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Australia’s economic growth secret

July 6th, 2014

I argue in this review of John Edwards’ After the Boom that it’s neither mining, nor macro reform. The reason our economy has done so well over the past 20 years is that policymakers have made the right macroeconomic policy calls when it mattered, during the Asian crisis of the 1990s and the GFC.

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  1. July 6th, 2014 at 13:15 | #1

    Pr Q said:

    I argue in this review of John Edwards’ After the Boom that it’s neither mining, nor macro reform. The reason our economy has done so well over the past 20 years is that policymakers have made the right macroeconomic policy calls when it mattered, during the Asian crisis of the 1990s and the GFC.

    I think you mean micro reform.

    And yes, AUS economic growth is not just mining or micro, although both have helped. Mining has improved our terms of trade and micro-economic reform has greatly smoothed our growth path by substituting quantity volatility with price flexibility.

    Macro-policy has been the big growth driver since 1991, particularly the RBAs strategic cuts in interest rates in the aftermath of Asia crisis and GFC, the depreciation of the AUD and the fiscal expansion by Keating One Nation and Swans fiscal stimulus.

    More generally macro counter-cyclical policy has been complemented by macro growth policy, driven by the boom in population and housing. AUS growth has been mainly extensive, rather than intensive. But it keeps the engine ticking over.

    The growth in the supply of labour factors has been driven by the gradual increase in (mainly female) labour participation rate and a huge increase in (immigration-driven) working age population. There have been Concomitant improvements in labour force quality, mostly high IQ North East Asians & North Indian Brahmins & Sikhs. The general spread of higher education and professional development have also done their bit.

    Correlated with that has been a huge secular increase in residential housing investment, which has underpinned an increase in the demand for consumer and capital goods. Think of all those soaring towers in the CBD, all those sprawling housing estates in the suburbs and all those endlessly delaying road works.

    Of course the rise of the robots and the “end of economics” (TM) mean that the growth curve will eventually flatten out. Political distribution will replace economic production as the main focus of social machination.

  2. Newtownian
    July 6th, 2014 at 13:47 | #2

    At the risk of being a mad greenie I am disappointed at your review John in that it seems to be a variant on ‘trust the economists and she’ll be right’.

    Given your role in the climate change commission I would have hoped for better. My concerns why your thesis is untenable irrespective of what Abbot and co get up to include the following:

    1. The Australian economy and its policies remain as I understand it predicated on continual largely unfettered growth which still ignores the biophysical barriers studied in the environmental and sustainability sciences and which practitioners have been trying to get, largely unsuccessfully, mainstream economists to incorporate for 40 years into their theoretical framework. Fossil fuels + climate change is only one.

    As I understand it Australian economic policy fails to address the sorts of problem highlighted in such references as ACKERMAN, F. 2009. Can We Afford the Future? The Economics of a Warming World, Zed Books Ltd, Cynthia Street, London, diverse works of Herman Daly e.g. DALY, H. E. 2008. A Steady-State Economy – SDC Reports & Papers. Redefining Prosperity. SDC. and Tim Jackson’s ‘Prosperity without Growth’. It doesn’t even seem to incorporate the arguably oxymoronic concept “Green Growth”.

    The source of the problem suggested the other day by Phillip Pilkington in Naked Capitalism is in effect the use of a system similar to medieval ‘Scholasticism’ as the basis for economic reasoning rather than genuine hard science style hypothesis testing.

    2. If growth is not sustained this will have increasing social impacts For example if the slower, zero or even ‘negative’ growth occurs, this will cripple the viability of our superannuation based retirement system, the basis for the livelihood of perhaps 40% of the adult population. This system depends on the promise of the economy growing at 5-6% to keep pace with inflation and taxation (and maybe event more given the finance industries creaming) let alone the increasing cost of maintaining a high tech society (what ecological economists call the EROEI problem – see below). Up until 2008 it seemed to be achieving this but since bubble mark 1 burst, the asset base (a government piggy bank if the TPP provisions along the Cypress model are introduced?) its deficiencies have now become evident.

    The logic of slow no or negative growth can be seen in even the crudest spreadsheets of yearly retirement assets incomes and payments.

    Trying to personally avoid the potential problem I’ve come across many problems e.g. all the recently touted growth seem to have been in a problematic stockmarket (and the main asset choices are banks, miners and high consumption dependent retailers) and vastly overpriced real estate. Then there is the impact of an increasingly aging population – of much concern to Ken Henry.

    3. The ‘Jevon’s Paradox’ is one solution many economists propose which indicates that technology could conceptually provide an adaptive fix. The trouble is the dependency on market economics seems to be prevent this as indicated by Ackerman’s analysis. As a result instead of going to sustainability our resources especially retirement moneys seem to be going into speculation mainly which suits the finance sector and the problems with the EU carbon trading system seem to illustrate.

    Beyond this is the absolute ceiling of the EROEI problem which affects all technology based solutions because they all need huge energy inputs and put an absolute ceiling on growth. This is nicely described here MURPHY, D. J. 2014. The implications of the declining energy return on investment of oil production. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 372.

    While I would agree technology may allow sustainability for 7 billion??!! the greatest barrier to its realization seems to be the current market based economic system which your review suggests isn’t all that bad.

    In the fullness of time I guess the economy will equilibrate but I fear we don’t have the time or else we will have a solution that doesn’t bear thinking about.

    (a quick plug – if this is acceptable (if not please delete) – colleagues at my university have organised a 2 day Fenner conference for this coming October to discuss these matters at a strategic level – the title is “Addicted to Growth? How to move to a Steady State Economy in Australia”. It would be nice to have some conventional economists there to start understanding this alternative viewpoint – and perhaps communicate why they see things very differently – even if only over coffee).

  3. Hermit
    July 6th, 2014 at 15:26 | #3

    My recollection is that the Rudd post GFC pre Gillard stimulus spending was enabled by a then balanced budget. Without that stimulus things would now be crook. Ergo the mineral boom was not squandered but kept the economy healthy.

    As a follow up to Newtonian’s post some opine that $100 oil (WTI) is already putting the brakes on the world economy and can only get worse due to declining yields. This line is pursued on green websites like Resilience ddot org. Yet mainstream economists say indefinite growth is possible. I’ll believe whoever turns out to be correct.

  4. Ikonoclast
    July 6th, 2014 at 15:46 | #4

    I question the implied proposition that our economy is doing well. Uur economy is well by any proper measure. Admittedly, it might look OK compared to thedecline of the European economy.

    Our May 2014 unemployment rate was 5.8%. That is 719,700 unemployed persons.

    In November 2013, Australia’s the total or extended labour force under-utilisation rate was 13.4% as measured by the ABS. I cannot quickly find more recent figures.

    Youth unemployment for people aged 15 to 24 has hit a 12-year high of 13.1 per cent.

    These are not healthy figures. Unfortunately, the poor employment performance has become the “new normal” and people do not remark it any more. These chronic poor employment figures indicate that there is something chronically wrong with our economy. It cannot yet be resource shortages as Australia is not yet impacted by any basic resource shortages. It cannot be lack of trading partners who are booming. China has been booming over the last decade or so. It cannot be lack of micro-reform and austerity as NZ had more and did worse.

    It can only be that certain public policies and macro-economic settings are still wrong. I won’t lecture or deliver my theories at present. However, I do want to highlight that by proper measures (caring about unemployment and its impacts) our economy is still performing poorly.

    An economy cannot be said to be performing fully well unless unemployment, including youth unemployment, is reduced to the frictional level of about 2%. In addition, it needs to be equitable, sustainable and to cease material growth in time to stay within environmental limits.

    Note: (Extended labour force underutilisation rate – the sum of the unemployed, the underemployed, and two groups of people marginally attached to the labour force, as a proportion of the labour force augmented by those two groups. The two groups of marginally attached people are: people actively looking for work, not available to start work in the reference week, but available to start within four weeks; and discouraged jobseekers. This is the broadest of the ABS measures of underutilised labour. – ABS site.)

  5. ZM
    July 6th, 2014 at 19:30 | #5

    Reflections on growth and the future by Brendan Gleeson in Coming Through the Slaughter (After Michael Ondaatje) MSSI Issue Paper

    “The growth compulsion is a beast that must be fed with live bodies and precious resources. As part of this, we have learned to discount the awful human cost, human and natural, of change, especially politically forced change that has sought to clear the way for growth. Countless lives have been tossed into the furnace of reform and innovation.
    Reflecting on the past few decades – the years of reform and then of the miracle economy – I’ve found my chance to deploy Ondaatje. We were told it was a time of wondrous growth. We were also reassured that the ‘fundamentals’ were right and that we could look forward to perpetual growth. The system failed on both counts. First, even during the boom years, growth was sluggish and uneven. Then came the great default of 2008-9 which showed this wondrous machine to be a Ponzi scheme of economic trickery and political manipulation.
    At what cost? Countless lives were side-lined and discounted. This was nowhere more evident than in our cities where new netherworlds of poverty have formed. Austerity governance with all of its privatisa- tions and inequities is our inheritance it seems.
    Modernisation, and its many booms and surges, lifted living standards for many. It was also, however, an era of fantastic waste and natural despoilation. A charnel house of growth, again reflected in our eco-cidal cit- ies. Our long run despoliation of Nature was speeded up and we now face both the legacy of industriali- sation and our more recent experiments with neo-liberalised capitalism. New gales threaten; this time not under our control and not in service of the growth imperative. Climate change and resource insecurity are the greatest of these natural tempests.”

    “The Promethean dream is reaching its improvident end. We wake in a time of vast possibilities. Something awful is being born, but also something new. The odds, if we take them, are in our favour. In the next world we can be monarchs of the beautiful waste.
    In the earthquakes to come, I very much hope
    I shall keep my cigar alight, embittered or no
    I, Bertolt Brecht, carried off to the asphalt cities From the black forests inside my mother long ago.
    Bertolt Brecht”

  6. zoot
    July 6th, 2014 at 19:55 | #6

    @Hermit
    The only thing that grows indefinitely is cancer. (Until it kills the host)

  7. hc
    July 6th, 2014 at 20:27 | #7

    “Edwards gives the numbers on this: for every $100 in value added by the mining industry, state governments get $6 and employees get $20. This leaves a profit of $74. Of that amount, the federal government gets $14, foreign shareholders get $48, and Australian resident shareholders get $12″. Wow!

    I’ll have to read Edwards to see how he gets these figures. it would be interesting to see net profit figures as a percentage of total investment. Shareholders have not done that well even during the peak of the boom and now, with the fall in commodity prices, returns will be more modest even with higher production levels.

  8. July 7th, 2014 at 03:26 | #8

    Is Australia’s success in macro a simple monetarist picture?

    http://informationtransfereconomics.blogspot.com/2013/10/australia-australia-australia-australia.html

    This model foretells US style low growth/inflation may be in the future though.

  9. Uncle Milton
    July 7th, 2014 at 13:36 | #9

    There are other ways residents benefited from the boom. Perth house prices soared, and if you bought and sold at the right time, you would have done very well.

  10. O6
    July 7th, 2014 at 13:53 | #10

    Some aspects of micro-regulation need improvement, rather than reform. I’m thinking of the CBA, the giant tip of a huge iceberg of financial advice that has sunk and continues to sink huge numbers of trusting but inexpert investors.

  11. paul walter
    July 9th, 2014 at 10:31 | #11

    I guess I have little problem in accepting Prof.Quiggins comments as both restrained and accurate.. he does see through the tragic misuse of micro economics for reactionary politicisation of society, culture and/ through the economics.

    His reading is similar to Stiglitz, I suspect: he sees no value in the smashing ( by way of the infrastructures ) of a civil society and the reconstitution of a form of feudalism, as someone like Judith Sloan would.

    He realises perhaps, that the dumbing down of media, education and science and a regime of fiat-imposed cruelty as more to do with the plunder of our civil society, as with the rest of the Western world, by a global financial sector cotton-wooled from reality and the consequences of what it has imposed and will continue to impose, on humanity.

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