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Archive for August, 2012

Job cuts and wage cuts

August 2nd, 2012 80 comments

I was on Steve Austin’s radio program today, talking about my critique of Campbell Newman’s claim that Queensland was on the verge of the kind of debt crisis we have seen in Greece and Spain. At the end, Steve threw me a question I hadn’t prepared for, about a couple of claims made by Newman in the last day or so. These were

* Job cuts would not be needed if the unions would agree to a wage freeze
* Every 0.1 per cent wage increase implies the loss of 800 jobs.

Newman didn’t spell out his reasoning, but it seems clear that he is assuming a fixed fund available to pay wages. Given this assumption, any increase in wages implies a proportionately equal reduction in employment. So, we can easily check his arithmetic, starting from an estimate supplied by his own office that Queensland currently has just under 200 000 (full-time equivalent) public servants (using the term in the broad sense to cover teachers, firefighters and so on, in addition to administrative workers).

Looking at the second claim first, 0.1 per cent of 200 000 is 200, so Newman appears to be out by a factor of four here, or maybe a little less if part-time employees are taken into account. The first claim is a little harder to assess, but the announced cut of 20000 jobs amounts to 10 per cent of the existing total, so an offsetting wage freeze would need to hold wages constant over a period during which they would otherwise increase by 10 per cent. That would at least 2-3 years, assuming steadily increasing real wages, more like 4 years relative to an outocme that maintained the value of real wages. In practice, it’s very rare to sustain a comprehensive wage freeze for so long. Good staff start leaving and are hard to replace, morale is poor and so on. Then again, the alternative offered by the government isn’t doing much for staff retention or morale.

The big problem, as I said last time, is that long-term problems are being addressed with short-term panic responses. Although he is happily ditching promises made to public sector workers, Newman cites vague language about the ‘cost of living’ to rule out any re-examination of tax poloicy, even though most of QUeenland’s low tax effort reflects concessions to business rather than households.

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Are Eurobonds inevitable

August 2nd, 2012 22 comments

That’s the title of my latest piece at The National Interest, opening paras below, follow the link for the whole thing:

“Whatever it takes.” Those were the words followers of the euro zone have been waiting to hear ever since Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank. To spell out the quote in full, Draghi said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Central bankers are famously gnomic in their utterances. This is, however, about as unambiguous as they ever get. Jean-Claude Trichet used exactly the same phrase in reference to his determination to put inflation control ahead of all other objectives, and he demonstrated it with policies that came to the edge of destroying the euro in order to save it from inflation. Draghi’s choice of words therefore amounts to, at the minimum, a sharp change of course.

Of all the actions open to the ECB, there is only one that is sufficiently big, and sufficiently controversial, to justify Draghi’s statement. That is a decision to buy the bonds of EU member states, if necessary printing euros to do so, and accepting the risk of higher inflation.

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Queensland isn’t Greece or Spain (crosspost from Crikey)

August 1st, 2012 20 comments

Here’s my latest from Crikey:

Campbell Newman’s hyperbolic claims that Queensland is on the verge of becoming the “Spain of Australia”, is on a “slide into bankruptcy” and about to execute a “power dive into the abyss” have been rightly derided. Queensland has a strongly growing economy, unemployment rates at near 40-year lows and a budget that is close to balance, and likely to return to surplus, even without drastic cuts.

Credit ratings agencies are overrated, but they are paid to estimate the likelihood that a given bond will go into default as a result of corporate or state bankruptcy. Despite some egregious failures, they are more often right than wrong. The comparison between Queensland’s AA+ ranking (the same as that of US Treasury bonds) and Spain’s BB- speaks for itself.

Unfortunately, Newman’s silliness is an echo of the interim report of the Commission of Audit, headed by Peter Costello, which the Liberal-National Party government commissioned on taking office. The recommendations of the commission are drafted as if Queensland is facing a Spanish-style crisis, and propose austerity measures similar to those adopted in Spain.
Read more…

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