All right, this blogger is sorry. He’s tried to leave it alone. He’s willed himself to ignore it. But he just can’t let Gittins! get away with today’s technicoloured shocker. According to the paragon of baby-boomer supiority:
The more economists examine it, the more they explode the seemingly self-evident truth that we’re living in a two-speed economy.
Why do people keep saying this? I think they’re saying that whoever’s benefiting from all the talk of a boom, it ain’t my state or my industry. In short: I see no evidence of any boom around me and I’m certainly not getting any benefit from it.
If there is a boom, they seem to be saying, it’s limited to the mining industry while the rest of the economy is struggling. Similarly, Western Australia and Queensland may be doing OK, but the other states and territories aren’t.
There’s just one small problem with all this: the facts don’t back it up. Consider, for openers, the figures we got last week for ”state final demand” (an imperfect interim substitute for gross state product).
Growth in this measure over the year to December averaged 2.7 per cent across Australia, but varied from 4.3 per cent to 1.5 per cent. The three fastest growing areas were the Northern Territory, the ACT and Tasmania.
Western Australia came fourth on 3.1 per cent and Queensland came eighth and last on 1.5 per cent.
As Saul Eslake of the Grattan Institute has reminded us, it’s not arithmetically possible for all the states to be above average like the kids in Garrison Keillor’s Lake Wobegon. There’ll always be some above the average and some below it. There’ll always be a multitude of reasons why, at any moment, some states are doing relatively well and others relatively badly.
Eslake has had a good look at the figures and found that, in the past two decades, there’s never been a gap of less than 2 percentage points between the annual rates of growth in gross state product of the fastest and slowest growing states and territories.
But that gap is narrower in recent years than it used to be. Over the past five years it’s averaged 3.7 percentage points, which is 1.5 percentage points narrower than it averaged over the previous 15 years.
Eslake adds that there’s much less divergence in the performance of our states and territories than there is in comparable federations. Over the past four years our divergence has been half what it is for the American states and about a third of what it is for Canada’s provinces.
Now, the phrase “two-speed economy” is generally thought to be the contemporary term used for “Dutch Disease”. This blogger will assume that’s what Gittins! means because he hasn’t bothered to define it.
Who ever said Dutch Disease has anything to do with state boundaries? This entire argument is a straw man, ascribed to anyone that has shown concern about non-resource export industries and then attacked as if they made the argument. It is pure sophistry.
Different states will react differently depending upon their export mix but so what? It’s the national totals that matter. On that score, this blogger has graphed the recent progress of those non-resource export sectors. From the DFAT Composition of Trade report. Manufacturing down for two years and this year is a certainty:
And services barely eking out gains, with just about everything except education (which we know is shrinking this year) going backwards:
Moreover, Dutch Disease is a phenomenon that is seen most clearly in rear-view mirror, when the resources boom ends, leaving the nation with high spending habits and collapsed income. The perfect recipe for a current account crisis, or financial crisis, if your banks happen to be the ones doing the nation’s borrowing. Which is precisely what happened in the GFC.
Yet, bizarrely, Gittins! uses this history as an argument against Dutch Disease:
But now Kieran Davies and Felicity Emmett, of the Royal Bank of Scotland, have examined the two-speed economy proposition using labour market figures for almost 70 regions around the nation.
In particular, they test the contention that the resources boom and the high dollar that goes with it are making the economy too dependent on mining and hollowing out the rest of the economy, thus making us more vulnerable to external shocks.
They find that at the height of the first stage of the resources boom in 2008, when national unemployment fell just below 4 per cent, unemployment was low across the country. There was a gap of only about 6 percentage points between the lowest regional unemployment rate of 2 per cent and the highest of 8 per cent.
Then, at the time when the mild recession caused by the global financial crisis led to national unemployment peaking at close to 6 per cent, the gap between the lowest regional unemployment rate of 1 per cent and the highest regional rate of 20 per cent was a massive 19 percentage points.
But now, as unemployment has continued to fall back from that peak, the gap has narrowed sharply. At the start of this year it stood at 14 percentage points, with the lowest regional unemployment rate still at 1 per cent and the highest falling to 15 per cent.
And get this: many of the regions with the lowest unemployment rates are in the non-resource-rich states. The regions with rates between 1 per cent and 2 per cent are in NSW (the Hunter Valley excluding Newcastle, and some parts of Sydney) and the Northern Territory. WA doesn’t feature in the top 10, though rural WA comes in at No. 13.
In 2008, before the onset of the crisis, more than 90 per cent of the regions had unemployment of 6 per cent or less. Now, with the economy yet to return to that height, 70 per cent of regions are at 6 per cent or less. If that doesn’t prove the benefits of the resources boom are being spread right around the economy, nothing will.
So far as this blogger can tell, this argument runs like this: We had low unemployment during the first commodities boom. We had high unemployment when commodities busted. We have low unemployment now that the commodities boom is back on. (And by the way, the Hunter Valley is in a HUGE coal boom and Darwin a HUGE gas boom).
So, during the boom we’re all employed and when it ends, we’re not. In other words, an over-reliance on a single resource export sector. It’s not rocket science, it’s Dutch Disease.
Gittins! then turns to retailers:
It’s true the retailers are doing it tough at present (mainly for reasons that have little to do with the resources boom), but it’s just sloppy thinking to see this as more evidence of the two-speed economy.
Hmmm, yes…that could be a good point. Let’s find out why … oh, that’s all there is.
Let’s not fall into the sloppy thinking trap, and ask ourselves why it is that retailers are suffering. Perhaps it’s got something to do with the fact that we over-spent prior to and during the last commodities boom. Assuming it would go for ever, the Howard government cut taxes again and again. This, in turn, fed housing and consumption booms that were driven by debt.
Now, as interest rates normalise, we’re struggling to repay that debt. That could be interpreted again as symptomatic of Dutch Disease. Moreover, looking forward, if the price of commodities falls significantly again in the medium term, do you think the international price of Australian bank debt will fall? Or, do you think global markets might get spooked about the Australian housing bubble and the overspending that it supports?
It may not happen, China may grow for ever, but that is not an argument that you don’t have Dutch Disease. It’s simply proof that you’re doubling down your bet.
Gittins! finishes with a doubled over heave:
Why is it not a two-speed economy? Because about three-quarters of us work in industries that are neither great direct beneficiaries of the resources boom, nor great victims of the high exchange rate it has brought about.
And also because we live in one national economy, not eight isolated economies. There is a high degree of trade between the states and territories. They are subject to the same exchange rate, interest rate and federal budgetary policy.
A fair bit of the cream from the resources boom goes to thefederal government. And all the mining royalties gained by the WA and Queensland governments are shared with the other state and territory governments via the formula by which the proceeds from the goods and services tax are divided between them.
The rise in the dollar is actually one mechanism by which part of the earnings of the miners is redistributed to all other industries and all consumers, in the form of cheaper imports.
If you think you’ve got nothing to show for the resources boom, all you’re showing is your economic ignorance.
Of course we’ve got something from the resources boom. My God, it’s prevented the collapse of our housing market and the descent of the nation into an Irish-like depression. Australians seem to understand this implicitly in their new found conservative saving habits. The same implies a healthy skepticism about the future of Chinese growth.
Gittins! should listen up.