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Oct 5, 2012

Nothing to worry about in the Oz economy? Think again

Claims that the Australian economy is hunky-dory -- including by Crikey's Glenn Dyer and Bernard -- need some debunking with reality.


When it comes to business commentary by my learned Crikey colleagues, Bernard Keane and Glenn Dyer make fine political and media experts. While their constant regurgitation of secondary-school Keynesian economic theory is entertaining, this week’s bizarre attack on Adam Creighton (and their recent mauling of David Murray) did little to further their credibility.

Keane and Dyer appear to be confident of Australia’s economic invincibility; apparently burgeoning household debt (Australians have a higher proportion of mortgage debt to GDP than the US before its housing collapse) is apparently an irrelevance. That the Australian government lost (which is really what a deficit is) $44 billion doesn’t seem to bother our fearless economic commentators.

Nor does the fact that those tax receipts are being held up by the vestiges of a Chinese government-constructed credit boom. Of course, it’s difficult to maintain services and a bloated public service when tax revenues are dropping and expenses rocketing. (And with unemployment at structural lows and commodities at all-time highs, it would seem impossible to envisage Australia’s fiscal position improving in the coming years).

This was, in essence, Europe (and the US’s) problem. Governments (which are employed by a rump of voters keen to protect their self-interest) have undertaken welfare state projects, which, since the GFC, have finally proved unviable. If the PIIGS governments (and even the US) were actual businesses, they would long have been wound up. The prima facie solution to these woes suggested by Keynesians (led by their oracle Paul Krugman, who famously advocated reducing interest rates in order to inflate a housing bubble in 2001) is to solve a problem created by too much debt and consumption by printing money to create more debt and spur further consumption.

But, according to Keane and Dyer, Australia has nothing to worry about. Why? Because the IMF said we’d all be OK. (Yes, that is the same IMF that was recently run by French Socialist Dominique Strauss-Kahn). In the space of two paragraphs, Keane and Dyer accused Murray of channelling “silly analysis” before noting “the IMF also said last week that the Australian banking system … was well placed to withstand a US-style housing crisis. After it had conducted ‘stress tests’ to see how our banks could cope with a housing collapse like that which hit the US and UK in the past five years – a 5% drop in GDP and 35% fall in house prices.”

Forgive us for thinking those stress tests may not be overly stressful — given that European bank stress tests in 2010 said all was all OK, only to almost take down the entire European economy a year later.

Keane and Dyer then argued that Murray’s views were foolhardy because the credit agencies said Australian was just fine. Crikey‘s economic wonder duo opined: “Not to mention the outlook on Australia being reaffirmed by Moody’s and Standard & Poor’s, at AAA stable. In fact, comments by a senior executive at Moody’s just two weeks ago directly contradict Murray’s thesis. ‘We are very comfortable with Australia’s triple-A ratings because of the government’s very low debt levels compared with other sovereigns in the triple A category’.”

This would presumably be the same Moody’s and Standard & Poor’s that rated hundreds of billions of dollars of US mortgage-backed securities as AAA just before they would be deemed worthless as the housing market collapsed (conveniently, the ratings agencies received handsome fees from issuers of the debt). Or the same Moody’s and Standard & Poor’s that rated Enron “investment grade” until a few days before its bankruptcy.

Keane’s and Dyer’s attack on Creighton was even harsher, perhaps because he dared write (in The Australian no less) that governments should try not to spend more than they can generate in revenue. Keane and Dyer went straight for the man, claiming that “Creighton is too young to remember the pain of the last recession in the 1990s and the impact of the wrenching reforms in the 1980s and 1990s as well – or what happened to a generation of blue-collar male workers when we combined the two.”

Keane and Dyer themselves appear to have minimal grasp of history — themselves living through the fiat money era since 1971. Keane’s and Dyer’s invoking of the reforms of the 1980s (which were the product of a left-wing Australian government) appears especially bizarre. The shift away from manufacturing is a byproduct of Australia’s inability to compete globally in some (but not all) sectors. Keane himself (in some of his very impressive work) has been a staunch defender of government assistance to failing industries.

Ironically, after attacking Creighton, Dyer and Keane actually reached the same conclusion, noting that “looking at all the data, it’s harder to conclude that the economy needs stimulus – to the extent it would get it from a 25-point cut”. And that is correct. The RBA is far from an oracle. While not as hopelessly conflicted as the US Fed, the Reserve Bank board consists of arguably partisan industry players like Heather Ridout and retailers such as Roger Corbett, and once included Solly Lew, Brian Quinn and Frank Lowy.

What should the RBA have done? Well, that depends on who you are. If you’re a responsible saver, or retired or own your home outright, then the RBA’s frantic monetary easing will reduce living standards. If you’re a poorly-managed retailer or over-leveraged home owner, then thank the RBA for its short-sighted approach.



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22 thoughts on “Nothing to worry about in the Oz economy? Think again

  1. Edward James

    It looks to me like world banks and governments are locked into supporting a round robin of borrowings, which commit taxpayers to generational interest bills, which are way beyond workers capacity to ever pay off. Successive governments have set and maintain the bad example. Living beyond our means is never going to end well. How many cut backs on consumption can consumers make before they are no longer consumers? Edward James

  2. Will

    Wow. That crackling sound is Adam Schwab’s credibility bursting into flame as he substitutes his normally hawkish but prudent analysis for cheap shots at market monetarism and counter-cyclical Keynesianism (which have actually held up remarkably well contra RBC austerity and hard money orthodoxy) and a morality play about hard money and saving and a nonsense propagandist one-size-fits all story of the Euro-zone.

    I don’t recall Keane and Dyer making the case that structural reform isn’t important or that the Australian economy has no vulnerabilities. Indeed, though I acknowledge that Keane and Quiggin are sometimes too quick to downplay structural factors, it’s certainly valid to call out hacks who opportunistically beat the drum on long-run ideological goals regardless of the difference between reform and immediate macroeconomic stability and health.

    Let’s cut the BS. Adam’s story of the Eurozone is wrong. Ireland and Spain do not fit the lazy profligacy story at all. People who invoke this as a morality play would do better to limit their contention to Greece and Italy where the shoe at least fits. Even there, there is still a balance of payments issue and an underlying tax avoidance and collection issue that isn’t being captured by the morality play.

  3. Paddy O

    Crikey why do you print this idiotic rant- some dumb charter of balance? Mr Schwab is an ideologue- his simplistic rant against a simplistic portrayal of keynesians says it all plus “the same IMF that was recently run by French Socialist Dominique Strauss-Kahn”. say no more, the guy has no critical analysis beyong ideology and Crikey’s daily mail should have better critics than this!

  4. Will

    There are a few silly things in this article, but I just want to address this.

    “That the Australian government lost (which is really what a deficit is) $44 billion doesn’t seem to bother our fearless economic commentators.”

    Entering a deficit due to automatic stabilisers kicking in and some discretionary fiscal policy (much of which was bipartisan) is not the moral equivalent of carelessly throwing money away. Anyone who says otherwise is clearly disingenuous. It is a particularly dishonest gambit for someone who wants argue gratuitous contractionary pain is morally necessary .

    You can only coherently evaluate a counter-cyclical fiscal policy in the context of counter-factuals and the opportunity cost of differing policy responses.

    So let’s see. The success of the stimulus payments showed that the behavioural literature (windfall psychology) beat the orthodoxy prediction (permanent income hypothesis).

    There was certainly some sub-optimal spending, but the size of the program was commensurate with the gravity of the crisis and it was the unquestionably the right paradigm in terms of targeting construction and housing sector. The problems of time lags were real, but state-by-state comparisons show that the worst problems were localised to state bureaucracies rather than problems entirely within federal responsibility. So the picture is muddled. There are also certain issues that are inherent to fast-tracking any program in the absence of a “shovel-ready” preparedness.

    Based on his contemptuous tone about fiscal policy in general, I think we can assume that Adam does not want to devote resources to improved shovel readiness capacity, so want is left to criticise? Further controls? Insisting on further controls would just increase the time lag trade-offs – thereby eroding the counter-cyclical value of the program – so the argument becomes incoherent.

    At root, it is a basic category mistake to only count operational waste and ignore waste in idling capacity and under-employment and loss of velocity of money. As WWII showed us, as hard as it is to swallow for the morality is economics brigade — even building tanks and wastefully blowing them up can be highly stimulative when there is a shortfall in aggregate demand.

    That said, I lean toward Sumner’s nominal GDP targeting over fiscal policy where possible, because it doesn’t suffer these time lag problems of big fiscal policies and it’s easier to deal with politically.

  5. dazza

    This bizarre defense of Wall Street mafia is incredible if not funny. Here’s something better and more to the point by Max Keiser. http://rt.com/programs/keiser-report/episode-349-keiser-max/

  6. pertina1

    A little tip Adam, check the address before you hit the send button. I assume youve been moonlighting for theTele and thats whats behind this absurd posting. No point dignifying this economically illiterate trash with a comprehensive response but suffice to say that anyone who endorses David Murrays stupid Greek scenario needs to seriously reconsider their vocation.

  7. Bill Williams

    Calling Keane and Dyer for their short sighted criticism of those that look at the Australian economy’s predicament with a time horizon longer than 12 months is refreshing Adam. You probably won’t get a Christmas card this year from Julia Gillard who sees the economy as a phenomenon that can be talked down or up.

    You lose me completely, however, with your comments about the Reserve Bank. In addition to “poorly mangaged retailers and overleveraged home owners” your list of people who might be happy about lower interest rates and a lower dollar should also include every Australian engaged in producing tradeable goods and services. These people, who have to sell into global markets despite the handicap of the highly regulated Australian labour market include, in addition to our almost extinct manufacturers:

    1. Farmers
    2. Tourism service providers
    3. Education exporters
    4. Miners

    If we followed your line of neo-classical logic, Adam, we would conclude that the Swiss are wrong in trying to keep the value of their currency from climbing too high in unusual market circumstances wouldn’t we? Let’s see who turns out to be smarter.


  8. drsmithy

    While Keane and Dyer’s belief in Australian exceptionalism is completely wrongheaded, the article above is also utter tripe, prime amongst which is this:

    This was, in essence, Europe (and the US’s) problem. Governments (which are employed by a rump of voters keen to protect their self-interest) have undertaken welfare state projects, which, since the GFC, have finally proved unviable.

    America’s debt has come from the public assumption of private debt – nothing to do with welfare.

    Why welfare is not responsible for Europe’s problems is covered here: http://mattcowgill.wordpress.com/2011/12/01/the-welfare-state-is-not-to-blame-for-the-euro-crisis/

    In short: no country is bankrupt because of poor people.

    Though this one, perhaps, takes the cake:

    If the PIIGS governments (and even the US) were actual businesses, they would long have been wound up.

    Governments are not businesses.

  9. Adam Schwab

    Only five negative comments and all were unable to make any semblance of a point…disappointing gents.

    @Will – Trust you’ve never visited Ireland or Spain. They very much fit in the Europe story. As for “automatic stabilisers”, this secondary school concept isn’t even valid given unemployment is at cyclical lows and we have witnessed record terms of trade.

    @Paddy – Your only actual comment of substance was to suggest DSK wasn’t a French Socialist. Which is of course,e exactly what he is.

    @Bill – Farmers sell product locally as well as globally. Miners have recorded record profits as the AUD has soared past $1. (Their problems are that China’s credit boom is finally reaching an end).

  10. Tony Ward

    Any sort of Keynesian economic theory is surely better than the neoclassical claptrap we’re being fed by Adam and other commentators. As the IMF and OECD, amongst many others, have agreed, the Oz stimulus package to counter the GFC worked brilliantly. Get over it guys. Yes, we now have some extra debt (tho’ much less than virtually any other OECD country). We’ve been there before and worked it out.

    Since Adam reckons none of the comments made a point let’s try a few of his. “apparently burgeoning household debt”? – have you missed the shift back from net dissaving just before the GFC (which was indeed dangerous) to household savings of 8-10% of incomes now?

    Next, the quality of post GFC stress tests differed – the US ones were robust, and have put their banks on a much better footing. The European tests (apart from other optimism) ignored the possibility of sovereign default, and deserve Adam’s ridicule. But smearing the Oz stress tests (which by detailed accounts were indeed thorough) by association is simply lazy.

    And as for the pure rhetoric of a “bloated public service”, two comments. First, the OZ public sector is half the proportion of GDP as many European countries, so smearing by association doesn’t work here either. Second, it looks like Adam missed the great recent Crikey article that the States with the best results in the education stimulus package were those who had maintained in-house ability to manage the process.

  11. Bill Williams

    Adam, to argue that farmers sell locally as well as globally confirms your unwillingness to let facts get in the road of your commitment to your neo-classical ideology: more than half of Australia’s agricultural production is exported. I note that you didn’t address the issue of education exports and tourism.

    Re mining, even though (most) mining exports have remained profitable with a high dollar, the fact remains that the gross return on products exported is reduced in direct proportion to any increase in the value of the AUD.

  12. Will

    “@Will – Trust you’ve never visited Ireland or Spain. They very much fit in the Europe story.”

    I have spent plenty of time in Spain actually, though I fail see the relevance of that as personally visiting a place is completely irrelevant to judging its antecedent fiscal position. The point I made and the point you have failed to dispute with your hand-waving response is that neither country suffered a primary deficit or crushing public debt entering into the recession. Indeed, Spain was running a modest surplus and Ireland was the poster-child of nascent reforms.

    These basic facts run contrary to the glib narrative you are pushing that Europe has a mono-causal explanation and that everything is structural. My point was not to wave away the problems of the European model. On the contrary there is ample evidence of the problems with the European model. I simply have a problem with the kinds of lazy generalisations you make in the piece, simplify the disparate progenitors of the debt crisis into a totallising morality tale about welfare and structural reform. It’s glib and seeks to superimpose a comforting bed time morality play of the squirrel and the grasshopper onto a complex situation that doesn’t match it.

    The fact that I have to spell this out to you underscores you do not understand what Keane’s argument was against opportunistic soothsaying simply because you’re on the same opportunistic, evidence-be-damned side. That’s fine, but it means you are just another irrelevant commentator.

    You’re right that welfare side automatic stablisers are not a significant in the Oz deficit. I didn’t say otherwise. Tax receipts are a problem, however, and I see that you do not respond to me calling out the category mistake in counting only the cost of spending on expansionary fiscal policy and not the cost of having a lower floor in the economy. Or do you believe that if the Federal Government had not spent a cent in stimulus, and if the RBA had no engaged in monetary easing, we would have regardless had such low unemployment?

  13. shepmyster

    This has to be the poorest piece of economic journalism I’ve ever read and I think that I’m being far to generous in describing it that way. Ok Adam there’s a housing bubble. You got that right. Everything else that has been written is pretty much non sensical rubbish.
    I was going to sit down and pick this thing apart but really most will see it for what it is. So I will just pick one.
    To suggest that Moody’s would, could make the same mistake with their analysist of loans in our housing markets would suggest Adams complete lack of knowledge or his willingness to completely ignor it.
    What happen in America was a fraud. Yes Moody’s should have done a better job but their faliure

  14. shepmyster

    What happened in America was due to poor regulation rather than Moody’s performance

  15. Mike Flanagan

    The publication of the above economic drivel, I fear is further evidence of an editorial shift the neo-liberal right by Crikey and is contradictory to their subscriber renewal promotional campaign.

  16. Will

    For the record, I have enjoyed Adam’s other pieces on CEO remuneration and corporate governance. That’s why this this piece disappointing.

  17. Wang Chung

    nee how ma, it so verrwy strange when two people who have so much in the common and much agree the ” ends ” but not so the ” means ” it minded me of old China proverb but it long gone now

  18. Sean O Finn

    The real problem here is not debt its Politicians of both persuasions, some like Howard worse than others buying votes by cutting taxes when demand for Government services is going up. Something that will only get worse as the baby boomers move into retirement. I don’t see this changing so long as the status quo is sacrosanct. Tax breaks like negative gearing on property should be a prime target for removal as should big deductions for superannuation contributions for the well off.As for Murray I don’t remember him doing such a great job with my Telstra shares nor the Commonwealth Bank that paid him a motza.

  19. Things of Stone and Wood

    [ Tax breaks like negative gearing on property should be a prime target for removal as should big deductions for superannuation contributions for the well off.]

    Has anyone noticed the real estate industry ramping up again? All the Big 4 banks are running very subtle low-docish looking adds again and please don’t try and convince me that last week’s rate cut is not a primer for the housing market.

    I’d be more concerned with the realestate industry promoting over valued listings than their smoke-screen-furphy under quoting at pre-auction. It’s bad joke that covers the underlined reasoning.

    In the Singapore realestate industry they have a saying.
    ” He who controls the listings controls the market.”

    I guess that equates to over-pricing just to get the listing, but here in Oz that equates to a flat to crashing market with no winners and through reasons of plain old greed it is gonna end bad.

  20. Michael Burrows

    Interestingly Enron receives a mention, as the dust begins to settle; within the US legal system: ‘several years’ on costing ‘x’ dollars. Any idea what year the Australian courts are presiding over?
    Some 25 years after the Asprey Review was commissioned by the then Whitlam Government, the Howard Government introduced Europe’s equivalent of a VAT(Value Added Tax)in the New Tax System, which comprises of our GST. Record insolvencies and bankruptcies have ensued (gross generalisation??).
    Smoke/fire – I don’t believe we’re out of the woods just yet!
    Sincerely hoping Ken Henry left something future Australians can utilise.

  21. Hunt Ian

    Adam Schwab has little grasp of economics or history. It is nice to hear that the problems in Europe show that the welfare state should be wound up. The debt problems in Europe and the US show no such thing. The key problem is the reduction in taxes on the wealthy. In the cases of Italy and Greece this problem is confounded by failure to collect even those taxes that are legally due.

    Will has said most of what needs to be said on economic policy and rubbishy claims about waste in government spending in the global financial crisis, although I think the government clearly failed to anticipate the threat of rorting by private contractors in the pink batts policy, which was designed to supply relatively unskilled workers with job opportunities, and take measures against it by flagging audits of spending from the start.

    Higher taxes on the wealthy paid off the vastly greater national debts as a percent of GDP after WWII than any country other than Greece has incurred since the GFC. The struggle between the Schwabs, who want the welfare state dismantled to preserve rentier wealth and income, and those who see that higher taxes on the wealthy will be necessary to pay off future debt in Europe and the US is the basis of the debt crisis.

    This problem is being imported into Australia, where large mortgage debt and a high exchange rate are about the only problems the economy faces with levels of national debt that can quite easily be paid off with only minimal increases in taxes on the wealthy. The problem of mortgage debt will become acute if the Schwabs of this world get their hand on the welfare state and government spending.

  22. Edward James

    i am still complaining about the way those governing us ignore the outstanding allegations, Gosford City Council is corrupt! Edward James 0243419140.


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