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Investigation

March 19th, 2005

Former blogger James Morrow is setting up a magazine called Investigate. As long-time residents of Ozplogistan will recall, Morrow is fairly firmly on the political right, but he was kind enough to invite me to contribute a dissenting column for the opening issue (and maybe a regular feature). Due to email foulups, the piece I sent him didn’t get through, and it will be thoroughly obsolete by the next issue, so I just thought I’d put it up on the blog for anyone interested – some of it has already appeared in blog post form, but I thought I wrapped it up into a pretty good rant.

Early in March, the Australian Bureau of Statistics published some alarming figures suggesting that Australia’s apparently strong economy might be less robust than it appears at first sight. In the December quarter of 2004, GDP growth was only 0.1 per cent for the quarter (and 1.5 per cent for the year) while the current account deficit exceeded 7 per cent of GDP. In recent experience, a deficit in excess of 5 per cent has generally been an indicator that painful adjustment is required. For Australia to run a 7 per cent deficit at a time of weak economic growth, and despite highly favorable terms of trade, suggests that the economy is seriously out of balance.

If the figures were alarming, the reaction of our political leaders was even more so. Both the Treasurer and the Prime Minister demonstrated that they lack basic knowledge of the economy they are supposed to manage. First, Costello sounded off on infrastructure bottlenecks, in a way that made it clear that he knew nothing about the issues involved in their ownership, regulation and pricing structures, or about the way in which the export chain for minerals is organised.

Then Howard joined in with the absurd suggestion that more young people should drop out of school at Year 10 in the hope of taking up a trade. It’s obvious from this remark that Howard hasn’t updated his understanding of the way the education and training system works since he went to Canterbury Boys High, back in the 1950s.

Howard’s advice is exactly that given by many working class parents to their sons in the 1950s and, at the time it worked pretty well. It is only since the 1980s that the problems have emerged for older workers with limited education and obsolete skills. Parents in the 1950s can scarcely be blamed for failing to foresee this, but Howard has no such excuse.

In today’s world, car mechanics are increasingly required to debug computer programs, and virtually everyone with a job has to deal with substantial volumes of (literal or digital) paperwork. This is one reason why the “sitting next to Sally� apprenticeships Howard is so fond of have increasingly been replaced by TAFE courses. For practical purposes, the skills of a Year 10 dropout are not adequate for these courses.

Indeed, the government’s own programs encourage students to finish Year 12 before going on to TAFE and taking up a trade. There’s been a big effort to make the school program in Years 11 and 12 more relevant to students who aren’t going on to university. But none of this seems to have sunk in with leading ministers. When they aren’t bagging the schools as academic and irrelevant, they’re complaining that they don’t teach enough Shakespeare.

There’s another way in which Howard’s comments suggesting kids should drop out at Year 10 are out of touch with reality. The implied background is one in which parents (and social pressure in general) are increasingly pushing kids to finish year 12 and go on to University. In reality, Australia’s school completion rate1 peaked in 1992 and the number of new Australian undergraduate enrolments in universities has barely changed since the Howard government was elected. The suggestion that we need even more dropouts is simply bizarre. In most developed countries, including European countries that do a much better job on technical education than we do, universal high-school completion is either a central policy goal or an established reality.

Throughout its term in office, the government has made it clear that education is an over-rated luxury and infrastructure is something you throw at rural voters to keep them quiet. It has made no serious contribution on either issue. The government’s infrastructure policy is symbolised by its decision, after 100 years of well-founded reluctance, to build the Alice Springs-Darwin railway, which has turned out to be even more of a white elephant than critics predicted.

As regards education and training, the government is great at dishing out feelgood policy statements that resonate well with focus groups (New Apprenticeships, Back to Basics and so on) but has been unwilling to finance the investment in human capital we desperately need.

Once Telstra is sold off, and industrial relations have been ‘reformed’, the 1980s policy agenda inherited from the last government will be exhausted. At that point it will become evident that the government’s only economic policy is to promote speculative investment in housing, and the consumption demand driven by capital gains from such investments.

As short-term economic strategies go this isn’t a bad one. It has certainly worked longer than I (and I suspect the Reserve Bank) believed possible. But, as the March figures showed, this kind of thing can’t go on forever. When the boom ends, it’s clear that there is no point looking to the government for answers. They have none.

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  1. March 19th, 2005 at 23:13 | #1

    John, I would apppreciate your comments on the current debate on which set of numbers should be believed – the national accounts suggesting anaemic growth or the job-growth numbers which suggest anything but.

  2. Tom DC/VA
    March 20th, 2005 at 01:10 | #2

    Oddly enough, in the US the numbers are reversed: we have anemic job and wage growth and strong GDP numbers. As someone who works for a living, I’m inclined to view the former set of numbers as the meaningful ones.

  3. John Quiggin
    March 20th, 2005 at 05:59 | #3

    A large part of the difference can be explained by favourable terms of trade, which means that weak growth in the volume of output is consistent with strong growth in income and demand.

    In addition, over the last five years, construction has been the most important source of employment growth. If productivity is declining in this sector, which seems plausible to me, then this would also help to resolve the gap between output and employment growth.

    More generally, as I pointed out in my last Fin piece, productivity growth has been weak since about 2000.

  4. anne
    March 20th, 2005 at 07:49 | #4

    Weak productivity growth in Australia, strong growth in productivity here and in Europe. Hmmm….

  5. anne
    March 20th, 2005 at 07:52 | #5

    Construction employment has been robust here. Why the difference in productivity growth for a few years? What am I missing?

  6. Ian Gould
    March 20th, 2005 at 08:30 | #6

    Anne,

    I suspect that Australia has, to some extent, hit the wall in terms of growth in produtivity.

    Australians now work about the longest hours of any developed country. Working longer hours, up to a point, increases total productivity because you can get more output for a given amount of plant and equipment.

    There were also specific labour market inefficiencies, most notably on the docks, which the current government removed.

    The one-off boosts to productivity from those factors are now largely past. So productivity in the future is likely to grow at closer to the average rate for other developed countries.

  7. anne
    March 20th, 2005 at 09:28 | #7

    Ian

    Thank you. But, if your surmise is correct then you will not be alone. I am reading and we will continue, but I do not find an obvious difference in the American and Australian economic mixes to account for the differences of a 5 year period. I simply need to learn more here.

  8. Molly Rowan
    March 20th, 2005 at 13:45 | #8

    Dear John

    Your ‘pretty good rant’ is super! Clear, cogent and telling (it like it is!). Now the so and sos have given the ‘old bloke’ the Senate, Sigh – oh for a bex and a good lie down!

    Molly Rowan

  9. March 20th, 2005 at 17:12 | #9


    the government’s only economic policy is to promote speculative investment in housing, and the consumption demand driven by capital gains from such investments.

    e unfair. THe government has run a surpus of sorts through the boom phase of the cycle, which has paid down debt & created some useful “dampening” fiscal drag.
    The GST was sound tax policy, broaden base, lower rate and so on.
    Also, Howard has spent a lot of time currying favour with the PRC/CCP on the mineral industry, much he has spent a lot of time currying favour with the USA/DoD on the martial industry. Wheter this is cringing, or caring, for the nation is an open question.
    The big failure of the govt is, as Pr Q says, its continued failure to promote efficient production and equitable distribution of hospital and educational resources. These resources are ethically good in themselves and are economicly value multipliers, making the body stronger and the mind savvier.
    There is finally fairly comprehensive ignorance of the importance to AUS of riding the nascent sci-tech revolutions in info-, bio- & nano-tech. We cant always make our way in the world by diging it up, cutting it down or shooting it.

  10. March 20th, 2005 at 21:11 | #10

    It is a misleading beat-up of the PM’s comments to say that he is encouragng kids to “DROP OUT”. Dropping out means giving up on education and training, at least for the time being. That is clearly not what the PM wants kids to do. As for the number of years in high school required to prepare students for training in trades and crafts, I doubt that more than four are necessary, provided that the primary school system delivers literate and numberate students to the high schools.
    John Howard may be open to counter-arguments on this, and I certainly am because my views are not informed by research. As for the additional skills required for auto mechanics, how long does it take to train a computer literate person to run standard debugging tests on the computer software? Besides, some advances have reduced the need for training, some complex parts are now replaced instead of being repaired.
    As you have indicated there are plenty of valid criticisms to be directed at the Coalition, especially aspects of their spending that do not make sense. This situation calls for economic rationality and not just taxing and spending.

    On the topic of productivity in the building industry, I wonder if the trade unions could assist in this matter?

  11. March 21st, 2005 at 09:52 | #11

    In recent generations the largest real improvements in car maintenance have been making cars easier to get at to work on.

    On the other hand, since the interwar period there has been a change of emphasis in the production engineering involved. It used to be that any old blacksmith could maintain a car, and the devices in factories could be made – slowly and inefficiently, but made – using only low technology, even if it was more cost effective to use high technology.

    These days there is a critical dependence on a high technology infrastructure base in place. Certainly, this is yet more cost effective in one sense, but it is less robust and there are more serious critical mass problems from network effects, economies of scale external to the firm, and so on.

    So the most important differences do not relate directly to the technologies involved, even though they are often enabled by them and sometimes even necessitated by them.

  12. October 20th, 2005 at 11:51 | #12

    When are people going to acknowledge the need for life long learning, updating and accreditation of skills and education and devise policy accordingly. Education policy seems to be decidedly linked to short term business policies rather than the education, up-skilling, and re-skilling of a nation. As well, Oprah in the US seems to have noted – while VCs and politicians here and there fiddle – the inextricable links of entrenched and oppressive debt and higher education charges. Why can’t education be accessible so that when John or Jan Smith – who were unmotivated and indifferent as teenagers or from poor families – find in their mid-twenties or mid-thirties their need for qualifications and on-going education, they are able to access the education and training they need without economic jeopardy to their family, family life, and their children. Ability to keep skills fresh and participate, through work of some sort, in the economic life of this country and the globalised economy can keep us young in spirit, mind and body and out of the hospitals and dementia wards.

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