http://hippocraticeconomist.blogspot.com/

One wonders how the true value of the dollar might be established. Bill Evans of Westpac this morning said that given the market for resources and interest rates they see fair value as US$95. That makes the current price about 25% below fair value. Fair to whom? I wonder how much manufacturing and agricultural activity we’d have if the market priced the dollar at 25% above what they regard as fair value - say US$118!

I do know that in Ozonomics Charlton describes our economy as suffering “Dutch Disease” - the weight of the mining sector on exports distorts other parts of the economy, and mining is a particularly cyclical industry.

Charlton also agree with you on what we should be doing; he argues that in the long term innovation is the driver of economic growth and improved living standards.

I recall the trade weighted index (TWI) as being at 54 in the early years of this century. Now it’s about 70, a 30% increase. This surely makes it hard for agriculture, manufacturing and tourism.

The other significant determinant of the dollar is comparative international interest rates, where ours are very high. Again my limited economics tells me that they need to be high to attract the funds to service our balance of payments, one of the most negative in the OECD.

What to do about it is the question. I think Rudd and Swan want to invest in education, infrastructure, research and innovation so that we can work higher up the feeding chain. Sounds good to me.

And you are right about the environment.

BBB

You’re quite right about Howard and Costello riding along the economic wave created by Hawke’s macro stuff and some of Keating’s micro stuff. I’m intrigued, though, by your specific criticism of Howard and Costello’s policy record. As you suggest, we can ignore for the moment some of the politically dubious expense measures of recent times. But it’d be great if you could just give us a decent list of the micro-economic reforms that Howard and Costello should have introduced these past 11 years, but didn’t. Also, what for you are the key changes that need to be made to the macro policy framework?

Cheers
BBB

Howard has blathered on endlessly about the merits of budget surpluses and the evils of “Labor debt�. You know it and I know it.

In times of economic expansion, as we have now, it is sensible for governments to run budget surpluses which, at the same time, takes them out as competitors in the capital markets, improves their sovereign debt profile thus strengthening the local currency, and provides them with options to re-enter the capital market with a lower inflationary risk, all of which leads to lower interest rates and prolongs economic expansion, keeping employment levels high.

I can’t imagine that in the current circumstances a Labor government would do anything much different from what the current government is doing.

The point is that the falls in interest rates haven’t resulted in more money in people’s pockets.

Only because they are making the choices open to them in a booming economy to borrow money at low interest on housing and consumer goods etc. However one Keating reform that should get much greater credit is the superannuation reform which at the same time has provided some retirement savings to many Australians who did not have them while helping to develop a local capital market, thus reducing dependence on foreign capital markets and, in the long term, reducing federal government liability for old age pensions funded out of current revenue. Sadly the compulsory superannuation rate is only 9% and not the 15% that Keating aimed for, nor the 18 to 21% that is really needed. I hope that an incoming Labor government will take this issue up.

While you may have argue that it was short sighted not to target a deficit in more difficult times - such as 2000/01, in hindsight the decision to run a tight ship seems to have been the correct one.

according to the ABS, the mining sector has added 1.2k jobs over the past year - or 0.4% of the 308k jobs that have been added. I don’t think that your blighe ‘mining boom’ riposte holds any water at all.

where the jobs have been added: +25k in manufacturing (despite the high AUD); +48k in construction (as less union interferrance lifts profit margins, lowers prices, and means more work - withness lieghton’s multiple profit upgrades on this score); +65k in property and business services; +31k in education.

it’s true, globally we are seeing lower unemployment rates, and higher house prices; and lower labour shares of factor income. policy obviously plays a role in regional variations (such as Australia’s sharp move up in employment growth over the past year), but you should be looking for global explanations if you are honest.

this looks like thin political point scoring.

i’m bored already. used by date is yesterday….

Howard and Costello inherited a strong economy and have kept it on track

That’s about it yet. The myth is that they’re some super-managers of the economy for managing not to screw it up. They haven’t had any hard yards to do. The hard yards were done for them.

So why should anyone be concerned that dumping them will hurt the economy?

That said, to take some of your points.

* Howard has blathered on endlessly about the merits of budget surpluses and the evils of “Labor debt”. You know it and I know it.
* As for lower unemployment, try demographics (the impending retirement of the baby boomers) and the mining boom.
* The point is that the falls in interest rates haven’t resulted in more money in people’s pockets.
* Government policy giving tax breaks to housing investment has pushed up house prices. In any case, if you’re going to ascribe the house price rise to international factors, why not the unemployment rate?

Debunking of myth 1 and 2: Sure this is partly true but that doesn’t mean all debt is good. There is no doubt that the efforts to control government spending have helped reduce overcrowding in credit markets and contributed to lower interest rates.

Debunking of myth 3: I would like an alternative explanation to 4.3% then. Especially since the recent falls in unemployment have led increases in production (usually it’s the other way around).

Debunking of myth 4: What does more spent on interest have to do with anything? Lower interest rates of course leads to people taking on more debt. Of course, in aggregate they may spend more on interest but they have more house, cars and o/s holidays to show for it.

Debunking of myth 5: That is extremely debatable and I am not exactly sure what you expect the Commonwealth government to do about it. House prices have gone up for a range of factors including lower interest rates, scarcity of land and flight from equities post-dot-com boom. Note that the explosion in property prices has not been Oz specific and therefore is unlikely to be connected to specific Australian government policies.

Debunking of myth 6: This is of course is a very complex debate. You haven’t really outlined his arguments so it’s hard to judge. Conservatives would argue that H/C have been able to deliver the tax cuts without imperiling the standard of government services or the fiscal position (like Bush), which is surely then only a good thing (unless you find paying taxes a carthartic experience). Also economists widely agree that the greater taxation of consumption was a good thing because it diversified the tax base.

Overall, I think the whole premise of the debate is sterile. It’s not a game of football, scored on who can rack up the most reform. And, why would we expect H/C to undertake as much reform as H/K? Hawke and Keating inherited a sclerotic economy that desperately needed change. They did a commendable job with a compliant Liberal senate. Howard and Costello inherited a strong economy and have kept it on track for which they deserve credit, especially in the facy of loonies in the Senate (including the Beazley/Crean Labor party). And, Rudd still runs around seeing we HAVE to manufacture cars! I don’t think it’s hard to decide who are the better reformers at the moment.

As noted above the fold, the ideas here are not new - if you searched around the Australian blogosphere and the more informed economic commentators in the media, the six “myths�, and others, have been discussed at length in the past.

So I didn’t buy it. But as you say, it’s probably aimed at a less wonkish and politically interested audience than we have here.