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The Resources Super Profits Tax and Decoupling: Is Australia Still Coupled to America?

The proposed Resources Super Profits Tax has consumed the nation. Most of the focus has been directed toward the affects, real or imagined, that the proposed tax would have on resource corporations.

Less critical attention has been devoted to the government’s proposals for how the proceeds of the tax are to be spent, critical to any moral arguments that invoke “mutual obligation,” and the underlying economic idea behind the whole thing. That idea is that we are about to have another commodity price driven resources boom, Boom Mark II, to match or even surpass the boom that we experienced in the noughties.

It’s assumed that Australia will benefit from a sustained boost to the terms of trade on the back of industrial production in China and India out to 2050, according to Ken Henry. The deputy head of the Reserve Bank, Phillip Lowe, argues that Australia is now “decoupled” from the United States. The old saying, when Wall Street sneezes Australia catches a cold, no longer applies. If America experiences a Japan style “lost decade” this won’t matter much. We’ll have China and India to save us. Lowe even is of the view that the Chinese and Indian booms have “decades to run.”

Decoupling is the critical idea underpinning the government’s economic strategy.

The RSPT is needed because we need to avoid all the problems associated with the “two speed” economy that we had during Resources Boom Mark I. For example, our resources were being exported to industry in China that was crowding out Australian manufactures in global markets.

Geelong and Elizabeth were losing because Tom Price and Broken Hill were winning.

Canberra, sensibly enough, wants to avoid such distorting effects during Resources Boom Mark II. The RSPT is a part of the government’s strategy to ease our way through the inevitable big boom.

Australia, however, has not decoupled from the United States. Despite the growing economies of China and India, what happens in America is still far more important for Australia. China and India are just transmission belts. The real game is still played in America.

I myself have been guilty of falling for the decoupling argument, but I see now that the case for decoupling was always pretty weak. Let me explain why.

Industrial production in Asia has depended upon exports to the United States and Europe, but especially to America. What has allowed this to happen is globalisation. Because of the globalisation of production industrial corporations have increasingly shifted factories, and even call centres, to low wage countries such as China and India. But, crucially, this is done with the objective of selling goods and services back to the US.

The strategy of export led industrialisation that the Asian based economies have pursued has thereby relied on demand from the US consumer.

The first resources boom, so the party line goes, happened because of the booming Chinese economy. On the face of it that’s true. But China was going gang busters because of the asset price bubble fuelled economic growth in the United States. Australia’s terms of trade was boosted, during Boom Mark I, by the US consumer purchasing cheap Chinese products. To export goods to the US market Chinese factories needed our raw materials. Even the construction boom in China, ultimately, owed its origins to America.

Our mining boom was therefore based in the United States, not China. But, one might well say, look at what has happened since. China has stayed up while the US went down. Commodity prices had picked up following big falls in 2008-2009. Australia has been riding on Red China’s back and thereby avoided recession.

It is true that China has been growing at an impressive click while the US has been stuck in the doldrums following the bust up on Wall Street and the collapse of the property bubble. However, when the crisis erupted on Wall Street in 2008 growth in China declined sharply. Since then the Chinese economy has picked up on the back of a massive fiscal stimulus, the ability of Chinese authorities to stimulate the economy by command rather than through indirect incentives and an asset price bubble, especially in the property sector, fuelled by cheap money.

In many respects this is similar to what has happened in Australia. We have avoided a recession because of the Rudd government’s stimulus spending and a deliberate strategy to prop up our own property market bubble.

However, the Chinese cannot stimulate their economy forever. In Australia we hope to keep the economy going by government stimulus until private demand picks up again. If it doesn’t then we are in trouble.

The same applies in China, except in this case Beijing is hoping that private demand from the US kick starts export led industrialisation again. If it doesn’t then China is in trouble. Likewise the property bubble in China has been stoking inflation. Beijing has moved to dampen the economy and global commodity prices have fallen in recent months as a result. Many analysts even go so far as to say that Resources Boom Mark II has now come to a close, well before 2050 it might be added.

The measures that Beijing has put in place since 2008 are temporary band aids. So long as China, and the rest of Asia, rely upon export led industrialisation then a stagnating US economy will prevent a long run resources boom in Australia. The debt crisis in the Euro zone does not help matters.

Should the US consumer continue to rely upon debt to fuel consumption, and the US financial system is not reformed to prevent further financial crises, then continued global economic instability will be difficult to avoid. This would prevent something akin to a multi decade long resources boom of the type commonly forecast to come about. We might add that US consumers now have little option but to deleverage. Cheap labour in China will dampen wages growth in America. There is something fundamentally amiss in the current makeup of the global economic order.

Australia would be truly decoupled from the US only if Asia proceeds to engage in regional integration, which is occurring to a limited extent, of the type gradually being implemented in Latin America and Beijing rejigs its economy towards domestic consumption. In the absence of these two changes Australia’s prospects will continue to be ultimately coupled to the economy of the United States.

The Rudd government’s economic strategy seems to be based on a complete misreading of the global economy and Australia’s role within it. Of course, this has no bearing on moral arguments for the resources tax which appear sound. When it comes to the poor “moral obligation” is accepted without demur. The rich insist, naturally enough given Adam Smith’s “vile maxim”, that they be exempt from mutual obligation.

Categories: Aus Economy, Globalisation

Australia’s Two Speed Economy: People Down, Profits Up

Last week’s retail sales figures were below expectations. They actually tell us a few interesting things about the contemporary “state of play” in the Australian economy.

Adrian Rollins had a good article in The Australian Financial Review on the retail sales result. He stated that (AFR, 7 May 2010 p4)

The week outcome adds to evidence that negligible wages growth, rising fuel prices, higher interest rates and an end to government handouts have weighed on household spending

Rollins, I think the AFR’s leading scribe, also went on to add the March trade figures into the analytical mix too

ABS figures show a 3.2 per cent jump in imports overshadowed a 1.5 per cent rise in the value of exports.

Reflecting the shift in the drivers of demand to investment, capital goods imports climbed 1.6 per cent and intermediate goods shipments jumped almost 10 per cent, while the intake of consumer goods dropped 3.9 per cent

A shift from consumer demand to private investment means people down and corporations up.

We might call this another variant to Australia’s “two speed economy.”

One sector that has been doing well has been financial services, especially the big banks. From what I have seen Westpac and the Commonwealth Bank have achieved good profit results on the back of what appears to be a public policy induced housing bubble. Gouging customers also helps.

Investors and the banks up, home buyers, especially first home buyers, down.

That’s another facet to Australia’s two speed economy we don’t focus on; profits up, people down.

Categories: Aus Economy

With Kevin Rudd Everything is the Same Only He Isn’t Here

It has been said that not long after the October 5 2000 uprising that ousted Slobodan Milosevic from power in Serbia many people grumbled that “everything is the same, only he isn’t here.”

So it is in Australia since the 2007 election. Remember when Brand Rudd told us that he’s “Kevin from Brisbane” and that “he is here to help.” Come in spinner! Everything is the same only he isn’t here.

The Age newspaper reports that the two-speed economy is to “return with a vengeance.”

The gap between the resource states and the rest is set to widen in years ahead as the two-speed economy comes back ”with a vengeance”, a report says.

Forecaster Access Economics says that, as the commodities boom gathers pace, Western Australia and Queensland will expand fastest this financial year, with growth rates of near 3 per cent extending this lead in the long term…

…After raising interest rates at five of the past six Reserve Bank board meetings, RBA governor Glenn Stevens last week said the CPI would shed some light on whether inflation was staying within the RBA’s target range of 2 to 3 per cent.

Rising interest rates, needed to nip inflationary pressure resulting from the boom in the bud, tend to hit the eastern states hardest because households there have larger mortgages

So we are going back to the two-speed economy. I though Brand Rudd wanted an Australia “that makes things.” Notice the bit about mortgage stress.

But much more important was an article by Charles Purcell, also in today’s The Age, that reports on the seething anger out there in the community that has been provoked by the massive declines in housing affordability. As I pointed out in my last entry the commodities boom threatens to crowd out Australia. The anger that Purcell reports on is the type that led to the rise of One Nation. Just take a look at what Purcell has to say

there is a voter groundswell of anger over housing in Australia. But it’s not the sort of transitory anger that one might have over many issues of the day — it’s a deep anger, a bitter anger that extends not only to those trying to buy their first house but also the parent who sees his children potentially locked out of the market forever, a fear his children share…

…It is an anger that grows as prices continue to spiral upward, rising to higher, ridiculous multiples of average yearly wages. It is an anger that festers over the outrage of negative gearing. It is an anger that grows as mortgage stress sweeps the land. It is the impotent anger of letters to the editor and calls to late-night radio programs, desperately searching for answers and reassurance

Purcell could have added that this sort of anger and concern is what got Rudd elected. That’s why Rudd told us that he was “here to help.” Interestingly, The Age today also has a report on a huge fine that has been given to a unionist in the building industry. According to the report

Electrician Mirek Grzegorek was stunned to receive a letter from the building industry watchdog warning him he could be fined $22,000 for attending a couple of short union meetings…

…”At the time there was an understanding if you go on a union meeting during working hours then your employer rightfully can deduct up to four hours of your time, even if the meeting takes 10 minutes.”

But the letter warned that Mr Grzegorek could face a much bigger penalty for attending an unauthorised union meeting

No wonder the Rudd Government caved in to a right wing campaign, pushed with force by The Australian newspaper, to reject a statutory charter of human rights.

The real estate market has been inflated, to a fair degree, by deliberate government policy. It itself is a type of bailout for property investors who banked on perpetually rising asset prices. This is all linked to the Government’s extraordinarily pro big bank friendly nature; to bailout the property investor class is to ultimately bailout the banks who don’t want to be exposed to too many non performing loans. It’s like the bailout of Greece is not a bailout of Greece. It’s a bailout of Greece’s creditors at the expense of the broader population.

So the affect that the real estate asset price boom is having on affordability is the type of externality that we should expect when Australia’s property market is positively geared towards investors, including foreign investors. The Government was just forced to scrap the pro foreign investor measures, but I reckon they’ll be back in one form or another after the next election.

So when Kevin told us that “he is here to help” he, actually, was telling the truth. But who was he trying to help? It is possible to write a thousand word, full referenced, essay in order to answer this question. But there are times when a picture tells a thousand words

Will The Commodities Boom Crowd Out Australia?

During the height of the commodities boom mania, prior to “the great crash of 2008”, the Reserve Bank of Australia made an interesting, though not much discussed, point.

Namely, the RBA argued that although rising commodity prices were great for Australia’s terms of trade the affect of the commodities boom was to crowd out Australian manufacturing. Our commodities were being used by low wage industries in China to outbid Australian manufacturers in global markets. This fed back into the two-speed nature of the Australian economy.

It was a perverse side effect of the commodities boom. Notice that the neoliberal reforms were instituted in order to change Australia’s structural profile from a commodities exporter to an exporter of high tech based goods and services.

It didn’t. We ended up with a two-speed economy, following the deep recession of the early 1990s.

Now towards the end of the pre 2008 resources boom a very important driver of Australian GDP growth was private investment. This was not because of the neoliberal reforms, but because cashed up resource corporations were investing big in an effort to pump out more lucrative commodities.

We are told by Ken Henry, and just about everybody else, that we are in for another commodities boom, to be fuelled by Chinese demand, well into 2050. Putting aside little quibbles such as Chinese Premier Wen Jiabao’s comment that China’s growth is irrational and unsustainable, we might discern another crowding out effect.

Ok, so commodity prices are rising again. Putting aside the extent to which this relies on public stimulus in China and the actions of speculators, we note that again the resource exporters are spending big on investment.

As investment increases given rising commodity prices so export volumes will increase, leading to a greater match between supply and demand. This effect would lead, all things being equal, to a dampening in commodity prices.

When we talk about commodity prices the affect on the terms of trade is much discussed. But I would like to focus on something else.

The problem with this little scenario is that it could lead to supply outstripping demand, especially if the global recovery starts to fade on the backdrop of either another financial crisis or the withdrawal of fiscal stimuli not being backed up by a sustained increase in private activity. Speculation in commodities prior to 2008 did play an important role in the rise of commodity prices.

In this case we won’t have the much vaunted capacity constraints that we hear so much about in Australia. Rather we will end up with excess capacity in Australia’s resources sector, the effects of which on the broader economy won’t be too pretty. If we are in the midst of a commodity prices bubble the affect will be multiplied. For a country highly exposed to commodity prices for economic well being risking excess capacity, given increasing speculation in commodities markets, a hallmark of neoliberal deregulation, is not a wise long term economic strategy.

The idea here is that we should aspire in Australia to be the masters of our own destiny. Take that very same RBA bulletin that I alluded to at the start. It showed that higher education is turning into an important little export earner for Australia. That’s good, but it also has a crowding out effect. Our universities are educating our future competitors.

If we truly had a program designed to build high tech industries in Australia we would instead be more interested in investing in skilling Australians for the type of interesting work that “makes things” at high wages.

Instead we have an education system increasingly tuned to foreign investors (foreign students are making a type of investment) and a labour market policy increasingly tuned to importing migrants. Both aspects of policy come at the expense of the broader domestic population.

It’s corporate Australia, in league with the politically correct intellectual-cultural classes, that are most fond of the idea of a “big Australia.”

Of course, under the vile maxim why invest to educate Australians when the masters of mankind can just import the type of labour they want and when they can make more money by educating full fee paying foreigners rather than ordinary aspiring Aussies?

How many young Australians missed out on a university place this year? How many of them won’t be able to afford a home because of the investor centric, including foreign investors, property market that is leading to an acute housing affordability crisis? Investors are crowding out home buyers, especially first home buyers.

Under the vile maxim we are not supposed to care about such questions. The only crowding out effect that you are allowed to focus on is whether public spending crowds out corporate Australia. These other types of crowding out in a future big Australia are better left unsaid.

Categories: Aus Economy