McKibbin looks beyond the boom

At the AFR today, Professor Warwick McKibbin offers us a ball tearing narrative for our times. It’s worth taking some time to dissect this piece as it is rare that we get something beyond the usual drivel. McKibbin begins:

Many policymakers fail to realise that a long-term transformation of the global economy is under way and the upheaval in established industries, reflected also in Australia, is not just a result of the mining boom or the Dutch Disease that commodity booms can spawn.

The implications of the global transformation are important for us as it will affect the rates at which our multi-speed economy adjusts, as well as the terms of trade and the capacity of the federal budget to respond.

The emergence of China and India has caused a growing structural shock for Western economies, as there has been a big change in production and consumption that has changed global relative prices and comparative advantage.

In short, production is moving where labour is cheapest. Western economies de-industrialise as Eastern economies industrialise. McKibbin then usefully profiles the US response to this:

Countries affected by the crisis have made the mistake of not adjusting their economies to this long-term structural shift, mistaking structural shocks for inadequate demand.

The 2001 recession in the US was met with loose monetary policy that led to further misallocation of global capital, setting the scene for the crisis in 2008, which was met again with demand management policy when the major problem was structural change and capital misallocation.

What an enormous relief it is to see a serious intellect and policy insider embracing two ideas here. The first is that the US was largely responsible for the post-millennium housing bubble, not China via the savings glut thesis. Although it is true that by 2005/06 the flow of Chinese savings into US long bonds was retarding the effect of interest rate hikes, by that time the horse had well and truly bolted, let loose by profligate rate setting under “easy” Alan Greenspan. Anyone who has tracked the writing of Doug Noland over the past decade knows exactly what I’m talking about.

The second idea is “capital misallocation”, which is an Austrian economics concept that in any boom you get overexcited capital doing stupid and ultimately  unproductive things. To my mind it is probably the most important idea produced by the Austrian school and should long ago have been embraced by central banks, enabling them to not so actively manage the business cycle, but rather stand back and allow busts to transpire (this would of course lead to more and smaller recessions but would help prevent the kind of loing-cycle debt reckoning we now face). Bravo!

Mckibbin then moves his argument to Australia and there he sees a confusion between policy aimed at offsetting Dutch disease and the real need to adapt to the larger de-industrialisation trend:

If policy is based solely on forecasts about whether China will keep buying our minerals, then Australia is making a big mistake.

…In Australia, the 2012 budget was framed against a backdrop of major structural adjustment from a changing global economy, a collapse in productivity and major risks from Europe. Yet the budget focused on income redistribution and rapid fiscal consolidation with the goal of reaching a surplus in 2012-13… instead of investments in labour market flexibility, significant tax reform and removing impediments to incentives to innovate, this government has chosen to use the proceeds to consume the boom.

In short, we are making the same mistake that the US did in 2001, only we’re using fiscal policy to make it, not interest rates.

This article is dense but I really recommend you click through to read the original. It is powerful when considered closely. As an advocate of addressing Dutch disease, this is the most potent expression of the argument against that I’ve seen for some time.

I completely agree with Professor McKibbin on his assessment of the shortcoming of the Budget, not to mention the government’s total failure to prepare the body politic for the transformation described. However, I remain uncomfortable with the vagueness of the outcomes of the argument. Letting the transformation run its course without seeking to mitigate or manage it in some way leads me to the conclusion that de-industrialisation in Australia would accelerate and leave us denuded of industries that will be competitive once commodity prices and the dollar fall. At that point the skills and capital to make them work again would be beyond us.

Still, reinvesting big sums of the commodity windfall into infrastructure (hard and soft) and reform to prepare the nation to compete afresh beyond its good fortune is inarguably a great idea.

David Llewellyn-Smith
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  1. 3d1k Redemption Song II.

    McKibbin (and Noland), always worth paying attention to – always cuts to the chase and says what needs to be said.

    Will others also pay due attention?

    • Partly. But the Prof is not arguing your case. This is another version of the long term decline of certain industries. But he also clearly sees an end to your boom, the destruction wrought by the boom and the need to plan well beyond it.

      The argument that remains is what to do.

      • I am not saying he is arguing my case. I am saying the bulk of what he has said mirrors my own views, views I have often expressed here.

        The long term decline of certain industries is global in nature (as perhaps will be the ascent of others), no benefit is served lumping said decline into an amorphous bunch under the banner of DD). To draw a longer bow, McKibbin’s article again addresses the range of issues discussed in The Clash of Ideas – the monumental changes and benefits wrought by globalisation now present many developed economies which are no longer on the endless credit teat with genuine challenges as to how to address loss of competitiveness, manufacturing capacity etc.

        Two things: I don’t see McKibbin talking in terms of ‘destruction wrought by the boom’ and in regard to clearly seeing an end to ‘my’ boom, all booms end. But as we both agree, we certainly don’t want this one to end any time soon.

  2. “de-industrialisation in Australia” I like the Professor, but if he says this is what we should allow he gets a fail from me.

    At the end of the mining what will we have as an economy? We’re destroying the education system, manufacturing, selling the farm, etc.

    I really can’t see a good outcome for this country unless we get some sort of unified policy in a country that does not value education, or innovation which might save us.

    I despair, but I’ll go and buy the AFR now to make sure I’m not judging this harshly.

    • You are a little but not that much. He clearly sees the need for more innovation which could be argued acknowledges the need for post-boom diversity. But I agree with you. It’s naive to think that that will suffice. At least, however, the Prof has gone beyond the simple restatement that industry must ‘casue industry has died.

      • So what is the policy framework that encourages innovation and diversification?

        How can we overcome the massive loss of competitiveness bestowed on Australia by our dirt-powered currency?

        • Jumping jack flash

          Through labour reform, and lots of it. Or alternatively, tariffs, and lots of them.

          Nothing wrong with mining, it is a niche industry, they can do what they like while the market allows them. Pay everyone working in mining a million dollars a year.

          Making steel, aluminium, hats, underwear, plastic balls and those little plastic nozzles that are on the end of your tomato sauce bottle – that’s not niche. All of that is no longer viable to produce in this country due to labour costs.

          But making all of those things represents jobs, wages and spending. Economic activity.

        • tsport100MEMBER

          The R&D tax concession is there for all to access, it’s up to the private sector to do the actual innovating and not wait for ‘policy’ to follow.

          The truth is, Globalisation makes it a super competitive world but the speed of technical evolution is always accelerating and with it, there are always new areas for innovators to expand into… If the world is looking for ‘growth’ as the great cure-all there is unlimited growth potential investing in EVs and renewable energy!

          What is REALLY lacking in Australia is a legitimate VC industry. Many are fake VCs propped up with government matched funds and such none-sense.

          Correct me if I’m wrong but I can’t name a single Australian born tech firm that has hit global success on the back of Australian VC backing???

          • VC…The truth,,,I will let the words of…”Another common belief is that most new ideas are brought to market by entrepreneurs funded by venture capitalists. While venture capital is a great U.S. success story, and Intel Capital is one of the largest venture capital groups in the world, venture-funded businesses represent a relatively small portion of the innovation taking place across U.S. industry. Most innovation is, in fact, done by mid to large sized companies who must continually innovate to stay in business. This is especially true in the information and communication technologies where much of our economic future will be won or lost. The question we must answer and answer quickly is how do we turbo-charge industrial innovation in the 21st century to ensure U.S. economic and, therefore, global leadership for decades to come.”

            Say what should be said…Oh That was from Justin Rattner, Intel CTO from The U.S. Innovation Summit on the 20th of June 2012…

          • +1 N. sme innovation is cute, but it’s rats and mice. Australia should use the cash from the mining boom to go for it.

            – massive concessions on genuine industrial RnD and associated capitl
            – massive concessions on commercialisation
            – zero taxes on ip and royalties

            This stuff is abandoning aust fast and we just need to join in the race to the bottom.

          • nicolas, as someone who’s worked in the US tech space recently for two major companies, and I have friends in Intel, and I can tell you the big guys Hoover up the little startups to drive and compliment company core innovation. These small companies start mostly via VC. It’s true what the Intel guy says, and to work in these companies is inspirational, but they draw on more than just internal resources. A huge part is the IP, and often they buy it, and the people who developed it. It’s how I ended up in one company. What I’ve also found is that the number of US born engineers/scientists are a small part of the companies workforce. I could walk through a campus of engineers and find a handful of locals. The US heavily relies on foreign training, but many of the foreign guys do extra degrees to further their careers. I just wish we had the model here or even valued technical education.

          • “Australia should use the cash from the mining boom to go for it.
            – massive concessions on genuine industrial RnD and associated capitl
            – massive concessions on commercialisation
            – zero taxes on ip and royalties”

            Agree and have said as much before. Too much political lip service, too many platitudes and then piss the boom away on tax cuts/welfare election winners.

          • The tricky bit is determining what is genuine industrial R&D and what is not. I believe a large percentage of the R&D claims in recent years have been lodged by the banks and miners, which says a lot about the sorry state of innovation in this country (cue MineBot to tell me about all the high tech shovels the miners have been developing)

            The refundable tax offset for loss-making businesses is a step in the right direction, because lets face it, its bloody hard for an export-oriented technology business to make a profit in Australia these days.

          • @ Lorax – yes, RnD support as it stands in australia is just a bit of corporate welfare for business as usual activities. The cash-back might help a few small businesses keep losing money for a bit longer but doesn’t really address the structural issues.

            It’s actually not that hard to tighten up the definitions a bit and really put some serious money where our mouth is. But it would take some political courage and that is not something we see much of.

            Singapore smashes us out of the water in supporting R&D.

    • I despair, but I’ll go and buy the AFR now to make sure I’m not judging this harshly.

      No need, this piece isn’t behind the paywall.

    • McKibbin is not advocating deindustrialisation – simply observing the phenomenon as manufacture relocates to more cost competitive locations (generally, West to East) – and don’t forget this is itself not cemented as even manufacturers in China look to cheaper production sources in say Vietnam, Burma or Cambodia. This has impacted nearly every developed economy, resources or no resources.

      He does however fail to see the benefit of investing proceeds of the boom in continued assistance to failing sectors and handouts for consumption – money far better utilise in developed of infrastructure and so on.

      • I agree that handouts to failing sectors is of dubious benefit — apart from maintaining a viable skills base in this country that we can utilise post-boom. But what do we invest in exactly? You say infrastructure? Like what? The NBN, or more rail and ports to get the dirt to market faster?

        Someone below has suggested education? But what kind of education? Geology, or engineering and sciences? If the latter, how can we hope to compete with the millions of engineers and scientists graduating from China and India each year?

        What comparative advantage do you envisage for Australia post-resources boom?

          • I saw that Mav. Nice in theory, much more difficult in practice and has become the mantra of all developed economies that have lost manufacturing competitiness. Likely to morph into the ‘motherhood’ womb of feelgood fantasies, along with ‘education’ ‘equity’ and ‘community benefit’.

            However, as an admirer of Peter Thiel, I concede it to be one of the few options available but far prefer Thiel’s more innovative and technologically pre-eminent bent.

          • Nice in theory, much more difficult in practice and has become the mantra of all developed economies that have lost manufacturing competitiness.

            And we have lost more competitiveness than everyone else, a point to refuse to acknowledge.

            Just so we’re crystal clear here: Your vision for Australia is to muddle through until the next resources boom?

          • Even though it is a theoretical proposal (mind you, with real life examples), it is much better than the Canberra group-think that assumes China will boom forever.

          • Lorax, ‘muddle through before the next boom’ is not my vision (which I have briefly detailed before) but, in darker moments, my expectation.

          • Your vision is to retool our industrial base to support the mining industry IRRC?

            That really doesn’t help diversification of our economy in the event of a serious downturn in demand for our resources.

          • That was a small part of it yes, focus on our resource base advantage, but not just our mineral resources, our agricultural ones as well (granted, much has been sold off), fully support CSIRO (in exchange for CSIRO not engaging in ‘smoking ceremony’ nonsense and the like), fully support medical research (we have a good track record), contain and revise downwards entitlement expectations. You get the idea.

          • Ok so I Google “smoking ceremony” and CSIRO and it finds a Quadrant article. Dear me, you really need to expand your reading beyond the hard right.

          • So? It is a nonsense for a scientific research body to participate or perpetrate the myth.

          • A smoking ceremony at the opening of a new lab is harmless and has no impact on the quality of the research performed.

            This apparently upsets you, but relentless attacks on climate scientists (at the CSIRO and elsewhere) is perfectly fine?!?

            Ok, I take the point that if a Christian ceremony was performed there would be howls of protests from the latte sippers, but this is hardly an issue that should determine the level of funding the CSIRO receives.

            Should the CSIRO be directed not to conduct research into the myth of climate change as well?

        • “What comparative advantage do you envisage for Australia post-resources boom?”

          This is THE question we will wish had been given adequate debate today when we look back in ten years’ time.

          I’m advising my children to choose careers that do not easily lend themselve to being performed at the end of a phone, computer connection or purchase order process.

          Everything that can be offshored will be. It’s always happened that way and, barring a massive switch to restrictive trade practices, it always will.

          • And its THE question no-one in authority is asking, because the Canberra group-think says China will boom forever.

        • Personally, I did my MBA in London…I can assure you I studied and learnt ( I estimate 2 times deeper ) than what is covered at Melbourne a UNSW MNA programs.
          Then it was over twice the amount.

          NBN and Infrastructure Bonds and labour mobility + the added expenditure of education are the key to a sustainable prosperous Australian future….

          • You lost me a bit there with the typos and three letter acronyms.

            But hang on, did you just seriously suggest that the National Pornband Network is the answer?

            I shudder to think what the question could possibly be!

          • JunkyardMEMBER

            Seriously? You think the NBN is only good for more porn? With our track record in medical research, passionate scientists, tyranny of distance, we could become world leaders in remote medical systems. And we could easily pay for the NBN out of savings in the healthcare system alone.

            And this is why we will fail, people who can’t see any future for us past digging really big holes.

            It depresses me no end….

          • TNA, I hope you are not a hypocrite and thereby use only a dial-up connection for your non-porn Internet needs.

            Why the hell does anyone need broadband other than to watch porn?

  3. Yes, one thing I’ve learned is always take McKibbin’s prognostications seriously.

    Some thoughts:

    1. Australia’s mining boom is largely built on over-investment and mis-allocation of capital in China. They’re not buying our minerals to make widgets for export to the west, they’re buying our minerals to build stuff they don’t need.

    2. How sustainable is the trend of de-industrialising in West and industrialising in the East? How does the West pay for all the widgets built in the East? With services? If so, why can’t these services be provided in the East? What is it exactly the West sells the East once we’ve completely de-industrialised?

    3. As the MineBot never fails to point out the deindustrialisation of Australia has been going on for decades. What he/she/it never acknowledges is the process has been accelerated by the doubling of the exchange rate during the noughties, which means we are at the bleeding edge of the Western deindustrialisation experiment. We will surely suffer more than most if it turns out to be a terrible mistake.

    • “We will surely suffer more than most if it turns out to be a terrible mistake.”

      Not at all. We will just find ourselves with the pack of non-resource countries alredy there – adjusting to reduced credit flows, continued deleveraging, increased unemployment, growing public debt and uncompetitive economies.

      No better. No worse.

    • 2. How sustainable is the trend of de-industrialising in West and industrialising in the East? How does the West pay for all the widgets built in the East? With services? If so, why can’t these services be provided in the East? What is it exactly the West sells the East once we’ve completely de-industrialised?

      We don’t, it’s not part of the picture.

      The one thing I do not understand is that there is no discussion on the broader Chinese policy.

      My legal professional friends have interpreted it working ins Shanghai. The Chinese are pursuing to being the global hegemon, simple.

      In fact they belive it to be inevitable, something relative to their own divine manifesto. They will peg the living standards of their peasants to accomplish this.

      We, in the west are hand them this, hand over fist, to pursue short term wage arbitrage.

      I have no qualms over free trade if it is fair, if all parties concerned have their own institutes to accomdate just trade outcomes.

      A pegged currency is not.

      For the west to blindly however latent capacity that strengthens their pursuit of global hegemon, while concurrently weakening our capacity to resist it, well I’d get edited if I used the first words that spring to mind.

      We aren’t going to sell them anything because of the players involved in the game being played think it does not concern us. Our long term future is not a consideration in the world of executive looting.

      • Well ok, I accept this might well be China’s long term plan, but for it to succeed China needs to transition to a consumer economy, because if they’re not selling to the West who are they selling to?

        So far the Chinese authorities have shown no appetite to make the transition, preferring to stimulate investment every time an economic crisis threatens.

  4. Invest in education, education, education.

    My daughter just started at the local public primary school. I am gobsmacked at what they get done with the budgets they get allocated.

    • There are some very ‘educated’ people making all sorts of decisions on Australia’s future at present…enough said?

      Education per se is not the answer.

        • Again we agree.

          I fail to see the point of training tens of thousands of (say) engineers and scientists when Australian industry is hopelessly uncompetitive thanks the our dirt-powered currency.

          Unless of course we invest big time in geology, which I’m sure you would agree is a wise long-term investment.

          • Lorax (and others)
            With apologies!
            Just to be the lone voice here (again)but it is a cogent alternative view although obviously not a perfect one.

            Surely at some stage we must look at the effect of speculative capital flows, Foreign Borrowing, and sales of Aus assets including mines, farms and industries as the major part of our over-valuation problem.

            To suggest we have a flexible floating exchange rate responding to trade flows is nuts in a world of mad ‘meta money’.
            OK I grant I’ve said it over and over before. Yet the evidence is that this is where our problems lie rather than in ‘dirt power’ If dirt power were the problem we would be running a massive CAS and an SWF would be both desirable and possible.
            Re the SWF I thought DE had finally put that to the sword?

            Note I’m not arguing with any of the thoughtful contributions posted here. I’m just saying we (Aus policy makers)ought direct ourselves to a realistic valuation for our currency. Then nobody has to ‘pick winners’ as such.

            I just remark again that nobody is considering even the possibility of ‘The End of Cheap China’
            Contrary to what someone said earlier there are not hundreds of millions of Chinese peasants waiting to step into the breach to ensure Chinese hegemony. There is already a shortage of labour.

            The changes that we need to make in education, industrial structure will take decades to enact. Then it will take decades to bear full fruit. Is anyone thinking in those terms?

      • Your mad. Education is the only answer but unfortunately it takes 15-20 to reap the harvest. There are no short term gains.

        Think, with education you would have the majority of the population partaking in Macrobusiness-like conversations instead of talking about which suburb is the best “investment”.

        • Sorry npitweet I hadn’t got to your post when I made my remark re 1-2! EXACTLY!
          However I think you are underestimating the problem!! 🙂

      • Yep, I get what you are saying. Education is a broad term.
        My point was more about the basics, child care, kindergarten, primary school education and high school. These are the times when money invested really provides returns to the nation.

  5. “…..In short, we are making the same mistake that the US did in 2001, only we’re using fiscal policy to make it, not interest rates……”

    The common denominator is urban growth constraint policies. Greenspan easing did not produce any price bubble in the 200 out of 260 cities in the US covered by the annual Demographia Report; the reason being that they did not have urban growth constraints.

    Australia does not need Greenspan easing to produce a house price bubble, or even any particular form of fiscal policies; urban growth constraints produce a house price bubble regardless of any other input factors. South Korea has even had a serious house price bubble with almost NO “credit” involved at all. In fact they have had rising SAVINGS associated with the bubble, because of young people with no mortgage credit available, trying to save up most of the price of a house, while the target rises faster than they can save.

    Urban growth constraints are where the real analytical failure of the mainstream profession has occurred.

    I agree 100% about the Austrian economics concept of “malinvestment” but would point out that the single worst “malinvestment” of the lot is capital diverted and SUNK into zero-sum non-productive increases in the price of what SHOULD be a “slack variable”, LAND.

    Futhermore, land is a factor of production and a significant cost, all the more so, when an industry’s requirements for it are greater. Don’ be surprised if inflated urban land costs correlate to the loss of land-intensive urban industries like auto manufacturing. The cost of housing is also a workforce cost pressure.

    I do not believe that the Chinese economy can ever converge on the US one as long as China’s urban land policies produce more expensive urban land than what is to be had in the USA’s South and Heartland even before “real” terms are calculated against incomes. (In China’s case it is fairer to say that outright corruption is responsible rather than “smart growth”).

    Because the mainstream profession is NOWHERE on all this, they are completely missing the inevitable “Asian Crisis II” where China will hit its glass ceiling just as Japan did (remember the Japanese property bubble? – China has one right now, and India does too) and they are completely missing the revival of manufacturing in the only part of the developed, western, democratically stable world that still has affordable urban land. Southern and heartland USA. (The US coasts with their anti-development policies are losing out just as Australia is).

    Australia COULD have been this part of the world’s Texas (where 70% of all employment growth in the USA since 2007 has occurred). It is a continual mystery to me how pragmatic, tough Ockers have let pansy Green latte-drinkers completely hijack civilisational progress. I wish the Queensland electoral reaction was the beginning of the end for this nonsense – I want Australia to be the world’s haven for people fleeing the collapse of the rest of western civ. (which collapse is due to the afore-mentioned nonsense just as much as anything else).

    • Further reasons to be cynical about China:

      The Master Narrative Nobody Admits: Centralization Has Failed
      – by CHARLES HUGH SMITH June 26, 2012

      “The primary “news” narrative may be the failure of the euro, but the master narrative is much, much bigger: centralization has failed. The failure of Europe’s “ultimate centralization project” is but a symptom of a global failure of centralization.
      Though many look at China’s command-economy as proof that the model of Elite-controlled centralization is a roaring success, let’s check in on China’s stability and distribution of prosperity in 2021 before declaring centralization an enduring success……..
      “…….The authorities and Elites attempting to maintain their centralized fiefdoms of power are desperately trying to control the technology of the Web, but disruptive technology that offers stupendous improvements in efficiency and productivity cannot be put back in the genie’s bottle. The authorities can try, but they will fail.
      The analog to the printing press is but one example. The centralized authorities of the Holy Roman Empire tried to limit the citizens’ access to the Bible and other books, and as their failure became evident they ramped up their oppression to extremes: printing the Bible was a “crime” punishable by death.
      Despite their almost total dominance of society and the economy, the centralized authorities failed to limit the technology of printing and distributing books.
      Centralized authorities face an impossible double-bind: if they limit access to the Web, their economic growth is doomed, and thus eventually so is their power as the impoverished and oppressed populace rises up to overthrow their failed Elites. But if they enable widespread access to the Web, then the populace eventually realizes the centralized authorities and Elites are burdensome hindrances to liberty and prosperity.
      The highly centralized Elites controlling China are engaged in a desperate campaign to constrain the Web in China to what they deem supportive of their regime. The “Great Firewall of China” reportedly has tens of thousands of employees monitoring and censoring content. Hyper-nationalistic rants are “enabled” to spread virally, while inquiries into official over-reach and misconduct are quickly suppressed.
      You can’t fool Mother Nature for long, and the Chinese are trying to tame forces akin to Nature.
      We already saw this dynamic play out with the Soviet Union. In the former U.S.S.R., networked computers were understood to be a serious threat to political control by centralized authorities, so access was strictly limited. Scientists and mathematicians in the U.S.S.R. were relegated to working with paper and pencils because this was “politically acceptable.”
      Denied access to transformative technologies, the economy and society of the U.S.S.R. withered and eventually expired.
      China has played a very quick game of catch-up based on a unique set of factors:
      1. An abundance of low-hanging fruit to be picked, both domestically and globally. If you watch documentaries filmed in China in the early 1980s, villagers were harvesting bamboo by hand and the village “theater” was one black-and-white television. By the time I first visited China in 2000, there was already a glut of cheap TVs and massive overcapacity in TV manufacturing.
      2. An abundance of mobile global capital to fund the initial industrialization.
      3. The ease of stealing/copying existing technology. It’s always easy to steal/copy existing technologies: strip down the motorbike to its parts, machine-tool a factory to make the parts and voila, you are soon producing “Yamaka” motorbikes in quantity (and drinking “Starbuck” coffee).
      But once the low-hanging fruit has been picked, you have to develop new technologies on your own to keep growing. The U.S.S.R. was able to keep up by stealing technology for decades, but once the pace of innovation slipped from centralized labs (where spies could be highly effective) to decentralized networks of innovation, the game was over: stealing technology became inefficient and/or impossible on the necessary scale and timeline to keep up.
      The Web also feeds social innovations. Centralized authorities move with glacial trepitude because any change, no matter how modest, steps on the exquisitely sensitive toes of some vested interest, protected fiefdom or favored Elite. So while the centralized Elites and their apparatchiks in government are detailing more regulations of the buggy-whip industry, the entire industry is bypassed by social and technological forces beyond the control of the Elites and their flunkies and factotums……”

    • Very good, I’d agree.

      I think population-concentration is a hangover of the industrial West from the days where the workers would walk to the factory. Its highly counterproductive for the new West, which should be dispersed and flexible, allowing many costs to be reduced to compete in a new services/knowledge economy. Many parts of the US have got this, few other places have.

      And yes, it has been a false agenda created by ecos that somehow concentrated population is less environmentally destructive than spread out. The irony is that the trend in the developing world is concentration also. The West has a chance to steal a march back on these guys if it realises the advantages of more flexible location. Australia should be leading this not trying to jam more people into the cities.

    • I’m just going to say, we live in a country that’s 90% desert. At the moment, we have two redeeming features as an economy:

      1) Rocks.
      2) 7 out of 14 years we produce far more food than we can eat.

      Urban growth boundaries should be manditory. In fact, I’d love to see the tax system change two things that prevent proper urbanisation.

      1) Negative gearing that allows the price of any old house you happen to be losing money on to be claimed against your income. What a waste. Buy an old shanty for 400k and ‘lose’ money on it and voila! There’s an investment strategy even the meatiest of meatheads can understand.

      2) Change (for the medium term) the depreciation schedule on dwellings to 20 years so that the old shantys can be knocked the hell down and replaced by something that doesn’t leak heat like a tent, doesn’t have the acoustics of a tent, has wiring wrapped in something other than lead, is made of something less hazardous than asbestos and can actually justify its price with some form of substance.


      Because we are utterly fucking retarded in this country. We have two tricks. We want to flog every rock there is until Australia is physically the size of New Zealand. The other is to grow FOOD. If we pave over every bit of land that can sustain a blade of grass for longer than 3 weeks, we’re not going to have any food growing capacity at all.

      I can see it now. A bunch of equity borrowing bogans importing food while sitting in their 3sqm tiled pergola that takes up all of their ‘back yard’, marvelling at their immense wealth because they happen to have a 1930’s shanty on the paved island called Australia.

    • “Don’ be surprised if inflated urban land costs correlate to the loss of land-intensive urban industries like auto manufacturing”

      Phil (Good stuff BTW)I think it is not so much a correlation as a self-reinforcing loop.
      We had a bit of this discussion with a Rumples post some time ago (Sorry I haven’t got it to hand) A productive economy is more decentralised. A consumption economy is more centralised. It’s just the way it works for lots of theoretical/practical reasons.

  6. A question worth pondering is at what point do the so-called emerging economies in China and India reach the point of diminishing returns? Remember the Asian Tigers – Taiwan, Singapore, South Korea and Hong Kong – who all started from very low economic bases and developed quite rapidly until such time as hitting the proverbial economic brick wall.

    Are we seeing the same thing in China and India; how sustainable is growth in these two powerhouses and for how long? The good Prof. has completely overlooked this issue in the AFR article.

    I fear for Australia in that many years of neglect re: investment in infrastructure and industry overall, will hit the country abruptly and with much pain, ie., once China and India reach their own developmental threshold. Australian policymakers have such short memories…

    • A question worth pondering is at what point do the so-called emerging economies in China and India reach the point of diminishing returns? Remember the Asian Tigers – Taiwan, Singapore, South Korea and Hong Kong – who all started from very low economic bases and developed quite rapidly until such time as hitting the proverbial economic brick wall

      They did the easy part, they followed the trail set before them.

      Innovation stems from the soft infrastructure of creativity. That is a multi-generational investment, and you can understand they wanted to lift many up at the same time.

      Singapore has made efforts to generate ‘creativity’ through subsidies and awareness. it hasn’t worked too well.

      Intuitively it is cultural, probably highly linked to individualism and theirs really isn’t an environment for that at this point in time.

      • Some thoughts I care to share.

        Capitalism without regulation generates monopolies. Now Australia has several duopolies etc but seemingly the big guys still call the shots, fact. If anyone really wanted to inspire creativity, they would tax the monopolies more and small business less. Simple really.

        • When I studied at Uni I remember there was some antitrust law in USA and some regulations against the monopolies. Where is this legislation today? It is gone, because the BIG ones have to compete on the global market, hence, there is no competition on the local markets, which kills any innovation and creativity. The monopolies are killing the free market and the capitalism itself. Kill the monopolies in every industry and the world will prosper again.

          • JunkyardMEMBER

            An interesting and difficult position that I’d never considered until recently. Monopolies are great for international competition, but destroy local innovation and creativity.

            Not sure what the answer to this is.

          • Internationally speaking, foreign corporates entering our domestic market would need to pay higher tax, i.e the bigger market share the more tax.

            And it would also provide incentive for domestic firms to branch out internationally for better returns?

          • Pure Capitalism = Monopolies.

            Capitalism is not the answer but just a go between before we think of something better.

  7. ‘Yet the budget focused on income redistribution and rapid fiscal consolidation with the goal of reaching a surplus in 2012-13… instead of investments in labour market flexibility, significant tax reform and removing impediments to incentives to innovate, this government has chosen to use the proceeds to consume the boom.’

    So he wants a government deficit with greater spending on R&D tax concessions? And is the recent round of tax cuts too focused on lower income earners?
    I don’t speak McKibbin.

  8. SweeperMEMBER

    “Countries affected by the crisis have made the mistake of not adjusting their economies to this long-term structural shift, mistaking structural shocks for inadequate demand”.

    This is a really interesting point. McKibbin could be right, maybe (from 2001) the Fed misread a positive global supply shock (Chinese and Indian Labour) for weak global demand, in which case they should actually have been lifting short term rates.

    I have doubts though. I think global demand was actually weak, partly because emerging markets were following an export oriented industrialisation model which required artificially low real exchange rates (or high ex ante saving). Proof of this could be seen in the real rate of interest, which fell from 2000 onwards. As McKibbin knows, over the long run, CB’s have no control over the real rate.

    What he says about Australia is spot on. We’ve blown the mining boom on middle class welfare instead of saving the proceeds in a SWF.