Is our economy just a case of your mood?

Some weeks ago I pointed that there was a growing gap between the government’s rhetoric on the economy – that we’re exceptional owing to the mining “boom” – and the reality of the economy for the vast majority of the population. I made the point that the government’s economic narrative had hit a wall given the growing list of job cuts. It’s since had a shot in the arm with breakout January jobs numbers from the ABS, but in a rhetorical sense the mining boom remains dead as a political narrative. It’s just not done to trumpet “booms” when punters are getting the boot.

But the economic narrative that has emerged since then is not going to serve the government well, either. For weeks the Treasurer has been telling the press that Australians are depressed about the economy and his number one henchman, Secretary of the Treasury Martin Parkinson, repeated the assertion that Australians “tend to think we live in Greece” last week. The same rhetoric is emanating from the Treasurer today:

Treasurer Wayne Swan says Australians should remain optimistic about the nation’s economic outlook despite recent reports of job cuts at several major companies.

Official data on Thursday showed 46,300 jobs, of which most were part-time, were created in January with the unemployment rate dropping to a six-month low of 5.1 per cent.

“It’s a fantastic achievement for our nation, particularly given the current state of the global economy,” Mr Swan said in his weekly economic note.

He said unfortunately reports of staff cuts at several large companies overshadowed the impressive data.

ANZ Bank has said it would cut 1000 staff and airline Qantas reported it would lay off 500 workers, with as many as 2000 to come.

“Of course we shouldn’t view the world through rose-coloured glasses, but we need to recognise the economy’s strong foundations if we are to make the most of our nation’s opportunities,” Mr Swan said.

I’m still wondering what this economic narrative aims to achieve. For the past few months we’ve seen a very similar line from Labour government sympathetic economic commentators at Fairfax. Ross Gittins has run his steady campaign for national ignorance on the basis that we might talk ourselves into recession. Michael Pascoe writes regularly, and did again on the weekend, that Australia is bullet proof, which seems to be his notion of contrarianism.

Certainly in the case of Gittins, if we look at his other work, he seems to believe that an economy is a reflection of the mood of its people – the old behavioural economist’s mantra of keeping “animal spirits” buoyant. This has been true in some degree for the past three decades when consumer borrowing was at the centre of economic growth. But it met its end in the GFC, as the shifting of surplus savings from one country to another with a savings deficit, was shown to be largely unsustainable because the banks that did the shifting can’t ultimately be trusted. Gittins is yet to enter this new reality.

Alan Kohler too added his voice to this debate, arguing that debt was depressing everybody.

Does the Treasurer hold a similar view? It’s hard to say. By doing so little to reform the tax and macroeconomic settings that produced yesterday’s borrow and spend economy, he seems implicitly to be saying that a return to it is possible. In that event what he’s really saying when he castigates Australians for being less than cheery is “go out and borrow”.

But of course he can’t be saying that. That would be very irresponsible indeed. No lesser authority than the Reserve Bank has spent the better part of two years telling us to do the exact opposite, even if along the way it has also marvelled at the outcome of its own power (in tandem with the attitude adjustment of the GFC), captured in the phrase the “cautious consumer”. It didn’t see the need to cut interest rates in February so it clearly sees no lack of confidence.

Let’s not forget either that the government has been cutting spending as it aimed for its surplus. In yesterday’s economy this would have necessitated private borrowing if we were to grow in a convulsion of Ricardain equivalence, but that was a passing fad only.

And that brings us to the truth that no polly dare utter. We aren’t depressed at all. We are in fact the opposite. Recovering from a bout of drunken exuberance that was a brief if highly distorting episode in the behaviour of Australian households:

For one marvellous historic moment everybody forgot that saving and investment, not spending, is the engine room of capitalist growth. Only through investing savings in productive enterprise do you sustainably increase capital formation. Of course this can be accelerated by taking on debt but without the base of savings, investment and production you have nothing.

So, where does this leave the governments’ and its supporters economic narrative? For starters, completely out of step with the attitudes of the Australian people who have made a structural adjustment to higher savings rates. Second, let’s give the government the benefit of the doubt and say it’s just trying to ease Australians through to their new growth paradgim, which is many lost jobs in the consumption based sectors, and more in productive investment areas involving hard hats. If so, why not say so? What is wrong with “structural adjustment ain’t easy”? That’s still a constructive narrative. And it isn’t “talking down the economy”.

Australian households have grown up. Time to treat them like adults.

Comments

  1. Surely investment in productive enterprises is the engine room of capitalist growth? Not either spending or saving.
    The answer to your title is yes. Our social mood is reflected directly minute by minute in the stock market, which is still the best indicator of where our economy is headed in coming months. Down the gurgler, according to the ASX 200…

  2. Very perceptive, H&H. What the government should be doing (and talking about) is assisting the transition.

    Building infrastructure in the north where the mines are, so that we reduce the social disruption associated with FIFO, would be a good start.

  3. I think the key term there is ‘productive’. Maybe the govt can spend a bit of time (and tax reform) to encourage this aspect of capitalism to the populace rather than selling tulip bulbs, oh sorry houses, to each other for ever more money which has no productive use at all.

    I mean if we took half the housing market here (ie how overvalued it is) and invested it heavily into developing fusion power or something like that, how long until we have a high value export industry?

  4. “What is wrong with “structural adjustment ain’t easy”? That’s still a constructive narrative.”

    Agree. That is pretty much was Parkinson said a last year and was somewhat ridiculed for suggesting any adjustment be difficult!

    Hopefully this is the future direction of the ‘structural change’ narrative. Realistic, mature, acknowledging that difficulties that will be experienced.

    It’s taken a long time to get this far on this issue rather than reflexive fallback to rusted-on ideologies.

    There is hope.

    • Oh FFS!

      Note to self: When structural adjustment is forced on the mining sector by a collapse in commodity prices, ensure that MineBot is “Realistic, mature, acknowledging that difficulties that will be experienced.”

      Gina will in Canberra with her begging bowl in heartbeat!

      • Lorax, if you have been in the resources sector over the years, you are better positioned than most to understand the nature of cycles!

      • I thought the boom was going to last a 30 years? Surely we wouldn’t be betting the house on resources if there were cycles in the commodities markets? I mean, that would be downright reckless.

      • Odd, I don’t recall any of the iron ore miners doing the rounds in Canberra with a begging bowl when iron ore was $10 a tonne back in 2003.

        Miners are made of sterner stuff than the feeble rent seekers in our Rip van Winkle industries (see Henry Ergas’s latest op ed in the Oz).

  5. Some weeks ago I pointed that there was a growing gap between the government’s rhetoric on the economy – that we’re exceptional owing to the mining “boom” – and the reality of the economy for the vast majority of the population.

    How many electorates are there in the Pilbara? How many are there in the manufacturing belts of Sydney, Melbourne and Adelaide.

    For that reason only, the politicians will change their tune on this to ensure their political survival. Abbott’s strategy is to blame it all the carbon tax, but the punters aren’t stupid. They know its happening already and there’s no carbon tax yet. Its all about the dollar.

    • It is all about the end of the credit/housing boom.

      All other issues secondary to that. The strong currency has mostly been beneficial to individual households in terms of consumption expenditure (most of it imported), o/s holidays and cheaper fuel). Most politicians would be loathe to go to an election having overseen a dramatic drop in the value of the AUD and commensurate increase in cost of living for all voters.

      • What utter drivel.

        In this highly correlated world, there is zero chance, ZERO, that a large fall in the AUD would not be accompanied by a large fall in the price of oil.

        Was petrol more or less expensive when the AUD hit 60c in late 2008?

        God I wish someone would just pull the plug on your server.

    • as destructive as the AUD strength may be in the short/mid term, we are better off overall by a high AUD.. to suggest that the carbon tax wont effect business and investment is foolish at best… taxing something isnt going to produce more of it..

  6. Wasn’t the “collapse” in savings pretty much an aggregate outcome due to the government running surpluses? i.e. government “saving” had to come from somewhere and the charts show where. So it was not as if they forgot to save. They had the government pick pocketing them in order to achieve a silly political objective.

    • if you look historically there were similar sized surpluses and nothing like the collapse in savings ratio highlighted by H&H.

    • its silly to run surpluses??, maby you should go to France where theyve consistently run deficits for 4 decades.. tell me how that experiment works out..

      • yes you’ve blown my argument apart. The alternative to running surpluses is living in France as a cheese eating surrender monkey. Superbly argued. (general applause)

    • “Wasn’t the “collapse” in savings pretty much an aggregate outcome due to the government running surpluses?”

      No. The conservation law “government deficit must equal private saving” does not apply in our credit driven economy.

      Read Professor Keen’s articles on endogenous money. Especially the “Roving cavaliers of credit”.

      • No. The conservation law “government deficit must equal private saving” does not apply in our credit driven economy.

        it is true that it doesn’t apply but not for the reason you have given. It doesn’t apply because the statement doesn’t take into account the external sector.

        I’ve read the article and I think Steve Keen understands that a government that has a net surplus must be getting its surplus from somewhere. It gets its taxes from somewhere and it spends its money somewhere. Whatever it has left over came from somewhere. That somewhere is us.

  7. “For one marvellous historic moment everybody forgot that saving and investment, not spending, is the engine room of capitalist growth. Only through investing savings in productive enterprise do you sustainably increase capital formation. Of course this can be accelerated by taking on debt but without the base of savings, investment and production you have nothing”

    Well said HnH

  8. Greek government debt to GDP ~160%

    Australian household debt to income ~150%.

    Is it any surprise Australians might feel a little Greek?

    • I keep saying this the difference between and Australia and the rest of the Western countries is the other countries have had their GFC and the govt took on the debt. Same thing will happen to Australia when the Aussie people cant pay for their loans anymore. The Aussie govt will have to take on that debt. It will happen sooner or later. To much debt. The mining boom wont last forever.

      • Methinks Parky has overstated the situation a little. Greek? Probably not. But it’s not surprising in a country where we have overpopulation, cost of living pressures, high debt levels, a housing bubble bursting, and so on, that people are concerned. It seems to me that Parky lives a little in the future; he asks you to get excited about the “opportunities” ahead of you — i.e. the decades to come. And that’s the problem. Outside of Canberra, people live in the present. There is, I surmise, some distance — and not just geographical — between Parky and his people.

  9. Mr SquiggleMEMBER

    Jan 2012 Australians employed = 11,448.
    Jan 2011 Australians employed = 11,426.
    (ABS data)

    The skilled migration component of our migration program is near 100,000 out of the 180K per year coming in.

    What is happening is that established non-migrant Australians are losing their jobs.

    THis is a big part of why the government’s rhetoric isn’t resonating.

    There is some sort of unofficial Job exchange program going on, whereby local Australians are losing their jobs in big numbers, and people who aren’t even in the country yet are the real beneficiaries of Australia’s miracle economy

  10. The “Economy” is a case of how much is in my purse to pay for *MY* CoL (Cost of Living) and how much my clients are willing to spend on the services I provide. And, how much I am able to spend on my business and growing my business and my self-education.
    Canberra rhetoric & *my* reality are two different critters.
    I don’t want to borrow. I need to manifest more income so I an pay my personal/business liabilities to neutral, and then have savings.
    Apologies for not posting earlier, I was working on my business. 😉
    Hope you all had a great day peeps!

  11. I think government bases it’s ideas and strategy on broken reports.

    I mean, seriously, how can you base any strategy on for example ABS’ unemployment report knowing it counts everyone who works over 1 hour a week as employed.

    Government better invest in proper information supply and at the very least align it’s reports with the rest of the world.

  12. This says a lot, and a reason after mining we’re screwed!

    Ease of doing business ranking

    1 Singapore

    2 Hong Kong SAR

    3 New Zealand

    4 United States

    5 Denmark

    6 Norway

    7 United Kingdom

    8 Korea, Republic

    9 Iceland

    10 Ireland

    Source: World Bank 2012

  13. mine-otour in a china shop

    MMM I always worry with these surveys metholdology – particularly the sample size and which people are asked. Iceland in 9th and Ireland in 10th place? I also see in the sub scores Ireland ranks 8th for getting credit – believe me this cant be the case.

    Anyway (ignoring some world bank data) I feel sorry for SME’s being hammered by soaring costs which have already overshot many years ago, falling competitiveness, falling domestic demand as some people are maxed up on debt and it is finally catching up on them, and a crippling exchange rate.

    The old confidence trick just doesnt cut the mustard when the country is clearly at an economic cross-roads? Can fiscal policy be reconstructed to assist real parts of the economy not just housing, civil service salaries and a rolls royce benefits system? Can it work in tandem with monetary policy to help bring down the exchange rate?

    Course it can’t – there is no policy lets just hope for the best,focus on everyone elses problems and keep the old chin up and story on script.

    Whats that I see? – a group of confident and happy looking miners coming up to a coffee shop with not a word of Greek among them? I’m off to buy a few more houses then….