We’ve lost our way

Over the weekend I was reading the local newspaper which contained a 3 page spread about  families who are struggling with day to day life because of the rising cost of living, mostly energy. In the same week it was determined that the new carbon tax would cost Australian families approximately $900/year and oil approaching record highs with and fuel hitting $1.50+ in some areas. This is on top of the already mounting evidence that many Australians are losing control of their finances due to their large mortgage burden.

At the same time the government is announcing that it is time for a tough budget.

Wayne Swan, has begun softening the ground for a mean May budget with a speech to Parliament detailing the economic impacts of the floods and cyclones in Australia and the Japanese earthquake. Mr Swan revealed the loss to coal and agricultural production in Australia was estimated to be about $8 billion, which is $1 billion more than was thought, while the nuclear crisis in Japan could exacerbate the impacts of that.

Mr Swan, who is in the middle of budget deliberations with other members of the government’s razor gang, said the disasters ”will make a difficult task even more difficult”. One source familiar with the deliberations said the only conundrum was whether to cause a lot of people a bit of pain or a few people a lot of pain.

The main priority is to ensure the budget returns to surplus in 2012-13, as promised, by when the next federal election is due. There are expected to be widespread cuts and the theme of the budget will be skills initiatives and welfare changes. These will be badged as productivity measures and designed to drive those who are able to work off of welfare and into the workforce.

As you can imagine anyone with even a simple grasp of FIAT currency macroeconomics is in a rage about the latest government media statements about the need for a surplus. However given the state of the economy outside of the mining sector, which has absolutely nothing to do with government, I can sympathise with those who claim that giving politicians more length on their economic reins would be a disaster. But lack of knowledge is dangerous whichever way you look at it, and the latest push for a surplus will just add to the strain on the public. Let’s not even mention here, as I have been documenting for some time, that there is a fair possibility that the housing market is about to stumble in a big way.

So after years of a China driven mining boom that continues to adjust our terms of trade ever upwards how did we get here? How is it possible that after so much luck in our economic circumstances we have a private sector choking on debt and a public sector claiming it doesn’t have the money to deliver services? In a decade marked by the privatisation of many government services and entities in order to balance government budgets I find it hard to point to a single piece of new production enabling infrastructure that any government has delivered. Today I note the federal government is now taking that lack of delivery further, claiming it needs the private sector to “fund” its work.

The Gillard government is planning to use next month’s budget to overhaul its key infrastructure body so it can more aggressively tap the private sector to plug a shortfall of government funds for crucial projects. As Julia Gillard and Wayne Swan warn that the budget will be tough because natural disasters have hit revenues, Infrastructure Minister Anthony Albanese yesterday quashed state government hopes of big-ticket infrastructure spending in the budget.

He revealed the budget would include measures to “strengthen up” the government’s advisory group Infrastructure Australia and to focus on leveraging private funds into infrastructure because of the “unavailability” of public financing for certain projects.

“This is not going to be a big-spending budget,” Mr Albanese told the Sky News Australian Agenda program yesterday.

“So in terms of the ambitions of any government, whether it be the incoming NSW government or others for massive infrastructure projects, that isn’t going to happen at this stage.”

How is this possible? I think there are a number of reasons for this.

One of the most startling is the basic lack of understanding that our economic “elite” seem to possess about how the economy actually functions at a macro level. (Please see this post by Leigh Harkness for an example of this), but this is only half the issue.

I think the main issue is that there is a complete lack of long term economic strategy in this country. As I have always said, the aim of macro economic policy should be to support sustainable growth, productive gains, employment and social calm, with the overall goal of economic self-reliance and a better standard of living for the nations citizens. The real issue as I see it is that Australia has forgotten this and simply lost its way. Somehow the public and the government have managed to convince themselves that debt driven speculation is a road to prosperity, when it is anything but. Australia is wasting its economic fortunes and unless it changes course will inevitably suffer the fate of other nations who lost sight of the important economic goals.

The two biggest issues I see are:

  1. The private banking system has been allowed to steer credit towards increasing the “value” of existing assets instead of business and new capital investment.
  2. The surplus from the nations productivity has not been re-invested in to support higher production rates, lower barriers to production or improve the standard of living of the population.

In my opinion the latest issues with the economy all stem from these two things. Now all I have to do is workout how to convince everyone else this is the problem and how to nudge the economy back on course. Any ideas ?

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Comments

  1. Your point 2 is not quite true. The big miners are busy investing heavily in infrastructure to support future mine expansion. Still agree with your larger point, however.

    One of the issues of the moment is that the current government, despite (in my view correctly) lambasting Howard for wasteful spending in the lead up to the 2007 election, has managed to increase federal spending from 23.2 per cent of GDP to 26.2 per cent. Worse still, we have only a plethora of over priced school halls to show for it. I support government spending to pay for welfare to the needy, provide for our defence, infrastructure and the education of our children. But you have to wonder whether that extra 3 per cent of GDP is justified. That is a lot of moola in anyone’s language.

    The other issue I think is relevant here, and will continue to be a dead weight on Australia until it is dealt with, is the fiscal imbalance between the federal government and the states. Until this is addressed once and for all, the states will continue to struggle to raise the funds necessary for infrastructure and the blame game between the two levels of government over failures of the health system will drag on.

    One final point: the pernicious influence of the baby boomer generation on our politics lives on. There’s been plenty of discussion here recently about their influence on our housing market, partly due to their preference for housing as an investment and partly to their influence on the way housing investment is taxed. However, that’s only one element. What about the way the superannuation and tax laws have been structured to favour baby boomers in retirement? I am a baby boomer myself, but I’m still gobsmacked that anyone should be given the privilege of paying no tax once they turn 65.

    • >Your point 2 is not quite true. The big miners are busy investing heavily in infrastructure to support future mine expansion. Still agree with your larger point, however.

      Big miners are doing for themselves what the government should be doing for the country. If you own mining shares you would be satisfied with this governance. As a citizen of Australia ( who therefore have shares in the whole economy ) you would be very disappointed with the rest of the economy

      • Dave From Pakenham

        DE – Correct, Australia is like Africa in that respect, quickest development without a care for who benefits.

        China maintains 100% of resource wealth, US provides its citizens tax incentives for E&P, Canada maintains more of the pie, South America takes a more dictatorial approach.

        We however maximise short term share gains for the few, predominantly O/S investors.

        The once off investment does not recur once the hole is empty, profits forever lost.

        Oh and the 23 year old, who left school at 14 to attend jail who now drives a truck earning $150k is proof of the inefficient and unproductive use of our nations wealth.

        • “Oh and the 23 year old, who left school at 14 to attend jail who now drives a truck earning $150k is proof of the inefficient and unproductive use of our nations wealth.”

          Dave, how exactly?

          • Dave From Pakenham

            hmmmm…

            Assume that mine operated and owned by the international organisation domiciled in Australia, which employed the truck driver (jail bird), also employed another truck driver.

            Now the government made up of a cabinet propogated by the bloggers on MB decided to double the tax on this specific mine. management of the mine sacked our first truck driver.

            And Cabinet lead by UE directed the $150k to employ 2 scientists in Melbourne to work on Stem Cell technology.

            Which scenario would likely yield greater returns for Australia over the long term>

            Price should not always be the greatest determinant of resource allocation it definately isn’t in China…

  2. I wonder how Treasurer Swan found a spare $20 billion change to buy private RMBS, when he can’t find the money in his budget to fund essential infrastructure projects!
    .
    Oh, And S&P says arrears on Aussie RMBS mortgages are climbing
    .
    “Arrears for sub-prime loans backing RMBS jumped 126 basis points to 11.45 per cent, the agency said.”
    .
    Wait.. What?? Did the Aussie MSM just say “sub-prime” for the first time? 🙂

    • Ah, but that’s bailing out the banks. There’s always enough money to bail out the banks. Just look at the US and Europe.

    • I should correct you – Thats bailing out the non-bank lenders.
      .
      For a bank bailout, $20 billion would be like p!ssing into the ocean ($900billion). But I am sure Wayne will still find the money in his budget.

    • How Swan finds $ 20 billion to buy private RMBS ? Simple …. just issue new FedGov bonds worth $ 20 billion, and sell these to the banks, which in turn sell them again to the RBA in exchange for fresly created money.

      The RBA’s policies allow it to buy Gov bonds outright (without a repurchase agreement). The amount of money the RBA can create to buy Gov bonds is unlimited.

      Of course the only side effect is an enlarged Base Money supply (M0) which will in turn create inflation later on.

      • True but the RBA is not buying outright large amounts of Federal gov debt, there seems to be a decent market for that from overseas (no doubt the first to run at the first hint of trouble).

        The RBA is however, buying outright considerable amounts of State gov debt, busily backstopping that market.

        • Yes, but that amounts to the same. The RBA would do wise to own itself those assets that nobody else outside Australia wants to buy – and that would create the biggest problems if they would be unsellable. Thus, RMBS and state debt, ends up in RBA ownership, while the more acceptable Fed Bonds when can be bought/owned by foreign parties or commercial banks. The RBA feels obliged or is pressured to provide the Gov / State the cash it needs and to bail out any Big 4 Bank if overseas funding stop.

          I really question the RBA’s independence – and actual inflation control or the limitation of Fed Gov / State / Bank moral hazard seems off the radar.

    • Yeah, I read that. Although the real scarey thing in there for me was this:

      “The survey findings revealed 31 per cent of Australians are unfit insofar as they have little or no savings, an over-reliance on debt, few assets, inadequate insurance and high housing costs relative to their income.

      Only 17 per cent were found to be financially fit, that is had regular savings, low housing costs, a range of insurance and high asset levels relative to debt and income, BankWest said.”

      So 17% doing ok vs 30% in deep doo do. Those number don’t look promising.

      cheers
      Darryl

  3. DE

    If the government somehow achieves a surplus from the current annualised monthly deficit of $62 or $63b, then I will be very very worried. We are headed for a brutal recession if thats the case.

    But I just don’t think it will be possible. With so much spending to be pulled out of hte economy, the government will simply not hit their revenue targets. The private sector is not really keen on re-leveraging at the moment and that is the only way I can see a surplus happening!

    Given I think it won’t be possible, its why I think the economy won’t hit full scale turbulence.

  4. Agree with everything except on one point. Government should cut not spend right now.

    By not cutting, they’re only increasing pressure on tradable goods sector to take the heat of adjustment toward resource investment because monetary policy has to do more to keep lifting and the dollar is higher.

    Also, we need a surplus asap to guarantee the banks’ debt. Anything else will blow up the ponzi quick fast.

    Fact is, the housing bubble is our fault, and we have to live with the consequences.

  5. “As I have always said, the aim of macro economic policy should be to support sustainable growth” only problem with this is “sustainable growth” is a oxymoron.

  6. DE… Let’s have a look at an example of long-term infrastructure you seem so keen for the Government to invest in…the NBN. It has been a disaster from start to finish. Changed plans, cost blow outs already, senior staff leaving today, low consumer take up and we haven’t even started the real big part yet!!! So why would you want more of this? The Government never makes the right decisions to invest – they don’t focus on productivity, they focus on politics and how to win the NEXT election.

    In contrast, look at the Telstra 3G Mobile Network, which for the past 5 years has been world class. Now they are trialling and about to release an LTE network which will also be world class.

    I ask you…what is so great about Government investment? Why do you charlatans think Government spending is good….it aint, it should be less than 20% of our economy and its already twice as much as that. The need for a surplus is because a Government with money doesnt need to tax so much and doesnt need to borrow. This allows the private sector to do their thing.

    We don’t need more Government spending. We need more private sector investment…but who would invest here in Oz (outside of mining) when you have the amount of red tape and cost of doing business here.

    The Government CANNOT save the economy…everything they do is aimed at securing their own political survival.

    • “DE… Let’s have a look at an example of long-term infrastructure you seem so keen for the Government to invest in…the NBN. It has been a disaster from start to finish. Changed plans, cost blow outs already, senior staff leaving today, low consumer take up and we haven’t even started the real big part yet!!! So why would you want more of this? The Government never makes the right decisions to invest – they don’t focus on productivity, they focus on politics and how to win the NEXT election.

      In contrast, look at the Telstra 3G Mobile Network, which for the past 5 years has been world class. Now they are trialling and about to release an LTE network which will also be world class. ”

      Yer except no one else would build it, and Telstra 3G is a joke compared to the NBN. you are talking about two things with are not even in the same class speed wise. and if you have had any experience with wireless tech you know that it quickly slows down with too many users due to wireless interference.

    • The Telstra 3G network is ‘world class’ in the price they charge, not in terms of technology. Australians pay a lot more for their mobile data plans. The biggest difference between ‘public infrastructure’ and ‘private infrastructure’ lies with how much the consumer ends up paying.Consumer pays more when infrastructure is owned privately.

    • erm.. Telstra started life as a misguied government “investment”.
      .
      No government investment, no Telstra.
      .
      We would still have Vodafail and Optopus (owned by Singapore Govt) though.

    • “The Government never makes the right decisions to invest – they don’t focus on productivity, they focus on politics and how to win the NEXT election. ”

      Governments in the past have funded Telstra, our seaports, our airports, our highways, our railways, our dams, our electricity stations.

      That sounds like investment in productive assets to me.

      “Why do you charlatans think Government spending is good….it aint, it should be less than 20% of our economy and its already twice as much as that.”

      It’s around 26%.

      “The need for a surplus is because a Government with money doesnt need to tax so much and doesnt need to borrow”

      Government surpluses don’t aid in taxation reduction or alleiviating future borrowings. Governments with a fiat currency don’t accrue unspent funds to be used at a later date. Treasurers don’t have an olympic sized swimming pool full of $100 notes from previous surpluses. Surpluses are a actually drag on domestic wealth in a country that typically runs currenct account deficits.

      “This allows the private sector to do their thing”

      If doing their thing involves savings, then other entity(s) are required to run deficits, which is the opposite of a surplus.

      “The Government CANNOT save the economy…everything they do is aimed at securing their own political survival.”

      They’ve ensured the survival of banks. However they haven’t done well at helping those who have lost their jobs, and homes survive, and the record level of mortgage stress would indicate there are plenty more who may not survive.

  7. DE, thankyou for giving a good piece on how the private citizenry and private businesses, with the assistance of various govts, has not only managed to squander the gifts-on-a-silver-platter that has been an extended resources boom, but (once the housing boom becomes bust) come out worse than it went into the resources boom.

    True squandering on an operatic scale.

    It really makes me sad.

    Stewart

  8. “One of the most startling is the basic lack of understanding that our economic “elite” seem to possess about how the economy actually functions at a macro level.”

    First Keen startled me on this point, then Mitchell, then Harkness. So now I’m convinced that very few understand how the economy functions at a macro level, but many think they do and create much noise in the process instead of holding their assumptions and prejudices more lightly. I’m just getting resigned to the idea that an economy will usually survive despite energetic and I’ll informed decision making of it’s key decision makers.

  9. Well we are in a full scale class war between the rentier/speculator class and everyone else.

    Naturally the US is far further down this route than anyone else, e.g.:
    http://www.nakedcapitalism.com/2011/04/stiglitz-tells-us-the-redistribution-fairy-is-dead-but-she-still-lives-in-economists-fantasies.html

    From Stilitz: “but America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead…..

    The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes”.

    I note, with cynical amusement, that the ‘great Govt surplus’ will disappear instantly if one or more of our banks go under (ah lah Ireland, etc).

    When you get into this situation then national economic decision making becomes totally skewed to benefit a small group and your principles can be expressed like this:

    . Sustainable growth – in their wealth.
    . Productive gains, employment – irrelevant*.
    . Social calm – that’s what all that national security stuff and jails are for.
    . Economic self-reliance – they’re self reliant.
    . Better standard of living – for them.

    So this current system is perfect to achieve the above, and it’s not going to change anytime soon.

    * Note that the endless rentier push, where people position themselves into extracting an endless non-productive economic rent from the rest of society, destroys productivity.

  10. To add to this theme, this from a US Capital Hill aide, about how the Govt decision making becomes distorted:

    “But it’s no different on the domestic issues I cover. The issues of jobs, health, taxes, the environment, regulation to protect kids’ health, oil drilling, workers’ safety, education, guns…they are all dictated by lobbies just as overbearing as AIPAC. All we do up here is cater to rich, selfish people and their special interests. And their interest is cutting all social programs so we can keep cutting taxes to make them even richer.”

    “Bill Moyers, the highly respected longtime PBS commentator …. calls the American political system of today a “plutocracy” — that is, one that is governed by the few and for the few.”

    http://politicalcorrection.org/fpmatters/201104010012

    Now for anyone that thinks we are different (we are not quite as bad as the US/UK yet, but the trendline is not encouraging) name some some State/Federal infrastructure/skill/etc investments over the last 10 years that didn’t overly benefit some rentier/speculator at the cost of the ordinary taxpayer (and small business for that matter). NSW and Victoria are the poster children for skewed public investment spending.

    Personally I can think of only 2 in recent times: the school building program and the home insulation one … and look at the howls of disapproval from the media, the ‘think tanks’, etc, etc.