General Glut turns his attention to Australia’s current account deficit, a topic that’s also being debated in a number of threads over at Stephen Kirchner’s blog. There’s a lot to cover here, so I’ll list the main points I’m going to cover up front

* Martin Wolf makes a point I’ve also been going on about for some time, that the Anglosphere dominates the consuming and borrowing side of the global trade balance
* Although Australia and the US have similar CAD/GDP ratios, the underlying stats are very different
* The claim that Australia’s CAD is being used to finance non-dwelling investment doesn’t stack up well when you look at actual expenditures, rather than volumes derived from dubious price adjustments
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So I was reading the less interesting bits of the paper and looked at a report on the price of oil which, as is pretty much routine, contained the suggestion that a shortage of refinery capacity was contributing to the high price of crude. Turning my brain on for a moment, it struck me that economics 101 suggests the exact opposite. Refineries and crude oil are complements in production, so a shortage of refinery capacity should lower the price of crude, while increasing the price of refined products such as petrol and distillate (easy thought experiment to show this: if there were no refineries at all, crude oil would be worthless).

A quick Google shows that I’m not the first person to notice this point, but the erroneous claim keeps on getting repeated.

How does an error like this get started. The obvious reason is that if the price of oil is driven by demand fluctuations (as at present) high prices for oil will be correlated with perceived shortages of refinery capacity. It will be easy to find specific instances to support an apparent causation going the other way. For a refinery working at maximum capacity, a breakdown will cause a supply interruption and will be very obvious. The same breakdown, occurring at a slack time, might be dealt with by rearranging operations and rescheduling maintenance and never reported to customers.

David Brooks resurrects the claim that

The Western European standard of living is about a third lower than the American standard of living, and it’s sliding. European output per capita is less than that of 46 of the 50 American states and about on par with Arkansas.

This was done to death in the blogosphere a couple of years ago, but it’s obviously time for another go.

Update: Oops! Scott Martens points out in comments at CT that the EIU gives US median household income as $57 936, way out of line with the Census Bureau figure, which obviously invalidates my comparison, and casts doubt on their figures for France. I guess I’d better not just rely on a quick Google next time. I’ll look into the EIU numbers some more.

And, as several commentators point out, that will also teach me to be more careful before slagging off others for sloppy work. Time for a dish of crow.

Further update I haven’t yet found out how the EIU gets its numbers, but I’ve fixed the obvious errors in the post and taken the opportunity to remove unfair comments about Brooks

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Another huge current account deficit, coming in at around 7.2 per cent of GDP. And that’s with high commodity prices and low world interest rates, thanks to the ‘global savings glut’. Put commodity prices back to normal, and interest rates up by a couple of percentage points, and we could easily be running a deficit in excess of 10 per cent of GDP. At that rate, net overseas obligations would be in excess of 100 per cent of GDP within five years.

Australia has been called a miracle economy on the strength of an impressively long, but by no means unique, economic expansion. But if we manage sustain this kind of imbalance for another five years it really will be a miracle. As far as I know, no economy has ever managed anything like it.

Brad DeLong coins a useful phrase. Referring to Bernanke’s global savings glut theory. He says

I’m very skeptical. It is of a brand of macro that I think of as one-identity-economics. You take an accounting identity. You assume that certain terms of it are fixed. And you then derive conclusions–in this case, that the growth of the budget deficit has moderated the fall in private savings.

The problem with one-identity-economics lies with the assumption that certain terms in it are fixed. There are lots of channels of adjustment in the world economy, and it is a safe bet that with different levels of interest rates and different levels of wealth we would see different levels of corporate investment and of net exports.

Some other examples of one-identity-economics are the crowding out hypothesis and the twin deficits hypothesis.

I’ve been working through the Budget and trying to look at developments since the present government came to office. As shown in previous posts, the income tax scale has become significantly less progressive over this period, so, for single taxpayers we can safely conclude that the poor are paying more and the rich are paying less.

The picture is much more complex for families. It’s clear that the value of Family Tax Benefits has increased significantly in real terms, and the rate of clawback has been lowered from 50 cents in the dollar to 20 cents in most cases. This reduces effective marginal rates of taxation in the relevant ranges, and is definitely a good thing.

But it’s obviously a huge job to work out the aggregate impact, and there are so many variations of family size and income structure that it’s easy to pick and choose (consciously or otherwise) a misleading example. Can anyone point me to some good work on this topic?

It’s the May Day holiday in Queensland, which I’ve observed by starting my long-promised post on contract employment and casualisation. What I have so far is only a first attempt at tackling the issues.

The two big changes in working life in Australia over the past twenty-five years or so have been, first, the reversal of the long-standing trend towards shorter working hours under standard conditions of full-time full-year employment, and, second, the displacement of full-time full-year employment by various combinations of part-time, casual and contract employment.

I’ve written a bit about working hours and holidays in the past, and Jason Soon has more. So I’ll talk a bit about the other developments.
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