26 thoughts on “Monday Message Board

  1. How much can a koala bear?

    Gillard enters my living room via the TV sprouting all her rhetoric about how important it is not to use protectionism to protect Australia, even as America protects its steelworkers and farmers.

    Now, based on a recent AusPol poll, finally the union movement has called for tariffs (Adelaide Advertiser 2 Feb 2009 p4).

    80% of workers want Rudd to encourage buying of Australian-made.

    I prefer to Tobin-like tax to tariffs, but certainly the stock academic arguments for tariffs do not apply when trade occurs between Western labour and ‘slave’ labour (which is why Australia has lost so much manufacturing).

    However, even though tariffs will lower the standard of living – they can lead to a more equitable society. You swap economic efficency for social equity.

  2. Recently Harry Nicolaides was jailed for 3 years after pleading guilty to lese majeste in his self-published novel (he sold like ten out of 50 printed) dishonouring the Thai royal family. (Writing is definitely a mug’s game.)

    I’ve been wondering where are all the cartoons are. Particularly from that paragon of freedom: Denmark. They like rude cartoons there don’t they.

    Why do I single out Denmark you might ask. Well if you go to the Australian National Portrait Gallery one can see the gallery commissioned portrait of Tasmania’s own Princess Mary of Denmark, in a Maddona-like blue dress with the Sydney Opera House in the background. Mary is not wearing a lot of jewelery but she is wearing an elephant on her sash. Apparently ties between Thailand and Denmark are quite close. A Dane was usually head of the Thai Police well into the 1950s for example. One result of this closeness is the “Order of the Elephant” which Mary is wearing as a member of the Danish Royal family.

    I’ve been informed by a retired professor of Asian Studies that the badge of this elephant is incomplete, that it is missing its member. Not so much air-brushed out as never painted in. It was too much for a portrait of a princess apparently in its proud original form.

    To rectify this painting and draw attention to the closeness of Denmark, it’s lazy cartoonists, and the new repression in Thailand, worthy of Burmese boycotts, I’ve decided to photoshop the Crown Prince of Thailand, Vajiralongkorn’s penis onto the elephant on Mary’s dress and put it up on flikr.com for all too see.

    I’m sure Jason Soon would have a good laugh at this.

    Or maybe I’ll just imagine photoshopping it. There’s too much photshoppping around anyway.

  3. Chris I am glad you have brought up trade. Before i go on, i would suggest that if you want to target inequal distriubtion of income it will be more effective to tackle the problem head on, through taxation and social security policy, then to fight it by proxy through protectionism.

    I have been reading the arguments in favour of protectionism over at Angry Bear. The argument seems to be that Ricardo does not apply anymore because the current situation is multi nationals (with American headquarters) sourcing different parts of the production process in different nations. I am not entirley sure that this argument makes sense.

    While protectionists are so focused on the local market they seem to ignore the fact that tariffs are unlikely to do anything positive for exports (and are quite likely to do some very negative things). Considering increasing incomes in the developing world i don’t know if it is in any western nations best interest to ignore exports.

    I do wonder however how much the rules are different for a huge economy like America and a small Economy like Australia.

  4. Also while it is easy to mock the wages paid in the devloping world as “slave” wages it does seem to be enough evidence that trading with the west has inceased the income of workers in China. A dollar an hour is of course more than a dollar a day.

  5. El Mondo

    As far as I am concerned Ricardo can stay on his pedestal. Comparative advantage still rules.

    Slave wages, more accurately is relatively slave wages.

    Relatively low wages (for identical productivity) causes an “artificial comparative advantage”. It is created by political oppression.

    As this occurs offshore there is no possibility of tackling the problem through taxation and social security policy (although the adverse impacts of unfair trade can be countered by a Tobin-like Tax).

    I prefer a Tobin-like tax, but if USA and others protect their farmers and steel workers, Australia must respond.

    A dollar a day offshore, making a shirt to sell where a day is worth $80, is unfair trade and leads to unemployment.

    Why do Chinese workers get a dollar an hour when their value-added (when sold in Australia) is a lot more?

    Answer: Relatively slave wages and working conditions.

    Protectionism will reduce exports but will increase domestic production.

    Increasing per capita incomes in the developing world are based on sales into the West which has been underwritten by debt (and increasing per capita debt at that).

    These ‘increasing incomes in the developing world’ are also based on investment and speculation based on the gamble that the artificial advantage created by oppressive labour laws and harsh minimum wages will continue.

    It appears to me that Gillard, Swan, Rudd and Tanner want Australian workers to accept unemployment and the loss of their houses and assurances from Government that they are very ‘concerned’.

    Australia must export – but only where there is a natural competitive advantage. Forcing exports for other reasons leads to too many other problems and often requires taxpayer subsidies.

    I do not think Ricardo (or Smith nor even Samuelson) ever supported free-trade where the comparative advantage was artifical and created by harsh exploitative labour laws and conditions.

  6. The lower cost of wages is not entirely due to difference in labour laws and workers rights. A key reason why wages are lower in some nations is surely to do with the amount of unemployment in these nations, the education/skill level and the (lack) of oppurtunity to work with the capital and technology.

    If the avergae GDP per capita throughout the nation is $1000 per annum the average worker can not rationally expect to earn $2000.

    Also while i can buy a nike shirt for $80, i can also buy a shirt probable of the same quality from K Mart for a bout $20 (still a huge mark up on the raw cost but that s not my point). Where does this $60 come from, the fact as disconcerting as it may seem is that the real value added comes from the change in peoples perceptions thaks to marketing.

  7. El Mondo

    yes obviously.

    So we just need tariffs that address the specific component of lower wages that is due to oppressed working/social conditions.

    This is where Swan-songs about new global systems should be looking.

  8. Based on news reports, Rudd has announced that tax receipts will fall by $115 billion. This announcement comes fairly early on in the economic crisis in Australia (unemployment has barely increased, growth is still positive, house prices have only fallen slightly), and the Government has consistently underestimated the potential downturn in Australia. Given how bad the situation looks and the probability of a ‘worse case’ scenario, there is every chance that the Government will have to announce further revenue falls in the next year.

  9. John, according to Nick Turse whilst various bailout schemes are announced little is being done for the distressed. In an article entitled “The Financial Crisis Is Driving Hordes of Americans to Suicide” Turse argues that there is an epidemic looming as a result of the fallout from the current financial crisis and economic recession. The number of individuals committing suicide, self-inflicted injury, murder, robbery and arson are on the increase.

  10. On ABC radio today, Steve Keen used the “D” word. Keen now predicts a depression. John Quiggan shied away from that prediction and suggested we still had ways and means of avoiding such a serious outcome.

    At the risk of over-simplifying the issues, there seem to be two schools of thought now. (I’ll ignore the thoroughly discredited neoclassicals and neocons.)

    These schools seem to divide into those who think the debt overhang is THE underlying structural problem (the Keenites) and those who think fiscal and monetary policy are still adequate levers in themselves (the Quigginists).

    The Keenites suggest that a depression cannot be avoided without massive debt moratoria and/or a deliberate policy of reflation (which serves to shrink debt). The Quigginists seem to suggest that large government deficits on their own will be enough to re-float the economy.

    Both schools favour much tighter financial regulation in the future which would presumably prevent the issuing of excess credit again to create another bubble. However, the Quigginists seem to be suggesting that the current bubble can be massaged away through government deficits over a few years of recession. The Keenites seem to be suggesting that the debt overhang is a massive toxic boil which must be lanced and deflated dramatically (massive debt write-offs) or the poison will cause systemic semi-paralysis for a decade or more.

    My money (little that it is) is on the Steve Keen view.

    If I’ve misrepresented anyone’s views, the floor is yours.

  11. John, many would agree that Rudd’s $42 billion stimulus plan combined with the the latest RBA’s 1% interest rate will have a positive impact on the economy and hopefully reverse the number of companies entering into administration, liquidation or receivership and personal bankruptcies. Fingers crossed.

  12. I just cant wait for interest rates to hit zero so that Costa can shut up about how a fiscal stimulus is a waste and all policy should be monetary policy in order to help business (translate – the soon to be unemployed are irrelevant). Was Costa a plant in the labor party because he sure is earning his keep as a hackneyed journalist for the extreme right.

  13. Re stimulus packages and free trade. I might be going off track here but after Howard fell over his shoelaces whilst he was bowing himself before GB to sign the free trade agreement with the US, I now note we many not be able to sell iron ore into the US fiscal stimulus programmes.

    Domestic purchases take precedence (and I dont disagree with this at all)?. Well it seems when there is a GFC, free trade goes out the window and into the garbage. Just when JH thought he had it all sewn up by serving up Australian industries to US entrepreneurs as a BYO plate he took to the party so they would allow him in.

    There is one born every minute. The GFC means that the global party is over and everyone wakes up in the morning with a hangover to tidy up the garbage (?and cringes with embarrassment at the “praise be we are free” songs they were singing the night before).

    Somehow I suspect trade disagreements between countries are the normal operation of the market and unencumbered global free trade was and always will be a utopian dream.

  14. Let’s be quite clear about fiscal stimulus vs monetary policy Alanna that they are one and the same unless our Govts have warehouses full of plasmas, piles of iron ore and tanks full of petrol to hand out. Failing that perhaps they’re handing out all our bullion they’ve got taxed away for us to exchange for said items globally.

    As for buying locally I’m not aware of sales outlets full of Lightburn Zetas, Victa plasmas and Hills Hoist mobile phones and taken to its buy local logical extreme, Victorians won’t be running around in Commodores, while we eschew Fords and Holdens presumably. Assuming we’re not about to resurrect the People’s Zeta Hybrid of course. If our problem is too much private leverage and debt now, then what the hell, clearly the answer is to pile on some more public debt, in the absence of any of the above. Now we’re all heading for zero interest rate nirvana
    it’s all free anyway, isn’t it?

  15. Observa #16 – fiscal stimulus can be targetted – monetary stimulus is blunt instrument – and it takes a damn long time to work if people dont want to borrow and I cant think of a worse time to take out new debt than now. Once you hit zero interest rates there is nowhere to go with monetary policy. Japan had that problem – you need both cannons but above all you need direct job creation right now. Waiting for monetary policy to deliver could be as good as waiting for the cows to come home.
    The government has a tool it hasnt even thought of yet and I wish they would get on with it – public sector service and construction jobs.

  16. ‘it takes a damn long time to work if people dont want to borrow and I cant think of a worse time to take out new debt than now.’
    But apparently many are comfortable with Govt racking up public debt on their behalf now. The Govt has Just asked Parliament for authority to borrow $200 billion, which is another $18,600 per worker by the way and that’s assuming employment remains at the same level. All this when they’re up to their armpits in private debt by all accounts. Treasury estimates put interest alone at adding another $2.6 billion in interest by 2010, although what they’re calculating that by is anyone’s guess, now that Ken Henry has admitted the world outlook is frightening and the worst since the 1930s. How quickly these experts went from she’ll be right mate, to the worst since WW11 and now back to the 30s. Basically they’ve had no idea what’s going on and yet now want us to believe Keynesian borrow and spend is the only logical path for all intelligent people now.

    When Labor last left office we had a $96bill debt to pay off and after 11 years we were finally in the black to the tune of around $23bill a year. Welcome to our savings over the business cycle and that’s all we have to spend now in the downturn. How long will the downturn last? That’s the $200bill question now apparently and we can’t look to the experts as we’ve seen, but here’s a clue for them. You didn’t understand the Great Stagflation, then you didn’t comprehend the Great Moderation and now you can’t understand the Great Geriatrification that’s begun with a bloody great bang, rather than the whimper you suspected. That being the case and everyone should smell it right now, we cannot in all conscience lump debt on our youth in future. We have to cut our suit to the new cloth of that third great demographic phase.

  17. “Explaining” events after the fact is a lot easier than predicting the future course of events.

    Do you still maintain Australia’s on the brink of hyper-inflation?

  18. Well my first reponse would be to ask “what is the SCB China Economic Activity Index”?

    “The China Economic Activity Index, which has just been released by Standard Chartered Bank’s Stephen Green, compiles the industrial goods production, freight, credit growth, and imports of major commodities in China. Though it doesn’t seem to be a leading indicator, it does provide an alternative view to the official GDP statistics that are often fudged by the government.”


    “Not a leading index” would appear to imply that in the past it has failed to accurately predict trends in the Chinese economy.

    The actual research paper from Standard Chartered Bank is behind a pay wall but this excerpt is from the link above:

    “The index is clearly signaling very weak growth momentum going into Q4 2008 and 2009…

    We expect to see some form of stabilisation in Q2-3 as bank loans rise, extra fiscal spending kicks in, looser monetary policy supports private-sector investment, and housing transactions increase. If this happens, we will be set for a restrained recovery in H2. But at the core, private investment will be weak in everything from real estate to heavy and light industry, and that is the problem. There are clearly significant downside risks for our current GDP forecast of 7.5% for 2009.”

    So another two quarters of weak (not negative) growth and then a recovery.

    This seems consistent with my argument that China will not experience a recession (two or more consecutive quarters of negative economic growth) and that China will experience overall net growth for 2009 of 4-8%.

  19. Here’s a fair roundup of the experts trying to explain in hindsight the savings glut of the Great Moderation phase of an historically unprecedented demographic- http://www.economist.com/displaystory.cfm?story_id=12972083
    Just as that demographic’s Great Stagflation youth phase produced a similar hindsight introspection and head scratching.

    In the BB youth phase if you threw money at them from the balcony a la Whitlam, etc, they’d spend it straight away and instantly feed general price inflation. As well there was a massive shift in females wanting to join the workforce and it would be some years before that demographic bulge and taste shift was accommodated. Hence that unprecedented stagflation. Also interesting to note that by the time public policymakers and pollies had woken up to the demographics and rapidly burgeoning suburbs with all that new household formation, their bold new plans for satellites and MFPs like Monarto in SA, were mothballed to become expensive zoos and the like.

    By the start of the 80s, the eldest boomer was 35 and a demographic in its prime would begin the great financial intermediation that would allow it to lever and borrow to takover old capital and run with it harder, faster, smarter and generally assume the reins of power from its 1920s baby boomer parents. Reaganites and Thatcherites all, as they eschewed old protectionism and couldn’t get enough of free markets and globalisation to facilitate that great shift.

    The question is where is it all at now and hence that roundup of views linked to above. Notice you can simply overlay Austrian analysis over it to come up with the answer. Let’s take the big cahuna US as the example, although the EU and various developed countries like us fit the bill too. In this middle stage of their lifecycle, central banks(ie the US Fed) could increasingly throw money at that demographic (especially to overcome any economic hiccups) and lo and behold, general prices would remain relatively stable, or more succinctly, meet those 2-3% annual theft of savings targets. What a marvellous new world had opened up for everyone from financial CEOs, super fund administrators, the previously doomed rentier classes, right down to world’s greatest Treasurers who were struggling with ugly deficits and tax receipts. The Great Moderation of all their problems it seemed.

    Not according to Austrian analysis. There would be a day of reckoning with all this fools gold and its concomitant malinvestments. Demographics might disguise that for an unusually long time, but the longer it did, the worse the scope and nature of the malinvestments to be unwound. Where would Austrian analysis expect the malinvestments to show up? The most obvious would be an explosion in consumption of things affected by the cheapening of long term borrowing. Welcome to Mcmansions as well as subprime homes. Next cab off the rank would be motor vehicles sold in record numbers and the bigger the better. From here you follow the easy money trail to the lowest stages of production, consumer goods and services. Lots of plasmas and lattes all on revolving credit.

    What other great malinvestments will there be under Austrain analysis? Well predictably the higher stages of production with complex capital to labour requirements will be decimated for the new latte economy. So the great names of industry, the GMs and GEs are emasculated by the siren song of cheap GMAC and GE Genie money, as the Chinas gear up for the lower stages of production and all those consumption goods until the inevitable occurs and Lehmans signals the great unwinding to begin. Money creation had fooled a very large demographic into believing that high nominally priced assets were in fact real savings. Take away the money and leverage to support that view and it’s clear they can’t sell out now at those prices, let alone hope to in future to a dwindling younger generation, in order to fund their retirement at continuing inflated levels. Still, you’ve got to try, which is why they’re all avowed bailout and stimulus Keynesians now and that’s one hell of a sanctimonious and hypocritical stance for them to take. Fancy them denying their offspring their own free market time in the sun we may well ask.

    In conclusion Austrian analysis offers us an overriding insight now. The scope and nature of the malinvestments to be unwound now, suggest any Keynesian countermeasures will be futile in trying to prop up baby boomer asset prices and a Starbucks lifestyle. We could certainly survey the BB cohort to see what they would do with tax cash handouts, now their super fund balances are looking decidedly ugly, but it wouldn’t exactly be Sherlock Holmes stuff. They aren’t going be levered up any more now their Great Geriatrification phase has begun with a bloody great bang rather than a whimper. They won’t mind levering up another generation though, I’ll warrant. They are all Keynesians of convenience now.

  20. No its not a leading indicator. Here is the rest of the sentence…

    Though it doesn’t seem to be a leading indicator, it does provide an alternative view to the official GDP statistics that are often fudged by the government.

    Its an unofficial measure of Chinese GDP, which seems to be ahead of mainstream forecasts (IMF etc)

    SCB was early to forecast a low 7.5% GDP growth for China, but my guess is that they and others will have to revise their estimates down even further in the upcoming months. Each of the indicators in the China Economic Activity Index are a sign of a deteriorating export market and weak domestic demand.

    The index dropped into negative territory for the first time since it began in 1994, which implies that GDP in 2009 could fall much further than many expect.

    Interestingly, the China Electricity Council (CEC) today warned of weakening power demand in the first half of 2009, and that probably is a leading indicator.

    The Chinese government may never admit it, but I reckon a few years from now it will be generally accepted that Q4 2008 and Q1 2009 were negative. Lets hope that’s the last of it.

  21. Observa#19
    says of me
    “‘it takes a damn long time to work if people dont want to borrow and I cant think of a worse time to take out new debt than now.’

    “But apparently many are comfortable with Govt racking up public debt on their behalf now.”
    the economy’s debt burden is clearly correcting. For the past two decades government debt and corporate debt has been falling while private household debt has risen. Did government and the corporate sector think they could go on reducing their levels of debt and letting private households carry an increasing percentage of the burden of debt forever???

    You can lead a horse to water with lower interest rates at a time like this but you cant make people drink (liquidity trap). Good old fashioned Keynesian animal spirits will killthe confidence and willingness to take on debt – so what do you do? You turn to the use of government debt to keep jobs and stimulate spending which then kickstarts private sector spending (The and only then as confidence returns, the private sector might start to borrow).

    You cant horsewhip people into a bank to make them borrow Observa but Im sure the economists at the Reserve Bank are willing to let you try such incentives as would be needed with any of the interest rate power you have left.

  22. The Rudd Government’s plan to start throwing money madly around seems almost as mad as the miserly penny pinching of the worst years of the Howard Government.

    Hard to know how even to be begin to think about it.

    I would rather the money be spent, for example, buying back Telstra or spent on fixing the Murray Darling basin and re-foresting Australia.

    There is a very good article (not by me) on this question, “Why we should think carefully about Rudd’s $42 billion Nation Building and Jobs Plan”.

    If you follow the link about my home page, you will be able to read some of my thoughts on Qld politics and the ongoing harm caused to Queensland and the rest of Australia by the Murdoch media and the Growth Lobby whose barrow it pushes.

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