Wednesday, September 22, 2010

Governor Stevens pwned!

See Tim Colebatch this morning.

Governor Stevens this week argued that there were not really two Australias:

"While some events can lead to a divergence in economic conditions across Australia, overall these differences have not been especially large in recent times . . . What is remarkable, in fact, is that the differences are not, in the end, larger."

But here's what Stevens was saying back in February:

"Yes, I think it is going to be a two-speed economy . . . I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance. The relative price of resources is high, that of manufactures is low. There are structural adjustment implications of this for our economy . . . they will, I think, probably intensify in the years ahead."

Some extracts from Tim Colebatch:

"In my next life, I want to be a central bank governor. People fawn on you, whatever you say is taken as gospel, and others rarely challenge it...

The Reserve chief played down the risk of that resources boom dividing Australia into a two-speed economy. Indeed, he tried to persuade his audience that this hadn't happened, and wouldn't happen.

The only evidence he presented was a handful of graphs demonstrating that over a 10-year or 15-year time period, movements in prices and unemployment rates had differed less in the six Australian states than in the 50 states of the US or the 27 countries of the European Union. You don't say. I wonder if that might have something to do with the fact that states are always more alike than countries. Or that six units of anything offer less scope for differences than 27 or 50.

The Guv's choice of time frame also missed the point. We were not a two-speed economy 10 or 15 years ago. This emerged in the past five years, as mining investment and export revenues grew exponentially, the Reserve responded by driving up interest rates, which drove up the dollar, which made significant parts of our manufacturing, agricultural and tourism industries uncompetitive.

That is why the two-speed economy became an issue. It is why we in Victoria fear the consequences of an even larger mining boom, and an even higher dollar, ahead.

It is why Stevens himself warned just seven months ago that the problems of a two-speed economy "are likely to re-emerge with a vengeance" and "will probably intensify in the years ahead"...

The new Glenn should listen to the old one.

Published in today's Age

Related Posts

. Reserve Bank sees two Australias

. Reserve Bank does not see two Australias


carbonsink said...

Colebatch is a legend. He's the only mainstream commentator in Australia who consistently points out the downsides of the resources boom.

Its not just Victorian manufacturers that are suffering. Look at what's happening to the universities or inbound tourism, or innovative biotech companies like Cochlear and CSL. Great Australian success stories that will have their margins crushed because of the high price of coal and iron ore.

Anonymous said...

I think Colebatch's analysis of inflation is misleading. When the RBA raised rates in 2007-2008, inflation peaked at 4.9% in Sydney, 4.8% in Melbourne, 5.6% in brisbane, 5.1% in Adelaide, 4.9% in perth, 4.5% in Darwin and 5.2% in Canberra -- to me this looks like the whole of Australia had an inflation problem, the biggest since the early 1990s. Also, unemployment, while lowest in WA was at the lowest level since the early to mid 1970s in every state. This also tells me that the RBA had an economy-wide boom to deal with.

Anonymous said...

We won't have a two speed economy in the years ahead because we won't have a manufacturing indistry.

carbonsink said...

No, we'll be a welfare state supported by mining income.

Look at the surge of employment in social services. Its already happening.

KitchenSlut said...

Carbonsink you may find that what is happening with universities is more related to changes to student visas and can find some commentary on that from Monash's Steven King at Core Economics.

If the currency is such an issue I fail to see why the policy response shouldn't be to pull the budget back into surplus more rapidly to take pressure off interest rates and the currency? No this is not based on a debt and crowding out argument but fiscal policy and why we are proposing a structural deficit at all for the next year or two?

That fiscal position should include NBN funding and exclude any mining tax which should be specifically linked to a sovereign wealth fund?

Matt C said...

If you are worried about a higher dollar, then you should advocate lower government spending.

In an open economy higher G leads to higher foreign exchange rate. We are running a massive structural deficit at the moment, it needs to be reduced.

Dave55 said...

Matt C,

What utter BS. Most of the developed world are running massive structural deficits much larger than ours and yet the $AUD is outperforming those with the biggest structural defecits in terms of increase in $AU (eg, US, UK and (most of the) EU. The last time our dollar was higher was around 26 months ago and Government expenditure was projected to be running at a surplus of between 2 and 3% and probaly would have delivered but for the GFC.

The reason the $AUD is so high is because (good) forecasters see our economy performing strongly into the short to medium term on the back of strong demand for commodities from Chindia, which in turn pushes up inflation and keeps the interest rates here higher than they are elsewhere.

KitchenSlut said...


"Tighter fiscal policy ..... could play a useful role in complementing monetary policy, reducing the size of the required increases in interest rates and the exchange rate" blue book page 5

So it seems that "utter BS" has also infected the Treasury? You have compared fiscal policy here to countries at or near the zero bound on interest rates (and also engaged in QE). In those circumstances, given excess capacity that wont push up interest and exchange rates. In fact it may feed the reverse via carry trades into higher interest rate currencies!?

Fervent pro-keynesians such as Krugman frequently reference the zero bound to support their stance for even bigger stimulus in the US. There are also references in the red and blue books above to an economy approaching capacity constraints.

We are not near a zero bound on rates and are accelerating away from that zone. Consequently any expansionary fiscal policy can only push the interest and exchange rates higher than otherwise and amplify any distortions from a mining boom?

carbonsink said...

More from Colebatch here.

As for lowering government spending to lower the AUD. What Dave55 said. What utter BS. While I agree that continuing fiscal stimulus while the RBA is tightening is insane, its demand for commodities, the Fed hinting at QE2, and interest rate differentials that are pushing the dollar higher, not government spending. If Australia had a massive surplus tomorrow it would make SFA difference to the value of the dollar.

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