Poor white trash becomes national treasure

This article was first published in Business Spectator on 29 November 2012:



It was 22 years ago today that Treasurer Paul Keating said Australia is in recession and that “this is a recession that Australia had to have”. He was commenting on the national accounts data that had been released earlier that day, which showed a thumping 1.6 per cent fall in GDP in the September quarter of 1990.

Keating was right.

One only has to look at the economic performance of Australia that has followed the nasty recession of the early 1990s to see how it cleansed the economy of inflation, high interest rates, stagnant real wages and asset price bubbles. It is unlikely that this would have happened without the recession.

Singapore’s President Lee Kuan Yew had made waves about a decade before the recession when he said that Australia was on track to become “the poor white trash of Asia”. Among the reasons Lee could have cited were industry featherbedding, automatic wage indexation, high tariffs, a lack of competition, tax inefficiencies and a slothful business culture in what was a harsh but probably fair assessment.

To move from trash to treasure, Australia not only needed to implement a raft of policy reforms, the economy needed to have a final purge of the structural rigidness and inefficiencies that had held Australia back during the 1960s, 1970s and early 1980s.

The recession fostered that purge.

The early 1990s recession saw inflation fall sharply. After a couple of years of low inflation, RBA Governor Bernie Fraser saw an opportunity for Australia to join the low-inflation countries and in 1993, he started to articulate an inflation target of 2 to 3 per cent. That target is still the prime focus for the RBA today.

In terms of policy success, annual inflation has averaged 2.5 per cent over the last 20 years – slap bang in the middle of the target range. In the 20 years up to the early 1990s, the average annual inflation rate was a corrosive 9.2 per cent.

The low inflation environment was a vital legacy of the recession as it altered investment incentives, saw a structural lowering in interest rates and underscored real wage increases.

In terms of interest rates, the cash rate set by the RBA has not been above 7.5 per cent since 1992 and has averaged 5.3 per cent over those two decades. In the period from 1980 to 1991, the interbank interest rate averaged a bruising 13.8 per cent and spent many years above 15 per cent.

It is arguable that the early 1990 recession-induced smashing of inflation lowered average interest rates by 8.5 percentage points. We should all be grateful for that.

The destructive power of high inflation meant that real wages fell in every year from 1985 to the start of the 1990 recession. To be sure, the structural change in the labour market, brought about by the policy consensus that came with the ground breaking prices and incomes accord, was a critical factor holding back wage gains, but somewhat perversely, in the near two decades after the recession, real wages have risen strongly in all but three and a half years.

Perversely because the recession drove the unemployment rate to 11 per cent, which might normally be a factor dampening wage claims. Rather than that, it furthered enterprise bargaining, wage rises were increasingly linked to productivity and there was some long overdue flexibility given to the labour market.

In the decade prior to the recession, the unemployment rate had only three months below 6 per cent and it in fact averaged 8.1 per cent, not counting three years during and immediately after the recession where the unemployment was above 10 per cent.

In the aftermath of that recession, the unemployment rate ratcheted down. The fact that the last time the unemployment rate reached 8 per cent was in January 1998 is clear evidence of this; it has not been above 7 per cent since 1999 and for every month since July 2003, the unemployment rate has been below 6 per cent. In the last decade, the unemployment rate has averaged a world beating 5.1 per cent.

The decade prior to the early 1990s recession was truly a miserable economic picture of high inflation, high unemployment and falling wages. Asset prices were surging, distorting investment away from productive uses and while many structurally important policy changes had been made in the prior few years, an active ingredient was needed to make them work.

This was the recession.

And the last word on the consequences of the recession should probably go to Lee. During a visit to Australia in 2007, in reference to his “poor white trash” comments a quarter of a century earlier, he said: “There are some words sometimes thrown in the heat of the argument which perhaps at that time was warranted. You have changed.”

Indeed Australia has changed. Its economy is the envy of the world, Australians have never been richer in absolute terms and relative to the rest of the world. These are the legacies of the recession that Australia had to have.

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2013 Election Betting: The Latest


There appear to be seven betting agencies offering odds for the next Federal election.

While it is difficult to be sure how much flow of money drives changes in the odds, there have been some big shifts in a range of markets especially which party will win in 2013 and who will lead Labor and the Liberal Party in that race.

In terms of the party to win the next election, the Coalition’s odds have widened over recent months.

Around the middle of the year the best odds for a Coalition victory were a Black Caviar like $1.20 – the best odds now are $1.45 with Luxbet. For Labor, who were as wide as $6.00 around the middle of year, the best odds on offer are Sportingbet and Centrebet at $2.88.

The net result is that the Coalition is still a hot favourite to win, but is a long way from the near certainty that the betting odds suggested even a few months ago.

In terms of who will lead the major parties at the next election, there have also been some significiant swings.

Julia Gillard and Kevin Rudd have, at various times, been close to equal favourites. With Gillard’s and Labor’s bounce in the polls, Gillard is now a hot favourite to stay leader at the time the next election is called. Sportingbet is offering the best odds for Gillard ($1.33) while punters can secure $3.75 on Rudd to be leader from Luxbet.

For the Liberal Party, Tony Abbott has gone from as short at $1.10 earlier this year to now be as wide as $1.50 (Sportingbet) to still be leader at the time of the next election.  Malcomlm Turrnbull is as short as $2.30, although Luxbet are offering the widest odds at $3.05. Joe Hockey remains around $10.00.

In all of this, is appears the changes in the odds follow new polling information and not, this far out from election day, betting markets being a good guide as to who will win.

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Gerard Henderson and Tonto McCrann – The latest


Gerard Henderson’s spirited defence of the Herald Sun’s economics guru Terry “Tonto” McCrann is cute. He added a bit in his weekly column on his website last Friday. It follows McCrann’s ham-fisted and uninvited entry to the discussion Henderson and I were having over the serious errors in an article Henderson wrote in the Sydney Morning Herald on 6 August 2012. It could be that McCrann and Henderson are operating some sort of tag team of distraction from the facts, or just that McCrann wanted to cozy up to Henderson to help out.

Just to repeat: Here is what Henderson wrote in August:

  • “The statistics tell the story. In 1974-75 Commonwealth outlays increased by close to 50 per cent. This equated to an increase in spending of more than 5 per cent of gross domestic product in just one year. Taxes rose by close to 30 per cent and the budget deficit increased substantially.” 

Henderson and McCrann are flailing around with a mix of smoke-screens, burley, offensive claims and every thing but the kitchen sink as they both avoid the obvious point that there are three significant errors in the above extract that are likely to have mislead anyone reading Henderson’s column.

Henderson admits one howler, on the increase in spending “of more than 5% of GDP” but has the temerity to say “you should concede that this is a minor error”.

Well Gerard, an error of at least 1.7% of GDP is, in today’s dollar terms, around $26 billion. I reckon that that is a major error, but your flippant approach to facts might make you right. What’s $26 billion in a single year when you are trying to make a point?

Henderson and his trusty sidekick Tonto McCrann refuse to acknowledge the other errors in the article despite me pointing him the primary data sources which I do again here.  http://www.budget.gov.au/2012-13/content/myefo/download/13_Appendix_D.pdf

Click on the link. In that document (Table D1) any one with good reading glasses and a calculator can see that the 1974-75 Budget delivered an underlying cash surplus of 0.3% of GDP. It was not, as Henderson wrote and McCrann reiterates a year where “the budget deficit increased substantially”. It was a surplus, not a deficit.

The data also shows that government outlays in the same year rose 39.6%, not the “close to 50%” claimed by Henderson. The tag team still refuses to acknowledge this error even though a 10% error in government spending is worth around $36 billion in a single year. $36 billion. That would almost cover the costs of the NBN – in just a year!

In all of this, Henderson refuses to note that he confused me with Jason Koutsoukis who used to write for The Age. As noted before, I suspect Henderson gets a little perplexed by these longish Greek names. Koukoulas, Koutsoukis – whatever.

Tonto McCrann is also silent on his work history and qualifications to comment on budget matters. Maybe that explains his mix up of surpluses and deficits.

Just one final point:

Henderson ridicules me for length of time I spent working in Prime Minister Gillard’s office – it was “for a mere 10 months” as he clucks. Well, this put down falls a little flat when one considers the fact (oh those nasty facts again) that I had a greater priority in my life in the middle of last year when I left Ms Gillard’s office, namely looking after my wife who was recovering from breast cancer.

I left a message last Friday to mention this to Mr Henderson, but he has not returned my call.

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An open letter to Terry McCrann



CC: mccrannt@heraldsun.com.au

Dear Terry

As the Herald Sun economics writer (is that akin to the cordon bleu chef at McDonalds, or peeling potatoes at Heston Blumenthal’s The Fat Duck I wonder?) you wrote to Gerard Henderson last week about the facts concerning the 1974-75 Budget. For those who didn’t see that contribution, I reproduce it below in full.

Before looking at your lack of self consciousness as you again fail to contemplate facts, I offer an opportunity to you to put your credentials next to mine.

My brief CV is below. Terry, can you please present your CV and let’s have readers decide who might be better placed to discuss budget matters and, in fact, any issue relating to the economy? Is it you or me?

The reason I do this is in part because you assert:

  • I recite “my assertions are the facts”;
  • that I “have little knowledge of history and even less analytical rigour”;
  • that I don’t “understand that in those days budgets were in August”;
  •  that some of the budget figuring “is beyond your correspondent”;
  • “he clearly does not understand that the Treasury ones [data] he quotes are quite literally made up”;
  • and finally, “Koukoulas seems unable to understand the arithmetic.”

Well Terry, he is my background:

  • Bachelor of Economics from ANU, Honours year 1985.
  • 8 years in Treasury working on Budget policy, economic forecasting, State financial relations, debt management and monetary policy.
  • 5 years in Citibank economics department, with 3 years as Chief Economist, a position attained at age 33.
  • 2 years as Economics Analyst at The Australian Financial Review.
  • 5 years Chief Economics Strategist TD Securities, Asia Pacific.
  • 3 years Global Head of Economic and Market Research at TD Securities in London.
  • 6 months Senior Economic Advisor, Treasury.
  • 10 months Economic Advisor to the Prime Minister, Julia Gillard.
  • 1 year Managing Director of my own business, Market Economics Pty Ltd.

In those 25 years or so, I was involved in some way in more than a dozen Budgets, mini-Budgets or fiscal updates. I advised the Treasury Secretary on monetary policy matters and prepared forecasts that underpinned government policy deliberations and budget revenue and expenditure estimates. I had frequent complex interactions with the Australian Bureau of Statistics and the RBA to discuss conceptual data issues, national accounting concepts, public sector finances and the veracity of the forecasting process. In these undertakings, it was important to use facts without fear or favour and to use the latest techniques and data.

In the private sector, I had around 2,000 client meetings with the biggest bond and foreign exchange fund managers in the world, including the reserves managers of 40 central banks. I also advised hedge funds and real money investors in at least 45 countries, ranging from Japan to the US, China to Algeria, France to Poland, Hong Kong to Botswana, Saudi Arabia to Finland. In aggregate, these fund managers oversaw a cumulative total of many trillions of dollars. I must say that it was interesting to engage with a fund manager who was about to embark on a program of buying or selling a few billions dollars of bonds and then revisiting those calls as market trends evolved. I had a legal obligation to use facts and not make things up. I learnt so much with these wonderful contacts that I am now able to apply to issues when I look at the budget, financial markets, policy and economics.

In advising the Prime Minister and her government on economic policy matters, it was important to make sure that going into a G20 meeting, for example, everyone was aware of issues that were involved in the US/China “currency war”; and what was involved in directing the AOFM to be active in the RMBS market, to name a few. Again, a high level of responsibility and a need for attention to detail. A 400 word spray based on numbers that I made up could have been damaging.

So Terry, can you present your CV so that readers can benchmark your bona fides?

I still find it very odd that you refuse to go with the times and accept that the latest, most accurate and conceptually sound data.

I very much look forward to hearing from you.

Best regards

Stephen Koukoulas


Terry McCrann to Gerard Henderson – 2 November 2012

Your occasional correspondent, former Julia Gillard advisor Stephen Koukoulas, is apparently of the genus of Labor Party shills that believes if you put your fingers figuratively in your ears, close your eyes, and just keep reciting, “my assertions are the facts, my assertions are the facts,” that you can make them so.

Unhappily for him, though, the facts of the Whitlam government’s dreadful 1974 budget are obtainable. For someone like Koukoulas who has little knowledge of history, and even less, it would appear, of analytical rigour, he would no doubt find puzzling the source I have used.

As you know Gerard, it is what is known as an original or primary source: the actual budget documents of the time. And more specifically, the 1975 budget, which had the full numbers in all their awfulness of the outcome of the 1974 budget for the 1974-75 fiscal year.

The relevant page from that budget is reproduced below. Two broad points need to be made upfront. Presumably Koukoulas does not understand that in those days the budgets were in August, so they contained essentially finalised figures for the preceding year ended 30 June. Unlike today’s May budget, which has “estimates,” usually wrong, for the financial year still to finish.

Secondly, the 1975 budget was not a creature of the incoming Fraser government dressed up to make the Whitlam Government’s total economic irresponsibility look worse. Apart from the fact that would simply not have been possible to achieve, the 1975 budget was brought down by Labor treasurer Bill Hayden, who back then, before the scales would subsequently fall from his eyes, was still a rusted-on “true believer”.

Indeed, I can vividly remember personally praising Hayden for aiming to exactly halve the growth in fiscal spending from 1974-75’s 45.8 per cent to “just” 22.9 per cent.

As you and your readers can see, the facts of the 1974 budget are as I stated in my previous correspondence – and you, with one trivial mistake excepted, did as well.

Outlays leapt as noted 45.8 per cent – as you wrote “close to 50 per cent.”  The budget deficit exploded to $2.57 billion. In those days it was broken down into a domestic and overseas deficit. Perhaps one day, I’ll explain why to Koukoulas.

The domestic deficit in 1974-75 was stated as being equal to 3.3 per cent of GDP. It is a calculation perhaps beyond your correspondent, but for his benefit and that of your readers, the total deficit was equal to a little over 4.3 per cent of GDP.

In an impressive combination of yawning ignorance and rather clunky abuse, Koukoulas has plucked purported figures for the 1974 budget from a table in the back of the current 2012 budget. He seems completely unable to understand that they are merely a theoretical reconstruction of the actual numbers, in an attempt to put them on the same cash basis as the modern budget numbers.

Koukoulas accuses me of making up numbers; he clearly does not understand that the Treasury ones he quotes are quite literally made up. They exist only in the Treasury computer. They are not, as he implies, “revised” or to “improve accuracy” – as for example, GDP numbers are revised, often years after the event.

The lie to that is the fact that the source you quoted for the 1974 budget numbers was published in 1982, some seven years after the 1974-75 fiscal year. Written by the distinguished Reserve Bank economist Bill Norton, whom Koukoulas seems never to have heard of.

The Koukoulas-(modern) Treasury numbers are not a “revision” but an inevitably crude attempt to adjust the earlier numbers to provide some hoped-for comparability with the modern numbers. If Koukoulas had more understanding of both statistical method and the structure of budgets, he would understand how approximate and indeed unreliable such an adjustment is.

Koukoulas seems particularly offended at being accused of “springing to the defence” of the 1974 budget. This demonstrates he has as little understanding of language and rhetorical method as he does of budgets and history. That he literally does not understand what he is writing.

How else could anyone characterise his abusive attack on your comments on the 1974 budget? If he’s not “defending the budget” what is he doing? Especially, as he seems to think it was triumph – his now, the budget’s then – that its spending jumped by only 39.6 per cent in 1974-75, not your “close to 50 per cent?”

As I noted, the correct increase was 45.8 per cent. As I further noted, even using his made-up, for want of a better word, lower figure, it would be the equivalent of lifting budget spending today by $140 billion, in a single year.

From his response, Koukoulas seems unable to understand the arithmetic. Given his former role advising Ms Gillard, perhaps that explains an awful lot about recent budgets. And the word “awful” is used advisedly.


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