Australian economy & Labor

Australia is a small open economy that takes economically what is dished out by the world economy.  We don't significantly affect world events.  The world has dished us out a really bad serve. The terms of trade we face have moved against us -despite a recent tick upturn - so we will export less and the value of many of our local productive assets have fallen.  The crisis we face is primarily an external economic shock.

We therefore face the prospects of a fairly sustained decline in economic activity. Longer-term we cannot offset this decline through monetary and fiscal actions seeking to expand the local economy since it is externally induced. If we assume the crisis will only last for a year or so the best we can do is to smoothe our consumption standards by borrowing a lot - running huge* public deficits - and by so doing seeking to build an economy that will be ready to take on the world when things recover when we then have to repay the debts we have incurred.  If we are pessimistic and assume that the world decline will last for at least several years - I am in this camp - then the alternative appropriate policy response is to be more moderate and to accept that our living standards will fall and to then get on with our lives by learning to live with the inevitably reduced living standards and lower growth rates. To fritter public resources away in this latter case is just to leave a weakened economy with reduced public resources and lower capacity to adapt as well as a much bigger than necessary long-term public debt.

The banal arguments about the precise way of creating a domestic boom to offset the externally induced recession draw attention away from from this fact.

The obstacles to accepting gracefully a fall in living standards include monopolistic trade unions which enforce downward wage rigidity when things get tougher. The mining sector layoffs are a direct function of the absurdly high wages the unions have 'gained' for the soon to be unemployed in this sector. Other obstacles include the uncritical belief that undirected government spending programs and attempts to underpin inflated asset prices can offset adverse world economic circumstances.

Not all unpleasant economic facts of life can be dissolved by policy.

Kevin Rudd's claim that he will 'do what he can' to reverse the effects of a negative terms of trade shock might do for university campus meetings of enthusiasts but the claims are, for the more balanced, just hopeless words.  The attempt to throw money at anything - e.g. the pre-Xmas handouts or providing insulation for housing - without regard for economics or for considerations of rebuilding the economy in anticipation of better times is a foolish political response - 'we are acting' - to a real crisis.

We will all suffer from waste induced from these attempts but, of course, those who are poor and disadvantaged will suffer most once public resources evaporate.  They might take solace in the fact that they at least had a decisive say in electing the 'leadership' who will now plausibly add to their miseries.

* The deficits will be $15 billion or so over the next few years without accounting for wasteful public expenditure programs.