers around countries not imposing carbon pricing, dismissing them as "old protectionism". We won't cop governments cloaking protectionism in this sort of green cloak of respectability, where it's just old protectionism. Of course we are committed to putting a price on carbon, but let's not believe that this is all about climate change. There is a very clear European old protectionist instinct under this green cloak of respectability and we won't cop it.

His stance of fighting environmental protectionism is at odds with Labor's subsidies of the car companies in the form of a green car innovation fund (hybrid Camry); and its subsidies for farmers in the form of water infrastructure, drought relief ad import restrictions.

So much for comparative advantage as understood by
Ludwig von Mises thusly:

There are countries with relatively favorable and others with relatively unfavorable natural conditions of production. In the absence of interference on the part of governments, the international division of labor will, of itself, result in every country’s finding its place in the world economy, no matter how its conditions of production compare with those of other countries. Of course, the countries with comparatively favorable conditions of production will be richer than the others, but this is a fact that cannot be altered by political measures in any case. It is simply the consequence of a difference in the natural factors of production.

The political reality is that free trade agreements typically involve some sectors are protected under the agreement and the agreement sets up an uneven playing field between countries and between industries. The Gillard government is seeking to protect jobs in Australia.

Secondly, GATT/WTO dispute-resolution panels have consistently held that various domestic environmental laws impermissibly interfered with free trade obligations.That is why segments of the environmental community have called for reforms to free trade agreements to make them more responsive to legitimate environmental concerns and objectives.

Posted by Gary Sauer-Thompson at 7:52 AM | Comments (6) | TrackBack

September 29, 2010

Tasmania: a silicon valley?

David Bartlett, the Premier of Tasmania, says that Tasmania is set to become the next Silicon Valley-style technology hub as the national broadband network is implemented over the next three years. It is envisioned that Tasmania will lead Australia in connecting to the global digital economy.

Tasmania, as a technology hub, is part of the Bartlett government building a dynamic and modernised economy structured around five priority sectors for innovation in the state’s economy:

• high-value agriculture, aquaculture and food
• renewable energy
• the digital economy
• a vibrant, creative and innovative Tasmania built on its lifestyle advantages, and
• further growing its tourism advantage.

This Innovation Strategy was first outlined in the New Economic Direction Statement (2008) which re-focussed the state’s economic direction on three key strategies: innovation, skills and infrastructure.

Most attempts at building the next Silicon Valley in other countries have failed. They thought in terms of "innovation in a box" that you can simply build overnight, unconnected to its surroundings, to the culture, to a moment in history.

Margaret O'Mara in Foreign Policy argues that Silicon Valley was based on substantive government contracts, a top-tier university (Stanford) as a research center and networking hub, a venture-capital model, a risk tolerance and meritocratic ethos of Silicon Valley financiers, and competitive amenities that provide a palce where creative, talented entrepreneurial people want to live.

O'Mara, the author of Cities of Knowledge: Cold War Science and the Search for the Next Silicon Valley, says:

The secret of Silicon Valley is that it wasn't a consciously planned silicon city. The Valley exists because of other big forces -- Cold War spending patterns, sustained GDP growth, and large-scale migration and immigration. It prospered because of unique local characteristics like risk-tolerant capital, entrepreneurial leadership, and good weather. It grew organically. It had room for happy accidents and lucky breaks. The not-so-good news for places like Shenzhen's University Town or Russia's Innograd, the high-tech corridor Medvedev wants to create in a woodsy area outside Moscow, is that this kind of ecosystem can't be built quickly from scratch. It takes time to grow, and success will depend on things its builders cannot control.

Even though globalization has changed the playing field, and the technologies that the Valley helped create have brought far-flung places and people together like never before, place still matters, and the right ingredients still make a difference.

It is not clear that Tasmania has the right ingredients to build a high tech hub or a city of knowledge. For instance, it is not clear that the University of Tasmania is like the American research universities that were at the heart of this formation of Silicon Valley: a university as an economic development engine, urban planner, and political actor.

In Silicon Valley universities and their administrators were central to the design and implementation of cities of knowledge, and successful scientific communities often depended upon the presence of an educational institution that not only had extensive research capacity, but was also an active participant in state and local political power structures.

Posted by Gary Sauer-Thompson at 2:50 PM | Comments (7) | TrackBack

September 20, 2010

an ideas -free zone?

According to Michael Stutchbury, the Economics editor at The Australian, the current power sharing Parliament is akin to a political circus concerned with simply dividing the spoils of power. He adds that so far, there is no sense of post-election policy direction from Gillard, such as how her rejection of Rudd's "big Australia" translates into a growth agenda.

Note the emphasis on the growth agenda--and not on sustainability. We can infer that Stutchbury is not in favour of sustainable development. He is, for instance, all for plain old economic growth as measured by GDP as an as an indicator of wellbeing, and he reckons that the absence of plain old economic growth is a social disaster. Stutchbury comments:

The complaints of the business and policy elite boil down to the sharpest such critique of the political class in a generation. Labor is gutless, Abbott's Coalition is populist, the Greens are anti-growth and the country independents are rural pork-barrellers. In short, the political system is failing to deliver the policies required to extend Australia's remarkable prosperity.

Who are the business and policy elite that Stutchbury refers to? What are the policies that will deliver prosperity? Do these policies move beyond growth as measured by GDP?

Stutchbury's policy elite are mainly those who are critical of the Gillard Government for a variety of differing reasons reckon the China boom won't repeat the prosperity gains of the past decade and that Australia is not making the most of our China boom. However, the impression gained is that what matters for Stutchbury is not the content of the criticism per se, but the criticism itself. It's another part of The Australian's kick the ALP meme.

If we dig beneath this meme, then we find the criticism from the Business Council of Australia president Graham Bradley. Bradley says that Australia faces losing its competitive benefit of cheap coal and gas energy, that Labor has provided no blueprint for Australia's future energy supply, and that the "excuse" of minority government should be rejected.

It is true that the solar energy industry has virtually given up on the federal Labor government to provide a mechanism for the roll-out of utility-scale solar installations across the country. What then is Australia's energy future? For Bradley and Stutchbury it is nuclear power, which could efficiently supply one-quarter of Australian electricity by 2050. And the subsides that are required to ensure that nuclear power is economically competitive? They are not mentioned. There is no mention of a cost benefit analysis either, even though this is demanded of the national broadband network.

Senator Scott Ludlam in Old-tech nuclear power is not the answer in The Australian says that:

In no deregulated energy market, anywhere in the world, is the private sector putting up its own money to build nuclear power stations. The industry remains on subsidised life support everywhere and is making headway only in a tiny handful of countries with state ownership of generators and command and control energy networks. The net effect, as researcher Mycle Schneider has graphed in stark terms, is that the nuclear industry flatlined in the 80s, began to decline in 2002 and is headed for steeper decline, or in the best case stagnation, for the foreseeable future.

He adds that the reasons are a complex mix of ageing reactors, formidable project costs, the unwillingness of insurance companies to cover the astronomical liabilities of reactor accidents and the 65-year unanswered question of what to do with radioactive spent fuel for the next quarter of a million years.

Posted by Gary Sauer-Thompson at 11:24 AM | Comments (3) | TrackBack

September 15, 2010

SA: the politics of the axe

The politics of austerity has come to South Australia as we have feared due to the bit of softening up of public opinion for massive budget cuts that has been going on. This austerity is in the context of the chill of global recession, the pace of recovery slowing in developed western nations, and still dysfunctional credit markets.

The high-level leak (of a 300 page document) from within Treasury reveals the full extent of the Sustainable Budget Commission's recommended $1.5 billion cuts to all government agencies ahead of Thursday's horror state budget whilst superannuation contributions for new MPs will rise from 9 per cent to 15.4 per cent of their annual salary.

RowsonM budgetcuts.jpg Martin Rowson

So we have learned that the document is classic wielding of the axe to thousands of program closures and spending cuts. It recommended closing schools and hospitals (country hospitals are earmarked for closure or a downgrade) including the Repatriation Hospital at Daw Park in Adelaide’s inner south and selling off the land, raising mining royalties, close police stations, cut the size of the government's ministry, thousands of jobs lost across the public sector and even to scrap taxpayer-subsidised cars for MPs.

The Treasurer Kevin Foley will tell the public that the (shaky) Rann Government, whose roots are those of social justice, really has their interests at heart. They have rejected "very ugly and seriously unpalatable" spending cuts recommended by the Sustainable Budget Commission due to the losses in government revenue from the ongoing effects of the global financial crisis. There was no alternative etc.

The spin is that the Rann Government, which dreams of a big mining future, will only make $1 billion of cuts across state government agencies and is only cutting hundreds of jobs; that the hard fiscal restraint is a road map to future surpluses so as save the state's AAA credit rating; and there will be no target cuts to major capital works. As they say in the publicity business "slash and burn" is a hard sell.

Those servants who lose their jobs -- estimates range from between 2000 and 5000 -- should take heart that Foley is getting the Rann Government's budget back to surplus as quickly as he can, that SA has a healthy economy, and that the deep cuts to state departments' administrative areas and not front line services. Any doubts they have should vanish when informed that Foley's politics of austerity is responsible economic management for South Australia. Foley is the right man for the job, the deficit hawks enthuse.

Little will be said about the "human cost" that will result from draconian cuts in public sector spending. Unemployment leads to a loss of earnings that is both substantial and long-lasting, especially among younger people. The forced austerity hits them especially hard, as it is more difficult for them to enter the labour market. If you lose your job, you are more likely to suffer from health problems, or even die younger. If you lose your job, your children are likely to do worse in school. There will be more urban decay, few green jobs, the run down of public education and greater illegal economic activity.

What this indicates is a clear rejection of demand-stimulating macroeconomic policies and that neoliberalism is still the only language used by South Australian politicians to confront the crisis and to face the social conflicts that result. The language of responsible economic management is management of austerity measures and repression.The austerity politics risked a deflationary spiral and a deeper jobs crisis. So democracy has become subsumed under, if not quite yet identical with, capital and the state and democracy no longer present an outside to capital that provides a way to counter the market's invasion of all aspects of everyday life.

Treasury's underlying assumption is that South Australia could compensate for the fiscal belt-tightening by selling more goods and services overseas. Treasury assumes belief is that hacking away at public spending will create space for the private sector to flourish. South Australia will cease to be so dependent on consumer spending and the state for its growth; instead, resources will shift to manufacturing and exports, thus reducing both household debt and the size of the budget deficit.

However, there is no argument by the Rann Government as to how this "rebalancing" will happen or provide a new foundation for innovation and growth. South Australia does not have an economic development based on a technology platform; nor does it have many expats returning from Silicon Valley returning home to lay a new foundation for innovation and growth structured around a culture where the start-up ethos is pervasive, risk-taking is expected, and failure is accepted.

Update
The Sustainable Budget Commission had recommended 310 pages of cuts - including closing hospitals, schools and police stations, along with across-the-board cuts in ministerial offices and reducing the number of Cabinet ministers by three. The political reality was that the Rann Government would shy away from many of the tough proposals - especially closing hospitals, schools and police stations.

MacmullinSABudget .jpg

Foley will cut $1.5 billion out of public spending over four years. There are huge cuts in public sector workforce numbers, cuts to their long-held entitlements and a raft of increased fees and charges - along with the removal of a range of subsidies such as those for petrol products in the rural areas.

The public sector bears the brunt and is the centre piece of the budget. The target is 3743 public service job losses, including 138 senior executives across all departments over three years. Public servants will be offered an initial separation package of 20 weeks' pay plus three weeks per year of service - up to 116 weeks' pay. This will reduce after six months of redeployment to 10 weeks' pay plus three weeks per year of service - up to 88 weeks' pay. If the targeted numbers do not accept voluntary redundancy within a year the Government will resort to sackings.

Public sector long service leave rates will also be reduced from 15 days a year to nine days a year for each year of service beyond 15 years to save the budget $90.7 million and public servants will lose permanent tenure. Foley says:

We are ensuring that the pain of cuts, the pain of restraint is internalised as much as possible.The public sector will be more responsive, more efficient, more focused, better quality...if the conditions that apply in the private sector are consistent with what we have in the public sector.The changes were needed to modernise public sector, which was still governed by regulations suited to a "bygone era".

On the other hand, it will maintain infrastructure investment commitments--- Adelaide Oval redevelopment, railway upgrades, hospital improvements and the major South Road expressway project. Nothing to foster the information economy by doubling of the current internet 100-hot spot CityLan scheme.

Water bills will increase by 21% to pay for the desalinisation plant. More revenue raising by traffic fines. Not a word about safety. Extra revenue measures are $479m.

No doubt the deficit hawks will go on about public sector debt, fiscal discipline, the crowding out of private sector borrowing and investment, and reducing pressure on on long-term interest rates. More needs to be done in terms of austerity, as South Australia has become addicted to Canberra dollars.


Posted by Gary Sauer-Thompson at 8:26 AM | Comments (2) | TrackBack

September 10, 2010

is regional Australia an economic ghetto?

We know The Australian's opposition to the national broadband network is because it sees it as the most politically rewarding pork barrel of all. We also know that News Ltd has commercial interests here, as Foxtel is threatened by the emergence of internet television (IPTV.) Hence their line that the future is mobile wireless and Telstra, which part owns Foxtel.

So what is the Coalition's argument against the national broadband network? Paul Fletcher, the Liberal member for Bradfield and ex-Optus executive, says that Coalition scrutiny will apply forensic scrutiny to the $43 billion national broadband network. Fair enough we need an opposition to keep an eagle eye on government mismanagement and waste for us.

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However, the Coalition's opposition goes deeper than that--as it is directed at the national broadband network itself, not the way it is implemented. Fletcher says it is the business case:

The business case was already fragile: Labor's implementation study predicted a paltry 6 per cent to 7 per cent return, and even that requires highly optimistic assumptions about the number of people who take up services on the new network.It is even harder with Gillard's new commitment to build first in rural and remote areas - where building a network costs much more and the number of customers is much lower.

And that is it. The Government's rate of return on its infrastructure investment is too low! The immediate response is why should the rate of return be 15% and not 7%. Fletcher doesn't say. He just assumes that it should be because this is the industry standard.

Kevin Morgan in his Deal turns NBN into shameless pork barrel in The Australian avoids the 'why a commercial investment'? issue. He says that the national broadband network:

is not a visionary nation-building project but little more than a pork barrel the government can dip into whenever it has a problem, in this case the need to cling to power....the fragile economics of building a national fibre-to-the-home network can be prejudiced if it suits the government because in assuring the independents that rural and regional areas will get priority for the fibre rollout the government has turned the business case for the NBN on its head....This commitment to a rural first rollout will mean the government will have to put more equity into the NBN or raise more debt on its behalf in its initial years, meaning the NBN cannot be considered a commercial investment but will have to come on budget.

So why should the National Broadband Network be understood as a commercial investment and not a nation-building infrastructure project? Morgan just assumes it should be; ie., that government should be run as if it were a business delivering a high return for its shareholders. Why should we adopt that business approach to policy making? He doesn't say.

The elephant in the room is neo-liberalism, as we can see from Henry Ergas' argument in Bush subsidies a romantic folly in The Australian that much of the spending by governments on the bush is ineffective:

By and large, people do not have few skills because they live in country areas; rather, they live in those areas because they have fewer skills. Were their skill levels higher, many would not remain where they are; rather, they would move to the main centres. This is because human capital is far more productive in cities....The unpalatable truth is the farther one lives from our large urban centres, the lower are likely to be one's human capital, lifetime earnings and life chances. Poorer prospects translate into riskier behavioural choices, including a significantly higher incidence of smoking, problem drinking and poor diet, and more widespread antisocial behaviour, which reduce life chances ever further.

Isn't this the inequity that the regional Independents raised? So what can be done? Ergas says move to the city because those handouts are a poisoned chalice:
Locking the bush into a culture of welfare dependency, and transforming country towns into economic ghettos without sustainable sources of wealth, will merely ensure large parts of regional and remote Australia die, leaving only pockets of economic and social viability.

But why not raise the skill levels in the regions and provide the necessary infrastructure for regional businesses to do take advantage of their opportunities? Ergas' response is:
Much of this spending is ineffective. To believe, for example, that computer use in country areas is low because networks are unavailable is wrong. As for believing digging optical fibre into the ground will solve the problem, that defies common sense. Moreover, the efficiency cost of the subsidies is high...And protecting the cross-subsidies from competitive entry will require entrenching NBN Co as a monopoly.

The proper solution is to remove the remove unnecessary imposts and distorting subsidies and the onerous regulations on the bush (land use regulation) that are so burdensome.

So why is the argument that computer use in country areas is low because networks are unavailable wrong? It is because those in regional Australia have fewer skills--eg., regional areas are attractive for retirees and people on government benefits---and those with more skills move to the cities because the regions are economic ghettos.

So why not provide the infrastructure that would enable regional Australia to avoid becoming an economic ghetto? Isn't that the reason for government intervention in to the market to build the national broadband network? In arguing that case the regional Independents are tacitly saying that neo-liberalism is deeply flawed with its market only approach to policy making.

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August 25, 2010

foreboding futures

There is a lot of commentary around the new politics due to the emergence of a multi-party democracy, the three regional Independents holding the balance of power in the House of Representatives and a minority government with some form of coalition. The promise emerging from this balance of power situation is parliamentary reform, better public services in health and education, more economic development for regional Australia and a more sustainable economy.

My own fear is that what will eventuate is a closure of this possibility, due to a minority Liberal government returning to power with the support of the Nationals and the regional Independents. That means three years of the economics of austerity based on the politics of fear constructed around the crushing government debt and financial catastrophe scenario that will bring ruin.

JenningsBcoalition.jpg Brian Jennings

This is a politics of neo-liberalism's free markets and small government economics that uses Johan Norberg's recent book Financial Fiasco as a road map. A politics designed to make the world safe for bankers and brokers in the citadels of capitalism.

My argument is that the Liberals are deeply opposed to the use of Keynesian style stimulus in preventing the economy from sliding into recession---because such governments continue to pursue a course of endless debt, higher taxes, more regulation. The Liberals have an explicit program of deep cuts to the government budget to reduce the deficit and government debt. Behind this is theory that tax cuts for the rich yield prosperity. No doubt their rhetoric will be one of "progressive austerity", unavoidable cuts, and returning the budget to surplus.

The economics of austerity and a hard deflationary budget---means that working families on the lowest incomes – particularly those with children – would be the biggest losers in the cities. For those living in the regions, already facing unemployment and reduced health and education services, it means more social pain from increased unemployment. It does not mean major investment in regional Australia and it does not mean overcoming the increasing levels of inequality and which equate the ‘good’ with what is economically efficient.

In these circumstances will the 3 regional Independents become Abbott's fall-guys? Will the coalition become unstable over the budget cuts? Will the Independents help to hold the axe handle, or will they turn the other way? They are not fools. They must know what Abbott's economics of austerity means for the bush and regional Australia. Are they critical of a neo-liberal mode of governance? Bob Katter certainly is.

And if the regional Independents decide to support Gillard Labor? Well, the budget cuts to return the budget to surplus over the next three years will be less severe than those advocated by the Liberals, and they could be counterbalanced by greater investment in public infrastructure in regional Australia.--eg., renewable energy grids and high speed broadband that would make a difference to everyday life in the regions.

Posted by Gary Sauer-Thompson at 11:42 AM | TrackBack

August 16, 2010

austerity is prosperity

In an op-ed in The Australian entitled ALP's knight is a thief in rusty armour the economic historian Niall Ferguson challenges Labor's economic narrative that the Keynesian style fiscal stimulus injected by the Rudd Labor government saved Australia from a much more serious recession.

In doing so he is challenging Labors claims about its good economic management:

PinnIpublic finances.jpg

Australia has dodged a global economic crisis and it has emerged with low unemployment, inflation under control and interest rates still well below their historical levels. Ferguson's argument is that there are more plausible explanations for Australia's relative out performance of the other western governments during the global downturn or recession arising from the global economic crisis. This is the core of his case.

How plausible is it?

Ferguson's explanation for this is:

Step forward five candidates with a better claim to the credit: 1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry...Stimulus? Yes, sure, Labor has stimulated the Australian economy, in the same way that Ned Kelly used to stimulate the economy of Victoria.

Sure, these are factors but they need to be weighted along with the fiscal stimulus. Monetary policy, for instance, would not have delivered even the limited recovery we have had on its own.

What is denied by this account as Tim Colebatch points out in the National Times is that:

Because private sector activity collapsed. In the non-residential sector - excluding education - approvals halved from $28 billion in 2007-08 to $14 billion in 2009-10. Bank lending to business has shrunk by $87 billion, or 11 per cent - and for many companies there are no other lending sources.Think about that. Even now, there are 150,000 more Australians out of work and 180,000 more working shorter time than before the crisis. Growth is sluggish, and GDP per head remains less than two years ago. Ask yourself: what would Australia be like now had the government not pumped all that money into new construction?

The stimulus kept the industry going. In the March quarter, 38 per cent of work on non-residential buildings was on schools and the like, up from 5 per cent before the crisis. Work also began on 4259 public housing units, more than they normally build in a year.

Ferguson is advocating “counterfactuals”---the study of alternative historical outcomes based on “what if” scenarios. What is implied is a counterfactual argument that a conservative fiscal policy on the part of the Australian government to fight the recession would have had beneficial results.

Ferguson sees the Labor Government as clinging to their dog-eared copies of John Maynard Keynes's General Theory to justify their profligacy. Ferguson, in other words, is a deficit hawk who would argue that the biggest problem with Australian fiscal policy is that, under Labor there is simply no plan to return to fiscal stability.

Deficits cannot continue indefinitely and this is acknowledged by Labor. Secondly, there is an international debate over fiscal tightening. Thirdly, in this austerity versus stimulus debate the deficit hawks, such as Jean-Claude Trichet the president of the European Central Bank acknowledge that western economies:

are emerging from the worst economic crisis since the second world war, and without the swift and appropriate action of central banks and a very significant contribution from fiscal policies, we would have experienced a major depression. But now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope.

The growth of public debt has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector.

Ferguson acknowledges that governments were facing the collapse of the financial sector but questions the Keynesian prescription of government deficit spending. A question we need to ask the deficit hawks is: "how would the Rudd Government's balancing their budget, as many conservatives demanded, have had little effect on activity, and even produced beneficial results? What is Ferguson's argument?

The general answer is that austerity is not bad news for business for much of what is being planned by the Coalition attacks waste in the public sector; it is the bloated public sector that the Labor Party allowed to expand is going to feel most of the pain. That is going to reduce the burden that the private sector has to bear in terms of taxation. This is good austerity---if you want business confidence to bounce back do some radical things that send the kind of signal that the Thatcher government and the Reagan government sent to business in the early 1980s.

Ferguson's argument is that the private sector (think mining) would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. Private enterprise does the trick. Oh yeah. This is akin to magic thinking. The construction industry in the eastern states (SA, Victoria, NSW) would have deflated and there would have been a big rise in unemployment.

I suspect the more important issue is the longer term economic sustainability of keeping growth going. The international situation is sobering. We a have entered a world of interminable fiscal deficits, increased government debt reduced effective demand, and downward pressure on prices. This suggests long-term deflation, which is what debt-heavy Japan has experienced. Indeed, the future that many countries face may well be unfolding before our eyes in Japan today.

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August 11, 2010

South Australia: the deficit hawks

I have mentioned the conservative deficit hawks before---in this post on the new austerity and election scripts + mantras who denounce and decry the government’s “irresponsible” and “unsustainable” fiscal policy.

These neo-liberals defend the proposition that they don’t want to have government intervention in economic affairs unless it benefits them. They preach austerity as the solution to recession. The way to prosperity is through austerity by scaling back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labour, slashing wages, and reducing social spending.

A wave of fiscal austerity is rushing over in South Australia. The deficit hawks are well and truly in control. The Rann Labor Government has set up a Sustainable Budget Commission to assist the Labor Government to move the State’s finances back to a sustainable position following the global financial crisis in order to maintain the state's AAA credit rating.

At that time the State Government was expecting a sharp decline in tax revenue as a result of the Global Financial Crisis (GFC), but since then the fears about a major hit to budget revenues have been replaced by forecasts of growth rather than decline.

The State Government's 'Sustainable Budget Commission' has been operating on the assumption that revenue to the State Budget will decline by around $3.8 billion over the next four years. The rationale for the budget cuts is this:

The global financial and economic downturn has helped push South Australia’s budget and financial position into a potentially unsustainable position, in the absence of corrective action.This is temporary. Ratings agencies recognise this. For now, the State retains its triple-A credit rating.Economic recovery will help restore the State’s finances. But more is needed.The Government has announced a savings target to restore financial sustainability.The Commission’s role is to advise the Government how it can achieve that savings target.Sustainable Government finances are important. South Australia would be a less attractive investment destination without them. Weaker economic and employment growth would be the result.Unsustainable Government finances also ‘cost’ South Australians in the form of higher taxes and less services (eg, for health and education).

The Government's immediate priority is to rein in spending and balance the books after successive deficits. The figure publicly mentioned is $750 from the public sector, which means 1600 jobs. The indications are that the cuts will be much deeper, despite a windfall in GST revenues from the Commonwealth. That means more jobs gone.

SA Health faces a cut of $450 million that is expected to eliminate 4,000 jobs which will will affect hospital and out-of-hospital clinical services; up up to 800 Justice Department jobs are expected to go.

The September budget cuts don't add up, and so the global financial crisis is being used as a rationale to slash and burn. You create an artificial financial or budget crisis, then come in and “save” the situation. Creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy in the name of fiscal orthodoxy by neo-liberals posing as hardheaded realists, doing what has to be done.

The argument is that markets are demanding austerity and social justice has to go. That hurts, but it is for a necessary purpose. If we don't do it, the bond markets will downgrade our debt and we will be even worse off. Only austerity can hold off the prospect of a debt crisis, even if that means increased unemployment reduced public services, their schools and hospitals being chronically underfunded.

The implication is that basic government functions — essential services that have been provided for generations — are no longer affordable. The antigovernment campaign to roll back the welfare state has always been phrased in terms of opposition to waste and fraud — in SA today it is the vast armies of bureaucrats uselessly pushing paper around. Nationally it is government waste.

What is rejected by Rann Labor is that when consumer spending collapses in a major recession governments need to borrow and spend to prevent a depression -- and then pay off the debt from the proceeds of growth once we have brought the good times back.

Posted by Gary Sauer-Thompson at 11:57 AM | Comments (6) | TrackBack

August 8, 2010

our future's present

The neo-liberal mode of governance, which emerged out of the critique and assault on regulated welfare capitalism and works at a number of levels has become the economic commonsense of our time. The bipartisan consensus on neoliberalism is now sufficiently deeply entrenched that there's almost no public discussion as to how it has transformed our society; or how it will continue to transform Australia in the future.

The taxi driver account which has passed into everyday usage: get the state off our backs, why should people get welfare for doing nothing, and the market knows best. Underpinning this commonsense is a suspicion of the state, the stress on freedom, a belief in entrepreneurship, and the capacity of individuals to do what’s best for themselves. Market relations are the only relations recognized as real.

Leunigvoter.jpg

The paradox is that for all the talk of economic growth and prosperity from the long global wave we have increasing inequality; for all the talk of change, innovation and digital technological utopianism we have a deep conservatism and conformity.

Update:
Jeff Sparrow in his Manufacturing political reality at ABC's The Drum makes reference to neoliberalsim. He says:

One of the most socially significant developments in Australian political and cultural life over the last few decades has been the evolution of neoliberalism from a fringe doctrine to a philosophy now largely ubiquitous. The neoliberal turn was always about more than pure economics, involving an insistence that notions of individual autonomy, consumerism, efficient markets and transactional thinking should be extended into all social relations, even - or, perhaps, especially - those that had previously been dominated by quite different rules.

Neoliberalism, however, recognises only one kind of social engagement: the market transaction. The neoliberal marketisation of society explicitly and consciously reshapes the country to suit homo economicus, who is defined exclusively as a rational profit-maximiser, for whom any collective identity constitutes a market failure.

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August 4, 2010

election scripts + mantras

The Coalition's mantra or slogan --- end the waste, pay back the debt, stop the big new taxes and stop the boats--- is wearing rather thin. Instead of being a framework for their ideas about economic policy it looks more like an election script based on zombie economics.

The reason that it is more mantra than framework is that the Coalition is giving the impression that there was no global financial crisis at all. The mantra about Labor's ''reckless spending'' and ' big 'waste'' and "huge debt" gives the impression that government's stimulus package thing just went to Labor's head---(its what Labor does) and because they are Labor they throw money around----"Labor is borrowing 100m a day"--- to keep the state big. Labor just loves a big state that crushes individual freedom. Or Labor are just tizzy.

Leunigvotenatural.jpg

The government is the problem not the economy is the implication. The global financial crisis and the global recession that followed is simply airbrushed out of history.

So there is no need to say what the Coalition would have done to deal with the global financial crisis; how they will bring the budget back to surplus other than cutting the waste (eg., killing off the national broadband network!) or how they will "stop the big new taxes" when they are proposing a new tax on larger companies, a 1.5 per cent levy, raising $6.1 billion in the first two years, to help pay for his paid parental leave scheme.

The reality is that Australia has low public debt according to the Glenn Stevens, the Governor of the Reserve Bank, good credit ratings, limited pressure on interest rates due to moderate inflation, and a mining boom that will increase government revenue.

So where is the Gillard Government's attack on the Coalition's mantras? Where is their economic narrative to show their good economic management? The general economic consensus is that the Rudd Government's fiscal stimulus package designed by Treasury, which includes the school building program and the $900 Commonwealth payment, saved the Australian economy from the worst of the economic crisis.

Posted by Gary Sauer-Thompson at 9:10 AM | Comments (12) | TrackBack

July 31, 2010

economic myths

One of the big myths of our time is the debt and deficit one. We are all consistently told that the government should balance its budget just like a household does, that persistent budget deficits are unsustainable and will lead to stagnant growth and even to sovereign defaults. Debt and budget deficits are bad for the resurgent austerity advocates.

This myth has been pushed by the Coalition and most professional free market economists since the global financial crisis These deficit hawks argue for lowering government deficits and debt in the midst of the current global economic recession, even though these orthodox economists don’t have a theory to explain the global financial crisis (since their models exclude the possibility of one).

Though they know that reducing the debt and the budget deficit through slashing public spending will create a heck of a lot of unemployment----unlike the Great Depression when they didn't know this --- their politics dictates that the market will continue its recovery without any additional government stimulus. Markets always work all the time, no matter what.

Government debt, they proclaim, is the spectre haunting Australia, not sagging global economic growth resulting from the global economy heading for a serious slowdown this year; a slowdown greased by the cutbacks in public spending in Europe that will shrink European economies, slow U.S. export growth thereby slowing China's exports.

The global financial crash of 2008 didn’t turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. It makes sense to cut back debt and the budget deficit when the global economy is likely to grow at a rapid rate because unemployment will come down.

So what will drive global economic growth? China, of course, because of its insatiable demand for commodities, an its fiscal stimulus, working mostly through infrastructure investment, did a great job in terms of buffering the real economy in the face of declining world trade in 2008-09.

China is the leading candidate to be at the epicenter of the next boom. The bet is that China can keep its growth high enough to sustain the global economy while o not getting drawn into some sort of bubble.China will save the day. How? Their middle classes will eventually become so big and rich they can buy everything the nations of Europe and the US will be able to produce,

As of now China and India are still relying on net exports to America and Europe to fuel their growth!

Posted by Gary Sauer-Thompson at 11:28 AM | TrackBack

July 5, 2010

time for the party to stop

I'm on holidays at Victor Harbor and doing some photography. So posting will be light for this week.

Australia appears to be insulated from what is happening in Europe: call for cutbacks in public spending, savage budget cuts in response to the big budget deficits run up by government to prevent a recession (or is it a depression?) and saving the big banks from the global financial crisis they caused.

We have the new austerity voices in Australia--eg., the Coalition and News Ltd--but the mining boom is cushioning us, and keeping the neo-liberal slashers and burners at bay. If Europe is shrinking its economy, then Australia has the option of growing its way out of the budget deficit problem.

Cameroncuts.jpg Martin Rowson

The UK, for instance, is facing future cuts to public spending up to 40% according to the Treasury.

Or is that a scare campaign designed to create a panic about the deficit so as to soften up the voters to a harsh "spending review"?

In Europe--and probably in the US--- it would appear that the politicians have decided that the financial sector can be rescued only by cutting back social spending on social security, health care and education, bolstered by more privatization and sell-offs. Apparently, they, as good utilitarians, reckon this is worth the price.

Bryan Gould points out that Nick Clegg seems to have gone along with the basic strategy of cutting the deficit, come what may, without firing a shot. He asks some good questions:

How else to explain the extraordinary spectacle of a supposedly left-of-centre party and its leader tamely endorsing a budget strategy that is positively perverse and that threatens a re-run of the global recession that similar neoliberal doctrine produced less than two years ago? How is it that a financial crisis that failed to become a full-scale depression only because governments and therefore the taxpayers bailed out the failed financial institutions has become the launching-pad for savage cuts in public spending and a punitive scaling-back in the role of government?

Why should anyone believe that throwing people out of work, and then cutting the support available to the unemployed, will somehow set the economy back on its feet? Why should anyone believe that the government's finances – including an indebtedness massively increased by the billions spent on the bailouts – can be restored by ensuring that tax revenues are depleted because economic activity is flattened?

He adds that those with a knowledge of economic history will know that George Osborne is all too faithfully following in the footsteps of those like Herbert Hoover who followed similar policies in 1932 and plunged us all into depression.

It’s capitalism that presents itself as having dissolved all illusions and exposed the underlying reality of things. Late capitalism is all about ceaseless reinvention, nothing is solid, everything is mutable. And yet late capitalism is alsosabout recapitulation, homogeneity, minimally different commodities. Capitalism is a bizarre mix of the ultra-modern and the archaic.

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July 4, 2010

Greenspan on climate change

Alan Greenspan in devoting two pages in the 531 pages of his memoir, The Age of Turbulence: Adventures in a New World, to the climate issue, illustrates the neoliberal minimization of the issue. What needs to be defended is the free-market ideology that rejects strong regulation of the economy.

His first tactic is minimization of the issue. He has “little doubt” that climate change is real and human induced (p. 454). But he offers merely one proposal to address the issue: an increase in the gasoline tax to protect America’s energy “security”.

There is no commitment about the need for state investments and subsidies to recast the infrastructure of consumption in the zones of transportation, housing, and power production; no urgency to cooperate with other states and international organizations to protect the earth’s forest and ocean systems, though both are key absorbers of carbon dioxide. No exploration of how changes on these fronts could also empower constituencies who seek to foster a positive and timely austerity of material desire.

Hence, his second tactic is evasion, because a robust engagement would throw his key assumptions about market control of investment, consumption, and work into disarray, and he would have to think more carefully about the need for new relays between collective patterns of consumption and state policies. What is his explicit reason for such a tactic? He says that the worst climate effects are scheduled to occur after the period he has “selected” for analysis, from today to 2030! Hence, the third tactic: deferral.

So we have neoliberal minimization coupled to corporate self-interest that functions to prevent action on climate change through a pricing of carbon. Laissez faire capitalism is a refuge for those who maintain that human can and should master and exploit nature.

Posted by Gary Sauer-Thompson at 9:21 AM | Comments (3) | TrackBack

July 1, 2010

Canberra watch: dividing the miners

From the various reports in the mainstream press we know that negotiations between the Gillard Government and the mining industry over the Resource Super Profits Tax (RSPT) are taking place in Canberra. All we know that is the talks have been "constructive and disciplined approach that is being taken by both sides". And that's all. Nobody is talking. No leaks.

What we don't really know is the government's political strategy in dealing with this conflict. Is it one of divide and rule? Where is the in-depth analysis and expert insight that enables us citizens to understand what is happening behind the closed doors and covered windows?

MoirMInersnegotiations.jpg

If you dig around a bit then you discover that the Gillard Government is trying to split the industry eg., changing the RSPT so that it would carve out the prospective coal seam gas-fed export LNG projects in Queensland, which would be covered by something akin to the existing petroleum resource rent tax.

Another strategy is to make concessions to the big miners to show that their hostility to that RSPT is unreasonable and self-interested; say by raise the controversial uplift factor in the tax from the government bond rate of less than 6 per cent to the 11 per cent or so.

Stephen Bartholomeusz in Business Spectator states that a political strategy had been developed by Rudd and Swan before Gillard displaced Rudd:

It was designed to fragment the hitherto united industry opposition to the RSPT, isolating BHP Billiton, Rio Tinto, Xstrata and the other big miners and enabling the government to portray them as obdurate and greedy and absolutely committed to not paying a "fairer" share of tax.The mining industry campaign would lose a lot of its potency if the industry’s solidarity was broken and it was being prosecuted only by a relative handful of the biggest players.

Bartholomeusz adds that such a politically driven strategy would be a breach of Gillard’s promise to negotiate in good faith. He adds that the RSPT:
was a just a naked grab for cash, akin to the partial nationalisation of the big end of the sector, largely without compensation, which would have undermined its stability, frozen new projects, decimated the smaller miners and driven capital offshore.

I'm not persuaded by the argument since politics lies at the very heart of these negotiations. The core issue is who runs the country: a democratically elected government or big multinational corporations concerned with their profitability. This is what the big miners have to accept---that here has to be an industry-specific profits-based tax for the public good ---as they press for concessions in their negotiations.

Update
The ABC is reporting that the Government is willing to water down the original deal put forward by former prime minister Kevin Rudd and The Treasurer, Wayne Swan. It says that is understood a deal could include lifting the rate at which the super profits tax kicks from 6 per cent to about 12 per cent and making the rules more generous for existing mines.

We will have to wait until tomorrow. My fear is that the increase in superannuation contribution (lifting compulsory superannuation contributions from nine to 12 per cent) has gone west. Let's hope the changes are to the company tax rather than superannuation. Business should bear the brunt of the miners desire to keep their profits.

Update
The renamed Minerals Resource Rent Tax (MRRT) will apply only to iron ore and coal in Australia, and will be capped at 30 per cent rather than the original 40 per cent proposed. Oil and gas projects will come under the current Petroleum Resource Rent Tax (PRRT) regime to all Australian onshore and offshore oil and gas projects, including the North West Shelf. The new ''super profits'' tax will only kick in when profit exceeds the long-term bond rate plus 7 per cent.This reduces the expected revenues by $1.5 billion.

The deal builds on that hammered out in the final days of Kevin Rudd. Lifting compulsory superannuation contributions from nine to 12 per cent is an important step.

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June 29, 2010

the econocrats: here we go again

Karthik Athreya, a specialist in macroeconomics and consumer finance who works in the Federal Reserve Bank of Richmond, argues that Economics is Hard. Don’t Let Bloggers Tell You Otherwise. He says that:

The following is a letter to open-minded consumers of the economics blogosphere. In the wake of the recent financial crisis, bloggers seem unable to resist commentating routinely about economic events. It may always have been thus, but in recent times, the manifold dimensions of the financial crisis and associated recession have given a fillip to something bigger than a cottage industry. Examples include Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich. In what what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy.

These authors, Athreya says, belong to the 'Macroeconomic policy is Easy: Only Idiots Don't Think So' movement, which also includes Paul Krugman and Brad Delong.

The argument is that econocrats as experts (PhD economists who publish research papers in referred journals) rule, and that the general public are simply being had by the bulk of the economic blogging crowd.

I'm sure that Athreya's argument is a commonly held amongst both the scientific economists in the academy and the econocrats in Treasury and the Reserve Bank in Australia; that only professional research economists should be allowed to discuss economics because, well, economics is really hard, and nobody else has a chance of understanding it or appreciating all the complexity of the discipline. Athreya puts it this way:

When a professional research economist thinks or talks about social insurance, unemployment, taxes, budget deficits, or sovereign debt, among other things, they almost always have a very precisely articulated model that has been vetted repeatedly for internal coherence.

Everybody else, not so much. And that 's the problem--what we get is the sophomoric musings of auto-didact or non-didact bloggers whose musings are just the speculations of untrained poseurs. In other words, economics bloggers are basically quacks, hardly worth paying attention to.

The assumption is that what economic policymakers do is economics (as a science) and he implies that political pundits trying to second-guess their decisions would be on a par with me trying to second-guess someone doing theoretical physics. But economic science is not what economic bloggers are doing or commenting upon.

I comment on economic events without any pretence of doing macreconomic theory (or science) and I do so because political discourse is structured around the economy, economic growth, jobs, inflation and employment. What this political discourse indicates is that economic is not about economics per se; it is about political economy in that it is economics plus politics. So we have public debates about what is the proper role of fiscal and monetary policy during a recession? What role should regulation play in govern the economy? How should the state govern the economy?

These kind of debates structure the way that we approach national economic policy. Bloggers are competent to comment on important public policy issues in the public sphere and they do so by examining the arguments. The economic bloggers mentioned above tend to offer better than average commentary than many journalists in the mainstream press.

One reason the economic bloggers have entered the public sphere is because, with few exceptions, Australian economists have not seriously addressed the issue climate change, which is the best policy to reduce greenhouse emissions (an ETS or a carbon tax) or the economic implications of the shift to a low carbon economy. Why their silence? Why the lack of a broad consensus on the merits proceeding with an emissions trading scheme.

Update
What is not recognized by Athreya is the crisis in neo-classical economics---pre-Keynesian theory after Keynes----which at its core holds that the consumer queen attempting to maximise her expected life time utility is the core actor and decision-maker, with all other actors and institutions subject to her whims and desires, especially within a competitive environment. This neither makes sense of what has happened with respect the global financial crisis and its aftermath, or of what should and could be done about it.

Posted by Gary Sauer-Thompson at 9:43 AM | Comments (3) | TrackBack

June 10, 2010

BP: socializing the damage costs

BP gives the impression that the oil spill, which is in the process of trashing beaches, wetlands, wildlife ocean and fishing industry in the Gulf is the acceptable cost of doing business. The public deeply distrusts BP, with good reason, as its record to date has been cutting corners to make profits. BP (Bad Petroleum) is undoubtedly willing to cost the rest of the country a near infinite sum to preserve its future profits.

LoomisRBPoilspill.jpg Rick Loomis, The oil slick in the Gulf of Mexico is seen from a helicopter, Los Angeles Times, May 6, 2010

The era of cheap oil is over and we need to question the energy companies, governments, regulators and the International Energy Agency who are continually overstating how much accessible oil remains in the ground. We may well have entered the peak in oil production.

So we need to question BP's narrative, rather than say we are pretty happy with a modern, fossil-fuel based economy. We can begin to do this in terms of the external costs of oil production. The BP oil spill is now causing political ripples in Washington, and damage control in the form of limited "media access to the coastline.

George Monbiot in his recent The oil firms' profits ignore the real costs in The Guardian addresses the environmental damage caused by BP's Deepwater Horizon oil spill in the Gulf of Mexico. He says that:

BP's insurers will take a hit, as will the pension funds which invested so heavily in it; but, though some people are proposing costs of $40bn or even $60bn, I will bet the price of a barrel of crude that the company is still in business 10 years from now. Everything else – the ecosystems it blights, the fishing and tourist industries, a habitable climate – might collapse around it, but BP, like the banks, will be deemed too big to fail. Other people will pick up the costs

The economic and environmental damage will be socialized. That is how capitalism currently works, and the energy companies will make sure that this business -as-usual continues.

This oil spill now poses a real problem for the Obama administration. It wasn't going away, and Obama needs to do something about it, even if he can't plug the leak, given the regulatory capture by BP.

Update
Business -as-usual means the corruption of the regulator---the Minerals Management Service the agency in the Interior Department charged with safeguarding the environment from the ravages of drilling.

Tim Dickinson in The Spill, The Scandal and the President says that this agency has been allowing big oil industry to self-regulate for years. Big oil, in effect, ran the corrupt agency in the sense that whatever Big Oil wanted, they got. The Obama administration failed to clean the regulator up and they kept in place the crooked environmental guidelines the Bush administration implemented to favor the oil industry.

Dickinson says that in the application that BP submitted for its Deepwater Horizon well only two months after Obama took office BP claims:

that a spill is "unlikely" and states that it anticipates "no adverse impacts" to endangered wildlife or fisheries. Should a spill occur, it says, "no significant adverse impacts are expected" for the region's beaches, wetlands and coastal nesting birds. The company, noting that such elements are "not required" as part of the application, contains no scenario for a potential blowout, and no site-specific plan to respond to a spill...Among the sensitive species BP anticipates protecting in the semitropical Gulf? "Walruses" and other cold-water mammals, including sea otters and sea lions.

Though walruses, sea otters, sea lions and seals do not live anywhere near the Gulf MMS gave the oil giant the go-ahead to drill in the Gulf without a comprehensive environmental review. This is Kafkaesque.

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May 20, 2010

Hockey + neo-liberalism

I couldn't bring myself to watch Shadow Treasurer Joe Hockey's budget reply speech at the National Press Club in Canberra to see how the Coalition would deliver on its promise to reduce the deficit.

I knew that deficit reduction was the primary focus of the Liberal's economic policy (through raising taxes and cutting spending), given their classic debt hawk position, all their clichés about fiscal responsibility, and their concern to push policies that keep the financial industry happy.

CoalitionEconomicstatement.jpg

So I worked on some photos instead of listening to Hockey stuck repeating himself.

I guess that I should have watched Hockey to see whether he would have addressed how government needs to govern in the context of the global financial crisis. This crisis has resulted in the ending of the neo-liberal mode of governance that came into being in the 1970s.

Instead I've scanned the text of Hockey's Press Club address, and it is about about values, policy and an alternate Budget strategy. It is an affirmation of small government, competitive markets, and self-regulating markets with no recognition that the financial crash has brought the era of neo-liberalism to an end. It is as if nothing has changed despite the paranoia and suspicion about the present.

The Coalition's combination of economic liberalism with social conservatism is a return to Thatcherism in the form of the grip of John Howard's wider political culture over Australian politics: a one nation conservatism; backing globalization and finance capital; a belligerence about going to war, xenophobia, racism and class warfare. Though this zealous right-wing mentality, which sees threats and enemies everywhere, from immigration to Islam and China, is a toxic brew, there has been little to no attempt to "detoxify" the Liberal Party.

What is astonishing is not the cuts to recurrent expenditure, as that was expected, given that efficiency and competitiveness is the only game in town. It is the way the Liberals, for all their talk about higher productivity, will slash public investment in infrastructure designed to facilitate the ongoing modernization of the Australian economy. What Hockey offered was substantial disinvestment. The assumptions are that economic expansion will come from the mining and that private capital will build the necessary infrastructure.

For example, there is no need for a national broadband network NBN). It's a white elephant. This ignores that the increased role for government in infrastructure building has been because of the sluggishness of investment in productive activity. We are taking about Telstra here. They got us into the situation of poor broadband (slow speeds, low quotas high costs) in the first place. They want to return to a situation where Telstra is free to hold back the market and build at its own pace, for its own profits.

The Liberals are not only going to take the axe to the NBN. The party will also axe Labor's e-health investment and discontinue Labor's Digital Education Revolution computers for schools program. They are returning us to the past, turning their back on the information/knowledge economy, and ensuring that Australia remains a digital backwater in a dynamic South East Asian region. A digital backwater with an entrenched digital divide.

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May 13, 2010

Coalition: in the spotlight

Now it is the Coalition's turn to establish their economic narrative about Australia's future, given the emergence of economic recovery. What kind of Australia does it envision. What kind of reforms does it propose to facilitate this? Will Abbot spell this out in his budget reply speech? They've promised to give voters a "clear direction" of their economic strategy. What would that be, now that their debt’n’deficits rhetoric has been effectively neutralized by Swan?

Judging from the comments this morning in the media can we expect anything more than the standard lines about "tackling with conviction", the budget deficit, government waste and mismanagement, the new resources tax, and returning the budget to surplus quicker than Labor?

Will there be any "real action" on health? Education? Or climate change? Or tax reform? Or will Fortress Australia make a comeback? Along with we love miners. They are hurting badly.They need to be defended etc. etc:

MoirA.Minersstockade.jpg

How about something substantive on workforce participation, which is strongly influenced by incentives in the tax and transfer system, and by the affordability of child care.

Will they address the strong disincentives of the high effective marginal tax rates around the withdrawal of benefits plus payment of tax? They could address this by lifting the tax-free threshold to $25,000. It's very expensive, sure, but a mining boom is underway. Super profits will be made. So why not use the proceeds to pay for such a tax reform.

This is not likely though. Abbott is about politics not policy reform. So the Budget reply will probably be about looking after the poor miners who are carrying an ungrateful Australia on their backs.

Update
Abbott's budget reply speech was all about we love the miners and we''ll fight for them cos we need their money. Okay, he didn't say the last bit. But he made sure that the super-profits-based tax of the mining sector was the core of his election strategy.

The Coalition will oppose the mining tax in the Senate and rescind it in government. Simple. Abbott finishes thus:

In the end, it’s a judgment about who can be trusted with the fate of the country that decides elections. This budget rests on the government’s new mining tax and the election should turn on this too.
Australia’s future depends on the bulk carriers travelling to Asia just as surely as it once rode on the sheep’s back. This election, like the budget, will pit a party that thinks it’s reasonable to make Australian miners the world’s highest taxed against one that doesn’t.The die is cast. Neither side will retreat. The only way to stop this great big new tax on the people who saved us from the recession is to change the government.

There was lots of negativity and attack at the beginning of the speech with little policy substance in the rest apart from slashing the public service and recycling WorkChoices. They can kiss Eden-Monario goodbye.

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May 12, 2010

hot rocks indeed

The economic narrative of the Rudd Government's 2010 pre-election budget is that Labor are responsible economic managers. They steered Australia through the global financial crisis and economic recession with generous stimulus spending that meant low unemployment. They imposed fiscal discipline with a 2 per cent real spending cap; they have charted a course back to budget surplus and enabled the economy to recover.

This kind of economic prudence is such a contrast to the huge cuts to public spending that will need to be implemented by the new coalition Conservative/Liberal Democrat government in the UK under David Cameron. In contrast to the turbulence in the economies of Europe that are burdened with debt for many years to come, Wayne Swan, Australia's Treasurer, is talking about a return to surplus in three years from a flow of tax revenue from strong economic growth due to the mining boom in iron ore, coal and natural gas.

Australia is the lucky country. We ride the mining boom to prosperity thanks to the continuing industrialization of China, and forget all about the effects of climate change on Australia. It's a political amnesia that flows out of winning the next election. And after the election? The China-fuelled growth means infrastructure bottlenecks, labour shortages, stubborn inflation pressures, rising housing prices and rising interest rates.

Climate change is over the horizon, beyond the rainbow of the never ending mining boom. There is no need to restructure the economy to take into account climate change by making a substantive start on baseload electricity generation by renewables. There is no commitment to a substantive investment in research and development in green energy technologies; investments so that we can have cheap solar panels rather than expensive ones as we have now.

Maybe, even though the reality of global warming is accepted by the Rudd Government, they are thinking that dramatically cutting carbon emissions is simply not warranted.

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May 11, 2010

Budget 2010: no frills

The budget spin from Canberra is "no frills", judging from yesterday's news grabs on the TV news. The "no frills" will need to help restore the fortunes of a "progressive" Rudd Labor Government, since its political credibility is looking rather tattered due to its shift to the right. Kevin Rudd's popularity is in free fall. The aura is well and truly gone--the honeymoon is over. Rudd Labor are on the nose.

WilcoxRuddpopularity.jpg

One explanation for the fall from grace is that Rudd Labor have adopted the NSW Labor Right's death grip script of all electoral tactics, little long-term strategy, and no substantive policies. Everything is geared to the tactical victory and the favourable headline in the 24 hour news cycle. Rudd Labor is repelling voters, who are shifting to the Greens. Nor are Rudd + Co increasing their support amongst those working families returning to being Howard's battlers.

The result of the oh too clever politics is that Abbot's Coalition is now in a "competitive" electoral position---Labor and the Coalition are suddenly neck and neck, and the recent trend is running against the Government and in favour of Tony Abbott and the Opposition. It looks increasingly as if the name of the game for Rudd Labor is to retain power for its own sake--just like the NSW Government--and that it will do what it takes to retain power.

No doubt, we will hear much rhetoric from Wayne Swan about how Rudd Labor's great success in dealing with a global recession--defying global economic gravity-- can be turned into growing prosperity --the China boom---for all Australians under the sound management and steady hands of a fiscally conservative Labor Government.

There will be few grand or big ticket expenditures---what the mainstream media call pre-election sweeteners or giving voters a raft of goodies in an election year. There will be more talk about deficit reduction and returning the budget to surplus quicker than forecast in the context of an international economy in crisis (the cold wind blowing from Athens).

That's my guess.

How will that be achieved? Will this austerity help them win an election? Presumably it will take some of the wind out of the tax and spend government out of control sails of the Abbott Coalition who claim that the Rudd Government is "Whitlamesque'' in its reckless spending. This is an opposition whose rhetoric of real action is increasingly retreating into the right corner.

Update
I didn't watch Swan's budget address. I listened to the blues whilst taking photos of dead flowers instead. A return to a $1 billion surplus by 2012-13 from a budget deficit of $40.8 billion this year. This will be primarily from faster economic recovery and higher commodity prices (the resources boom) rather than from big budget cuts.There was little slash and burn and no tax cuts as the recovery in revenues flows to the treasury and not to voters.

Gee, there is even a little new renewable energy fund to try to prove the government is still committed to climate change, even without the emissions trading scheme it still admits is essential. No money for an emissions trading scheme. How about that? I note that they've taken the axe to to several environmental programs, worth millions just to show that they are "balanced". This is not a green government.

I note that more money has been pumped into primary health care -- $2.2 billion all up, in addition to the funding deal thrashed out with the states and territories at COAG. There are cheaper prescription medicines, more GP super clinics; more money for clinics and nurses to staff them; a nationwide network of primary health care organisations; and electronic health record by mid-2012.

The biggest health reforms "since the introduction of Medicare"? Health under Nicola Roxon represents the strong reformist side of the Rudd Government. But there is no new mental health funding and nothing on a universal dental scheme. However, the government has not lifted the proportion of the health budget spent on prevention much above the level of the previous government, partly because of the huge increases in spending on hospitals and doctors.

There will be more analysis tomorrow. Too much red wine has been drunk whilst listening to Dark Star.

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May 10, 2010

The eurozone's debt crisis

In the Introduction to their 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown Simon Johnson and James Kwak say:

If the basic conditions of the financial system are the same, then the outcome will be the same, even if the details differ. The conditions that created the financial crisis and global recession of 2007–2009 will bring about another crisis, sooner or later. Like the last crisis, the next one will cause millions of people to lose their jobs, houses, or educational opportunities; it will require a large transfer of wealth from taxpayers to the financial sector; and it will increase government debt, requiring higher taxes in the future. The effects of the next meltdown could be milder than the last one; but with a banking system that is even more highly concentrated and that has a rock-solid government guarantee in place, they could also be worse.

This does appear to be a description of what is likely to happen in the UK:

KalUKcuts.jpg
Kal

There is a economic crisis happening now in Europe.

Greece's debt crisis threatens to spread to other European nations (such as Portugal, Spain and Italy ) and threatens the euro. Greece has run out of options. It has to be bailed out. Germany dragged its feet.

Because Greece, as a member of the EU, cannot devalue its currency without leaving the eurozone, the only remedy available to Greece is loans whose conditions require prolonged and savage deflation, pay and pension freezes, the tax increases and the public spending cuts.

Meanwhile as the markets test and probe the credit-worthiness of each member, the euro itself is at risk because there has been no way of passing around the hat to protect the eurozone's weakest links. Now they are talking in terms of €500 billion emergency support mechanisms: a troubled country will have to explain its plight to the European Central Bank and the European Commission, then ministers of the 16 eurozone countries will have to approve the help unanimously.

Fiscal tightening reduces domestic demand---- Spain is tightening at the same time as Greece, Ireland and Portugal, with Germany following suit (plans for a tax cut have been abandoned after Sunday's regional elections). So the EU will be looking to gain global market share, an incentive to let the euro slide further to make exports cheaper.


Will this stablize markets? Will some of the Eurozone banks go down? Are we seeing the politics of a nasty recession across Europe, including Britain, in which ordinary taxpayers and workers have been asked to foot the bill for bank bailouts, austerity plans and the like: ie, to pay the price for the proceeding economic bubble in so many parts of the west.

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May 7, 2010

hysterical miners

In The Australian Arthur Sinodinos says that the resources tax on super profits means that it is now the turn of the big bad mining companies to play the national villains for the Rudd Government. He says:

They are lambasted as multinationals with substantial foreign shareholdings that are sucking the life out of Australia's non-renewable energy sources. Never mind the jobs generated locally or the royalties, taxes and charges paid at all levels of government.

The self-serving miners, who were successful in blocking an emissions trading scheme, are now making daily threats about stopping resource investment, cancelling projects and even nationalisation.

MoirMiners.jpg

Now Sinodinos does make a reference to the national interest:

Australians will go along with taxing the mining sector more only if they can be confident it will not harm the national interest. And, broadly speaking, they support maximising resource development.

But he makes little mention of sharing the wealth from a booming industry that has grown and prospered to the Australian population.

Isn't the well-being of the Australian population the core of the national interest? Treasury thinks so.

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May 5, 2010

a question

As a result of the global financial crisis, the corruption of the international rating agencies, the subsequent global economic recession and the euro crisis in Europe---high unemployment and high government deficits--- people have criticized the government for withdrawing from the economic and particularly financial sphere and allowing private sector actors to do whatever they wanted.

One of the issues raised is the lax regulation of the finance industry. Hence the calls for reform of the financial system to arrest the dominance of a financial sector that looms too large on our economic landscape.

Wall Street fights back regulatory reform to ensure its political power, and even though the ideology of deregulation has been exposed as a failure, Wall Street and its political allies are still invoking the bogeyman of big government to fight off financial reform. They appeal to the U.S. values of free markets and minimal regulation:---the broad imperatives of globalization are marshaled by well-connected and "untouchable" business interests to defeat regulatory oversight of the financial system and elsewhere.

The lesson learned is that what is good for Wall Street is not necessarily what is good for America as this is an industry that makes toxic products with huge negative externalities. This raises a key question:

Do we think the government should simply act so as to correct the imperfections in free markets? Or do we see a positive role for government in determining what kind of an economy we should have?

It is true that some free market economists deny that the market has any failings or flaws (externalities) because of their "efficient markets" and rational market assumptions. However, most economists do favour a more active role for government; but they usually limit the government to correcting known problems with the free market so as to allow the economic machine to keep on ticking over.

Climate change highlights the issue of what kind of economy we should have, since addressing climate change requires shifting to a low carbon economy.

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April 20, 2010

The non-existent hand

My position is that the failure of financial markets is at the centre of this global financial crisis and that financial markets are not necessarily rational. Hence the need to regulate them (to prevent deliberate fraud ) so that those who make mistakes bear more of the consequences of their decisions – and that others bear less.

This reform will be difficult given the power of financial capital (Wall Street) in the US, whose policy agenda favours deregulation, growing inequality, weakening social protection and bank bailouts

In his The Non-Existent Hand in the London Review of Books Joseph Stiglitz says that he shares the view that most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities) and that a considerable portion of the blame lies with the economics profession. He adds:

The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era.

He adds that the present crisis should lay to rest any belief in ‘rational’ markets. The irrationalities evident in mortgage markets, in securitisation, in derivatives and in banking are mind-boggling; our supposed financial wizards have exhibited behaviour which, to use the vernacular, seemed ‘stupid’ even at the time.

He adds that:

markets are not necessarily rational, and even when they are, they are not always well intentioned. The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to the rest of society. They can make money by inducing panic and then feel pleased with their ‘insight’: their concerns were justified, but only because of the responses to which their actions gave rise. Since the time of Keynes, the ability of markets to mount such speculative attacks has increased enormously.

The result is the multitude of other bubbles, booms and crashes that have marked the past quarter-century. Western banks have repeatedly had to be bailed out because of their bad lending decisions.

Hence Wall Street's agenda foir more bailouts. more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.

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March 8, 2010

bubble-driven economic growth?

In his How They Killed the Economy in the New York Review of Books Roger E. Alcaly states that almost everyone agrees that the global financial crisis developed in part because of failures of regulation—principally of banks, mortgage brokers, and derivatives markets—and much effort is currently being devoted to revamping and shoring up the regulatory system.He adds:

By any measure, the crisis was a consequence of extraordinarily reckless behavior—by banks and other financial institutions, by governments and their financial regulators, and by consumers—behavior that continued even in the face of a widely shared sense that serious trouble was brewing...The failure of central bankers and regulators to rein in leverage—the practice of borrowing as much as thirty or more times one's equity capital to increase investment potential —and excessive risk-taking owes much to complacency that had developed over the preceding twenty to twenty-five years.

This crisis was part of a series of crises, which were contained, including the stock market crash of 1987, the junk bond collapse of 1989–1990, the Asian crisis of 1997, the Russian default in 1998, the failure of Long Term Capital Management—a large and hugely leveraged hedge fund—later that year, and the collapse of technology stocks in 2000–2001.

Quick and effective responses to these and other dangers by Alan Greenspan's Federal Reserve (FDA) appear to have induced banks and investors to rely unduly on its ability to stave off collapses that threaten the system, and to ignore the serious malfunctioning of the financial markets.

The central argument is that the FDA' s monetary policy of keeping interest rates low for so long encouraged the housing bubble and the explosion of borrowing throughout the economy. This helped to create a false sense of security and stability that enticed financial institutions and investors to leverage their investments enormously, borrowing sums that dwarfed the capital they committed. The second argument is that the regulatory mechanism failed to mitigate boom/bust cycles of the “casino economy” and only tinkered around the edges. Hence the need for reform of the international financial system.

The implication is that financial firms faced crises largely of their own creation and that government's needed to protect major financial institutions from system-threatening disasters. This insurance to keep the whole game going encouraged the financial firms to ever more risk-taking to enhance their profitability. Because of the benefits the big banks have accrued from a number of government programs/subsidies, the big banks are profitable again and now dictating the terms of financial “reform”. We have “asset price driven recovery", attempts to reinstate financial institutions as the motor force of the economic system, and bubble-driven economic growth.

What we have is the emergence of an unprecedentedly huge and fragile financial superstructure subject to stresses and strains (ie., financial bubbles that threatened to burst) that increasingly threaten the stability of the economy as a whole. If what has emerged since the 1980s is the shift in the center of dynamic core of the capitalist economy from production to speculative finance, then the normal economic situation is going to be an unstable one of more financial crises

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February 20, 2010

Glenn Stevens on the economy

In his Opening Statement to House of Representatives Standing Committee on Economics Glenn Stevens, the RBA Governor says that:

the historic shift in the centre of economic gravity to the Asian region is continuing, and if anything it has been highlighted by the different performances during the crisis and initial recovery. The differences in speed of recovery between the emerging world and the advanced world, and the likely persistent differences in growth trajectories into the future, will increase the pressure on exchange rate arrangements in the region. Australia is relatively well-placed. We are located in the part of the world that is seeing the most growth. And in terms of fiscal sustainability, Australia’s position is, by any measure, very strong indeed.

He adds that the overall size of the downturn in economic activity was considerably smaller than thought likely a year ago. Consequently, there is less scope for robust demand growth without inflation starting to rise again down the track:
Monetary policy must therefore be careful not to overstay a very expansionary setting...If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium term. This is a normal experience in an economic expansion: as economic activity normalises interest rates do the same

Michael Stutchbury uses this to reiterate his well known economic policy theme---budget surpluses, paying off debt and retreating from Labor's re-regulation of the job market.

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February 16, 2010

Canberra Gaze: political convergence

George Megalogenis makes a good point on his blog about Rudd and Abbott. He says that the ascendency of Abbott as Liberal leader has brought a combative new political polarisation. However, on one crucial question, the role of government, both sides converge

Each leader is offering voters a version of greater federal government intervention in the economy during recovery. Who has the bigger health package, the most dollars for the environment, the largest cheque for families? Yet they also insist Australia’s record budget deficit should be wound back as soon as possible. The main parties can only walk both sides of the fiscal street if they find more revenue and force expenditure restraint elsewhere to pay for their promises.

The conversation breaks down here because neither side will spell out the clawbacks to go with the carrots for fear of stoking the other’s scare campaign. So there is no talk about trade-offs. It's all blue sky.

This account is spot on. There is little talk about spending cuts or belt tightening. Austerity doesn't sell. It's bad. So the talk is about expanding the reach of government rather than curtailing government spending even though the recession is behind us.

An overly austere budget could well crunch the economic recovery that has been driven by the stimulus package. Surely the extent of economic growth/recovery needs to be factored into Megalogenis' scenario. The optimist's scenario currently circulating is 'the go go China one': --- a second mineral boom buoyed by a resurgent Chinese economy with the boom automatically reducing budget deficits and so reducing the need for the harsh budget cuts advocated by the conservative economists.

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February 2, 2010

economic orthodoxy

The old economic "wisdom" is returning as the global financial crisis of free market capitalism fades into history and participants at the World Economic Forum Annual Meeting 2010 in Davos meet to discuss how to rethink, redesign and rebuild the global economy to ensure principled growth and sustainability. For them the global recovery is fragile--- reliant on the stimulus provided by ultra cheap money and budget deficits--- and now is the moment to rebuild prosperity.

The old economic "wisdom" about rebuilding for prosperity as expressed in our media in Australia is well known. It states that we know from an economic point of view how to deal with excessive debts and deficits. You just take the bitter pill of austerity. That means public spending cuts and possibly some tax increases. The political question is can governments deliver that kind of pain-- some ‘shock therapy’? Do they have the political courage?

This is a shift in our understanding of crisis-- moving the crisis of the economy from one of free market capitalism and the financial sector to being one of the state, public spending and public debt. Behind it sits the discourse about welfare dependency, "rolling back" the state and people as atomised consumers, not citizens.

This account of crisis---one of managing sovereign debt--is swirling all around us in the media. It is being articulated by the Liberal Party, whose campaign meme aims to persuade voters that paying down national debt fast trumps all else. This has little connection to the new conservatism. if Interests trump ideas in politics, then in the Liberal Party, the weightiest interest is property and their political instinct is to approach policy from the point of view of the owners of property and wealth.

The above account of crisis is given by finance capital's institutions, bodies and agencies associated with them: banks, hedge funds and independent analysts who work in the financial sector. The modern media covers our politics and economics by providing a platform for these market fundamentalist views, which are presented as true (backed by science) and basically non-ideological. These views are not contested in the media.

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January 19, 2010

Intergenerational Report: Australia to 2050: Future Challenges

So there is to be a third Intergenerational Report, entitled Australia to 2050: Future Challenges, which analyses the key long-term challenges facing Australia for the first half of this new century. This is to be released in the next few weeks, but we have heard this account before from Peter Costello, when he was Treasurer in the Howard Government. Kevin Rudd adds little that is new. More problematically he says nothing about addressing the effects of climate change on the economy.

According to Rudd's Australia Day speech the ageing of our population is the key challenge. Rudd says that to understand its implications, we need to ask three basic questions:

First, how much are we ageing by?
Second, how will this impact on family living standards and the economy?
Third, what can we do about it?

No mention of ageing and wellness at all. For Rudd its all about the negative impact of ageing economic growth and prosperity. Rudd says that:

On the first question, the Intergenerational Report projects that our population will grow from 22 million today to 36 million by 2050... On the second question public finances will be burdened with the increased costs of looking after the needs of older Australians - in health, aged care and age pensions - but with a smaller proportion of Australians in the workforce, tax revenues won't keep pace with those rising costs.

Consequently, we will either generate large, unsustainable budget deficits into the second quarter of the century, or else we'll need to reduce government services - including health services - as the needs of an ageing population become greater. This is the same message as Costello. For the old political order an ageing population is not an active population.

The third question is what can be done to strengthen economic growth in the face of the fundamental challenge from the ageing of the population.Rudd says:

In the long-term, there are three sources of economic growth - the three Ps of population, workforce participation and productivity growth.With lower fertility rates and stable migration ratios, population policy will on current trends at best make a marginal contribution to the challenge of an ageing population.The truth is that the strong policy levers lie with policy measures to lift participation and productivity growth...the most important of the three Ps [is] productivity growth. It is productivity growth that must play the central role in building Australia's future economic growth.

Again this is same message as Costello. It's Treasury's message. Rudd's twist is that productivity growth had fallen under the Howard Government:
During the 1990s, productivity growth hit the two per cent mark following the reforms of the Hawke-Keating Governments, but it fell to just 1.4 per cent in the first decade of this century. If we let this trend of lower productivity growth continue, Australia will struggle to meet the major challenges facing our economy in the decades ahead....The Australia to 2050 report shows that without a concerted effort to increase productivity, average annual productivity growth will be just 1.6 per cent over the next 40 years, leading to average annual economic growth rate falling to 2.7 per cent, compared to the historical average of 3.3 per cent over the last 40 years.

And Labor's plans to grow Australia's productive capacity over the long-term? Well, there is nothing new there either.

It is increased investment in long-term nation-building economic infrastructure including in roads, rail and ports; an education revolution, in the form of doubling the investment in Australian schools over the next five years; helping businesses use technology to work smarter and faster through the high-speed National Broadband Network, and implementing microeconomic reforms to cut red tape for business and build a seamless national economy.

Nothing about greening Australia to make it more sustainable or making the shift to a low carbon economy. Not a mention, even though this is actually a key long-term challenge for Australia.The inference is that Rudd Labor is not serious about making the shift to a low carbon economy.

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January 5, 2010

a renewables national electricity grid

The Rudd Government has been around long enough for us to know that it says that it wants to promote renewables (the 2020 target, which requires Australia to generate 20% of its energy from clean sources?) whilst it goes for other policies to protect the coal-fired energy companies behind the scenes.

solarpowerstation.jpg photovoltaic solar power station, Granadilla, Spain

First, the Rudd Government has no intention whatsoever of kicking dirty energy sources like coal off the national electricity grid. Secondly, a lack of connections to the national grid, which were not designed to channel power from the scattered and remote locations that suit renewables, has stalled the uptake of alternative energy. Thirdly, there is no real policy to transform the national grid to a renewable one, or even to remove the barriers that currently prevent renewable generators connecting to the national grid.

There is no vision in Australia for a continent-wide renewables supergrid so that electricity can be supplied across the continent from wherever the wind is blowing, the sun is shining the rocks are hot, or the waves are crashing.

solarpowerplantgranadilla.jpg photovoltaic solar power station + wind farm, Granadilla, Spain

There is no such action from the Rudd Government. Their action--and those of the states--- is about protecting the coal fired power stations vis-a-vis the national electricity grid, whilst doing little to solve one of the biggest criticisms faced by renewable power – that unpredictable weather means it is unreliable.

Update
What we have in energy policy terms are little bits of investment in renewables here and there rather than a concentrated investment to create a low-carbon economy. Penny Wong's talk about creating a low-carbon economy is just rhetoric that covers up the continued use of coal fired power stations. There is no attempt to increase the size of the renewable energy target, no moves to start building gas-fired power stations on the sites of the existing brown-coal power stations, nor any requirements that mining companies source power from off grid solar/thermal power stations .

In an op.ed in The Australian Richard Denniss says that:

The CPRS legislation proposes that we begin with a fixed pollution permit price of $10 a tonne. Wong has said while her scheme isn't perfect, something is better than nothing. She should take her own advice and introduce a carbon price; $10 isn't enough but it's better than nothing.The advantage of a $10 starting price is it would raise revenue to invest in efficient technologies and send a signal to new investors that the old days are over, while not being so high that it would have a significant effect on our so called emission-intensive trade-exposed industries.

Investing in efficient renewable technologies is the key. However, the Rudd Government is more focused on defending its flawed emission trading schemes--its such a poor example of an emissions trading scheme---- from those who would question it. All we get is the standard talking points repeated over and over again. Block block block.

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January 4, 2010

Krugman on US economic woes

Paul Krugman strikes a discordant note about US recovery in his Nobel lecture, on currency crises. He argues that the US is not likely to see a phoenix-like recovery from the current slump caused by the global financial crisis, that in turn, caused the world economy to substantially contract.

This currency crisis has left the bubble economies, such as the US and the UK, in a vulnerable position in a world where China's heavily managed exchange rate regime---its mercantilism---is a legitimate concern of its trading partners.

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Since US households are broken on the wheel of debt it is unlikely that there will be a spending surge based on buy-now-save-never habits of yore. A housing boom is unlikely given the vacant houses and apartments left behind by the previous boom and massive unemployment.

At the end of his lecture Krugman asks: 'how long should the recovery in the US be expected to take?' His answer:

Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is … forever. OK, strictly speaking it’s 18 years, since that’s how long it has been since the Japanese bubble burst, and Japan has never really escaped from its deflationary trap.

He adds that despite the praise being handed out to those who helped the US avoid the worst, the US is not handling the crisis well: fiscal stimulus has been inadequate, financial support has contained the damage but not restored a healthy banking system. All the indications are that the US is going to have seriously depressed output for years to come.

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December 31, 2009

using capitalism to save the planet?

In the light of the failure at Copenhagen to halt and reverse the growth of carbon dioxide in the air and the Coalition's forthcoming green light approach to reducing greenhouse gas emissions without cost we have this insight from John Bellamy Foster and Brett Clark in their The Paradox of Wealth: Capitalism and Ecological Destruction. Their argument is that:

Today orthodox economics is reputedly being harnessed to an entirely new end: saving the planet from the ecological destruction wrought by capitalist expansion. It promises to accomplish this through the further expansion of capitalism itself, cleared of its excesses and excrescences. A growing army of self-styled “sustainable developers” argues that there is no contradiction between the unlimited accumulation of capital — the credo of economic liberalism from Adam Smith to the present — and the preservation of the earth. The system can continue to expand by creating a new “sustainable capitalism,” bringing the efficiency of the market to bear on nature and its reproduction.

They add that in reality, these visions amount to little more than a renewed strategy for profiting on planetary destruction.

James Hansen in How to Solve the Climate Problem in The Nation says that there is no "silver bullet" solution for world energy requirements and that the problem demands a solution with a clear framework and a strong backbone.

Hanson adds:

Let's define what a workable backbone and framework should look like. The essential backbone is a rising price on carbon applied at the source (the mine, wellhead, or port of entry), such that it would affect all activities that use fossil fuels, directly or indirectly.Our goal is a global phaseout of fossil fuel carbon dioxide emissions. We have shown, quantitatively, that the only practical way to achieve an acceptable carbon dioxide level is to disallow the use of coal and unconventional fossil fuels (such as tar sands and oil shale) unless the resulting carbon is captured and stored. We realize that remaining, readily available pools of oil and gas will be used during the transition to a post-fossil-fuel world. But a rising carbon price surely will make it economically senseless to go after every last drop of oil and gas--even though use of those fuels with carbon capture and storage may be technically feasible and permissible.

Hanson goes on to say that a successful new policy of “sustainable capitalism,” cannot include any offsets. We specified the carbon limit based on the geophysics. The physics does not compromise--it is what it is.
And planting additional trees cannot be factored into the fossil fuel limitations. The plan for getting back to 350 ppm assumes major reforestation, but that is in addition to the fossil fuel limit, not instead of. Forest preservation and reforestation should be handled separately from fossil fuels in a sound approach to solve the climate problem.

Fossil fuels continue to provide most of our energy because we do not take into account their true cost to society in that the effects of air and water pollution on human health are borne by the public. So the expansion and accummulation of capital trumps actual public interest in protecting the vital conditions of life.

Hanson says that in the end, energy efficiency and carbon-free energy can be made less expensive than fossil fuels, if fossil fuels' cost to society is included. The question is will this succeed in reducing emissions? Or will it simply result in capitalism continuing to profit on the destruction the planet?

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December 28, 2009

dreams and reality

Our dreams and reality? Or maybe scientific rhetoric and reality? Or capitalist dreams of ever expanding growth versus ecological reality?

Maybe in 2010 we can come to realize that we human are not apart from the natural world, that we do not have dominion over it, and that our mastery over nature through science and technology coupled to the deregulated free market can have destructive consequences.

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Maybe we will realize that life on earth is linked by a delicate web of connections that are easily broken. Or recognize that the economy's negative impact on ecology through the exploitation of natural resources (eg., water) or pollution (eg., greenhouse gas emissions ) also affects the economy in a negative way---- eg., the decline of irrigated agriculture from the lack of water).

This two way process provides a critical point to question the evolutionary adaptationists, who take it as:

securely established that organic change proceeds through the natural selection of individual traits, each of which improves the organism’s reproductive chances, that each trait’s evolutionary end-point represents an optimum, and that no other process is needed for an evolutionary lineage to move along through time.

Human beings in a capitalist economy do not just adapt to changes in nature; they also transform nature through technology and our economic practices. Haven't we done that in the Murray-Darling Basin?

Update
The continuing commitment to economic growth through the deregulated market and new levels of technological capability has produced a historical crisis. Our public debates about this are still contained between two options: ‘let the market rule’ with minimum regulation as advocated by the free market think tanks and Murdoch press and the recognition that regulation is indispensable.

Within the mainstream it is clear that the latter has prevailed due to the global financial crisis and global warming. This is the position of the Rudd Government-- a return to rapid growth with a more active regulation of the economy.

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December 18, 2009

Greening the Reseve Bank

The Reserve Bank of Australia is an independent institution in control of monetary policy. Currently it's monetary strategy is one of raising interest rates to shape economic growth to prevent inflation whilst reducing unemployment. It's primary focus is low inflation and, like the Treasury, it is GDP growth, reducing unemployment and raising productivity. It is not facilitating shifting the Australian economy to a low carbon one.

Carbon reduction is a distraction, or side issue. You can see this from this recent Monetary Policy in Open Economies conference---not one of the papers dealt with monetary policy and carbon reduction! Not one! Nor did any of the Research Discussion papers in 2009. Similarly with its statement on monetary policy in November:

The global economy is growing again after contracting sharply late last year and in the early part of 2009. here has been some recovery in world trade and most of the major economies now look to be expanding. The risk aversion that was so evident earlier in the year, particularly in financial markets, has abated and confidence is gradually returning.Asia is at the forefront of the global recovery. The region’s financial systems have not experienced the same dislocation as elsewhere, and the economies are benefiting from a recovery in domestic demand, underpinned by stimulatory settings of both monetary and fiscal policy. Growth in China and India has been particularly strong.

There is no mention of the UN conference at Copenhagen where all nation states are grappling with issue of economic growth and reducing greenhouse gas emissions; or even the effects on the economy of Australia's attempt to introduce an emissions trading scheme

The monetary policy statement goes on to say:

Economic conditions in Australia have also been stronger than expected. In contrast to other developed economies, the Australian economy is estimated to have expanded, albeit modestly, over the first half of the year and recent data suggest that this expansion has continued into the second half. Confidence has improved and spending has been supported by stimulatory settings for both monetary and fiscal policy. The Australian economy has also benefited from the strong bounce-back in Asia, particularly in China, with export volumes remaining broadly unchanged during a period in which global trade fell markedly.

The inference? The economic mandarins (monetarists?), who are concerned with stable money supply and low inflation, are basically out of touch with the long term transformation of the Australian economy. Do the understand the tragedy of the global commons? Doesn't Australia need to invest in home-grown energy to accelerate the development of green technology whilst boosting the economy and reducing unemployment? What if the Reserve Bank's monetary policy is used to push for less sustainable patterns of growth?

The statement on monetary policy ends thus:

Conditions in the global and Australian economies are significantly better than was expected when the Board lowered the cash rate to 3 per cent earlier in the year. The Australian economy is operating with less spare capacity than earlier thought likely, and the outlook for the next few years has improved. Given this assessment, the Board has judged it prudent to lessen the degree of monetary stimulus that was put in place when the outlook appeared much weaker, increasing the cash rate by 25 basis points at both its October and November meetings. The cash rate remains at a low level, and a further gradual lessening of monetary stimulus is likely to be required over time if the economy evolves broadly as expected. The Board will continue to monitor developments closely and set monetary policy so as to promote sustainable growth in the Australian economy and keep inflation consistent with the medium-term target.

If the aim of monetary policy is to promote sustainable growth in the Australian economy --the Reserve Bank's own goals--then shouldn't 'sustainable growth' include cutting greenhouse gas emissions? Or is the Reserve Bank's assumption that if climate change is real, then we should let pure markets operate to solve it, even though climate change has shown how spectacularly impure markets can be. It is the market failure par excellence.

If high unemployment is to high price to achieve low inflation, then so is a heated up world.

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November 23, 2009

The GPRS

The big news in Canberra and politics this week will be the passing of the emissions trading scheme (CPRS) by the Senate. All the indications--as of this morning--- are that the GPRS legislation will be passed by the Senate. No doubt Minchin will probably use the filibuster tactic as his best chance of stopping the CPRS before Copenhagen, many Coalition Senators will cross the floor. There will be blood on the floor as the Liberal climate changed denialists, who don't have the numbers, threaten to blow the show up if Turnbull doesn't do what they want. High drama.

This signing into law will happen in spite of the theatrics of the deep divisions within Coalition, the forever opposed noise from the denialists, the tactics of those right wing Liberals obstructing the bill to protect the coal industry, the now naked threats from coal-fired power generators, such as Truenergy and International Power. Bring on the heat they cry in unison.

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The only surprise will be how much the Rudd Government concedes to the Coalition in giving extra subsidies to the coal fired power stations in order to safe-guard the power industry-- protect even the dinosaurs from another era such as Hazelwood and Yallourn. Rudd + Co will bend over a long way in giving the power industry even more free pollution permits and to extend the compensation beyond 2015. The Brumby state government in Victoria wants that outcome as well.

No need to worry though. The CPRS is not designed to reduce greenhouse gases and it won’t do that. Hence the justified opposition from the Greens. The rorts are too great. This legislation won't achieve the levels of emissions cuts promised, nor will it drive the major technological innovations that are needed to shift our economy on to a more low-carbon path.

The only game in town is to clean up existing coal-fired power stations and make the new ones cleaner. Clean coal is the future, so let's roll out the new coal fired power stations to meet increased demand in NSW.

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November 4, 2009

Ken Henry: shape of things to come

The Secretary to the Treasury, Dr Ken Henry, delivered an important speech entitled The Shape of Things to Come for Australia: Long Run Forces Affecting the Australian Economy in Coming Decades to the Queensland University of Technology Business Leaders' Forum in October this year. Henry spells out what I've been haphazardly grappling with on this blog in a clear and concise way. It helps to clear away some of my fog.

The core statement is this:

As the Global Financial Crisis hit our shores, the Australian economy was in structural transition in response to four large, long term forces: (1) population ageing; (2) climate change adaptation and the prospect of climate change mitigation; (3) the information and communications technology revolution; and (4) the impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India. Over the past year, the shockwaves from the global financial crisis have obscured the intensity and scale of these forces. But as growth resumes, they will re-assert themselves. And, as they do, the Australian economy will undergo a set of structural changes more profound than anything in its history.

He adds that over the past year, the shockwaves from the global financial crisis have obscured the intensity and scale of these forces. But as growth resumes, they will re-assert themselves. And, as they do, the Australian economy will undergo a set of structural changes more profound than anything in its history.

His argument is that Australia can look forward to a long period of unprecedented prosperity - provided we accept a raft of unpopular economic reforms that will hurt us, and don't seek to resist the change being thrust upon us. I'm more pessimistic than this.

Take the first structural trend. Henry says that Treasury had been thinking about population dynamics in terms of ageing and a rising dependency ratio, but there is now a need to factor in the long term projection for Australia’s population increasing from 28.5 million in 2047 to more than 35 million people in 2049 (due to higher immigration and increased fertility). That increase of 13 million people, or around 60 per cent, over the next 40 years, has implications for our cities (Sydney, Melbourne, Brisbane) and the environment.

How will the capital cities cope with a rapidly growing aged population? By expanding their geographic footprints at the same rate as in the past several decades, loading more cars and trucks onto road networks, continuing the traditional patterns of land use and using up natural resources. Climate change means a drier Australia, which in turns means ever more stretched water resources, the decline of the Murray-Darling Basin as a food bowl, and a population shift from the south east corner of Australia to the north. It means lots of public investment in infrastructure.

Judging by our previous history on managing water and biodiversity it will be more business as usual than adapting to climate change by the cities becoming more sustainable. the main reason why am I pessimistic is that the impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India takes the form of the capital-intensive, mining sector dominating the economy, the structural decline of manufacturing, and flat to declining real wages outside the resource sector. Henry put it this way:

standard economic theory tells us that if the terms-of-trade remain at high levels, not only will the resources sector command more capital and labour, manufacturing and other industries whose relative output prices are declining will command less, even as our total stock of capital expands. Furthermore, as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative.

The resource sector, we should never forget, is fundamentally opposed to Australia mitigating and adapting to climate change and to the development of renewable energy. And the mining sector has captured state and federal governments to such an extent that they are able to shape the direction of public policy.

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October 31, 2009

the road to recovery

So housing prices are rising again in Sydney, Melbourne and Canberra:

notforsale.jpg John Spooner,

The recession never happened, the stock market is booming and interest rates are rising. All is well in the world. The global financial crisis " What is that? That is so yesterday. Optimism rules. So does the finance industry. The narrative is now about efficient markets, animals spirits and China’s emergence as the world’s biggest creditor country. So let us praise inequality because that is the pathway to prosperity, opportunity for all and happiness. Australia is the lucky country.

So what happened to the reform? To financial re-regulation and reform of the global monetary system? The finance industry has grabbed the government's money and told it to go away. So it is back to business as normal--to the cycles of confidence and panic in our world of debt, be that debt public or private, domestic or foreign, in which credit is extended freely and then withdrawn brutally.

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September 29, 2009

finance capital rules

In Australia the recession has been announced as more or less over by the Reserve Bank of Australia (RBA). Various conservative voices are calling loudly for an exit strategy (freezing the stimulus, beginning a programme of retrenchment of government spending to allow the private sector to resume its starring role, and averting any mild danger of inflation) whilst defending the bonus culture of finance capitalism.

The good ole days are back and the spectre of socialism recedes into the background:

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So what have we learned from the global financial and economic crisis that is still continuing in the form of massive simultaneous economic contraction across the industrialised west?

Will Hutton says not much:

Western governments took unprecedented and extraordinary action to avoid what undoubtedly would have been a global slump. The good news is that they have succeeded. The bad news is that what caused the crisis – the stranglehold of a new financial oligarchy upon public policy – has hardly been touched.. Governments have got to reform the entire structure of western finance –bonuses, credit rating agencies, capital adequacy requirements, banks that are too big to fail, the use of offshore tax havens, the role of derivatives – from top to bottom.

Governments aren't and they won't. Finance capital is too powerful. The G20 is just a forum where the heads of state of 20 economies discuss some important economic issues. Team Obama derailed serious proposals regarding financial reform for Wall Street at the G20 meeting.

So we are left with markets trampling over values that society holds dear, the need is for the profit motive always to triumph, financial markets must be allowed their freedoms, and equality must be subordinated to individual freedom. The casino of finance is the way things are and the governments role is to bail the bankers out when things go wrong, not reforming the financial system.

The big banks have gotten bigger and bigger --- we have an oligopoly of banks and “the oligopoly has tightened” --- and their very size distorts the markets and limits the growth of smaller banks. However, the Rudd government shows little interest in decentralize power and deposits and increasing the variety of banking models, to create a healthier financial system. The RBA is saying naught about breaking up the big four banks.

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September 23, 2009

Gittens + ecological economics

Ross Gittens makes a good point in his article in the Sydney Morning Herald. Referring to the climate crisis he says that though we've seen it coming for years we still can't take it seriously. He says that there is a need to shift from a "growth at all costs" economic model to one that recognizes the real costs and benefits of growth.

The core of Gitten's critique of, and breakout from, the ideology of free market capitalism and unlimited economic growth is this:

Even the economists who brought us the emissions trading scheme don't adequately appreciate the problem we've got. They think all we've got to do is switch to low-carbon energy sources (ideally by finding a way to capture all the carbon emitted by burning coal) and the economy can go on growing as if nothing had happened. Being economists, they see us as all living in an economy, with this thing at the side called the environment that occasionally causes problems we need to deal with. As usual, wrong model.

In reality, the economy exists within the ecosystem, taking natural resources from that system, using them and then ejecting wastes, including sewage, garbage and all forms of pollution and greenhouse gases.


He adds that on the one hand we're chewing through non-renewable resources at a rapid rate and using renewable resources faster than their ability to renew themselves. On the other, we're spewing out wastes faster than the ecosystem can absorb them. Global warming is an example of the latter.

Mainstream (neo-classical) economics, with its negative conception of freedom, holds that economic growth, the democratization of affluence, and ever increasing consumption are both the formula for individual and social happiness and the goal of public policy. All traditional economic problems (poverty, overpopulation, unemployment, unjust distribution) have a common solution, namely an increase in wealth.The way to get richer is by economic growth.

This disconnects economics from the economy's biophysical foundations and is blind to the biophysical limits to economic growth. It is flat-earth economics since nature is not a containing envelope, but just a sector of the macro-economy - mines, wells, croplands, pastures, and fisheries.

The possibilities of economic growth increasing costs by more than it increases benefits (which is what climate change suggests) introduces the idea of sustainability. Ecological economics maintains that the economy is a subset of an ecosystem which is finite, non-growing, and materially closed (i.e., no matter enters or leaves it) and that it uses the environment as a source for material inputs and as a sink for wastes.

Unfortunately the economy has become so large relative to the ecosystem that human activity is undermining the ecosystem's ability to support human life. Hence the need for a new model of the economy and development.This requires making the shift from thinking of the economy as a growth machine to ecological economics that models the economy as a living system.

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September 19, 2009

Stutchbury on the national broadband network

I have trouble following the arguments of Michael Stutchbury, the Economics editor of The Australian. When writing about the Rudd government's response to to the global financial crisis Stutchbury appears to start from an opposition to the Labor and then hunt around for arguments to show why Labor was plain wrong with its stimulus package. Presumably, what sits underneath the partisanship is a commitment to small government, competitive markets, individual (economic) freedom, lower government spending and less intervention in the economy.

On the Telstra issue he uses Michael Porter, a former adviser to the Kennett government and now research director at the Committee for Economic Development of Australia. Porter says:

I worry that vertical separation is just a mantra response to Telstra's abuse of its monopoly status. I don't see why vertical separation of Telstra is the main game.The government's main game instead should be to promote competitive provision of rival broadband technologies: Telstra's existing copper wire, mobile wireless systems, the hybrid fibre-coaxial cable used by Foxtel and optic fibre. That is, competition between networks rather than competition between rival telcos using the same open-access network.

Stutchbury adds that in contrast, Conroy's NBN largely mandates a particular technology: fixed-line fibre-optic cable. Taking this technological risk may seem safe now because fibre optic is the biggest information pipe available. But the technological revolution has revealed how much consumers value mobility and convenience. That has made wireless the fastest growing area of broadband demand.
There will be competition between networks---- Telstra will continue to develop its mobile broadband under a national broadband network. Why would your strategy be one of infrastructure competition between Telstra's existing copper wire and fibre to the home, when the former has had its day and the latter is a replacement of the former.

Stutchbury response is to quote Conroy critic and economist Henry Ergas who likens the NBN to Sydney's unprofitable Cross City Tunnel.

What we are really saying is we have built this new motorway and we are going to close the other roads because the only way the motorway will cover its costs is if everyone uses it.

It shows that Stutchbury doesn't get it --we are talking about a national information highway around the nation not one tunnel on a particular roadway.

So Stutchbury tacit argument is that there should be no government ownership of infrastructure--it should be privately owned.

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September 7, 2009

economic fairy tales

As we know few economists saw our current global crisis coming, but this predictive failure was outweighed by the economic profession’s blindness to the very possibility of catastrophic failures in a market economy.

A quote from Paul Krugman's recent article How Did Economists Get It So Wrong? in the New York Times Magazine:

Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions.

The model of a perfect, frictionless market system is a myth, or a fairy tale, given the global financial crisis. The neo-classical model (eg, the Chicago School), which is based on the assumptions that everyone is rational and markets work perfectly, is characterised by its utter failure to make sense of the greatest economic crisis in three generations.

If you start from the axioms that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable. As some neo-classical economists do. They reframe the Great Depression as the Great Vacation. Unemployment is high they reason because many workers are choosing not to take jobs.Something has to give when you reach this level of absurdity and end up in a cul de sac.

I mention this because David Burchell in his op-ed in The Australian---An economist's laugh, but joke's on us reduces Keynes to satirical sallies:

we're all still living in the shadow of Keynes's high-spirited, if malicious, economic humour. It was, after all, an elaborate joke on his part to present every other economist in the world as being in the thrall of something called the "classical" economic view, a view according to which, if we were to believe Keynes, all was for the best in this best of all economic worlds, even in the pit of the Great Depression...By the same token, Keynes was toying with us when he suggested that, so foolish and obdurate were classical economists in their refusal to stimulate demand, even as their world collapsed around them, that literally any kind of expenditure would be a better bet than the precepts of economic policy...In practice, a good deal of the fiscal stimulus doled out across the Western world over the past 12 months has followed Keynes's light-hearted spirit.

What Burchill fails to acknowledge is that the neo-classical view of capitalism as a near perfect economic system wasn’t sustainable in the face of mass unemployment. However, as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market is sustainable in the face of the global financial crisis, which indicates that the economy’s market system can undergo sudden, unpredictable crashes.

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September 3, 2009

Canberra Gaze: Coalition on economics

I watched Joe Hockey on Lateline last night and then I heard Malcolm Turnbull on Radio National Breakfast this morning talking about the Rudd Government's stimulus package and its impact on economic growth.They both argued that the small economic growth figure of 0.6% in GDP, at a time when the global economy is still in deep recession and negative growth, had very little or nothing to do with the government's fiscal stimulus.

What then caused the Australian economy to grow marginally and so avoid a recession? According to Hockey it was: Australia's very strong economic performance under the Coalition (three cheers) ; there was no massive financial collapses by our banks (thanks to good regulation under the Coalition); there were stronger terms of trade than the last days of the Howard Government (lower dollar increases exports to China); and the right monetary policy in that the Reserve Bank cut interest rates more aggressively than anywhere else.

Hockey inferred from this that, since the government's fiscal stimulus spending had minimal impact (just the cash splash and tax rebates for equipment), it needs to be wound back significantly to ease the massive tax burden that is going to impair our economic recovery over the next few years. Debt and inflation is going to strangle us.

I scratched my head. Who accepts this account-- that the fiscal stimulus package had a minor impact (5 minutes of economic sunshine). Haven't consumers have been propped up by the government handouts? Hasn't the stimulus helped to lessen the rise in unemployment and save jobs? Hasn't it stablized the economy from the external shocks?

The Coalition has consistently denied that the fiscal stimulus has worked since last year, even when most economists in Australia accept the importance of the fiscal stimulus for domestic economic growth. The data confirms this picture. So the Coalition is in denial.

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What is going on here? Keynes, it would appear, is taboo There is a rejection of Keynes' argument that an increase in government spending is a solution to unemployment. His proposed solution is to increase consumption through government through spending deficit spending an public works projects.This Keynesian counter-revolution is one in which the free market and the ideas of Friedrich Hayek are under massive assault. The Keynesians are again in the saddle, riding the whipping horses of “crisis”, “deflation” and “stimulus” to the largest takeover of the free economy in the nation’s history.

The grounds for rejecting the counterrevolution is that government intervention prevents the efficient functioning of the market---adjust to slow conditions through price and wage rate reductions, unsound investments sold off and redirecting capital into more productive and profitable uses. The market does not make systematic errors. The profit motive will cause them to be self-correcting. This happens from private businesses, investors and workers paying for their mistakes. Markets clear if not interfered with. Government should get out of the way by reducing taxation, spending, regulations, and government control of money and the interest rate.

The problem here is that many of those suffering from the global financial crisis clearly did nothing wrong; they're innocent bystanders:--workers who have lost jobs through no fault of their own, investors who have suffered huge wealth losses due to the misfeasance or malfeasance of corporate executives, and well-run businesses that were forced into bankruptcy solely because of the recession.

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August 29, 2009

bringing the banks into line

In an interview in Prospect Magazine Adair Turner, the chair of the Financial Services Authority in the UK, called for the introduction of a new tax to help cap 'excessive' bonuses in the finance sector, a Tobin tax on the trade of currency across borders, as well as describing the finance sector as having “grown beyond a reasonable size.” Bingo.

That speaking truth to power caused ripples, especially in the financial world. In the UK, the policy consensus amongst the City, government and academia is that maintaining the competitiveness of the City of London should be a primary aim for the British economy. Turner's proposal is seen as questioning that consensus --hence the backlash---Turner has lost his marbles.

A question can be asked: is society simply paying too much to the financial system in order for it to allocate money across the economy for us? It's not a question that the financial sector would admit to being a legitimate policy question.

Questioning the bank's financial power is quickly dismissed. The blocks go something like this. If you raise the question of market abuse the response is what is that? The market is self-regulating Pointing to the need for tough regulation to protect retail customers brings forth the "competition ensures that" response.The blocks gives the impression that the financial sector understands its self to be the very embodiment of the great and the good and so there is no need to cut the financial sector down to size because the sector is full of "socially useless activity".

The block seeks to deny that there has been a very fundamental shock to the 'efficient market hypothesis' which has been in the DNA of the FSA and securities and banking regulators throughout the world"

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August 11, 2009

IPA on the national broadband network

Chris Berg in PM's national broadband plan really is no net gain in the Sydney Morning Herald starts off on a promising note. The editor of the IPA's Review asks: "Has there ever been a major Commonwealth program more hastily conceived than the national broadband network?" (NBN)

It's a good question, and one that needs to be asked since the price tag of $42 billion is questionable and there is little prospect that NBN Co can be financially sustainable on a standalone basis. The commercial viability of the NBN is addressed in the Goldman Sachs JBWere's report.

This argues that it will take until financial year 2017 before 50 per cent of homes are passed by the network, and until 2028 before 85 per cent of homes are connected. On their forecasts NBN Co won’t be free cash flow positive until 2025. So the original concept of a giant public/private partnership will founder without massive and ongoing government subsidies.

Berg's answer to his question is that the NBN was most hastily conceived but he slips way from public policy:

After it was clear their previous $4.7 billion broadband plan was a dismal failure, it was reported Kevin Rudd and the Communications Minister, Stephen Conroy, dreamt up this $43 billion plan while on two flights between Sydney and Canberra in April.That's not just policy on the run. That's policy desperately sprinting from a horde of angry zombies while trying to pretend that the bite mark on its arm is nothing to worry about.

There was a review process with recommendations as opposed to a "horde of angry zombies". That's abuse ---name calling those who argue in favour of a highspeed national broadband network and a digital economy.

For Berg a digital economy is utopian, and government subsidies for it are akin to government subsidies for sunshine, flowers and walks on the beach. 'Utopian' is a code word for Left here since it refers to equity of access, not the neo-liberal utopia of a self-regulating market efficiently allocating scarce resources. However, Berg does comes back to policy:

The most common argument for government-sponsored broadband is productivity. But the national broadband network isn't going to be a magical productivity switch. There just aren't many potential Australian entrepreneurs having their innovative business plans stymied because their broadband isn't fast enough. Some businesses might find a faster internet connection useful, but few people seriously think our present internet speeds are what's holding the economy back.

It's more than just needing to be fast for businesses--there is also spread and access, given the problems in regional Australia. So what's holding the economy back, then? Berg is pretty clear from this paragraph:
Anyway, our hunger for ever-greater productivity might be better satisfied by allowing the private sector to build the network. (As much as four years ago Telstra was begging the government for a regulatory reprieve so it could build a new broadband network by itself.)

Wow. A company notable for its anti-competition stance, its anti-regulation, poor service, high cost products and slow backhaul is the answer. A company found to have rejected requests for third parties to install equipment in telephone exchanges across the country where space was found to have been available.

We can infer that the issue for Berg and the IPA in general is one of government intervention and subsidy. The government should not be building the network nor providing the massive subsidies needed to get it up and running.This is what is holding the economy back, and the reason why it is not good public policy.

The second reason Berg offers is that, "if it's productivity we want, perhaps the Federal Government could just reduce a few taxes. That'd give the economy a bit of a kick-along." Didn't the Government bring in tax cuts during its first budget? The issue is one of tax cuts versus subsidies in the context of the national broadband costing consumers more for the service than they are paying now.

Issues of government intervention and subsidy for the NBN are core issues and do need to be debated, but the desire to debate is blocked by Berg's turn to abuse--"horde of angry zombies". The immediate reaction to this is why bother to engage?

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August 8, 2009

goodday sunshine

Big banks show big profits, the stock market is up, bonuses are back, even manufacturing output is rising … so the recession is over already.The inference is that markets work well, the business cycle is self-stabilising and it is business as usual. Though it looks to be a jobless recovery, central banks are talking about raising interest rates to prevent inflation.

economicrecovery.jpgMartin Rowson

However, a stock market rally is not enough to ensure that households and firms purchase the goods that will maintain employment. The employment figures do not account for the increasing numbers of people working part-time who'd rather have full-time job; nor a large number who have given up looking for work.or those who have found new jobs that pay less than the old ones they lost.

Nor do they indicate that most of the jobs that have been lost are never coming back.

Though new jobs will replace some of them, eventually, but --not all of them- we need to recognize that the structure of the Australian economy is changing.

What's pushing the stock market upward? Isn't it corporate profits? However, those profits aren't being powered by consumers who have suddenly found themselves with a lot more money in their pockets from increased work. The profits are coming from dramatic cost-cutting -- if a firm cuts its costs enough, it can show a profit even if its sales are still flatlined.


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July 24, 2009

manufacturing or bust

Paul Howe, the anti-climate change unionist, is calling for an manufacturing policy to ensure that Australia continues to make things rather than just digs rocks. He says that in the middle of the worst global recession since World War II, Australia must do everything we can to support manufacturing and position the industry for the future.

The future, we should add, means adaption to global heating and an emissions trading scheme to deal with greenhouse gas emissions. Howe has run a campaign against an emissions trading scheme in the name of protecting jobs ( job security) from the extra costs of electricity under an an emissions trading scheme.

LeunigETS.jpg

It is fair enough to defend manufacturing as opposed to Quarry Australia. However, what sort of things does Howe have in mind? Howe has come across as defending old Australia in the face of the new in the past.

Recently, Howe has been talking about a 21st century Steel Plan---a stratagem to save a key industry in the face of the global economic crisis. Howe is advocating motor vehicles, of course. And the steel industry. Howe says:

we need to build on the new steel plan launched earlier this year by the AWU. Steel's position as a strategic sector of the economy, with vital capability to meet infrastructure and defence requirements, should be recognised with greater accountability in the tender procurement process -- that is, if a project does not source Australian steel, it would need to explain why not -- to keep foundries busy supplying nation-building projects.

Buy Australian steel is the message here. It implies subsidies to encourage private sector buyers to take Australian steel over cut-price steel from global conglomerates. Does Howe's suggestion that a national manufacturing policy should build on progress in steel and automotives plus adding value to Australia's natural resources through investment in downstream processing mean something like an uranium enrichment plant? A national action plan, according to Howe, would build:
on progress in steel and automotives, elements include how best to add value to Australia's natural resources through investment in downstream processing; integrate trade and industry policy more effectively by getting the Industry Capability Network, Austrade and Enterprise Connect working together. We also could encourage the emergence of a new generation of global firms anchored in Australia, including in the $6 trillion environment and low-carbon industries; forge organisational design and skills formation into a competitive advantage; educate and inform so that manufacturing attracts the best and brightest students; and deal with the consequences of the next boom and an appreciating exchange rate to ensure the nation retains a viable manufacturing sector.

Now Howe does mention the $6 trillion environment and low-carbon industries. What does "green technology" mean in terms of manufacturing in new forms of renewable energy, a knowledge economy or sustainable cities, given Howe's antagonism to an emissions trading scheme, the shift to a low carbon economy, and greater use of renewable energy rather than coal?

Update
Howe's argument is that the impact of the economic crisis is starting to bite. Steel plant furnaces going offline from reduced demand from steel, and they may not be started up again, resulting in the loss of tens of thousands of jobs. Without significant government intervention, regional centres such as Wollongong and Newcastle would be devastated.

The AWU's steel plan for the 21st century does appear to be centred around production subsidies, guaranteed sales to government infrastructure projects and extra protection from foreign takeover bids under an industry "survival strategy".It is about helping struggling steel manufacturers to adjust and restructure from reduced demand.

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July 21, 2009

unemployed professionals

The newspapers are saying that the global economic recession won't be that bad, unemployment will not be severe in Australia, China's economic growth will ensure Australia's prosperity and Australia is on the road to recovery. So let us dig up more coal, build the new infrastructure to transport the coal more efficiently, ship it quick to China, and keep using coal to power the economic engine to produce unlimited growth and limitless freedom.

The other face of the economic recession is not the denial that the ecological crisis (eg., the Murray-Darling Basin and climate heating) has become the most distinctive expression of the crisis of capitalism and modernity. It is also a new situation wherein some laid off workers in Australia — professional and technical as well as industrial — are refusing to engage in wage and salary labour that does not meet the standard of a living wage.

As Stanley Aronowitz points out in Situations this trend is not being squarely looked in the eye. These people are not the working poor suffering from lack of skills, drug addiction and just plain laziness., which are the main historical ascriptions by politicians and many mainstream journalists of why men of prime working age refuse to take available jobs in the paid workforce.

For the most part these men were either long-time employees of large manufacturing corporations or highly skilled professionals including journalists. They are not willing to settle for low-paid employment (driving taxis) which, for men over fifty, is about all the work that is available.

These men, who have dropped out of the paid labor force, are a growing segment that is refusing to work, at least given their options. For these men in their prime of career life, they survive on their separation packages taking out second and third mortgages on their homes, drain their pensions and savings, depend on their wives’ income and accept occasional short-term work to keep their heads above water.

If they were prepared to go quietly into the night from paid work, many become web designers, photographers researchers, musicians, blogging etc---the world of self-determined work. This is a different kind of world to the world of communication and information of the new media, where the quantity of information and data has multiplied at
a geometric rate. The former provides possibilities for enriching lived experience, enlarging the new social spaces that have emerged with the internet and digital technology and producing new new languages in which to express lived experience.

The world market in information, data and news is characterised by the replacement of meaning by signs, the shift from positive knowledge to information, the replacement of philosophy by technology in that the technological fix becomes a substitute for critical reflection. The global media, reflecting the new social hierarchies where access to data bases and the internet, becomes a marker of whether you count and the knowledge contained therein defines what political and economic knowledge is. Hence the desire of media corporations such as News Ltd to gain control of the internet.

The new digital spaces that we are in the process of producing in the creative economy need to be defended from being appropriated by the media corporations opposed to 'the free'.

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July 14, 2009

China: a rising power

There is a lot anti-China feeling circulating in Australia at the moment. These arise from the arrest of Rio Tinto's executive Stern Hu and others over the recent iron ore trade negotiations, in which an aggressive Rio has endeavoured to keep this year's iron ore contract price cuts to 33 per cent. The allegations are that the four Rio Tinto employees paid for detailed government trade and manufacturing data to give Rio Tinto executives an edge in iron ore negotiations with Chinese state-controlled steelmakers.

Michael Stutchbury in his column in The Australian:

Humiliated by rejection, Chinese state security has locked up one of Australia's top iron ore negotiators in its cells for the alleged theft of state secrets and taken possession of the computer hard drives from Rio Tinto's Shanghai offices. And it has refused to indulge in reasonable dialogue with the Rudd government over the matter. Talk about many ways to skin a cat!

Stutchbury's column is entitled Magic dragon grows into menacing bully even though China frames resource security in national security terms. China takes its resource security seriously and Chinese firms have encountered difficulties when trying to take large stakes in Western oil and mining companies.

MoirChinaHu.jpg

Rowan Callick observes that China's arrest of Rio Tinto executive Stern Hu for stealing state secrets:

amounts to a strategic throw of the dice. Beijing is upping the stakes in its relationships with Australia and with the broader industrialised world. It is confident that the ball is in its court, that it is becoming the prime actor not only in the economic world but increasingly in the diplomatic world, too.

China and India are quickly becoming the world's new economic powerhouses and China’s state has a de facto monopoly on most of China’s outward investment for national security reasons.

Though China’s economy may have expanded over the last year ---China almost certainly produced a bigger stimulus program than any other major economy---that expansion clearly hasn’t fed through into more Chinese demand for US, European or Japanese goods. It is only in commodities, where Chinese demand — and Chinese stockpiling — has had an impact. However, China is the only country amongst those that relied heavily on exports for growth (Japan, Germany etc) to have avoided large economic downturns. China has reflated its domestic economy as world demand slowed.

China has the upper hand, given the increasing concern about the sustainability of the United States’ large external current account deficit. The globalization of finance which resulted in a world where the poor financed the rich, not one where the rich financed the poor. This “financing" flow was essentially a government flow. Despite the talk of the triumph of private markets over the state a few years back, the capital flow that defined the world’s true financial architecture over the past several years was the result of the enormous accumulation of foreign exchange reserves in the hands of the central banks of key Asian and oil-exporting economies, especially China.

China is now the largest of the U.S. creditors and its willingness to absorb U.S. Treasurys could be key to the success of the U.S. fiscal stimulus and banking sector rescues. China is worried that the US will deal with its unsustainable fiscal path via inflation and debasement of the value of the dollar via depreciation. Consequently, China is flexing its muscles on the question of the global reserve currency system dominated by the dollar.

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July 13, 2009

moving out of the current crisis

We are currently living through a crisis of capitalism in that capitalism is running into serious environmental constraints, as well as market constraints and profitability constraints. The 3 per cent growth rate that capitalism requires to reproduce itself is going to exert tremendous environmental costs as well as pressure on our social situations and institutions.

In an interview at Democracy Now David Harvey usefully addresses this idea of 'crisis'. Harvey, a Marxist geographer, says:

You know, crises are terribly important in the history of capitalism. They are what I would call the kind of irrational rationalizers of the system. What happens is that capitalism develops in a certain way, has real problems, then it goes into crisis, and it comes phoenix-like out of it in another form. We went through a long crisis in the 1970s. There was a long crisis in the 1930s. So a crisis, then, is a moment of reconfiguration of what capitalism is going to be about. And right now, as I’ve said, the powers that be are more about trying to reconstruct the pre-existing power structure or save the pre-existing power structure without intervening in it in any way.

It appears that the US is going to have to bear the brunt of this financial and economic crisis and its global role will be diminished. This would leave the US as one powerful region alongside many others (eg., south east Asia, structured around China?) and without the power it has exercised over the global economy. Regionalisation is one process that we may well see.

What else?

My response to the various sessions on the city at the The Adelaide Festival of Ideas, which were dominated by exploring the mitigation and adaptation to the effects of climate heating, is that urbanisation is another central process.

Adelaidefestivalideas09.jpg.gif

The last 30 years have witnessed an immense amount of the capital surplus has been absorbed into urbanisation: urban restructuring, expansion and speculation. Our cities are huge building sites for capitalist surplus absorption.

Since the gentrification process was a kind of reconstructing urban environments our cities are also sites for household debt (mortgage and credit card) that helped the property developers who are building the houses in the process of gentrification of the urban fabric. With the collapse of credit from the global financial crisis we are now experiencing asset devaluations with the losses of asset value with the collapse of credit.

How the city develops is largely determined by state governments, their development boards and the developers and the financiers. Most of us in the local community don’t really have a very strong say.

So there is a need for the democratization of the city, of city decision making so that we can all actually not only have access to what exists in the city, but also be able to reshape the city in a different image, in a different way, which is more socially just, more environmentally sustainable and so on.

We do need a new pattern of urbanisation--a more local one concerned with the development of productive systems such as solar power, to create more decentralised employment apparatuses and possibilities.

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July 12, 2009

more competition in the banking sector

One of the consequences of the Rudd Government protecting the Australian banks during the global financial crisis is that competition in the financial sector has been sacrificed. The balance sheet of the state was put behind the big banks. The non-bank financial institutions, which lent for home mortgages at cheaper rates, have been decimated or taken over. Time for a big inquiry into the finance industry to restore some form of competition.

PettyBgreenshoots.jpg Bruce Petty

The big four banks are amongst the most profitable in the world, and they have set up a flow of money from a variety high charges and penalty fees that bear little relation to the actual cost. The banks, in short, are gouging customers who have little power to challenge the banks. It's called saving the banks and socking it to the people. As soon as the big guns get into trouble, the state bails them out. The inferred politics is that state power should protect financial institutions (bailing out the banks) at all costs.

In the words of Martin Wolf at the Financial Times:

What has emerged after the crisis is ...an even worse financial system than the one with which we began. The survivors are an oligopoly of “too-big-and-interconnected-to-fail” financial behemoths. They are the winners not because they are necessarily the best businesses, but because they are the best supported. It takes no imagination to realise what these institutions might now do, given the incentives for risk-taking.

The big four banks are deemed to be too big and interconnected to be allowed to fail, no neat structural solution can be identified, and the banking sector is vital to the UK economy. The the banks are using the money not to lend to anybody but to buy other banks. They are consolidating their power. We’re the ones who are paying and they are the ones who are benefiting.

What then of the costs imposed by the financial sector on us? What we know is that the financial sector will see off attempts to impose a more effective regulatory regime in the name of the “light touch” approach to regulation, the concentrated interests of the banks will overwhelm the general one, and the state is concerned with protecting the bankers, not with protecting the people.

We are going to hear a lot of special pleading from the industry mixed up with rhetoric about individual liberty personal responsibility, privatisation and freedom of markets and all those kinds of neo-liberal things.

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July 7, 2009

private greed reliably creates social good?

Big banks have failed, bailouts measured in hundreds of billions of dollars are not nearly enough, jobs are vanishing, mortgages and retirement savings have been savagely reduced. Didn’t economic theory promise us that markets would behave much better than this in delivering prosperity for all?

Didn't this promise invoke the imagery of the invisible hand and the notion that economic theory has demonstrated that market outcomes are optimal?Didn't this underpin the free-market fundamentalism and the neo-liberal push for deregulation over the last thirty years?

Moircapitalism.jpg Moir

Competitive markets, the economists kept telling us, offer a framework in which, in the memorable words of the movie Wall Street, “greed is good.” Adam Smith’s parable of the invisible hand, the founding metaphor of modern economics, explains why the attempt by butchers, bakers and the like to increase their own individual incomes should turn out to promote the common good.

The same notion, restated in mathematics, is enshrined in general equilibrium theory: free markets have been proved to allow an ideal outcome – meaning that the market outcome is “Pareto optimal,” i.e. there is no way to improve someone’s lot without making someone else worse off.

Conservatives repeated endlessly over the last two decades that government is the problem and the market is the solution–---until 2008. Then the roles the roles were reversed.The economics profession's traditional reliance on models, axioms and mathematics had been mugged by empirical reality. Markets are not efficient since free markets are wild markets.

Maybe we need to return to the political description of the individual as a “citizen” or a “voter” instead of the economic description of the individual as a “consumer”, as a way of questioning the traditional and neo-liberal economic way of thinking.

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July 6, 2009

climate change: doing nothing

The politics of climate change is one in which the coal, mining and farming industries, a large part of the Liberal Party, all of the National Party, the free market think tanks and national newspaper, the Australian , are in favour of business as usual. This do nothing alliance has historically justified its stance in terms of denying that climate change is a man made problem.

As this justification increasingly lacks persuasive power in public debates, the denialists have turned to neoclassical economics for a justification for them doing nothing. This social science discipline has a stranglehold over public policy, and the acceptance of its utilitarian framework requires that policy is evaluated in terms of a cost-benefit analysis and discounting to justify the expenditure of scarce economic resources.

Neoclassical economics, which presents itself economics, presents itself as a self-sufficient mode of analysis, is primarily concerned with economic growth of GDP and it values the natural world only in terms of how much profit can be generated by its exploitation. It fails to grasp the ecological underpinnings of the economy, sees the economy as independent of the environment, and holds that there are no environmental constraints on economic growth. Environmental problems either do not really exist, or they can be solved by the free market plus technological fixes.

Even though climate change is the greatest and widest-ranging market failure ever seen, conventional neo-classical economists argue that saving the planet for its inhabitants may be all very well and good … but it is simply too expensive for the capitalist economy to afford. Stabilizing our future climate is too expensive. Conventional economic analysis typically recommends doing much less, and more slowly, in order to avoid dampening the prospects for economic growth. The inference is that it is better for society to bear the long-term costs of climate change than the short-run costs of climate stabilization.

Julian Simon in his book The Ultimate Resource published at the beginning of the 1980s, he insisted that there were no serious environmental problems, that there were no environmental constraints on economic or population growth, and that there would never be long-term resource shortages. Simon's mantle of firring salvos aimed at environmentalism was picked up by Bjørn Lomborg, now an adjunct professor at the Copenhagen Business School). In The Skeptical Environmentalist, (200) Lomborg argued that attempting to prevent climate change would cost more and cause more harm than letting it happen. His Copenhagen Consensus” (2003), which ranked the world’s leading problems, placed climate change at or near the bottom of the world’s agenda.

His 2007 book Cool It: The Skeptical Environmentalist’s Guide to Global Warming (2007) was primarily an extended attack on the Kyoto Protocol and all attempts to carry out substantial cuts in greenhouse gas emissions. Lomborg's essential point was that “all major peer-reviewed economic models agree that little emissions reduction is justified.” He relied particularly on the work of Yale economist William Nordhaus, a leading economic contributor to the economic discussion of global warming, who has opposed any drastic reductions in greenhouse gases, arguing instead for a slow process of emissions reduction, on the grounds that it would be more economically justifiable.

So the slow ‘policy ramp’, with meagre emission reductions over the next quarter of a century, is implicit in the arguments of Nordhaus and other neo-classical economists. The Stern Review stands in marked contrast to these arguments and so the issue was joined.

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July 3, 2009

economic policy re the recession

The battle lines drawn over economic policy in the context of the global financial crisis and recession are well known--its either the government or the market.The Washington Monthly's special report The Next Frontier addresses this conflict.

In the Introduction to the report Paul Kedrosky spells out the two polarized sides of the debate and offers another option. He says that on one side there are those who advocate that:

government stimulus spending will be the primary force in our eventual recovery. This view holds that the key to exiting economic downturns is countercyclical public spending to keep the U.S. economy closer to its optimal level of activity. You should deficit-spend when the economy is operating at less than its full capacity; you should shrink spending and manage debts when the economy is back to normal. It is, in short, the Keynesian view, named for economist John Maynard Keynes and widely held by congressional Democrats. And there’s some truth to it. Massive government spending can cushion the blow when an economy shrinks as severely and as quickly as this one [ie., the US] has. But imagining that a fiscal stimulus, however outsized, can compensate for indebted consumers hell-bent on saving their way back to (relative) solvency is high-definition dreaming.

This Keynesian position is the one adopted by the Rudd Government, which claims that it's stimulus softens the negative effects of the recession whilst the big spend on infrastructure gets things going again until China picks up its economic growth.

On the other hand there is the view that:

greater government spending only leads to higher tax rates, hence to declining incentives for investors to take risks. Better, in this view, to allow the economic crisis run its course, permit large firms to collapse, and let entrepreneurs pick up the pieces and create new companies, jobs, and wealth. This is the "Hayekian" view (à la Austrian economist Friedrich von Hayek), widely held by congressional Republicans, and there’s some truth in it, too. Higher tax rates will, at some point, undermine investment incentives (though the evidence suggests that we’re not very close to that point yet). Downturns—especially severe ones—do disrupt markets and provide opportunities for innovators. Microsoft, Allstate, Morgan Stanley, and many other companies rose from the wreckage of economic downturns. Small companies have been the primary source of job creation in the United States over the last few decades. Unless you expect that trend to change, start-ups and small companies must, by definition, play a major role in any meaningful recovery.

This laissez-faire overlooks the vital role government has played in opening up new entrepreneurial opportunities.

Kedrosky's argument is that if it is the case that growth is riding on entrepreneurs, then the best hope for entrepreneurs may be riding on government. Economic crises create the opportunities for new platforms on top of which entrepreneurs could generate economic growth. Energy provides one new platform in that economic growth can come from companies exploiting new technologies and from innovations that solve real-world problems.

It is this kind of economic policy that is missing from the Rudd Government as it has allowed itself to be locked into protecting the old fossil fuel industries and has done very little to provide a platform for energy entrepreneurs to generate economic growth by exploiting renewable energy technologies.

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June 29, 2009

changes in migration policy

Temporary worker schemes are a fact of life. They exist around the world including Australia with its 457 visa system and they indicate a shift in international migration from settlement migration to temporary migration. Globally, the flows of temporary labour have been increasing.

Peter Mares in an article entitled The Permanent-shift-to-temporary-migration over at Inside Story says that there has been a transformational shift in Australian migration policy.

What was initially intended as a way of plugging temporary skills gaps has become a permanent feature of the Australian labour market. Last financial year, for the first time, the number of visas issued to temporary foreign workers under the 457 scheme outstripped the number of visas granted to permanent skilled migrants. There is every possibility that this will happen again: although the permanent skilled intake is capped, the employer-driven 457 visa scheme is not.

The market for 457 visas was expected to rise and fall in line with economic needs, and indeed there has been a sharp fall in new applications since the onset of the global recession. But when growth returns to the economy numbers will rapidly go up again. Employers are likely to bring in temporary workers far more swiftly than the government lifts its annual quota for permanent migrants.The fundamental shift from permanent to temporary migration is a shift away from the migration pattern in the the twentieth century when migrants came by sea and stayed for good.

Mare points out that Australia is moving towards a “two step” migration program, in which permanent settlement is preceded by a period of temporary residence as either a migrant worker or an international student. This is a “try before you buy” system of migration. Are 457 visas are being abused as source of cheap labor, rather than as a means to overcome skills shortages? Mares says:

The concern swirling around the 457 visa program is not about Irish nurses or English doctors pushing down wages and taking jobs in Australian hospitals; the focus is on workers from “developing countries” like China, India and the Philippines. Their “temporary” status is used to raise questions about the legitimacy of their presence in the Australian workforce...at one level the union concerns are accurate: the 457 scheme does risk undermining hard won conditions in Australian workplaces because temporary workers, particularly blue collar workers from non-English speaking backgrounds, are unable or unwilling to stand up for their rights.

He asks: how do we respond to this problem? Should we end the scheme or change its operation? Mares explores the latter option.

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June 24, 2009

NBN + digital economy

The national broadband network (NBN) discourse has been dominated by discussion over its cost and whether to go ahead with a Fibre-to-the-Premises (FTTP) architecture. Instead of seeing basic connectivity as just another marketplace we look at it as we do roads, which means a state-funded organisation with one mission: universal gigabit access as a public service.

Yet the action is not the network per se, as it is going to be in the applications you run over the network. The development of applications in healthcare, education, social networking and general business as primary areas where innovation would occur and opportunities arise.

In other words we are talking about a digital economy. Since the NBN would be a white elephant without the digital economy, it is better seen more as a national infrastructure, with that infrastructure carrying all information services with broadband Internet being just one of them. IPTV will almost certainly be another, voice services, government-related services, creative businesses and financial services.

The digital economy is the key to the nation’s economic future, and how it will drive future industrial capability and competitiveness. Australia's communications infrastructure and increased digital participation are key to building a 21st century knowledge economy.

But it comes with the fundamental seachange in rights and responsibilities conferred by the biggest upset in intellectual affairs since literacy because NBN becomes another form of distribution for music, media and visual content to the shop or cinema of the analogue era of distribution and control. We need to consider a general fair-use provision to allow sharing for private purposes — not a debate about who should be the one to tell-off file-sharers or forcing internet companies to disconnect persistent users of illicit P2P file-sharing.

Such a fair-use provision, that would acknowledge copyright, but permit limited usage for non-commercial purposes, is a middle-ground between making content owners choose between putting something fully into the public domain or controlling it tightly through copyright.

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June 20, 2009

too much spin?

George Megalogenis makes two key points in Let reality do the talking in relation to the second part of the Labor government’s economic stimulus package. Megalogenis rightly acknowledges that the structure of Labor’s stimulus package --the money flowing through the real economy--- is one in which the school building program aims to take over from the so-called cash splashes.

The first point made is that the second strand of the stimulus package is working:

Construction, the sector that usually leads the nation into a jobs recession, happens to be hiring again, according to this week’s official statistics. That makes it two ticks so far for the stimulus. Phase one, the $20.1billion in cash handouts, propped up consumer spending. Now phase two, the $14.7bn school-building extravaganza, is keeping the blue-collar tradie off the dole queue.... The construction sector had shed 15,000 jobs between last August and February. But 10,000 jobs were added in the three months to May - that is, after the second stimulus package was announced in February. Over the year to May, construction employment is up 8500, or 0.9 per cent. To put that result in context, construction had lost 50,500, or 4.3per cent, of its workforce at the equivalent period of the last recession in the early 1990s.

So the stimulus is doing the job it was designed to do--- a quick hit to the GDP in a context where many constructions are being finished slowly, some developments have gone bust, and there are few new big developments being started. Presumably, this hit holds things---helps prevent a deeper recession--- together until the big infrastructure projects come on line.

Megalogenis' second point is that a question mark should be placed over the second stimulus package in terms of whether the money is being spent wisely. There are examples of this not being the case. He says:

Kevin Rudd confuses the worthy exercise of sandbagging the most volatile part of the labour market with nation-building...Labor couldn’t have it both ways - spending promptly and investing wisely - so it sacrificed efficiency and equity for haste. ...Rudd lumps the mass school maintenance, announced in February, with the budget’s infrastructure agenda. This is where he invites confusion because he is selling a gymnasium and a road or a port as the same thing. Plainly they are not. If the economy wasn’t on the edge of recession, the gym may not have attracted the taxpayer chequebook. But the road or port would have been built, preferably by the private sector or in a public-private partnership in keeping with Labor policy.

Megalogenis is right on this: calling the money for school maintenance and buildings nation building is spin, since the word 'nation building' has historically meant really big infrastructure projects.

What is unclear is why Labor needs to spin in this way when the stimulus is working. It doesn't cover up the obvious flaw that nation building is more business-as-usual and has very little to do with making the shift to renewable energy. Is it the consequence of the obsession with media management? Is it a bad response to the Coalition's attack on Labor's Keynesian policies?

The question mark has the effect of increasingly interpreting Labor's reform policies as more about spin than action. My judgement is that the reform current of Rudd Labor is weak--the light on the hill flickers in the darkness. Most of the reform rhetoric looks increasingly like spin to cover up inaction.

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June 19, 2009

a symposium on the economic crisis

The Crisis and How to Deal with It is a symposium hosted by the New York Review of Books on the global recession. The context of this debate is the ongoing conflict within the economic profession over what to do, given that the financial system as we know it actually collapsed, really ceased to function and had to be put on artificial life support. That collapse then caused a recession in the global economy.

The traditional classical economic position is that free markets are automatically self-adjusting to full employment. They were either continually at full employment or, if disturbed by an outside shock, rapidly returned to it. The only thing capable of wrecking the workings of the market’s invisible hand was the visible hand of government interference. The Great Depression of 1929-32 clearly showed that markets had no automatic tendency to full employment. This failing of the invisible hand justified government intervention to boost demand so as to maintain full employment.

In the 1960s the Chicago School lead by Milton Friedman reinstated classical theory using mathematics to argue that markets are instantaneously, or nearly instantaneously, self-adjusting to full employment. The message of the neo-classical economists was simple: markets were good, governments bad. Policymaker signed up in droves, persuaded that economics, unlike sociology, was a natural science that had discovered the truth about the real nature of things as expressed in mathematical theorems.

Then along came the global financial crisis recession and it showed that markets were not self-adjusting. The bubble-prone financial system had collapsed of its own weight, not from external shocks. Governments did so by running budget deficits and going into debt.

The counter attack by the neoclassical economists, such as John Taylor, concentrated on the level of debt of the US government. The argument was that the debt could do more damage to the economy than the recent financial crisis, with government now the most serious source of systemic risk. Neil Ferguson outlined the risk in terms of upward pressure on interest rates and rising inflation from too much money sloshing around because governments printed money to fund the deficit.

In the symposium Ferguson, defending the neo-classical position, stated that:

we're using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman—Milton Friedman, that is —which is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I'm fine with that. That's the right thing to do. But there is another course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes—John Maynard Keynes—and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly minted bonds.

His argument is that there is a clear contradiction between these two policies, and we're trying to have it both ways. You can't be a monetarist and a Keynesian simultaneously—at least I can't see how you can, because if the aim of the monetarist policy is to keep interest rates down, to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.

Nouriel Roubini's response to this is the right one on counter-cyclical monetary and fiscal policy-- the stimulus in the short run and then to restore medium-term fiscal sustainability. He says:

on the question of policy responses, there is no inconsistency between monetary easing and fiscal easing. Both of them should be stimulating demand, and the monetary easing should be leading also to restoration of credit. Of course, in a situation in which the economy is suffering not just from a lack of liquidity but also problems of solvency and a lack of credit, traditional monetary policy doesn't work as well. You also have to take unconventional monetary actions, and you have to fix the banks. And we need a fiscal stimulus because every component of our economy is sharply falling: consumption, residential investment, nonresidential construction, capital spending, inventories, exports. The only thing that can go up and sustain the economy for the time being is the fiscal spending of the government.

The argument about the risk of government debt ignores that the policy response has been to socialize the bad debts of the financial institutions and to put them on the balance sheet of the government.

Ferguson's response is that this implies a massive expansion of the state to substitute for the private sector and re-regulating the market. He says:

The lesson of economic history is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from the private sector, not from the state.

In the long term yes. In the short term governments need to kick start the economy.

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June 12, 2009

beyond neo-liberalism

Robert Wade in Financial Regime Change in New Left Review makes an interesting point about the global financial crisis. He says:

The shocks of the past year—another thirty years on from the last major shift—support the conjecture that we are witnessing a third regime change, propelled by a wholesale loss of confidence in the Anglo-American model of transactions-oriented capitalism and the neoliberal economics that legitimized it (and by the US’s loss of moral authority, now at rock bottom in much of the world). Governmental responses to the crisis further suggest that we have entered the second leg of Polanyi’s ‘double movement’, the recurrent pattern in capitalism whereby (to oversimplify) a regime of free markets and increasing commodification generates such suffering and displacement as to prompt attempts to impose closer regulation of markets and de-commodification (hence ‘embedded liberalism’). ... The first leg of the current double movement was the long reign of neoliberalism and its globalization consensus. The second as yet has no name, and may turn out to be a period marked more by a lack of agreement than any new consensus.

Polanyi argued in the Great Transformation that under capitalism the economy becomes disembedded and dominant, thereby creating grave dangers for humanity and the environment. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime and starvation. Nature would be reduced to its elements, neighbourhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed.

In the face of this danger, society develops defence mechanisms that, in turn, can hinder the pursuit of profit. This is the famous 'double movement' which, Polanyi strove to show, emerged spontaneously in market societies--a sort of dialectical relationship between destruction and protection.

Polanyi's work holds explanatory potential in the current period of neoliberal globalisation. Some have even suggested that a new 'double movement' can currently be witnessed: the destructive impact of neoliberal globalisation and attempts, by different groups within society, to regulate it. Wade begins to spell this out when he says that the double movement means that the globalization model itself needs to be rethought. It over-emphasized capital accumulation or the supply side of the economy, to the detriment of the demand side (since the stress on export-led growth implied that demand was unlimited).

The failure of catch-up growth,, stems in part from neoliberalism’s lack of attention to domestic demand, reflecting the dominance of neoclassical economics and the marginalization of Keynesian approaches. Developing domestic and regional demand would involve greater efforts towards achieving equality in the distribution of income—and hence a larger role for labour standards, trade unions, the minimum wage and systems of social protection. It would also necessitate strategic management of trade, so as to curb the race-to-the-bottom effects of export-led growth, and foster domestic industry and services that would provide better livelihoods and incomes for the middle and working classes. Controls on cross-border flows of capital, so as to curb speculative surges, would be another key instrument of a demand-led development process, since they would give governments greater autonomy with regard to the exchange rate and in setting interest rates.

If the second leg of the present ‘double movement’ turns out to be a period from which consensus is largely absent, it may also provide space for a wider array of standards and institutions—economic and financial alternatives to the system-wide prescriptions of neoliberalism. This may give the new regime that emerges from the current upheavals greater stability than its predecessor.

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May 21, 2009

Ken Henry, fiscal policy, challenges

Ken Henry in his speech, Contemporary challenges in Fiscal Policy to market economists in Sydney this week takes on his critics of the underpinnings of the 2009 budget. Most of the Australian criticism has been directed at the assumptions underlying forecasts that underpin the medium-term fiscal path to return the budget to surplus. The claim is that they are too optimistic. Henry has provided a detailed explanation of the basis of Treasury's growth forecasts that suggests they are plausible.

A complex issue is the requirement to explain the large budget deficit now and how that deficit would be wound-in over time through a medium-term fiscal strategy. That in itself is not a difficult concept to grasp, even if the way this is to be achieved is complex.

One trenchant critic of the 2009 budget was the Institute of Public Affairs, the sturdy defender of free market capitalism, individual liberty and small government. Their messages are: Free markets thrive on creative destruction. Reduce the regulatory burdens. Let financial markets manage through the crisis on their own since they are self-correcting. These classical liberals hold that market relations should dominate just about every sphere of social collective life, other than the moral order. Utilitarianism is their default moral public philosophy.

This is in contrast to Australian conservatism which holds that social conservatism rules in the moral order. Conservatism today in Australia practically means neo-liberalism + social conservatism.

In his speech Ken Henry says:

Consider the reporting of the budget in the Wall Street Journal Asia last week. According to that reporting, in all of the decisions taken by the Government in response to the global recession, the only ones that will have any stimulatory impact on the economy are the 'tiny' personal income tax cuts announced in the 2008-09 Budget. The journal also informs its unfortunate readers that revenue downgrades alone would not have driven the Australian budget into deficit. And to cap it off, readers were told, in what is surely one of the most ironic sentences ever uttered in macroeconomic analysis, that '(t)his Keynesian revival comes at a particularly bad time, given that tax revenues are falling as the economy slows, a normal feature of economic downturns'. Apparently, the right time for a 'Keynesian revival', involving the spending of large amounts of public money, is when tax revenue is strong and rising, a normal feature of economic boom times.

Henry's comment is that the budget's complex story-telling exceeded the reading age of this commentator, and that newspaper readers in Australia can be thankful that they don't often have to confront material that is quite that bad.

For me this account shows the awful position the conservatives have got themselves in once you step beyond the surface debt debt debt /deficit, deficit deficit rhetoric and ask well, what would you do to address the global financial and fiscal crisis. Their position is that the Rudd Government should not have adopted a highly expansionary fiscal policy, not gone into deficit and just opted for tax cuts. Keynesianism is Big government and that means socialism, which in turn means the crushing of individual liberty by the state.

This often leads them into strange territory such as Oliver Marc Harwich's op-ed in The Australian, which tries to argue that Kevin Rudd's hero, Dietrich Bonhoeffer, was a neo-liberal.Harwich's work for the CIS tries to claim the German "social market" movement -- in which it is argued that the market must be accompanied by state planning, collective economic sectors, and a strong welfare net--- for contemporary neo-liberalism. Contemporary neo-liberalism (the Thatcher /Reagan kind) is opposed to the social market movement.

Once you accept that the worst recession since the 1930s requires a substantial fiscal response the immediate issue becomes the size of the deficits and the quality of the spending. Henry explicitly address the way the budget was constructed in terms of the integrating stories in three time periods: the four year forward estimates period; a 12 year medium-term; and a 40 year Intergenerational Report time-frame:

We developed the medium-term scenario to provide parameters for the medium-term projections of the budget balance. The latter are required to span the gap between the four-year forward estimates period and the 40 year projections contained in the intergenerational reports.In spanning the gap we also wanted to reconcile the short and medium-term GDP trajectory with the long-term projections contained in our IGR modelling. Call us fastidious if you like, but we don't like discontinuities in our economic projections. We wanted to be sure that we were describing a medium-term scenario that is consistent not only with the short-term forecasts, but also with the long-term IGR projections.

The approach is predicated on a gradual recovery in aggregate demand in the final forecast year (2010-11), after which the supply-side drivers of the economy take over, then holding growth in real spending to no more than 2 per cent in real terms until the budget returns to surplus in 2015-16.

This is not the same thing as saying Treasury believes such fiscal discipline will be exercised.That is the realm of politics. The responsibility lies with the Rudd Government to limit real spending to no more than 2 per cent in real terms until the budget returns to surplus in 2015-16. This is another point of criticism.

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May 13, 2009

Budget 2009 ---good times near

The heavily leaked Budget 2009 is being sold as the third phase of a fiscal stimulus to ease the fallout from the recession. The headline number is an $22 billion investment in the infrastructure that Australia requires to recover, grow and prosper. There is $8.4 billion on roads, rail and ports, $3.5 billion on clean energy, $2.6 billion on education, $3.2 billion on hospitals and the old $4.7 billion investment in the National Broadband Network. The total---$22.4 billion for "building our way to recovery"---is a fairly modest government contribution to infrastructure spending.

This part of the budget proceeds with, and repackages and makes-over, the spending on infrastructure measures decided during an economic boom. The permanent tax cuts that will cost the Treasury $5.3 billion over the first three years were barely mentioned. It is simply adding on top of that the cost of responding to the economic bust. And beyond the recovery in a year or so? What then. Nothing said!

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It is not a green budget at all. It fizzes very badly on clean energy being a green shoot as all we have are four Solar Flagship projects. Even though the budget is all about spending the money for the future, the amount for solar energy is small ($1.3b). It shows, yet again, that the Rudd Government is not that serious about greening the economy and using the recession to start making the shift to a low carbon economy.

There is little to indicate that the Rudd Government is freeing itself from eleven years of Howard Government hostility towards renewables, which was encouraged so effectively in the media by the coal and nuclear lobby. There is little to suggest that the Rudd Government will develop a renewables manufacturing industry, creating jobs and export income at the same time as cutting Australia's reliance on fossil fuels.

The attack on middle class welfare has been done with a feather, the unemployed are ignored, whilst the reduction of the big deficit ($53.1 billion) and reducing debt (gross debt of $300 billion or 14 per cent in 2014 and around 4 per cent 10 years from now) is based on optimistic growth forecasts, rather than cutting into middle class welfare (health insurance, family payments, super concessions).

The economy will bottom out in mid-2010, with a recovery beginning in the second half of next year and back to solid growth and good times. China plugs the gap. The "worst recession since the Great Depression" is pretty much coming to a close and the concern is planning what the government will do in the recovery. So how do they reduce the welfare spend that Australia can no longer afford cos the boom is over?

The Labor tradition is an increase in pensions--single age pensioners get an extra $32.49 a week whilst couples will get an extra $10.14 a week--and paid parental leave. Despite the effects of the stimulus package, unemployment in Australia will reach 8.5% next year, yet the budget contains little in terms of measures specifically directed at improving the lot of the unemployed.

How come that unfairness? Is it assumed that they'll all get jobs quickly. However, the long-term unemployed are ignored in favour short-term youth unemployed. So what does what fairness really mean here?

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May 11, 2009

budget 2009

It is hard to avoid next Tuesday’s budget--well the selling the Budget as a Major Event----or the rhetoric of the Rudd Government that it has been mugged by the recession and rising unemployment. The leaks about the big collapse in government revenue, the big deficit, the cutting back on middle class welfare are everywhere in the media. Behind the media management stands the spectre of a generational problem of long-term unemployed coupled to industry's going off-shore. Layoffs, bankruptcy and closures will be the norm.

In the background, despite the upbeat economic messages from the Reserve Bank, the future looks rather austere. It is one of lower levels of growth, less advantageous terms of trade than those to which the miners have become accustomed, and the decline of some industries. Government spending has skyrocketed and projected receipts have plummeted, and it will take many years for revenue to recover sufficiently to ease the structural deficit and return the budget to surplus. That will only realistically happen with a substantial increase in the tax revenue share of GDP.

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Let's accept the above account an downgrade the budget from being a Major economic Event and go behind the media stage management. We can ask: does the Rudd Labor Government have a long term strategy beyond saying that the current financial mess is caused by the "global financial/economic crisis" and that downturns call for budget deficits? Does it have a policy framework that links budget cuts and the shorter-term stimulatory measures with longer-terms goals and objectives, apart from an economic stimulus for the short term and sacrifice for the long term.

What are the longer term goals? I do not see a coherent policy framework. Quarry Australia still stands supreme coupled to corporate welfare for the car industry and heavy polluters. The spending on skills and training to avoid future supply bottlenecks is about the trades, rather than a generous response to the Bradley review into higher education, tied to further improvement in how universities operate.

There is little recognition that the arts and creative industries are increasingly being recognised as anchors for economic development, or that universities are the engine rooms of science and innovation, when appropriately linked to incentives to commercialisation.

The rhetoric is one of highlighting the importance of research, innovation and international collaboration to the nation's social and economic wellbeing, especially in this age of economic gloom and doom. It says that the traditional emphasis on structural adjustment is due for reconsideration, and the emphasis should shift to innovation capability and performance and on capability building in firms, with a view to the development of a knowledge-intensive, high wage, high productivity sectors.

However, the talk does not translate into the walk. In contrast to the car industry, there looks to be very little funding to help prime the drying liquidity pump from which promising innovative information and communications technology, renewable energy and biotech start-ups normally drink.

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May 5, 2009

Budget forebodings

We know that the global recession overshadows the Rudd Government's budget and that the recession will shape the series of reforms that had been set in place. So what is going to happen? Tax receipts are falling, welfare claims are climbing, the global recession has hit home and there are political commitments to meet, such as the pension hike. What will be pushed into the background?

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Lindy Edwards in the The Age says that:

The big gamble of this budget is how deep the recession will be and whether stimulus can effectively offset it. Will some of the more benign local forecasts be right? Or will unemployment spike enough to drive a collapse in housing prices, unleashing a downward spiral and making the IMF's doom and gloom more prescient?

Edwards adds that a milder recession means that a good stimulus package might be enough to keep things on the rails.

However, not being able to escape the worst of the global downturn means that the stimulus money might disappear as a drop in the bathtub as we all go down the gurgler. If the spending isn't initiated quickly enough to avert the worst of the recession, there are no guarantees the Rudd Government will be re-elected.

One consequence of the budget is that we can kiss the education revolution goodbye. As Simon Marginson says most of the recommendations of the Bradley report on higher education and the Cutler report on innovation will be "postponed". Priority will be given to measures that extend the capacity of education to meet unemployment, and advance social equity.

Treasury, he says, is less interested in the education revolution than in growing exports and education is our third largest export sector in dollar terms, behind only coal and iron ore. Education earns more than wheat, beef, wool, gold, tourism and other staples. The growth of commodity exports has been slowed by the recession but education exports will grow in 2009 and look recession-proof, for the time being at least, and those educational exports will be supported at all costs.

Paradoxically it is the public underfunding on higher education that drives the exports since the universities seek to overcome the loss they make on domestic students with international students paying full fees. The price is the decline in the average student-staff ratio, from 15 to 20, and middling research capacity.

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May 2, 2009

SA's gravy train?

BHP Billiton is going to press ahead with plans to turn its Olympic Dam mine in South Australia into the largest open cut mine on earth. Thus five stage expansion will help kick the SA's regional economy back into prosperity, even though the company is sticking to its plan to send uranium-infused copper concentrate to China for processing, if it moves ahead with the multi-billion-dollar expansion of the Olympic Dam copper, gold and uranium mine.

It's all a long way off though. Only the 400 page draft environmental impact statement has been released, and that says the project can go ahead on environmental grounds. That claims need to be assessed by the SA and Rudd Government's. An investment decision is sometime next year, whilst the project requires that BHP build a new desalinisation plant, a railway, additional port facilities, a gas-fired power station and remove the over-burden to convert the underground mine into an open pit.

It's spun as the gravy train for SA. But it is still Quarry Australia--just digging up rocks and shipping them overseas without any value adding. BHP will not go a step further and build a smelter that produces mineral in its almost-pure form, as it will sell its product as concentrate with the processing done offshore.

SA needs a rabbit pulled out of the hat because car manufacturing (GMH) is going into decline (two shifts have been reduced to one at the Elizabeth plant) and as bankruptcy hovers over General Motors in the US.

The other gravy train in SA is defence --building 12 new generation submarines--as part of the Defence White Paper's policy of defence self-reliance and increase in military hardware( frigates and destroyers). The White Paper makes clear that it is the ability to deter or defeat armed attack on Australia will continue to be the primary force structure determinant of the Australian Defence Force and that this means focusing predominantly on forces that can exert air superiority and sea control over our approaches.

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April 29, 2009

budget blues

The 2009 budget has to give and take, even though the numbers are going to be written in red ink. The federal budget will show a massive deficit for this year, next year, and the one after and it will detail how much the Government needs to borrow to fund the deficit.

Access Economics gives the context in its Business Outlook March quarter issue:

Batten the hatches. The discussion here focuses on risks and uncertainties around the forecasts, but the first message is the most important – conditions are worsening very rapidly, and we recommend our clients batten the hatches. This is not just a recession. It will be the sharpest deceleration Australia’s economy has ever seen. Apologies for the gloom – we do recognise that, in forecasting mayhem, we make it ever so slightly more likely to happen. Still, we wouldn’t be doing our job if we didn’t tell you
what we think comes next. The emerging economies generated three quarters of global growth in the past eighteen months, but now they too are slowing, and their slowdowns will become Australia’s recession. In brief, much of Australia will feel the pain of the collapse in the global banking system by end-2009. Many businesses will fail as demand gains shrink. Unemployment will leap, and profits will be cruelled.

Giving means distributing more borrowed money to stop the economy's hard landing, preventing the unemployment rising towards 10 per cent, and fulfilling political promises such as tax cuts and an increase in the single aged pension. Increasing economic growth is the way to repay to the loan taken out to fund the deficit.

Taking means pay down the mounting public debt that the descent into deficit financing will feed. That means squeezing the welfare state. Who then will be squeezed to achieve the medium-term goal of bringing the budget back towards balance? Most economic commentators point to middle Australia bearing the pain rather than cutting back on the handouts to the coal or car industries.

In its Business Outlook March quarter issue Access Economics raises some good questions. They say that it is not the short term implications of Budget deficits which worry us. Indeed, running anything other than a Federal Budget deficit in 2009-10 would be irresponsible.

Rather, it is the longer term risk of chicken-hearted policymaking now that Canberra’s ‘rivers of gold’ are drying up. This nation has legitimate policy goals in education, infrastructure, Federal/State relations, climate change and water management. What it doesn’t have any more is the money to help achieve reforms in those areas. That leaves some very uncomfortable choices for Canberra’s politicians – of all stripes – as well as concerned Australian citizens. Do we waste continue to money on welfare to the car industry, or do we have an education revolution? Do we maintain all the personal tax cuts of recent years or do we achieve Federal/State reform? Do we pay the promised increases in age pensions, or do we scrape together the money needed to make serious gains in water reform and climate change policy? Do we continue to pay for the middle class welfare of Family Tax Benefit B, or do we subsidise a broadband network?

Tricky trade offs!

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April 20, 2009

downturn, ever down

Before the global financial crisis and its economic fallout happened new office buildings and apartments were going up all over the Adelaide CBD at a furious pace. For the last couple of months or so the construction in the city has become rather quiet. Eerily so. The holes in the ground remain fenced whilst the building sites that are still active have skeleton crews working ever so slowly. Me? I'm waiting for the boarded-up shopfronts to appear so I can take a photo of the history we are living.

Meanwhile finance has boomed, becoming ever more powerful. The banks have enormous political weight and the executives of the world of high finance believe that they control the levers that make the world go round. For them it was axiomatic that the interests of the financial sector are the same as the interests of the country. The economy was always fundamentally sound.

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The words "expanding" , "affluent" , "prosperous" and "efficiency" appear empty, now that the city is no longer trying to cannibalize itself and the dead commercial spaces start appearing. Things are getting worse is how it appears.

Life is being quietly snuffed out from the shock waves of a dirty economic bomb set off by the bankers who continue to make their millions whilst on the living off public subsidies. As the wreckage they have caused continues to mount we suspect that the finance industry has effectively captured our government and they are pushing onto the government the substantial problems (toxic debt) that have arisen. Corruption? Nay. The financiers are God's favoured children.

The shock waves continue to roll across the landscape causing destruction in their wake. More unemployment. Longer bread queues. Another firm collapses. The economic commentators talk in terms of "green shoot"s, “V-shaped” recoveries and “glimmers of hope”, whilst the Commonwealth Government subsides the old industries who promise "clean coal", and it turns its back on renewable energy. Corruption? Nay.

The economic commentators are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic in the name of rational expectations and efficient markets. This belief system is the finance industry's cultural capital. Yesterday’s “public-private partnerships” have yet to be relabeled “crony capitalism.

As Paul Krugman observes:

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Banks “do not want to recognise the full extent of their losses, because that would likely expose them as insolvent ... This behaviour is corrosive: unhealthy banks either do not lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and, as it does, bank assets themselves continue to deteriorate – creating a highly destructive cycle.”

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March 26, 2009

governing the economy

"We have to clean up the banking system" is the refrain from politicians and policy advisors as they gear up to the G20 Summit, to discuss the reforming the governance of the global economy. The Summit will probably achieve very little, but they will present the face of consensus and warn about the need to avoid protectionism.

We do need to remind ourselves that very few of the country's economic experts (market economists who are representatives of financial institutions) foresaw the global financial and economic crisis that is now upon us. Most of them thought that the global economy was working well and needed nothing more than some tweaking here and there since the invisible hand of the deregulated market would continue to do its thing etc etc.

BellSbailout.jpg Steve Bell

The reality is that the culture of financial capitalism is rather rotten. How could How could so many economic experts have been so mistaken something as significant as the global financial and economic crisis? How come they didn't see the flaws in the neo-liberal mode of governance?

The shift is to governance of the conduct of a population rather than ideology of the free or unregulated market. Neo-liberalism, on this account, is a mode of governing a population, not a fundamentalist belief in extreme capitalism and excessive greed; a mode of governance of an economy that is currently undergoing a major restructuring.

The market economists, along with the economic experts in the Obama administration (eg.,Timothy Geithner, Larry Summers), remain deeply committed to Wall Street and its economic mode of governance, and they assume that when the crisis is over, everything will return to normal. Until then, the government must support finance sector at all costs and the taxpayer foots the bill.

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March 17, 2009

Larry Summers on the economic crisis

Larry Summers, the Director of the White House National Economic Council, gave a speech to the Brookings Institute on the Obama Administration's approach to the historic economic crisis. Or more specifically their understanding of the roots of their current economic crisis, the rationale for the administration's recovery strategy, and connecting that recovery strategy to the central objective of sustained and healthy expansion.

An important paragraph in the speech is this one:

One of the most important lessons in any introductory economics course is that markets are self-stabilizing. When there is an excess supply of wheat, its price falls. Farmers grow less and others consume more. The market equilibrates. When the economy slows, interest rates fall. When interest rates fall, more people take advantage of credit, the economy speeds up, and the market equilibrates.This is much of what Adam Smith had in mind when he talked about the “invisible hand.” However, it was a central insight of Keynes’ General Theory that two or three times each century, the self-equilibrating properties of markets break down as stabilizing mechanisms are overwhelmed by vicious cycles. And the right economic metaphor becomes an avalanche rather than a thermostat. That is what we are experiencing right now.

So Summers' notices the mess that he helped create and his plan to clean up the wreckage connects the avalanche to the need for extraordinary public action to restore the capitalist market system to health.

The rest of Summers' speech was an effort to talk up both the economy and the administration's economic plans in the face of the avalanche. Somehow the response seems inadequate in relation to the economic metaphor, even if it is the boldest economic program in the US to promote recovery and expansion in two generations.

Not to worry. The Wall Street Journal's new theme is that things are looking up. Then again, in the late 1990s, Larry Summers, in his capacity as U.S. Treasury Secretary and Tim Geithner as the Under Secretary for International Affairs were literally touring around the world to “make the world safe for AIG”, as the slogan went. They stood in a tradition that asserts U.S. independence and implied its domestic superiority on global rulemaking.

They endeavoured to achieve the above by claiming that the U.S. financial system was superior to that of all other nations — in terms of such metrics as transparency and disclosure, general accounting standards, market depth and liquidity, as well as compensation practices. Secondly, they argued that other nations could only benefit from adapting U.S. practices in a dynamic fashion (and would fall onto the ash heap of history if they didn’t).Thirdly, they argued that emerging markets from China and the rest of developing Asia to Brazil and South Africa, should adopt market opening measures to provide access to U.S. insurance firms, investment banks and other entities keen to expand their presence in those markets.

Thsi is a tradition in which the IMF, which has a mandate to establish rules for the international financial system, has been used as an instrument of U.S. policy. The United States has used the IMF as a vehicle for delivering messages to other countries about their policy weaknesses.The United States behaves as if it alone knows best how to deal with every global economic challenge. The U.S. economic authorities have acted as if they believe they know everything about the regulation of markets continually evolving in ways that are, in fact, unknowable.

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February 27, 2009

black humour

As Paul Krugman observes in The New York Times we have zombie banks, unable to supply the credit the economy needs. He adds that to end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

Rowsoncapitalism.jpg Martin Rowson

Krugman adds that what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.

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February 26, 2009

socks and jocks

The decision by Pacific Brands, the company behind some of Australia’s well known clothing labels (Bonds, Berlei and Holeproof), to lose seven factories, axe more than 1800 jobs, indicates that there is no future for low wage, low skill manufacturing in Australia and shift production to China. The sad reality is that the sacked PacBrands workers are not going to get another low skilled job and the dole, at $255 a week, is not enough.Nor is it likely they will be able to reskill and become skilled workers.

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This judgement is in spite of PacBrands having problems of its own making, including a brand portfolio built by acquisitions that is full of duds, a debt repayment profile that has morphed from manageable to threatening since the global crisis erupted and the consumer shift to discount retailers and a decline in consumer spending. Pacific Brands immediate problem is debt, not sales and margin. This is in spite of clothing tariffs being set to drop from 17.5 per cent to 10 per cent next January, and to 5 per cent in January 2015.

Australia is a high wage country and low wage manufacturing is not competitive with low wage manufacturing in China. So closing Pacific Brands’ remaining Australian factories and shifting production offshore by the clothing, textile and footware is a necessary strategy.

The recent Green review of the TFC sector supported financial assistance but emphasised innovation and industry focus on high-end value-added, rather than trying to compete with low-wage countries. Green said:

Evidence to this Review demonstrates that the key success factor for the TCF industries, as for industries more generally, is the development of innovative capability at the level of the enterprise and workplace,which is driven not only by research and technology development but also by an increasing emphasis on business model transformation, market-led organisational changes and the integration of firms into collaborative networks and supply chains.

The Review maintains, contrary to the manufacturing sceptics, that Australia’s TCF industries have a promising future, but this can only be achieved through a concerted effort to differentiate their productshrough uniqueness, product quality and design, branding, quick response and new approaches to supply chain management, with a clear emphasis on corporate social responsibility in the application of labour and environmental standards.

However, though the Rudd Government is happy to spend $6 billion or so of taxpayer dollars to drive innovation in a car industry Australians won’t support when they buy their cars, but will only offer a far smaller version of the same kind of subsidy----- $270m between 2005 and 2015--- to the TCF sector. Strange.

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February 21, 2009

souless globalization

So Starbucks turns to instant coffee as a way out of its economic woes in a bust global economy.

recession.jpg Martin Rowson

Neo-classical economic orthodoxy assumes rational optimising behaviour by economic agents and is reluctant to contemplate more than minor deviations from that axiomatic presupposition even though we know that the economy is also driven by irrationality and animal spirits. Think Las Vegas (or Crown Casino), housing bubbles, Greenspan's over-exuberance and excesses, the gloom and despondence of an economic depression or all the talk about confidence being the key to getting the economy back on track.

Thsi introduces the possibility that the Rudd Government's stimulus package may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen. Some background here.

The term "animal spirits," popularized by John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money, is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

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February 18, 2009

Hockey's economic message

In the context of the collapse of Wall Street and the subsequent global recession, Joe Hockey, the new shadow Treasurer, stands firm in defence of the free market at a time when General Motors told the US federal government on Tuesday that it needed to increase its loan request to $30 billion, $12 billion more than it had initially sought, to avoid a bankruptcy filing and Japan's export engine stalled due to its dependence on the US.

Hockey's message is simple. It is to let global financial flows flow:

We believe in free enterprise. We believe that if the market can fix it, that is the starting point with an appropriate safety net.There will be market failures but the challenge is not to overreact with more regulations which end up placing handcuffs on capitalism. The market has made everyday Australians richer than they have ever been -- even with this economic downturn.

An economic downturn? Isn't the main point about the collapse of Wall Street that the market could not fix it? Wall Street had to be, and continues to be, bailed out. Obviously, Hockey is just a bit lax on the detail of what has happened. The market is not working. Hence the government bailouts for Wall Street and the auto companies. For Hockey bailing out firms--ie., placing them on life support--- is placing "handcuffs on capitalism!

Hockey's other economic message is that the Rudd Government is being panicked by the global recession into wanting to stifle business with needless over-regulation, and that it is deliberately slowing down the Australian economy. This is music to The Australian's ears, even though it requires big subsidies to print the Australian Literary Review. I would have thought that the Australian economy was in recession due to the decreased demand for Australian goods and raw materials as a result of the Chinese and Japanese economies taking savage hits. The subsequent collapse in growth and consumer demand, not increased regulation, means that small businesses are set to hit the wall this year.

Hockey also overlooks the global pressures on the banks in the US and the UK, whose collapse indicates the need for full-scale nationalisation. Despite the bailouts the banks are failing to resume lending to businesses and the so-called masters of the universe have no idea what to do.

By nationalisation is meant some kind of a global debt for equity swap---socialising the losses---and then slowly selling all the government controlled assets back into the private market in the future at a profit. Hockey fails to say what he would do when faced with this kind of market failure. He gives little indication that he even understands it.

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February 4, 2009

The $42billion Nation Building and Jobs Plan

Will the $42 billion stimulus package---the Nation Building and Jobs Plan--- do its job? Will it give the desired boost to economic growth in a vulnerable economy, and help ease the rise in unemployment? Will this kind of timely support soften the pain? Can this question be explored whilst avoiding the toxic, partisan polemics of a Janet Albrechtsen about neo-socialism downunder?

Stephen Kirchner, a research fellow at the Centre for Independent Studies, suggests that it is possible to avoid polemics. His argument is that activist fiscal policy doesn’t work. He outlines it thus:

Historical experience with fiscal stimulus packages in Australia and abroad is far from encouraging. Japan, for example, rolled out one stimulus package after another for the better part of a decade during the 1990s, to little effect. Why is activist fiscal policy generally ineffective in stimulating economic growth? The failure of discretionary stimulus measures reflects a basic reality that governments cannot create economic activity, they can only redistribute the income and wealth created by the private sector.

Why so? Helping the unemployed to retrain is a good idea. So is money for public housing and helping people to make their houses more energy efficient given the climate change scenarios of increased temperatures. Who could argue against refurbishing school infrastructure, more money for maintenance and increased investment in new infrastructure (eg.,libraries for primary schools and laboratories for secondary schools). These measures were temporary as well as timely.

What then are the reasons for the failure of countercyclical discretionary fiscal policy? It's more than being the measures could have been better targeted, or the states tightening their budgets in a recession. Kirchner says:

The problem for all governments is that these unfunded fiscal stimulus measures ultimately have to be paid for out of future taxes. An unfunded fiscal stimulus package of $42billion is thus equivalent to announcing a $42billion future tax increase......The danger with activist fiscal policy is that governments relax the criteria for good policy for the sake of pushing money out the door. By throwing out the constraint that new policy measures should be fully funded, they abandon the fiscal discipline that would otherwise force the government to choose carefully between competing alternatives.

What then is the answer, given that Kirchner says that doing nothing is not an option and no mention is made of market failure?

Kirchner says that the correct focus for fiscal policy is the structural and supply-side measures that will deliver sustainable gains in future prosperity. His argument is that budget balance could be expected to swing into deficit as a result of the operation of the so-called "automatic stabilisers", those components of government spending and revenue most closely tied to the level of economic activity. The automatic stabilisers have the very desirable effect of cushioning the economy from the downturn.

This cyclical deterioration in the budget balance is ultimately self-correcting. When the economy recovers, the cyclical component of the budget balance can be expected to improve, without the Government having to make explicit policy decisions other than to allow the automatic stabilisers to do their work.

I presume that "supply side" measures refer to tax cuts but what does "structural" measures refer to? Reducing public spending to address the issue of big government (Leviathan?). Does that mean cutting back on the welfare state? Does it mean tcutting back on the middle class welfare of the Howard years? Does it also include tax reform? The basic CIS position is to empower individuals to meet their own needs and reduce their future dependence on government. Does that mean in the current situation encouraging increased savings?

Kirchner's argument is premised on his assumption that markets are self-correcting. Thus

in credit and other financial markets, the present crisis can be interpreted as a global re-pricing of risk following an extended period in which risk was incorrectly priced. Again, no government or regulatory intervention was required to set in train this market correction. We may not like the price signals generated by markets in the context of the credit crisis, but that does not mean the market is not working or the price signals are wrong.

That misses the main point. Government intervention was necessary to prevent the financial and credit markets from self-destructiing. The judgment was that Wall Street had to be saved to prevent the collapse of the financial system.

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February 2, 2009

Australia's recession

Ross Gittens hits the nail on the head with respect to the current global recession now working its way through the Australian economy and society. He says in the Sydney Morning Herald that:

This recession is different. The recession on Main Street has been precipitated by a global financial crisis emanating from Wall Street. And the crisis has not yet been resolved. It retains the potential to wreak a lot more damage to the real economy, mainly through the denial of credit to perfectly sound businesses, big and small.That's why the actions of governments this time have fallen into two distinct categories: measures aimed at repairing the financial side of the economy and more conventional measures aimed at stimulating demand on the real side.

It is premature to conclude that the global financial crisis is now ‘over’, or even that the end is in sight, in that the upturn is inevitable. It is more realistic to say that the crisis has moved into a new phase.

Gittens rightly says that the "RuddBank" is a measure aimed at shoring up the financial side of the economy and keeping credit flowing (not at "supporting jobs" by budgetary stimulus as the spin has it). It is a contingency measure put in place in case it's ever needed---- to provide reassurance to the industry with the likely flight of the foreign banks out of Australia. This is all about keeping to lubricate the flow of credit in the economy.

The next--forthcoming--- government stimulus to support economic growth and jobs is a different kind of package. Hopefully the emphasis will be on public spending as this promotes employment more powerfully than tax cuts; secondly, that the investment does so by avoiding embracing protectionism; thirdly the public investment facilitates Australia's shift to a low carbon economy.

Generally speaking, the Australian focus is on the US recession and the economic wreckage ----the collapse of the housing and stock-market bubbles that wiped out $6 trillion and counting of housing wealth and $8 trillion of stock-market wealth.

The House of Representatives has just passed Obama's big $800bn-plus stimulus package to address the deepening recession without Republican support. Apparently, the Democratic majority in the Senate, which now takes up the legislation, is too small to assure passage without Republican votes.Meanwhile Wall Street is in its frantic search for the next new thing -- a bubble to replace the ones that burst.

There is little focus on the effects of the crash in the exports of the economies of south East Asia---Japan, Taiwan, South Korea, Hong Kong and Singapore--- for Australia. These--Japan and South Korea--- are Australia's first and third largest export markets.

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January 22, 2009

hard times

So the global slow down continues. The news from China is all about declining growth, rising unemployment, factory closures, and falling exports. The domestic banks are not lending. The foreign banks are pulling out of Australia. More bailouts of banks are announced, in spite of the them receiving billions of dollars of capital injections from the government. The heartfelt assurances from politicians in the US, UK and Australia that they've "fixed things" ring hollow.

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The banks are sources of turmoil and painful contraction in economic activity as the historic consolidation of the banking system continues a pace. Schumpeter's concept of "creative destruction" in which market economy will incessantly revitalise itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones" needs to be tossed out.

This implies that governments need do nothing since the pattern of progress and obsolescence is the normal workings of the business cycles in a market economy. Isn't this account the triumph of ideology over science?

Isn't it time to stop viewing economic reality exclusively through the categories of neoclassical economics? For instance its a priori conception of markets and economies as determinate systems that by the action of individual agents alone tend toward an efficient and market-clearing equilibrium.

A vicious feedback loop now exists between falling asset prices and credit creation. As asset prices fall, banks are forced to hoard more and more cash to offset the potential write-down of more and more bad debts, secured against those falling assets. The intention of all the bail-outs globally has always been to allow the banks and the economy to take advantage of the government's credit quality, in return for a fee or shares, so that lending could be reignited.Yet in the absence of buoyant demand and recession credit is mere bad debt. Banks are "acting rationally by retaining their capital and curtailing lending".

As the American former Labour Secretary, Robert Reich, said it is "socialism for rich bankers and capitalism for everyone else". The banks want their losses paid for. Many lost so much money on toxic subprime mortgage-related derivatives that they have been essentially insolvent for more than a year.

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January 12, 2009

They've gone

Well nearly. Howard has long gone. After the 20th January 2009, George W. Bush’s disastrous reign will be over. Everyone is waiting for Obama's inauguration. Washington is getting ready to party. It's a new era and all that. So these conservatives celebrate themselves for using words --torture--that means just what they choose it to mean, neither more nor less.

MoirBush+Howard.jpg

All eyes are on Barack Obama’s efforts to deliver a fast fiscal stimulus (an US $800bn two-year package, split roughly 60:40 in favour of spending increases not tax cuts), which is designed to kick start the US economy. This is going to take a lot of time and energy to get through Congress.

The recession in the US appears to be accelerating and the implications for unemployment look dire.That is the fallout from the current collapse of the Thatcher-Reagan model of self-regulating market capitalism with finance in the driver’s seat. The US has an external primary deficit (the external current account deficit plus US net foreign investment income) was running at around five or six percent of GDP. The US was also a net external debtor. Its net external investment position is somewhere between minus 20 percent and minus 30 percent of annual GDP.

Is Obama is faced with the decline of the US economy and its international economic hegemony --similar to that of Britain's decline of its international influence in the 1950s? William Buiter at the Financial Times observes:

The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally. Even the most hard-nosed, Guantanamo-bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed. Key wholesale markets are frozen; the internationally active part of its financial system has either been nationalised or underwritten and guaranteed by the Federal government in other ways. Most market-mediated financial intermediation has ground to a halt, and the Fed is desperately trying to replace private markets and financial institutions to intermediate between households and non-financial operations. The problem is not confined to commercial banks, investment banks and universal banks. It extends to insurance companies (AIG), Quangos (a British term meaning Quasi-Autonomous Government Organisations) like Fannie Mae and Freddie Mac, amorphous entities like GEC and GMac and many others.The legal framework for the regulation of financial markets and institutions is a complete shambles. Even given the dismal state of the legal framework, the actual performance of key regulators like the Fed and the SEC has been appalling, with astonishing examples of incompetence and regulatory capture.

Buiter says that in between two and five years from now there will be be a global dumping of US dollar assets, including US government assets. If old habits die hard, and the US dollar and US Treasury bills and bonds are still viewed as a safe haven by many, this will not always be so.

So who is going to rescue the US? As Martin Wolfe oberves in the Financial Times the US rescue efforts need to be big enough not only to raise demand for US output but also to raise demand for the surplus output of much of the rest of the world.

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January 6, 2009

Garrett gives Gunns the green light for pulp mill

How do we interpret Garrett's statement on Gunns multibillion-dollar pulp mill at Bell Bay in the Tamar Valley in northern Tasmania? He has withheld final approval for the project's environmental impact management plan for a further 26 months.

My interpretation is that Garrett gave the logging giant Gunns the go-ahead for the project, and then gave the appearance of toughening the Government’s stance on effluent outfall in Bass Strait ( 64 million litres of effluent) by adopting a precautionary approach required by the Environment Protection and Biodiversity Conservation Act. That toughening, in effect, was giving Gunns Ltd another extension.

The conditions Garrett placed on the go-ahead require the company to provide detailed environmental data on the effect of effluent runoff into Bass Strait before the mill will be allowed to begin processing woodchips and to impose fines of up to $1.1 million if Gunns exceeds environmental limits. Garrett has given two years to Gunns to provide effluent data through hydro dynamic modelling.

So Gunns can go ahead and build the mill and muddle along on the modelling. All the modules except for the effluent disposal are approved. Isn't that a green light? isn't that a blow to the tourism, wine-making and fishing industry groups in the Tamar Valley? Why invest given the threat posed by the mill?

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January 2, 2009

the economic road ahead

The economic consensus is that 2009 will be worse than 2008 for Australia but that things are basically fine. They could have been worse. There is no place for pessimism. As an editorial in the AFR said:

Yes, the road ahead looks difficult. But this is no time to abandon our faith in the capacity for enterprises and markets free of oppressive state intervention to reinvent ourselves and bounce back. Human ingenuity will prevail, confidence will eventually return and the wheels of commerce will spin again. There is too much evidence that the world, despite periodic setbacks, continues to progress

Interesting isn't it. The defence of free market capitalism now depends on faith not on reason. Reason cannot do the job any more given the global financial crisis and its aftershocks on the economy. So faith is called in to plug the gaps whilst the progress narrative provides the justification for the faith.

Farrcapitalsism.jpg Farr, capitalism

Were the reasoning any more contorted it would be a circus act by aged mime artists. What needs to be pushed into the background is the idea of equilibrium: that market activities would balance themselves out and generate positive-sum outcomes all round.

So what of 2009, the immediate future? The AFR says:

Climate change is the challenge of the 21st century, daunting but hardly insurmountable. We have the means and must will the end. But overcoming the financial crisis is the immediate challenge.

It's all faith and will isn't it. We will survive etc. What ever happened to hard edged neo-liberal economics? What does the end mean in "willing the end"?

There is no hint of contradiction in this account: ---the bailing out of companies and banks to save capitalism by the state is statism, which undermines the bottoms-up innovation by entrepreneurs that is suggested by the phrase "human ingenuity".

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December 24, 2008

after the stimulus?

So we end the year on an upbeat economic note: big stimulus packages to kick start the economy with the rhetoric saying that things will get better soon. As Paul Krugman puts it in relation to the US: once a burst of deficit spending turns the economy around we can quickly go back to business as usual.

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Steve Bell

However, Krugamn argues that things can’t just go back to the way they were before the current crisis.

The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.

Krugman asks: So what will support the economy if cautious consumers and humbled homebuilders aren’t up to the job? The answer in Australia is simple. The miners. Another resource boom for the Lucky Country. Boom boom, bust bust, that is the way capitalism goes.

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December 22, 2008

corporate welfare

Foe once I agree with Paul Sheehan. He says in the Sydney Morning Herald that the Rudd Government's multibillion-dollar plan to reduce Australia's greenhouse gas emissions

is a green light to every big polluter in the country to keep doing what they have always done, which is short-change the future by polluting the present without adequate compensation. This policy does nothing to create green jobs....After all the horse-trading with big business and the unions by Labor's bagmen in cabinet, the primary burden of paying for this scheme will rest not with big polluters but with middle-income households and small businesses. Not only do big polluters get excess hand-outs, they are given little incentive to make radical change.....The policy sends the wrong market signals to polluters. It sends almost no market signals to consumers. The scheme will operate with no independent governance. It is entirely political.

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And the Liberals have gone missing on the issue. Meanwhile Rudd, Tanner and Swan are trimming waste so the Government could deliver to priority areas, including pensioners and battlers struggling in the face of the global economic crisis. Despite the global financial crisis had poked a "$40 billion hole" in expected tax receipts over the next four years, the Rudd Government has been spending like there is no tomorrow. Why not trim the waste of corporate welfare?

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December 13, 2008

taking the wrong turn

The impression is forming that money is being thrown around by the Rudd government in the name of stimulating the economy, coupled with precise numbers of jobs resulting from each stimulus package. it would seem that the state, once again, is a problem, that the process of planning is deeply flawed, and that we are dealing with the fictions of abstract econometric models not reality.

We need to remember though that the market is no longer seen as the solution to every problem and that the state has to step in to save capitalism. Everything has changed with the global financial crisis and the recognition of the dangers of financial deregulation. So we can infer that economics, somewhere, somehow took the wrong turn.

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We do have a self-devouring capitalism with the global financial crisis. Economists, until recently, still routinely invoked the imagery of the invisible hand, the notion that economic theory has demonstrated that market outcomes are optimal and that private greed reliably creates social good. These assumptions have been shown to be flawed.

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December 10, 2008

green lite Ergas

Henry Ergas's response to the economists open letter to Kevin Rudd commends their initiative in engaging a debate on these issues and says that it takes courage to make proposals as bold as those they recommend, and that courage helps illuminate the choices that lie ahead. Ergas is not persuaded however, as he says that the three key recommendations are unconvincing and, if implemented, are likely to make things worse rather than better.

On the issue that I was concerned with, namely substantial incentives be provided to boost spending on energy efficiency, Ergas says:

The letter claims that firms and households underinvest in energy efficiency, but that claim is controversial. Firms have every incentive to minimise unnecessary costs and there is little evidence that they systematically fail to do so. As for households, some are constrained in their access to credit and cannot finance investments that would otherwise seem worthwhile at market interest rates. However, it is reasonable to believe that what investment funds those households do have are allocated efficiently among competing uses, including energy efficiency. There is, in other words, no market failure reducing household investment in these types of assets relative to other equally durable capital goods.

True, there is no market failure but there is little retro fitting of the existing stock of buildings and little regulation to ensure high standards of energy efficiency in new offices and houses. So energy efficiency is not really happening in a systematic way, even though it is a good way to address global warming. There is a need to introduce energy efficiency standards (green ratings) to inform consumers of the extent of the retro-fit and upgrade of the property they are planning to buy.

Ergas continues:

Given that [lack of market failure] and especially with an emissions trading scheme providing price signals for emissions abatement, it is not clear why public subsidies for household capital spending should be compulsorily allocated to outlays on smart meters, insulation and solar hot-water systems rather than to renovating kitchens, extending patios or painting roofs. After all, once price signals are properly set, subsidising households to reduce their energy use is no more sensible than subsidising them to reduce their consumption of toilet paper, cat food or tinned beans. To suggest otherwise is to attribute a magical status to energy, as if it were uniquely worthy of being economised on. The costs of throwing money at energy efficiency are likely to be compounded by the forced pace of the subsidised spending.

Attributing magical status to energy? The way that energy is currently produced from coal fired power stations is the problem, because it causes greenhouse gas emissions and global warming. This pollution is classic market failure and is the reason for government intervention---- even if the carbon trading scheme has a low reduction target of 10% when it starts in 2010.

Secondly, the public subsidies to reduce energy use is not the equivalent of economising on cat food because we are dealing with market failure on energy usage. Thirdly the point of solar panels ls on roof tops with a feed-in tariff is not to increase energy efficiency; it is to make the shift to alternative forms of energy production that do not cause greenhouse gas emissions.

Making that shift is difficult in Australia because of the market power of the coal fired power stations and energy intensive uses that is being used to prevent the shift to lower carbon economy. They are using their power to look after their sectional interests at the expense of the public good.

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December 3, 2008

chilly economic winds

Another interest rate cut by the Reserve Bank. Another sign that the economic storm clouds are brewing offshore as the optimists pen their op-eds on growth and bargains galore on the local share market. The Liberal opposition has yet to adopt a new talking point: fairness is a luxury for countries in decline.

Xmas2008.jpg Alan Moir

Everybody is slashing interest rates these days. Chinese exports are declining as is it's manufacturing output. So much for the optimist's myth that China can decouple itself from the US economy, thanks to a strengthened domestic economy. Asia's export-driven economies are being battered by the chilly winds of faltering demand in the US and Europe. (Don't you just love the weather metaphors for economics?)

The global economy is already headed toward a recession. A hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America and in Australia, since Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters.

The World Bank’s latest China Quarterly Update says that China really is a manufacturing and investment driven economy and that China ultimately has to produce for Chinese demand not world demand. However, wages have fallen from around 50% of China’s GDP at the start of the decade to around 40% of GDP and so consumption is a low share of GDP.

As Nouriel Roubini pointed out in Forbes several months ago:

For the last few years, the global economy has been running on two engines: the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort, spending more than its income and running large current account deficits, while China has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.

If the US engine of growth has effectively shut down, then the Chinese engine of growth has stalled. An aggressive easing of monetary and credit policy will not prevent a hard landing since monetary and credit-policy easing may be ineffective given the overinvestment of the last few years has led to a glut of capital goods.

Could fiscal policy rescue the day? The Chinese government has massive infrastructure projects for the next five to 10 years; but front-loading most of that multi-year spending over the next 12 to 18 months will be close to impossible.


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Ergas contra Keynes

Paul Krugman in the New York Review of Books argues that what the world needs right now is a rescue operation. Circumstances right now are anything but normal. The global credit system is in a state of paralysis, and a global slump is building momentum. To deal with the clear and present danger policymakers around the world need to do two things: get credit flowing again and prop up spending.The latter is good old Keynesian fiscal stimulus.

In an op-ed in The Australian Henry Ergas, the chairman of Concept Economics, argues that trying to spend your way out of recessions is a mug's game:

When the economy slows, government outlays increase due to higher welfare payments while tax revenues diminish. This fiscal weakening cushions the extent and effect of the slow-down. Governments can try to augment this "automatic stabiliser" by a further, discretionary, weakening in their fiscal position, through increased outlays, lower taxes, or both.It is debatable whether such discretionary fiscal policy is desirable. As the eminent macroeconomist John Taylor recently noted, the evidence is mixed as to whether discretionary fiscal stimulus works, and if so, when, how and by how much. But even if it is desirable, the '80s showed that approaches centred on increased outlays can be both ineffectual and inefficient.

Ergas is in favour of allowing the automatic stabilizers of the market to work but is opposed to Krugman's good old Keynesian fiscal stimulus (public spending) to help prevent a weakening economy from sliding into an actual recession.

Ergas' argument that Keyensiaan economic policy approaches that are centred on increased outlays are both ineffectual and inefficient is this:

They are ineffectual because the lags between government spending decisions and ultimate economic impacts are difficult to predict and, at least for some kinds of expenditures, likely to be very long .... Increased social spending has shorter lags, but often reduces incentives to work and save, creating problems for the future ... Increased outlays are additionally likely to be inefficient because the setting of spending priorities is so vulnerable to rent-seeking. As spending increases are targeted to favoured constituencies, a steep deterioration typically occurs in the quality of public expenditure, making the community worse off.

Ergas qualifies his general argument by saying that if a discretionary fiscal stimulus is required (presumably he accepts that it is), then it is consequently far better delivered through general cuts in taxes (ie., moving the tax system towards flatter rates of tax, eliminating distortions at the bottom and the top of the taxable income distribution) than through targeted increases in outlays.

Hasn't the Rudd Government already put tax cuts into place to return the surplus? Why would any more money from extra tax cuts actually be spent in the current circumstances? Secondly, infrastructure spending would mean that something of value (e.g., decent public transport) would be created.

Surely Australia needs now is good investment in public infrastructure in health, education, renewable energy, public transport, water. The lag argument can be countered by saying that it very hard to see any quick economic recovery, unless some unexpected new bubble arises (broadband anyone?) to replace the housing bubble. Secondly, there is no reason why this investment cannot be based on full transparency of cost-benefit evaluations. isn't the problem the criteria for infrastructure project selection.

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November 29, 2008

Canberra watch

There is such a fetish about budget deficits in Canberra. It is seen as the hall mark of economic mismanagement and irresponsibility. The politics is that Labor equals budget deficit because they cannot run the economy. And as this politics goes, a deficit is not seen as a way to prevent he economy from sliding into recession.

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It is hard to build a case against the way the Rudd government has responded to the economic downturn on budget deficits are bad. What is the next step? That the Rudd Government is going a spending spree? That doesn't cut much ice when the general economic consensus is that there is a need to boost demand through government spending on infrastructure and aggregate demand.

What sits underneath this deficit is bad view is the neo-classical view that economic systems tend naturally towards equilbrium when markets cleared and all resources are fully allocated; and that regulation is distrusted and needs to be minimised.

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November 20, 2008

Reserve Bank: financial stability and high growth

In his speech to the CEDA annual dinner Glenn Stevens, the governor of the Reserve Bank, is pretty optimistic. Even though we face difficult circumstances there is no need to worry really. The economic authorities and regulators have things are in hand by the economic authorities and regulators. All we need to really worry about is worrying about how bad things are. Confidence is what is needed, not gloomy talk.

After reading the speech I had the impression that we live in parallel universes. What has happened in the financial world has been catastrophic and its effects on the Australian economy are likely to cause is a recession and a rise in unemployment. Yet Stevens, whilst acknowledging systemic collapse, continues to think in terms of normal business cycles and the markets automatic stabilisers. Referring to the financial crisis Stevens says that:

a good deal has been done already towards addressing the financial problems themselves. These measures cannot avert a significant slowing in the global economy – it is fairly clear that a recession in the major country group, the G7, is under way. That, in turn, means that credit losses will be incurred by the lenders in those countries as typically happens in a business cycle downturn. But the measures averted, in my judgment, potential systemic collapses that would have had massive repercussions throughout the world. That leaves an international business cycle event to be addressed. So what are the ingredients for doing that?

The worst is over, in other words. Now it's just a matter of a business cycle to sort out. And its easily done. Stevens says that the fall in commodity prices has increased the scope for many central banks to reduce interest rates and for fiscal expansion that passes the ‘good policy’ test. Stevens does not mention an active labour policy (training,wage subsidies, direct job creation), nor say what the good policy test is, other than "worthwhile public investment."

"Worthwhile" is not unpacked. Presumably, it means nation-building infrastructure projects as opposed to tax cuts for the rich, bailing out NSW, or concreting river beds in the Murray-Darling Basin. Does "worthwhile" exclude the recent grants to local government? If not, then what sort of nation-building infrastructure project? Does it include an active labour market policy for unemployed workers?

Stevens adds that it is not realistic to assume that regulators and central bankers will always have the wisdom and prescience, or even the scope, to deploy their few instruments such as to ensure that an ideal combination of financial stability and high growth can be achieved consistently. Note the "ideal combination of financial stability and high growth". There is no mention of policy reform to shift the Australian economy to a low carbon one. Shouldn't a principal policy intervention be to place a price on carbon to support changes on both the consumption and production sides and to encourage necessary investment in R&D and the takeup by business?

On Stevens account, as it stands, we can have high growth coupled with environmental destruction on a massive scale. He qualifies this by saying that policy-makers and regulators both here and abroad will need to stand ready to act promptly to provide any necessary support for the financial system and sustainable economic activity, without saying what sustainable economic growth is. It is not obvious that "sustainable" would include seeking a lower level of emissions or active labour market measures.

Stevens goes on to celebrate the market in terms of the recent shift to greater regulation:

the genius of the market economic system is that so much of the risk that is prudently taken, much of the time, turns out to reward the risk-taker, and indeed all of us, with the profitable deployment of capital, jobs, more choice, higher productivity and better living standards
.
But he does not mention that greenhouse gas emissions are a classic example of an external cost that is a result of market failure. Both the producers and the consumers ignore any costs caused by the greenhouse gas emissions as they add to the stock of greenhouse gases.

Stevens concludes his speech thus:

given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness. Yes, the situation is serious. But, as I suspect CEDA members know well, the long-run prospects for the Australian economy have not deteriorated to the extent that might be suggested by the extent of some of the gloomy talk that is around. If businesses remain focused on the long-term opportunities; if markets and commentators do the same; if banks remain willing to lend on reasonable terms for good proposals; if governments are able to so order their affairs as to continue supporting worthwhile – and I emphasise worthwhile – public investment (even if that involves some prudent borrowing); then Australia will come through the present period.

The biggest mistake is not tackling climate change in a resolute way. It is talking ourselves into unnecessary economic weakness! My opinion of the Reserve Bank sinks lower after reading that "soothing upbeat" speech.

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November 19, 2008

Reserve Bank: they didn't see it coming

The doubts about the Reserve Bank continue to grow as more information comes to light. Only this month is it recognizing the decline in household wealth from falling house prices and the decline in retail sales. In October it still saw inflation as the top problem, even as Lehman Bros collapsed, commodity prices collapsed, the share market tanked, and the Australian dollar fell. They reckoned that, because Australia was uniquely placed by the resources boom, it could avoid a substantial downturn in economic growth.

Rick Battellino, the deputy governor, was still against interest rate cuts because of the inflationary pressures and he argued that:

household finances and the economy more generally remain in good shape. The main problem that had built up – inflation – is manageable and is being dealt with. The next couple of years will be noticeably more subdued than the past five. We should not be surprised by this as the income and wealth generated over the past five years were simply extraordinary. By definition, the economy must grow at a below-average pace for some of the time. These periods provide the economy with the breathing space to sustain the expansion. There is no reason to assume that the next year or two will not do the same.

That would indicate that it had little understanding of the depth of the financial crisis and the way that its impact of the global economy would effect Australia from the slow down in growth in China and Japan. Or that optimism ruled, as it did amongst most economic commentators.

It's a different story now---the illusion has cracked. It's a turn around in a couple of weeks. The headlines are now about GM Holden halving car production at its Elizabeth plant in Adelaide and a global economic recession. Australia stands on the cusp of a recession, and it is unlikely that interest rate cuts, the fiscal stimulus, and the lower dollar will stop the slide in the short term. Unlike the US there is still trust and confidence in the ability of the policy makers to do the right thing.

Deficit spending will be needed since things are getting worse rather than better in the housing market----as Nouriel Roubini observes:

And of course there is this vicious circle that’s been discussed between the financial shock leading among other reasons to the economic contraction, and now the economic contraction occurring, then the financial losses, the credit losses, delinquencies for households and corporates rising making the financial strains even more severe.

It's called a downward spiral and that means that the Reserve Bank of Australia's ability to pump up the economy by cutting interest rates — has lost traction.

I wonder if the Reserve Bank has any estimate of the bottom of the fall in housing prices? How many people are underwater? What sort of economic stimulus will stop the downward spiral? What would be its size? Does it recognize that 2008 is different from 1992 in that in 1992 Australian consumers were not highly leveraged – it was the companies that were in trouble. This time Australian consumers are among the most highly leveraged in the world, and so Australians are over-extended on two fronts.

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November 14, 2008

Costa on economics

We can see one of the reasons why NSW is in the doldrums. Michael Costa, the former Treasurer, doesn't like Keynes. He says in The Australian that traditional Keynesian macro-economics is the theoretical refuge of economists who continue to believe economic magic can occur by the government waving its fiscal wand. The reality is that the market is best left to do its adjustment thing. Costa says that we need to put Keynes aside for a while and pick up Joseph Schumpeter and read about creative destruction.

Costa mentions Paul Krugman, as an example, and questions Krugman's argument that monetary policy by itself won't solve the financial and economic crisis and that a fiscal stimulus for the US economy is also needed.

What is wrong with this Keynesian argument? According to Costa:

How Krugman can equate this situation with the circumstances of the '30s described by John Maynard Keynes in his General Theory is difficult to understand.Even if you accept Keynes's analysis that lack of effective demand was responsible for the mass unemployment of the '30s, you would be hard pressed to credibly argue, coming off the recent speculative asset bubble, that lack of effective demand has caused the present problems....what is absolutely clear is that attempting to maintain aggregate demand at the levels seen during the asset bubble is a recipe for further financial dislocation.

Krugman is not saying that we need to return to the levels of demand of the asset bubble. What Krugman says is that:
what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

As Martin Wolfe asks on Lateline: what are the engines of demand to pull the world out of this? He adds that historically the final engine of demand for the last 10-15 years has been the US consumer; and to a lesser extent the consumer in the United Kingdom, Australia, Spain etc. However, the big spending consumer is no more. So, where is the demand going to come from that will really pull the world out of this tailspin?

Costa opposes this form of fiscal intervention in favour of letting the market do its automatic adjustment thing coupled with a bit of welfare for the deserving poor:

As the recession bites, households' ability to consume at the levels of the recent past will certainly be curtailed. But remember, this household expenditure was based on excessive leverage and clearly unsustainable. A period of economic contraction and financial deleveraging is the natural, albeit unpleasant, antidote to the excesses of the period. Certainly the Government should provide support to those caught up in the inevitable adjustment process. In many ways the automatic stabilisers built into the system already provide that support through the social security system.

On Costa's account the present financial crisis is caused by the failure of government institutions, principally central banks, that were reluctant to burst the asset price bubble and are unwilling to accept the inevitable readjustment by the market. The inference is that government intervention should be minimal, because the market will inevitably produce the most efficient outcomes. So we should work to restore faith in markets.

His free market ideology Tiss that free markets are always best. This belief holds that that markets ultimately work themselves out, and therefore only need small nudges in the right direction by governments. If free markets are always the solution, then there is little need to flex the muscles of government when markets fail.

That still leaves us with the problem of where the demand going to come from that will really pull the world out of the recession tailspin? Costa's argument is that there are plenty of investment opportunities in the global economy that would return more than the risk-adjusted cost of capital. Markets are sufficient to generate investment, and people aren't hoarding scarce capital because of lack of profitable opportunities; rather, they are confused.

The immediate objection is that this overlooks the fact that without effective demand there is no point in firms investing in capital equipment. Costa's response, however, would be that investment drives growth not consumption---investment creates jobs that create the demand they keep the rest of the economy going.

However, if consumption is falling, and private investment is unable to compensate, then the federal and state governments should--have to---fill the gap. Secondly, Costa's defence of the free market is strange given that the market has failed, free market financial capitalism is broken, and the core of the lending system has been nationalized. This happened because something had gone terribly wrong, the financial world has been mismanaged, and people are now living in a world of hurt.

Where Costa is right is that we are entering a period of structural adjustment, and it will be painful for many.

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November 12, 2008

NSW: a tough budget for tough times?

The NSW mini-budget is an indication of what is to come from state governments in response to the global and economic crisis. It is to raise taxes, sell off assets, reduce infrastructure spending, cut public service spending. The neo-liberal Treasury i rules to protect the state's credit rating with rating agency Standard & Poor. The political will to reform is kept in the can in favour of measures to stunt the growth of the regional economy on the edge of recession.

Keynes, it would seem, is still out of favour. As Ross Gittens in The Age says

And if it makes the downturn worse for the people of NSW, that's just something they will have to cop. At a time when Federal Labor is increasing its spending and rapidly turning a budget surplus into a deficit to bolster the economy, it may strike you as strange that its state Labor counterpart is doing the opposite: cutting government spending and increasing taxes.You're right, it is strange. Perverse, in fact.

Though the Roozendal mini budget has the appearance of reform ---the start of an effective system of congestion taxing in Sydney with the harbour bridge toll changes and increased parking levies in major business areas---it is only an appearance. There is no investment in public transport: both the North-West Metro and the South-West Rail Link are axed.

Labor is yet to deliver enough baseload electricity to keep the lights on, hospital spending is bursting its banks, Sydney is gridlocked, and no moves are made towards shifting to a more sustainable ---carbon less--economy. Treasury rules. Close things down.

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November 8, 2008

SA "trim its sails"

If the financial and banking crisis train has left the station, then so has the global recession train, and it looks as if we are in for a long and severe and protracted two year global recession. Already the economic crisis is beginning to play havoc on state government budgets. NSW is now usually mentioned as on the way to becoming a basket.

The impact is also significant in South Australia, which is facing a $400 million budget blackhole that is expected to wipe out projected surpluses for some years into the future. Public sector job losses, spending cuts and deferment or cancellation of major capital works are now on the table, since SA has accepted that its cherished AAA credit rating will be under threat if it does not defer spending on capital works.

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Kevin Foley, the Treasurer, has quarantined from the chopping block plans for a series of superschools, the $1.7billion new central hospital and $1.4 billion desalination plant. However, the Rann Government is hoping that the Rudd Government will rescue the centrepiece of the last state budget -- a $2 billion electrification of Adelaide's rail network and extension of its tram lines.

It is a similar story in other states. All are hoping that the Rudd Government will finance their infrastructure projects, since it is the federal Government wants to fast-track new infrastructure projects to pump-prime the slowing economy.The global financial crisis had reduced federal budget surpluses by $60billion over the next four years continued to cause deep concern in state governments, which had been expecting big contributions from the commonwealth for infrastructure and new COAG funding deals on health and education.

The International Monetary Fund was expecting the global downturn would be "deeper and more prolonged" than previously anticipated. It projected that the developed world as a whole will move into recession in 2009. Rebuilding balance sheets and allowing house prices to fall back to sustainable levels will make for a grim time. Unemployment will rise. The IMF argued that politicians across the world should take measures to get people spending again.

Nouriel Roubini says:

For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.....For the last few months the first engine of global growth has effectively shut down ....More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling.

He adds that with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters.

That prognosis applies equally to Australia.


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November 6, 2008

the start of the downturn

Treasury's mid-year outlook takes the wind out of the sails of the panglossian spinners who have underestimated the financial and economic crisis until the last possible moment.

Treasury estimates that growth in output will slow to 2% this year and 2.25% next year; predicts that jobs will keep growing, slowly, while unemployment is kept to 5.75%; that business investment will rise even higher, then level off, and exports will increase in the depressed global market due to the lower Australian dollar.

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The mid-year outlook marks official recognition of the protracted economic downturn the financial market meltdown has caused. Some commentators say that Treasury believes the worst global financial crisis since the Great Depression will cause no more of a ripple across the Australian economy than we saw with the introduction of the GST in 2000-01. A ripple with 5.75% unemployment and $46 billion wiped off the budget surplus over the next four years? That sounds pretty grim to me.

The mid-year outlook admits that Treasury simply doesn't know what lies ahead. "Significant uncertainty remains over the extent and duration of the economic downturn stemming from the crisis, and the effect on Australia" it says. So things could be worse than forecast. The growth projections could be on the sunny side. If they are lower then unemployment will go higher.

The known unknown is that the economic downturn is not going to be quickly reversed. As Malcolm Maiden says:

The national balance sheet will be hit successively over several years by lower capital gains receipts that flow directly from the market losses, and then by lower corporate tax revenue as the crisis undermines consumer demand, pricing power, margins and profits.

We have a share market slump, falling house prices, scared households paying off their debts, businesses shelving their expansion plans and the collapse in commodity export prices.


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November 4, 2008

different moods

Melbourne Cup day. Lots of gambling and partying and excess. House prices continue their quarterly fall in Sydney, Perth, Hobart, Canberra and Brisbane, retail sales continue to contract, whilst newspaper job ads have slumped. Help is on the way as the Reserve Bank announces further reductions in interest rates. The political rhetoric is now about sheltering households from the global economic storm and preventing a recession.

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In contrast to the spectacle of the Melbourne Cup the new public mood is one of belt tightening given the looming job market recession.Continual drops in the value of our property is a signal to hoard, not spend. And the commodity boom has just ended in the sunbelt.

Update
I cannot see how reducing the interest rates by 0.75%, which is a form of mortgage relief, is going to counter the decline in house prices, restore manufacturing output, prevent unemployment and restore state government revenues. Even when monetary policy is working in tandem with fiscal policy --- the Rudd Government's $10.4 billion stimulus package. Maybe the economic mandarins are relying on resilience and entrepreneurial flair to counter the economic downturn and keep economic growth going.

The economic mandarins have been slow on the appreciating the significance of the economic downturn, as they had pinned their hopes on the China effect to insulate Australia from the effects of a recession in the US and the global economic downturn on the Australian economy. Maybe they were too busy listening to the spin from the miners (eg., Rio Tinto + BHP) about the resource boom lasting for ever, with global demand for iron ore increasing forever?

The core problem is that the Australian housing boom has seen the household total debt double relative to their disposable income from 80% to almost 160%. Excessive household borrowing makes us vulnerable. to the global recession.The Reserve Bank is optimistic, as it reckons that household finances are in good shape in terms of income, whilst household assets are higher than liabilities. What if the value of the assets (shares and investment properties) continues to fall?

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October 29, 2008

avoiding recession?

Will Australia avoid recession? It has the characteristic of a developed economy and the characteristics of a commodity economy dependent on overseas exports. In The Age Ross Gittens judges that what will happen this time is:

a recession that lasts a year or two, with the unemployment rate rising to double figures. What could produce such a result would be the severe recession in the other developed countries, combined with a "negative wealth effect" as many Australian households cut their consumer spending and increase their saving as they attempt to pay down their mortgage debt or rebuild the value of their retirement savings.

This is the scenario that the Reserve Bank, Treasury and Government will endeavour to avoid. They seem to have allowed the environmental crisis of global warming to retreat to the background of the policy agenda even though it is the more significant crisis.

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Jeff Angel's observation in the Sydney Morning Herald is that the two crises have become intertwined.

Big companies are pressing to delay action, giving them the maximum amount of time to continue business as usual - that is, to continue polluting - and they want to be paid to do it, with free permits or big cash handouts. They are using the financial crisis as another reason to delay emissions trading, or they lobby for soft targets and maximum handouts.
This is despite leaks indicating that the forthcoming Treasury modeling for carbon trading that economy-wide cost of carbon trading would be modest even though some emissions-intensive industries would be hit.

The two crises are also intertwined in that Australian industry is now maneuvering to grab most of the infrastructure fund to upgrade the ports that service the export hubs for coal in NSW and Queensland and minerals in the Pilbara in WA, rather than making Australia's economy more sustainable. The new line from the Minerals Council is that Australia desperately needs export dollars to insulate it from the impact of the global financial crisis.That kind of subsidy is the response by miners faced with falling commodity prices and shrinking Chinese demand.

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October 25, 2008

global economic governance

Jeffrey Sachs argues that the international financial system is broken; an integrated set of reforms will be needed to achieve sustained economic growth and shared prosperity; and that the G8 leaders must go well beyond the issues of financial regulation. A true Bretton Woods II summit would set a financial framework to achieve urgent global goals in macroeconomic stability, economic development, environmental sustainability and trade for development. Who is going to push for this?

Keynes.jpg Martin Rowson

There will be no lasting settlement that is centred the global economy on the United States system as was Bretton Woods as we are witnessing the end of American economic dominance.

There needs to be something more modest. On Lateline Joseph Stiglitz said that there was a need for a financial product safety commission, a financial system stability commission and getting the economy going in the short run in a way that's consistent with long run needs of the US. The former, a financial product safety commission, would:

look at the individual products, like these credit default swaps, and make a judgment; are they appropriate for these, as I say, commercial banks that are taking care of other people's money.They might be appropriate for particular uses; for instance, if you are exposed to a foreign exchange risk you can insure against that foreign exchange risk, but not to gamble. So, one would look at the specific products and make a decision about what uses are they appropriate for, are they transparent, can we see what will happen?

The latter, a financial system stability commission, would:
look at the system as a whole, the financial market stability for the whole system, because what we've discovered is that AIG, an insurance company, was insuring Goldman Sachs, an investment bank, that the interrelations of the various institutions are so complex that each of them has become too big to fail. And if they're too big to fail, that means, and they know it. That means they have an incentive to take too big risks; and we've seen that.

Stigletiz argues for a broad role for governments in getting economies out of the crisis, particularly in America. His big picture solutions include calls for big public investments in infrastructure, education, and technology, but also energy.

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October 24, 2008

Costa, urban planning

The op-eds in The Australian by Michael Costa, the former Treasurer of NSW, give us an insight into the mentality of the Right of the NSW Labor Party - (currently headed by Obeid, Tripodi, Rozendaal) that now run the clapped out administration called the NSW Government.

Costa's latest on public infrastructure adopts the stance, and frame of, neo-liberal economics to have a go at those who advocate a shift to a more sustainable economy in our public culture. Costa says:

The growth of the "sustainability industry" is closely correlated with the emergence of green politics, particularly the anthropomorphic global warming religion of which Carr is attempting to become Australia's high priest...There is a tendency among the more extreme public transport ideologues to adopt a "Field of Dreams" approach to public infrastructure projects: build it and they will come. It is also true that many of these people are urban planners. The availability of appropriate public transport in dense urban environments is a logistical necessity.

These urban planners aim to to shape the urban environment around their personal green worldview that is ideologically based.

spoonerIndustry.jpg Spooner

Costa rightly says that the real debate is about what type of public transport, where it should be provided and at what price. Who could disagree other than add that the investment ought to foster the shift to a more sustainable mode of urban life.

Then he says that;

most urban planners have an elitist disdain for market-based land use outcomes. They are particularly hostile to the lifestyle preferences of Rudd's "working families", witness their hostility to the McMansion.

Maybe the urban planners are critical of McMansion style suburbia because that urban mode of life is not sustainable in terms of energy and transport in the context of climate change?

That is not good enough for Costa. Such an approach to urban planning and public transport provision for him is ideologically based as the urban planners views on global warming influence their urban planning approach. He illustrates this with reference to Peter Newman, a former NSW Carr government-appointed sustainability commissioner, and present board member of Infrastructure Australia. It is the scepticism about climate change ("the science is not in") that underpins Costa's antagonism to sustainability, public transport, urban planning, and urban planning elites advocating so-called urban villages.

Costa, no doubt, would see this negative stance as continuing his campaign to challenge Labor shibboleths after another begun with removal of tariffs, the deregulation of the economy, ditching centralised wage fixing and the embrace international competitiveness. He has little time for environmental concerns, talks in terms of the environmental McCarthyism of the Greens and public transport ideologues, and made his last stand as Treasurer on energy deregulation.

Costa, apparently is not an ideologue, despite his neo-liberalism and his view that it is not only 'elitists' that are pushing for more public transport.

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October 22, 2008

the debt overhang

Barry Hughes argues the following in the Sydney Morning Herald:

Rudd Government's $10.4 billion package is seriously incomplete. It is a one-off splurge designed to fill in near-term domestic growth potholes over roughly the next six months until global recovery comes. But what if the global rebound runs late? What does the Prime Minister do for an encore? Presumably the answer is another package. Australia is in the fortunate position of having more budget flexibility than most.

Speculation on assets is a potential path to individual riches. But why should households splurge when they are in debt due to big mortgages and maxing the credit cards from participating in irrational exuberance and may be faced with unemployment? Secondly, all the signs are that the global slowdown will last quite some time--we are talking in terms of years not months.

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it is going to take sometime to reduce that debt. Apart from Steven Keen who is dismissed as an alarmist, few commentators in the media seem to be willing to talk about household debt---over-indebted households--at a time of rising unemployment.

We should talk about debt. Under flexible exchange rates the main tool for stabilising the economy is monetary policy not fiscal policy. As Hughes points out, though the monetary policy (fiddling with rates and the like) of the Reserve Bank will be in the form of rate cuts designed to induce more borrowing. However, people will be unwilling to borrow and go into debt.

As Keen says on his blog about the economic crisis in Australia:

the root cause of this crisis is excessive debt that drove house and share prices to unsustainable levels. Times appeared rosy as the house (and stockmarket) bubble continued, but this was only because borrowed money was adding to demand.No-one worried about this when it was easy to flog a house for a higher price. But unfortunately, this game had to come to an end, because debt servicing became prohibitive as house prices rapidly outstripped incomes. The bubble burst first in the USA, and the carnage it has wreaked there should warn us all that asset price bubbles are dangerous.

The newspaper headlines are going to be about repossessions of homes as people fall behind in their mortgages, not about buying new cars or plasma TVs.

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October 21, 2008

optimism surges

Optimism returns. O happy days. The governments (the G7, the EU and others) have rightly committed to do whatever is necessary to do the right thing for the financial markets. They have done the right thing and a total systemic financial meltdown has been avoided. The stock market has reached the bottom and now surges upwards; interbank markets and credit markets are mending; and the the stomach-churning market gyrations of the last six weeks are now economic history. To be haunted by the past is for sickly weaklings. The future beckons.

Australia can avoid the looming economic crisis. Three cheers for Keynes. There won't be another Great Depression, just a bit of belt tightening. Nothing really serious. The fundamentals are solid. China's growth is slowing.

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If the optimists are back in town and busy sending out their Panglossian press releases, then they have forgotten that this financial meltdown is the latest in a succession of financial crises that have struck periodically over the last 30 years; and that this crisis has its roots in the way the global economy has worked in the era of financial deregulation. So the crisis is systematic. That does no look good for the US.

Any developed country that receives a huge and sustained inflow of foreign lending from the surpluses of emerging economies (China, Saudi Arabia etc) runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. The consequence of being in this situation is that United States is heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system. Will China continue to do so? The power is shifting to the East.

The United States is economically vulnerable since spending on America's crumbling infrastructure, its inefficient health care system, and environmental programs will be limited by the Everest-sized public debt that now stands at more than $10 trillion. That debt is not going to go away. Are they going to use debt to pay for a Congress Democrat fiscal stimulus package that would direct government money to consumers to lift a sagging economy?

The bell is tolling quietly on a nihilistic US casino capitalism, and few realize that it is tolling the end of a mode of life based on irrational exuberance. Twilight is falling. The highest values have been devalued.

Will the return of the Panglossian optimism mean that the critical reflection on the way that the standard economic commentary has been dominated by the cheerleaders for the policies which have led to this crisis be forgotten? Will there be critical reflection on the way that while the authorities themselves and the academic profession of economics itself have turned a blind eye to any arguments that questioned the mantra in favour of deregulated finance capital?


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October 19, 2008

Keynes et el

A quote from John Maynard Keynes, written in March 1933.

We have reached a critical point. We can ... see clearly the gulf to which our present path is leading. If governments did not take action, we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.

Keynes, an English liberal, aimed to preserve the market economy by making it work. In The General Theory of Employment, Interest and Money (1936) he argued that economic downturns are not necessarily self-correcting, as held by free market economists. The classical economists held that business cycles were unavoidable and that peaks and troughs (or booms and busts) would pass. They thought in terms of an artificial world of slight deviations from equilibrium.

Keynes contended that in certain circumstances economies could get stuck.

There was a certain stickiness as it were. If individuals and businesses try to save more, they will cut the incomes of other individuals and businesses, which will in turn cut their spending. The result can be a downward spiral that will not turn up again without outside intervention. So the government of a nation-state pumps money back into the economy by some means, such as spending on public works, to persuade individuals and businesses to save less and spend more themselves.

Hayek's response in the Road to Serfdom was that the application of Keynes policies gives too much power to the state and leads to socialism.

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October 18, 2008

the illusions of the economists

The neo-liberals are currently covering up economic reality by highlighting the failure of their core economic orthodox----that financial markets are effective, stable and self-correcting mechanisms. They are doing this by mocking those on the left who are apparently saying that we are living the history of capitalism's failure and end.

Marx+Lenin.jpg Leak

If you peel away the mocking, derisory tone, then we find that the neo-liberal economists are rather quiet about what went wrong with their theories, despite their claim that they stand in the tradition of scientific rationality and its testing of hypothesis through evidence. Their rationality now looks akin to dogma. So we need to go here to learn about the fundamental causes.

What we have is a particular cycle: credit expansion fueling growth and asset price inflation, resulting in undue optimism and receding perception of risk, followed by financial collapse and unpredictable financial interactions and economic consequences. Another serial bubble that has been pricked (a Minsky moment). But why do we have serial bubbles?

The free market economic commentators just change their tune---embrace Keynesianisms--- and hope no one notices. Thus Alan Wood says in The Australian:

These important issues [extending a government guarantee for bank deposits to nonbanks] don't change the conclusion that the tide has turned in credit markets, but along with other pressures do suggest a fundamental reshaping of financial institutions and the financial system. And what about this week's fiscal policy spendathon? A sensible move, but will it save the Australian economy from recession? At this stage all that can be prudently said is that before it was announced the spread of recession from the big economies to Australia looked inevitable, but there is now a reasonable chance we might avoid it.

And so a huge government intervention into the free market is rationalized as "the tide has turned." This covers up the need to address the issue of financial markets being nothing like effective, stable and self-correcting mechanisms; or the fundamental reconstruction of financial architecture that is taking place with partial nationalization of the banks.

Wood, it would seem, does not understand his own economic system or the self-destructive forces (contradictory tendencies in Marxist language) that drive it's movement and requires good old-fashioned Keynesian fiscal policy or stimulus package. Keynes, for the neo-liberals, was not just wrong; he was not even intellectually respectable.

Nouriel Roubini's predictions of how the credit bubble would implode have turned out very accurate. But he says hardly anything about what drove the expansion of the bubble in the first place, beyond mentioning 'reckless financial innovation and securitization'.

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October 16, 2008

credit default swaps market

Wasn't it only Monday that global sharemarkets soared like a bird on the wing with commentators on Tuesday saying that we had stepped back from the abyss, the stockmarket had bottomed out, credit was flowing again, the storm clouds had moved on, and sunshine was on the way with Rudd's recession buster?

Now its sliding down again on fears about recession in the US, as its economy now has tremendous downward momentum. What of the unregulated $90 trillion global credit default swaps market? It seems to have been forgotten. Janet Morrissey in Time magazine says:

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

An exciting product to make some quick and easy money during boom times. When the economy is booming, corporate defaults are few and making the swaps a low-risk way to collect premiums and earn extra cash. Initially the swaps focused primarily on municipal bonds and corporate debt in the 1990s, not on structured finance securities. Investors flocked to the swaps in the belief that big corporations would seldom go bust in such flourishing economic times.

The CDS market then expanded into structured finance, such as CDOs, that contained pools of mortgages. It also exploded into the secondary market, where speculative investors, hedge funds and others would buy and sell CDS instruments from the sidelines without having any direct relationship with the underlying investment. They are a form of "derivatives"---complex bank creations in which the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: You can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves.Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds.

When the economy soured and the subprime credit crunch began expanding into other credit areas over the past year. Would the parties holding the CDS insurance after multiple trades have the financial wherewithal to pay up in the event of mass defaults? The problem is lack of regulation:

Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded — or swapped — from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults. The instruments can be bought and sold from both ends — the insured and the insurer.

Trouble looms as the derivatives are often three times the value of the debt they are created against.

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October 15, 2008

how things have changed

The politics of prosperity that framed Labor's rise to power less than a year ago have transformed into the emerging politics of austerity. Austerity is not inflation---it is recession looming. Main Street may go bust, as it were. The world really has changed is the new economic narrative. Inflation is not the central concern. It is possibility of recession and a surge in unemployment that are the central policy problems, and then how to how to soften the slide.

Now it was only last week that Rudd and Co were trumpeting an IMF report that Australia was doing well---- a relative soft landing for Australia, with the economy expanding by 2 per cent-plus through 2009---- and the economic advisers in Treasury and the Reserve Bank were saying that China's growth was Australia's insurance policy. No worries. The world should be looking at us and so on.

My my how things have changed in a matter of days. First, there was the emergency government banking guarantees. Now we have Keynesian pump-priming to help kick-start the slowing economy:

Ruddspendmoney.jpg

We have a fiscal package that is worth a total of $10.4 billion, of which $9.65 billion will be spent in 2008-09, and which is targeted at pensioners, families, carers, seniors card holders and first-home buyers. They are being told to spent it quick smart. That is nearly half the previous budget surplus of almost $22 billion expended in one substantial hit around Xmas.

It can mean that they--the policy makers and ministers-- fear the risk of a deep recession in the global economy impacting heavily on Australia. The inflation hawks or policy mandarins at the RBA, would not have produced the 1% cut last week if they were concerned about inflation. So what happened to the first fiscal stimulus plan (the big tax cuts for households) announced in the 2008 Budget? Not working as a fiscal stimulus? Spent on shares?

So what was all that upbeat optimistic talk of the past two months about? Spin? Or have they--the policy mandarins at Treasury and the Reserve Bank--- just put the looming recession picture together: ---a global financial crisis, slowing global economic growth led by the teetering US, UK and European economies, falling prices for Australian commodities, the dollar has plunged, unemployment is going up, business and confidence indicators in Australia are dropping, and household debt levels are very high.

Or have the policy makers dumped their modeling since it doesn't work when faced with the extent of the damage that has already done from the fallout of the crash in stock markets and financial markets? Or did the policy makers look up from their modeling, peer into the abyss of a global recession and remember Keynes' advice on using fiscal policy to boost aggregate demand?

It's odd that Rudd Labor----Swan in particular--- are now trying to sell a message that they knew what was happening all the time and they were on top of it. What utter nonsense. They had little idea of what was going to happen. Few did.

This kind of fiscal stimulus does imply that the private sector is not spending and/or cannot spend. Consumer demand is down and business investment is falling. If old fashioned traditional Keynesian spending by the government is now deemed necessary, why isn't it embracing infrastructure, the development of new green technologies that addresses the reality of climate change, rather than shipping more coal and minerals to China.

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October 9, 2008

the standard economic narrative

Mike Steketee in The Australian says that Labor governments in Australia are fated to deal with economic crises. He adds, with respect to the current financial crisis and spooked markets, that:

Less than a year in office, the Rudd Government faces the worst episode of global financial instability since the Depression. Its prospects of matching the Scullin government's unenviable record of losing power after one term hang on Australian financial institutions avoiding the collapses suffered by their counterparts overseas and the nation not sliding into recession alongside the rest of the developed world. Whether or not voters blamed the Government directly for a failing economy may be less important than the souring of the political mood that would come with mounting job losses and shrinking personal wealth.

Rudd faces the possibility of being undone by a Depression is the argument. Steketee adds that what the Government can do to influence these events is limited. This is the reality in a world integrated by trade in goods, services and finance and there is no way of insulating Australia against a worldwide recession.

This bleak scenario is then qualified. Australia's cushion is strong growth in China and India, its main banks, are "in first class working order", whilst it has "we have the best regulatory system in the world". It's the standard narrative ---trust our banks---repeated by Steketee without a critical edge.

What of falling house prices? The plunging dollar? The current account deficit? Consumer debt? The focus of this narrative is all on the banks, regulation and easing the liquidity freeze. Have faith in our banks is the sub message and the assumption is that things will return to normal. Yet we have a bursting housing bubble, highly indebted consumers who are facing falling house prices in Sydney and elsewhere, rising unemployment and reductions in household wealth.

What we know is that the long economic expansion in Australia is over. Market prices for coal and iron ore have dropped below the highs established in this year's contract negotiations. That means growth slowing and consumer spending contracting.

What about all the infrastructure spending that is needed to keep Australia growing. Who is going to finance that nation building? The assumption that it will be private public partnerships no longer looks realistic as the private investors flee from risk taking.

Are we looking at a Depression scenario in Australia ? What we can say is that growth slowing, consumer spending is contracting and market prices for coal and iron ore have dropped below the highs established in this year's contract negotiations.

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October 7, 2008

ever downwards into mythology

The credit crisis appears to have shifted from the US to Europe, where governments from Brussels to Copenhagen to Berlin hare rushed to shore up their faltering banks. Britain's Chancellor of the Exchequer, Alistair Darling, is reportedly considering giving banks billions of pounds in return for shares to shore them up in the face of the global credit crunch. Stock markets continue to tumble and the US, Europe and Japan are more or less in recession, thanks to the global credit crunch. The banks are still refusing to lend to each other and healthy companies cannot roll over their debts.

USbailout.jpg Moir

The global recession is being transmitted to Australia through the seizing-up of global credit markets, the sharp slide in commodity prices and the falling Australian dollar. The boom has busted. Australia looks vulnerable----the current account deficit is our biggest problem. We are borrowing $60 billion a year whilst enjoying the best terms of trade in history.

We can reject the view that the market is a "self-regulating" mechanism which can correct itself as Alan Greenspan maintained. He also maintained that the greatest danger facing the economy was that governments will endeavour to reassert their grip on, and intervene into, economic affairs. The events of the last couple of weeks show that is no "invisible hand" as the neo-liberals maintain, so there is nothing inevitable or "natural" about the way markets work. They are always shaped by political decisions.

Of late, Greenspan has been calling for governments to reassert their grip on the economy in the form of the bail-out.The inference? The neo-liberal talk of the invisible hand and self correcting markets since the 1970s is mythology. Greenspan, once the oracle of the mythology of the financial markets has been praying a lot to shore up his faith in the market as a self-regulating mechanism that is driven by “irrational exuberance”. The prayers aren't working as they should because the bailout hasn't given an immediate lift to restoring confidence in the US financial system. That is what it was designed to do --restore confidence so that the banks would start lending. Instead we have a global panic.

Update 1
Things must be serious in Australia. The Reserve Bank has reduced interested rates by 1%, twice as much as the market economists expected. This is the reasoning:

Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia’s trading partners in Asia. The expansionary effects of the recent surge in Australia’s terms of trade are still coming through, but some decline in the terms of trade now looks likely over the coming year, with many commodity prices having declined from their peaks. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate in 2009.

Thus far, the overall path of economic activity in Australia appears to have been close to what the Board had expected, with the needed moderation in demand occurring. The next CPI is likely to show an increase of around 5 per cent over the four quarters to September, but the Bank remains of the view that inflation will start to decline in 2009.

The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.

So the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy. That shift from inflation to slow global growth is some turn around.

Update 2
It looks as if the US financial system - including the system of financing of the corporate sector - is now at risk of a systemic financial meltdown. We're seeing a generalized liquidity run that expresses a situation of generalized panic and lack of trust in financial inst

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October 4, 2008

as the credit dries up

In the wake of the US market meltdown it is not just superannuates who are rethinking their situation by considering working longer. The debt ladened American consumer is also burdened with falling house prices, rising unemployment and reduced access to credit because of the tightenness in credit markets. Debt has been the enabler of the American economy and it has been blown on consumption. It will be more difficult for Americans to walk away from their credit debts as easily as they can for their houses.

retirement.jpg Tanberg

In Australia credit has become tight, prices are falling at the top end of the housing market as well as western Sydney, and homebuyers and consumers are being squeezed as the flow of cheap and available credit dries up.

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September 9, 2008

Why the economic gloom?

Michael Stutchbury, Economics editor of The Australian, asks some good questions about the state of the economy:

If the Australian economy is still basically healthy, why has economic confidence slumped so sharply compared with other countries? If we've got the cushion of the China boom, why has our stock market fallen further than other rich countries, including even the US where the whole credit crunch began? If the economy is being propped up by an investment boom, why is business so pessimistic? If Australia is so well placed, why is our currency being marked down?

He turns to the appearance by Glenn Stevens, the Governor of the Reserve Bank, before a federal parliamentary backbench committee yesterday Stevens said that the high export prices of iron ore , coal and other minerals will fall by 5 per cent during the next year. He acknowledged that China is slowing down.

As the credit crunch had hammered the US and Europe, exports from China clearly have suffered. The rest of the world is marking down the value of Australian assets on the back of the China slowdown.

The scenario is one of slow economic growth in Australia and rising unemployment.

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September 1, 2008

RBA eases monetary policy?

It looks as if the Reserve Bank of Australia will ease monetary policy by starting to reduce interest rates as the global economy takes a downturn. Economists in the financial market (most are ex-Treaasury or ex RBA economists) are saying that this will likely be one of several cuts to boost a slowing economy.

Dysoneconomics.jpg Dyson

Business is saying its confidence is shattered; that the economy is fragile;the brakes have been on for too long, there is too much uncertainty and that they need some relief quick fast. Poor business.Unlike the Reserve Bank they have a very clear idea where the economy is going. Not for them the image of driving an unfamiliar care with dim headlights on a foggy night unsure where the next bend is or what direction the road takes.

Update: 2 September
So the RBA has started the reduction of interest rates even though the rate of inflation remains high. People clapped and cheered, then sighed with relief. It is 'ease the squeeze' time. About time too. Lots more are needed. The market factored in another three cuts.

However, the central bank gave no hint that it would follow up yesterday's cut with another, stressing the importance of bringing inflation back under control rather than keeping the economy growing. Notably absent from yesterday's statement was any echo of its assertion a month earlier to "make adjustments as required in order to promote sustainable growth". Instead the bank spoke about the need to "set monetary policy as needed to bring inflation back to the 2-3 per cent target".

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August 18, 2008

the commodities boom?

Is the commodities boom dying? The prices of gold, copper, and nickel are falling and have been for a while. So have the shares of mining companies. Does that mean China's growth easing? What happens to Australia's current account deficit if it does? If mineral exports currently account for over half of Australia's export income, then the deficit will increase. Wasn't China meant to be the security blanket for the world economy?

Spoonerminingboom.jpg Spooner

The turn around in commodity prices has been so quick, as it has happened is less than a month. Does this drop reflect the slow down in global economic growth--changes in economic fundamentals, as the economists are wont to say? Or is the lessening demand in the US for commodities (and in Europe and Japan) due to the economic slowdown there?

Or is it just a market correction, and so not something to worry about? Some argue that the big rise in commodity prices was the result of speculators fleeing from the fall in the US dollar. They are now selling commodities, hence the fall in prices. So it is a consolidation rather than a dramatically sharp cyclical downswing (a bear market).

Others argue that China is far more important to world commodity markets than the US these days, and economic growth in China is slowing. Since that has significant consequences for social stability and pulling the 700 million rural Chinese out of poverty, and so the Chinese government, to ensure its own survival, needs to keep the economy buoyant and growing. This will be done through accelerated government spending, as has happened in the past, and so China's demand for raw materials (coal and iron ore) will continue to grow. Australia's future prosperity is secured.

Trouble is the Australian dollar, the world's strongest currency in the first half this year because of its commodities link, has fallen 10 per cent against the US dollar, and is retreating even against the New Zealand dollar. Doesn't that indicate that financial markets expect a slowdown in global economic growth.

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August 17, 2008

Bracks Report

The industry review headed by Steve Bracks, the former premier of Victoria, proposes $2 billion in subsidies to the car industry over the next decade (2020) to enable it to go through a transition process in return for a planned cut in tariffs from 10 p% to 5%. What is unclear is the transition to what? The aim from what I can gather is to secure the future of the local industry. To ensure that it survives in a global world, or achieves "economic and environmental sustainability by 2020" in the words of the Bracks' report. So we have a car industry policy based on budget subsidy, and this is held to be preferable to a policy based on a tariff wall.

Spoonercarindustry.jpg Spooner

Maybe. Yet this is an industry that has spent around a third of its 60 years in intensive care under structural adjustment programmes. It seems as if it is has been on a structural adjustment program since the 1980s. Yet it still continues to lose domestic market share after two decades of structural adjustment, and it struggles to make this up in increased exports.

The car industry has a small output--not much more than the capacity of world-class new plant--and its expertise is in building large cars when consumers are switching to smaller cars as a response to higher fuel prices and emission concerns. According to Bracks the industry's future lay in being "internationally competitive, more globally integrated and greener", and Industry Minister Kim Carr wants the emphasis on skill, innovation and new forms of public assistance to ensure this. Treasurer Swan says that tariff cuts have alway been accompanied by transitional assistance.

Why not devote the $2 billion to building a renewable green manufacturing industry in Australia?The skills and knowledge gained could then be used to help India and China become more environmentally. sustainable. Carbon sequestration will take 20-30 years to be commercially viable whilst some of the the mining companies are calling for nuclear power to reduce emissions.

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August 12, 2008

Reserve Bank refocuses, somewhat

The Reserve Bank's narrative over the last year has been a simple one. Inflation needed to be squeezed by slowing economic growth. there was too much growth and too much inflation. So to slow the economy, it lifted rates four times in seven months, in an economy already heavily loaded with debt. In doing so it downplayed the US credit crisis caused by the masters of the universe and the way that the crisis kept getting deeper. The narrative said that Chinese demand for Australian resources should cushion its economy from the global downturn, and it downplayed the way that falling demand from the US would affect China's demand for Australian resources.

Now the direction for interest rates is down, even if it is unclear what the speed of the gradual reduction will be. Why so? Because, though inflation still remains high, the inflation squeeze has done its job: economic growth is slowing, especially in those states with no export coal and iron ore mines. Though they are experiencing increasing unemployment, lower consumer spending, falls in house prices, the Reserve Bank is still primarily focused on inflation.

What continues to be downplayed is the increasing probability that the global economy - not just the US - will experience a serious and protracted recession. As Nouriel Roubini points out

Macro developments in the last few weeks suggest that now all of the G7 economies (the group of the major advanced economies including US, UK, Japan, Germany, France, Italy and Canada) are already in a recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the Eurozone including Spain. Ireland the the other Euro members; New Zealand, Iceland, Estonia, Latvia and some other South-East Europe economies) are also on the tip of a recessionary hard landing.

And once this group of twenty plus economies enters into a recession there will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and China) and other emerging market economies and likely tip the overall global economy into a recession.

So maybe the Reserve Bank's flagging of gradual interest rate easing may be too slow and delayed and it only happens when the G7 and global recession has become entrenched. They key for Australia is the slow down in China's exports and its trade surplus. is there any evidence that this is happening, due to the exposure of China's export base to the global economy? Brad Sester says nope.

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August 6, 2008

competition + supermarkets

So we have The competitiveness of retail prices for standard groceries report by the ACCC dumped on us. Its about a rogue industry which is not solely responsible for the soaring food prices over the past five years. The ACCC found that grocery prices have risen by 21% since 2003, but only one twentieth of that was directly attributable to expanding profit margins ar supermarket chains:

The relationship between the farm gate and the check-out is quite direct for fresh products, such as meat, fresh fruit and vegetables. Coles and Woolworths often purchase directly from farmers, bypassing wholesalers, and then organise any necessary further processing themselves. The ACCC has not found any evidence to suggest that the major supermarket chains are acting in an anti-competitive way in their dealings with suppliers of fresh products. In particular, there is no across-the-board evidence to suggest that retail prices for fresh products are going up by a greater percentage than farm-gate prices. The gross margins of Coles, Woolworths and Metcash in fresh products have as a whole not increased significantly in recent years.

The ACC says that there are some examples of relatively minor increases, as well as examples of falls. It is certainly the case that the large price increases in many fresh items over recent years cannot simply be attributed to the retailers. What then is the analysis of supermarket competitiveness?

The core argument was that competition in the grocery sector was "workably competitive"---there was competition but itwas not as strong as it could be.

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May 21, 2008

Reserve Bank uneasy

I see that the Reserve Bank has some doubts that it has done enough to constrain inflationary pressures and expectations and to ease wage and price rises. The increases in interest rates may not be enough to do the job. during a golden age of demand for its basic commodities, such as coal and iron ore). The Reserve Bank argues thus:

Looking ahead, members could see powerful opposing forces affecting the Australian economy. On the one hand, the slowdown in the developed economies, the ongoing strains in world financial markets and tight domestic financial conditions were working to slow demand and activity. Working in the other direction was the larger-than-expected stimulus to domestic incomes from the rising terms of trade that would flow from the very large recent increases in bulk commodity contract prices. Members acknowledged that the net effect of these forces on the prospects for growth and inflation was highly uncertain.Board members noted the importance of reducing inflation if Australia was to avoid a prolonged period of economic difficulty.

The staff forecast was that inflation would return to the target band by the end of the forecast period in 2010, if the recent slowing in demand was sustained. And then there is this:
The question therefore remained whether the setting of monetary policy was sufficiently restrictive to secure low inflation over time. Members spent considerable time discussing the case for a further rise in the cash rate. But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the Board decided that it was appropriate to allow the current setting of monetary policy more time to work. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed. The Board would need to evaluate prospects for economic activity and inflation in the light of incoming information.

They are sitting on a tightrope. But they fear that they may have to increase interest rates in the future if inflationary pressures don't ease. in the short-term. That makes Malcolm Turnbull's job---working out an alternative economic narrative--- a lot harder doesn't it, especially when Treasury stands by the Reserve bank's mandate to target inflation.

In an address to the Australian Business Economists in Sydney Ken Henry, the Secretary to the Treasury, says:

there has been some questioning in recent times of the appropriateness of the inflation targeting regime for monetary policy that was adopted by the Reserve Bank in the early 1990s; that is, the policy rule that targets inflation of two to three per cent on average over the cycle. Given the significant contribution that the conduct of monetary policy has made to our relatively strong macroeconomic performance in the period since the adoption of that particular monetary policy framework, the fact of this questioning is quite peculiar. And today I want to explain why it is seriously misguided.

That won't help to boost the Liberals credibility as economic managers. That has been tarnished by them squandering the revenue from the resources boom on new spending and tax cuts when in government. They allowed the revenue from the mining boom to feed into the strong economic cycle and bequeathed the misery of resource-fueled inflationary bubble that inevitably led to an interest rate crunch.

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May 14, 2008

rhetoric + reality

Will the tightening of fiscal policy make a difference to squeezing inflation? Will inflation stay above the Reserve Bank's target band? Will most of the work have to be done by the Reserve Bank as high continuing inflation flows through into higher wages and prices? Spending has been cut but not by enough to offset the $7 billion in tax cuts.

Swanbudget08.jpg Moir

The snip and tuck pruning of the Howard government excess is the downside side of the Swan budget. The upside is the nation building--- investment in health, infrastructure and education, and a more constructive relationship with state governments. Defence spending is up university spending is down. So what happened to the education revolution? Where is the military threat to Australia's security? Why not cut the increase in defence spending and put the money into universities?

I'm yet to read the budget papers about the implications of climate change and emissions trading. Since nobody is saying anything I presume that the budget papers do not address these issues. They are postponed to the future. The amount being set aside( $2.3 billion) looks inadequate. The spending has been announced before and some of it has been pushed back.

As Anna Rose observes in New Matilda Rudd and Swan missed this opportunity to make historic shift in Australia's economy by not investing enough in climate solutions to start the shift to a low carbon economy, cutting back on subsidies that encourage us to pollute and using the money to encourage emission reductions is essential.

Consequently, the proof of the Government’s commitment will become apparent when it delivers on its promise of an emissions trading system and, crucially, the target it sets in the medium term

On the other side, after the Liberal years of economic policy that drove greater demand and consumption in the short term, we have an ALP starting to make productive investments needed to underpin longer term economic growth.

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May 12, 2008

Budget blues, 2008

The ethos is no longer one of 'If you've got it, flaunt it', is it? It is all about the dark clouds on the economic horizon: a global economic downturn, a credit crunch due to fallout from the sub-prime mortgages in the US, rising inflation, increased interest rates, budget cuts, fiscal responsibility, sharing the burden and so on.

SwanBudget.jpg Bill Leak

The economy is slowing down. But that was the goal of economic governance, wasn't it. Are we going to have some good old fashioned therapeutic politics along the lines of ' I feel your pain' as well? A sharing of the tears as it were in the form of economic populism.

Is the key to tax reform broadening the base to ensure international competitiveness? Or should it minimize the concessions and distortions to make it more efficient? Or should the tax system become more progressive and equitable? It would appear that the GST and some aspects of superannuation have been excluded from consideration.

No doubt those on high incomes and free marketeers will applaud the attack on middle class welfare and deploy the postponement of tax relief for high income earners---the rich. Why so? Their argument is that doing well from hard work is being punished rather than rewarded. It is the politics of envy for those who have done better than the working families during the boom times. Reduce the tax on luxury cars! Increasing the tax on luxury cars is inefficient, as it distorts decision making and rewards the wrong kind of innovation. A progressive tax system is the wrong way to go. It smells of Karl Marx.

Update:13 May
The strategically placed "leaks" about the "tough as hell" budget have been freely flowing the last few days. This media management can be seen in the leaks about the rise in luxury car taxes, the increase in Medicare surcharge levels, the climate change package, the collapse in revenue, the cuts in taxation expenditure, aged care funding etc etc.

The ghostly pale Liberal Opposition appears to have gone into hiding as the voice of their leader and shadow ministers are nowhere to be heard in the media. What is heard is distant Liberal voices attacking themselves.So who questions the Rudd/Swan spin about them being economically responsible, delivering on its election commitments, responding to the inflationary pressures inherited from the irresponsible Coalition, and investing in the long term future of the country. The media? Are they going to show us the extent of the rise in unemployment as economic growth is slowed?

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May 10, 2008

Canberra: economic narratives

What is the economic narrative of the Rudd Government? It used to be investing in new infrastructure, increased productivity and broad reform. Their argument was that the Howard Government had squandered the proceeds of the boom in mineral exports instead of investing in infrastructure and education and health to enhance and expand the capacity of the economy to generate economic growth. That is their big picture.

Yet that has been undercut by the alternative narrative of addressing inflation through big budget cuts and substantial surpluses so as to help the Reserve Bank's use of monetary policy to squeeze inflation. And yet this alternative narrative is undercut by the big personal income tax cuts that are in opposition to the use of interest rates to squeeze inflationary pressures in the economy and reduce economic growth.

So which is the economic narrative? Do these different narratives cohere in a broader big picture? If so, what is that big picture? It is not clear. Are the conflicting tendencies being thought through? It is not clear.

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May 7, 2008

Gittens on economic growth

Ross Gittens has an interesting op-ed on economic growth in the Sydney Morning Herald. He says that for nearly all economists, business people and politicians the need to maximise the growth of the economy is a self-evident truth and should not be questioned. Those who do so, eg., Clive Hamilton, are treated with scorn by economic rationalists and libertarians, even though economic growth is commonly seen as a means to achieve the good life, rather than an end in itself.In short, there's more to life than money, and the more than is usually understood in terms of wellbeing.

Surprisingly, the 2020 Summit failed to question economic growth as an end in itself. One of their new ideas was to try harder to maximise economic growth---to increase "gross domestic product per capita so that Australia is among the top five countries in the world on this measure, with strong, stable economic growth."
How strange. I presume that it hasn't occured to them that one could have wealth but live a damaged life. A
damaged life in the sense of a loss of the full experiential richness of life at the hands of the “technological, schematized modes of human thought and power relations which dominate neo-liberal capitalist modernity.

The economic section of the final report of the 2020 Summit has the following ambitions:

Australia should be the best place in the world to live and do business. This will require urgent action to increase economic capacity through the creation of a truly national, efficient, sustainable and inclusive economy supported by seamless regulation. We should set national goals for Australian prosperity in which all Australians share:
• Increasing GDP per capita so that Australia is among the top 5 countries in the world on this measure, with strong, stable economic growth; and
• Inflation between 2% and 3%.

Nothing about wellbeing there. The target is given and the emphasis is placed on the implication for meeting the target for economic growth in the coming decades--- world-class infrastructure.

Is the failure to question this growth fetish in terms of the wellbeing of the population a failure of intellectual nerve?

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May 5, 2008

Iemma strikes out alone

Has the Iemma government left it too late to privatise its electricity assets (generators and retailers)? Though Costa and Iemma suffered a humiliating 702-107 vote against privatisation at Labor's state conference on the weekend, they are determined to proceed with the sale despite entrenched union opposition.

Will the government and the unions keep talking? If they do, the only realistic position is the compromise of some kind of public-private partnership in charge of the industry along with guarantees on jobs and future pricing.

Costa.jpg Moir

Is this standoff a sign that the unions traditional influence over the parliamentary wing, with conference as the supreme policy-making body, is becoming history. What does business require in order to invest in new electricity generation--two new base load power stations and retro fit the old power stations--- under an emissions tradiing scheme?

No doubt we are going to hear a lot from the conservatives about bullying thuggish unions and minority interest groups running the state, along with other clichés such as the ALP conference looking like a rabble. The reality is that the Iemma Govt is a bad and incompetent government that deserves to be dumped. It hasn't because the Liberal Opposition is not politically credible and is even more incompetent.

The other reality is that the traditional form of the ALP is changing as its membership fall, the union's base shrink and it becomes ever more managerial in its ethos.

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May 2, 2008

economic troubles

The official story from the economic policy elite used to be that China ensured that Australia was firewalled against bad times in the global economy, and that working families (Howard 's battlers rebadged ) would be okay. The good times would continue and the commonwealth government was looking after working families. All was well in the world. Not so any more:

Swan.jpg Moir

The political talk is now "sharing the burden" of economic slowdown and rising inflation and those people on modest incomes are entitled to a fair go.

If there is a policy it is a move away from Howard government pressing on the accelerator with new spending and the Reserve Bank pressing on the brake by raising interest rates. The Rudd Government's talk, in contrast, is about helping the Reserve Bank in its fight to prevent inflation becoming entrenched in the economy by cutting spending.

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March 20, 2008

where have all the good times gone

Does this particular credit crunch financial meltdown, with its centre in New York, signify that the good times are over for the US, as Rupert Cornwell argues? By all accounts the crisis---market turbulence or volality some sharp elbows call the market crashes, mortgage failures and liquidity freezes----still has some way to run and to spread to areas beyond mortgages.

ThompsonM.jpg Mike Thompson

A financial crash means that survival is the priority not bargains in this bear market. Even though the hedge funds may fade away, it looks as if Goldman Sachs and Lehmann Brothers are still okay.

However, as Thomas I Palley notes:

stopping a financial crash does not get the US economy out of the woods. There remains the underlying residential mortgage debt crisis, and many risky mortgages will go bad as will the mortgage backed securities in which they are embedded. There is also the problem of recession, which calls for reviving aggregate demand and getting the economy growing again. Both the mortgage debt crisis and the recession need their own tailored policy responses. However, if the Fed fails to prevent a crash, the mortgage crisis will be deeper and a recession far more severe.

As Cornwell says a backlash against the moguls of Wall Street so greedy in good times, so quick to plead for the state's safety net in bad ones is already starting. The tide of deregulation will be reversed, and government, so often branded the enemy, will again be regarded as a friend.

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March 15, 2008

economic push and pull

Jennifer Hewett, writing in The Australian begins to trace the impact of the global financial crisis on Australia. She says:

that the global credit crunch is paralysing the financial system, rampaging through the Australian stock market, forcing up the cost of doing business and creating havoc with everything from individuals' superannuation accounts to the availability of bank credit. This is not only an issue for a few corporate whiz kids who thought the use of ever-increasing debt would be a permanent magic pudding. Problems in the market turn out to be dangerously infectious.

She adds that the confusion comes because no one can be sure of the result, particularly given most of the experts seem to have been spectacularly wrong about how all this would play out. The argument was that Australia was supposed to be insulated from the economic debacle unfolding in the US thanks to the resources boom powering on regardless, courtesy of China.

She observes that this decoupling theory still has plenty of advocates despite the growing number of sceptics who point to the obvious global contagion of the past six months.

What we have is the impact of two economic forces: the China boom (boosting demand) and global financial conditions (dampening demand). Will the latter ultimately overwhelm the former? Martin Wolf in the Financial Times outlines the common features of financial crises:

They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system. Credit growth slows, or even goes negative, and spending, particularly on investment, weakens.

My guess is that the two speed economy scenario still holds in Australia. Parts of the economy will turn sour during the next year, with rising unemployment, falling house prices, and foreclosure in parts of the economy. The effects of constraining inflation and the credit crunch will come together. Step one is a housing recession--falling house prices that will reduce household wealth; step two is further corporate losses from the credit crunch flowing from more losses in US subprime mortgages; step three is the “credit crunch” spreading from mortgages to a wide range of consumer credit; step four is the downgrading of some financial institutions as too risky.

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March 14, 2008

Finance capital's crisis

Will the estimated $400bn of mortgage-related losses in the US cause a credit contraction resulting in a $1 trillion fallout for the real economy? Would this translate into a 1.3% reduction in GDP growth? Is this a worst case scenario?

Certainly the connection between the bursting of the housing bubble in the US and the fragility of the global financial system has created huge dangers and risks for financial markets and the US economy.

Financecowboy.jpg Leunig

The situation is one of a vicious interaction between falling asset prices, financial stress and spending.Nouriel Roubini of New York University’s Stern School of Business, argues that there is a rising probability of a ‘catastrophic’ financial and economic outcome. The characteristics of this scenario are a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”

His scenario is given in 12 steps and points to the need to consider the fiscal costs of a bailout of the financial system in what some call a “worst case scenario”.

The government would have to mount a rescue. Up to now the Federal Reserve has been rushing money to the banks, who were having trouble attracting funds. But that hasn't stopped the financial panics. The black hole is that the whole financial system is facing demands to come up with cash it doesn’t have.

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March 12, 2008

about economists

It's a low blow, but a witty one. What it does indicate is that the old cliche about economics being the dismal science is no longer the case. Economics is the language is public policy and there is a close connection between economics and politics.

The pro-market argument assumes that the goal of economic activity is basically democratic, i.e., to deliver to the public the goods and services it wants, not build pyramids for the Pharaoh. The market theorist would argue that the best indication of how strongly people really want something is how much they are willing to pay for it, and this is reflected in the market price.

economists.jpg Spooner

Economists celebrate the market as a device for regulating human interaction without acknowledging that their enthusiasm depends on a set of half-truths: that individuals are autonomous, self-interested, and rational calculators with unlimited wants and that the only community that matters is the nation-state.

Update
These foundational assumptions of economics justify a world in which individuals are isolated from one another and social connections are impoverished as people define themselves in terms of how much they can afford to consume.

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March 9, 2008

a hard landing acoming?

Will the latest interest rate rises by both the Reserve Bank to restrain booming spending and by the commercial banks to restore their profit margins cause a hard landing in NSW, Victoria, Tasmania and South Australia? No gain without pain, as the utilitarians would say? This is a scenario of rising bad debts, foreclosures, falling property prices and fire sales; investment , hedge fund and corporate company collapse from margin calls as the credit crunch from the subprime crisis deepens; lower growth and rising unemployment.

Nabbed.jpg Matt Golding

The Reserve Bank takes a largely benign view of the unfolding credit crisis, believing China's growth will insulate us from its worst consequences. The RBA does not have a good history of managing soft landings. Will we hear the snap as distinct from sounds of the steady decline or slowdown? Where is the tipping point in terms of interest rate increases?

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March 4, 2008

inflation woes

According to the logic of the market, if things get too tough in western Sydney due to the shocks and pressures created by the Reserve Bank raising interest rates, then it is best to sell up, pack your bags, kiss the Emerald City goodbye, head west to Perth and make your fortune quicktime.

Inflationstrike.jpg Martin Sharpe

It's boom time there, the Chinese are our friends, and there will be little dislocation or alienation as the corrupt Labor Party culture will help foster the relaxed and comfortable feeling. And all your friends, being rational economic agents operating in terms of self-interest, will all follow suit. Only the irrational ones will continue to satisfy their desires in the low growth world of an expensive Sydney.

The purpose of any further interest rate hike in March will be to dampen domestic demand and push unemployment back towards 5 per cent. In the Canberra Times Peter Martin observes that:

The inflation we do have right now is fuelled by climate change (higher energy and water prices), a worldwide food shortage (higher grocery prices), higher oil prices, higher rents and the mining boom.Higher interest rates will dent none of these. But they will crunch the economy and push people out of work.

That makes it difficult to keep up the mortgage in western Sydney. More foreclosures will then happen when the Reserve Bank increases interest rates.

Update
The Reserve has increased interest rates by .25% to contain inflation, whilst using language of a ''substantial'' tightening in financial conditions and ''tentative'' signs of a cooling in demand:

There is tentative evidence that some moderation in household demand is beginning to occur with business and consumer sentiment softer recently and household credit demand slowing somewhat. The extent of that moderation is uncertain however.

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March 2, 2008

monetary policy as a sledgehammer

Martin Leet writes in the Brisbane Line, the online magazine of the Brisbane Institute, that:

In essence, the history of monetary policy in Australia is really a history of the bludgeoning of the economy. It kills off economic activity. Even now, as interest rates rise, commentators note that the inflationary problem will not be addressed. Higher interest rates will not stop China from demanding our natural resources. And asking people for wage restraint in the context of a strong labour market is a bit like asking China to stop growing. It’s not going to happen.

That's pretty true. It does appear that Australia, like Europe, is diverging from a recession slide in the US and that the inflation in Australia will not be lessened by the backwash from the US. Does that mean the monetary sledgehammer?

It does mean another interest rate rise very soon. Leet has an interesting argument. He says that:

Successive governments, of both political persuasions, have eroded a key policy instrument they could have been used to bring the inflationary problem under control: a centralised wage system. Now, politicians are reduced to ‘asking’ for wage restraint, and to ‘setting an example’. In addition, the obsession with budget surpluses has meant that much investment in public infrastructure has been neglected, creating the kind of ‘production constraints’ with which we are now faced. And yet calls to cut expenditure are as strong as ever.

As before many people will suffer from high and rising interest rates. This time round on the boom /bust rollercoaster people will suffer much more than in the past since the economic good times of the last fifteen years have encouraged people to borrow far beyond their means for their homes.

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February 25, 2008

The BCA speaks

So the Business Council is calling for substantial budget cuts--- the Government must reduce expenditure by $31 billion over the next three years to match the government’s promised $31 billion in tax cuts.This requires taking an axe to welfare, slash the public service jobs, cutting back on health expenditure and reducing defence spending. It calls for government spending to be targeted at education, infrastructure skills and workforce participation and for wage restraint to fight inflation.

How about reduced subsidies to business? Why isn't business spending on education, both vocational and university? Why does business attack the welfare state and public health ---crowding out expenditure its called--- yet call for government to spend much more on vocational education? Doesn't a workforce need to be g healthy to work? Why is the BCA calling for a reduction in the corporate tax rate? Why the exemption of wage restraint for executives in corporate Australia?

Corporate Australia primarily concerned about corporate Australia is it not? At least the BCA is willing to fire a few shots at the Howard Government for its failure to use the cash from the resources boom to invest in the future to enhance future productivity and underpin longer term social and economic prosperity.

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February 21, 2008

governing inflation

So inflation is going to be above the Reserve Bank's band until 2009/10, by which time the recession in the US will have had a negative impact on the Australian economy. And the next two interest rate rises will only counteract the tax cuts. In a two speed economy the interest rate increases will have little impact on the boom states of WA and Queensland, but they will impact on NSW and Victoria, especially western Sydney.

Moirinflation.jpg Alan Moir

Senior Rudd Government ministers say they are very concerned by any proposal that would lead to election promises not being kept. Labor insiders want to avoid an electoral backlash if they do not deliver on their election promises. That means no support for the idea of completely scrapping the tax cuts - and turning them into retirement savings or superannuation. So any attempt to squeeze demand to bring it into line with supply is going to have to come from the cuts to the federal budget.

The talk in Questrion Time is that the Rudd Government is going to be tough on slashing the budget but the programmes that have been cut is tinkering around the edges of the Howard Government's excess--the regional rorts and less funding for Canberra. Rory Roberton on the ABC's 7.30 Report says:

I think you need much bigger spending cuts than are in prospect to have any major effect on the outlook for rates. I think the Reserve Bank would be impressed maybe with something of the order of $10 or $15 billion, one and 1.5 per cent of GDP. But I am not sure that's what's been flagged and some of the things that have been flagged are things that won't actually dampen inflationary pressure much at all. Cutting back on embassies offshore and cutting back spending on military equipment, that's not exactly going to dampen the pressures that the Reserve Bank sees pretty well across the board.

And Chris Richardson conforms this.He acknowledges that the Rudd Government has inherited a lot of extra spending in the Howard administration in its last handful of years and a lot of it is middle class welfare. But to get the $10 billion a year or even the $15 billion a year, is a very difficult thing to do.
... the maths certainly point to a major problem, we have existing inflation pressures and still chances are that demand will grow faster than supply in Australia. The net of an extra $25 billion over the coming year. Now, if that's the problem if you like, if that's the addition to the inflationary stresses we face, each interest rate rise of a quarter point out of the Reserve Bank is only taking about $3 billion away from a $25 billion problem and that's what the Government's up against. It's giving up $7 billion of tax cuts on 1 July. In a sense, it's handing us on the one hand pressures on the Reserve that add up to two interest rate increases. The question is what they can deliver on the spending savings to take that back out again.

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February 12, 2008

the elephant in the room

"On the current outlook, and allowing for the inevitable uncertainties in forecasting the risk of inflation remaining uncomfortably high for some time is considerable." So says the Reserve Bank of Australia.

That means more interest rate increases, sooner rather than latter as the judgement is that the underlying inflation will be between 3 and 3.75% until 2010 — unless rates rise higher. There's heartbreak ahead for some.

inflationelephant.jpg Bruce Petty As Tim Colebatch says in The Age the Reserve Bank's explicit aim is to slow Australia's rate of economic growth to well below average levels, with rising unemployment, so that harsher times can wring inflation out of the system. The Reserve's argument is that Australia has overshot its capacity in that demand has grown so fast for so long, and supply has not kept up.

So the policy focus needs to be on increasing on lifting supply — eg, training more skilled workers — not squeezing domestic demand. The Coalition largely ignored this, whilst Labor is trying to have it both ways — giving us tax cuts, taking away some of our services and talking about increased productivity and easing capacity constraints.

Putting on the brakes is the short term option. So is the razor gang cutting back on government spending. That's the options as we enter a boom bust situation.

The long term scenario is one of booming growth in China and India for the next couple of decades and that means a big demand for Australia's resources. The monetary brakes is not going to deal with the effects of this global growth. Nor is increasing interest rates to make it very expensive to buy the plasma tv, Apple computer, overseas holiday and digitial camera on the credit card.

Increasing the capacity to supply the booming demand is one policy option. Another is to develop smarter ways to manage inflation than squeezing demand.

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February 7, 2008

a new governance style

The Rudd Government has got a few problems in terms of political governance that are of its own making. Consider Rudd's cut to spending programs so as to use a bigger budget surplus to help restrain the economy and diminish inflation pressure, thus reducing the need for further rises in interest rates.

This wouldn't be necessary if Rudd had not committed himself to big tax cuts in each of his next three budgets. So Rudd is busy boosting demand with one hand while it seeks to restrain demand with the other.

economicmangement.jpg Allan Moir

Another example is the "education revolution" to put computers in schools, upskill disadvantaged student whilst retaining the Howard government's formula for grants to non-government schools that favours private schools. As Ross Gittens points out in the SMH in 1996 non-government schools got about $3.50 per student for each $1 per student going to government schools. By now the ratio has blown out to almost $5 per student.

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February 6, 2008

turrning the screw

The argument from economic commentators is that the Reserve Bank needs to slow the economy by increasing interest rates yet again, since inflation is building faster than the economists realized. So there needs to be a significant slowing in demand. They now talk in terms of the focus of economic policy being on getting runaway prices back under control; waiting is not an option for the RBA; the rate rise is the right medicine; people need to feel pain; inflation must be stomped on.

The AFR says the economy is running at full throttle and beginning to overheat. Yesterdays editorial says:

Australia's economy is hard up against capacity constraints. There are bottlenecks in the labour market that have been bound to result in wages inflation. Global food and energy inflation has feed into higher costs.So what will the federal government do?

The call is that the Government must fix things. That is what it has been elected for. But what can the government do?

It cannot do anything with interest rates as that is now the task of the Reserve Bank. It cannot do anything about global energy prices. It can blame the Howard Government though. It does, and no doubt we will hear about the Coalition's negligence and failure to control inflation for years to come.

Hang a mo. Has not the Reserve Bank been rather slow to act? The signs of overheating were there during 2007, as were the signs of increasing household debt (mortgage and credit card). If the finger can be pointed at the RBA to "stomp on inflation", then that finger belongs to the federal government. It can hold the economic mandarins at the RBA responsible for getting inflation under control. The RBA needs to be held accountable.

In the RBA's defence we can say that it issued several warnings over the last couple of years that inflation was rising, that the government had to address skills shortages, infrastructure bottlenecks and other capacity constraints, and the government needed to bring its fiscal policy (those tax cuts) into line with monetary policy (interest rates). Now the Coalition was slow to act. It was seduced by the resources boom and wealth creation, and they were irresponsible in the disbursement of the resource-generated wealth. To its credit the RBA did raise interest rates during the election in November 2008.

However, the logic of the situation is this. If the resources boom boots domestic demand ( plus the tax cuts) then spending by households will have to be cut disproportionately to slow domestic demand. This is what the RBA failed to do. The reason may have been political--Howard and Costello standing in the way---and there is only so much the RBA can do---- it needs to avoid the hard landing or a recession we had to have. But it still failed. It hesitated for too long and the inflation genie or demon escaped from the bottle-- in that the inflation rate is well above the RBA's target range.

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February 5, 2008

Goodbye Mitsubishi, hello knowledge economy?

It has finally happened. Mitsubishi has pulled the plug on manufacturing cars at its South Australia plant. They have been on life support from both the SA and federal governments for years. It was no longer viable. Politicians and business leaders reassure us that the states economy is strong enough to withstand the shock, that they have been shifting the economy away from its reliance on manufacturing, and that Adelaide is not destined to be a backwater.

South Australia's future depends on maximizing opportunities sin the the resources sector. The most promising development we are told is the multi billion dollar expansion of the Olympic Dam uranium mine.This will lead to a mini-resources boom. And an increasing focus on defence and education is also part of the strategy to diversity the states narrowly based economy.

This strategy is having some success as manufacturing and agriculture, the traditional lifeblood of the South Australian economy have been declining in importance (from 27% in 1990 to 20.8% in 2006).

However, few of the movers and shakers in South Australia talk in terms of the knowledge economy as a strategy of diversification, which the Organisation for Economic Cooperation and Development (OECD) defines as:

one that encourages its organisations and people to acquire, create, disseminate and use codified and tacit knowledge more effectively for greater economic and social development.

Doesn't globalization and a new knowledge-driven economy present South Australia with a major challenge in that digital technologies are transforming the old agricultural/industrial society into an information society?

We have to see, in any strong way what is so evident in Sydney: the tendency to privilege the kind of skills and expertise which can circulate easily and rapidly through global networks (finance and property), relatively unfettered by national regulations and easily absorbed by those in other cultures; coupled to the tendency to marginalize those types of knowledge which are more nationally bounded and/or relational and context dependent.

Posted by Gary Sauer-Thompson at 5:34 PM | Comments (6) | TrackBack

the demons of rationality

Under the rational surface of an enlightened neo-liberal economics lurk the demons. These demons are created by the free market itself and they require some form of economic management or governance to prevent them from doing too much harm to the people who matter.

inflation.jpg Alan Moir

Australia, as the commentators are telling us, has a big inflation problem. Prices are just going up and up. So ordinary folks need to be squeezed to reduce their demand through increased interest rates. If some with high mortgage debt lose their houses from the higher interest rates in the process, then that kind of suffering is the price that must be paid for the greater good. The greatest good for the greatest number is the economic criteria.

As the processes of the free market are pretty rough, so they need to be managed. Economic management or governance is pretty crude. Demand must be squeezed because little can be done about increasing supply in the short term. Strange isn't it.

n his column in todays AFR former NSW auditor general Tony Harris suggests that the Federal Treasury was either bullied or cajoled into hiding its real views on inflation before the election.His argument is that just before the federal election inflation was not a problem, even for Treasury in its Outlooks issued in October 2007. It was forecasting inflation for 2007-8 and 2008-9 of 2%. Nothing to worry about according to the best professional judgements of the department economists. All is well, inflationary pressures would ease. A month or so latter, with a new government in power, Treasury was telling Rudd and Swan that inflation would exceed the Reserve Bank limits for the next 18 months. Did Treasury trim its sails for Costello and Howard in the leadup to the election? Did Treasury massage their own forecasts for political purposes?

Is it trimming its sails now to justify big budget cuts to government spending on welfare, health and education? Is it providing cover for Mr. Fiscal Responsibility--discipline, caution and economic responsibility-- to follow the neo-liberal policy prescription and take slices out of the budget to pay for the tax cuts they favor.

Update
As expected the Reserve Bank raised the cash rate by 25 basis points to 7.0 per cent. Inflation has been forecast to remain above the Reserve Bank's 2-3 per cent management bracket for at least a year. Interest rate rises are supposed to slow the economy but it hasn't happened yet.

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January 30, 2008

Gitten's on the economic troubles

Ross Gittens argues in the Sydney Morning Herald that it's not at all clear that, if the US drops into recession this year, it will drag us down with it. He says that though it's true that globalisation has made us more susceptible to developments in the rest of the world, but that's truer of developments in Asia than in the US and Europe. He acknowledges that:

The US is still the biggest economy in the world. If it goes into recession and so cuts back its imports, that does have a dampening effect on the countries that trade with it, including us. But the old saying that if America sneezes we catch a cold is simply wrong. It didn't hold in 2001 and won't hold now.That's because such a high proportion of our exports now go to Asia, particularly China and increasingly to India. The rapid development of these "emerging economies" gives them a momentum all their own.

However, isn't China's economic growth very export orientated? Won't a recession in the US lessen the demand for Chinese exports? Won't reduced growth mean less Chinese demand for our minerals?

Gittens tackles this argument head on.

It's true that a quarter or more of China's exports go to the US. But much of any decline in China's exports is likely to be offset by increased domestic consumption and, more particularly, increased investment in factories, housing and public infrastructure. Whichever way the Chinese jump, they'll require our coal and iron ore.

The real problem for Australia, says Gittens is the booming economy and inflation. That is why the Reserve Bank is trying to engineer a slowdown in the economy that would probably involve a slight worsening in unemployment. This is true. The looming US recession is not going to curb inflation in Australia in the near future. But these inflationary pressures are being overlaid by changes in the global market in which Australia does business.

Gittens is agreeing with Swan and Rudd that the booming Chinese economy will insulate Australia from the worst of the global financial meltdown. China's export strength should carry Australia's economic growth. We are the Lucky Country. However, things are changing. The Chinese, for instance can see an economic slowdown in China being caused by the problems in the US. It is in the long term interest of China and perhaps the global economy for China to begin absorbing its own products.

However, Gittens is also assuming that the Chinese can "decouple" from the US hard landing. Can they? To what extent? Steven Roach says says that the decouple assumption is questionable:

There's no region of the world that is more externally driven than developing Asia, which is where I live now. Exports represent 42 to 43 percent of pan-regional GDP, a record high. Private consumption represents 48 percent, a record low. So how is this region going to decouple? Advocates of decoupling would point to all the young consumers in China and India. But consider that the U.S. consumer last year spent $9.5 trillion. Chinese consumers spent about $1 trillion, and Indians about $650 billion. The power of the American consumer is still six times that of this new "Chindian" consumer. It's mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians. And there will be a meaningful decrease in U.S. consumer spending.

And Brad Sester says that the recent surge in Chinese growth hasn't come from a surge in domestic demand since domestic demand is actually weaker than it was in 2003 and 2004. Rather it stems from a bigger contribution from net exports.he adds:
Asia has been a huge source of demand for commodities. But when it comes to manufactured goods, Asian demand hasn't kept pace with Asian supply. That implies ongoing growth in Asia's surplus with the US and, now perhaps even more so, in Asia's surplus with Europe. China has decoupled to a degree from the US over the past two years. The US hasn't been the engine of demand growth globally over the past two years.... Europe, by contrast, has emerged as an engine of demand -- growing more rapidly than the US. That has meant that China has shifted from relying on US demand to relying on European demand. Up until now, China has offset the slowdown in the pace of growth in its exports to the US with strong growth in its exports to other parts of the world.

So the question is: to what extent will the E.U. be hit should the recession in the U.S. be mild to severe?

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January 24, 2008

inflation woes + Goldilocks

Inflation in Australia burst through the Reserve Bank's safety zone to hit 3.6 per cent yesterday. The RBA now faces the dilemma of managing inflation while the global economy faced a slowdown as the US approaches a recession. However, the inflation result makes an interest rate rise next month a near certainty, with more to come.

inflation1.jpg Bill Leak

Not to worry though. Wayne Swan is reassuring us that the Australian economy is still strong and in a great position to withstand international shocks. Why so? The Reserve Bank and Treasury Secretary Ken Henry have reassured the Treasurer that Australia's reliance on Asia, particularly China, would absorb external world economic shocks. This is the Goldilocks' scenario.

Goldilocks says that the US will avoid a hard landing and that the rest of the world--including Australia--- could decouple from such hard landing if it happened. Those who think otherwise are just worry warts. The Goldilocks have a particular vision of globalization, one best described by Brad Sester as:

The new vision of globalization that emerged in the first part of the 2000s [is that] globalization offered the US cheap imports and cheap bond financing, a combination that proponents argued offered big benefits to the US, even if it hurt workers who had to compete with cheap imports. That vision is now coming under question: Chinese goods aren’t quite as cheap as they used to be, imported oil certainly isn't cheap and the emerging world no longer seems all that inclined to accept US bonds in exchange for its exports.

The boom in China and its demand for our natural resources depends on the American consumer buying cheap Chinese exports. Will they continue do so with falling house prices, rising petrol prices and increasing unemployment? Or is the debt burdened US consumer on the ropes and faltering?

Can China decouple from a US slowdown or recession? Will the latter mean a slow down in global economic growth? Is it still the case that when the US sneezes the rest of the world catches the cold? What if the US does more than sneeze? It catches a big cold that develops into the flu?

The answer to these questions are not clear, nor is the Treasury's and RB's Goldilocks scenario the only one. If there is a recession in the US then who replaces the US consumer as the engine for world economic growth. The Chinese or Indian consumers? That borders on fantasy land. Will Europe be the dynamic engine of the world? Few are suggesting that? So Treasury and the RBA are either banking on a slowdown in the US not a recession or they hold to the decoupling thesis.

Why do they not make their argument public? Why keep it behind closed doors?

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January 23, 2008

explaining the crisis in financial markets

Martin Wolf, in an op-ed in the Financial Times asks the question: "So how did the world economy fall into its predicament?" He gives three answers. The first view is that this crisis is a product of a fundamentally defective financial system. The second view is that US monetary policy was too loose for too long after the collapse of the Wall Street bubble in 2000 and the terrorist outrage of September 11 2001.

The third view, which I ascribe to, is that the crisis:

is the consequence neither of financial fragility nor of mistakes by important central banks. It is the result of global macroeconomic disorder, particularly the massive flows of surplus capital from Asian emerging economies (notably China), oil exporters and a few high-income countries and, in addition, the financial surpluses of the corporate sectors of many countries.In this perspective, central banks and so financial markets were merely reacting to the global economic environment. Surplus savings meant not only low real interest rates, but a need to generate high levels of offsetting demand in capital-importing countries, of which the US was much the most important.

On this account ( the Fed could have avoided pursuing what seem like excessively expansionary monetary policies only if it had been willing to accept a prolonged recession, possibly a slump. But it had neither the desire nor, indeed, the mandate to allow any such thing.

Wolf adds that the Fed’s dilemma then was that the only way to sustain domestic demand at levels high enough to offset the capital inflow (both private and official) was via a credit boom. This generated excessively high asset prices, particularly in housing. It has left, as a painful legacy, stretched balance sheets in both the non-financial and financial sectors: debt deflation.

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Dr. Pangloss genuflects to the free market

Here is Ben Bernanke, Federal Reserve Chairman, in May 2007, speaking at the FBA of Chicago annual conference on bank structure and competition when the subprime problems were spooking the markets:

Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime housing market will likely be limited, and we do not expect significant spillovers to the rest of the financial system. Markets can overshoot, but, ultimately, market forces also work to rein in excess. For some, the self-correcting pullback may seem too late ad too severe. But I believe that, in the long run, markets are better than regulators in allocating credit

So we have the FR chairman (the regulator) assuming the role Dr Pangloss genuflecting to the markets. What about the deceptive banking practices that misled consumers? What about the poorly structured and supervised derivative conduits in the financial markets? An isolated event that would have limited fallout? The current stock markets bloodbath is a good way to regulate?

The sub-prime mortgage crisis is only threatening the battered and bruised American banking system itself, the wider economy and global markets. What we have today is a growing sense of crisis in world financial markets and a judgment that Bernanke and the FR have been asleep at the regulatory wheel (regulation-lite) and have made a last minute response to the crisis.

There cannot be 'recession talk' by the FR can there? We cannot spook the markets, can we? We must keep their confidence up. We must talk up markets. We must defend capitalism Wall Street style and Republican style regulation. As David Leonhardt says in the New York Times:

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”These days, though, the great moderation isn’t looking quite so great — or so moderate.

It's been a poor performance by Bernanke--worse than even Greenspan's easy going monetary policy and regulation that contributed to the housing bubble.

The reality is that the sub-prime mess is a disaster, the US will not have a soft landing, the Federal Reserve will not be being able to ease and avoid the hard landing, and the rest of the world is not decoupling from the US hard landing.

Posted by Gary Sauer-Thompson at 12:55 AM | Comments (9) | TrackBack

January 21, 2008

war on inflation

Gee now we have a war on inflation along with a war on drugs. What's happened to the war on refugees and the war on Iraq. Are they still going? The war on inflation is based on a five-point plan according to Mr Prudence and Mr Stability.

Rudd (Mr. Prudence) says that the central plank of the plan will involve setting a new budget surplus of 1.5 per cent of Australia's gross domestic product, giving the Government a surplus of about $18 billion; it will examine all options to provide real incentives to encourage private savings; unfolding federal Labor's plan for tackling the chronic skills shortages in the economy; providing national leadership to tackle infrastructure bottlenecks and providing practical ways of helping people re-enter the workforce. There is no detail as to the content of these 5 points.

Do you remember Swan/Rudd's old election rhetoric about Howard and Costello squandering the fruits of the resources boom through irresponsible vote buying and failing to invest in capacity-boosting reforms for the future? Now Swan (Mr Stability) is saying that the Australian economy is well placed to withstand the global economic turbulence. Australia being 'well placed' cannot be the work of Prudence and Stability, as they haven't done anything yet--other than announce a war on inflation, lecture the Big Banks on raising interest rates too much, and saying that the US economic slow down will only have a moderate impact on the global economy and on Australia.

Swan is repeating the views of Treasury and the RBA who say that in terms of risk management fighting inflation has a higher priority than slowing global economic growth. So maybe we all should pack our bags--leave the health and education systems, do a quick trades course (outside TAFE) and go and work in the sunshine states of WA and Queensland for $150, 000 with bonuses.

We mobile patriotic workers would be doing our bit in fighting the enemy of inflation, would we not?

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January 19, 2008

its more than a slowdown folks

Tim Colebatch in the Age says that gllomy predictions based on the write-offs of $US80 billion of losses by the Wall Street firms---Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehmann Brothers and Bear Stearns-----could:

turn out to be too bleak, and Wall Street quickly recovers its footing, and this crisis turns out to be just another blip in this long global boom. Or it could be that, with stockmarket values in the US and Australia now down by roughly 15% since the crisis began, we might be entering a serious financial meltdown, that ends the global boom and remakes the financial world into a new order.

He says that it is just too early for any of us to know the answers. Well, the always optimistic bulls are in retreat on the economy and on the stock market, as they can see that it will be an ugly year for equities in the US and across the world.

What is looming in the US is a severe recession, and the massive and growing financial losses for financial institutions, households and the corporate sector will have a big effect on the financial markets and on the US and global stock markets. That is why President Bush is calling for a $150 billion tax cut stimulus.

financialcrisis.jpg Bruce Petty

Colebatch then asks: Is the world's largest economy headed for recession? If so, how severe would it be? Would it spell the end of the extraordinary boom that has seen global output expand by about 4% a year on average through this decade? And what would it mean for Australia, a major beneficiary of that boom, and — like the US — a nation that has grown heavily dependent on spending the savings of others?

One judgement, that of Glenn Stevens of the RBA, is that while global growth is likely to slow sharply this year, the odds are that the slowdown will be concentrated in the US and Europe, with Asia experiencing only the spillover effects of reduced US demand for its exports. Nouriel Roubini says that it is more than 'slowdown' in the US:

The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation's worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who — thanks to falling home prices — can no longer use their homes as ATM machines to allow them to spend more than their income.

He adds that on top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/cancelled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis.

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January 17, 2008

bogeymen and fairy tales

We often hear about the European bogeyman from the free marketeers and The Australian newspaper. Bogeyman stands for Big Government that crushes freedom in the name of equality welfare state style. Big Government strangles the economy and creates a culture of dependency is their message. So the welfare state needs to be rolled back and replaced by individual initiative and self-help. Things are best left to the markets is the battle cry. We need to create an opportunity society.

Paul Krugman in The New York Times says:

According to the anti-government ideology that dominates much U.S. political discussion, low taxes and a weak social safety net are essential to prosperity. Try to make the lives of Americans even slightly more secure, we’re told, and the economy will shrivel up — the same way it supposedly has in Europe. But the next time a politician tries to scare you with the European bogeyman, bear this in mind: Europe’s economy is actually doing O.K. these days, despite a level of taxing and spending beyond the wildest ambitions of American progressives.

My favourite free market scenario is the privatization of highways. This is a classic libertarian fantasy: government auctions off the land, private enterprise pays for construction and maintenance, tolls cover the cost, competing routes keep it all efficient. So what about the intersections? What happens there? Another company owns them. And the traffic lights? Same? So how are the customers on the different roads treated fairly or equitable? Why through incentives to the companies of course.

So what happens when market failures are substantial enough to overcome any fear of countervailing government inefficiency--eg., global warming or cancer caused by Big Tobacco?

There is a difference between between using market forces and leaving something to the market. Governments can intervene to use market forces to our advantage rather than hoping the market corrects itself.

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January 16, 2008

crunch time at Citigroup

The New York Times reports that Citigroup is writing down $22.2 billion because of soured mortgage-related investments and bad loans. The bank is also cutting its dividend by 41 percent, obtaining a $12.5 billion cash infusion to strengthen its balance sheet, and cutting 20,000 jobs.

Citigroup’s capital levels have been severely depleted in the fallout from the continuing credit crisis and worsening downturn in the housing market. Even with the $12.5 billion capital injection, analysts think that the bank may need even more money to shore up its balance sheet if economic conditions worsen.

On his Global EconoMonitor blog Nouriel Roubini makes the following points in a presentation that provides his views on the US and global economic outlook for 2008 and the implications of this outlook for all the major financial markets and asset classes:

• The US will experience a hard landing (recession) that will be severe and protracted rather than mild

• The liquidity and credit crunch will get worse and the risk of a systemic financial crisis is rising

• The Fed easing will be “too little too late” and it will not prevent a recession

• The rest of the world will not decouple; it will rather recouple with the US hard landing leading to a global economic slowdown

That is not good news for Australia, facing strong inflationary pressures.

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January 14, 2008

things look bad in the US

David Uren in The Australian acknowledges the reality of what is happening in the US economy:

The fallout from the financial economy into the general economy is becoming more intense. Foreclosures are forcing housing sales into a falling market. There is no longer demand for housing from people without good credit histories. The tightening of finance is also starting to spill into the commercial property industry, where developers are finding it harder to obtain or roll over debt. The fall in housing prices and now the fall in shares are eroding household wealth. The American consumer, who keeps the great flywheel of the US economy spinning, is pulling back.

Have rising exports, due to to the weak dollar, helped the US to avoid slipping into recession, despite the decline of the US manufacturing base? Paul Krugman argued so on his blog late last year. He is now having second thoughts. As US imports continue to rise the US trade deficit continues to increase.

Despite rising unemployment, slowing economic growth, declining consumers confidence, inflationary pressures a deepening housing crisis (rising foreclosures and falling house prices) and a panicky stockmarket, the Bush administration is saying that economic fundamentals are sound. No wonder the Democratic presidential candidates are attacking the Republicans on the economy and bringing forward multi billion economic packages involving relief and stimulus measures.

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January 11, 2008

the limits of political power

So the Treasurer cannot do very much in dealing with the credit crunch in global financial markets. That much is obvious. He can just appear to be doing something.

Swan.jpg Alan Moir

We know know that Australia's four big banks have $1 billion direct exposure to the US subprime mortgage market whilst the debt market volatility appears to be a problem for Wesfarmers, which borrowed $10 billion to buy Coles and needs to refinance around $4 billion in short term debt.

This playing off the executive of the nation-state against the global economic flows does have its conceptual limits, as indicated by this post on philosophy.com. Neverthless, Swan can do very little.

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January 7, 2008

industry handout?

I see that the car industry in Australia is asking for more help, either in the form of an extension of the import tariff of 10% beyond 2010, or financial assistance to improve its productivity and innovation. Apparently, the car manufacturers (Mitsubishi, Toyota, Holden, Ford) are under pressure from a high dollar, changing consumers tastes in favour of fuel-efficient and hybrid models, increased imports and pressure from the parent companies to become more cost competitive.

Apparently, the viability of two of the four (Mitsubishi, Ford?) is threatened without more government assistance in some form. The Victorian and SA state government have called for a freeze on tariff cuts in 2010---the proposed reduction from 10% to 5% shouldn't go ahead.

Isn't the solution for a viable car manufacturing industry in Australia one of exporting more cars that consumers actually want--hybrid and flexible fuel cars? So where is the innovation to make a green car?

Posted by Gary Sauer-Thompson at 5:42 AM | Comments (11) | TrackBack

January 6, 2008

Washington reneges

These days the economic establishment seems to offer the same answer to every question: let markets decide. Those policymakers and thinkers who suggest alternatives--some form of intervention by governments are shrugged off as leftist dinosaurs fighting yesterday’s battles. Consequently, most economists don't generally dare to buck conventional economic "wisdom" and policy makers generally talk up the economy, often insisting in the face of contrary evidence that the outlook is positive, the fundamentals are sound, and the good times will continue to roll.

A classic example is the US President---George Bush continues to strike an upbeat note despite despite a worsening housing crisis; continuing turmoil in credit markets and the evidence pointing to a hard landing (recession) for the US economy. But the Washington Republicans are being mugged by economic reality and Bush is talking in terms of government intervention:-- stimulus package may be required to nudge the market to what it should do--an adjustment/cathartic process that sorts things out. Despite the market being the natural order of things the hand of man is required in Washington to do something about the slowing American economy.

Just a little stimulus mind you---a little something for the housing construction industry, which has become caught up in the sub-prime mortgage crisis. That means the market can no longer prevent the US economy from getting into a bad shape. A little crack in the neo-liberal edifice.

In America’s Houses of Cards at Project Syndicate Joseph E. Stiglitz says that there is a macro-story and a micro-story here:

The macro-story is simple, but dramatic. Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years.

With higher interest rates depressing housing prices, the game is over. As aggregate demand weakens so will the economy. He says:
The micro-story is more dramatic. Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more – there was already excess capacity. Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital.
It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge. But this is what Alan Greenspan encouraged Americans to do. When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages – at a time when interest rates had nowhere to go but up.

Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income. Globalization implies that America’s mortgage problem has worldwide repercussions.

What happened? Why the free marketeers went very quiet on all their stuff about moral hazard and ran to their respective governments demanding a bail out for America’s bad lending practices. Will that lead to greater financial sector regulation, especially better protection against predatory lending, and more transparency in financial markets?

Nope. The market is best left to do its thing say the financial free marketeers. Government intervention is not required. It has negative consequences and strangles economic growth. It's a mantra isn't it?; one told by those who need to sustain their faith in the natural workings of the free market.


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December 28, 2007

let the good times roll

The odds of an increase in interest rates in February have shortened after the sold-out sales over Xmas. The emphasis has been on the big ticket items---game consoles navigation devices, LCD and plasma TVs, digitial cameras were racing out the door in Sydney and Melbourne.

My PC at Victor Harbor, which ran Microsoft Windows XP and Office 2003, died just before Xmas. I've decided not to upgrade to Microsoft's Vista and Office 2007 for my personal use. I'm shifting over to an Apple Macbook, display screen, i-pod and photographic software. But I am going to pay off one of my credit cards before I spend up big.

Xmas.jpg Alan Moir

The Xmas sales indicate that the household debt level and the current interest rates are not too restrictive for Australian households. The resources boom continues, house prices continue to rise the field of investment dreams grows ever more expansive, there is easy money is too be made and the Liberals have been swept into history. The future is ours.

The public mood is rather different in the US. House prices continue to fall and consumers are underspending. it's enough to cause jitters on Wall Street that is finding it rather hard to spin the huge loses incurred by the global banks and brokerages (eg. Merrill Lynch) from the sub-prime mortgages as good news. The US is headed towards a hard landing in 2008. Nouriel Roubini, over at Project Syndicate, spells this out. He says:

The US is now headed towards recession, regardless of what the Fed does. The build-up of real and financial problems – the worst US housing recession ever, oil at $90 a barrel or above, a severe credit crunch, falling investment by the corporate sector, and savings-less and debt-burdened consumers buffeted by multiple negative shocks – make a recession unavoidable. Other economies will also be pulled down as the US contagion spreads.

Robert Schiller has an article at Project Syndicate, which explores our images of economic disaster entitled Imagining Recession. He says that:
Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time. Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche. The images that have accompanied past episodes of market turmoil are largely absent today.

However, there is an image that does exist in the US :
The images that are uppermost in our minds are of a housing crisis. We imagine residential streets with one “for sale” sign after another. Worse, there are images of foreclosures, of families being evicted from their homes, their furniture and belongings on the street. If home prices continue to decline in the United States and possibly elsewhere, there could be many more vivid images. You may yet be presented with the image of your child’s playmate moving away because his parents were thrown out in a foreclosure. You may see a house down the street trashed by an angry owner who was foreclosed. Such images become part of your sense of reality, and could disturb your sense of confidence and reduce your willingness to spend and support the economy.

This is what is happening in the US now, though not Australia. The good times are rolling along courtesy of the resources boom.

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December 24, 2007

Religion, public life, postmodern shopfest

Since Xmas is upon now is a good time to reflect on the role of religion in public life. A good place to start is Tina Beattie's The end of postmodernism: the “new atheists” and democracy in Open Democracy on the conflict between science and religion in postmodernity. I quote two passages that describe Beattie's understanding of the current postmodern condition in liberal democracy:

religious zealotry can be interpreted as the other face of the metropolitan fancy-dress parade which constitutes the consumerist lifestyles of postmodern urban elites, reflecting as they do the banality and homogeneity of a global market which is no respecter of boundaries, cultures and traditions. Instead of freedom we have choice, and instead of values we have labels and lifestyles. We citizens of the western democracies have become solipsistic consumers indifferent to the squandering of our hard-won freedoms and rights by governments for which terrorism has become a byword for ever-more draconian strategies of surveillance and control. As democracy withers and the political forum is colonised by the suave-speaking mediocrities of the soundbite era, as blatant self-interest on the part of the world's most powerful nations becomes an excuse for every kind of collusion in the politics of corruption and violence, we in whose names the battles are being fought have allowed our horizons to shrink so that we see no further than the nearest shopping-mall.

This ignores the ethical life that we live whilst inhabiting a consumer culture and the way this shapes our ethical judgements about right and wrong beyond the shopping mall. But it is Beattie's narrative.

Beattie describes that the counter religious response thus:

For many others, it is religion - particularly in its more dogmatic forms - that offers a potent alternative; those drawn to it include people both disenfranchised from the beginning because they are too poor or too oppressed to participate in the postmodern shop-fest, and people who are afraid of what they perceive as the moral meltdown of modern western culture. In these forms of religion, people can find certainty instead of confusion, clear rules instead of ambiguity, tight-knit communities instead of shifting and transient relationships; and all this is presided over by a wrathful male God who hates all the things they hate - particularly gays, feminists and libertarians of every description - and who sanctions violence in order to keep His values safe from corruption.

Beattie says that the most pressing question confronting us lies here: how to respond to the slow death of democracy, and adds:
The recent confrontation between religion and science is in this context a smokescreen which is distracting us from much more urgent political and intellectual issues. It allows the secular intelligentsia to hide behind a convenient and inflated - where not fabricated - myth of religious extremism which masks from us our own complicity in the murder and mayhem by which western global supremacy and our own privileged status within that are now maintained.

I agree that the recent replay of the confrontation between religion and science is a smokescreen which is distracting us from much more urgent political and intellectual issues. All that cultural wars stuff about needing to return to religion to get some ethics is blowing in the wind. Modernity has its secular ethics--rights based and utilitarianism--and, as Nietzsche pointed out , it is the highest values of Christianity that are being devalued.

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December 20, 2007

choking on our own prosperity?

One of the centre pieces of the ALP's election campaign was a tax package that will add a lot more to demand than they do to the supply of labour. And the Reserve Bank lets it be known that it would have put up interest rates again in December if it were not for the credit crunch in international financial markets. Treasury is talking in terms of the likelihood of further pressure on the underlying inflation rate over the next 18 months given the economy's lack of spare capacity.

inflation07.jpg
Pryor

Access Economics says delivering on the tax commitments will push up interest rates unless there are extra spending cuts. It says adding another tax cut to an economy already at full stretch does not boost the size of the economy and create more jobs. Instead it brings a bigger import bill and higher prices. So more spending cuts are required.

This kind of response needs to be put into the context of what is f happening in international financial markets. Does not the credit crunch crisis there represent the first crisis of financial globalization? The clogg up in the international money markets increasingly appears to be the most severe financial turmoil hitting advanced economies in the last twenty years. Nouriel Roubini says that we should be wary of the international central bankers as their understanding of this crisis has a history of being flawed:

...the central banks – the Fed in particular – have been behind the curve for over a year now. The Fed totally underestimated the housing recession arguing – like most market folks – that this was a temporary slump that would bottom out by the end of 2006 (sic!); it kept on saying throughout the winter of 2006 that the sub-prime problem was a niche and contained problem when it was not just sub-prime mortgages but also near prime and prime and excessive and reckless lending and leverage across the entire financial system; it kept on arguing that the housing slump would not affect other sectors and would not lead to a more severe economic slowdown that is in full swing now; it underestimated the risk of broader contagion to the financial system and ended up being literally surprised when the liquidity and credit crunch hit in the summer time; it then it deluded itself in believing that this crunch was temporary and that Fed easing would resolve it; and it was then surprised (as Kohn admitted in its last speech) when the crunch got worse rather than better in the fall and has now gotten much worse than in August. So, the Fed has been persistently wrong for over a year now in its assessment of the economy and of financial markets.

The housing downturn in the US is entering its third year and the Federal Reserve's actions to contain the fallout have largely ineffective. The hard landing that the US is now experiencing and a severe global economic slowdown are the consequences for the credit excesses, the asset bubbles, the reckless leverage, the lack of minimal appropriate supervision and regulation of financial markets of the last few years. The central bankers are saying very little about the medium terms issues of reforming the architecture and governance of the international financial system.

Posted by Gary Sauer-Thompson at 5:39 AM | TrackBack

December 17, 2007

an economic healing process?

The global crisis in financial markets arising from the sub-prime mortgage crisis in the US continues to unfold in good dialectical fashion. Last week we had an emergency action plan-- a bail out?-- by the US Federal Reserve and four other central banks (Banks of England and Canada, the European Central Bank and the Swiss National Bank) that injected lots of liquidity ($70 billion) into global financial markets.

Is it a case of too little too late? Is the current turmoil in the US just a liquidity crisis? A “temporary” credit crunch, as it were? Or is it something more?

coldsick.jpg
Steve Bell

This bailout, it was argued, would help banks to continue borrow to fund their activities. The Central Bankers big fear is that the US housing problems will drag its economy into recession and damage worldwide economic growth. There is now a serious risk of a global economic downturn in 2008 as the US inevitably heads towards a recession, and this recession leads to economic recoupling across the globe.

The signs are not good: banks in America are warning that their write downs will be greater than predicted; Britain's house price bubble looks to burst because of the credit crunch; the interbank system is not working very well; the regulatory systems in Asian countries are vulnerable to the forces flowing through global markets; the U.S. current account is in bad shape; inflation is becoming more of a threat in Australia, Europe and Asia. Moreover, the US dollar continues to weaken and, as it is the major currency for trade, its continuous depreciation will push up prices of oil and gold and reduce the wealth of dollar-holding nations (eg. China, America's creditor). Or is this a case of a dirty float?

That's a dollar crisis on top of a credit crunch, poor governance and a weakening economy. That's a lot of friction and anxiety being generated within the political economy of the world of nations, and the rippling effects can be felt everywhere.

What if the events unfolding in the US represent a debt or a insolvency crisis among a variety of borrowers that over-borrowed excessively during the boom phase of the latest credit bubble? What if the end process of the economic flows are insolvent and bankrupt households, mortgage lenders, home builders, leveraged hedge funds and asset managers? What if we have a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy?

If so does that not require more than liquid injections to deal with the causes of the credit crunch? Paul Krugman says:

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working. Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

This is a world of bad debts and falling equity. As Krugman observes there’s a lot of bad debt out there in the US and you just don’t know how much of that bad debt is held by the guy who wants to borrow your money.That's a serious case of lack of transparency and thus a regulatory issue.

The global bailout addresses the issue of the interbank system not working very well (the banks don't trust one another), but not the other issues. Nor will the monetary easing through interest rate cuts by the Federal Reserve in the US prevent the unavoidable hard landing in that nation's economy. At best it will only postpone the necessary restructuring after a reckless credit-boom driven asset bubble. Liquidity injections by themselves do not resolve the deep insolvency problems of many overstretched borrowers--households, financial institutions, corporates-- in the US.

A possible scenario is that a US hard landing followed by a global slowdown will seriously reduce the current inflationary forces, as these will lessen once the US hard landing is in full swing. If so, then we need to ask: why do central banks allow credit bubbles to grow and burst? Why don't the central banks work to bring about regulatory reform of the global financial markets? Why aren't there moves to bring non-bank financial institutions into the regulatory framework? Why is there a lack of movement to create a sounder and more transparent global financial system?

Update
The rippling effects of the credit crunch continue to bite in Australia. RAMS Home Loans was unable to refinance some of its loans. Now the Centro Group, a management and property group of companies, has revealed that it has been unable to negotiate a package to refinance $1.3 billion and unable to roll over $3.9 billion in short term loans that expire on February 15, 2008. There’s an additional $3.4 billion that falls due within 12 months and the remaining $10.6 billion expires some time after that. Shares in Centro Properties Group collapsed today.

The banks have become more risk averse and various bankers have basically pulled back from lending to property assets. This has led to hefty increases in the cost of capital for other borrowers. Centro, which manages