economics
The Economic Challenges Facing a Rudd Labour Government - musings on the Fabian Society forum
The saying goes “ask five economists a question and you’ll get five different answers – six if one went to Harvard”. At Wednesday night’s Fabian Society forum, three interesting economists managed to produce a lot more than three answers to the question: “what are the key economic challenges facing a Rudd Labour government”. The general conclusion was: it’s going to be tough. The recurring theme was the upward trend in inflation, and the consequent need for fiscal restraint, tempered with concerns about the impact of a sharp downturn in the US economy, and the level of indebtedness in the Australian economy.
ANZ’s Chief Economist Saul Eslake identified inflation as the key short-term challenge, which is likely to see interest rates rise further, and require fiscal restraint by the Rudd government. He argued (as in a previous interesting speech) that settings of fiscal policy have in the past been too loose, and that revenue windfalls associated with the resource boom should have been spent more on enhancing the productive capacity of the economy rather than on cuts in income tax. (This presentation was also the most broad ranging of the three, also touching on longer term economic challenges including global warming and the ageing population.)
A similar line was taken by HSBC’s Chief Economist John Edwards, who noted that the Rudd Government has been elected in much less favourable economic circumstances than previous governments. The Hawke government took office at the trough of the 1980s recession, with economic conditions gradually improving though its first term. The Howard government’s first term was characterised by the emergence of the Australian economy from a mid-cycle lull. Edwards argued that the Rudd government, in contrast, faces significant short-term economic challenges: an overheating domestic economy, which will require contractionary monetary and fiscal policy, despite the possibility of a significant downturn in the US economy.
In contrast, Associate Professor Steve Keen of the University of Western Sydney focussed on the high and rising levels of household debt in the Australian economy, suggesting that – as in the US economy – a serious and protracted debt-induced recession may be on the horizon. In that context, he argued that higher inflation may in fact aid households, by reducing the real value of their debt. This was subject to some subtle criticism from Saul Eslake, who noted in discussion following the presentations that rising debt is also a consequence of the development of financial systems, and that it was not clear cut to argue that the level of debt per se is a problem, but rather the capacity of households to service that debt.
On federal economic interventions under today's neoliberalism
Every time I blog about economics it gets torn apart, but I can’t seem to help myself.
It strikes me that the policies being pursued to deal with the economic tumult descending upon us by the authorities in the US and Australia are rather sad, a sad reflection on the paucity of controls on the economy under neoliberalism.
The US is rather clearer. The economy is tanking, so both the Fed and the government are doing all they can to leverage it within the constraints of neoliberalism. The Fed drastically cuts interest rates – basically the only thing it can do. Given that the problem is one of people having too much debt, this is both a good and a bad thing to do: good insofar as it takes the pressure off the indebted, but bad insofar as it encourages people to take on even more debt. The government is cutting taxes. This is a bad move insofar as it plunges the nation into even more insane levels of debt to pay for the float. Essentially, the question here is whether the crazy levels of public and private debts in the US are sustainable. For some reason it seems to be widely held that, though unprecedented, they are. I take the view that the economy is teetering on the edge of a precipice - while it doesn’t have to fall over the edge, over a long enough time span something’s bound to happen that will topple it. The US still has an ace in its hand though, viz. the nice fat war that is basically an economic cure-all, should it be possible to amp it up further. We haven’t yet found out how far this strategy can go, but we will. None of the serious US presidential candidates are willing to “take military action off the table”, and as such the wonderful economic and political panacea of aggressive war remains likely to characterise US public policy for the foreseeable future.
The Australian case is somewhat more opaque. Though the ASX has followed the trajectory of the US markets, the RBA sees no sign of recession, but is on the contrary worried about the Australian economy ‘overheating’ because of the rise of inflation. Here is where I’m going to really get in over my head, but it seems to me that this is a shocking misdiagnosis, and that inflationary pressure is not caused by overheating at all. The Aussie economy has been going gangbusters for years, with very low unemployment and high rates of growth, without inflationary pressure mounting – why is it only ‘overheating’ now? The answer is that it’s not. Rather certain extraordinary factors unconnected to economic growth are causing price inflation. The primary one is the price of petrol. This affects the price of almost everything in Australian shops. The drought has also had a big impact, though one assumes that will be abating to some extent now. The other thing is rental price inflation. House price inflation might be a factor too, but I don’t think it is, inasmuch as it didn’t cause inflationary pressure to speak of when Sydney house prices were going through the roof earlier in the decade. Rather, in Sydney at least, the decline in attractiveness of house-buying in outer suburban areas, which is in no small measure a symptom of rising petrol costs, has caused a decline in profitability of outer suburban housebuilding, hence a rise in pressure on rental housing. Even this is probably not decisive, however: what’s really piling on the inflationary pressure here is precisely the high interest rates themselves. Since much rental housing is owned by mortgage holders, higher interest rates drives them to push up rents. Moreover, the high interest rates also put the squeeze on owner-occupiers.
On these fronts, inflation driven by rising consumer prices in consumables and housing, increasing interest rates really doesn’t help. The only thing that could help here is serious state action (e.g. introducing rent controls, creating new public housing, introducing price controls on petrol, creating new public transportation, investing in rail infrastructure for shipping goods). This is the case in the US too (where there is only one possible state action allowable in the conjunction of neoconservatism and neoliberalism in US public policy, namely a military build-up and expenditure). The Rudd government’s only action thus far is to try to constrain government spending. Since I don’t believe that Australian government spending is part of the problem, I can’t see how it can be part of the solution. I regard as at least plausible the arguments of the University of Newcastle’s Centre of Full Employment and Equity that running a public surplus means privatising debt (notwithstanding that in the US both the government and the populace are running up debts like there’s no tomorrow).
Ghosts of PMs past
One the the things I’ve found frustrating about the federal ALP’s approach to economic policy in recent years has been the way that the Hawke/Keating economic reforms - and their contribution to our current prosperity - have been disowned.
So I found it fascinating to see three allusions to Keating in the first 15 minutes or so of tonight’s Leaders Debate. It was just a pity that the leader making those points was Howard, not Rudd! First, a reference to the “10 to 20 years of economic reform” in Australia. Then - asserting his commitment to reform - a mention of voting for “reforms to tariffs and deregulation of the financial system”, under Keating. And finally, he characterised himself as a “true believer”.
Second Class Workers
Billionaire Harvey Normam chief wants to create a second class of worker - comprised of foreigners - with lower pay and fewer rights than domestic workers.
BILLIONAIRE retailer Gerry Harvey says Australia needs a two-tier wage system to allow employers to pay foreign guest workers less than locals.
The Harvey Norman boss said Australia’s prosperity was creating a labour shortage and endangering the nation’s competitiveness.
He said a growing number of Australian manufacturers were moving overseas, where cheap labour was plentiful.
He called on the Federal Government to allow foreign workers on fixed visas to form a second tier to the labour market.
“Australia doesn’t have cheap labour. Many overseas workers would be prepared to move here for a much better life and half the money Australians earn,” he said.
“When you get unemployment down to four per cent, to three per cent, to two per cent, business can’t get the labour.
“I’ve got horse studs and it’s difficult to get staff.
“Workers would rather work in the mines where they get paid twice as much.
“Fruit- picking companies are relying on backpackers.”
I’m sure we all feel sorry for Gerry and his understaffed horse-studs.
Liberals' Tax Policy Puts Pressure on Interest Rates
The Liberal Party has started their reelection campaign with an astounding example of voodoo economics - a big ticket tax cut.
While this is good politics, it is bad policy and bad economics.
Senior economist with HSBC, John Edwards, says the tax cuts would put upward pressure on inflation.
“It certainly means interest rates would be higher than they would otherwise be,” he said.
“I cannot imagine were it not for an election the Treasurer would be contemplating these tax cuts of this order.
Some economic fallacies
Recently we have seen the Textor-Crosby machine kick into overdrive. Howard is making the absurd argument that State borrowing levels are causing “upward pressure” on interest rates.
You can read some commentary at LP. I also commented in an earlier post that the entire proposition is delusional.
In the interests of informing people about some common economic fallacies, I have tracked down a link to William Vickrey’s “Fifteen Fatal Fallacies Of Financial Fundamentalism”, which I think is mostly intelligible for the layperson.
Fallacy 1:
Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital.
Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.
Debt and Interest Rates
“The states are going into debt. My point simply is that if you go into debt, you have to borrow to finance that debt and when you borrow to finance that debt, you put upward pressure on interest rates because you compete with private borrowers.
“The federal government is not doing that. State governments are doing that, that’s the point I was making.”
Any right-wingers care to explain the economics behind Mr Howard’s statement here, given that state governments borrow in the international markets? Is Howard suggesting that the deficits run by a few Australian State Governments seriously reduces the total amount of finance available globally (or even in Australia)?
Bad example
AUSTRALIA’S car industry has vowed to fight any moves to impose compulsory greenhouse gas emissions standards for new vehicles, despite such rules already applying in the United States and China.
…
“As (General Motors) boss Bob Lutz has described it, that’s like trying to solve the nation’s obesity problem by saying that the clothing manufacturers are no longer allowed to manufacture larger sizes.”
(The Age)
Perhaps an emissions target for new cars is like the government trying to solve obesity by reducing the amount of fat and sugar that food producers put in their food…
$27.36 a week - good news for whom?
Today the Australian Fair Pay Commission awarded an increase of $27.36 per week to low paid workers. For workers at the bottom end of the wage scale this represents a 5.67% pay rise. Predictably, unions are hailing a win while the Government, Australian Industry Group and Australian Chamber of Commerce and Industry bleat about it hurting business, locking in an interest rate rise and giving lie to the claims that the new system will hold down wages.
I think they’re all wrong.
Everybody's Talking Fabian!
The noun/adjective on everybody’s lips at the moment is Fabian. Far more interesting and exciting than that word used to describe the model, the Fabian Society is a group of people dedicated to promoting democratic socialist ideals, and suggesting means for their adoption.
John Quiggin has published, in full, a rather good letter from socialist stalwart and historian Tristan Ewins, the sentiments with which I broadly agree: up with the S-word! Nicholas Gruen fell victim to self-organising-gone-disastrously-wrong, while over at Catallaxy, Jason Soon denies the Fabian world conspiracy, and the Currency Lad is posting semi-book length extracts from the NCC’s Santamariaist manifesto.
You can’t get away from collectivism run rampant, and you can certainly hurry to jump the rolling bandwagon at the next NSW Fabian Society event:
Are Factions Killing the ALP?
Event date: Wednesday, September 20, 2006 - Wednesday, September 20, 2006
Location: LHMU Auditorium 187 Thomas Street, Haymarket, NSW.
Time: 6.00 pm - 7.00 pm
With: Senator Robert Ray, Dr Carmen Lawrence MP & Evan Thornley.
Chair: Senator John Faulkner, President NSW Fabian Society
Cost: Non-Fabians $10/$5
Members of the Fabian Society: Free – please show your membership card on the night to obtain free entry.
