It is amazing what is transpiring in our political economy at the moment. Here we are, with a once in a one hundred and fifty year mining boom ending, and we couldn’t be more happy about it. Earlier this week we saw a nice bounce in consumer confidence:
And yesterday Westpac’s inflation and unemployment expectations data both fell:
As the above charts show, we have spent the better part of two years feeling down on our luck, as the greatest investment boom in 150 years took a hold, and now that it is passing we’re all thrilled about it. Why?
In 2008, when I wrote The Great Crash of 2008 with Ross Garnaut, the good professor composed the following passage:
Economic circumstances can obviously be made better or worse by how they are managed by government. The easy days of economic policy are those when the community’s expectations of expenditure are below the economy’s productive capacity, augmented as it may be by the sensible and sustainable use of international funding. The difficult days of policy are those during which expectations of expenditure exceed the productive capacity of the economy.
In places and times in which expectations of incomes and expenditure fit comfortably within a country’s capacity to produce goods and services, it will be easier to run policies to secure full employment and price stability. These are circumstances that are conducive to high rates of investment and productivity growth, which further increase the expenditure and incomes that are consistent with economic stability and full employment in the future.
On the other hand, during the difficult days, the lowering of expectations and expenditure to sustainable levels creates immense political strain. To the extent that the task is for the time being beyond the will or capacity of the polity, economic instability and distortions in resource allocation reduce the productive capacity of the economy even more. Countries that find themselves in the difficult days of economic policy are more likely to make policy mistakes that compound the difficulties.
We are in the latter phase. The average Joe currently enjoys extraordinarily inflated standards of living expectations, coming off twenty uninterrupted years of economic growth and a commodity boom of epic proportions that was fed into the polity by politicians seeking favour.
So, do we stand at the juncture described, on the cusp of a policy mistake that could create economic instability and compound the difficulties? Early data is suggesting that as the mining boom winds down, and the prospects of increased productive capacity and income diminish, rather than wind back our expectations, we are ramping them up, getting ready to spend.
Now, don’t get me wrong. In some sense, I agree that the productive phase of the boom lies ahead as exports increase following the investment boom. And I do not think that the polity is as short-sighted as the economic mandarins that brought us to this point: we are not the verge of some new housing and retail boom. Even if pollies have learned nothing, the polity has a sense that it needs to save and invest to progress its wealth.
But there is no doubt that the economic settings we are being presented with by our betters is discouraging that rather sensible attitude.
And what awaits if they succeed? It’s worth repeating yesterday’s Standard and Poors warning:
“If there’s a sustained delay in returning the balance to surplus, as the economy gathers momentum and as people start spending again, as the import demand picks up and current account blows out, we might not see the government’s fiscal position as being strong enough to offset weaknesses on the external side and that’s what worries us…Australia’s already, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position…It’s got high levels of external liabilities, it’s got very weak external liquidity and that basically means the banks are very highly indebted compared to their peers…For us, we look to Spain, which was Australia’s closest peer four or five years ago in terms of having a very strong fiscal position, very similar to what Australia has at the moment, its external position was weaker, like Australia’s, and it got routed very quickly…The government needed to provide support to the banks, it had to shore up growth in the economy and its debt levels more than doubled…We can see that happening in Australia’s case.”
But again referring to our better, what greets this apposite warning? Arrogance. From the AFR:
Australian banks have dismissed comments from ratings agency Standard & Poor’s comparing the country’s banking system to Spain’s.
“You need to ask the S&P guy why he feels the need to deliver a stronger message,” said Australian Bankers Association chief executive Steven Münchenberg. “If it’s an attempt to raise the heat I don’t know why they’d do it. I certainly don’t think the Spanish experience is particularly enlightening to the issues we’ve got here…Spain clearly had a housing bubble in the run-up to 2008. The big difference in Australia is that the housing boom wasn’t met with a construction boom. We’ve got the opposite problem – various figures say we don’t build enough houses.”
And just as many posit that underlying demand for housing is inflated by the bubble itself. I can only suggest that the question readers should be asking is why is a bank lobbyist rolled out to attack an S&P analyst?
