Parko meet petard (updated)

Regular readers will know that the Treasury Secretary Martin Parkinson and I disagree on many things. And that tradition continues today with a speech last night given at the opening of ANU’s new Centre for Economic History.

The nub of my disagreement with Dr Parkinson is captured here:

Indeed, I cannot count the number of times during my IMF and Treasury career when officials of foreign governments assured me that their country was ‘different’ to all others so that the fundamental forces of economics did not apply. As Reinhart and Rogoff recently reminded us, they have only been matched by the number of financial market participants (and property developers) asserting “this time it’s different” in the face of economic cycles, aided and abetted by a short-term focus in the media that lauds everyone riding an upswing in asset markets as a certifiable genius.

Well you weren’t and it wasn’t!

As George Santayana famously stated: “Those who cannot remember the past are condemned to repeat it.”

My memory of recent history is that it was the Australian Treasury that embraced and promoted the Pitchford thesis. The idea that private debt and current account deficits didn’t matter becasue it was the result of decisions by “mature adults”? Dr Parkinson was head of Treasury’s Macro Group through much of the period it was in vogue.

Of course the Pitchford thesis met its Waterloo in the GFC. And the lofty heights from which Dr Parkinson now dispenses his wisdom would have crumbled miserably had it not been for a propitious resurrection of the mining boom, even allowing for some nice executed Keynesian counter-cyclical policy in the middle.

Yet my disagreement does not end there. Having used Australia’s good fortune to defend Treasury he makes it clear that Canberra is determined to make the same blunder:

We need to produce graduates who can draw on the economic challenges of the past and relate them to the challenges of today.

For example, in today’s context, understanding the effects of past terms of trade booms – recognising that when mineral commodity prices rise, and are expected to remain at historically high levels for a long period, welfare will be well served by allowing resources to be drawn into the increasingly-sophisticated mining-and-related sectors, and into non-tradable sectors. Indeed, consideration of the work produced here at the ANU in the 1970s and 1980s by Bob Gregory, Max Corden and Peter Neary is fundamental to gaining this understanding.

We need people who understand that if you replace quotas and tariffs with other interventions, no matter whether to create “national champions” or to support so-called strategic industries, you are placing producer interests ahead of those of consumers, and it is still akin to protection.

So then, I guess this time it’s different. Except, of course, it never is, as 200 years of commodity history shows:

And by extension, as Warwick McKibbin recently said:

ANU professor and former Reserve Bank director Warwick McKibbin said yesterday if the nation assumed the resources boom would continue forever, then it should absorb the pain of effectively abandoning manufacturing and other trade-exposed sectors.

However, Professor McKibbin said there had never been a permanent boom in the terms of trade. This meant the nation should invest the proceeds of the boom to ensure the non-mining parts of the economy had a future. “China won’t disappear and will still be a market for our minerals, but there will be a big supply response — others can produce what we produce,” he warned.

Moreover, I’m not sure that the pioneers of Dutch disease diagnosis would be all that impressed at being yoked to Treasury’s current embrace of that very disorder .

Now, Dr Parkinson may just be doing his job defending policy in public. But that’s not really an excuse. Even if, in the end, he concludes with this more useful observation:

And if intervention isn’t focused, defined and term limited any chance of “creating” comparative advantage will disappear, and it is the poor who typically pay the ultimate bill.

The study of economic history isn’t required to learn these lessons but it can help!

Indeed it can.

Update

For anyone who noticed, I have rewritten this post. The substance is identical but on reflection I thought the tone overly curmudgeonly.

2316 ANU Centre Eco History

Comments

  1. Moreover, I’m not sure that the other pioneers of Dutch disease diagnosis that Parko presses into the service of his thesis that we should embrace Dututch disease would be all that impressed either.

    But.. but.. RBA’s Philip Lowe says No Dutch Disease in Australia.
    .
    Economic myopia continues..
    .
    I hope, as part of this so-called “structural adjustment”, we can force Canberracrats to go and work in the mines. 3d1k, can you identify suitable jobs for Parko and Lowe? 🙂

    • The concept of Dutch Disease is much disputed, however HnH is an ardent supporter of idea. We are not a small possible despotic African nation dependent on one industry only.

      • Hotly disputed by whom? We’re in the heat of it. Nobody denies its effects. The only debate is over whether the boom will run forever and therefore the disease is a blessing. Or whether it won’t and we’ll enbd up with houses and holes in the medium term.

      • Much disputed, by many.

        “It is rather difficult to definitively say that a country has Dutch Disease because it is difficult to prove the relationship between an increase in natural resource revenues, the real-exchange rate, and a decline in the lagging sector. There are a number of different things that could be causing this appreciation of the real exchange rate. The Balassa-Samuelson effect occurs when productivity-increases affect the real exchange rate. Also important are changes in the terms of trade and large capital inflows.[9] Often these capital inflows are caused by foreign direct investment or to finance a country’s debt.

        Similarly, it is difficult to show what is causing a decrease in the lagging sector. A case in point is the Netherlands. Though this effect is named after the Netherlands, economists have argued that the decline in the Dutch manufacturing industry was actually caused by unsustainable spending on social services.”

        Just that it is a convenient tag and fall guy for economies in transition. Has been much popularised of late. Doesn’t make it any more fact. Completely ignores the effects of globalisation of manufacturing sector, etc.

        Quick but am in a rush.

      • You’re not surely disputing that the high dollar is casued by the mining boom? And that the pressure on the tradable goods sectors is not a result?

        Did you mention credibility a moment ago?

      • The mining boom one influence on high AUD – comparatively high interest rates (carry trade), some rather fluid ‘haven’ role, total absence of currency management by central bank are others.

        Canada also a strong resources nation but far more mature in outlook, far less hand-wringing and single focussed than Oz.

      • 3d1k, I have a very simple question for you – How long do you think the current mining boom will last, with the high AUD and +ve ToT.
        .
        2 years? 5 years? 10 years? 20 years?

      • Nobody denies its effects. The only debate is over whether the boom will run forever

        Nobody can deny that high export prices would TEND to increase the value of the A$. However is it really the most serious influence on the over-valuation of the A$?

        It isn’t! The inflow of foreign funds in both capital investment buying up industries and resources and the carry trade are the most significant factor in the over-valuation of the dollar.

        Yet every time this matter is traised you just retreat to the same old tripe. “It’s all the fault of the rich miners. Confiscate their wealth!”

        How many times do we have to go over this with everyone ignoring the facts. We have these debates. There is a lot of very sensible commentary. We all agree that the carry trade is the biggest problem and we are all concerned about the sell-off of all our mines, industry and land. Then you go back to exactly the same position they started out with.

        Time and again the point has been made, and agreed with by pretty much everyone that the problem of the A$ is not caused by the export of stuff we dig out of the ground. It is caused by our absorption of some 10% of world savings in the form of both foreign investment and the carry trade.

        If we get rid of those factors the problem of the over-valuation of the dollar would be fixed. If it isn’t then we are then running a CAS which we get rid of with an SWF to re-purchase some of our own assets.

        Why do we keep this dozey rant up about the evil miners causing the demise of Aus manufacturing.
        That’s the simplistic rubbish we get from politicians. Can’t this site rise above that silly jingoism?

      • dunno what 3d1k veiws are on this. but if he opposes governemnt handouts of loss making industries that artificaily keeps the unemployment rate down, interes rates up, and AUD up, then yes.

      • Speaking of confirmation bias – Showing an Eastern States bias there HnH. Indian Ocean thanks.

        Even I’m not sure what you mean by “all the way with 3d1k”. Although it would probably be the correct action.

      • Fair enough. Just.

        Really is time for a Flashman global geopolitical econo overview. So much of interest smouldering on the horizon – Israel/Iran/MidEast/Burma/Russia/Turkey/Euro dare I say China

        Please. Just a few paragraphs. 🙂

      • 3d1k, I recommend that you watch the BBC documentary called “The Party’s Over: How the West Went Bust”.
        .
        Credit driven consumption era was just a scaffolding to keep the “globalisation’ mantra from being exposed for the scam it is, while the manufacturing base was hollowed out and shifted to China.
        .
        The same people who boosted the benefits of “globalisation” are now talking about “decoupling” and “Chinese consumption” driven growth.
        .
        Auto manufacturing is strategic, not because a Commodore engine can be fitted into a tank. but because – once it is gone, it is impossible to get it back. It is an ecosystem in itself, with various ancillary industries attached. When the mining boom ends, what are we supposed to do? ship the dies back from China?

      • Mav, I do believe I was the first to post a link to that very doco – ahead of the curve my friend! 🙂

      • Indeed you were 3d1k!!!!

        Hm credit driven consumption? Like it is only the fault of the big bad banks? Just asking Mav.

        The problem is us.

      • Therefore we have to feather bed the whole industry so the executives can pay themselves what they want and give their unions whatever demands they make.

        You need to come into my place and explain to my storemen who work harder than anyone at a car factory why, when they earn about 1/3 as much money they should pay more tax to support car industry workers.
        I keep asking the question and I’ve never got a satisfactory answer from anyone.

      • so your a “tariffs/quotas and other protectionist measures for those that yell the loudest, have the most political influence, short term self interest over the general interest” type of guy?

      • Well, if you’ve read my stuff you’d know that’s not the case. I argue that the government should be working at the level of prices signals not businesses.

        I make an exception in the case of the car industry becasue if China invades we’ll need a few engines.

      • you see we can all write hyperbolic smart ass replies

        is that protected/strategic industry mantra still making the rounds??

        how funny

      • “I make an exception in the case of the car industry becasue if China invades we’ll need a few engines.”

        What? What?

        When I was at Military College initial and Staff College overseas, tinpot Commodore engines never fitted in the aftermath meeds following a successful ‘landing’ and opposition air superiority.

        If you don’t have an ironclad alliance with the USA the red flag will fly in Canberra within a month anyway. Why do you think we went to Afghanistan and Iraq? Quid Pro Quo.

        However, resistance fighters need functioning 4WD utes with big donks and tray capable of taking a 105 Recoilless, AAG and Mobile Mortar.

        The Maloo doesn’t fit jack shit. Do we make heavy pickups in Australia?

        http://en.wikipedia.org/wiki/Technical_%28vehicle%29

        I believe our Hilux’s are made in Thailand. The Isuzu D-Max (Holden Colorado) is made in Thailand, Vietnam etc. The Mazda B series (Ford Ranger) is made in Thailand etc.

      • “I make an exception in the case of the car industry”

        and what about the 18-22% pay rises GM just gave its staff so they can continue making stuff no body wants after securing tax payer funded assistance?

        you make an exception for that too?

      • China invades?

        Under what circumstance and in what timeframe do you postulate this extreme scenario?

        I think this detracts from your credibility HnH (lol – that a couple of small car producers could help counter invasion is but part of the detraction…).

        Where is Flashman?

      • Obviously a metaphor my man. Not fingering China. Simply saying that maintaining an expertise in building the stuff thaqt goes into military hardware is a sensible strategic priority. Flashman would most certainly agree!

      • All China needs to do is position a few battleships off our ports and stop any oil tankers coming in. Your Commodore engined tanks wont be worth much then.

      • “If you don’t have an ironclad alliance with the USA the red flag will fly in Canberra within a month anyway. Why do you think we went to Afghanistan and Iraq? Quid Pro Quo”.

        US Govt denied Aust request for full access to wikileak cables before they were released so as they were deemed to senistive. Fat lot of good going to Iraq and Afghanistan did for our strategic interests…

    • personally I’m all for supporting the manufacturing industry but not in perpetuity. Lets spend the money on starting up new industries that we can actually be competitive in with a definite end date for that assistance. The current situation jsut strikes me as moral hazard for the manufacturing idustry as they can be as inefficient as they want and still collect the govt payout

      • +100. but how are these new idustries going to find the people they need if they are all locked up in unprofitable tax payer funded industries?

      • Further to that, how can we be competitive at anything when the cost of doing business in Australia is so high?

      • do it in things that can’t be done overseas in a third world country as easily. Ie high tech industry etc. How about we start up our nuclear industry here and transfer them into building all the plants etc? Be a net exporter of nuclear technology and other renewables? Only limited by your imagination. I can tell you what isn’t going to help the cost of doing business: propping up failed business models which then allow unions to jack up wages far beyond what they are really worth.

      • I like the boldness of your vision Serenco but suggest that for a country that can barely decide to sell uranium and or just who to sell it too, would suggest we’re a little behind on the nuclear technology scale!

        But you pinpoint our great failure imo, we have this marvellous natural resources base yet have never successfully transferred to next generation processing or innovative technological development. And before all the anti-mining brigade come in, these activities are not and should not be limited to miners. Opportunities abound. Alas we will continue to do nothing, far easier continue to support dinosaur sectors via subsidies than venture funds for the new.

      • Throw in the Carbon tax…it now seems to rule out most processing here. I have a bit of close-up experience with a project in this regard. Info seeping through the media seems to indicate it is a factor for others as well. Of course if you say so ASIC threatens you with a multi-million dollar law suit…talk about extremist govt going mad.

      • why thank you, certainly I’m more knowledgable about the uranium side of things since I’m a physicist (hospital based nowadays) but it seems that we are indeed wasting a lot of time and effort trying to keep things around just ecause we’ve had them before. I’m sure that steam traction engine factories supported many ancilliary industries but some guy called Ford realised that it was better to mass produce some new fangled technology. And now that industry supports many others. Maybe rather than looking to centralise all these industries so they rely on one ‘strategic’ industry we could develop many smaller high tech ones ala silicon valley. That way if any given one becomes uncompetitive and has to shut down then its not the end of the world

  2. It’s one of the few instance where a country really is like a large company – just because 1 product’s selling well, doesn’t mean you should cancel all the other products and pray for the good luck to continue. Betting the house on “comparative advantage” is perfectly good in the short term, but an undiversified economy is very risky in the longer term.

    Prediction: When the mining boom in Australia ends people will again be saying “all profits picked up by the mine owners; all losses picked up by the taxpayer.” Banks, cars, mines – every industry has it’s day.

    • if we were to run on that logic, no industry ever created would ever fail as anything thats hear ‘today’ should be there tomorrow, because the country needs diversity and the government should support it..

      We would have a nice amount of blacksmiths, horse and carts, and other redundant industries..

      but then if you dont agree with that you are now implying that you think the ‘elected’ body of bureaucrats should pick and choose which industries to keep/prop up and which to let fend by itself.. then the question arises what if the all knowing bureaucracy is wrong??

      • im not arguing against having a diversified economy, I personally would prefer mining to be less ‘Dutched out’, although the concept of letting people decide what industries are important seems dangerous/susceptible to bad decisions..

      • No, no – definitely not recommending picking winners! But Mr P seems to be implicitly “picking losers”. Choosing to support the boom by encouraging more people to seek careers in the sector (as opposed to just employment in the sector) and not balancing the economy away from that sector is equivalent to picking winners.

        I agree it’s difficult to say when a sectoral boom represents “comparative advantage” and when it’s a bubble. But given that this boom is in commodities, which are renowned for boom/bust cycles (especially unrefined commodities), I think we should at least consider the possibility that [insert Monty Python quote here]…

    • You can extend this paradigm further given that at its root is the specialisation of labour itself.

      Essentially people bet their careers on comparative advantage.

      • Broadly agree, but I think comparative advantage works best at a high-level (eg. is our CA in mining, manufacturing, research, financial services, ex-im etc) rather than product-level (eg. is our CA in making cars or making horse-shoes). Similarly, encouraging labour to focus on the general skills that apply across industries where the country’s CA is(eg. maths, engineering, general trades) is better than betting on the specifics and forcing people to stay in that industry forever. Welders and electricians have far more industry-flexibility than bonds-traders or miners.

      • Econ, a hypothetical for you. Australia has no resources sector. GFC occurs. Australia has massive private indebtedness. A housing boom. A manufacturing sector that has been in decline for decades. AUD at say .70. Kind of like many other developed economies. Where do you think we would be positioned now, sans the mining boom.

    • A country is not much different to a large company in anything. You only think it isn’t because you don’t think money flows through. Please refer to the debate we had on that recently.

  3. The Treasury has made an art form out of “this time is different” or “this country is different”. Don’t know why Parkinson is bringing up Reinhart/Rogoff. Eg. According to Treasury (and slightly exagerrated):

    – China will grow at 9% forever
    – Commodity prices do not fall suddenly and sharply; therefore a commodity exporters ToT will stay positive forever.
    – A currency only appreciates in line with the ToT: Therefore any appreciation is a good thing and policy which tries to limit this appreciation is a bad thing (CB should continue to target inflation).
    – Real exchange rate is not mean reverting: Australia’s currency will stay well above PPP forever, so industry’s which can’t compete at a high exchange rate should give up.
    – External solvency: Australia can amass foreign debt through CAD’s forever, because the external solvency rule (ironically developed by Rogoff) doesn’t apply to Australia.

    There are others as well, I just can’t think of them.

    • Great stuff sweeper
      Substitute Ireland before the crash for Australia
      High currency euro 1.60 crushing production
      Boom industries electronics and pharmaceuticals
      Real estate boom

      A dollar 1.08 crushing production
      Boom industries commodities
      Real estate boom then overvaluation prolonged by tax breaks and govt subsidies

      However rba and treasury could be right and Australia can expand govt employment in health education etc to the sky with their own tax breaks and gold rivers will forever run

      • Douglas, that overview is a good example of how it is NOT commodity based Dutch Disease that creates difficulties.

        It is the combination of globalised sources of manufactured production diminishing domestic production further accelerated by strong currency pressures.

  4. I’m truly gobsmacked that he can say this with a straight face. We are the ultimate “this time it’s different” case!

    “Indeed, I cannot count the number of times during my IMF and Treasury career when officials of foreign governments assured me that their country was ‘different’ to all others so that the fundamental forces of economics did not apply. As Reinhart and Rogoff recently reminded us, they have only been matched by the number of financial market participants (and property developers) asserting “this time it’s different” in the face of economic cycles, aided and abetted by a short-term focus in the media that lauds everyone riding an upswing in asset markets as a certifiable genius.”

    • Just to start with some of these “this time it’s different” assumptions:

      – Our TOT will remain at record highs for the foreseeable future
      – CADs don’t matter
      – Our dollar and purchasing power will remain high forever
      – Dutch Disease doesn’t apply here
      – Our massive private debt is no problem
      – Our massive overseas liabilities don’t matter
      – Our house prices are amongst the highest in the world but that’s due to our “strong fundamentals”

      Any I’ve missed?

      • Yes AB and I agree with all those…except this one is a fact. We have about the highest natural resources per head of population of any nation in the world and we are willing to sell off all industries, mines and productive land to sustain our consumption.

        Again I’m not saying the mining boom doesn’t tend to produce a higher dollar etc. It just ISN’t the main source of our problems of ‘Dutch Disease’
        Our willingness to sell anything and everything, as well as to gamble on the ‘carry trade’ going on forever, to maintain our over-consumption is the main problem that we have.

      • Flawse, not having a go, but what do you realistically see as the solution to Australia developing a culture and corporate and political class that strives to live within its means, if that is indeed the solution ? (apart from the moderating effect of a particularly cold shower the market may or may not have in store for us).

      • (Not Flawse, but I’ll have a go…)

        I don’t think anything except a deep recession or depression is going to change our attitude.

        And for better or worse (worse in the short-term, better in the long-term), I think it’s coming…

      • It seems to me that generalised economic pain in the form of a depression mostly just results in (relatively) short-term changes in behaviour.

        What lasting, long-term lessons did the American political and corporate class really take away from their own sobering depression in the 30s ? Or those relatively quite recently impoverished Irish who didn’t spurn the opportunity to leverage up on property ?

        I hate to think that future generations are always doomed to repeat the same mistakes of their forebears, but given the ingrained propensity of most to believe that something can be had for nothing, and the nature of political and ideological cycles, maybe that’s how it’s supposed to be ?

      • Pith I think you should talk to optimistic people like AB and DNE!! 🙂
        In response to you I immediately penned a bit of a usual rant with variation. Then it occurred to me that it was just another repetition of economic policy issues and while they are very important they are not the real problem.
        So I took your question to heart and wrote a rather long-winded answer.

        Frankly I cannot do the question justice so I won’t post what I’ve written. However I’ll pose a thought…not economic. I do so with trepidation. I’ve seen Burbwatcher address this issue once or twice with one-liners so here goes.

        As you know my view is that all the good possible economic answers lie back in time. Everything we do now involves major dislocation…a euphemism for bad hurt for a lot of people. Even then I agree with AB above. However even real pain won’t fix what is wrong.

        In summary Western civilisation and democracy is doomed. The path we are on will not be changed and there are no good endings to this path. It can’t be fixed because the problem is ‘US’.

        If the problem is ‘US’ then we need to start with ourselves.
        I see the decline of religions as part of the problem or at least symptomatic. I’m not religious as such. Truthfully my upbringing made me quite anti. However there is much to be said for religions that concentrate on the spirituality of the self rather than imposing their beliefs on the world.
        In summary western civilisation has suffered a chronic loss of ‘soul’ That loss permeates all our activity.
        It’s why we express ourselves as the attainment of material welfare.
        It’s why most CEO’s measure their success in terms of their own rise and wealth rather than in the pride and welfare of the employees and in the products they make.
        It’s why bankers and CEO’s can take multimillion dollar payouts for presiding over the destruction of companies and economies and lives.
        It’s why lawyers can act so outrageously and totally without conscience.
        It’s why one powerful union will bludgeon their way and ask those earning much less to pay for goods and services made more expensive by their outlandish activities.
        It’s why kids, and people, take drugs
        It’s a sickness that permeates our whole society.

        Can we go out and reform a whole sick society all at once…no! We’d need to be dictators and we know how that ends in 99% of cases. So despite my running for dictator it is not really an option. Unfortunately, on our current path, it is the option we will eventually choose.

        You can see what goes on here in an intelligent environment like MB. We talk all the sense in the world. Yet immediately 99% of participants then retreat to their own position of self-interest. Whole new economic theories are dreamed up, totally removed from reality, just to reinforce people’s own egos. What chance do we have of reforming the world?

        So major blanket reform is impossible. We can only choose to bring our own soul into play, to make ourselves better people and in so doing to create a better world for those around us, our families, those with whom we work, people we see every day. Just make a slightly better world every day. Given time the better world we create for ourselves and those around us will grow and expand and maybe take in those who are so much further up the human feed chain.

        Places like MB are of paramount importance. Despite my earlier comments each of us contributes to something good in here. We each aspire for something better for our world. It’s a good place (despite the presence and persistence of MMTers 🙂 )

        Sorry if this all sounded like a Sunday sermon and apologise if it seems somewhat off the point. It isn’t but can appear so. It IS way outside the intentions of this blog I’ll grant. I have things going on that are turning my attention more closely to such things.

        The motto of the Mankind Project, of which I am a part, says “We’re saving the world one man at a time” Note MKP is not anything to do with religion. It certainly is elementally spiritual. The Mankind project works for me. Each to his or her own. But we should each learn to be more soulful. I’ll push something else while I’m at it here 🙂 I am currently reading a book called ‘Soul Mates’ by Thomas Moore. I thoroughly recommend it

      • Flawse
        Thanks for your honest and thoughtful reply. It is deserving of a better response than I can muster right now, but hopefully will have a chance to draw you on that further in another forum.

      • “Our willingness to sell anything and everything, as well as to gamble on the ‘carry trade’ going on forever, to maintain our over-consumption is the main problem that we have.”

        I agree and I certainly don’t blame the mining boom. The boom has just allowed us to postpone our day of reckoning. Of course the longer we can postpone it, the worse it will be.

  5. H and h. Well done. The Pitchford thesis was always academic twaddle. How can a CAD be good so long as the debt accumulators are consenting adults. It is about time that treasury,the RBA and incumbent governments took responsibility for economic settings and their consequences. Now it is just commonsense that the dollar is far too high and distorting the economy. This is a crisis in play. Most of the inflation apart from mining wages and costs is government induced. To control this uncontrollable interest rates for business borrowers are about 5 per cent higher than comparable countries. This together with the carry trade are supercharging the dollar. This is causing carnage in productive sectors. In order to offset this government is applauding the expansion of health education public admin etc at an added cost to the producing sectors. If commodities fall ie the terms of trade revert let us see what RBA and Treasury have to offer.

    • We know what the RBA has,potentially, and we know it is limited.
      Don’t ask too much of them.
      Treasury however is a dark horse. How much clout do these mandarins have? Can they stir the Govt. bones in the right direction? Do they know the right direction?
      Are we going to see the public sector advocate for a smaller public sector?
      I’m not hopeful.
      Our elected reps. are where the answers lie.
      But there is no understanding there and no policy pursuing backbone.
      Downright sad.

      • “Policy pursuing backbone” “a smaller public sector” Jelmech? Do my ears ‘ear right? You could be up for heresy.
        Richo said it best “whatever it takes! (to stay in power)” No effort too great to avoid the mistake of attempting to implement necessary but unpopular policies.

  6. I think Parkinson’s general point is the economy needs to be adaptable. Surely this has been the lesson of the currency float, capital market liberalization, labour market reform and tariff reductions over the last 25 years.

    The economy has been exposed to many “shocks” – the East Asian Financial crisis, the dot-com boom and bust, the global property bubble and its denoument (the GFC), mining booms A and B – to name just some. All along the way, the system has adapted and evolved. It has even been able to cope with some of the more egregious, home-grown policy errors.

    So there is a good argument for learning to bend with the winds rather than trying to resist them. To oppose the winds of change is to accept the inherent risks of becoming exhausted and then completely pushed off course.

    Manufacturing industries should be re-orienting themselves to serve and grow them in alignment with the resources industries, both in this country and abroad.

  7. The issue that I have and Flawse articulates it much better than myself is two fold, you can have a very efficent, high quality product, and unless it is a unique product like cochlear, a german manufacturer will be more competitive due to currency manipulation. Second Australia has outsourced, even the making of small arms munitions, gaols, water filtration and environmental services detentions centres, etc to foreign multinationals such as SERCO,Veolia,Thales etc and even our long term food security is in doubt. Try buyin frozen australian produced peas for example. I believe Ken Henry was a better head of treasury.The bushmaster is an example of an australian manufactured product owned by an overseas company(thales) that Australia has no patent or royalties rights even though it is now being brought by the Dutch and the UK.
    We need to make it more efficent and inour nations self interest to export both goods,capital rather than the sale of assets.
    There is probably some form of synthetic mechanism that could be traded/created via the RBA instead of subsidies to a specific industry. I am positive it could be done with commodities

  8. Just re industry support witness what is occuring at the moment re the tendering for new trucks for the defence force. The defence minister is pushing for a modified bushmaster variant from THALES where as the Army prefers a german manufactured vehicle that is cheaper and better quality.

    • You won’t beat a pollie seeking to ingratiate him or herself overseas with arguments about jobs and local investment.

  9. Mav @4:53 pm

    “Auto manufacturing is strategic, not because a Commodore engine can be fitted into a tank. but because – once it is gone, it is impossible to get it back.”

    Mav, perhaps you could explain to me why, once a Commodore engine has gone, anyone WOULD want it back. 🙂

  10. Kudos to ANU for its Centre for Economic History.
    -If the intent is for genuine history then the empirical method suffices.
    -If it is for mainstream economists (MEt) to go in search of validation of their premises, then it will add no value. I suspect, though, that it is just another vehicle for publications.
    -Economic historians have adopted various methods to interpret past data. If Bernanke, for instance, looks at the Great Depression, it is a mainstream economist looking to validate his premises, using historical data as the evidence. That is fine, as such, because no one is without bias.
    -The historical method always requires premises; it is in this that mainstream economics cannot pretend that it is neutral or empiricist. I have never met its representative agent in the real world.
    -The point is that one’s epistemology must be in turn with one’s ontology. Thus it reminds me of a conversation that I had the other day with a MEt, who was arguing for equilibrium and perfect knowledge – known preferences, budget allocations, rolled forward and, presto, the representative agent can be mathematically modelled. He challenged me, representing an Austrian position, why they all believe that hyperinfation is around the corner in the US. I replied that I do not think they all believe this; however, why are the commercial (?) banks sitting on so much money deposited with the Fed and not lending? He had no answer. The solution for the US, he stated, was for more government spending (a mere proxy for real demand).
    -At least Mises dispensed with the equilibrium construct, as Rothbard notes, as an import from physics. Mises went back to the subjectivism of Menger and recast marginal economics in a rationalist position – which almost no one today supports but nearly every economist applies, because they, apriori, must begin with an epistemological edifice. The question is which set of universals are appropriate.
    -At least market (macro-) economists and those that have to deal with commercial realities, know that formalism can sometimes be a hindrance to good analysis.
    -And my PhD Met friend? We engaged in another discussion sometime later. He had a proposition presented by entrepreneurs with deep pockets from Europe to establish an agency or company here in Australia to market their product for the leisure industry. As one who has directed my own company, we discussed the necessity to market, advertise, obtain leads and new clients. We discussed present costs — staff, premises, advertising, accounting support, etc — and the prospect for future income. So he had to weigh up the present costs against his estimates of the percentage of those out of his target prospects who may buy, and decide whether to go ahead. So I stated to him that their is no perfect knowledge – no exhaustive understanding of the future. So why pretend that their is? (By the way, that perfect knowledge premise ironically slipped into mainstream economics via Lionel Robbins, at the time an Austrian — oops, that’s history of economic thought, which we don’t teach anyone, because it is passe!).
    -So my friend has to deal with the real world, in his assessment of a real-world business, and write economic research for journals using intellectual tools that deny methodological individualism in favour of formally modelling the representative agent. Why does mainstream economics hold to the perfectly competitive model and deny a role for the entrepreneur? The Austrians seem to have sorted out step-by-step capital-based economics and have a significant place for the entrepreneur / undertaker, who, in Rothbard’s words is the preeminent forecaster. They are the ones who predicted that you would buy the computer and software you are currently using to read this note! Put that in your general equilibrium model (do not ASSUME it).
    -Kudos to ANU. I hope the Centre for Economic History is more than an exercise in the validation of mainstream economics; somehow I have my doubts.

  11. I replied that I do not think they all believe this; however, why are the commercial (?) banks sitting on so much money deposited with the Fed and not lending? He had no answer.

    Seriously? 🙂

    Do you similarly ask why a farmer might be sitting on a lot of grain and not selling it? Probably not, because in that case you, in all likelihood, would consider the demand side and not just the supply side.

    Banks aren’t reserve constrained so they could lend at any time should there be demand for credit from credit worthy borrowers. Do you reckon that collapsing house prices and 17-18% U6 unemployment may have had an impact of demand for credit (ex-student loans)?

  12. Flawse 17 Feb 6:25pm

    “By our absorbtion of 10% of world savings”

    Why is it that we rely so much on foreign investment and we do not have our own funds for investment in the financial and mining sectors?

  13. McKibbin says “China won’t disappear and will still be a market for our minerals, but there will be a big supply response — others can produce what we produce”. True, but our logical response is to produce it better and cheaper, not to get diverted into things we don’t have comparative advantage in.