Cartoons of the Week

China, Mining and Manufacturing

Interesting allegations about Chinese contract stipulations about sourcing from China in a Wayne Swan interview with Fran Kelly on ABC Breakfast

KELLY: In terms of productivity, what about making the most of the manufacturing we do do? You did suggest yesterday the Government would announce more this week to follow up on union calls for a more effective local content policy. What are you talking about? Are you talking about direct incentives or tax incentives to encourage resource companies to buy Australian?

TREASURER: No, what we're talking about is that Australian firms should have the chance to pitch for business on a commercial basis. Now what I've heard from several businesses and from several sources is that some Australian businesses are not even getting the opportunity to pitch for the business on a commercial basis. I'm a bit disturbed by that so I'm going to examine those claims closely with the industry because I do think it is important that Australian business gets the opportunity to maximise the business that flows from these investments.

KELLY: Some of those claims - let me go to one of those claims because I've heard it too around places that some of the big miners signing contracts with China for instance over gas and other resources, within that contract it's mandated they buy Chinese equipment, not Australian.

TREASURER: Well, I'm a bit disturbed by that.

KELLY: Is there something you governments can do about that?

TREASURER: Well, I certainly intend to follow up that claim and ascertain whether it is true or not, and I would be very disturbed if that was the way it was going in some of the big projects. There are many people who are getting work out of these big projects. They are absolutely massive and there are lots of Australian businesses that are getting work and I'm aware of many of them. I've seen them in operation but if we are getting those sorts of practices creeping in that's not good and it's not good for the country. So I intend to look at those quite closely.

KELLY: And the report that suggests only 10 per cent of steel being used - massive amounts of steel - in projects like Gorgon and Olympic Dam, only 10 per cent of it is local. Are you critical of Australian resource companies for not buying locally made steel?

TREASURER: Well, certainly some of the steel will be imported and I don't think anyone would be surprised about that but if Australian manufacturers who are offering good product aren't getting the chance to get their head through the door then that's worth looking at very, very closely. 

While I'm against forcing companies to buy Australian., I'm also against companies being forced not to. If you're going to have a freer market-based economy, governments must be extremely vigilant against anti-competitive behaviour.

Just how good has Australia's economic performance been?

A good aggregate indication of a country's economic performance is real GDP per capita (GDP per person).

The graph from The Economist shows that the best performer over the last 3 and half years have been China and India. Argentina has also done very well, a fact that may give Americans and Southern Europeans some faith in the ability of an economy to recover from financial disaster! Indonesia has also been a quiet achiever. 

What you might notice is that the best performers have mainly been emerging economies with Taiwan and South Korea as exceptions. 

Australia's position is also fairly good, especially in comparison to other developed economies. Canada is still 1% below its pre-crisis level and America is down 3.5%. Britain has performed even worse. So while many might complain about wasted spending. In a time of stagnation policy-makers in Britain and the United States would do well to remember that cutting sending at such a time is likely to exacerbate the situation.

US Inequality in a Nutshell

The difficulties of doing something about inequality  in the United States are numerous, but as Paul Krugman once said the explanations for inequality are more sociological than economic. Globalisation or economic openness are not responsible even if they provide persuasive arguments to explain why rising inequality is inevitable.

If governments want to do something about inequality they could, but they would require popular support to do so. At what point does rising inequality in the US cause a rethink amongst the population that political interventions are required to lower inequality instead of increasing it?

Unfortunately for egalitarians, the economic crisis has led to a right-wing populist backlash against government, rather than a left-wing populist backlash against corporations and the wealthy.

One of the richest men in the world Warren Buffett has written an excellent article in the NYT called "Stop Coddling the Super-Rich".

Buffett wonders why the rich haven't shared in the necessary sacrifices required to deal with the economic crisis.

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

The most appalling fact is that the rich get these benefits at the expense of middle class and poor workers.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

Buffett argues that higher taxes would not stop investment as many corporations and financiers argue.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

And it's gotten worse over time.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

Buffett's solution is to tax those earning over $1,000,000 a year at a higher rate.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

The problems with taxation go much deeper than this, but Buffett's plan would make a good start.

Sub-Standard and Poor in Cartoons

The reputation of Standard and Poor took a big hit when they rated toxic mortgage securities as AAA grade. They've now downgraded US debt from AAA to AA+, but US debt remains in significant demand despite the political crisis in the US.

These cartoons tell the story fairly neatly ...  and a Peanuts for good measure

Australia, China and the US

For those students in 7007IBA a recent article by Paul Dibb about the Australia, China and US relationship covers some of the themes we discussed in our Seminar on Security and Defence.


Dibb's piece is called China: Not about to attack Australia
 
In it he offers a critique of White, Babbage and Sheridan's views about the strategic triangle between Australia, China and the US.

It is quite premature to advise that Australia should encourage the US to accommodate to the realities of Chinese power, as my colleague Hugh White insists. It is downright dangerous to suggest that Australia must develop the military capability to tear an arm off China, and even provoke revolt inside China, as Ross Babbage argues. It is also incorrect, as Greg Sheridan would have us believe, that historically no country has ever developed a navy the size of China’s without going to war.

Structural Change in the Australian Economy

While this might seem like a boring topic, it's probably one of the most important medium to long term economic issues facing us as Australians. 

I have recently written a piece for APO, called Structural Shenanigans in the Australian Economy. The APO  is the best source of information on Australian policy issues. It is run by Peter Browne from Swinburne, who given the amount of work he does must never sleep!

Click on the link above if you want a read or paste this into your browser http://www.apo.org.au/commentary/structural-shenanigans-australian-economy ...

The Shift in Economic Power

Interesting stats from The Economist's Daily Chart.

Since the end of 2007 the developing world has grown by 20 per cent, while the developed world* has failed to get back to where it was. This has accelerated the shift in economic power towards the developing world.

But note the crossover is still a forecast.

*definition of developed economies based on 1990 data: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States.

Another chart shows just how bad this recession has been in the US compared to previous recessions ... 

All the more reason why the US needs to be less concerned about debt right now and more concerned about growth and employment.

Stagnation, debt and inequality

The following is from the Unconventional Economist (Leith van Onselen), who I encourage students to read via the Macrobusiness Superblog. Your parents (or you) might benefit from a reading of his (and Delusional Economics') views on housing. 

Leith highlights a report from Societe Generale’s Albert Edwards.  This is a negative view of the global economy, but one I have long worried about since preparing the manuscript for The Vulnerable Country from 2006.

As we see a short-lived economic recovery failing only two years into the cycle and a plunge back into recession, we remind investors that this was exactly the Ice Age template that Japan showed us. A fragile recovery undermined by private sector deleveraging collapses as a semi-bankrupt government tries to rein in runaway deficits…

I and many others have been pointing out for a long time now the simple fact that the global economy has been living way beyond its means for years. A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting. I believe the Fed and Bank of England, in particular, were wholly complicit in this ‘daylight robbery’.

These unsustainable private sector, debt mountains were transferred to the public sector in 2008 to prevent the adjustment to the depression-era reality that the debt unwind would undoubtedly have brought about. Yet, those debts are as unsustainable in the hands of the public sector as they were in the private sector. Central bank polices haven’t changed though. Print and print and print. And if that doesn’t work, print some more. And as London burns, the point I have always made is that the US and UK are not like Japan in one very special way. Although Japan suffered a decade of pain it is a very homogenous, equal society (see below). The UK and US are not…

In the Eurozone, the markets are now realising what should have been obvious from the start. The authorities are in very little position to halt the rot. During the bubble (aka The Great Moderation) the Eurozone had the same mechanics of mutually assured economic destruction that was seen on a grander scale between China and the US, viz the excessively loose US monetary policy causing a housing and spending boom that resulted in a huge trade deficit, financed in the main by a willingly mercantilist China printing money ad infinitum to keep their fixed exchange rate link (incidentally it’s a bit rich for the Chinese to complain about the US profligacy when they are just as bad when it comes to cranking the printing press).

The Eurozone has been no different to this unstable US/China nexus, with some member countries enjoying (suffering?) super loose monetary policies through no fault of their own (unlike the US), leading to housing and spending booms causing huge trade deficits funded in the main by Germany with a Chinese-style trade surplus, with their banks lending money to the deficit nations in the periphery to keep the party going.

So, during the Great Moderation, although the overall trade situation of the Eurozone seemed to be in external balance with the rest of the world, under the surface the situation was always every bit as unstable and poisonous as the US/China situation…

Edwards makes several important points about the problems at the heart of current global problems and much of it can be slated back to rising inequality, the third of the key vulnerabilities facing Australia, but obviously much more acute in the US and UK.

If globalisation (meaning here the proclivity towards freer trade and finance) is to remain sustainable then it has to be accompanied by redistribution of opportunity and of wealth, otherwise populists of the right (and left) will gain increasing leverage over political processes and lead to a return to insularity.

The massive transfer of wealth to the rich in the US is not seen, unfortunately, as a cause of US problems by supporters of the extreme right. Instead mild efforts to maintain growth in the US are seen as signs of rising socialism.

The US economy is in deep trouble not because its debt is unsustainable - its not - but because the political process is broken. Some basic measures to raise taxes on the very rich and make corporations pay tax, at the same time as increasing spending on worthwhile labour market programs and infrastructure development would make a big difference.

The US Economy in Cartoons