A big goods and services deficit

John Quiggin12 Comments

The seasonally adjusted balance of trade in goods and services came in a deficit of $2.7 billion. If continued at an annual rate, this would amount to about 4 per cent of GDP, implying a current account deficit in excess of 67 per cent.

There’s plenty of debate about whether large current account deficits can be sustained indefinitely. But there isn’t (or shouldn’t be) any such debate about large deficits in the goods and services balance. A large and stable deficit on goods and services necessarily leads to an explosion in net debt and in the current account deficit[1]. This can’t be sustained, and therefore won’t be, but the process of adjustment may not be pleasant.

As various people have pointed out, one contributory factor is the poor performance of the “elaborately transformed manufactures” sector, on which high hopes were set in the early 1990s. More generally, it’s difficult to square this outcome with claims of a miraculous productivity performance in Australia.

I don’t suppose that this will have much impact on the election campaign. But it helps to point up the fact that the government’s reputation as good economic managers is as much the product of good luck as of good judgement. Running sustained large current account deficits is a gamble that world capital markets will continue to take the relaxed view of such deficits that they have in the last decade as regards OECD countries, rather than suddenly changing their minds as they have done in relation to Mexico, Asian countries. Argentina etc.

fn1. If the rate of growth of nominal GDP is higher than the rate of return received by foreign lenders and investors, a small deficit on goods and services can be consistent with a stable ratio of debt to GDP. But that isn’t the case for Australia. The ten-year government bond rate is 6.25 per cent, which is about equal to nominal growth, and private borrowers would mostly be paying rates higher than this.

One Cheer for John Howard (guest post from Jack Strocchi)

John Quiggin35 Comments

Following up Brian Bahnisch’s guest post, I’m presenting another from Jack Strocchi. It should be obvious that I don’t agree with Jack’s view of Howard as a Straussian/Machiavellian, telling “Noble Lies” to lead us all to his vision of tolerance. But I’ll leave it to others to make up their own minds.

I found the discussion of Brian’s post very interesting. Jason Soon has some more thoughts, with which I broadly agree, though I’d concede that excessively narrow utilitarianism can lead to the kinds of moral blindness pointed to by Brian.
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Two beatups

John Quiggin19 Comments

Tonight’s election news had both parties engaging in dreadful beatups. The Libs tried to turn a Labor policy of a 0.1 per cent addition to the Superannuation Guarantee Levy into “a new national payroll tax’. This is so bogus I can’t imagine it lasting past tomorrow.

Meanwhile Labor plugged away on the line that Costello will replace Howard sometime in the next term of office, and that Howard is being dishonest by not admitting this. Of course, this will probably happen, but it might not. Having predicted before the 2001 election that Howard would not serve a full term, I’m not going to make any predictions or demand any promises on this one. If you vote Liberal, you might get Howard, you might get Costello, you might get someone else. I suppose it’s unlikely that Labor would dump Latham in his first term if he won, but give him a couple of terms in office and the same question will arise.

A reminder of our insignificance (in American eyes)

John Quiggin9 Comments

The headline for William Safire’s Op-Ed piece in today’s NYT is “Four connected elections”, and the teaser is

More than one election will affect the young democracy in the land of Saddam’s former tyranny.

Obviously, there’s the election in Iraq itself, and the US election in November. Then there’s another Presidential election in Afghanistan. What’s the fourth? You might expect that the first national election to be held in one of the original “Coalition of the Willing” countries since the war would count for something. But actually, it appears that Safire counts the outcome in Najaf[1] as a ‘primary’.

I’m well aware of how little we are noticed, but even so I opened Safire’s article expecting a mention of Oz. For anyone who thinks that our policy of unwavering support for the US buys us anything in the way of gratitude, or even attention, this is a sobering reminder of our insignificance in American eyes.

fn1. Which by the way, he grossly misinterprets. Sistani, who he correctly presents as the big winner, has been an unwavering opponent of the US occupation. However happy he may be that Sadr is out of Najaf, he is unlikely to countenance a continued presence once a Shia majority government is installed.

Barns on hypocrisy

John Quiggin10 Comments

Writing a defence of Ross Cameron, and political hypocrisy in general, Greg Barns puts forward the startling proposition that it’s OK for politicians to keep a mistress at taxpayers’ expense[1].

For the body politic in France, Italy, Spain, Portugal and their former colonies, the fact that their political leaders attend church on Sundays, preach the need for less corruption and moral virtue during the week, but keep a mistress at taxpayer’s expense merely raises a resigned shrug of the shoulders.
 
This latter approach is not only more realistic but recognises the point .. that there’s little reason to expect that the personality type attracted to politics is a human of impeccable moral virtue.

If Barns himself should ever run for office, we can’t say we weren’t warned.
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Monday Message Board

John Quiggin23 Comments

It’s time for the Monday Message Board, where readers are invited to post their thoughts on any topic (civilised discussion and no coarse language, please). There will doubtless be plenty of posts from me on the election, and plenty of room for discussion, so I’d encourage Message Board comments on other issues.

The markets and the election

John Quiggin14 Comments

Commenter “tipper” supplies the numbers on an issue I’ve discussed previously, observing

Centrebet has the Coalition at $1.55 and Labor at $2.30. For the non-punters, that means you have to bet $7 to win $4 on the Coalition and $10 to win $13 on Labor. I think I read somewhere recently, that the bookies have picked the elections better than the polls for the last couple of years. So go all you “true believers”, make an honest quid for yourselves, for the first time in your lives, by proving the bookies wrong. Or as John would put it, prove the “efficient market hypothesis” wrong.

If I’ve done my arithmetic properly, and allowing for the bookies’ margin, I get the implied probabilities as 0.60 for the Coalition and 0.40 for Labor. The polls have Labor ahead, but looking at all the discussion, I’d say that the consensus view is that the election is a 50-50 proposition, and that’s also my subjective probability.

How good a test of the efficient markets hypothesis will this be? Bayesian decision theory provides an answer[1]. If our initial belief is that the EMH is equally likely to be true or false, and the Coalition wins, we should revise our probability for the EMH up to 0.55. If Labor wins, we should revise it down to 0.45.

As regards the betting option, there’s a collective decision problem here. Given my subjective probabilities, a bet of $100 on Labor would have an expected net payoff of $15, but $15 isn’t enough to cover my transactions costs for placing the bet, etc. A bet of $1000 would have an expected net payoff of $150, which would be worthwhile in these terms. Unfortunately, the 50 per cent chance of losing the $1000 comes with the additional cost of having to explain to my (non-Bayesian) wife what a good choice I had made ex ante . The net expected benefit comes out as a big negative here.

fn1. The workings are easy for those who know Bayes’ theorem and accept the modern subjectivist interpretation , but they won’t make much sense to those who don’t.

The idea of the university

John Quiggin3 Comments

Before we get bogged down in the election, I thought I’d do a quick post on this piece that caught my eye. It was a piece in the Age in the long-running dispute between Melbourne University Private and Senator Kim Carr, Labor Science and Research Spokesman. Here’s what caught my eye.

[Carr] claimed five of the 12 research publications MUP had produced up to June 30 this year did not meet Commonwealth Department of Education, Science and Training guidelines and suggested there were doubts about another five.

The university, in its final submission to the committee on Thursday, denied making any false claims, maintained its research report had been properly audited, and said its research publication rate was almost twice the national average (emphasis added).

I thought this must be a misprint. An entire university with 12 publications in a year? I get more than that[1], and so do quite a few other researchers. And how can this possibly be “above the national average?”
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