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Our facts have changed

Date

Tim Colebatch is The Age's economic editor.

View more articles from Tim Colebatch

Governments are showing no flexibility despite Australia's unprecedented situation.

Illustration: John Spooner

Illustration: John Spooner

''When the facts change, I change my mind. What, sir, do you do?''
attributed to JOHN MAYNARD KEYNES

Whether Keynes ever voiced these exact words is a matter of dispute. What is beyond doubt is that he expressed such thoughts - and we remember them because they embody a profound truth. When we find ourselves in a new situation, our ideas must be flexible to respond to it.

Our facts have changed. But our governments, the Reserve Bank and the federal opposition have not changed their minds. 

Australia is now in a new situation, one unlike anything we have seen before. In the year to December 2011, investment in mining grew by more than GDP did. Mining investment grew by $8.24 billion; the volume of GDP grew by only $7.7 billion.

One industry located mostly in the outback is growing very fast. Most of the rest of the economy, located in the south-eastern cities, where the bulk of Australians live, is growing slowly or not at all.

The main reason our economy has hit a wall is that the Australian dollar has risen to hover around $US1.05 - 50 per cent above its long-term average of US70¢. This has made a wide range of economic activity uncompetitive, forced firms to close and sent tens of thousands of jobs overseas.

Second, the Reserve Bank has set interest rates at levels appropriate for mining, not for the mainstream of the economy. Lending rates for home buyers are now at 2005-06 levels. Lending rates for small business are at late 2007 levels. The economy needs stimulus, yet interest rates are contractionary.

Third, governments are cutting spending to get back to surplus, and cutting hard because revenues have been clobbered by tax losses run up in the global financial crisis, by consumers' caution and by the lack of growth.

Our facts have changed. But our governments, the Reserve Bank and the federal opposition have not changed their minds. What is happening to Australia does not fit the stories each wants to tell us. So for different reasons their policy is to ignore it, and hope that it goes away.

One luminary tells of a recent conversation with a Chinese banker, who gave him an earful of his amazement at Australia's complacency at this threat to our industries. ''What is your policy to deal with the dollar at this level?'' the man from the world's most successful economy asked with vehemence.

In fact, the banker knew the answer: our policy is to allow Australian manufacturing and service industries to wither, hoping this will ''free up'' workers to take jobs in mining without causing inflation.

This is not good enough. Our manufacturers are constantly berated with advice that they must be flexible and nimble in responding to challenges. So they do; but it is ludicrous when the advice comes from those who are inflexible in their own job: policy.

Take the dollar. There has long been a consensus in Australia that floating the dollar was a good thing; I too was part of it. The dollar rose and fell over that time, usually between US60¢ and US80¢, sometimes higher or lower. But firms facing trouble could tighten their belts and wait for it to change.

The situation firms face now is very different. Even well-run companies that took tough decisions to adapt to the crisis are now struggling. The dollar has made imports 33 per cent cheaper on the domestic market, and exports 50 per cent more expensive overseas. That is a huge blow to our competitiveness. China would not allow it to happen to its producers, nor would Singapore, South Korea, Taiwan or any other economic success story.

The Bank of Switzerland has drawn a line in the sand; it has intervened in the market to force the franc back below 1.20 to the euro, and keep it there. Central banks can do this because they can create currency. The downside is that increasing the money supply adds to inflation. But the risk of inflation getting out of control in a flat economy is remote.

We need to talk about this. We need to talk too about why Canberra is pledging a budget surplus that will impose a contractionary budget on an already weak economy.

In effect, Wayne Swan is promising us that he will bring down a bad budget that will be the opposite of what Australia needs. And Tony Abbott and his team are attacking him for not promising to make things even worse.

The Baillieu government is in a trickier position. The states have few sources of revenue, and ours is drying up. The Victorian Treasury and its Vertigan review have told ministers they should invest more, but pay for more of it from revenue. And in a normal world, that's the right advice. Victorians need to know that when the state runs a surplus today, it is to invest it in building new infrastructure, not to lock money away in the bank.

Victoria's economic slump into near-recession has been sudden, and due to reasons beyond any state government's control. The government has taken a long time to make decisions, but it is more important that it makes the right decisions rather than fast ones. The Baillieu team has been in power just 15 months. It did not expect to win government, and it came in with a lot of baggage from opposition, most of which it has slowly cast off. It now supports myki, the regional rail link and the desalination plant. Eventually it will abandon its silly policy to put armed guards on every railway station.

Its real problem is that it has yet to decide why it's there. It needs to have a credible central policy that tackles the real problems Victoria faces. It needs to have a story to tell, and be willing to go out, meet people and tell it.

Why was it elected? Primarily because transport infrastructure had not kept up with the demand for services. Building that infrastructure should be its policy. That would lift productivity, growth and jobs. The facts have changed, but that policy would fit them.

Tim Colebatch is Age economics editor.

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82 comments

  • Tim,

    You approvingly quote Keynes in one respect and then ignore one of his more profound views. That currencies should not be floated and allowed to become the playthings of speculators. That means activity turns from risky, but real, economic activity, to gambling on currency fluctuations. That is precisely what has happened in the West, largely at the urging of an economics profession mired in an ideology that blinds it to the truth. The Chinese, the most spectacularly successful economy in the world, has achieved that success by ignoring the conventional wisdom of the West. But we go on blithely believing that we can avoid that rather uncomfortable truth.

    Commenter
    Lesm
    Location
    Balmain
    Date and time
    March 20, 2012, 7:34AM
    • Tim, are you for real? The Chinese economy is the most spectacular in the world?

      Their GDP per capita is among the lowest. Their communist, planned economy runs against the wisdom of every mature western nation.

      You need to become more informed...

      Commenter
      Dave
      Location
      Western Suburbs
      Date and time
      March 20, 2012, 10:10AM
    • I have a 4th reason why our economy is tanking: the 6 leading members of Labor's Gov't, from Gillard down, have a collective work experience of 181 years, but only 13 years in the private sector.

      If you take out of those 13 years the number that were spent as trade union lawyers (11), only 2 years were spent in the private sector.

      With 2 years of private sector experience, Labor is responsible for the administration of our entire economy.

      Any wonder they've plunged Australia into unprecedented debt, introduced 19 new taxes, yet keep telling us how good they are for the WORKING family....

      Commenter
      sophie
      Location
      melbourne
      Date and time
      March 20, 2012, 12:53PM
    • Sophie, your argument is pathetic. You ignore reality and push on with some rubbish about private sector experience (which could equally apply to the Liberal Party leader incidentally).

      The problem is not private sector experience, it is with the Australian public's flawed belief that government surpluses and low taxes are the answer to all problems.

      There is a cost to Gina Rinehart being on track to become the richest person in the world... and that cost is incurred by each one of us not in mining.

      We need to tax mining much more heavily and use those funds to support development in the rest of our economy.

      Commenter
      Dave
      Location
      Melbourne
      Date and time
      March 20, 2012, 1:22PM
    • Tim, you are right on the money with this piece! I've been saying for weeks on Facebook that someone needs to do something about the dollar, not just sit there and watch manufacturing companies die.

      I am horrified by the hubris of the Reserve Bank board that they can say everything is okay. Circumstances, as you've said, have changed. And as such the way we treat our dollar should be the way China and Korea treat their currency: stablising it.

      Commenter
      Julie Zilko
      Location
      Melbourne
      Date and time
      March 20, 2012, 1:45PM
    • brilliantly written article

      Commenter
      greg in mulgrave
      Location
      mulgrave
      Date and time
      March 20, 2012, 2:22PM
    • Dave, Sophie's view it is by no means flawed. Fact is this Labor gubbernment has no credentials in the real world whatsover.
      These are people who lived from the public hog all their life in a parallel universe. The only connection to the real Australia they have is via their tax-funded "advisors". This junta has tricked and maneuvered itself into power driven by deceit and a plethora of borrowed public money wasted on silly pet projects. Now people begin to realise this queen has no cloths, and the rest is sagging.

      Our interest rates need to go down to 2.5% quick smart.
      Still more than Japan and the USA, but the Pacific Peso is hovering over parity for so long, it is absolutely suicidal. We all understand Swanny wants to sell more and more bonds to foreign investors to fund the ALP splurge. But at some point reality must catch up, and why is it always the hardworking Australians who have to suffer and foot the bill? Why not for once those bastards who put us in the misery for their own gratification?

      Commenter
      Ralph Sherman
      Location
      Melbourne
      Date and time
      March 20, 2012, 4:52PM
  • Thank you Tim, fine piece of analytical writing and forgive me, someone has to say it, right on the money. I'm in the construction industry and we can hear crickets chirping. The first to feel it are the front end folk, brokers, project managers and designers and the lay offs have started. We need courageous visionary leaders, but, damn, there are those crickets again!

    Commenter
    Perk Cartel
    Location
    Westgarth
    Date and time
    March 20, 2012, 7:50AM
    • It's not just our high dollar that has caused our economy to hit the wall. Our massive household debt (close to the highest in the world) is finally having an effect and it's only just started.

      Commenter
      AB
      Date and time
      March 20, 2012, 7:54AM
      • In addition to the debt, what about the ridiculous FWA and low productivity? Colebatch bangs on about the high A$ and even infers that the government should fix it without discussing the adverse impacts (imagine Australia surviving the Asian financial crisis without a free floating dollar). Even worse, Ross Gittins was on his high horse yesterday about taxes needing to be increased from its already high level. Gittins does not stop for a moment to consider that governments should live within their means (i.e. stop wasteful spending - today's news that Labor racked up $0.5bn in consultany fees alone). Wasteful taxes only hinder the economy.

        Commenter
        hbloz
        Date and time
        March 20, 2012, 8:17AM

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