Alan Wood of the Oz, an occasional reader of this blog, has a piece in today’s Oz which links neatly to this post which in turn links back to Ross Garnaut in the Oz (thanks to Jack Strocchi for the link).

One striking feature is the statement that ”

total national savings – household, government and corporate – have plugged on at about 19 per cent of GDP

. This is superficially inconsistent with my observation, a while ago that net national savings are close to zero (I guessed 3 or 4 per cent of GDP). As this piece from the ABS shows, the actual rate is about 3 per cent. Wood’s observation presumably refers to gross national saving, which includes depreciation. I haven’t checked it carefully, but the number seems plausible.

It’s true that both gross and net national saving have been stable for the last decade or so, but I can’t say that’s comforting. A long expansion ought, I think, to have produced a recovery in national saving, rather than chronic reliance on overseas borrowing.

While I’m less sanguine than Wood, I agree entirely that

Slamming on the brakes now because of fears about our external debt and deficit would be a silly response, particularly as recent history has shown monetary policy cannot fix a current account deficit problem.

The correct lesson of the debate about the CAD launched by John Pitchford in 1990 was not that “deficits don’t matter”, but that contractionary macro policies are rarely a sensible response.

I’ve been working on a piece about productivity, targeted as an Economics Briefing for the Fin Review. This used to be the Schools Brief, but they’re trying to broaden the appeal a bit. The target audience, I think falls into two groups

* Students with a year or two of economics under their belts

* The subset of the Fin audience with an interest in economic policy issues, as opposed to business news

Any suggestions or criticisms will be much appreciated.

By the way, I hope no-one minds being used as unpaid editorial advisers. The payoff is that you get to read stuff well before the print audience.
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Ross Garnaut has been highly critical of the FTA with the US and the way it has been debated. He has now broadened this criticism into a more generally pessimistic view of the Australian economy. Since Ross has historically been an optimist, this is quite a shift. He points to excessive domestic demand, the current account deficit and signs of incipient inflation, masked by favorable movements in terms of trade.

Garnaut argues that our impending decline is due to the abandonment of microeconomic reform. In my discussion of the Howard government in Robert Manne’s book of the same title, I also observed that microeconomic reform has slowed down substantially under Howard. However, I’m much less of a fan of microeconomic reform than Garnaut – the Kiwis had reform in spades, and it didn’t do them any good. In diagnosing the same imbalances, I’d point to causes such as the deliberate promotion of a boom, then a bubble in the housing market.

In addition, while I don’t believe in mechanistic business cycle models, I think there is some truth to the idea that, the longer an expansion goes on, the more fragile it becomes. A good run of luck breeds complacency, which encourages unsound investments and unwise consumption, and thereby brings about its own downfall. Garnaut rejects this view, saying “no economic expansion is doomed simply on account of its longevity”.