Monday, 7 May 2012

Noisy Chickens

Paul Sheehan has an article in the SMH today which ably summarises the series of economic challenges currently facing Australia.

Here's six noisy chickens, each worthy of a column.  General confidence in the federal government is low.  The non-mining economy is slowing.  Retail is flat.  Job creation is contracting, especially full-time jobs.  Industrial and workplace disputation is rising. Small business formation has fallen off a cliff.

All of these problems are interrelated to some extent, and few are being addressed by anyone in Canberra.  The government is preoccupied with the imposition of new taxes and regulations, which will undoubtedly exacerbate these issues.  Meanwhile, the opposition is focused more on winning the next election than on the articulation of a bold agenda.

The Treasurer rather comically responded to the Reserve Bank's recent interest rate cut as though it were a testament to the strength of his economic management.  In actual fact, the RBA's decision was a direct response to the alarming weakness of Australia's economy beyond the mining sector. Mr. Swan has failed to properly address the yawning gap in performance between the different segments of our economy.

The Liberals have been equally disappointing in this regard, limiting their policy proposals in order to provide a small electoral target.  In fact, the Coalition seems to be almost as complacent as the government when it comes to the health of Australia's economy.

Mr. Sheehan berates Labor for attempting to 'take credit for the hard work done before it ever came to power', referring to the remarkable position bequeathed to Mr. Swan by the previous government.  Indeed the strength of Australia's banking sector, a direct consequence of some Costello-era reforms, is often a forgotten reason behind our insulation from the Global Financial Crisis.  Labour market flexibility, an enviably low unemployment rate and the substantial budget surplus also made Labor's job much easier.

But it is no longer good enough for the Liberals to cite the Howard Government's record as sufficient evidence that they are superior economic managers.  Mr. Abbott's front bench needs to develop a policy platform to address all of the issues listed above, before trouble inevitably strikes.

An incoming Coalition government could begin by dismantling the institutionally biased and dysfunctional Fair Work Australia system and reintroducing much needed flexibility to the labour market.

The drop in small business formation is at least partly rooted in government debt, which is making it more difficult to procure startup loans.  A return to surplus and a focus on freeing up the loan market would certainly yield benefits, and a business-friendly tax reform package would further energise the lagging retail sector.

But perhaps the most urgent question confronting us is barely mentioned by the political class. What happens when the mining boom ends?  Mr. Sheehan quotes Albert Edwards, an employee of Societe Generale:

"We see a credit bubble built on a commodity bull market, which is based on a much bigger Chinese credit bubble."

Bubbles always burst.  Demand from China will inevitably slow, leading to a collapse in commodity prices and wiping out the one factor that currently keeps us from flirting with recession.

How would a Liberal government insulate the Australian economy from this eventuality?  The Coalition's economic team needs to seriously consider this specific question.  But any policy response must begin with measures designed to wake the conventional sectors of our economy from their slumber.

Labor's tax policies may actually narrow the gap between mining and non-mining performance by dragging the former back into the field.  A conservative agenda would contrastingly seek to lift the other sectors to a higher standard, improving their ability to compete.

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