Home > Economics - General > Assessing Australia’s Declining Economic Growth: Guest post from Hannah McKale

Assessing Australia’s Declining Economic Growth: Guest post from Hannah McKale

December 7th, 2010

I’ve been given the following guest post by Hannah McKale. Please discuss, remembering that the usual standards of courtesy and civilised discussion apply with extra emphasis for guest posters – JQ

The effects of the global economic crisis have been wide reaching and dramatic, having an impact on almost all industries, stocks, and housing prices in most developed nations. The fall of Lehman Brothers in September of 2008 was a predominant trigger of economic catastrophe, as it was a sign of just how tumultuous things had gotten in the financial markets. While it would take a degree from any of a number of political science schools to fully grasp the full range and depth of the economic crisis, it is easy to see that the tightening of credit markets, plummeting housing prices, and unprecedented uncertainty in the financial markets started on that cold day in September. As it spread around the world at a fast pace, it was clear that the economies of major developed nations are all intertwined and exert an enormous amount of influence on each other. By May of 2009, twenty-nine of the thirty OECD (Organization for Economic Co-operation and Development) nations were officially experiencing a recession, defined by two straight quarters of financial decline and negative growth. The 1 country that did not enter into a recession, and is experiencing growth at faster levels than all of the other OECD nations, is Australia. While Australia has experienced declines in certain areas of their economy, most notably during the December quarter of 2009, they immediately bounced back in the next quarter, (March 2010), holding off a full recession at a time when all of their economic peers were in the midst of one. It is worth asking the question: how is Australia remaining economically strong at a time of such widespread economic weakness and uncertainty?

Much of its solvency can be attributed to Australia’s ample mineral resources coupled with a lucrative trading partnership with China. While also in the midst of a recession, China’s manufacturing sector is growing at a break-neck pace, though it has slowed in recent months to a growth rate of 10.6%, down from a first quarter growth rate of 11.9%. However, growth statistics like these are enough to make US investors salivate, as US manufacturing output has been growing at a much slower rate of between 3 and 5% for the past 16 months. Australia is the number 1 exporter of iron ore to China, which translates to billions of dollars in revenue and hundreds of thousands of jobs. Australia took a proactive step against the initial financial crisis before it even hit their shores by passing a $42 billion stimulus package dubbed the Nation Building and Jobs Plan. This plan mandated that the money be used for road and rail maintenance projects, updating schools and technologically equipping them for the 21st century, and maintaining social housing projects. Before the Nations Building and Jobs Plan was passed, Australia’s GDP declined sharply by 5.88% in the 2008-09 fiscal year. The passage of this stimulus helped to raise Australia’s GDP by 2 ¾ percent in the 2009-10 fiscal year and looks to have been instrumental in another 1 ½ percent raise in 2010-11. Thus, Australia actually added 210,000 jobs when most nations were losing theirs by the millions.

Australia’s highly centralized and regulated banking system has allowed them to weather the financial storm better than most of their peers. While the US was drowning in un-paid foreclosures, causing housing prices to plummet and household wealth to suffer as a result, Australia was treading water nicely, having not given out risky loans to non-credit worthy applicants. Their reliance on social housing programs, which are almost unheard of on a grand scale in the US, also anchored Australians in a base of financial security. Overall, Australia has weathered the economic crisis better than any other country in the world. While its trading partners have borne the brunt of the financial calamity, Australia’s resources have remained at high demand throughout. It will be interesting to see how Australia responds as other nations crawl out of their economic stagnation and become solvent once again.

Hannah McKale recently received her Masters in Political Science, and is currently seeking a Ph.d program. McKale focuses much of her writing on the international political economy.

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  1. December 7th, 2010 at 20:17 | #1

    Hannah McKale said:

    Before the Nations Building and Jobs Plan was passed, Australia’s GDP declined sharply by 5.88% in the 2008-09 fiscal year. The passage of this stimulus helped to raise Australia’s GDP by 2 ¾ percent in the 2009-10 fiscal year and looks to have been instrumental in another 1 ½ percent raise in 2010-11. Thus, Australia actually added 210,000 jobs when most nations were losing theirs by the millions.

    [My apologies for shirt-fronting Ms McKale in her first guest post, but blogging is a contact sport, at least for this little black duck.]

    The headline of this blog makes a sweeping generalisation about “Australia’s declining economic growth”, without periodic specification. Although the body of the blog drastically qualifies this assertion by claiming that “Australia’s declining economic growth” over FY2008-09 was arrested primarily by the federal government’s 2009 emergency fiscal stimulus.

    Both the headline assertion and the qualified explanation are wrong. AUS did not have a terrible recession in 2008-09. And the Rudd-ALP fiscal stimulus did not pull us out of what slump we had. The Howard-L/NP deserves most of the policy credit for giving AUS a sound economy.

    The ABS figures show that Australia’s trend GDP growth for the relevant year (Sep 2008 Lehmans bust – Sep 2009 stimulus spent) was 1.0%. If you slice and dice the dates and data you might be able to “cherry pick” negative growth for that era. But our negative growth was nothing like Ms McKale’s “5.88%” claim, which would have been equivalent to a full-blow depression.

    More to the point, the evidence is slim that the fiscal stimulus was the main policy lever that pulled Australia’s economic chestnuts out of the fire. The one really successful fiscal policy was the enlarged first home owners grant, whose main effect was financial, to bolster bank’s credit worthiness. Although every little bit helps, its remarkable that, according to Treasury, the scale of our fiscal stimulus substantially under-predicts our subsequent growth rate.* Which implies that other, stronger, forces were at work in our recovery.

    Factoral, financial and forex policies all played at least as great if not greater part than fiscal policy in AUS’s recovery. I know, I have been saying it for two years now. But I base my claim on fact, not ideology.

    Specifically, the overwhelming factor in pulling AUS through the GFC was our labour factoral policy – an astronomical immigration rate which kept a very robust floor under housing prices and therefore maintained the solvency of our banks mortgage portfolios. All those Asian student-citizens paying off every other Boomers RIP loan or buying property for themselves.

    And just look at how our banks were travelling in late 2008, not only were they not in crisis, they were jumping into the global big league.* No burst housing bubble, no credit crunch and therefore no recession to speak of. And this banking success pre-dates most of the stimulus spending.

    [Bragging Rights alert enabled] In OCT 2008, on this very blog, I predicted that AUS’s blue-chip housing market would make us “odds-off for a recession” in 2009 for those very reasons. [alert disabled] Alan Wood also deserves some predictive kudos.*

    Remarkably, not all that much of AUS’ resilience in the crucial FY2008-09 period can be put down to the PRC’s booming demand for our minerals. Our terms of trade dropped quite precipitously from SEP 2008-09.* And mining shares took a big hit in 2009.*

    Next in line of importance was financial policy. The RBA was the unsung hero of our economic salvation. Hugely important the RBA’s 4.25% cut in the cash rate starting in MAR 08 (7.25%) and ending APR 09 (3.00%).* These cuts applied to one trillion dollars mortgage debt and therefore injected around $40 billion cash into borrowers pockets, almost as much as the stimulus.

    On top of that you can add the RBA’s more conservative prudential regulation of banks instituted in the wake of the Wallis committee. Keep the Big Four established, and don’t go overboard with NINIJA loans to get rich quick types. Don’t forget Rudd’s timely guarantee of large bank deposits and the credit facility offered to holders of commercial real estate debt, mostly to financial institutions exposed to the traditional Gold Coast property spivs.

    And finally we have forex policy, which basically amounts to our floating exchange rate. Remember how the floating dollar provided a shock absorber during the late nineties Asia crisis? Well it came to the rescue again in the late noughties. The AUD-USD dived massively over 2008-09, from 98c to 65c.* This shored up the domestic incomes of exporters and therefore put another floor under GDP.

    The aftermath of the GFC has provided alot of different economic schools an opportunity to spin their favourite story. FWIW I would argue that in the US, the epicentre of the GFC, the crisis had an “Austrian” cause and a Keynsian cure.

    But in AUS, the Left is vastly over-selling the fiscal rescue. It was our toiling mortgage slaves that pulled us through.

    * Links deleted due to moderation suspension, available on request.

  2. sdfc
    December 7th, 2010 at 21:46 | #2

    Jack

    There can be little doubt that government spending contributed in large part to Australia having avoided a deeper downturn than it did during 2008/09, The government cash handouts helped contribute in putting a floor under household consumption expenditure in DQ08 and increases of 0.4% and 1.1% in JQ09 (sa). it’s worth noting that domestic final demand declined 0.9% and 0.6% in these quarters respectively. Public gross fixed capital formation contributed 2.2 percentage points of 3.3% demand growth over the following four quarters. So in reality it is difficult to deny that fiscal stimulus played a large part in keeping unemployment to a 5.8% peak.

    Real gross domestic income (terms of trade adjusted real GDP) fell 1.5%, 0.8% and 1.4% in DQ08, MQ09 and JQ09. Falls in RGDI of this magnitude have traditionally been associated with sharp increases in the unemployment rate.

    And before you give us a round of how well Workchoices went. The labour market, as in trends in full-time and part-time employment growth, behaved exactly as it always has in economic downturns since at least 1978.

    The fact that our banking sector was spared huge stress was due to unemployment being kept under control.

    While I would not discount the role of the RBA in supporting the economy, nor would I discount the impact of fiscal stimulus. Though I do think much of the schools spending was ill-conceived. Though this may have much to do with my kids school getting at least one building they did not need.

    In hindsight the stimulus was probably overdone and there was room for the RBA to cut further, but policy makers had to make a decision and given the circumstances and the depth of the global downturn I think it was justified.

    Apart from running a budget surplus courtesy of the terms of trade boom I’m not sure why you claim it was all Howard and Costello’s work.

    By the way I think the first homebuyer grant was extremely poor policy. It would have been better if confined to construction and new home sales.

  3. sdfc
    December 7th, 2010 at 21:52 | #3

    By the way Jack the rough detail of the financial crisis was described by Keynes in the GT in far more detail than any Austrian reference I have read. Though I am open to any paper you want to recommend.

    Unfortunately Keynes wasn’t really a Keynesian in the modern sense of the word.

  4. Jarrah
    December 7th, 2010 at 22:11 | #4

    Australia was treading water nicely, having not given out risky loans to non-credit worthy applicants

    Careful – JQ normally comes down hard on anyone even suggesting that this had anything to do with the GFC. You’ll probably get off easy, though, being a guest poster ;-)

    “Hugely important the RBA’s 4.25% cut in the cash rate starting in MAR 08 (7.25%) and ending APR 09 (3.00%).* ”

    Thus showing that having room to move is vital, and that interest rates shouldn’t be kept at artificially low levels as was done in the US.

  5. Jarrah
    December 7th, 2010 at 22:12 | #5

    “The labour market, as in trends in full-time and part-time employment growth, behaved exactly as it always has in economic downturns since at least 1978.”

    What about hours worked, sdfc? Didn’t that drop much more than job numbers, and wasn’t that because of greater workplace flexibility?

  6. Hermit
    December 7th, 2010 at 22:49 | #6

    I think it is on the cards that China and India will be taking less of our coal and iron ore in 2015 than in 2010. Both countries have enormous domestic aspirations way beyond what their local resource base can supply. A global economic slowdown for whatever reason will highlight their vulnerability and I think they will look inwards. Short term commodity prices may increase before this contraction however. Australia’s export income may then shrink markedly. An unexpected benefit is that global emissions may decline further regardless of any climate conferences.

  7. Chris O’Neill
    December 7th, 2010 at 23:46 | #7

    It was our toiling mortgage slaves that pulled us through.

    My guess is that Australia has a much greater per capita ability to pay home loan interest than the US. I’d also guess this is because US borrowers spend much more of their income on consumer goods and services.

  8. Alice
    December 8th, 2010 at 04:45 | #8

    @Jack Strocchi
    Jack – it could just be you had more than three links in one post.

  9. Alice
    December 8th, 2010 at 04:54 | #9

    @Jarrah
    Hours of worked dropped true, but you ascribe “flexibility” as the reason.

    For whom does the “flexibility” bell toll?.

    It was because of a slowing and because thanks to workchoices V1 aka “work before dignity” and workchoices “slightly diluted but not removed” V11 which replaced it, employers have more casuals – who had their hours / shifts / days cut.

  10. December 8th, 2010 at 06:37 | #10

    sdfc @ #3 said:

    Jack, There can be little doubt that government spending contributed in large part to Australia having avoided a deeper downturn than it did during 2008/09,..So in reality it is difficult to deny that fiscal stimulus played a large part in keeping unemployment to a 5.8% peak.

    I never denied, and I went out of my way to acknowledge, that the Swan-TREAS fiscal stimulus played some part in AUS’s recovery. But it was minor in the great scheme of things, dwarfed by the combination of Costello-RBA’s  factoral, financial and forex policies. All of which were in place, or cut in, well before the fisc started to stimulate.

    But AUS was the economic odd man out, relative to the OECD. AUS & CAN were the only major countries that had a property boom which did not end in a bank crash. Something about our property markets was different from all the RoW. It is blue-chip rather than sub-prime, thanks to the high quality of borrowers and/or debt servicers.

    And that something, as every man and his dog knows, was our humongous and high-quality immigration rate which created huge upward pressure on rents, these high earnings validating our the banks pricey loan assets. Hence our banks did not have a credit crisis and did not need a bail-out, contrast this with the UK and US.

    The fact that our banking sector was spared huge stress was due to unemployment being kept under control.

    Nein, nein, nein, nein nein, nein!

    The AUS banking sector was never under much stress in the first place! It might have been put under stress had the stimulus been smaller, assuming the stimulus was the main expansionary factor, which it wasn’t.

    But this is piling supposition on supposition, not dealing in facts. The facts are that the AUS banking sector was sitting pretty in late 2008, here is a DEC 2008 AUSTRADE report on our banks tiny ratio of bad debts and healthy profits. As Ken Henry points out, the uncompetitive nature of our “Big Four” banks may have been a virtue, not a vice, given that their comfortable niche made them reluctant to go out and chase risky business.

    sdfc said:

    The government cash handouts helped contribute in putting a floor under household consumption expenditure in DQ08 and increases of 0.4% and 1.1% in JQ09 (sa). it’s worth noting that domestic final demand declined 0.9% and 0.6% in these quarters respectively…Real gross domestic income (terms of trade adjusted real GDP) fell 1.5%, 0.8% and 1.4% in DQ08, MQ09 and JQ09. Falls in RGDI of this magnitude have traditionally been associated with sharp increases in the unemployment rate.

    My argument with Ms McKale is based on a simple statistical fact: AUS did not suffer a -5.58% GDP growth rate in FY2008-09. The ABS site is the canonical authority in these matters and gives real GDP growth for this period at 1.0%. (Per capita GDP growth was slightly negative owing to astronomical rates of immigration.)

    Now you come along with a variety of other measures – domestic final demand, real gross domestic income – that suit your defence of the stimulus. This makes cross-country and inter-temporal comparisons impossible which is the whole point of arguing about the relative efficacy of fiscal v financial v factoral v forex policy. Please stick to real GDP measures like the rest of us.

    In any case, a few quarters slow or even negative growth does not imply a serious ”native” economic crisis. Most of AUS growth slow-down in FY2008-09 can be explained by reference to the secondary effects of slower growth in the PRC, US and EU. Or a temporary chilling of domestic business confidence as everyone held their breath. At worst we had a temporary liquidity crisis.

    In the GFC, both in the US and EU, the real economic killer is the permanent solvency crisis, financial institutions weighed down by huge stocks of non-performing assets. Debt hanging like a mill-stone over firms, households and governments.

    But AUS’s debt seem to be pretty good quality for households and governments at least. And surely our firm’s debt can’t be too bad given our biggest customers have the largest foreign reserves in the world.

    I know it kills Left-Kenysians to admit it, but the fact is that Howard-Costello-Macfarlane did a pretty good job running the AUS economy through the nineties and noughties. With an honorable mention to Rudd-Swan-Henry. The GFC was the ultimate stress test of their administrative skills and they passed with flying colors.

  11. jquiggin
    December 8th, 2010 at 06:51 | #11

    @Jarrah
    Jarrah, you’ve missed the point. Obviously the decline in lending standards in the US and elsewhere played a central role in the crisis. This decline was led by mortgage providers like Countrywide, and facilitated by the willingness of Wall Street investment banks and ratings agencies to repackage bad loans into allegedly AAA assets.

    What I’ve come down hard on is the absurd suggestion that all of this can be explained by an obscure piece of legislation (the Community Reinvestment Act) passed in the 1970s, and aimed at preventing discrimination in lending against minority neighborhoods. None of the key players mentioned above were subject to the Act and even if they were, there was nothing in it forcing them to push loans onto people who couldn’t pay.

    That leaves aside the racism implicit in the suggestion that it was poor blacks and Hispanics rather than rich, mostly white, people who caused the crisis. In fact, even on the borrower side, the worst default rates have turned out to be in the Alt-A category (‘liar loans’ to high income earners) rather than in subprime loans.

  12. December 8th, 2010 at 07:16 | #12

    sdfc @ #3 said:

    Apart from running a budget surplus courtesy of the terms of trade boom I’m not sure why you claim it was all Howard and Costello’s work.

    The H & C economic ministry has been substantially under-credited by our predominantly Left-keynsian Fairfax economic punditariat and blogosphere. Although a fair amount of credit should also have gone to Hawke & Keating for floating our exchange rate and introducing enterprise bargaining.

    Lets look at the economic policy scoreboard to see which side kicked the most goals:

    Factoral: A hugely expansionary immigration policy achieved a remarkable economic trifecta: supplied the booming mineral sector with skilled labour, fully exploited the tertiary education sector with hard-currency paying foreign student and drove up housing demand which strengthened banks asset portfolios. Full credit to H&C for this perpetual money making machine. Full debit for the disastrous ecological consequences ensuing.
    Fiscal: A largely counter-cyclical budget which accumulated a big “Future Fund” war chest for the rainy day, whilst our credit rating remained AAA. A half-credit to Rudd-Swan who used the stimulus in a timely, targeted and temporary way.
    Financial: Much tighter prudential regulation in the wake of the Wallis committee. And of course the dynamic duo allowed interest rates to climb during the height of the bubble, to choke off asset inflation. A half-credit obviously to the RBA.
    Forex: The floating exchange is a bipartisan policy, so H&C deserve a half-credit for this. This aspect of our recovery has been almost completely ignored by the punditariat. Yet you only have to look at GRE and the US to see the importance of currency valuations for open economies. GRE is chained to the GER dominated euro, whilst the US quantitatively eases to its hearts content.

    I am by no means an unqualified admirer of the Howard-L/NP. And I’ve got a lot of time for Swanny, who plugs away conscientiously at his ministry. But one must give credit where credit is due.

  13. Chris Warren
    December 8th, 2010 at 09:00 | #13

    Unfortunately this “guest” post is symptomatic of the sort of spin we have been getting from the ALP-Lib regime over the last 30 years.

    I object to vague words such as; “wide reaching”, “ample”, “break-neck” etc…

    I also object to statements such as: “Australia’s GDP declined sharply by 5.88% in the 2008-09 fiscal year” – with no evidence.

    The ABS data on GDP from 5206.0 – Table 1 [Chain volume measures] for the last 19 quarters from March 2006, to September 2010, show no decline at all. It is a monotonous increase. [Data series A2304334J

    A little bit of rigor would not go astray.

  14. December 8th, 2010 at 10:29 | #14

    sdfc @ #4

    By the way Jack the rough detail of the financial crisis was described by Keynes in the GT in far more detail than any Austrian reference I have read. Though I am open to any paper you want to recommend.
    Unfortunately Keynes wasn’t really a Keynesian in the modern sense of the word.

    As Marx would say, “Je ne suis pas Keysnian”.

    The GFC is a complicated story. Each of its several players, like Tolstoy’s unhappy families, were delinquent in their own way.

    Thus the theory of the GFC must encompass several perspectives. The Austrians should get alot the credit for diagnosing its causes. The Keynsians get most of the credit for prescribing its cures.

    Its hard to see how the GFC conforms to the canonical Keynsian scenario, where busts are caused by deficiencies in aggregate consumer and investment demand. Keynsians usually trace these back to dampened animal spirits amongst households and firms. This is not how I would characterise the US economy during the era of affluenza.

    At a deeper level, the Keynsian story frames the boom-bust problem as some kind of mis-match between the nominal and real economy, usually triggered by a balance of payments crisis, loanable funds credit squeeze or rigidities in the investment of capital and deployment labour. Again, its hard to put the US sub-prime crisis in this frame.

    By contrast the Austrian theory fits the GFC like a glove. The Austrians have always placed the blame for business cycles on asset price inflation, particularly real estate speculation. Facilitated and validated by fiat money creation by the central bank. And exacerbated by perverse government interventions in the market. Well, what did we see in the GFC:

    Shonky real estate investment: sub-prime bubble – tick.
    Fiat money creation: Greenspan put – tick.
    Government agencies distorting the market: GSE’s – tick

    And the Austrians, and their fellow-travellers, have the predictive record to back this analysis up. As far back as 2002, Ron Paul and Peter Schiff predicted that the US housing bubble would end in a major financial crash. They repeatedly criticised the Fed’s easy money policy, the relaxation of bank lending policies to potential dead-beats and the GSE’s ventures into high-risk securitization. In 2005 Raghuram Rajan, from a much more rarefied theoretical perspective, also accurately predicted the causes and consequences of the GFC.

    The Keysians do have some predictive clout. Roubini, Schiller and Krugman were definitely getting bearish throughout the noughties. As was Pr Q. Although they did not really put their finger on the root cause of the problem -banks exposure to bad loans – until it had become apparent to everyone in 2007.

    Like I said, there is plenty of blame to go around for the insitutitons that caused the GFC. And plenty of credit to go around for the intellectuals that predicted it.

  15. Mr. Eyesore
    December 8th, 2010 at 12:17 | #15

    “By May of 2009, twenty-nine of the thirty OECD (Organization for Economic Co-operation and Development) nations were officially experiencing a recession, defined by two straight quarters of financial decline and negative growth. The 1 country that did not enter into a recession, and is experiencing growth at faster levels than all of the other OECD nations, is Australia.”

    Not true. Poland:
    - is a member of the OECD and has been since 1996,
    - also dodged the recession bullet in 2008-9, and
    - currently has a faster-growing economy than ours.

    And with an essentially static population, too. No, I don’t know how they did it – though the fact that their main trading partner is Germany probably helped.

  16. Jarrah
    December 8th, 2010 at 13:32 | #16

    @jquiggin
    I admit never having come across anyone who claimed “all of this can be explained by an obscure piece of legislation (the Community Reinvestment Act) passed in the 1970s” (emphasis mine). I don’t know if you could easily point to someone who did, either. Plenty who thought it was a factor, or more accurately the changes to it years after it was passed.

    And if it’s racism to suggest the poor (mostly minorities) couldn’t pay their debts, then is it racism for you to suggest that Alt-A (mostly white) couldn’t pay theirs?

  17. jquiggin
    December 8th, 2010 at 14:24 | #17

    @Jarrah
    The standard line on the right is to blame first (and most absurdly) the CRA, then Fannie & Freddie. Unlike the CRA, F&F do deserve some of the blame, though they were late to the game and only lowered their standards after others had taken market share.

    On your second question, no, refuting racist lies is not racist.

  18. jquiggin
    December 8th, 2010 at 15:33 | #18

    Jack, you are confusing accounts of the way in which crises emerge, where Keynesians and Austrians largely agree, with the problem of equilibrium unemployment, where Keynesians have a theory and Austrians do not.

    There is no good reason, on the Austrian account, why there should be unemployment in recessions. On the contrary, boom and bust cycles in investment demand should be offset by oppposite cycles in consumption

  19. Alice
    December 8th, 2010 at 18:24 | #19

    @Jack Strocchi
    says “I never denied, and I went out of my way to acknowledge, that the Swan-TREAS fiscal stimulus played some part in AUS’s recovery. But it was minor in the great scheme of things, dwarfed by the combination of Costello-RBA’s factoral, financial and forex policies.”

    Jack – thats a major piece of denial. You favoured sons of the right named here – Costello had nothing much to do withe recovery. They were just lucky enough to be riding the boom – in the right place at the right time and were it not for Howards getting voted out, and Kevin Rudds Government and the fiscal stimulus – you and the rest of us would be eating austerity pie right now (and you would have been eating the first slice after the GFC meltdown).

  20. Alice
    December 8th, 2010 at 18:36 | #20

    I have one critiscm for Hannah who says re Australians
    “Their reliance on social housing programs, which are almost unheard of on a grand scale in the US, also anchored Australians in a base of financial security.”

    Im not so sure Hannah?? (perhaps better to check ten year data on this – is stock of public housing investment declining compared to the past? I do know the KK state government is flogging off traditional city public housing about as fast as they can and there really hasnt been much investment in Aboriginal public housing to the extent extended families now sharing one abode ? Not good.)

    I dont really see Australia as able to be wearing a medal over this compared to decades past so Id caution against being too rosy when issues like public investment and spending on public anything are under attack from all fronts and governments seem to want to cow tow to these sort of neoliberal ideologies by flogging off public housing and other sorts of privatisations.

    It would be nice to think our public housing helped us weather the storm but it was more likely the stimulus and the surplus and the 4pillar policy and the fact that China was still needing iron ore.

  21. sdfc
    December 8th, 2010 at 18:41 | #21

    @Jarrah

    Jarrah

    Declines in full-time employment during a downturn and rising part-time employmenet suggests cutting back of hours worked suggests a fall in hours worked. This a pattern which is evident in every downturn since 1978.

    Jack
    The national accounts suggest you are wrong in saying fiscal policy played only a minor role. Employment is a function of economic activity. The contribution of government spending to demand over the period suggests fiscal policy paid something more than a minor role in keeping a lid on unemployment.

    The major reason our banking sector did not come under stress is because unemployment did not rise to extreme levels. High quality borrowers become low quality when unemployed.
    Bank balance sheets are loaded with mortgage assets should we experience a sharp increase in unemployment you will find our banks aren’t quite as safe as what you think they are. Household debt is 160% of disposable income. A recipe for disaster.

    I don’t know where the -5.58% figure came from either. However I don’t believe real GDP is the best measure of Australian growth anyway.

    Real gross domestic income (terms of trade adjusted real GDP) is a far better measure of our economic well being. RGDI shrank by ~2.5% during the downturn. That we escaped with a 5.8% peak in unemployment is quite extraordinary, given declines of this magnitude have in the past lead to 10% unemployment rates.

    Given our exposure to the global economy Australian downturns are very rarely domestically driven.

  22. Alice
    December 8th, 2010 at 18:44 | #22

    Oh and I will qualify my comments above before some neolib gets in here and says the “$cost of public housing has increased exponentially in Australia in the past X years” – its the sort of comment that will attract them unfortunately.

    so have building costs because of the boom years…and so has the propulation grown..so any analysis of public housing in Australia eg relative to past decades needs to take into account these variables.

  23. sdfc
    December 8th, 2010 at 19:07 | #23

    @Jack Strocchi

    I don’t see how the huge expansion in immigration played anything other than a minor role in keeping us from following the rest of developed world into deep recession.

    Howard and Costello ran increasingly pro-cyclical fiscal policy as the boom went on. Distributing the tax windfall generated by the terms of trade boom to households was inflationary and in my opinion extremely poor policy.

    I agree with your comment on prudential regulation though I am less a fan of RBA policy during the boom. They were too slow to raise rates and so fed the huge rise in household leverage and eventually CPI inflation. Glenn Stevens as basically acknowledged this.

    The counter-cyclical role of the floating exchange rate is widely acknowledged as it should be, however that can’t really be attributed to H&C as the currency had been floating for 13 years by the time they were elected. I agree it was bipartisan policy.

    I take your point that you are not an unqualified admirer of H&C, but I reckon you might admire them more than I admire Swan who I have little time for (so to speak).

  24. sdfc
    December 8th, 2010 at 20:42 | #24

    @Jack Strocchi

    Jack
    Canonical Keynesianism as you call it is not really Keynes but rather a reconciliation of Keynes’ ideas and neoclassical economics. The so-called bastard Keynesianism of the post WWII period. Keynes General Theory was conceived amidst the Great Depression which has you know was a financial crisis not entirely unlike the GFC. The major difference of course being that policy makers failed to act in a decisive manner in the early 1930s.

    Keynes correctly identified that during a boom risk animal spirits would lead to unrealistic expectations of future returns, as the boom progresses speculative excess takes over as the major driver of investment asset prices are bid up and risk premiums are pushed to imprudently low levels. Once the bust comes these animal spirits head in the opposite direction and investors withdraw from the market, preferring the safety of cash. This rise in liquidity preference causes interest rates to rise putting even more downward pressure on investment and asset prices. This is pretty much what happened during the height of the GFC.

    Both Keynes and the Austrians (to the best of my knowledge) correctly identify investment as the big swing factor in the economy, where they differ as far as I know is that the
    Austrians see the solution as being deflation, a long period of readjustment and high unemployment. Deflation is a disaster in an economy with high levels of private debt. Keynes saw the solution as being one of promoting demand by way of fiscal policy as a means of raising expected returns and so inducing investment.

    The Austrians view a fall in nominal wages as being the best method of increasing the demand for labour while Keynes saw inflation as a means of lowering real wages.

  25. hix
    December 9th, 2010 at 08:26 | #25

    Nobody finds the neverending current account deficit words mentioning?
    http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/weorept.aspx?sy=1980&ey=2010&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=71&pr1.y=17&c=193&s=BCA_NGDPD&grp=0&a=

    Seems to me the only two things that differentiates Australia from Ireland, Greece and the like right now is a basic resource boom and friendly capital markets.

  26. jquiggin
    December 9th, 2010 at 10:07 | #26

    @hix
    http://www.crikey.com.au/2010/05/11/quiggin-economists-need-to-be-alert-if-not-alarmed/

    Final para reads

    It’s impossible, though, to avoid observing that Australia has its own vulnerabilities, which haven’t been resolved. Our housing bubble is still inflating, along with China’s at a time when bubbles everywhere else in the world have burst. And our current account deficit remains higher than is comfortable, reflecting the fact that our savings are insufficient to finance both the mining boom and our predilection for big houses.

  27. stockingrate
    December 9th, 2010 at 15:33 | #27

    “Overall, Australia has weathered the economic crisis better than any other country in the world. ” Australia continues to sell and mortgage assets to other economies: if we are doing so well why does Australian ownership of the domestic economy continue to decline?

  28. December 9th, 2010 at 20:40 | #28

    Pr Q @#18 said:

    Jack, you are confusing accounts of the way in which crises emerge, where Keynesians and Austrians largely agree, with the problem of equilibrium unemployment, where Keynesians have a theory and Austrians do not.
    There is no good reason, on the Austrian account, why there should be unemployment in recessions. On the contrary, boom and bust cycles in investment demand should be offset by oppposite cycles in consumption.

    No confusion here. I am not trying to vindicate the Austrian theory of the business cycle, or the Keynsian for that matter. FWIW, I think that the Keynsian model is more useful in general, mainly because the model is quantifiable. But the Austrian theory is more applicable to the GFC in particular.

    I am mainly interested in explaining how the GFC started, not how it persists. IMHO, economic slumps, like Tolstoy’s unhappy families, have a great diversity of histories.

    I am trying to fit various orthodox theories into the story of the GFC. None of them fit perfectly, mainly because the GFC was really a gigantic white collar crime wave, it did not really have the character of an endogenous economic process.

    The Keynsian theory of how slumps begin is not really rigorously specified. At least the Austrians have a prime suspect, the financial shenanigan that banks get up to in cahoots with states.

    Although the Keynsians have a well documented suspicion of unregulated financial institutions, their theory of business cycles largely relies on unsustainable dis-equilibrium between macro-economic aggregates (savings – investment, balance of payments).

    But the GFC was basically about financial institutions accommodating unsustainable property speculation, with monetary and fiscal authorities recklessly guaranteeing and exacerbating this speculation. This fits the Austrian model fits the GFC scenario pretty well, and its no accident that Austrians were predicting gloom and doom for much of the noughties.

    I am not that interested in the problem of “equilibrium unemployment” in this case. Obviously Keynsians have a better theory of how a slump persists, based on quantity constraints in the employment of labour, due to sticky wages-prices. With a complementary constraint on the employment of capital, at least in the case of a liquidity trap where consumption demand is stagnant.

    The Austrian’s, as you say, can never really let go of Say’s Law. So their theory of equilibrium unemployment largely consists of railing at unions.

  29. December 9th, 2010 at 21:26 | #29

    sdfc @ #21 said:

    Jack, The national accounts suggest you are wrong in saying fiscal policy played only a minor role. Employment is a function of economic activity. The contribution of government spending to demand over the period suggests fiscal policy paid something more than a minor role in keeping a lid on unemployment.

    sdfc, you theory of the GFC is back-to-front. In the case of the GFC, the bank crashes preceded general economic slumps and the sharp rise in unemployment, that was what made the GFC unusual. Your failure to grasp this key point is the reason you have misunderstood the AUS case.

    You can’t prove the efficacy of fiscal policy just by pointing at the national accounts and saying “hooray for fiscal policy”. You need a properly testable theory to disentangle the effects of factoral, financial, forex and fiscal policy. Other countries had bigger stimulus packages and yet suffered worse slow-downs. By contrast, as Treasury notes, the size of the AUS stimulus significantly under-predicted the speed and scale of our economic recovery.

    sdfc said:

    The major reason our banking sector did not come under stress is because unemployment did not rise to extreme levels. High quality borrowers become low quality when unemployed.

    Wrong, the US did not experience a steep rise in unemployment, leading to non-performing loans and bank crashes. Rather it had low-quality borrowers who fell behind on the mortgage, leading to non-performing loans which led to bank crashes and then a steep rise in unemployment. In AUS we have all those industrious Asian students doubling up to rent residential investment properties, and burrowing away in the service industries to pay their way from student to citizenship.

    sdfc said:

    Bank balance sheets are loaded with mortgage assets should we experience a sharp increase in unemployment you will find our banks aren’t quite as safe as what you think they are. Household debt is 160% of disposable income. A recipe for disaster.

    Well I have been hearing the Steve Keen boy story for more than a decade. I used to give it credence, but now I’m not holding my breath.

    As I have repeatedly said, housing is an asset like any other, and its value ultimately depends on its earning power. So far as I can see most of the high price properties in the eastern seaboard are attracting high rents, mainly because of our astronomical immigration rate. People will pay good money to stay off the streets or avoid living with their parents.

    Maybe the debt disaster will come one day with a sufficiently large exogenous shock. But we have had a series of stress tests and more or less passed them – the Asian crisis and then 911 and then the GFC have come and gone. Yet our property market still looks robust. So when is this recipe for disaster actually going to start cooking?

  30. December 9th, 2010 at 22:11 | #30

    sdfc @ #23 said:

    I don’t see how the huge expansion in immigration played anything other than a minor role in keeping us from following the rest of developed world into deep recession.

    Thats because you continue to see the GFC through the prism of a typical business cycle, which it wasn’t. It was largely a story of insolvent banks. The evidence shows that countries that ran a high flow high quality immigration rate tended to maintain solvent banks.

    AUS’s banks stayed solvent because our borrowers and/or debt servicers were “blue-chip”, they paid their mortgage/rent on time. The US banks went insolvent because their borrowers and/or renting debt-servicers were “sub-prime”, defaulting on mortgages and behind in rent. CAN also had a high flow-high quality immigration rate with fairly pricey property. And likewise it sailed through the GFC. Undoubtedly both countries benefited from the PRC mineral boom effect.

    We know that the US property boom was, by global standards not very bubbly, yet it was very fragile, crashing at the first hint of interest rate rises in 2007. By contrast the AUS property market was very pricey by global standards, yet it proved very robust to interest rate hikes. The RBA raised the cash rate 3% over the course of the noughties property boom, from 4.25% Q3 2001-02 to 7.25% in Q3 2007-08. Yet this did nothing more than put a light lid on the boom.

    You just have to look at the fundamentals of our property market – we have a huge run-up in demand for accommodation, together with a fairly inelastic supply of new accommodation. For most of the noughties we have been running about 20,000 residences per annum behind in accommodating the growth in households. But income has been growing strongly. So prices and rents have gone up.

    That makes for healthy bank profits -> no bank busts -> no credit squeeze -> no wealth collapse -> no economic downturn -> no unemployment.

    sdfc said:

    Howard and Costello ran increasingly pro-cyclical fiscal policy as the boom went on. Distributing the tax windfall generated by the terms of trade boom to households was inflationary and in my opinion extremely poor policy.

    Well it was good politics. I dispute your charactrisation of H&C’s fiscal policy, which was at worst neutral and turned in quite a few surpluses over the course of the decade. Paid off quite a bit of debt, okay partially from privatisation. But still.

    I know it sticks in the craw of Howard-haters but the record shows H&C did a good job in managing the budget, or at least better than most other economic ministries.

  31. Chris O’Neill
    December 10th, 2010 at 13:29 | #31

    @Jack Strocchi

    As I have repeatedly said, housing is an asset like any other, and its value ultimately depends on its earning power. So far as I can see most of the high price properties in the eastern seaboard are attracting high rents,

    You seem to be saying that prices have stayed in line with rents but that’s not what I’ve seen over the last decade. Over a lot of suburbs in Melbourne, house prices have tripled in ten years. Rents, on the other hand, I guess have increased 50% in a decade (average 4% per annum). I’ll check with the ABS later but I can’t imaging rents have averaged more than 4% per annum growth. In that case the price/earnings ratio of housing is now double what it was 10 years ago. To continue this rate of house price growth will require the price/earnings ratio of housing investment to continue rising and for new investors to make up continuing increases in negative gearing losses. Thus housing keeps getting more and more out of line with share investments. Is there anyone willing to suggest that this will keep happening forever?

    The history of the housing market suggests its periods of boom or bust can last a long time – 30 years. So ignoring the size of the gain, the present boom which started in the late 90s could last until after 2025. But considering how much gain there has already been , the boom might last a lot less than 30 years.

  32. sdfc
    December 10th, 2010 at 18:45 | #32

    Jack

    Quantitative Keynesianism isn’t the Keynianism of the GT, it’s Hicks and Co. Uncertainty is unquantifiable.

    You’re stuck in a neo-Keynesian world. Keynes saw no difference in motive between business investment and financial investment as far as I can tell. His analysis of the marginal efficiency of capital and the rate of interest is one of asset prices and investment returns it appears to me to be a pretty accurate description of the financial crisis.

    Keynes brushed over the boom part of the cycle but that is not to say he boom is not integrated into his theory. He was explicit in saying speculation becomes destabilising when it becomes the major driver of investment. He explicitly said that during the boom risk spreads became imprudently low. That is exactly what happens when asset prices rise as the result of a speculative boom. We saw it coming into the GFC.

    He went on to say that when the boom turns to bust, the flight to liquidity puts downward pressure on risky assets driving up credit spreads and of course interest rates.

    Quality borrowers become low quality when those borrowers become unemployed. Declines in income raise the debt burden. Aussie households have a debt to disposable income ratio of 160%. In a financial crash it’s not the speculation that kills you it’s the leverage. Any economy with such a high level of household debt is vulnerable. A large part of our CAD is mortgage financing costs.

    Sorry Jack but immigration played only a small part in generating growth, the major driver is the TOT.

  33. Alice
    December 10th, 2010 at 19:41 | #33

    Id like to ask Hannah what she thinks of the responses so far?

    Also Im wondering what happened to the sciences and subjects like engineering and construction and architecture etc in the online learning (its not in the search engine) or is online learning only suited to business, MBAs and IT fields – must be the most popular subjects and easy to get materials for as it is obviously a private business enterprise.

    I know students want flexibibility but do some just want easy, cheap and fast?

  34. December 11th, 2010 at 21:35 | #34

    sdfc @ #32 said:

    Sorry Jack but immigration played only a small part in generating growth, the major driver is the TOT.

    Sorry sdfc, you have completely missed the key point about the AUS economy over the past decade, which is that our economic system is now geared to property values. The growth in realty dwarfs the ToT driven growth in mine-realty. The ratio of dwelling to non-dwelling worth has almost doubled over the past decade, going from 3:2 in 2000 to a bit under 3:1 in 2010. (The Treasury figures go only to 2007, but obviously shares have dropped since then, whilst property has continued its dizzying run.)

    Economic growth is a function of increases in the quantity and quality of economic resources. Obviously we have had an increase in the “quality” of our minerals sector, as measured by improvements in ToT. But we have also had an increase in the quantity of our resources sector, as measured by increases in the labour supply.

    More importantly, all this extra labour has to be housed. And its higher effective demands on property, either directly as buyers or indirectly as renters, has pushed up the floor on property prices. Mineral wealth improvements have raised the ceiling of property prices. That higher and sturdier floor on property prices has been the key in AUS avoiding the GFC.

    Thats why I bang on about immigration all the time. This is whats driving the across the board general increase in property prices. If the story of AUS’s boom was all about mining then Perth and Brisbane realty would be going gang-busters. Instead they are in the doldrums, whilst Melbourne, the destination of the bulk of immigrants, has been the star performer.

    sdfc said:

    You’re stuck in a neo-Keynesian world. Quantitative Keynesianism isn’t the Keynianism of the GT, it’s Hicks and Co. Uncertainty is unquantifiable.

    FWIW, as I have said numerous times, I am a pluralist instrumentalist when it comes to macro-economics, Keynes, Friedman and Hayek all have useful ideas and one just uses their theories as one would use tools, to try and generate useful and valid predictions. Thats why I keep saying the GFC was Austrian in cause, Keynsian in cure.

    Obviously the GT is in the realms of pure economic theory. The econometric application came later. Kuznets quantitative surveys of business cycle data provided the empirical grist for the Keynsian macroeconomic mill.

    Keysnian theory was turned into a testable macro-economic model by Modigliani and Samuelson. Friedman showed later that the Keynsian model of slumps is a special case of a more general monetary theory of business cycles. Hicks developed the IS-LM model, which is a useful pedagogical device.

    sdfc said:

    Keynes saw no difference in motive between business investment and financial investment as far as I can tell.

    THats true, in fact its a key part of his critique of capitalism that business was “amoral” about the virtues of direct industrial v portfolio financial investment – GT ch 12:

    Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

    The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

    Keynes certainly laid a large part of the blame for the Great Depression on speculative investment in equities, which was the main culprit in the Great Depression. But speculative investment in properties is a somewhat different animal, largely because it goes to the heart of the financial system – banks – whose main source of business is providing mortgage finance.

    Keynsian theory depended very much on current consumption. But we are much wealthier these days. So Friedman’s focus on the permanent income hypothesis has to be a bigger factor given the importance of the “wealth effect”.

    You need to get your head around the crucial role of immigration driven property booms or else you will stay behind the curve on economic analysis. My theory embodied these assumptions which is why I correctly predicted that AUS would be “odds-off” for a recession. What did you predict?

  35. December 11th, 2010 at 21:49 | #35

    sdfc @ #32 said:

    Quality borrowers become low quality when those borrowers become unemployed.

    You keep chanting this mantra, as if it will ward off the evil spirits that threaten your cherished beliefs. Of course its true that a rise in unemployment will cause a decline in borrower quality, thats trivially true. But this was not the causal sequence of events in the US during the GFC.

    In the case of sub-prime borrowers, the mortgage defaults preceded the growth in unemployment. This triggered a solvency crisis in the banks, followed by bank-runs, credit squeeze and then general liquidity crisis as everyone tightened their belts.

    In short, the decline in the “quality” of the banks loan portfolios caused the growth in unemployment, not vice-versa as in the traditional Keynsian scenario.

    By contrast, in AUS, this crisis was averted because the underlying quality of our borrowers was much better. Our residential investment property market is extraordinarily big by world standards, largely cashed-up Baby Boomers using property investment as an alternative superannuation fund.

    AUS banks imposed reasonably stringent borrowing tests on these investors. And of course they found willing and able renters in the hordes of well-educated diligent Asian students flocking to our universities. This market fights hard to retain its investment and keep a roof over its head.

    You really need to revisit the data and revise your theory accordingly.

  36. sdfc
    December 12th, 2010 at 17:15 | #36

    Jack

    Real GDP rose at an average rate of 3.3% in the period MQ 2000 to SQ 2008 whereas because of the terms of trade boom real gross domestic income grew at an average rate of 4.6%. So to say the boost to national income wasn’t terms of trade driven just flies in the face of what we know about the Australian economy.

    The propensity to borrow is really just a function of income, expectations and interest rates, so it is fairly safe to say that the run up in house household debt and hence the ability of households to service that debt is a function of national income.

    That housing supply has not kept up with demand is not being questioned. What is being questioned is the household sector’s ability to validate its 160% debt to disposable income ratio should the unemployment rate rise sharply. Let me put it in simple terms for you. Debts are validated by income, not magic.

    By the way it is no secret that the increased rate of population growth was largely as a result of the terms of trade boom.

    I’ll ignore your restatement of your previous erroneous conflating of Keynes with post war Keynesianism.

    The GFC is applicable to speculation in assets of all kinds, not just equity speculation. To reduce the theory to only being applicable to equity speculation is a gross over-simplification. It is not the speculation that kills you it is the leverage. When financial institutions lend for the purpose of speculation they are also speculating. That is why I say the GT is as relevant to the GFC as it waS to the Great Depression.

    Keynes theory did not rest on consumption at all. Keynes considered investment as the primary determinant on changes in employment. The problem comes when investment is depressed because of a decline in the expectation of profit. Support for consumption by supporting income via fiscal policy (assuming monetary policy has reached the end of its tether) will induce investment.

    Friedman’s permanent income hypothesis is not really applicable to a depressed economy, so that is a bit of a red herring.

    You need to get your head around the fact that immigration is pro-cyclical.

  37. sdfc
    December 12th, 2010 at 17:41 | #37

    I’ve restated that high quality borrowers become low quality in the hope that you would finally get it that borrowers need income to service their debts. This is pretty simple yet you continue to fail to comprehend it.

    Rising defaults in Australia as a result of falling household income will put stress on Australia’s banks. Just in case you didn’t know our banks have borrowed and so similarly have to service their own debts.

    Our banks have tightened standards and increased lending margins, even though default rates remained low and they remained financially sound. Just ask any household and small business borrower.

    You keep restating that the subprime crisis preceded the rise in unemploymnet in the US as if it was some huge “gotcha” moment, when it reality it just goes to show a lack of in depth analysis of the situation. The 8m rise in unemployment saw household insolvency spread beyond the ultra-risky liar loan crowd into mainstream America. Classic contagion.

    Just why you believe a large investor share of housing makes us less vulnerable to correction is baffling as it is these borrowers who are most likely to react to a decline in house prices by selling up so to avoid capita losses.

    Its not me that needs to review the data I’m afraid. The rise in immigration was the result rather than the cause of the boom.

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