Some articles worth reading...

Jessica Irvine in You can't have your cake and eat it, too looks at middle class welfare.

Ross Gittins in Herd mentality at work in blowing financial bubbles writes about economics and the neglected role of interpersonal comparison.

Ross Gittins in Time for our industrial evolution writes about the changes happening to the Australian economy and the effect on jobs.

The removal of Kevin Rudd

To quote Annabel Crabb:

Perhaps we should borrow the filing system of former British Labour figurehead Tony Benn, who used to say that politicians could be classed into three categories: fixers, straight men or maddies.

Mark Latham was a "maddie". After Latham retired Kim Beazley was asked how could Labor have made someone like Latham their leader and what would they have done if he had become Prime Minister. Beazley said that if Latham had been Prime Minister and it had become apparent to the party that he was not suitable for the office Labor would have removed him. That's what happened to Kevin Rudd in 2010. It became apparent to those around him that he was not a suitable person for the office of Prime Minister. Unfortunately, for a variety of reasons Labor did not communicate the real reason for Rudd's removal to the voters of Australia.

So why wasn't Kevin Rudd prime ministerial material? John Mendoza was senior adviser on mental health to Prime Minister Kevin Rudd. He quit his job shortly before Rudd's removal because, he claims, of Rudd's dysfunctional leadership. In an interview on ABC radio he discusses some of the problems.

David Marr wrote Power Trip: The Political Journey of Kevin Rudd in Quarterly Essay 38. An edited extract - We have to talk about Kevin - was published in June 2010 and is well worth reading for and insight into Rudd. He has just written an article about the removal of Rudd: Total candour was only way to stop him:

No Kevin. This isn't a breakdown in civility. Your colleagues are at last telling us why you were sacked. And here the political is inescapably personal: you couldn't run the place. The result was, as Julia Gillard said yesterday and every newspaper and television station has been repeating since, "chaos and paralysis".

He also writes:

For months before his execution the media had been reporting Rudd's dysfunctional dealings with ministers, the relegation of his cabinet, and the ceaseless difficulty of getting the man to sign anything.

Much might have been forgiven if the decisions Rudd finally reached were extraordinarily good. But they weren't. For all the effort, he doesn't come up with particularly interesting solutions," a former aide told me. "His policy positions aren't breakthroughs, not particularly new or exciting. After all that work, they are dull."

James Button was at one time a speech writer for Kevin Rudd. In Time we heard truth about the real Kevin he discusses his time working for the Rudd Government and the reasons for Rudd's removal.

The truth is, Rudd was impossible to work with. He regularly treated his staff, public servants and backbenchers with rudeness and contempt. He could be vindictive, intervening to deny people appointments or preselections, sometimes based on grudges going back years.

He made crushing demands on his staff, and when they laboured through the night to meet those demands, they received no thanks, and often the work was not used. People who dared to stand up to him were put in "the freezer" and not consulted or spoken to for months.

His staff's prodigious loyalty was mostly not repaid. He put people down behind their backs. He seemed to feel that everyone was always letting him down. In meetings, as I saw, he could emanate a kind of icy rage that was as mysterious as it was disturbing.

He governed by, and seemed almost to thrive on, crisis. Important papers went unsigned; staff and public servants would be pulled onto flights, in at least one case halfway around the world, on the off-chance that he needed to consult them.

Vital decisions were held up while he struggled to make up his mind, frequently demanding more pieces of information that merely delayed the final result. The fate of the government seemed to hinge on the psychology of one man.

As I watched this unfold in Canberra, I tried hard to put aside my poor experience of working for Rudd. I had been a journalist for more than 20 years and knew that just because three people complain about something or someone does not make it true. When 30 or more witnesses complain, you can start to believe it.

He goes on to write:

But, amazingly, apart from a handful of conversations praising his formidable intelligence, his efforts on the economic crisis and the fact that he left some ministers alone to do their work, there was no other side to the story. Hard-bitten commentators will say that character, or kindness, are irrelevant to politics; what counts is getting the job done. But you can never escape the human factor. In the first six months of 2010, Rudd's personality and government policy collided, to catastrophic effect.

People saw it coming. As much as four months before his downfall, Canberra insiders were warning that in the next few months Rudd had to land his health plan, the Henry tax review, a new plan for the carbon pollution reduction scheme after it had been defeated in the Senate, and the federal budget.

Each one was a massive operation. Each one required months of parliamentary and public battle. It was like trying to land four jumbo jets at once on the same runway, and people said it could not be done.

Some of these people were in a position to say these things to Rudd but he had stopped listening. He shut them out. While the clock was ticking and those aircraft were descending, Rudd kept visiting one more hospital, creating one more media opportunity with one more entrapped patient.

As a result, policy was neither properly prepared nor argued. Rudd focused obsessively on the health reforms, which turned out to be unimportant, and too little on the carbon scheme and the mining tax, which mattered immensely. It was in these circumstances, with the polls tumbling and mining companies' anger rising, that Gillard took the decision to mount a leadership challenge.

If I could I would quote the entire article. It's well worth reading.

Laurie Oakes quotes a Labor insider, now no longer in Government, about the problems when Rudd was Prime Minister, especially the last six months. In Why they hate Kevin Rudd so much Oakes writes:

It was through the negotiations over carbon pricing that "we learnt that Kevin Rudd would never have that ability of all successful long-term leaders and that is to go into a defensive crouch and absorb a few days of punches to hold a position that would serve him well in the longer term.

The PM had a reflexive fear of even momentary unpopularity, so that he became an easy target for every lobbyist in town". It says that, despite Rudd's reputation as a policy wonk, "this was something we never, ever saw behind closed doors. His instinct was invariably for the politics of a policy problem.

"His most common put-down of officials and his own policy wonks was: 'That's a fine idea, but how do I explain it on Today Tonight?'

"I suspect he simply didn't like the way officials thought - of practicalities, long-term consequences, consistency with other policies.

"These all became an unnecessary burden in his management of the politics and the media cycle. Nearing the end, he seemed to take each piece of considered policy advice as a personal affront or thinly veiled invitation for him to commit political suicide".

The highly respected Andrew Probyn, in Resurrection of Saint Kevin, writes:

One of the mythologies pushed by some in the Rudd execution squad was that the Labor Party faced oblivion if they had stuck with him.

The ALP would almost certainly have lost all but one of the 15 WA seats because of the mining tax debacle and lost a fair few in NSW and Queensland as well, but the greater risk under Mr Rudd, it was judged, was that the ALP would sneak across the line.

The caucus acted against him in June 2010 because he was in a rare moment of vulnerability. They could save themselves three more years of the same.

Let's go over that bit again. The reason the ALP caucus (not the factions, not the faceless men, not an ambitious scheming Gillard as Rudd might claim) no longer wanted Rudd as leader was because they were afraid he might win the next election. His leadership was so poor that they judged the risk of losing without him was a better alternative than winning with him. They would rather have risked opposition than another three years under Kevin Rudd.

At the end of the day the argument between Rudd and Gillard is fairly simple. Rudd argues he should be the leader because he's more popular and can win the next election. Gillard argues that she should be the leader because she can better govern the country. No doubt there is an element of truth to Rudd's claim. He is a very good campaigner and he knows how to handle the media. He's also a far better public speaker than Gillard. If Labor was in opposition then Rudd's argument might well be compelling. However, Labor are the party of Government, they are there to govern in the best interests of the country. The Prime Minister's primary job is not to win the next election, it's to govern the country. Kevin Rudd might be a great campaigner, but he was a lousy Prime Minister. A country needs a Prime Minister who can govern, not one who's highest priority of the day is ensuring his face appears on the nightly news. That's what Kevin Rudd doesn't understand and that's why Labor was right to remove him in 2010 and why they should reject his attempt to regain the leadership.

One final thought. If Rudd somehow returns to the Lodge and goes on and wins the next election Labor are going to have a serious problem. At some stage they will have to remove him again.

Has Australia's cost of living really increased

Nope. Matt Cowgill discusses in The cost of living – if the facts aren’t sensational enough, just add a twist that the recent Economist Intelligence Unit report on the Worldwide Cost of Living is looking at it from the perspective of an expat earning US dollars.

Imagine if Australian prices and wages both went up by five per cent in a year. The cost of living for Australians would be unchanged.

Now imagine that the Australian dollar appreciated by 10 per cent in the same year. Although Australian goods and services would be no more expensive for Australians, they would suddenly cost more for Americans and Brits who earned US dollars and pounds. Australia would have become a more expensive place for Americans to live, if they’re being paid in US dollars, but the cost of living for Australians would have stayed the same (setting aside the fact that imports actually would’ve become cheaper for Australians).

He goes on to note:

The EIU report is intended to help “calculate cost-of-living allowances and build compensation packages for expatriates and business travellers”. It calculates the cost of living in various cities in a common currency, US dollars. This means that in my hypothetical example of a few paragraphs ago, the report would show the cost of living in Australia going up, because the AUD had appreciated. It would take more US dollars to achieve the same standard of living in Australia as it did before the appreciation.

Although the study is perfectly well designed for its intended purpose, it tells us very little about the cost of living for people who live and work in Australia and are paid in Australian dollars. The EIU is quite clear about this – the first subheading of the report is “Currency Swings Move Global Players”. It clearly states that its measure of the relative cost of living in various cities is more affected by changes in exchange rates than changes in domestic prices.

However, that's not how our media reported it. Let's make up two headlines:

• Cost of living in Australia goes up for Americans, stays the same for Australians
• Cost of living in Australia up - Sydney more expensive than New York

I imagine the latter will get the click throughs.

Is there too much polling?

Yes, I think so. The author of How opinion polls poison politics seems to as well.

The reasons why interest rates rose

Have a read of Greg Jericho's Spin and anger aside, facts you can bank on. It's an excellent summary of the reasons for the recent increases in bank interest rates.

George Megalogenis on budget surpluses

Back in November George Megalogenis looked the dumbing down of our economic knowledge in The curse of public economic illiteracy. He particularly focused on the damage done by Peter Costello in overly focussing on budget deficits and surpluses:

In a perfect fiscal world, where the politics and economics are aligned, voters would understand the need for temporary deficits. But this is Australia, where both sides of politics have spent the many years since Keating was booted out of office wilfully reducing the community's basic understanding of economics.

Costello is more responsible than most for dumbing down the debate. He had done so well with the "Beazley black hole" slogan in the late 1990s that he refused to countenance the possibility of cyclical deficit at the 2001 election. The nation's economic literacy has fallen ever since.
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That Costello budget slipped into the red anyway because he wasn't going to cut into a downturn. But the deficit wasn't confirmed until many months after the government had been returned for a third term. This is where he, and on his behalf the nation, lost perspective. Instead of saying, "Yes, that is what the budget is supposed to do in a downturn", he made excuses.

He goes on to write:

Like the children overboard affair, it was an unnecessary fudge with unforeseen consequences still being felt today. The public, in its wisdom, insists that Labor return the budget to surplus for 2012-13 even though the global economy is in danger of a double-dip recession. Why a surplus for the next financial year is non-negotiable has never been explained by either side.

It is easier to blame the politicians than the people when a nation trafficks in comic-book absolutes such as "stop the boats", "no, send them to Malaysia".

But the electorate must share culpability for the notion that a budget must always be in surplus. Seriously, what rational citizen demands handouts in good times and a surplus in bad?

He goes on to note that:

One final piece of information worth mentioning. Before the world froze in the second half of 2008, the budget projections for the financial year we are in now - 2011-12 - assumed revenue at 25.5 per cent of gross domestic product and spending at 23.9 per cent for a surplus of 1.3 per cent of GDP after removing the earnings from the future fund.

The post-GFC reality, as revealed in this year's budget, is that revenue is lower by 2.3 per cent of GDP while spending is 0.6 per cent higher for a deficit of 1.5 per cent of GDP in 2011-12.

To blame government waste for the deficit, as Abbott does, and to accept the sledge as Swan does by offering to keep cutting, is to miss the point of the real structural weakness in the budget. It's the tax base. But, like spending, it can't be repaired too quickly because the pursuit of more revenue from a slowing economy would increase the danger of a self-defeating recession.

The Howard Myth

Last year Peter Brent looks at the Howard electoral victories (Time to puncture the Howard myth) and argues that we are neglecting the international context of those victories. Howard was lucky enough to be in the right place at the right time of the economic cycle:

For example, when Howard took office he inherited a budget deficit, the profligate Labor government (the story goes) having not delivered a surplus since 1989-90*. Howard and his treasurer Peter Costello cut spending to bring about a surplus in 1997-8.

But by remarkable coincidence, over in the UK Maggie Thatcher delivered her last surplus in 1989, after which the Tory government ran only deficits. It was left to Labour’s Tony Blair and Gordon Brown to deliver the next surplus ... in 1998.

The reason of course was that what we call Paul Keating’s “recession we had to have” was really an international recession that all (or at least most) industrialised countries experienced and recessions turn surpluses into deficits.

And, also across much of the industrialised world, the next decade and a half saw sustained growth. It was a wonderful time to get elected, to get the new incumbency.

Banks and cost of funding

This week ANZ and Westpac increased interest rates on variable rate loans. ANZ also reduced intereste rates on three year fixed mortgages. The banks have been telling us for some time that they have increased funding costs so the rate rise was no surprise. However, given their level of profitability, I think the interest increases are indicative of an industry lacking sufficient competition. In a competitive environment a business is limited in its ability to pass cost increases on to its customers. In many cases it will need to accept a lower level of profit instead.

Jessica Irvine addresses this issue in High returns, little competition - life is still sweet for the big banks. She argues that Australia's big four banks have an excessive return on equity (average 15%) given their low risk level.

Banking, by contrast, ain't exactly rocket science. It's a very simple process of buying low and selling high. Borrowing at a certain rate, lending at something higher and sitting back to collect the interest. The potential for innovation is low, on par with, say, a utility. Banks are a low-risk investment. Why, then, should they offer shareholders average or above rates of return? They shouldn't.

She argues that we have a failure of competition in the banking industry:

So how do the big banks get away with it? When faced with higher costs, businesses in a competitive market have only three options: cut costs, raise prices or accept lower profits. Most businesses have only a limited capacity to raise prices - because they would be undercut by a competitor. If a business can pass on higher costs entirely to customers, it is a clear sign that there is a failure of competition in the market. Which, of course, is the bottom line with the Australian banking system. Has been for a long time.

I agree with her conclusion:

Customers have every right to feel ripped off if they're slugged with higher rates. Australian banks just don't take enough risks or add enough value to justify their high rates of return.

Disclaimer: I own shares in ANZ bank.

Ross Gittins on economic modeling

Ross Gittins has some interesting things to say about economic modelling in The very model of a future based on guesswork.

Ian Verrender looks at the impact of the high Australian currency on productivity in Let's be prudent as we rush to find who's responsible:

Australia, meanwhile, is being flooded with capital. It is pouring in on an unprecedented scale as resources companies scramble to build ever bigger mines to supply the rapidly emerging global economic powerhouse that is China.

The earnings impact of that investment, and the effect it will have on productivity, has yet to be felt. Right at the moment, however, it is having a seriously negative impact.

That flood of cash has kept our currency at near record levels, which has put the squeeze on manufacturing and other export-oriented industries. Earnings have shrunk and the ability to invest in new technology has waned as a result.

The Government's industry assistance

In Industry's secret shield of taxpayer dollars Jessica Irvine gives an insight how much the Government spends on industry assistance packages:

But while tariffs have fallen out of fashion, and rightly so given the costs they impose on consumers and other businesses, industry continues to clamour for direct government subsidies and tax concessions. Australian industry received some $7.9 billion from such assistance in 2009-10. About half came in the form of direct payments and half in tax concessions.

To put that into perspective, the cost of budgetary assistance to Australian industry is approaching half of the federal government annual spending on defence ($21 billion) and a third of what it spends each year on education ($30 billion). These are no small bickies.

She notes that the car industry receives just under 10% of Government industry assistance ($721m). It's number three on the list after property and business services ($799m) and finance and insurance ($794m).

Next time you hear an industry calling for more assistance, remember it all adds up. The hidden cost for tax taxpayers is either higher taxes or less spending on health, education and other services - sometimes both.

Europe's economic woes

I've seen some people suggest that the Australian Government didn't need to stimulate the economy to offset the effects of the GFC. They argue that cutting interest rates alone would have been enough. I think their argument is rubbish.

• Monetary policy has a lag. Cutting interest rates today will have negligible effects on demand in the short term. Indeed some people argue that it can take 18 months to flow through the economy. By then the economy will be in deep recession and unemployment and rates of business failure will have increased significantly.
• The point of cutting interest rates to stimulate economic activity is two fold. One, people and businesses will pay less in interest on existing borrowings and so will have more money available to spend on other goods and services. Two, lower rates are more likely to encourage people and business to borrow money and spend it. However the reality is that when the economy is doing poorly many people and businesses become fearful of the their economic future. They're more likely to try to reduce their debt and save rather than spend and borrow.

In Europe must not ignore the tough lessons of history Ross Gittins somes up this latter point well:

One thing the central bank can do is cut interest rates to encourage borrowing and spending. In normal times this is usually effective, but in really bad times a lot of people are too uncertain about the future to want to borrow and expand no matter how low rates are. And if interest rates are already very low - as they are in the advanced economies now - you can't cut them below zero.

The current Government talks about keeping the budget in surplus over the economic cycle. That doesn't mean that the budget will be in surplus every year. What it does mean is that the Government will run a budget surplus when the economy is going well, but will run a deficit if it needs to stimulate the economy when growth is too low.

So why run a surplus? Two reasons: it helps to control inflation; and it means that the Government has enough funds available to stimulate the economy when it needs to.

The problem for the USA and many countries in Europe is that they've been running deficits when their economies have been strong. Over time they've built up substantial levels of debt to finance their deficits. Although this was bad policy they could afford to do it because they had enough tax revenue to service their debt. However, the GFC has seen their tax revenue plummet and their expenditure increase (on things like unemployment assistance). Now some of these countries are having trouble servicing the debt they already have. They're in a catch-22 situation. They need to run a deficit to stimulate their economies. However, they don't have the reserves to pay for the required budget deficit and are having trouble borrowing money to finance it. In fact the deterioration in their budgetary position means that they are now having to implement austerity measures - increasing taxes and reducing Government expenditure. This in turn is reducing economic activity in their economies and driving them further into recession.


As Ross Gittins writes:

Their economies are still quite weak, but they want to increase taxes or - more commonly - slash government spending to get their big budget deficits down in a hurry. In consequence of this policy of ''austerity'', the European economies are heading back into recession and their deficits are getting worse.

Why are they doing something so counterproductive? Because their stock of government debt is so unsustainably high. Whereas sensible policy involves running surpluses and reducing debt during the good years, they kept running deficits and piling it up in the noughties.

When the global financial crisis struck in 2008, many had to borrow heavily to rescue their banks and then borrow even more to kickstart their economies. Their debt is now so high the financial markets have started wondering whether they'll be able to repay it.

Then you have Greece:

Of course, when a country's sovereign debt gets so high that markets will soon refuse to lend more to it at any price, it has no choice but austerity. You can renege on your debts, but you can't run a deficit if no one will finance it.

Even if some international institution bails you out, it will punish you for your profligacy by insisting on austerity. Will this make things worse long before it makes them better? Inevitably.

The other problem for Greece is that it's in the Euro. Normally a country with its problems can at least devalue its currency or try to inflate its way out of its problems. Greece can't as it shares its currency and interest rates with the other Euro zone countries.

Back to the other countries. Ross Gittins again:

But most of the European countries aren't in those dire straits, so why are they slashing spending? What they should be doing is promising and laying plans to reduce their spending down the track, as their economies recover and can take it in their stride.

Why don't they? Because, after decades of fiscal indiscipline, they don't have much credibility when making promises to be good tomorrow. But that doesn't change economic reality: cut when the economy's weak and you make it weaker. The answer is to find ways of making their promises more credible.

High taxing economies

It seems they don't do so badly after all. Lane Kenworthy compares the performance of the USA with two high taxing countries: Denmark and Sweden in Is heavy taxation bad for the economy?

Has Gillard changed her speaking style?

I've always thought that Gillard had the Simon Crean disease - she talked too slowly, especially in news conferences and speeches. This can sound boring and patronising. It can also come across as artificial if it's not your normal speaking voice.

However, watching her today she seemed to speak at a much more normal pace.

Some comments by Tony Abbott

In Don't give Gillard any free kicks, says Abbott Phillip Coorey writes:

Addressing his party room as Parliament resumed for the year, Mr Abbott cited internal divisions over the Murray-Darling Basin and subsidies for the automotive industry as examples.

''The fight you have over $500 million here and 1000 gigalitres is the type of fight you have in government,'' sources quoted Mr Abbott as saying.
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''In opposition we can't fix these things so don't get bogged down in them.''

Tony Abbott is right, there's a limit as to what an opposition can do about these issues (with the reservation that when the Government does not have a majority in either house the Opposition does have some influence). However, the Opposition is the alternate Government. When they next go to an election they need to be able to tell voters what their policies are. It's better to have the debates (even if behind closed doors) and decide these matters now rather than have to do it in the middle of an election campaign. If the issues are controversial then the Opposition might not have the opportunity to postpone the decision until after they obtain Government.

Tim Dunlop on the media and politicians osbcuring the truth

Tim Dunlop has written an interesting piece at The Drum: Have the dark arts of spin outflanked the fourth estate?
The recent kerfuffle at The Lobby restaurant in Canberra involving the leaders of both major parties and protesters from the Tent Embassy is a nice example of the way in which the media and politicians operate in a way that obscures, rather than reveals, the truth.
It's worth a read if you care about what's happening in our media (and if you don't care it's probably even more important that you read it.

Recommendations to improve the competitiveness of the banks

Mike Bouris and Christopher Joye have written an essay entitled Our banks: too big to fail, too few to be competitive. It's an interesting discussion on the competitive advantages the large banks have in Australia in raising funding. They also make three recommendations to improve the situation.

Edit 1st March: Crikey takes a critical look at the claims by Bouris and Joye in Wallis not Joyris, the Yellow Brick Road duo.

The myth of cost of living pressures

Mike Seccombe looks at how, except for the unemployed, cost of living pressures in Australia are a myth in Economic Hypochondria Down Under:

By the time we members of the vast Australian middle class have saved some 10 per cent of our income (not counting superannuation), paid for the private school fees, the house extension, the new flat screen TV, the overseas trip (did I mention the number of Australians taking advantage of the high Aussie dollar by holidaying abroad was up 13 per cent in the year to November 2011, compared with the same period the previous year, and up 34 per cent in two years?), our wallets are a little light.

Thus we notice the power bill and the price of bananas.

One thing that is expensive in Australia is housing:

The big cost rise he identified was housing. He compared the two most recent Housing Expenditure Surveys from the Australian Bureau of Statistics, done for 2003-04 and 2009-10. They showed weekly mortgage payments had jumped 37 per cent in real terms over six years. Over the same period consumer prices, as measured by the CPI, had risen only half as much - 18.7 per cent.

The cause did not appear to be interest rates; they were almost identical at the time of both surveys. He attributes much of it to the "quite frightening undersupply" of housing. The reasons for this are many, including a shortage of suitable land, convoluted approvals processes, constraints on builders' finances, and Australians' stubborn resistance to higher-density living.

Of course people who already own a home are happy when house prices increase:

Yet even as increasing home prices made it harder for new entrants to the housing market, for those who already owned homes - 70-odd per cent of Australian households own outright or are paying them off - increasing prices were often perceived as a good thing.

"I am reminded of one election night, when John Howard had just won re-election, and I asked someone why he had voted Liberal, and he said, 'When Johnny Howard was elected my house was only worth $200,000 and now it's worth $400,000. He made me real well-off,'" McAuley says.

"Over the past two years, we've had a flattening, and some falls in house prices, and it's made people feel nervous."

The economy is not like a speedboat

Greg Jericho has a look at interest rates and their impact on our economy in Rates, jobs and speedboats: the economy explained. He concludes with the following remark:

Let's hope we can keep our eyes on what matters and remember that while maybe 35 per cent of the population have a mortgage, 62 per cent have a job – there may be a link between the two, but it is hard to pay for the first if you don't have the latter.

Greek and Southern Europe Debt

Nicholas Gruen looks at the economic problems besetting Greece and the other southern European countries in The Greek default death spiral. He notes that vested interests and rent seekers have effectively derailed needed reforms and that default is inevitable.