Earlier this week I argued the folly of several Coalition policies that aimed to wind back the best of the Labor government’s reforms for no reason other than Tony Abbott’s strategy of mindless objection to everything.
Today there are a number of stories at large which add some more texture to this narrative.
The first is a leaked guide to a Joe Hockey speech to be delivered today. Phil Coorey reckons Hockey will argue:
“We can compete with higher wages provided our output per worker is globally competitive,’’ he will tell the Committee for Economic Development of Australia.
“Australia’s standard of living must not go backwards. There is no national benefit in cutting wages.
“What we need to do is to ensure our workers have the skills and knowledge that out industry needs. Education, training and retraining are a key step to unlock our productivity gains.’’
Say what? Julia Hockey? Joe Gillard? Jokes aside, this is some relief to me. The line that we should join a race to the bottom on wages, which has been driven madly at the AFR, is at best a quarter of the story and it’s a relief to know that the constraints of Australian centrism win out over it.
That is not to say that industrial relations reform is, or should be, dead. On the contrary, Australia’s real effective exchange rate, which includes things such as wages, needs to correct if we’re to continue to attract investment:
But the sensible way to go about it is through productivity gains linked to investment and a slow melt in wages in real terms. Most importantly, however, is that it happens via the dollar. On that we have mixed news from Hockey:
He will also seek to downplay expectations that a Coalition government can do much to lower the dollar. He will make the same observation as is being made by the government, that the dollar is remaining stubbornly high despite the softening of commodity prices.
Mr Hockey will pledge to run a a tight fiscal policy to put downward pressure on the dollar and promise to argue more pro-actively than the Labor government in international forums for less state interference in currency markets…“those who argue for a high dollar are effectively arguing in favour of higher prices for consumers at a time when many households are under extreme financial pressure’’.
Yes they are and quite sensibly too. It is only productive investment that grows your economy sustainably over time, not consumption. This is especially so when you’ve wasted so much capital on unproductive property speculation. It is some irony that as the dollar really does look like its run into a serious headwind and is grinding lower (down last night into the $1.01 range) that every official and his dog can’t wait to talk it up.
Hockey’s pledge to run tight fiscal policy will help on that front if its true. But like his pledge on wages I suspect it won’t be. The mining boom looks to be at or past the peak and its unwinding will weigh heavily on growth whatever the pace of decline. When Hockey wins power, the level of fiscal cuts needed to find a surplus will represent sever austerity in the circumstances. I note Hockey is preparing the ground for this given “the surplus” has now been decisively replaced by “tight” policy.
There is still a loaded gun here for the economy in that if whatever Hockey means by “tight” fiscal policy is enough to lower the dollar, that will also mean it’s enough to lower interest rates, and risk further destabilising credit and asset price growth. The real need in Australia, to shift from debt-driven speculation and consumption to exports and investment for growth, remains as compromised as ever and again we come back to the need for new tools in monetary policy to disrupt this paradigm. Only the central bank has the vision and independence to break the politco-housing complex down and insure that any new space for growth is occupied by productive investment not more useless mortgage debt.
Next up, the AFR has a story on the difficulties facing Abbott’s extremist pledge to repeal the carbon price:
Energy analysts at Bloomberg New Energy Finance have advised clients there is only a one in three chance of the carbon tax being repealed if the Coalition comes to power.
…“The Abbott-Proof Fence is secure. To fulfil his ‘pledge in blood’ therefore, [Coalition Leader Tony] Abbott must change the law. To do that, he needs a decisive election victory this year that either delivers him control of the Senate, or enough political capital to risk taking the carbon price to a double dissolution.”
Exactly right.
So, today at least, it rather looks like our incoming government is doing what Rudd did to Howard. They are occupying the middle ground, compromising core beliefs so as not to scare the horses. Creating a safe pair of hands as it were.
However, as I’ve noted before, the Coalition still has it backwards, with Joe Hockey representing the secure, strategic and centrist leader while Tony Abbott plays the extreme and tactical nut job. One wonders just how far ahead in the polls they would be with better execution.
“He will make the same observation as is being made by the government, that the dollar is remaining stubbornly high despite the softening of commodity prices.”
The stubborn dollar?
So it is just a personality issue. No wonder neither side can do anything about it as cognitive behaviour therapy for currencies is still at an early stage of development.
Perhaps it is not remaining high due to stubborness at all.
Perhaps it is because we are hooked on foreigners seeking to purchase $AUS assets like government securities and make loans to locals to buy over priced houses.
And because we have been hooked for so long any attempt to change course would cause more discomfort than our pollies can sell.
‘Perhaps it is because we are hooked on foreigners seeking to purchase $AUS assets like government securities and make loans to locals to buy over priced houses.
And because we have been hooked for so long any attempt to change course would cause more discomfort than our pollies can sell.’
That be it for sure…
An inability to see economic reality for what it is, place that against a framework of known economic/financial laws, and address the reality until it represents logic (or something close to it) against those known laws.
Joe also said:
Mr Hockey will present an upside to the high dollar, saying it is good for consumers and importers, and business should also seize the opportunity to import “cutting-edge equipment and world-class technology so as to boost the productivity and efficiency of their domestic operations’’.
So there you have it. There is zero chance, nil, nada, of either side attempting to “engineer down” the AUD. The MineBot is wasting his time with the constant fear-mongering about higher petrol prices. It ain’t gonna happen.
When the dollar falls, it will fall in tandem with commodity prices, as the next financial crisis envelops the world. So never fear, petrol will still be affordable, we just won’t have a manufacturing sector, or any ability to generate export income outside of mining.
“When the dollar falls, it will fall in tandem with commodity prices, as the next financial crisis envelops the world.”
correlations can and will change on a whim
on political/economic engineering… what an illustrious history that has had, especially when trying to dictate the direction of a currency
““those who argue for a high dollar are effectively arguing in favour of higher prices for consumers at a time when many households are under extreme financial pressure’’.”
I’m confused. Isn’t a lower dollar likely to to lead to higher prices?
Yep I noticed that as well. An error in Coorey’s piece.
Absolutely.
Hockey is either an idiot or dissembling (or has a speech writer who is). I am never sure which it is. I like his affable demeanour but I don’t have confidence in his personal ability under pressure.
A lower dollar would mean higher liquid energy prices unless taxes on petroleum products were reduced.
Everything that is being imported or priced off the selling price of imported products would rise by 10% over say 12 months as old orders flowed through the production, delivery, inventory and sales process and new orders flowed through after them.
Overseas holidays, clothing, appliances, cars, food (Australian food production is, in the bulk commodities at least, the processing of imported fossil fuel and fertiliser into foodstuffs), wine, orange juice.
And for businesses, transport equipment, mining plant & equipment, manufacturing plant & equipment, computing equipment.
Transport equipment and fuels would flow through into the cost structure of everything with fuel within 3 months and equipment costs gradually over 3 to 5 years.
Inflation would be higher undermining real wage levels.
Importers would face a sectoral recession as volumes dropped, retailers would be hit by consumer reaction to sticker price shock.
A significantly lower AUD in a shortish period would be a significant challenge to the economy and to inflation management and real wages and voters standards of living.
On the other hand it would be good for manufacturers including of small to medium fuel efficient cars.
Explorer, it’s the same game as Swan saying interest rates are low because the economy is in such good shape and he’s WBT and low rates are a vote of confidence.
Public utterances on both sides are economically illiterate.
Hockey has 2 speech writers
Not sure that Gillard understands at all, suspect Hockey does (but with Labor always ready to rattle the Workchoices bogeyman and the bollocking Hockey received for his ‘entitlement’ speech) but proceeds with caution.
Who is going to be the politician to tell Australians that it is likely that in coming years standards of living will decrease along with incomes etc? In an election year?
No-one. Stick to the spin – we can continue to be a high wage country (decreasing competitiveness), continue to spend enormous amounts on education (return declining standards because they’ve got it all wrong) and continue to reward ourselves with a raft of (generationally unsustainable) entitlements.
Hmmm, Abbott’s nutty ideas seem to be getting some traction- in Govt. Low and behold, Gillard suddenly learns about dams?
I don’t think the majority of voters are prioritising the high dollar at the peak of their Hate and Love lists as they apply to the 2 contenders. So the AUD level and policy to it is not an election decider- even if it deserves to be.
3d1k is correct, Hockey is playing it safe. I know that the meeja are constantly looking for thrills, intrigue, conflict and drama. But smart Govt isn’t like that and I believe we have been warned the Coalition will be boring for many as they go about THEIR JOB of governing. First order of business will be to get elected. Then, if successful, see what kind opportunities their majority offers to exploit.
Make no mistake though, they are out to trim the size of Govt. Good thing too.And sound financial management will mean much more rigorous tests being applied to expenditure. Another very good thing.
I think the REAL issue coming now to the fore is credibility. Both parties will continue putting foreward their policies and plans, general electioneering. The public will be challenged in 2 areas with all this- a) Who do they believe will keep their promises and b)who has the level of competency to execute policy without the detriment of unintended consequences.