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Revising my priors

February 21st, 2007

Looking at the desperation with which opponents of climate science, and of sensible policy responses such as Kyoto, are holding on to positions that have clearly become untenable, has prompted me to think about my own views on a range of issues, to see whether I am holding on to beliefs that can’t be sustained in the light of accumulating evidence.

The most obvious problem for me is that of continued macroeconomic stability in the face of trade and current account deficits driven (or so it seems) by speculative asset price booms. I’ve long argued that such deficits can’t be sustained and that neither Australia nor the US is on a path to a smooth adjustment. However, while deficits have continued and, in the case of the US, grown steadily, evidence of anything but smooth adjustment is certainly thin on the ground.

The rapid growth of China, and the apparent willingness of the Chinese government (and maybe also the public) to hold low-return $US assets and to buy large quantities of commodity exports from Australia has rendered previous projections largely irrelevant. While the “Bretton Woods II” story that emerged a couple of years ago seemed implausible to me, it has held up pretty well so far.

While I’m not ready to join the optimists just yet, it’s clearly necessary to rethink the implications of a Chinese economy that is already a substantial part of the global total, and growing rapidly.

A point on which I don’t need to revise my beliefs is my long-running dispute with the Productivity Commission over the productivity ‘miracle’ of the mid-1990s which, I’ve long argued, was a mirage generated by a combination of recovery from the 1989-92 recession and an increase in work intensity. The latter phenomenon, evident to everyone who held a job, but steadfastly denied by a large number of economists, has now been partially reversed. Given my analysis, I predicted at the time that the productivity surge would turn out to be a blip, and this has indeed been the case. Alan Mitchell has a piece in today’s Fin pointing out that the most recent year of poor data can be explained in part by the mining boom, which has led to growth in marginal mines, but some such explanation (drought, the Olympics, GST-related disruptions and so on) is always possible. After seven years of weak data, the productivity miracle has run out of excuses.

Coming back to work intensity, there’s been an interesting paper recently showing that Australian data on average annual hours of work are biased upwards by the way the ABS treats public holidays (hat tip to regular commenter DD). Claims that we have the longest average hours in the world aren’t sustained once this correction is made. Unfortunately, there’s a bias going the other way, associated with our very high rates of part-time employment. I’d like to see international comparative data on average hours of work for full-time employees (bearing in mind that this is not the well-defined concept it would once have been). Can anyone help on this?

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