Some good, but possibly temporary news in the national accounts


Most of the attention in discussion of the December quarter national accounts was focused on the negative sign of the aggregate GDP number, combined with the seemingly unkillable belief that there exists a “technical definition” of a recession, namely two consecutive negative quarters. An aggregate number anywhere zero is pretty good by comparison with the world economy as a whole, so the real interest is in the components. Ross Gittins The Brothers Grimm move has a nice piece going through the details, and concluding, unsurprisingly that we are in a recession. The aggregate number has some negative bits that should be temporary (inventory rundown and the statistical discrepancy) but against that, we are bound to get more bad news on exports over the coming year. Our terms of trade, which rose consistently during the term of the last government (one reason things turned out so well in terms of the macroeconomy) have started turning down, but there is a long way to go.

The (possibly temporary) good news is that household savings have risen greatly, to 8 per cent of income. It’s reasonable to assume that this reflects a combination of precautionary saving as the prospect of recession hits home, reactions to the huge capital losses of 2008 (reversing the process by which illusory capital gains prompted people to run down household savings), less home equity loans (can anyone find me some data on this?) and the fact that some part of the money handed out in the stimulus package was saved. Unfortunately, as the recession hits home we are likely to see lots of households with declining income, raising the question of whether the improvement in savings can be sustained.

There’s been a lot of confused discussion about the stimulus in this context. On the one hand, it’s obviously desirable that the stimulus should increase consumption. On the other hand, the resolution of a financial crisis requires, among other things that household balance sheets are made sustainable, that is, that household debt should be brought down to manageable levels relative to income (not relative to inflated asset values). This is a tricky problem, but its obvious that if households are going to increase savings, and aggregate demand is not to decline too much, someone else needs to increase their net demand. Since private investment and export demand are almost certain to shrink, that leaves government as the only candidate.

It seems pretty clear that, as well as providing cash to households governments are going to need to increase their own expenditure, and, given the fragility of the economy, these increases will need to be sustained for some time. That in turn requires a credible promise to service and repay the resulting debt, which means higher taxes. The obvious candidates for higher taxes are the upper income earners who did best out of the bubble. In this context, the government’s apparent determination to press ahead with the tax cuts, targeted at this group, promised in the radically different environment of late 2007 seems like a recipe for disaster.

(Nicholas Gruen has some more on this)

49 thoughts on “Some good, but possibly temporary news in the national accounts

  1. 25# Paul, as you mentioned before the genus orc is known for its predatory feeding habits on the healthy, the vulnerable, and the young (everyone else actually) and probably sees the unemployed as “good for nothings” except perhaps processing to feed to fellow orcs (at a price).

  2. Alice,
    I was using the quote further up the thread for the stats.
    We do not have 33% unemployment (yet – Julia seems to be working on it), nor do we have a combined pensioner / unemployed rate of 33% – I hope.
    If you imagine the last 10, 20 or 30 years as an era of “small government” when somewhere around 50% of all spending is directed through the government then I am terrified as to what you may think “large government” may be. Add to that all of the spending done as directed by regulation, all of the business decisions taken not because they make sense but because they are told to take them by regulation (for example in that most regulated of all businesses, banking) and you really have no idea, do you?

  3. Andrew, you really are anal concerning these issues. Fields like occupational health and safety and environmental protection developed because business would not act voluntarily on said issues. Likewise taxation and accounting practices.
    Legislation in these fields is intended first and formost as a signal to business to operate within certain paramenters inthe firstplace, for the sake of a wider community. Gunns comes to mind as the most obvious example of why we have regulation and what the pigheaded and expensive response of business to even the most reasonable of compliance measures, usually entails.
    I know this will grate with your Nozickian rightist so-called libertarianist nonsenses; the bugger you jack American ideology/apology that think tankers are so enamoured of, but the point remains that business needs to get off its self obsession for long enough to stop wasting time on tax and compliance avoidance and redirect some of the money heading into executive salaries into healthy workplaces, also a little forethought as per community and environment.
    That’s apart from the sort of example Lindsay Tanner gave a the press club luncheon televised yesterday, with a Wall st firm seconding $billions of now bankrupt investors money to play, literally, “Casino” capitalism.
    Which incidentally brings me to the point of your inadequate response to my previous post, exemplified in further diversionary alibiing for big business here, (accidentally, of course) shifting attention away from consideration of capitalism and its own contribution to the current recessionary bail outs situation (talk about double-dipping!)

  4. So, Paul – what level of taxation do you believe is necessary, then? Should it all be taxed and redistributed (because, of course, we can trust politicians and regulators implicitly to follow the best course for us all) or do you see any level below that as being optimal?
    As for your examples of corporate greed, for every one example of that it would, I contend, be simple to find at least 10 where a government program has supplied similar perverse outcomes.

  5. Andrew, in sheer dollar scale and immensity – I doubt you could find one government program as perverse as the obscenity that CEO salaries have become unless you want to to also talk about the scale of corporate sector rewards also solicited by private sector firms, from government guarantees or legislation, like the enrichment of Halliburton and the like during the Iraq war at the cost to the US taxpayer.

  6. Hmmm – one program. I don’t know – perhaps you may regard the Iraq war with all its deaths as a little more perverse. A lot of deaths and a lot of money wasted.
    That may be a little more perverse.
    Shall I go on?

  7. Andrew, that was GW. Perhaps there is one Australian program more perverse. JH agreeing to go with him, but people voted them in didnt they? If you are suggesting no vote or no government thats a bit primitive. Who leads then? The king of the Zulus or Alan Moss?

  8. Alice,
    I am not suggesting no government, just a lot less and for the government we have to be much closer to the individual – more in local councils, less in state governments and very little in the Federal.
    In any case, for people to suggest that the faults are because of one government or another and then to maintain that we need more government is to me to suggest that there is more than a little cognitive dissonance going on.
    All power tends to corrupt and absolute power corrupts absolutely. Corruption is inherent in power – the more we trust anyone with power the more corruption with which it will tend to be exercised. It really is that simple. You may get one or two amazing individuals that exercise any powers they are given purely altruisticly, with considerable foresight and with a good knowledge of the side effects, but for each one of those you will get hundreds who do not entirely measure up to the lofty ideal.
    Any system has to be designed around this simple fact. I do not think that centralising systems – such as modern Conservatism or any socialist system – have this simple concept in mind.

  9. Andrew – an alternative to less government is greater participation in the exercise of power through a reduction in possible length of terms in office. The downside of that is a shifting of power outside of elected office. The (possible) solution to that is to restrict terms in power for both elected and (permanent)public servants. No doubt there are other problems, but power sharing is a mechanism that is insufficiently explored in my view

  10. #33 The problem I have with your approach Andrew is that it fails to deliver the big ticket items like infrastructure and health or eeducation institutions. I just cant bear the thought of a mass of tangled toll roads for example, getting from one place to another. The state government has been privatising all this sort of thing and making a complete hash of it. They have grossly underestimated the ability of private sector firms to also be cheats, liars and spin merchants.
    I really dont think either the private sector or the public sector is relatively more or less burdened by cheats and liars, or is relatively more or less efficient, but it helps for at least one group to be working within a framework of the common good and to be able to deliver commonly useful low cost (not overly inflated by the profit motive) infrastructure. I think that is terribly important for a healthy economy. It assists everyone, private sector firms and individuals alike. It is only ongoing vigilence that prevents opportunism in either sector. The public service should have better controls and the private sector needs rules too. No one is immune from regulation / legislation in reality. We cant just go around doing unethical or immoral or dangerous things to other people or groups. Lcocal government cannot caste its net over groups from other areas and I would not like to live without a basic legal framework in place.

  11. Andrew #33

    Although sometimes I will confess with organisations like the State Government who are hopelessly addicted to zombie privatisions sometimes I do feel really really cheated. First I get to pay taxes and then they invent raft upon raft of user pays government charges or new charges are created by private outsourced functions (higher than before). It is a bit like being fished once and then fished twice and then they come back fishing again. I feel fished out! They have put so many speed cameras up you could almost get caught walking down your own driveway. Im amazed the hells angels have not shot them out actually. We have become a nation of complete subservients to all these additional charges.

    State Labor pollies are happy to splurge it on advertising, annual trips, limousines, mates and perks – and cant be bothered to get up to Canberra and get something done about the vertical fiscal imbalance so they can afford to repair infrastructure and not come and hit us again.

    They dont want the responsibility of government and just want to live like spoilt brats on federal handouts that have diminished over time while the state’s population has grown and they are running us to collapse or gridlock (same thing).

    Canberra was impounding our income tax pre Rudd (mean old JH – its pretty beautiful in Canberra – roads, transport etc. There is plenty of money there obviously – ours!!) and everything “state” is deteriorating with the likes of Roozendal and Costa and the razor gang (hitting us with user pays charges) and cutting services here there and everywhere to shore up a budget that is “broke” – but they are too dense to see it cant be “fixed” their way since GST and loss of state taxes and the real estate boom fell over.. and it is never going to get “fixed” their way.

    There are times when I do think we could do without them or wish for a clean sweep and a total purge of ideology there. I would be lying if I said I didnt.

  12. “useful low cost (not overly inflated by the profit motive) infrastructure.”

    Deadweight loss is at least equivalent to (average) profit, if not greater.

  13. 37# Jarrah – deadweight loss is an economic term I dont find nearly as useful as an untolled uninterrupted main road or decent affordable (average not inflated profit) public transport to get to work. Relying on the private sector to deliver this could see me growing a beard and others going prematurely grey waiting and waiting.. (finally the “privately provided publicly subsidised” infrastructure arrives late and dysfunctional and expensive after enough lawsuits to pay for it ten times over).

  14. I’m not sure I understand your argument. I had thought you were saying that profit inflated the price of infrastructure (ie, more of a society’s resources than necessary were being used). If I misunderstood, my apologies.

    My comment about deadweight loss was meant to remind you that financing infrastructure by taxation involves its own kind of ‘wastefulness’ – conservatively, about 20 cents on the dollar.

    “Relying on the private sector to deliver this could see me growing a beard”

    You’d be the first Alice I’ve heard of with one 🙂

    But seriously, if you are saying that the private sector was unwilling to provide roads or mass transit, you’re empirically and theoretically wrong.

    Theoretically, if the profit is too low for one activity, it means the profit for another is better – ceteris paribus, this is a signal that the other activity is more valuable to society, and that going ahead with the first is wasting society’s resources. This is one of the key problems with government spending decisions.

    Empirically, I can point to a large number of projects, starting with the early UK turnpikes and canals and railways, and ending with the Sydney light rail and new ferry provider.

  15. Jarrah,
    One of the specious arguments for private sector provision of mass infrastructure provision is that it results in more competition and lower prices. If you read todays paper yet again we see Telstra upping the prices….toll roads the same, electricity and the list goes on of higher user pays charges. Well many users cant afford it and it worsens inequality. What some people pay now to cross the city now to get to work (and especially for those that live far from the city like lower income earners) is unjust and unethical and widens the gap between rich and poor which is occurring …as is misappropriating (diverting) once public roads to steer people to toll roads.

    your comment “My comment about deadweight loss was meant to remind you that financing infrastructure by taxation involves its own kind of ‘wastefulness’ – conservatively, about 20 cents on the dollar.”

    does not take into account associated market failures from unethical activities by private sector “partners” who of course can pay themselves handsomely for some years and then fall over “Tcard” ..etc (and in the UK the London underground disaster) which occur too often .

    Government failure to take responsibility, private sector spivs and spin merchants, gouging of public monies, remuneration to private partners in excess of their contribution, wasteful lawsuits with both “Ps” in the deal seeing the taxpayers and users as corralled sheep who are there to be shorn, all borne at greater social costs by the external party – the taxpayer.

  16. There’s no argument from me about the woeful implementation of PPPs in Sydney or elsewhere. The incompetence of our representatives to make good deals is depressing. But that’s an argument about bad methods and bad incentives, not about the merits of private participation in infrastructure provision. If anything, it’s an indictment of the capacities of government officials!

    “does not take into account…”

    Of course not. It’s simply the factual response to the claim that profits inflate costs. And that’s not even taking into account competition for contracts, which reduces profit.

  17. I didnt say profits inflate costs. Perhaps I should have said “rent seeking behaviour” over profits, inflates prices. If market power (exclusive deals, mates rates, donations, being in the boys club, scratch our back and we will scratch yours, closed shop arrangements, secret info about tenders somehow leaking to tenderers, non market derived tender costings, and the list goes on of what can be done to a tender!!!) etc by the two “Ps”, permits it can also affect input costs and then prices.

    Either way the taxpayer gets bitten by both “Ps” and it happens, sickeningly, way too often

  18. “I didnt say profits inflate costs.”

    OK then. I did ask if that’s what you meant, and apologised in advance if I was attacking a position you didn’t hold.

    And I acknowledge the corruption opportunities inherent in PPPs. I just think that’s a good reason to reform government behaviour rather than to reduce private involvement. I’m guessing you feel differently 😉

  19. Well Jarrah –

    Yes, I could have expressed myself more clearly there. I do feel differently. I am of the opinion that the public sector should choose carefully those infrastructure services they would provide in the best interests of the majority. Public provision should be kept clearly away from the influence of any private sector income or initiatives. The infiltration of private sector monies and private sector ambitions, into the public sector erodes the public sector slowly from from within. Each year that passes brings a relaxation of public sector standards eg what is “acceptable”, or “in the public interest” “appropriate behaviour for a public servant” and a relaxation of controls over “entrepreneurial, risk taking behaviour” by public servants.

    Call me old fashioned, but I consider the whole notion of public institutions “seeking profits” through PPPs or the multitude of other semi governmental agencies, to be a contradiction in terms. In the same way, I dont think its seemly to see politicians or senior bureaucrats “doing deals” around town, with elegantly attired individuals from office towers in Pitt St or elsewhere.

    I come from a line of public servants and I can recall when this was “mixing up” of public purpose, with private purpose would have been frowned on for all the right reasons.

  20. Unfortunately the public sector “erosion from within” does not, in many cases, reduce the costs of running the public sector. It dimishes the quality of the services provided and raises the costs to the taxpayer as the public sector turns into a leaky bucket pitted with holes that money falls through.

  21. 42# In short Jarrah, the mixing up of public purpose with private purpose turns the public purse into a pig trough from which both public servants and private entrepreneurs gorge.

  22. Alice,
    So (and to paraphase you, hopefully correctly) you think that the public sector should do only what it is good at and has a substantial majority benefit. Everything else should be left to the private sector.
    We are not so far apart as you may think.

  23. 48# No, perhaps we are not that far apart Andrew and we probably agree on a clear line drawn in the sand between public purpose and private purpose – would I be right on that?.

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