Wednesday, June 13, 2012

Not Just Lucky, Good: The Australian Economy in 2012

Prime Minister Julia Gillard is keen to make the point that Australia is not just lucky, it's good and it's good because of good policy.  At the Prime Minister's economic Forum in Brisbane (I'm still waiting for my invitation) she said:
It probably wasn't Gary Player who first said "the harder I work, the luckier I get" but he certainly made that quote his own. He could have been talking about Australia. If we ever were just a lucky country, we're certainly not now.
It's not luck that makes this a top-10 country on low trade barriers, openness to international ideas, sophisticated and independent economic institutions, a list that goes on.
Luck didn't give us the three triple-A ratings which only seven other economies can claim – which no previous Australian government can claim either.
Luck didn't make us a top-two country on the measures that are most important to us: political stability, social mobility, ease of starting a business.
Luck didn't keep us out of the worst global recession in 80 years. 
And luck won't build us a new economy for the future. We have to make it.
The Gary Player quote is of course an old chestnut that John Howard used when people argued that the good economic outcomes were mainly to do with luck, rather than good policy. 
There’s nothing fortuitous or guaranteed about economic prosperity. That old saying of, was it, Arnold Palmer or Gary Player that … the more I practice the luckier I get … what it really means is that the harder you work at good policy, the better the outcome … economic management is not some kind of automatic autopilot thing.
During the 2007 election campaign, Paul Keating argued that John Howard was the beneficiary of both a booming global economy and Labor’s transformational policy reforms of the 1980s and 1990s.
I think the public are quite wise about the economy and governments now and they know that the structural changes of the ‘80s and ‘90s are working. The real question today with the economy growing so rapidly and unemployment so low is why doesn't the tinder box go off? That is, why don't we get the big bang? The big bang in inflation and in wages back into the old dismal cycle? The answer is because of the structural changes. Nothing to do with Mr Costello's economic management … and everything to do with Labor’s structural changes from the ‘80s.
If it were true that public were wise about the economy, then I imagine that the government would be doing better in the polls.

The determination of whether Australia's current favourable predicament is due to luck or skill is only half the problem for analysts of Australia's political economy. Right now the real problem is that most Australians don't seem to be aware of how well things are going for Australia. Part of this has to do with the fact that some people aren't actually doing that well, particularly in relation to others. The aggregate concepts of GDP, terms of trade and so forth are exactly that: aggregate. 

But many Australians are doing well. And in particular more people (per capita) in Australia are doing well than in other countries. Basically Australia is the best country in the world to be living in right now (that is beyond the non-economic reasons as to why living in Australia is so excellent like Australian rules football) 

So why do we have such a negative view of our economic success. A read of Glenn Stevens latest speech provides some of the answers and I've written previously on why I think there are negative perceptions about Australia's economic predicament. To argue that the mining boom is the major problem is just plain wrong. Without the mining boom we'd be doing a lot worse. But, the mining boom has had a negative impact on other tradable sectors of the economy (that is those parts of the economy that export or compete against imports).

The real problem for the government lies with a series of structural changes that are negatively affecting collective perceptions of future prospects.

The first is the long-running shift away from manufacturing towards services and the more recent revitalisation of the mining sector. This has come, to some extent, at the expense of manufacturing and important service industries such as tourism and international education. The following graphs come from a presentation made by the RBA governor to the PM's economic forum. 

The two sectors that have been in major decline are agriculture and manufacturing. For good or bad these are two sectors of the economy that are seen as 'special' and so when they are doing it tough their problems are amplified through the public sphere. 

The second structural change is the shift away from debt-financed consumption and rising housing prices to a higher rate of saving – generally considered under the description deleveraging or simply the paying off or consolidation of debt. The NSW government in its Budget has tried to boost the housing market once again by giving large sums of money to property sellers.

We should really call this second structural change the end of an earlier structural change towards higher debt that’s been going on since the liberalisation of the financial sector. The inability to continue to grow debt even further undermines an important source of growth over the past 20 years

The problem is that household debt remains at historically high levels. 

The third structural change is the tentative shift towards a less pollution-intensive economy through the establishment of a carbon price and support for renewable energy through a variety of schemes and policies.

The first two structural changes are long-running and largely unavoidable without significant and perhaps costly policy interventions, which could cause more problems than they fix. 

The third involves a greater level of immediate political choice. But it has the ability to encourage a shift towards a more diversified, future oriented economic structure. 

And though the introduction of a carbon 'tax' is only likely to have a minor impact in the short-term, the way that debate has polarised the community has added to negative perceptions of the Gillard government. Despite the government's major efforts to redistribute wealth to compensate voters for the price rises associated with the carbon 'tax', it seems that those same voters focus only on increasing costs, particularly the cost of electricity.

All three structural changes have acted together with popular perceptions of government incompetence, profligacy and duplicity – well prosecuted by the opposition and sections of the media – to undermine optimism and support for the government in opinion polls.

I’m not suggesting that these three structural changes fully explain voter dissatisfaction, but they have made a substantial contribution to it. 

I want to finish with some other graphs that should at least allow us to agree that the Australian economy is doing better than most other countries. 

The first is GDP, which shows just how well we've done compared to other advanced economies.  

Another measure which shows the quality of the growth is GDP per capita, which also shows us leading the pack. The real basket case here is the UK economy, which is showing clearly how well austerity works as a solution to recession. The UK is still behind where it was in 2005. Fabulous performance! Take out the German economy and the Euro area would also be doing very poorly. 


The lucky dimension of Australia's success is explained by the terms of trade, which have sky-rocketed in recent years after being in long-term decline for the whole of the twentieth century (see the red line). The forecast is for a significant decline of the terms of trade in coming years - a prediction that makes more informed punters pessimistic. I must admit that I often find myself wondering just how many years can we go without a recession?

One of the major reasons for the high terms of trade is explained by this fabulous graph form the Governor, which shows the relative decline of the US and Europe and the rise of China and India. 

Relative economic decline has been going on since the end of World War II. See here for discussion.

A long-term look at unemployment, also shows how well we've been doing compared to the period before the last recession. In the early 1990s I thought there was a chance that unemployment would continue to trend upwards over economic cycles. I was certainly wrong about that, but those were days where pessimism was perhaps more justified. 

This improved employment outcome has occurred despite a growing percentage of workers since the 1950s as more women entered the labour market. In coming years, the definition of 'working age population' will change as workers stay in the labour market beyond 65, some by choice, others by necessity. It seems certain that as life expectancy increases that working life expectancy will increase. Indeed it will become a fiscal requirement for the state in all economies. 

So cheer up, things could be worse. We could not be having a mining boom and we could have really bad economic policy-makers like those in the UK and Europe who believe that austerity is the solution to economic stagnation.


  1. Great post. Scott Sumner (The Money Illusion blog) recommended folk have a look at it when I drew it to his attention.

    I also added it into my Easy Guide to Monetary Policy.

  2. Thanks Lorenzo all praise gratefully received!!

  3. Very interesting, looking forward to read more!

  4. Not bad Tom a 1003 iba student thinks so


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