Monday, February 02, 2009

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.


Anonymous said...

"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."

Harry, that is preposterous. The mining companies were falling over themselves to offer higher and higher wages to attract workers in the boom.

Do you think it is the unions who got wages of $200K p.a. for electricians to work in the Pilbara? They were independent contractors who weren't even members of any union.

hc said...

Its not preposterous - with pay cuts many would retain their jobs. The CFMEU have done huge damage and recently sought 30% increases.

The electrician salaries then might adjust downward if other complementary inputs are not monopsonistically delivered.

Anonymous said...

Harry, wages will come down in the mining sector. You can bet on it.

What you said and what I quoted was that the "absurdly high wages" were the result of union activity. This is a nonsense. There was a mining boom on - the biggest since the gold rushes - and a huge shortage of labour. Of course wages went up stratospherically. Put your political prejudices to one side for a moment and think like an economist. What else was going to happen? The workers were all on individual contracts. The mining sector led the way on this years ago. Unions were irrelevant.

I defy you to find one mining company executive who claims unions forced them to pay wages that were higher than the wanted.

Anonymous said...

Rudd and his band of clowns are putting a wrecking ball to the economy..

Ordinarily people like Swan-dive would be happily working in a processing job.

Bek said...

Kevin Rudd's government wants to inject $15 billion into primary school buildings and maintenance for both primary and secondary schools. If they are so much concerned about short term downward sloping economy, why not boost university spending and increase scholarships as well, as students tend to contribute to economy with much faster rates once they graduate.

Anonymous said...

"might do for university campus meetings of enthusiasts but the claims are, for the more balanced, just hopeless words."

do you fair dinkum consider yourself balanced? you are as rabidly anti-labor as they come!!!

thank christ we have a government acting generally on the economic concensus, rather than on discredited supply side fanaticism

imagine if julie "right-of the laffer curve" bishop had any influence over decision making?

Anonymous said...

imagine if julie "right-of the laffer curve" bishop had any influence over decision making?

Well, I'm pretty sure it wouldn't be as bad as Swan-Dive who seems to be about the third worst treasurer in federation history... after Crean and the good Dr.

derrida derider said...

This is ridiculous Harry. Apart from your truly absurd claim about the mining unions, the one thing we lefties have to acknowledge about Howard was that he did wind down government debt.

That means that even in a prolonged downturn our credit will be good, allowing us to borrow from our children for a while to keep our living standards up. That's in stark contrast to the US (who in their right mind would buy long-dated US Treasury bonds?).

Anyway, in a prolonged world downturn our TOT would not stay this low indefinitely. The basket of our imports and exports would change - we'd do more food exports, less mining exports, and much less manufacturing imports.

hc said...

DD, Its you who are being ridiculous DD and not looking at vwhat is starring you in the face. Remember the CFMEU and its 30% pay claim a few weeks back? Supporteed by Sharon Burrows of ACTU.

And you didn't read the post - you just rushed to defend your ideological masters. I clearly wrote that the government could consumption smoothe if it believed the crisis was temporary.

I'll try to be fair if you will but what you have written is knee jerk nonsense.

Anonymous said...

"Well, I'm pretty sure it wouldn't be as bad as Swan-Dive who seems to be about the third worst treasurer in federation history... after Crean and the good Dr."

*pats jc on the head and gives him a wiberal party wowwy pop

hc, any efforts that stimulate collapsing consumption and investment that saved jobs and small businesses at the margin (i.e. very much viable any non-extroadinary climate) could reduce the depth and length of any recession / slow down - regardless of its likely endurance

lets be clear here that you are pitting yourself against a broad concensus in opposing fiscal stimulus (and one focused on spending initiatives)

and i suppose you've volunteered to take your pay cut all ready?

Anonymous said...


First off if you want me to take you seriously, you have to do something about that first name. Change it.. do something.

Secondly Bruce, I'm not hugely fond of the Liberal party, Bruce, but if you, Bruce put a gun to my head, I would choose the libs in a heart beat simply because the combined IQ of the current front bench would be no higher than our labradoodle.

Thirdly Bruce, my comment was actually meant to be serious as I do think Swan-dive is the third worst treasurer in the history of the federation. Even if the other two jokers were liberal I would still put Crean and Juni Marosi’s former lover as the two worst.

Lastly Bruce, these 90,000 jobs are actually costing a great deal more than $233,000 a piece on an annualized basis, Bruce. They have to borrow the money you nong, so if we placed a commercial borrowing rate on the money and say they issued bonds for 10 years, each job has an economic cost of around $500,000. We lost 43,000 jobs last month alone you complete innumerate which tells you the power private enterprise has in terms of being the job engine compared to the government. So rather than dribbling out stupid inane comments like the last comment I suggest you try and not think about these issues as it would be like trying to read War and peace to a pet out loud in the hopes he would understand it. Bruce.

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Anonymous said...

An interesting post - leaving aside the silly comment re Pilbara unions!
What is interesting is the, perhaps simplistic, contrasting responses to the substantial 'decline in economic activity' depending on the the short or medium term prognosis. It would seem, in Harry's view, that if you can't cure the disease in the short term don't bother attending the patient (ie don't waste resources). If the patient, notwithstanding the pain, finally recovers then like good stoics we get our stiff upper lip into place and get on with life. A legitimate if perhaps asinine and unsophisticated view of the appropriate economic responses to the issues at stake.
I would agree that the problem is not short but medium term - but that does not remove the appropriatenes of the 'palliative' actions of the Rudd government - if I can continue the medical anology above. In the circumstances this would seem a very appropriate economic strategy - and also politically adroit as Turnbull is discovering.

In the real world of business you don't fiddle around seeking the "perfect" solution for every issue facing you, you select the most appropriate action in the time-frame available and get on with it. I might add that 'perfect' solutions are of a "post hoc" nature - usually the province of academics, historians, or others with no responsibility for making the necessary decisions at the time!

JC Even allowing for your obvious capacity for hyperbole, there is a need to make a couple of points re 'worst Treasurers since Federation'
1) I would add Howard to the two you mention - but in many ways Howard and Frank Crean were made impotent by their masters ie Whitlam and Fraser
2) It is is far too early to judge Swan's performance - unless, of course, one is guided by ideology rather than objectivity. His parliamentary performance has improved dramatically - performance in terms of economic policy clearly remains a matter for future judgment!
BTW I would drop the 'federation' ref and confine it to post WW2 - it would perhaps make it a more credible assertion.

Anonymous said...


I'm really lost in trying to understand what is you're trying to say.

It is is far too early to judge Swan's performance - unless, of course, one is guided by ideology rather than objectivity.

No not really he's a clown completely out of his depth.

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