There’s no interest in education


The Abbott government cannot find the $1.2 billion needed to roll out the Gonski education incentives to all states over the next four years.

The changes to the education system that are being abandoned by Mr Abbott are damaging to otherwise good economic policy. Educational attainment and skills are long run drivers of productivity and have the added benefit of being equitable and uplifting to the disadvantaged.

The folly is that the $1.2 billion that cannot be found to put to education is almost exactly the same amount that Treasurer Joe Hockey has ear-marked for the interest cost for giving the RBA $8.8 billion for reserves that it did not ask for and does not urgently need.

Yes, the interest cost alone is $1.2 billion over 4 years.

Here’s how we get that figure. Take the $8.8 billion of extra government spending that is for the RBA reserve fund, multiply it by the likely borrowing cost of the government at, say, 4.0% (the 5 year government bond yield is around 3.5% while the 10 year yield is around 4.2%) and there you have $352 million in interest per annum, give or take a bit. Multiply that by 4 years and there you have the $1.2 billion.

The Abbott government is choosing to borrow money with an interest cost of $1.2 billion over four years to give it to the RBA and at the same time, has squibbed on $1.2 billion of education funding.

Weird priorities.

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Barriers and Incentives to Labour Force Participation


The ABS has released a terrific data set – Barriers and Incentives to Labour Force Participation. The link is here:  http://www.abs.gov.au/ausstats/abs@.nsf/mf/6239.0?OpenDocument

There is a stack of interesting information in the release, but something that caught my eye was the overview of those of working age who were not in the labour force and the number of those who were actively looking for work.

Here is what the ABS found:

  • Of the 5,459,600 people not in the labour force, only 1,212,800 (22%) wanted a paid job. In other words, there are 4,246,800 with no interest, intention or ability to enter the paid workforce.
  • Of the 1,212,800 who wanted a paid job, some 847,900 were available to start work, yet only 30,300 actively looked for work.

This means that only 5.5% of those people not in the labour force were actually looking for a job.

This means that next time you hear about a drop in the participation rate being linked to disillusioned job seekers leaving the labour market, turn away, close that email, delete that thought because it is not supported by the facts.

As a final note, of the 4,246,800 of working age not on the labour force:

  • 965,200 said they had no need to work;
  • 1,396,900 were permanently retired;
  • 17,200 said their welfare/pension may be affected;
  • 783,600 had a long-term sickness or disability;
  • 215,000 were studying;
  • 367,900 were caring for children;
  • 215,800 were caring for ill, disabled elderly person;
  • 46,100 were pregnant; and 58,700 said they were undertaking home duties.

There you go.

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Keating and the recession we had to have


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

Link here: http://www.businessspectator.com.au/article/2012/11/29/resources-and-energy/poor-white-trash-becomes-national-treasure

Poor white trash becomes national treasure

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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Hockey putting politics ahead of economic management


As Shadow Treasurer, Mr Hockey voted against the increase in the debt ceiling despite the fact that the global financial crisis was smashing the budget, crunching confidence in the banking sector and funding was needed to avoid Australia sliding into recession.

Fast forward to now where a small on-going budget deficit and some policy decisions from the new government require the debt ceiling to rise again.

A grown up Treasurer would have approached the looming breach of the current $300 billion debt ceiling with full knowledge that a $100 billion increase would easily cover the matter for 18 months or more.

Indeed, if there is some fiscal tightening in the budget next year or the economic parameters surprise on the upside, a $400 billion ceiling might suffice for many, many years to come.

A grown up Treasurer would have noted the risks of playing games with the debt ceiling from the debacle in the US over recent years. To avoid any chance of this mess occurring in Australia, they would have proposed an increase to $400 billion which the Parliament would have passed with out fuss, bother or any potential jolt to confidence and financial market stability.

But not Mr Hockey.

Always keen to put politics ahead of economic management as he showed when he voted against previous plans to raise the ceiling, Mr Hockey wanted to do two things in rummaging for a debt ceiling of $500 billion:

  •  Try to sheet home the debt to the previous government and then
  • make sure that the ceiling was so high it was unlikely to be reached until after the 2016 election, if ever.

To be sure, in another year or two, if the debt ceiling needs to rise to $500 billion or $600 billion for that matter, Mr Hockey can bring the new budget numbers to Parliament and it would undoubtedly pass the legislation needed to meet this new debt level.

Unless Mr Hockey comes out and quickly accepts that economic management wins out over politics and he advocates a more modest $400 billion ceiling, there is a real risk that he will undermine the post-election lift in confidence and global investor sentiment towards Australia.

It will be interesting to see which course Mr Hockey takes.


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