Wayne Swan to retire from politics

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1930s Depression, Australia, business, China, Coalition, debt, deficit, economics, economy, Euromoney, expenditure, exports, GDP, GFC, global financial crisis, government, Joseph Stiglitz, Labor Party, Liberal Party, Lilley, Malcolm Fraser, mining boom, National Party, New York, OECD, Paul Keating, politics, recession, revenue, stimulus packages, treasurer, unemployment, Wayne Swan, world economy

Wayne Swan, the member for Lilley in the Australian House of Representatives since 1998 (and from 1993 to 1996), has announced that he will not stand at the next election due in 2019. It was Swan who was treasurer during the global financial crisis (GFC) period, the world’s worst economic downturn since the 1930s Depression. Australia was affected quite severely by the GFC as was nearly every country.

Some on the right still mistakenly believe that the GFC was largely confined to advanced economies in the northern hemisphere and that it only lasted a short time. Australia’s GDP growth fell from about 4% to 1% and revenue fell from 25-26% of GDP pre-GFC to a low of 21.4% in 2010-11 and it still hasn’t recovered. This is why we have had deficits for the last nine years and an increase in government debt.

Swan and the Labor Party government came up with two stimulus packages worth $52 billion, most of it in 2009, to keep us out of recession. They had to be put in place in a hurry due to the collapsing world economy and weren’t perfect but they did the trick and kept us out of recession. Many on the right think that the mining boom and exports to China saved us from recession. But gross value added from mining grew by about $3 billion and exports to China by about $9 billion in 2009. Each 1% of GDP at the time was about $14 billion. So with growth falling to about 1%, the stimulus packages were quite clearly the only thing that kept us out of recession.

Nobel prize winning professor of economics Joseph Stiglitz of New York said: “You were lucky to have, probably, the best designed stimulus package of any of the countries, advanced industrial countries, both in size and in design, timing and how it was spent – and I think it served Australia well.” He also said that such programs are “preferable to the waste of human and capital resources that would have resulted if there was no stimulus”. Most countries had stimulus packages of some sort. Swan won Euromoney magazine’s finance minister of the year.

Stimulus package spending was across the economy and prevented many businesses from going broke. Unemployment was kept under 6% compared with more than 10% during the world and therefore Australian economic downturns of the early 1980s and early 1990s with Malcolm Fraser and Paul Keating as prime ministers.

The Coalition (Liberal and National parties) and some of its supporters still talk nonsense about debt and deficit disaster under Labor. But Australia came out of the GFC period with the third lowest government debt to GDP ratio of the 34 OECD countries in 2013, since pushed out to ninth lowest after more than four years of Coalition government. Expenditure under the Coalition is actually higher as about 25.4% of GDP than it was under Labor which averaged about 24.8% and Labor had the GFC.

We can be thankful that the Coalition wasn’t in government at this time. Given their slowness and conservative nature, I think their response to the GFC would have been too little too late to keep us out of recession. Thank you Wayne Swan and Labor for being there.

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Was the GFC the fault of economists?

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Australia, banking, budget, budget emergency, business, carbon pricing, deficit, Direct Action, easy credit, Ebola, economics, economists, economy, emissions, environment, extreme weather, forecasts, future, GFC, global financial crisis, Hong Kong, inequality, insurance, ISIL, models, rational man, regulators, revenue, temperatures, theories, turning points, Ukraine

(originally published to Bubblews writing site, now gone)

An article appeared earlier today (2 Oct 2014) in The Conversation and in Business Spectator here in Australia, “Building a new economics for the #Occupy generation” that talked about blaming economists for not predicting and preventing the global financial crisis in 2008 and how economics needs to reinvent itself, etc, etc. In response, I posted the following to Business Spectator …

The causes of the GFC are complex and can hardly be blamed on economists. Quite a few did predict it, but were often criticised by the banking, insurance and business sectors who were making a heap of money with easy credit and relaxed rules and who carried more weight with the regulators than any economists did. But predicting the future can be little more than guesswork. You can base forecasts on the best available data at the time and they can turn out to be wrong.

The article talks about economic or rational man. But people, businesses and governments don’t always behave rationally and perhaps increasingly so in an ever-more complex world. This throws out any forecasts for the future and makes predicting turning points in the economy very hard. A good example is the federal government with its talk of a “budget emergency” and then they go on a spending spree pushing the deficit up from $19 billion in 2012-13 to $48 billion in 2013-14 and it will probably get larger with various extravagant pet programs yet to kick in, little being done on the revenue side, and some overly-optimistic forecasts that look to be politically influenced.

Economics can keep adding new theories and models but it will probably never be able to keep up with irrational behaviour by people, business and government. The last few lines of the article mention the “financial crisis, growing inequality, and looming environmental catastrophe” but these sorts of things have been included in economics for ages. I studied environmental economics in the 1970s before the right even realised there was an environment. There was a survey of 35 economists in November 2013 with 30 opting for carbon pricing, two for direct action and three for something else. But the federal government abolished carbon pricing. This will now cost the budget $18 billion over four years and who knows how many billions as emissions and temperatures keep going up, causing untold damage, including to our coastal cities with an increase in extreme weather and rising sea levels.

Economists can produce all sort of theories and models and suggest things, but it’s hard if governments, business and people behave irrationally, and then who knows what will happen. Added to this are other issues that spring up and we often have no idea of the impact on the wider economy until it happens, e.g. Ukraine, ISIL, Ebola and now Hong Kong. How these things will play out and what effect they will have on the world and Australian economies over the next 12 months is anyone’s guess.

Australia: Don Argus incorrectly blames Labor

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Australia, Canada, capital gains, China, Coalition, debt, deficit, Don Argus, Donald Trump, economy, expenditure, exports, finances, GDP, Germany, GFC, global financial crisis, government, housing prices, Joseph Stiglitz, labor, mining, negative gearing, recession, revenue, stimulus packages, tax, tax concessions, tax cuts, taxes, UK, unemployment, US

An article appeared in The Australian on 12 December 2016 in which former National Australia Bank CEO Don Argus accused the Labor government of 2007 to 2013 of spending up big and putting a “dead weight” on the country’s finances. He complained about the government’s “cavalier approach to spending” in 2008. Not a scrap of data was provided to back up the claims. See http://www.theaustralian.com.au/business/don-argus-says-ruddgillard-spending-weighs-on-economy/news-story/a89fdbb6f0a4c3b6d94bcd192eaafc05.

For a start, the stimulus packages were not announced until February 2009. They totalled about $52 billion and the reason for them was to keep the economy out of recession in the face of the global financial crisis. Australia’s GDP growth fell to about 1% and without the stimulus packages, the economy would have contracted by around 2.5%. This would have resulted in many more businesses going broke or being in trouble and a considerably higher unemployment rate.

Expenditure as a proportion of GDP in 2007-08 (Labor was in office for the last seven months) was 23.1 %, the lowest it had been since 1989-90. It rose to 25.1% in 2008-09 and 26.0% in 2009-10 with the stimulus packages. It then fell to 24.5% in 2010-11, 24.9% in 2011-12 and 24.1% in 2012-13. Since mid September, the right wing Coalition government has been in office and expenditure rose to 25.6% of GDP in both 2013-14 and 2014-15 and 25.8% in both 2015-16 and 2016-17 (projected).

When the GFC hit, revenue went through the floor. It had been 25-26% of GDP in the years before the GFC. It then fell to 23.3% in 2008-09, 22.0% in 2009-10, 21.4% in 2010-11, 22.1% in 2011-12 and 23.0% in 2012-13. This is the main reason for the deficits and debt in that period rather than the extra expenditure to keep us out of recession. It is sometimes thought that mining and exports to China saved us from recession (rather than the stimulus packages). But gross value added by mining grew by about $3 billion in 2008-09 and exports to China by around $12 billion, which together was about 1% of GDP.

Australia came out of the GFC with the third lowest government debt to GDP ratio of the 34 OECD countries. Many commentators have applauded the Labor government’s efforts during this time. Nobel prize winning professor of economics Joseph Stiglitz of New York said: “You were lucky to have, probably, the best designed stimulus package of any of the countries, advanced industrial countries, both in size and in design, timing and how it was spent – and I think it served Australia well,” http://www.abc.net.au/news/2010-08-06/stimulus-served-australia-well-despite-waste/935002 The article also stated that Stiglitz felt that such programs are “preferable to the waste of human and capital resources that would have resulted if there was no stimulus.” The packages weren’t perfect at such short notice but they did the trick.

Expenditure has risen under the Coalition government. Also, it doesn’t seem to think there is a revenue problem, which we’ve had since the GFC. It was 23.5% of GDP in 2015-16, still a couple of per cent below pre-GFC. The Coalition wants to give corporations a $50 billion tax cut, which Argus and others support. But consumer demand for goods and services isn’t there, which means that tax cuts will be unlikely to go to business investment. They will more likely go to shareholders, which is likely to result in more money spent on overseas holidays and more residential investment properties. Any tax cuts will also make the deficits even larger. The UK and Canada have reduced corporate tax rates half a dozen times over the last eight years. The US and Germany hasn’t, but if anything their economies have done better than the UK and Canada.

Overly generous tax concessions (negative gearing and capital gains exemption) to investors in residential property have been another major problem in Australia and an important reason the economy is underperforming and the deficits are larger than they should be. Our housing prices are among the highest in the world and first home buyers have been priced out of the market by speculative investors in property pushing up demand, prices and rents.

Don Argus also said we are “becoming one of the highest-taxing economies in the OECD”. This is simply not true either. We are one of the lowest if company and personal taxes, GST type taxes and others are taken into account. Our GST rate is especially low. He mentions Donald Trump proposing to reduce the corporate tax rate to 15%. This will have a devastating effect on the budget. Deficits and debt will grow. Services such as health, education, law and order, and roads will decline, and the economy will struggle even more than now.

If Argus and a few other commentators on the right had a look at the facts and figures, they might not come up with such outlandish and incorrect statements.

Australian politics: budget saga

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Abbott, Australia, bracket creep, budget, budget emergency, carbon pricing, Coalition, debt, deficits, economy, expenditure, fiscal policy, GDP, GFC, GST, Hockey, Joe Hockey, Malcolm Turnbull, Morrison, politics, property investment, revenue, Scott Morrison, Senate, stimulus packages, superannuation, surplus, tax avoidance, tax concessions, tax cuts, tax evasion, taxation, taxes, Tony Abbott, Turnbull

Here’s what I posted as a comment to Business Spectator and the Conservation sites yesterday. The Coalition is struggling with the budget but don’t seem to have many ideas up their sleeves. Malcolm Turnbull and Scott Morrison have replaced Tony Abbott and Joe Hockey, but this doesn’t seem to have made much difference …

The Coalition has now spent 2.5 years treading water on revenue issues. I’m not sure Morrison and Turnbull have much more of an idea than Hockey and Abbott. If another 2% of voters (i.e. swinging voters) feel this way in the next few months, the government could be in trouble, and remembering that the Coalition only had about 46-48% of the vote under Abbott.

Abbott and Hockey talked of a ‘budget emergency’, which was always nonsense. Then they proceeded to chop taxes and spend a heap on pet projects. That was never going to fix the budget. The measures that would have hit the sick, the poor, the old and the young, but didn’t get through the Senate, would have given the budget some slight short term relief but no good for the economy, or the budget in the longer term.

Morrison still doesn’t seem to think we have a revenue problem. We’ve had a revenue problem since 2008 when the GFC sent revenue through the floor (as it did in countries all around the world), falling from 25-26% of GDP to 21.5% in 2010-11. It still hasn’t recovered (at 23% of GDP), unlike the situation in many countries.

Morrison and Turnbull seemed to be testing the waters on increasing the GST. That didn’t work and they more or less dumped it but not quite, which caused various contradictory statements. Now it’s totally dropped but they don’t seem to have anything else specific. This showed in Morrison’s nothing talk to the Press Club.

There are all sorts of things the government could do but they don’t seem to want to. The government needs to look at things like tax concessions on superannuation, property investment, etc at the high end, corporate tax avoidance and evasion, carbon pricing (its abolition is costing the budget $18 billion over four years according to the Parliamentary Budget Office), etc as well as some expenditure cuts (expenditure is at 26% of GDP; it was 24.9% in 2008-09 to 2012-13 and that was with the stimulus packages to keep us out of recession; mining and China wouldn’t have been nearly enough) before it can reasonably think about income tax cuts. Or they will never come close to a surplus, let alone reducing the debt.

Then there’s bracket creep. Treasury modelling showed the average tax rate would go from 24.4% to 26.6% by 2020-21. Morrison described it as a job killer and growth killer. Theoretically, that would be the case if the money isn’t spent. But it’s a trade-off between growth and reducing the deficits and debt. I’d probably let bracket creep go another couple of years and implement the measures I outline in my previous paragraph. Federal government debt has increased from around $265 billion to $410 billion under the Coalition, or about $5 billion a month, and the deficit is twice what it was in 2012-13.

The global economic impact of the financial crisis in Greece

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confidence, credit rating, debt, default, deficit, economics, euro area, exports, financial markets, GFC, global economy, global financial crisis, government expenditure, Greece, gross domestic product, imports, interest rates, public debt, trading partners, unemployment

(originally published in 2011 to Helium writing site, now gone)

The financial crisis in Greece has been building for several years. In 2009, it recorded its first fall in gross domestic product since 1993, and suffered rising unemployment and low international competitiveness. Government spending continued to rise rapidly. By 2010, Greece’s public debt was estimated at about 140% of GDP, rising to 160% in mid 2011. The country also has a very high fiscal deficit, estimated at 15% of GDP, and a large trade deficit. Greece is trying to avoid default and suffers ongoing recession and an unemployment rate of 16%. The financial crisis may have a serious impact on the global economy.

Greece is a part of the Eurozone and uses the same currency, the euro, as the other 16 member countries. Its current high level of debt, fiscal deficit and political instability has caused a downgrading in its credit rating to “junk” status, leading to falls in stock market prices around the world. Uncertainty as to whether Greece can pay its debts has resulted in a hefty increase in the rates of interest it has to pay on its borrowings. The rate on Greek two year government bonds has risen from about two percent in mid 2009 to 10 percent in mid 2010 to 26 percent and higher in mid 2011. This only serves to increase the level of debt.

The situation in Greece has contributed to investor nervousness in other euro area countries, particularly Ireland, Portugal, Spain, Belgium, and now perhaps Italy. These countries are already having their own problems with debt and financial stability. Most other European countries also have high debt. Germany is an exception but is worried because it has a large volume of outstanding loans with Greece and other high debt countries.

The high risk of default by Greece places upward pressure on interest rates in other countries as lenders demand a premium. This reduces demand in these countries. It also takes savings away from more productive investments in manufacturing, services, infrastructure, tourism, and so on. The economies of these other European countries would therefore be worse off than otherwise. Their lower exports and imports mean that their trading partners are worse off too.

Some commentators feel that the global economy would be better off if Greece, and perhaps Ireland, defaulted on their debt, favoring a controlled default or restructuring of debt as the best solution. Greece poses a major threat to the European banks and financial system. Uncertainty stifles financial markets and the best way to reduce or eliminate the uncertainty might be for Greece to default. An alternative would be for Greece to leave the Eurozone and devalue its currency. This would be likely to keep the markets and the banks relatively happy too.

The Greek situation has implications for countries beyond Europe. Financial markets are global by nature, with funds shifting quite freely between countries these days. Stock markets around the world have reacted to Greece’s financial situation and this affects investor and consumer confidence. Countries such as the US, UK and Japan have their own economic, financial and debt problems and these are not helped by what is happening in Greece.

Trading partners of Greece will suffer because of its debt situation. With an increasing level of funds pumped into servicing debt and pushing up interest rates, the rest of the economy suffers, including exports and imports. Greek exports have fallen from $29.1 billion in 2009 to $21.3 billion in 2010 and are predicted to be $21.1 billion in 2011. Main export partners are Germany, Italy, Cyprus, Bulgaria, US and UK. Imports have declined even further, from $93.9 billion in 2009 to $64.2 billion in 2010 and an estimated $44.9 billion in 2011. Major import partners are Germany, Italy, China, France, Netherlands and South Korea. Thus all these countries have suffered a fall-off in trade with Greece.

A positive impact on the world economy that should come out of the financial crisis in Greece is lessons to be learned from taking on too much debt. Many countries around the world have pushed their debt levels up to support their desire for greater consumption and higher living standards. They are now paying the price. They are also seeing the turmoil in Greece when debt levels are pushed over the edge and the populace have to pay with draconian cuts in government spending and services and an ongoing recession.

The difference between a recession and a depression

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consumption, depression, economic boom, economic downturn, economics, employment, fiscal policy, GDP, GFC, global financial crisis, Great Depression, Great Recession, gross domestic product, income, inflation, investment, Keynes, monetary policy, National Bureau of Economic Research, NBER, production, profits, recession, sales, unemployment, world economy

(originally published to Helium writing site, now gone)

The world economy took a giant hit in 2008 with the Global Financial Crisis or GFC. Many countries went into recession, and the word depression was even used. Here’s an article that looks at the difference between a recession and a depression.

Recession is the term used to describe a general economic downturn featuring lower than usual levels of gross domestic product (or GDP) and its components, such as consumption and investment, as well as falls in employment, income, profits and inflation. In broad terms, a depression includes all the characteristics of a recession but at a worse level and often includes additional factors such as a significant fall in asset prices, less credit, bank closures, shortfalls of goods, and deflation.

There are no official criteria separating a recession from a depression. Various benchmarks and definitions have been used over time and between places. In the United States, the National Bureau of Economic Research uses a qualitative definition of recession. It describes a recession as a significant decline in the economy of three months or more, reflected in GDP, production, sales, income and employment figures. It then uses these and other statistics and indicators to determine if the economy is in recession and the dates involved. The NBER defined the US as being in recession from December 2007 to June 2009, with GDP falling 12.8% during this period. It doesn’t separately identify depressions but acknowledges that these are severe recessions.

Other countries don’t have the services provided by the NBER and usually use a more quantitative definition of a recession, often defining it as a fall in GDP of two consecutive quarters. Interestingly, the US recession of 2000 and 2001 would not have been defined as a recession under this definition. GDP fell in three quarters but none were consecutive. Another indicator used is a rise in the unemployment rate of at least 1.5 percentage points over 12 months. The US rate rose nearly four percentage points between mid 2008 and mid 2009 to more than 9%. Sometimes an extended period of lower than usual growth is used to define a recession.

Commonly used quantitative measures to define a depression are a fall in real GDP of more than 10% in one downturn or declining GDP over a period of at least 3-4 years or more, although sometimes two years or more is used as the benchmark. The best known economic depression was the so-called Great Depression of the 1930s. Its effects were severe, prolonged and worldwide. US gross national product fell 33% between 1929 and 1933 and the unemployment rate rose to 25%. Another period of depression, sparked by speculative real estate investments, ran from 1937 to 1942.

Up until World War II, depression was the term used to describe any significant economic downturn. Many depressions were referred to as panics because they often coincided with a run on banks as people tried to withdraw their money during a sudden downturn. An early use of the term depression was in 1819 by US president James Monroe as a description of the Panic of 1819.

Many 18^th and 19^th century downturns were probably recessions rather than depressions but the term recession wasn’t used until after WWII. On average, pre-war depressions were considerably more severe than post-war recessions. This is because when governments in the earlier period were faced with a downturn, they made it worse by contractionary monetary policy, as well as trying to balance their budgets by increasing taxes and reducing spending, and lifting tariffs. This led to falls in wages and prices, which we don’t commonly see in recessions. Booms were also more pronounced, leading to boom and bust cycles.

After the war, major countries vowed not to allow a repeat of the depressions of earlier times and initiated expansionary economic policies during downturns as urged by leading economist John Maynard Keynes. Also, rather than dig up memories of depressions, a new word was sought, and economic downturns came to be known as recessions (recess is from the Latin “recessus”, meaning “a going back”).

The new term came with a fresh set of policy responses to downturns. Governments implemented expansionary fiscal and monetary policies to try and get the economy moving again. The general result was that post-war recessions were less severe than pre-war depressions. There have been a number of exceptions. Russia’s economy shrank nearly 50% in the first half of the 1990s, while other ex-Soviet republics were also in depression as defined above (a fall in GDP for 2-4 years, or a decline of 10% over any period). Finland’s economy contracted for three years in the early 1990s. During the Asian financial crisis of the late 1990s, Indonesia’s GDP fell 18% in 1998, Thailand’s by 15% over two years, and Malaysia’s by 11% in a year.

None of these exceptions were commonly referred to as a depression though. Indeed, they didn’t display all the usual characteristics of depressions, which include falling asset prices, reduced credit, lower prices and declining economic activity, only some of them. High inflation was a feature in the ex-Soviet states and in the Asian crisis. Japan met most of the criteria, however, when its GDP fell 1.0% between 1997 and 2001. Prices also declined 1.0%, wages were down 5.5%, bank lending decreased 16% and property and share values plummeted. But the depression word wasn’t used, and perhaps rightly so as the declines were far milder than those in many pre-war downturns.

The recession of 2007-2009, with its Global Financial Crisis, has been described as the most severe global downturn since the Great Depression and has been dubbed the Great Recession. In the US, GDP fell 12.8% and the unemployment rate blew out to 10.1%. Housing prices collapsed in many areas and several large financial institutions went under. In April 2011, 26% of Americans thought the economy was still in recession, while 29% said it was in depression. This is despite annualized GDP growth of 1.8% in the March quarter.

Thus the difference between recession and depression is hazy. NBER has a qualitative definition for a recession but no separate one for a depression. Quantitative benchmarks are used in many countries to determine the difference, although the measures are far from perfect. Pre-WWII downturns were called depressions. Since then, the term recession has been used. Whether some of the post-war downturns can be called depressions is quite subjective.

Should Australia increase its GST rate?

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abolish the states, Australia, budget, carbon pricing, Coalition, GFC, GST, Labor Party, land tax, tax concessions, tax on consumption, tax on income, tax reform

I posted the following comment to a Business Spectator article (http://www.businessspectator.com.au/news/2015/8/21/tax/nsw-presses-case-15-gst) yesterday:

An increase in the GST [goods and services tax] rate is probably the way to go. When a country raises a large proportion of its taxes from income, as in Australia, it is more susceptible to the ups and downs in the economic cycle. This is because income (and therefore taxes on it) fluctuates more than consumption (and the taxes raised on it). Thus it would probably make sense to increase the proportion of tax on consumption, such as an increase in the GST to 15%. What’s in and what’s out can be discussed. At the same time, we would need to lower tax rates on income, especially at the lower levels, to compensate.

But the net change in tax wouldn’t amount to much. It might be a relatively small increase and we would still be running the large deficits we’ve had ever since the GFC pushed revenue through the floor, and it still hasn’t recovered. Practically every government (left, right and centre) in the world ran deficits at the time of the GFC to keep their economies out of recession or in many cases to ease the severity of an inevitable recession.

The Coalition is now pushing the federal government debt up by $5 billion a month because they have reduced taxes and increased expenditure. Expenditure by the Coalition will average 25.6% of GDP in 2014-15 to 2018-19 compared with Labor’s average of 24.9% in 2008-09 to 2012-13 and that period included the GFC and stimulus packages to keep us out of recession. But fundamentally, it remains a revenue problem rather than an expenditure one. The Coalition has pushed the federal government debt up from $265 billion to $380 billion in 23 months. At that rate, the debt will be around $900 billion by 2023-24.

The problem started in the early and mid 2000s with endless tax cuts and high expenditure with the government not putting much away for a rainy day. The previous Coalition government was wasteful according to a 2013 IMF report using data to 2011 that found the Australian government “profligate” in 2003, 2005, 2006 and 2007 (and 1942 and 1960). Also, public service numbers increased by 40,000 from 2000 to 2007 compared with 5000 between 2008 and 2013.

In order to fix the problems that the previous and current Coalition governments have given us, we will need to do much more than fiddle with GST. We would still need to look at the overly generous tax concessions on property investment and superannuation. Tax concessions amount to about $120 billion a year or 8% of GDP, far higher than comparable countries.

We would also need to look at some form of carbon pricing rather than the expensive and ineffective Direct Action which has pushed emissions back up after we saw a fall during the time of the carbon tax. Getting rid of carbon pricing will cost the budget $18 billion over four years according to the Parliamentary Budget Office or about $800 a person.

Land tax is another option that should be discussed.

We might also need to abolish the states and save $50 billion a year according to a 2007 estimate in a PhD study by Dr Mark Drummond. At the moment we have eight systems (six states and two territories) all basically doing the same thing, which the federal government (one system) could do, rather than all the current inefficiencies, overlapping and fighting.

But the problem at the moment is that we have a federal government that wants a “mature” debate on tax but has ruled out most areas of potential reform, or has placed various conditions such as with any changes to the GST making agreement unlikely. They will probably just keep on playing the blame game like kids. There will be plenty of talk but in the end nothing much will be done.