Other economics
How to cripple a country – encourage it to stop investing
A reader has alerted us to an article in Monthly Review Online: The US is trying to persuade China to commit suicide by John Ross of the Chongyang Institute for Financial Studies.
It takes a little time to get into its logic. The simple summary is that if China abandons its policy of prioritizing long-term investment its rate of economic growth will slow down. That’s pretty basic economics. China has had, and still has, a much higher rate of capital formation than other countries, “developing” and “developed”. That’s been the way most east Asian countries have lifted themselves out of poverty.
Ross’s more confronting assertion is that America has traditionally engaged in economic competition not by strengthening its own economy, but by using its influence on the world financial system to slow down its competitors. It does this through pressure on countries to revalue their currencies – the modern substitute for tariffs – and to liberalize their financial markets, allowing large flows of speculative funds to flow into their economies, resulting in reductions in their real long-term capital investment.
Perhaps he assumes there is too much strategic logic in America’s economic policies. But it is true that when the financial sector achieves a strong position in the economy, the real economy suffers, as short-term financial speculation crowds out long-term investment that would create wealth into the future. We can see this happening here and around the world, as loose money has contributed to inflation, resulting in central banks having to raise interest rates, making the cost of capital higher for public and private investment.
There doesn’t have to be a US conspiracy for this to happen. For example it was the Howard Government, in the name of “financial dynamism”, that deliberately changed Australia’s capital gains tax rules to encourage short-term asset speculation while relatively discouraging long-term patient investment. That pressure came from our home-grown and coddled financial sector.
From a different perspective, without any hint of a conspiracy, Martyn Goddard in his Policy Post points out how our government has unnecessarily restricted itself from investing in public assets, because it has taken on the Coalition’s obsession with government debt: The debt-and-deficit scare is back, wearing Labor’s colours. It’s still a dangerous lie.
His piece is mainly a clarification of the distinction between gross debt and net debt (the latter is net of public assets), an explanation the book entries that produce these scary figures (much of it about the government lending money to itself), and comparisons of our government debt position with that of other countries (our government s among the least indebted). He acknowledges that we have to pay more tax if we are to fund useful public investment: that’s more economically responsible than denying ourselves the benefits of those investments.
Some public investment, such as transport infrastructure, appears on government balance sheets, meaning figures on net debt are lower than figures on gross debt. That’s all in line with established accounting conventions. But much public investment is in less tangible assets, such as early childhood education, public health, environmental protection. Goddard argues that such spending is indeed “investment”, because it involves immediate outlays in order to realize benefits in the longer term. Because of accounting conventions, however, which have trouble dealing with anything that doesn’t hurt when you drop it on your toes, such spending is recorded as “recurrent”, inflating the reported figures for net debt.
It is apparent that our governments, Commonwealth and state, are withdrawing from public investment. Both the Victorian and New South Wales governments have announced specific delays in major urban transport projects – delays which will result in billions of dollars of waste as partially-completed projects lie idle and as the benefits of other useful projects are delayed by many years, in spite of rapidly-growing populations.
Maybe these deferrals have been necessitated because of skills shortages. If so, they are a consequence of years of economic neglect for which the current government cannot be held accountable, but they should prompt the government to invest strongly in strengthening our skills. Or maybe our government, like many others, is sensitive to the judgement of the worldwide finance sector, which is quick to criticize governments that spend on projects like public housing and transport infrastructure, “crowding out” private investment in worthy projects like casinos and shopping centres.
If that’s the case, conspiracy theories such as John Ross’s have some credibility, but it may not be the US government’s doing: rather it’s more likely the power of global finance.
A dismal economic forecast for the coming financial year
In accounts of the 1962 Cuban missile crisis we learn how perilously close the world came to all-out nuclear war. Similarly, with release of the Reserve Bank minutes of its April 4 meeting, we learn that the Bank came very close to imposing another interest rate rise this month. A reading of the minutes reveals that the Bank’s board is hyper-aware of every possible source of price rises or wage increases, even though few of these relate to demand-pull inflation.
Deloitte Access Economics, in its summary of its March Business Outlook, using reasonably strong language suggests that the Bank has been “tempting fate”. The Reserve Bank’s February and March decisions to lift the cash rate by 25 basis points were “unnecessary, and have promoted a further downgrade in Australia’s growth outlook”.
They point out that the Bank’s aggressive hiking of interest rates will contribute to a fall in house construction. Deloitte Access estimates that house construction this year will be 70 000 lower than it was in 2021, even as immigration resumes strongly. They estimate that population growth this year is 1.7 percent, from 0.7 percent in 2021-22, and will stay high for a few years.
Their table of key forecasts presents a dismal picture for 2023-24. The CPI will be higher than nominal wage growth; per-capita real GDP growth will be negative; real business investment will be up by only 0.4 percent; unemployment will rise; and there will be zero growth in household consumption.
Deloitte Access is not alone in its gloomy forecast and criticism of the Reserve Bank. Regarding the outlook for households, Commonwealth Bank Chief Economist, Stephen Halmarick, predicts a collapse in real household disposable income: in fact it is already declining at 4 percent a year. He explains that the full effects of the Reserve Bank’s decisions won’t be realized until later this year, when many mortgagees have to re-finance their loans at higher rates.
He points out, however, that in comparison with other “developed” countries, the Australian economy is travelling reasonably well, and inflation should soon come down to be close to the RBA’s comfort zone: CBA Chief Economist warns of collapse in real household incomes on ABC Breakfast (9 minutes).
Nine years of Coalition government, a pandemic, and a central bank on a crusade, have combined to leave a long trail of economic destruction.
The pandemic and the Coalition government are behind us. That leaves the Reserve Bank. Will it still pursue such aggressive crusades, when it has a more publicly accountable system for setting monetary policy, as recommended in the Review released in Thursday – An RBA fit for the future?
It’s not just the miners who are doing well
One closely-watched series in our national accounts is the ever-growing share of income going to corporate profits, and the corresponding decreasing share going to wages.
The standard explanation for this transfer has been that these profits have been accruing in the mining sector enjoying high commodity prices, while in the non-mining economy – 85 percent of our GDP – profits have been comparatively flat.
Greg Jericho and Jim Stamford of the Australia Institute’s Centre for Future Work have dug into the figures, analysing profits by sector – Profits and inflation in mining and non-mining sectors. From December 2019 to December 2022, while wages rose by 18 percent, mining profits rose by 53 percent, and profits in the rest of the economy rose by 27 percent. Even if we disregarded the mining sector’s profits, in the rest of the economy profits have risen faster than wages.
They report that profits have risen particularly strongly in “wholesale trade, manufacturing, transportation and other strategic sectors”.
They note that “in these strategic industries, businesses could exploit supply chain disruptions, consumer desperation, and oligopolistic market power to increase prices well beyond production costs”. Other sectors, however, have not done so well.
In any event, why should anyone disregard the mining sector in relation to inflation? As Jericho and Stanford point out, the mining sector is directly responsible for price rises in many consumer products, including electricity, gas and gasoline, and indirectly in many manufactured goods.
While their analysis tracks down recent sources of price rises, it is hard to imagine how the Reserve Bank’s strategy of raising interest rates can do anything to halt these price rises. Indeed, when firms and entire industries have strong market power, such as that wielded by the energy sector, it is possible that higher interest rates are treated as increases in business costs that can be passed on to their customers. While the Reserve Bank is trying to control inflation through suppressing demand, it may be undoing its own efforts when it comes to firms and sectors with strong market power.
The Reserve Bank has consistently disagreed with the Australia Institute’s analysis, asserting that worldwide demand, Russia’s invasion of Ukraine, and cartel behaviour by oil producers have pushed up profits, as if the debate is about assigning blame. The more basic issue is that raising interest rates, and suppressing domestic demand, does nothing to rein in these price rises. This dispute is covered in a post by the ABC’s Gareth Hutchens: The mining sector made more than half of Australia's corporate profits, so why do economists want to ignore it?
Wellbeing and location – life is tough in the bush
The employee-owned SGS Economics and Planning consultancy has produced Australia’s Wellbeing Index, which looks at wellbeing along seven dimensions: economic output, income and wealth, knowledge and skills, housing, health, equality, and the state of the environment.
Its national findings are in line with those of most other economists. Its real and significant contribution is its fine-grained spatial data, revealing often stark geographic inequalities.
Unsurprisingly people living in capital cities experience better wellbeing than people living in other regions, particularly on the dimensions of health, income and wealth. They find that wellbeing tends to correlate with people’s closeness to the capital city centre.
The link above takes you to their report. Another link takes you to a webpage on the report, from which you have access to an interactive map, presenting all seven components of wellbeing on a fine-gained scale. Its capital city maps reveal complex regional structures: the well-off regions do tend to be clustered around city centres, but that’s only a broad generalization. Some peripheral regions on the fringes of Melbourne, Sydney and Brisbane are very well off – resembling patterns observed in many US cities. At the same time there are pockets of deep disadvantage, such as those in northwest Melbourne and the northern extremities of the Adelaide conurbation. (These two urban regions have stood out for their strong support of far-right political parties in recent elections.)