Who’s to blame for Dutch disease?

It’s slowly dawning on the press that we’ve made a mistake hanging our economic future so exclusively upon China. There are a number of quite good takes on this today but The Australian has a quote from former White House adviser, Pippa Malmgren, that is to the point:

A FORMER financial adviser to the White House says Australia made a big mistake in neglecting trade and investment links with the US and other major economies while it became fixated on selling commodities to China over the past 10 years.

…”Why do Australians restrict themselves to the flight to Shanghai and Beijing?…It always makes sense to diversify, but for whatever reason Australia didn’t diversify over the past decade; they’ve just said ‘the US is history, China is the future. And now the US is coming back to life and China is weakening — and for Australia it’s too late to rejig the model. I think Australia has made a very big mistake in that they have pegged their future principally on China. It would behove Australians to focus more on the one market which has always been there for them, which is the US…In fact Australia is about the only country that is not a net beneficiary of the fact that manufacturing is leaving China. So why isn’t Australia attracting it? Because Australia pegged its future not only exclusively on China but exclusively on resources.”

Pippa is a friend of mine. She is a former financial markets adviser to the Bush White House and a smart lady to say the least. More to the point, she is an economic neo-liberal. Yet here she is asking why it is that we embraced the Dutch disease thrust upon us by global markets. Given this, it is perhaps a good moment to ask, who’s fault is it?

Over such a long boom, it’s not an easy question to answer and in some very important sense is artificial. It’s all 20/20 vision in hindsight after all. Nonetheless, there are a series of mistakes that it is reasonable to call out our elite on. In the end, they all come back to one fundamental error, too much of the boom was spent and not enough saved, overheating the economy, driving external debt and the dollar too high and hollowing out everything not bolted down or a hole in the ground.

The Macfarlane RBA used the boom to rationalise its housing bubble (20% blame)

The RBA of Ian Macfarlane offered easy money for far too long. From the moment it came into being, it slashed interest rates on reasonable inflation levels resulting from the productivity-related growth of the late nineties. As Phil Lowe has written, it is a mistake to lower interest rates simply on the back a positive supply shock such as this and disregard the results, such as rising asset prices. By the time Macfarlane awoke to this simple truth in 2003, Sydney’s housing bubble was huge. But as the terms of trade boom began, bailing out the mistake, his RBA continued its easy money policies and rather than deflate, the bubble went national with Brisbane, Perth, Melbourne, Adelaide and Hobart (cities far and wide, many unaffected by mining directly), all followed Sydney house prices skywards. By the time he retired, Australian inflation expectations were, to say the least, firmly entrenched:

More than anyone, the Macfarlane RBA established an expectation of rising asset prices to replace traditional savings. Under its watch, a chronic current account deficit became a borrowing glut.

The Howard/Costello regime gave us too much of a good thing (30% of the blame)

Accompanying the Macfarlane era’s easy money years, fiscal policy was too easy. Yes, Howard and Costello paid down public debt to very little, established the Future Fund and installed a tax on spending in the form of the GST, but they also exacerbated falling savings rates with fiscal largess and giveaways that were overly generous.  Capital gains tax alterations boosted asset prices and successive tax cuts had us all borrowing and spending like drunken sailors with no thought to the future. Shortly after leaving office, the resulting mountainous external private debt imploded in the GFC, the banks were effectively nationalised, and suddenly the savings rate  (which had already begun to turn) rocketed.

The Rudd/Gillard/Swan regime botched the solutions (20% of the blame)

The GFC stimulus was well handled with the exception of one policy. When Treasury sent its proposed stimulus package to Cabinet, there was no First Home Buyers Grant boost in it. It was added by the pollies. The result was a blow-off round of housing speculation in 2009 that saved growth but missed the opportunity to deflate (not crash) Australian asset prices. The resulting re-inflated bubble has dogged every move made by the RBA since. Rather than extra capacity freed by the GFC being redeployed into the renewed mining boom, the RBA has had to raise rates and the dollar and force capacity to free up. That is, it embraced Dutch disease as a way to prevent the mining boom overheating the economy again. We simply should have allowed housing to deflate in 2009 even via recession if necessary.

Since then, the Rudd /Swan team tried to install a Resource Super Profits Tax that would have helped shore up government savings for many years yet and may as well have helped contain the second round boom (though it was probably too late) But its policy process ruined the chance of getting the tax over the line with the body politic. It was rushed, poorly designed in a political sense and opened the way for a violent mining backlash. This failure will dog the country for many years to come.

In the face of this, the Gillard government and its executive embraced Dutch disease as Australia’s saviour, extrapolating unsustainable Chinese growth endlessly into the future.

Unethical mining and media companies (10% of the blame)

Presented with the opening offered by the Rudd/Swan team’s poor policy process, mining companies engineered perhaps the cheapest and easiest bloodless coup in the history of democracy, with the help of hapless media firms. Australia was left naked before an onslaught of investment that, by definition, meant an increased reliance upon very few commodities going to even fewer countries.

The Australian people (20% of the blame)

We all did this in some measure to ourselves.

In sum, I give to you, the Dutch disease blame donut:

 

Comments

  1. What? No blame for the Stevens RBA, Treasury, ABARE/BREE and the Canberra groupthink?

    No blame for the bullhawk economists, bureaucrats and commentators?

    I think you need to break it down a bit further…

      • I don’t see how you can blame Treasury. They are public servants. The Government can accept or reject Tresury’s suggestions. Treasury will always give a range of options, and the Government selects.

        You never hear about about the Treasury suggestions that get knocked back (except in the rare case of a major public document, eg the Henry tax review – which was almost entirely knocked back!).

        And see the example of Treasury NOT recommending a FHOG in 2009, but pollies putting it in anyway.

      • Treasury has advised successive governments that the China resources boom is likely to run for decades, and it is good policy to allow the non-resource tradeables sector to contract.

        They made it ok for governments to make bad decisions. If the boffins are saying its good policy to sacrifice manufacturing, which pollies are going to stand up to that?

      • HnH, Thanks.

        Another thing: When are you going to impose the MineBot Quarantine to prevent the derailing of this thread? 😉

      • They have provided intellectual cover for incompetent management.

        Some examples:

        – Their forecasts of Chinese growth and commodity prices
        – Claiming the AUD was driven by the ToT, and that it would be overvalued forever – which flies in the face of all international macro models and history.
        – Throwing cold water on a SWF. This was no-brainer, because its the only effecive instrument which can be used to respond to dutch disease. But Treasury said it wasn’t necessary because we have compulsory super (which is just comical).
        – Not advising Rudd/Gillard to abandon stimulus when the ToT were rocketing back to historical highs.

        There are other examples as well. And they never admit they are wrong. They just keep coming up with the same unrealistic crap.

      • Government ignores Treasury advice a great deal of the time. Particularly if Govt thinks the punters want something else.

        As I see it, manufacturing was basically headed down the tubes anyway, due to our difficulty in competing with labour costs etc.

        And Government has been doing a fair bit of propping up anyway, giving sweetheart deals to the car and steel sectors (to little avail of course – just can-kicking – but it’s what the punters want).

        It’s a bit too convenient to sheet home blame to Treasury for the selective decisions of government.

      • Treasury also advised the RSPT.

        Sure, Treasury advised that government capture some of the proceeds of the boom — good — but they also advised the boom would last for a very, very long time, and it was ok to let the non-resource tradeables wither and die — bad.

        While they provide that “intellectual cover” as Sweeper put it, future governments will make the same mistakes. That is why I believe Treasury — and the Canberra groupthink — is at the core of the problem.

      • I believe whomever was responsible for the 1996 re-weight of the CPI that removed mortgage interest from the calculation played a very key role in the housing bubble, and thus deserves a nod here.

  2. But Australia wants to replace the Dutch with the Kiwis? This is what low interest rates do for a country that has hollowed itself out, and relies on assets speculation for its future “Rangitoto Ave in Remuera sold for $1.175m above valuation.” I know lower interest rates in the current environment look necessary,as they did for New Zealand 2 years back, but don’t they always?
    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10849753

    • And that leads to the US model longer term.

      Bulldozed cities and massive asset deflation. Check out Detroit, Cleveland etc.

  3. reusachtigeMEMBER

    That’s all fair enough but I think you need to cut those percentages in half and give 50% blame to the npeople of Australia. Seriously, it’s half our own fault for taking the greed bait and running.

    • It’s also symptomatic of the dumbing down of eduction. Australians are now too stupid to look at issues objectively and instead form their views from highly credible sources like Today Tonight and ACA.

    • You’re. Lordy!

      Many Australians were seduced by the lie that the mining sector saved the economy during the GFC. Fiscal stimulus in Australia and China saved the economy, the miners simply took advantage.

      • I don’t know how much the mining boom really did help our economy, but it did make it look very good on paper.

        When your macro economy looks good on paper it keeps up confidence in markets. Perhaps from this perspective alone the mining boom did ‘save the economy’, for the time-being at least.

        One thing I do know is that if you drink enough booze you eventually get a hangover. More credit anyone?

      • “…and China saved the economy”

        How?
        Did it involve a response from Australian resource sector?
        Did this response have an impact on the Australian economy?

        Tip: Read DE before answering.

      • “Many Australians were seduced by the lie that the mining sector saved the economy during the GFC. Fiscal stimulus in Australia and China saved the economy, the miners simply took advantage.”

        Spot on.

  4. Really good article HnH. Its a crying shame that this information wasn’t (and mostly still isn’t) widespread in the mainstream media.

    Was saying this 5-6+ years ago and being treated like a moron for saying it.

    And I agree with Labrynth, the Australian people went along wholeheartedly with this insanity. If we had kicked up there would have been some more of what passes for political will in this country, for change. We get what we deserve etc.

    Boganomics wins again – we all lose.

  5. HnH

    You cant possibly leave out Mega Bank and its regulatory arm APRA.

    APRA has allowed Mega Bank to game the capital system so the housing was seen as the only lending that bossted returns on capital. This togther with the implied government guarantee allows the socilaisation of losses and the bonuses of banksters to be maximised.

    This is structural and will not be broken unless we have a crash as until that happens the APRA/Mega Bank alliance will deny the situation and pollies in their ignorance will joyfully follow

    • At least acknowledge that Basle was an international agreement regarding risk weighted assets and it was that international agreement which led to housing being such an attractive asset for banks. APRA/RBA and the banks then applied it.

      The law of unintended consequences then prevailed and housing boomed with disastrous impacts on it’s global record of being ultra secure from credit loss.

  6. We did exactly the right thing and responded to the global demand for our natural resources. It has prevented Australia from the full impact of the GFC, provided governments with wherewithal to reduce personal taxes, introduce vote buying middle-class welfare entitlements and myriad other actions (outlined in The After the Party: How Australia Spent the Mining Boom).

    Yes, management of the boom was flawed, but the boom itself bloody marvellous – we’ve spent the post GFC years wryly oohing and aahing over the increasingly desperate position of those in the Eurozone and US. Now with the prospect of a reduction in the level of mining investment activity and our own indebtedness coming back to haunt us we cry like spoilt children and look to cast blame. Pathetic.

    I return to my first challenge: someone, anyone – what else could we have done, what else could we have in particular with the US.

    Pippa is mistaken. We have continued to engage with the US, but they just haven’t been that interested. China may be slowing, but it ain’t over and they remain keen.

    • What else could we have done 3dik? Introduce a resources super profits tax – a proper one – in about 2003, instead of pissing a record boom against the wall for a decade.

      • In 2003 i/o was around $13/tn. There were no Super Profits. Any additional taxation at that level would have ensured no additional investment which would have ensured no easy street for the nation post GFC.

        Whilst I believe the concept of a super profits tax itself is ludicrous, the MRRT is working as designed and will capture revenues when commodity prices rebound.

      • Excellent. My litmus test is that if 3dik opposes your mining policy, your mining policy is probably right.

      • You’re arguing about its name?

        Be it a RSPT, a sovereign wealth fund, or something else. Call it what you like.

        Basically we needed something, anything, that would have stopped us pissing a giant mining boom against the wall.

      • Well, yes – I suggested government policy/management could have been different.

        But of course we had to have a ‘boom’ in the first place and luckily for us, we did!

      • Yeah. It’s funny (but not in a nice way) that Downer tried to get as much as possible from Timor in the oil deal saying that they would just piss it against the wall when they have behaved responsibly we have been the ones pissing it against the wall.

    • I agree – this is a somewhat disingenuous statement from Pippa Malmgren. Australia has bent itself over for the US in terms of liberalising trade, though probably not as much as US financial services and pharma businesses would like. Is the US honestly saying it is prepared to give Australia greater access to its agriculutural markets at the expense of US jobs ? Oh really !

      • I agree spleen. The US has always been looking out for No1. Sure, it’s possible we could have handled the boom better but good lord, talk about the pot calling the kettle black! The only time Australia gets on the US radar is when the issue at hand is in the US global strategic interest.

        On the notion of who is to blame, I place this firmly between the RBA and to a lesser extent on the Australian public – they have behaved like lemmings. RBA IR settings and the LACK of Bank lending guidance has channeled Trillions in debt into unproductive assets and household balance sheets. Lending and credit gone mad.

    • Don’t forget that employment in the mining industry is very small, about 2.5% from memory. Even if half of that is lost a minor sectoral rebalancing can absorb it.

      In my view, fullish employment will prevent a lot of harm to most people, including highly geared recent dwelling buyers and their lenders (and the lenders shareholders and creditors).

  7. Neo-liberals (in the media, polity, private sector) are to blame. And this phenomenon is not limited to Australia.

    Over the last decade, most middle class jobs in the developed world were outsourced and their incomes replaced with private household debt, productive/manufacturing jobs replaced with “services” or FIRE sector jobs. Then they went ahead and blamed public debt for all the ills in the world, while studiously ignoring the role of private debt.

      • Your one-line denials are a great contrarian indicator – I must be on the right track and it seems to bother you very much. Why is that? Are you a neoliberal and do you believe in the neoliberal ideology?

      • I am a bit curious about Minebot’s response though.

        I didn’t finger the miners or the Libs or anyone in particular…. just neo-liberals in general…. And he took great offence at that. Inquiring minds would like to know why. Perhaps he sees clear and present danger in his ideology being exposed for its hollowness and moral/social/financial bankruptcy.

      • “…most middle class jobs in the developed world were outsourced and their incomes replaced with private household debt”.

        Untrue on both counts. Prove it if you feel otherwise.

        “…productive/manufacturing jobs replaced with “services” or FIRE sector jobs”

        This has happened to some degree but what is your point. Your iPhone was designed by service sector produced by the manufacturing sector – a globally intertwined world. The aircraft you fly designed by the service sector produced by the manufacturing sector, your car, your health needs attended to by the service sector, addressed by equipment designed by the service sector, produced by the manufacturing sector. Do you get it?

        Your comments are weighted with ludicrous dogma.

      • 3d1k, you pretend to have a memory of a goldfish..

        Evidence have been presented before.. multiple times here and elsewhere.. income disparity have risen sharply over the last decade, both in the developed world and the BRICS. The rich are getting richer and the middle class is getting more indebted (aka income poor).

        On your point about iPhones and aircraft design being the “services” sector, note the financial services sector’s share of corporate profits has gone up and up.. With the GFC bust, middle class found out that designing iPhones and aircrafts isn’t going to provide them with enough jobs and FIRE sector jobs vanished overnight, leaving only household debt behind.

        The stats are there for all to see and I am not going to fall for your diversionary tactic of asking for proof.

      • When does Gina Rinehart announce the winner of that $50,000 award for Best Performance in the Service of Conservative Thinktanks and Resource Sector Obfuscation ? It feels like it’s getting close.

      • Perhaps 3d you can give us your sources for your own similar assertions here …

        “formerly strong Western economies that have grown fat on the fruits of easy credit which itself drove the path forward for globalisation.

        We are now (or at least some years ahead) seriously facing the fact that even a vast range of service occupations are as ripe for offshoring as the previously much maligned production process”

        You almost seem to be saying that middle class jobs have been offshored – sorry, supply chain managed– out to other countries, and that wealth replaced by debt ?

      • No Spleen. Most middle-class jobs have not been lost and replaced by debt (itself an oxymoron) as Mav asserts, however, that is not to say job loss may not occur into the future. Credit approval is generally reliant on having an income to repay.

        Read Dalia Marin for an interesting perspective on the future of much of the services sector in a competitive global market. She may be wrong but I think we seeing increasingly signs she is not too far off the mark.

      • Some types of jobs have been lost to low wage, low regulation, low transparency, high corruption, highly authoritarian Asian countries – sorry, competitors. That much should be obvious.

        It should also be fairly obvious to you that we have been attempting to calibrate our ability to keep consuming to a greater reliance on services’ jobs, underpinned by the financial sector. Now, what do you do when real wages are declining but you need the punters to keep buying ? Easy – liberate the financial sector from all of those pesky regulations and higher credit standards, and let the money flow ! Why tie lending to an ability to repay when you can just assume ever increasing asset prices, and an expectation that taxpayers will backstop the increased risk of widespread default ?

        And if you’re one of the clever managerial clogs that has engineered the productivity gains from effective supply chain management, why shouldn’t you reap the rewards ? Why should those profits accrue to labour when the point is sourcing labour as cheaply as possible in the first instance ?

        And why invest in R&D, infrastructure, education, when you can just extract a fee for the organisation of all of that cheap labour, and provision of all that credit ?

        And if the rest of those whinging bludger workers are too stupid to become part of the managerial or capital owning class, then they should just take whatever wages and conditions they can get, be glad they’re part of the globalised consumer capitalist system that has extended their miserable life expectancy by 30 years, and just shut the f**k up !

      • “Then they went ahead and blamed public debt for all the ills in the world, while studiously ignoring the role of private debt.”

        This bit is very true.

      • For good measure, let me quote TP’s excellent General advice warning on 3d1k:

        First, to anyone reading this 3d1k is a PAID PR consultant for the mining industry. Basically, he is paid to move the conversation away from the mining sector and towards or blaming anyone else. Mining ALWAYS good..

        Secondly – he keeps asking this question repeatedly to sow doubt into anyone’s mind that maybe its not mining after all

        Thirdly – yes, its been proven many many many times, here and elsewhere. There are so many links and data supporting this its not funny. In fact its downright preposterous that you would ask, and shows your ethics in clear view. You prefer a paycheck to the truth.

      • First: I support the resources sector and yes, it is good.

        Secondly: I’ll stop asking the questions (and there are more) when data supporting broadbreadth claims is provided. I maintain however, that along with many other developed economies, globalisation has impacted domestic manufacture (and into the future, some services).

        Thirdly: I agree that the due to our good fortune to be a resource based country, demand from China stepped up at the very time demand for product/services in many other nations declined – and this indirectly (as DE has well explained) provided a buffer of sorts to the full impact of the GFC. Impact which most other non-resource based countries are still reeling from today.

        My main concern Prince is that to my mind there is not one easy fix to the economic problems we potentially face into the future. If we cannot identify and address these problems we have little prospect of improving them.

        The next generation will come into a world of far greater economic uncertainty, the paradigm shift has been of such magnitude. Globalisation ensures affordable product for consumption around the globe, lifts millions in the emerging economies out of dire poverty, extends the human face of relationships. But there is the challenge for formerly strong Western economies that have grown fat on the fruits of easy credit which itself drove the path forward for globalisation.

        We are now (or at least some years ahead) seriously facing the fact that even a vast range of service occupations are as ripe for offshoring as the previously much maligned production process.

        In a truly global world all is fluid. Corporations have no nationality. So we join the race to the bottom, our dollar is worth squiddly dump. Even then here are still millions prepared to do what we do, cheaper.

        A little dystopian I know. But potentially the alternate side of the globalisation coin.

        No easy fix

      • Dystopian, Why?

        Empowering and liberating, are the thoughts that come immediately to my mind when I read about globalization.

        Change is what most people fear, so it is not by accident that the greatest value can be extracted by becoming an instrument of change.

        Take Last week I bemoaned the fact that within the IT world it is much more difficult to find PLC programmers (programmable controllers typically used in industrial automation) than say web page constructors or network architects (whatever that is)

        In response I was told that PLC was a niche skill, and furthermore that this niche skill would also devalue if everyone raced to acquire this skill. So complaining about IT off-shoring was a much better use of their time than was learning PLC programming.

        I haven’t found a way to avoid change so I’ve learned to love it!

      • The prevailing global order has its share of intellectual defenders, academics, pundits, and ideologues.

        These “functionaries of the superstructure” (Sartre) serve to mystify the real inner workings of the emerging order and the social interests embedded therein.

        This new era is briging rising material prosperity amidst pauperization. Humanity is bound together as never before, yet divided into the haves and the have-nots in a way unprecedented in human history. It is a time of escalating political and miliatry conflict as contending social forces face each other in innumerable yet interwoven struggles around the world. The global capitalist system, by the turn of the century, faced a structural crisis of overaccumulation and also an expanding crisis of legitimacy.

        And yet we find 3d1k and China-Bob here, pounding away day in and day out, attempting to legitimize an obsolete system that grows more corrupt and decadent by the day.

      • No easy fix

        I can’t believe China Fanbois themselves have missed it. China has shown us the easy way to fix it, by lowering taxes on its local iron ore miners

        Protectionism/kleptocracy. Or as you prefer to call it – “capitalism with communist characteristics”.

      • No Mav, I wasn’t taking a shot at anyone, it was just amusing to me that the very same facts, as outlined by 3d1K, can be interpreted in such radically different ways.

        I think this ability that we all have to interpret data in the best light, given our own personal circumstances, goes to the heart of the western entitlement issue.

        However, when I have no skin in an existing game than I’m also unlikely to recognize the “valuable” role that others play within the game. So I feel free to eliminate them completely, thereby define my own game, which is naturally the ultimate freedom…

      • Mod: Modified comment

        Glen : “A little dystopian I know. But potentially the alternate side of the globalisation coin.”

        Did you not understand what I wrote?

        My view is that globalisation has been of enormous benefit overall but that it is not without challenges, particularly for western developed economies, going forward.

        Simplistic reversion to left/right paradigms lead nowhere.

      • @ 3d1k

        Yes, I understand perfectly what you wrote, and it is pure fiction.

        You wrote: “Globalisation ensures affordable product for consumption around the globe, lifts millions in the emerging economies out of dire poverty, extends the human face of relationships.” Your claim, however, is about as far from reality as one could possibly get.

        Take US workers, for instance:

        Productivity in the economy grew by 80.4 percent between 1973 and 2011 but the growth of real hourly compensation of the median worker grew by far less, just 10.7 percent…

        http://www.epi.org/publication/ib330-productivity-vs-compensation/

        German workers have also gotten the shaft:

        Net real wages in Germany have hardly risen since the beginning of the 1990s. Between 2004 and 2008 they even declined. This is a unique development in Germany—never before has a period of rather strong economic growth been accompanied by a decline in net real wages over a period of several years. The key reason for this decline is not higher taxes and social-insurance contributions, as many would hold, but rather extremely slow wage growth, both in absolute terms and from an international perspective. This finding is all the more striking in light of the fact that average employee education levels have risen, which would on its face lead one to expect higher wage levels. In contrast to the prevailing wage trend, income from self-employment and investment assets has risen sharply in recent years, such that compensation of employees makes up an ever shrinking percentage of national income. Inflation-adjusted compensation of employees as a share of national income reached a historic low of 61% in 2007 and 2008.
        http://www.diw.de/documents/publikationen/73/diw_01.c.342371.de/diw_wr_2009-28.pdf

        These facts are awkward enough in your Alice in Wonderland world, but where labor has really gotten murdered is in the developing countries like China and Mexico. In Mexico, real wages have fallen 50% since 1982:

        http://www.jornada.unam.mx/2011/07/17/economia/024n1eco

        Although reliable information about wage trends in China is almost impossible to come by, we know from reports like these that Chinese workers have suffered mightily:

        http://www.youtube.com/watch?v=Y2TLl6Nj6Oo&feature=related

        http://www.youtube.com/watch?v=BqGmCq0hUBk

        http://jacobinmag.com/author/eli-friedman/

      • Glen. Millions of workers in emerging economies have benefited from globalisation – workers that otherwise would be consigned to abject poverty in rural locations.

        I suspect that in utilitarian terms vastly greater numbers in said emerging economies have benefited compared to the numbers in developed economies whose positions have stagnated – but have largely remained employed.

        Is this indeed a levelling of the playing field in global terms? A little stagnation for the well-off, significant improvement for the poor yet still in no way equal. And we are the ones bitching?

        Not too many in developed economies were crying out in protest at the paucity of conditions of those in emerging economies – we were collectively the 1% in global terms.

        I have linked before to the German experience where in broad terms standards of living have not increased in ten years – an exchange for some employment guarantees. Nonetheless, most German workers remain relatively well off when compared with fellow Chinese and Mexican workers who themselves remain comparatively well off with the rural poor.

        Globalisation has a great challenge now to ensure it is not a race to the bottom in terms of wages and conditions for workers globally. The fact remains that we in the West may have to accept some modification of conditions if we are to remain globally competitive. It seems flavour of the month is productivity. Well we’ll see.

      • Funny man 2d, they are there to stop worker suicides on factory premises after a dozen workers jumped off the dormitory buildings.

        To think that Foxconn is supposedly the most generous (and largest) private employer..

      • 3d1k says:

        Millions of workers in emerging economies have benefited from globalisation – workers that otherwise would be consigned to abject poverty in rural locations….

        Is this indeed a levelling of the playing field in global terms? A little stagnation for the well-off, significant improvement for the poor yet still in no way equal….

        The fact remains that we in the West may have to accept some modification of conditions if we are to remain globally competitive.

        Well you certainly do have the talking points down pat, even though they have about as much basis in reality as the Garden of Eden. The big lie goes something like this: “Workers in the developed world must do with less so those in the developing world can have more.” The truth, however, is that workers in both worlds are doing with less. The transnational capitalist class is the only winner.

        Al Jazeera did a report on Mexico that blows some major broadsides into your defactualized little world:

        Mexico: Impunity and Profits
        http://www.youtube.com/watch?v=A-4ALKGBbOE

        And then from India, there’s this from Arundhati Roy:

        If you look at a map of India’s forests, its mineral wealth, and the homelands of the
        Adivasi people, you’ll see that they’re stacked up over each other. So in reality, those who we call poor are the truly wealthy. As the globalized corporate economy strengthens its grip on our lives and our imaginations, its beneficiaries have united and seceded into outer space. From there they look down at the forests and river valleys where the poor live and see superfluous people sitting on precious resources. They are puzzled. They wonder: What’s our water doing in their rivers, what’s our bauxite doing in their mountains? What’s our iron-ore doing in their forests? The Nazis had a phrase for superfluous people —überzähligen Essern, superfluous eaters….

        In Dantewara district of Chhattisgarh, where some of the world’s finest iron-ore is, 644
        villages have been emptied. 50,000 people have been moved into wretched police camps, the
        young among them have been armed and trained to become a vicious peoples’ militia called
        the Salwa Judum. The remaining 300,000 people are off the government’s radar, no one
        really knows where they are, how they are surviving. The police has branded all those not in
        the camps as Maoists or Maoist sympathizers which makes them legitimate targets for India’s
        famous ‘encounter’ killings. The Security forces are taking position, waiting for the rains to end.

        But almost every day as the news trickles in, it seems clear that the killing and the dying and of course the raping of women, an inevitable aspect of militarization, has already begun.

        How has it all come to this?

        Twenty years ago, in the winter of 1989 many of us watched the joyous moment when the Berlin wall came down and this city was re-united…..

        In India the rules of the game changed suddenly and completely. Millions of people who lived in remote villages and deep in the heart of untouched forests, some of who had never heard of Berlin or the Soviet Union, could not have imagined how events that occurred in those faraway places would affect their lives. The Indian economy was thrown open to
        international capital. Laws that protected workers rights were dismantled. The era of
        Privatization and Structural Adjustment was upon us.

        Today, words like ‘Progress’ and ‘Development’ have become interchangeable with economic ‘Reforms’, Deregulation and Privatization. ‘Freedom’ has come to mean ‘choice’. It has less to do with the human spirit than it does with different brands of deodorant. ‘Market’
        no longer means a place where you go to buy provisions. The ‘Market’ is a de-territorialized space where faceless corporations do business, including buying and selling ‘futures’…..

        Two decades of this kind of ‘Progress’ in India has created a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it—and a much, much vaster,
        desperate underclass. Tens of millions of people have been dispossessed and displaced from
        their land by floods, droughts and desertification caused by indiscriminate environmental
        engineering—the massive infrastructural projects, dams, mines and Special Economic Zones.
        All of them promoted in the name of the poor, but really meant to service the rising demands
        of the new aristocracy.

        Arundhati Roy, “Democracy’s Failing Light”
        http://www.literaturfestival.com/service-en/intern/reden/arundhati_roy_engl

      • You guys have no idea what you are talking about, if you believe that most Chinese workers lives have not been improved by globalization.

        It is a very humbling experience to learn what some Chinese villages went through to allow one of their own to achieve excellence. I close friend from a very poor region who’s talent for mathematics enabled him to earn a place at one of China’s most prestigious universities. Today he is a very successful engineer and is in the process starting his own company.

        Interestingly the elders of his town feel that his greatest contribution to the youth of the village is the knowledge that they can succeed. Knowledge is a very difficult force to repress.

      • @ China-Bob

        Oh geeze! Now we’re getting treated to the Horatio Alger myth, but with a Chinese twist: instead of the American dream, we now have the Chinese dream.

        Can the arguments get any more hackneyed and insipid than this? You guys are really scraping the bottom of the barrel now.

      • Glen you are blinded by ideology.

        Globalisation has benefited millions of individual lives. Like any man-made system it is not perfect but it has allowed many to make choices about their lives, to break the shackles of rural poverty, to earn (in many cases) sufficient income to support family, to purchase consumer product like mobile phones and computers which broaden understanding and connection within the global community.

        Again, which you conveniently ignore, the challenge is now to mature the process of globalisation to enable all peoples the opportunity of reasonably paid employment and greater global interaction. It is a big challenge – repeated tirades from a sole political perspective (in your case communist or socialist) offer nothing to address real world considerations.

        As for Mexico (a country I have spent many months in) corruption and the narco-state have done far more harm than introduction of maquiladoras of the Free Trade Zone.

        You need to get out more often!

      • @Glen

        “Can the arguments get any more hackneyed and insipid than this?”

        Hey be happy it was either this or a philosophical rant about Kantian Enlightment vs French Existentalism. Since this is a little of topic, I decided that a healthy does humility and a Chinese rags-to-riches story was more entertaining.

      • Mav

        So all the Union and Labor stooges in here will put their hands up?
        Will all those getting paid by the taxpayer to work but spending their time pushing their own PS bourgeois barrow in here, effectively stealing from the ordinary person, also stand up?

        This puerile venom constantly aimed at 3d1k is stupid, boring, unfair and indicative of a group think that is just plain poisonous.

      • China-Bob

        A fool is one who knows not and knows not that he knows not. There is no point in trying to add to its knowledge it is impervious.
        It’s obvious you don’t get it Bob…China-Bob indeed! Glen knows more about China and the conditions and well-being than you and I and everyone else put together. Hells bells man he doesn’t have to go there to know all that. I mean what the hell would you know? You’ve probably been only visiting there for 30 years, probably speak the language. Glen knows everything and probably has never drunk Moutai in his life!!!!!!

      • Flawse
        I can prove I’m not a public service, union, ALP stooge. Q&A Is on right now and I’m not even watching. What more proof could you want ?

      • Glen you are blinded by ideology.

        Where’s the ideology ? All I see are facts, citations and quotes.

      • 3d1k said:

        As for Mexico (a country I have spent many months in) corruption and the narco-state have done far more harm than introduction of maquiladoras of the Free Trade Zone.

        You need to get out more often!

        Phew! Where to begin?

        I notice you just ignored the Al Jazeera report. So let’s cite some other facts from written reports. Here’s one report:

        • Since 1982, when the neoliberal model was first implemented in Mexico, the economy has grown an average of 2.1 percent per year.

        • The National Poll of Household Income and Expenses, conducted by the National Insitute of Statistics and Geography (INEGI), shows that 29 million households in Mexico have lost real income. That is in a nation with a total population of 130 million, so the vast majority of households are losing real income.

        • The minimum salary will now buy a third of what it did in 1982.

        • The salary of the average union worker has lost 50% of its purchasing power since 1982.

        • Whereas before most of the workers who fled Mexico were day laborers, now the drain is on the country’s university-educated workers.

        • 12 million Mexicans have emigrted to the United States

        • The Secretaries of Hacienda (federal tax office), Ernesto Cordero and Bruno Ferrari, dismiss the falling incomes of 112 million Mexicans (86% of the population) since 1982 as being “just a perception” and assert that “Mexico is not a country of poor people.”

        “Narcotrafficing generates the most employment: 600,000, says expert”
        http://www.jornada.unam.mx/2011/07/17/economia/024n1eco

        Here’s another report:

        • The ultraprivatization period of presidents Salinas y Zedillo (1988 to 2000) saved the banks and guaranteed impunity.

        • During this period, the number of Mexicans living in extreme poverty increased from 5 million to 22 million.

        • “The only buoyant economy was narcotrafficking,” says the historian Andres Openheimer.

        • US banks, according to the investigator of Peter Dale Scott in American War Machine, are the principle beneficiaries of the Mexican drug trade. Scott conducted an extensive study of documents released by the US Congress and the US Treasury, and what is happening is that the tens of billions of dollars that flow into Mexico each year from drugs somehow, as if by magic, invariably get laundered and deposited into US banks.

        “Drugs and Poverty”
        http://www.jornada.unam.mx/2011/06/06/opinion/a12a1cul

      • Wow! flawse has finally shown up.

        Now we can elevate anti-intellectualism and willful ignorance into the blue empyrean.

      • One has to wonder, if China is the Shangri La that 3d1k, flawse and China-Bob would lead us to believe it is, why more than half of China’s wealthy are considering leaving the country, as was reported by The Wall Street Journal:

        More than half of China’s millionaires are either considering emigrating or have already taken steps to do so, according to a survey that builds on similar findings earlier this year, highlighting worries among the business elite about their quality of life and financial prospects, despite the country’s fast-paced growth.
        http://online.wsj.com/article/SB10001424052970204394804577011760523331438.html

        Oh well, I suppose all those wealthy Chinese are just stupid and uninformed, the only ones who really know what is going on in China are flawse, 3d1k and China-Bob.

      • Glen that is typical of your usual mis-placed drivel. Just keep your head in that book. Don’t ever listen to anyone who has been anywhere or worked or observed. Just keep your head in the book or wherever else it is.

      • The productivity issue is a furphy. The flavour of the next few decades will be protectionism. And it will be so because the mythical, transformative powers of globalisation you are expounding will be increasingly felt by those shallow, self-interested voters as an inequality of opportunity.

  8. As a recent Aussie expat return, I really can’t speak about the local development of this Dutch disease, however I’d be taking a long hard look at the realities of global markets and the manufacturing for these markets as the prime causes.

    Manufactures will always clump together because by co-locating they create a system where the sum of the parts is worth more than the individual parts.

    A point solution manufacturer can focus his attention on a given market and achieve global scale for that niche product, however this focus caries with it a tremendous risk. IMHO the greatest of these risks is the inability to defeat some relatively simple technical problems. This is precisely where the clumping of manufactures adds incalculable value because it allows skills that exist in related clumped companies to be leveraged.

    Most of these linkages / leverage are informal and can be as simple as management golf buddies supporting each others companies whenever a critical skill can be provided. The point is that a grater depth of manufacturing infrastructure leads directly to a greater depth of support with a higher probability that the critical skill will be accessible.

    Minus this depth there is really not much point in globally competing. So we are destined to create local niche product which will always loose out to a more globally focused competitor if the market ever scales to global levels.

    This is not just an Australian problem because we are seeing exactly the same forces at work when comparing the evolution of manufacturing in (Spain or Greece) vs Germany. Even the US is loosing out to Asia because it lacks depth in critical manufacturing (e.g LCDTV manufacture), most of the original development happened at US companies but when the product really went global these companies lacked the scale to keep up with Taiwan and Korea.

    • if your still looking to buy an australian manufacturing company, there will be a few distressed sales early next year the way things are going.

      • I’m definitely still looking at acquiring an Australian business, but I’m finding that I need to be very selective about where I invest my time.

        I must admit I’m learning a lot through the selection process, much of which goes to the core of what it means to be Australian. I guess I’ve long ago replaced the Aussie concept of “fairness” with the realities of a competing market place, this makes for some interesting conversations.

      • So you’ve replaced the “concept” of fairness with the “realities” of a competing market place?

        The only way you could have done that is if you have drifted off into a massively ficticious world.

      • “The only way you could have done that is if you have drifted off into a massively ficticious world.”

        Just for my own education: would that be a neoclasical or Austrian ficticious world?

      • Neither, as my comment alluded more to psychology than economics. As the Polish psychologist Andrew M. Lobaczewski, who lived 6 years under a Nazi regime and 32 years under a Communist regime, put it:

        The pathological authorities are convinced that the appropriate pedagogical, indoctrinational, propaganda, and terrorist means can teach a person with a normal instinctive substratum, range of feelings, and basic intelligence to think and feel according to their own different fashion. This conviction is only slightly less realistic, psychologically speaking, than the belief that people able to see color normally can be broken of this habit.

        Actually, normal people cannot get rid of the characteristics with which the Homo sapiens species was endowed by its phylogenetic past. Such people will thus never stop feeling and perceiving psychological and socio-moral phenomena [e.g., fairness, equal justice, empathy] in much the same way their ancestors had been doing for hundreds of generations. Any attempt to make a society subjugated to the above phenomenon “learn” this different experiential manner imposed by pathological egotism is, in principle, fated for failure regardless of how many generations it might last.

        ANDRES M. LOBACZEWSKI, Political Ponerology

      • Ah days of Communism.
        That does leave me pining for a bygone era….

        I remember walking the streets of Jena (East Germany) with two Stassi minders trailing behind. These guys took their jobs seriously and derived extreme pleasure in the repression of the free market activities of a couple of Jena’s “likely lads”

        Fortunately for me the free market activity that they repressed was my own mugging.

      • @ China-Bob

        You attempt to portray your free-market fundamentalism as the opposite of communism, when in reality it is its mirror image. As John Gray notes:

        Through their deep influence on Marx, Positivist ideas inspired the disastrous Soviet experiment in central economic planning. When the Soviet system collapsed, they re-emerged in the cult of the free market. It came to be believed that only American-style ‘democratic capitalism’ is truly modern, and that it is destined to spread everywhere. As it does, a universal civilization will come into being, and history will come to an end.

        This may seem a fantastical creed, and so it is. What is more fantastic is that it is still widely believed. It shapes the programmes of mainstream political parties throughout the world. It guides the policies of agencies such as the International Monetary Fund. It animates the ‘war on terror.’

        JOHN GRAY, Al Qaeda and What It means to Be Modern

  9. “We simply should have allowed housing to deflate in 2009 even via recession if necessary.”
    Yes. Yes. Yes. The same aim still applies now – better late than never.

  10. I’m still waiting for the economy to implode from so called “Dutch Disease”, the same disease that caused Holland to implode…

    We need higher interest rates to continue the deleveraging process. We had a good period in 2011 when we had a trade surplus, high interest rates and falling housing prices, that’s changed thanks to the RBA’s third mandate to support property prices.

      • “We simply should have allowed housing to deflate in 2009 even via recession if necessary.”

        So a recession in 2009 would have been acceptable but now it’s to be avoided?

        I don’t view recessions as bad things. Just an inevitable part of the business cycle and the event that follows every boom. During a recession the economy restructures by liquidating the investments that are the least productive, allowing the released labour and capital to be reallocated to the most productive sectors.

      • “We’d be hurtling into recession as we speak on that prescription.”

        So instead we’re hurtling into more and more debt with the correction postponed and magnified. If we’re all lucky our kids can bear the brunt! Great!!!
        We can avoid recession if we can make debt grow fast enough, sell off assets at a faster and faster rate and consume ever more faster and faster and faster and faster and….

  11. In answer to the original question:
    1. Chinese stimulus,
    2. poor long term analysis by treasury and
    3. the usual inclinations of all including politicians to take whatever benefits one can while one can.

    Government will operate within the bounds of external economic forces and internal political forces to avoid recession, high unemployment and falling comparable household net worth (eg middle aged households normally build net wealth while older households end up reducing net wealth after retirement).

  12. “The US coming back to life” ?? The process of deleveraging in the US is far from over. A lot of folks say that the US has, when it comes to deleveraging, “barely moved the needle”. So, proclaiming that “the US is coming back to life” is far too premature.