Australia likely to be in recession by end of year

Despite all the wonderful protestations by business leaders and politicians about how strong Australia's economy is, bad economic news continues to bubble up.

The latest bit of news is that job advertisements in November 2008 have dropped the most on record. Last week, inflation gauges showed prices dropping quickly in October and November, coming at the same time as the Reserve Bank cut rates aggressively.

So we have a considerable fall in inflation accompanied by a considerable decrease in employment demand. Anyone with ECON101 knowledge knows that those figures together indicate a slowdown.

But then we have to add more, namely the recent GDP figures showing 2008 Q3 growing at a mere 0.1%. If that is revised downwards (and it is possible), then 2008 Q4 - which is already looking to be a negative number - could result in a "technical definition" of a recession (two quarters of economic decline).

So. Who to blame? Kevin Rudd? Despite the fact that the guy hasn't really done anything in his first year as Prime Minister you can't blame him for the current downturn. What about John Howard? The former PM and the coalition government did create some good economic conditions - namely a complete removal of government debt - which will give Rudd and the ALP a lot of room to run sustainable deficits. Howard, though, did help create a housing bubble in Australia with the First Homebuyer's grant and the Negative Gearing tax loophole - but then again Rudd hasn't done anything to remove it since winning the Federal Election 12 months ago.

But, of course, Australia is a small economy that is joined to the rest of the world, and as the economic contagion in the US has spread to Europe and Asia, so it has also spread to Australia.

Having said all that I still have some level of confidence in the Australian economy. We certainly won't avoid a recession IMO, but it will be on the upside (the recovery) that Australia's economic strength (or lack of it) will be shown. Unemployment, for example, will not exceed that of the US.

Claytons change

For my Australian readers, it comes as no surprise that Kevin Rudd's short time as PM has not been one to gush about. Even back in 1996 I was cynical enough to know that John Howard's shine would eventually wear off but in 1997 he was still, in my mind, quite liked by most, including myself. And that wasn't due to clever marketing but substantial policies that had been initiated but had yet to bear any fruit.

Rudd, on the other hand, is suffering from a bit of malaise. I use that word deliberately because he reminds me slightly of Jimmy Carter's late 1970s problem. Rudd is unlucky enough to become PM during the cusp of a world recession while Howard was "lucky" enough to be PM during a period of great expansion.

But, even when factoring in these issues, what exactly has the Labor government actually done? Said sorry to Aboriginies... that's good. But are there any substantial policies in place to help them? Signed Kyoto Accord... that's good, but any substantial policies in place to reduce carbon emissions? Well there's the whole carbon trading thing but that's not substantial enough in my books.

One thing which invigorated the early Howard years was the conservative rhetoric that went along with it. Despite much of it being mere blabber, there was enough substantive statements to make it "feel" as though Australia was headed by politicians who had clear goals in mind. It doesn't feel this way presently. I know that centrist ideas are typically difficult to energise people because they are so, well, "complex"... but there's no real debate that I can see going on about Australia's future on behalf of the ALP. Maybe I'm out of touch... I know more about US politics than Australian politics these days.

What I do know is that the ALP is in power in every state government in Australia and controls the Federal government. Despite being "new" to power in Canberra, there is a jadedness about the ALP that I feel at the moment. The Coalition may have been a toxic mixture of racists and populists but at least they had some brilliant policies that bore fruit. The ALP seems filled with political operatives who are more concerned about their own position within the party than with good governance. The Coalition always seemed to produce political "Mavericks" who, for good or ill, roiled the party and the nation with ideas. The ALP, on the other hand, just seems bereft of ideas.

As Australians all know, "Claytons" is a brand of non-alcoholic beverage that looks like Whiskey but tastes like anything but. Back in the 1970s Claytons created a brilliant marketing campaign that has entered the national psyche. This campaign had the message "Claytons - the drink you have when you're not having a drink". Ever since then the term "Claytons" has been used as a perjorative term. In this case, the ALP government is indulging in "Claytons change" - the change you have when you don't have change. It means a cheap rip-off, a pale, weak and despised copy of what should really be there.

Ross Gittins, a noted economic commentator at the Sydney Morning Herald, says this:

Kevin Rudd fought the election by promising "fresh leadership" that would make our lives better without involving unpopular change. Indeed, he promised to retain vast swathes of John Howard's policies. In short, he promised change without change.

The public's slowly growing disillusionment with the Rudd Government represents its dawning realisation that change without change isn't possible.

Rudd left us with the impression there was something he could do about high petrol and grocery prices. As it turns out, what he's able to do is of little consequence. Somehow that's a lot clearer now than it was then.

Rudd promised us an Education Revolution that would bring us better schools, universities and technical colleges and so more of the highly skilled, better-paid jobs we need to prosper in a more competitive world.

But not to worry, this would not involve interfering with the Howard government's scheme for making grants to public and private schools.

I respect Gittins as a commentator. Apart from "saying it like it is", he is more concerned with good policy than with political ideology. He was one of the first respectable expert commentators to question John Howard's economic policies back in the late 1990s. Although I often disagree with Gittins' economics these days, I think his article is spot on and fleshes out everything I am feeling towards Rudd and the ALP these days.

If Rudd and the ALP continue in their do-nothing, "Claytons change" ways... and if the Coalition flips on climate change and the environment... I would be more than willing to endorse the Coalition at the next election.

Lessons from Italy and Australia

If the United States is to avoid a long term fiscal disaster, it needs to learn from other nations. America cannot continue to ignore the lessons learned from other countries in the blinkered belief that manifest destiny or divine intervention somehow makes it different from the rest of the world and not subject to the same set of rules.

Now usually when I say this sort of thing I am often pushing forward something wonderful that is present in non-American countries that America could use. Universal health care, increased public education and stricter gun laws come to mind here.

This time, however, I am going to use a negative example as well as a positive one. Rather than just showing America what it could become if it does the right thing, I am also going to show what America could become if it does the wrong thing.

In previous posts (here and, more recently, here) I have pointed out that the fiscal irresponsibility of the US Federal government is, by itself, a clear threat to medium-long term economic growth. When combined with other factors (namely Peak Oil, the subprime mortgage crisis and an unsustainable current account deficit), its negative effect is amplified.

When a government does not have enough tax revenue to fund its expenditures, it turns to the market to borrow the required amount. Government bonds are an integral part of credit markets worldwide and function as a baseline measurement for corporate bonds and mortgages and other forms of debt-based activity.

Notwithstanding the part that government debt plays within the world's financial markets, if a government runs deficits over the long term then the debt to GDP ratio increases. In the case of the United States, this number is probably somewhere between 40 and 60% of GDP.

The country that I am setting up as a warning for America to heed is Italy. The following image is one I scanned from a pdf file about the 2007 Italian Budget (download here. pdf, 627.2kb):

This is obviously not a detailed report on the budget, but it gives more than enough information for our purposes.

There are two very important figures in this budget summary. The first is the section marked burden of national debt, which totals €74,564 million. The second is the bottom section marked redemption of national debt, which totals €189,099 million.

That first figure - burden of national debt - represents the interest repayments that the Italian government has to make on its borrowings. Like all bonds, government bonds first have to pay back interest and then, once it matures, the principal. This figure in the budget represents the amount of interest they have to pay on bonds owing. The second figure - redemption of national debt - is the amount of money the government pays back on maturing bonds.

Together, the amount of money the Italian government spends on debt servicing (interest plus paying back principal) is €263,663 million.

Now let's put that number in perspective.

€263,663 million represents a whopping 41.2% of the Italian government's spending in 2007. According to the same document, Italy's GDP in 2007 was estimated to be €1.475 trillion, which means that debt servicing also represents 17.9% GDP.

Such figures almost defy comprehension. Italy's net public debt is around 107% of GDP. Moreover, Italy's public debt has been at this size or even higher for more than a decade (it was 113.6% in 1999).

By way of comparison, America's fiscal irresponsibility is mild. Debt servicing so far represents 15.75% of government spending and 3.13% of GDP - figures that are dangerously high but not as extreme as Italy's.

This is not the place to discuss in detail the reasons for Italy's fiscal nightmare - the nature of Italian politics is probably a major contributing factor. The fact that Italy's political leaders have been unable to find bipartisan support to control government spending has meant impoverishment for their nation.

But just how impoverished is Italy? After all, they are a sophisticated and educated western nation with a high standard of living. That may be true, but the key to understanding how impoverished they are is to examine the opportunity costs of such massive debt servicing.

From a leftist point of view - the point of view which supports high levels of government spending to support universal health care, free and/or cheap public education and so on - the €263,663 million in debt servicing (41.2% of the budget) is money that could have been used for public spending. Education spending in 2007, for example, was €50,066 million. Health spending was €11,661 million. Public order and safety spending was €21,122 million. Every Eurodollar spent in debt servicing was money not spent on improving the nation's social services.

But the leftist view is not the only valid one. From a more economically conservative point of view, that €263,663 million was money that could have been returned to people and businesses in the form of lower taxes. And imagine what sort of tax rates they could have been - 17.9% of GDP not taken up by the taxman.

The message here is clear - governments that have run long term deficits have, over the long term, created a combination of less government services and higher taxes. Money that could have gone into government spending or lower tax rates are instead being used to pay back a national credit card bill that, in the case of Italy, defies logic.

Fiscal responsibility is therefore not a left/right issue. From whatever ideological position you come from, ensuring that public debt does not spiral out of control must be a common goal.

Italy does, of course, have a number of natural advantages. As part of Europe they are in close proximity to an immensely rich and wealthy group of nations that have enriched it through trade. The fact that Italy has adopted the Euro means that any concerns that investors have in Italy's financial position are cushioned by the economic strengths of other nations that have adopted the Euro as well. This fact is tempered, however, by the fact that many other nations in the Eurozone have problems with fiscal irresponsibility as well - though nowhere near that of Italy's (with the notable exception of Belgium).

The good news is that it is possible for politicians - even those in Italy - to work together in a bipartisan way to fix their budgets. The solution is actually simple - either increase revenue or decrease expenditure and run a fiscal surplus over many years. When it comes to politics, however, this is easier said than done, especially when increasing revenue means raising taxes and decreasing expenditure means cutting spending on health, education and public welfare.

While the Clinton years are often seen as a period of intense political partisanship, it is important to remember that the Democratic president and a Republican Congress - for all their bitter fighting - were able to agree very early on to fix the nation's public debt. The result was a series of budget surpluses late in Clinton's second term (helped in no small part by the 1990s Tech boom) and a reduction in national debt. Although Bush and the Republican Congress have ruined this since 2001, there is every reason to believe that a bipartisan solution can be found. Sadly, however, the current political discourse rarely mentions the fiscal imblances which means that, when the next US president takes office in 2009, neither Republicans nor Democrats will see balancing the budget as a priority.

There is one country that has, however, managed to eliminate net public debt - and has done so without resorting to profits from oil but from pure budgetary discipline. That nation is Australia.

Australia's fiscal example should stand as an example to other nations. In 1996 when the conservative Howard government came to power, net public debt was around 20% of GDP. While this was quite small in comparison to other nations - both now and at the time - steps were taken very early to cut spending. So although net debt was comparatively small, it was never allowed to increase. Importantly, cuts to spending were made when unemployment was moderately high - at around 8%. This meant that, when the economy recovered from the effects of the spending cuts, economic growth in the years that followed produced large and growing budget surpluses and steady improvements in unemployment. Moreover, the government could then afford to make incremental tax cuts on an annual basis - a process that was quite politically rewarding. Since 2005, unemployment has dropped below 5%, big budget surpluses are run regularly, income tax rates are lower than ever and net public debt is now negative.

The Howard government did, of course, lose power in 2007, which shows that no poitical party should rely solely upon economic performance to drive their political fortunes. Nevertheless, Australia should serve as an example of what can be achieved if politicians take a long view on important things like fiscal responsibility.

It is likely that the effects of Peak Oil and the subprime meltdown will be far reaching. Countries that are fiscally weak like Italy will either be forced into making painful fiscal readjustments or else run their nations into bankruptcy-in-all-but-name by increasing their deficits. On the other hand, countries like Australia will be in a more flexible position and will have room to cut taxes or increase public spending.

What will become of America, though? While I would like to think that America could avoid Italy's fate I am not at all certain that bipartisan steps can be made to rectify the situation before net public debt hits record levels - say between 75-85% of GDP.

One thing is certain, however, and that is that America's fiscal position will determine its influence in the world over the next 20 years. If America should go down Italy's route, you can almost guarantee that America, as a society and as an economy, will be a pathetic reflection of what it was for most of the 20th century.

In the face of a semi-permanent energy crisis along with the spectre of global warming, what the world of the 21st century needs is a strong, free America. Being fiscally responsible is an important step in that direction.

AAAAAAAAA

A blog post with every single category marked (I'm doing this for scribefire)

The ALP today - it stinks

As the years have passed by, I have become more firmly entrenched in a centre-left political stance. This means, of course, that I am more likely to vote for parties that subscribe to my politics. This is why I am more likely to support the Australian Labor Party and the Greens when it comes to elections.

I am not a partisan, however. I am not a member of any political party and I see principle and ideas to be far more important than supporting a particular political party. This is why I can, for example, praise the Howard government for its fiscal intelligence while also criticising them for their immoral stance on immigration and the Iraq War.

Yet despite Howard's success, and the success of the Liberal/National coalition in Federal politics, Australia is now governed entirely by the Australian Labor Party. Not only is Kevin Rudd the new PM in charge of an ALP government, but every single state government in Australia is Labor as well. Despite the apparent ascendency of the Liberal/National Coalition since 1996, the hard fact is that Australia is dominated by the ALP. More than that, the chances of a revival in the coalition's electoral success is increasingly slim. The Liberal Party, for example, took around 37% of votes in the last Federal Election. The National Party is in even worse shape, getting only 5.5% of votes.

Of course part of the reason why these figures are so low for the coalition is because of the rise of the Greens to being Australia's third largest political party. Yet the party which has been affected least by the Greens is the ALP.

The ALP has been enormously successful in surviving the Howard years at state level by positioning themselves as a centrist party. The dominant right faction of the ALP has ensured that the more progressive/leftist members of the ALP have not had any real power since the days of Gough Whitlam.

Yet I would have to say that the price of this success has been corruption and inaction. The NSW Labor Party, for example, is enduring all sorts of political fallout - all of it the result of their own stupidity and greed. NSW Labor politicians have been threatening restaurant staff, sexually abusing teenagers, taking money from property developers and mismanaging state funds for quite some time now.

I can't remember the last time I voted for the ALP. I think it was in the 1980s. Ever since then I have voted Liberal, Democrat or Green. The survival of the ALP and its reputation does not concern me in the slightest. I abhor any form of politics that results in inefficiency and corruption. Even though I was deeply angry with Howard's treatment of immigrants and his position on the Iraq War, I cannot think of any major scandal rocking his government during his 11 years in power.

One of the most frightening things I can think of is the potential for Kevin Rudd to turn into a federal version of Morris Iemma, leading a federal version of NSW Labor. That would be complete disaster. Unfortunately I can't see anything positive yet about Kevin Rudd's (albeit short) time as PM. So far Rudd has been strong on words but low on actual, measurable outcomes. Unless Rudd actually starts doing something, I can't see anything beyond a descent into a long term NSW-type Labor activity. And that will do nobody any good.

Reactions to the Budget

I was working tonight so I didn't get to watch it live and have instead had to rely upon the SMH's less than stellar online coverage and comment. So here's my comments:

1. Surplus of A$21.7 billion. I still can't find on the SMH website what Rudd and Swan are going to do with this money. It represents 1.8% of GDP and Australia's net public debt was erased 2-3 years ago so I'd like to know what they're going to do with it. Is it going into Howard's future fund? Will it be invested overseas?
   
2. The income tax cuts are modest but are likely to be universal in scope, thus reducing the tax burden upon every Australian wage earner, but affecting low wage earners the most (a nice change from all the tax cuts for the rich made under Howard). High wage earners do get a cut as well, which doesn't really bother me much.
   
3. Environmental spending is a joke. Rudd's environmental credentials have been shot out of the water with this budget. A$2.3 billion sounds like a lot, but it is peanuts compared to other areas of spending. If Peter Garrett doesn't resign in protest at this there is no point in supporting the guy's political career any further. Bob Brown is rightly "concerned".
4. $250 million on roads isn't really a huge amount but there's little, if any, money going towards any form of post peak oil infrastructure. It's as though oil is still around $25 per barrel in Rudd's mind.
   

In short, there is nothing in this budget that could be called daring or far-sighted. There are some good things but there's a whole heap of incorrect assumptions they have made over the environment and the effects of high oil prices. Cutting spending and keeping a big budget may sound nice from an inflationary perspective, but does little in actual solutions.

Don't get me wrong - I'm glad that Howard is gone - it's just that Rudd and the ALP have not managed to go beyond the symbolic (saying sorry to Indigenous Australians, signing Kyoto) and actually done anything of substance. The budget was the ALP's chance to do something really different - instead we got a few nice things thrown together with a bunch of blinkered decisions.

My verdict? 4 out of 10. Fail.

Unemployment, Recessions and Monetary Policy

Okay, first look at this graph:

This is another FRED graph, courtesy of the St Louis Fed. The blue line represents the unemployment rate while the red line represents year-on-year GDP growth. As you can see there are some interesting relationships.

It doesn't take an (economic) Einstein to tell you that unemployment rises whenever GDP drops - it is one of the most obvious relationships in economic history and one that is borne out quite clearly in the graph above. Moreover, as I pointed out in a previous posting, unemployment in recessions rises quite suddenly and then tapers off slowly as the economy recovers.

Let me put it another way: Downturns lead to very sudden spikes in unemployment; recoveries lead to a slow and steady decrease in unemployment.

This is an important piece of economic data, because it teaches us that, while a definite relationship between GDP and employment exists, the relationship does not have an equal result. During the recession and recovery period, GDP drops then recovers again, and may even exceed GDP levels prior to the recession - yet this occurs while unemployment levels remain higher than what they were prior to the recession.

This graph, again from the St Louis Fed, shows what I am talking about:

Because of the way the graph is designed, the unemployment data appears different to the first graph but is exactly the same. What is different is that the GDP figures are now measured in chained 2000 dollars (which takes inflation into account) rather than the year-on-year GDP growth of the first graph.

Look at the 1979 and early 1980s "double dip" recession. What do we see here? The first thing to note is that US GDP at the beginning of the 1979 recession was lower than at the end of the early 1980s recession. In other words, the US economy had a net expansion - albeit a small one - that spanned these two recessions. Yet unemployment, which was 6% at the beginning of the 1979 recession, reached 10.8% when the second recession was over.

So. We have a situation in which there was net economic growth alongside a considerable increase in unemployment. Why?

The issue is not the fact that there was net GDP growth - the issue is that GDP growth during this period (1979-1982) underwent a series of contractions (whereby GDP actually declined). It is these contractions which have the effect of causing large spikes in unemployment.

I would argue, therefore, that the best conditions for creating steady employment over a long period is not to increase GDP growth, but to prevent economic contractions. The longer the period between contractions, the more stable the labour market is and the less unemployed people there will be.

Of course, this is not to say that GDP growth isn't important - it is. Moreover, preventing an economic contraction logically assumes that GDP should grow.

What I am suggesting, though, is that GDP should never be allowed to grow too fast. Growth must be sacrificed in the short term in order to allow growth over the long term. Moreover, short term growth must be sacrificed in order to prevent a contraction later.

For those whose study of economics takes into account the importance of social justice, economic growth must not become an end it itself. In other words, increasing output, while important, should not be the sole outcome. Any form of economic growth must result in higher standards of living for the people who live in the economy - including those whose contributions are not as great as others.

From a macroeconomic perspective, therefore, progressive economists should embrace any system or policy that will prevent contractions while allowing room for slower-paced economic growth.

Here's one: Absolute Price Stability.

Yes you were probably waiting for my solution, probably even waiting for that one.

Absolute Price Stability (APS) is an alternative form of monetary policy to the inflation targeting practised by most central banks. Rather than trying to keep inflation under 3% (which is the policy of the Reserve Bank of Australia), APS involves the central bank keeping prices completely stable over the course of the business cycle. In practice, this would mean having neither inflation nor deflation. Of course, prices go up and down all the time - but whenever inflation rises it means that prices are going up more and down less. Deflation, of course, has an opposite effect. Moreover APS is not some pseudo price fixing law - prices can go up and down as much as the market dictates. However, for APS to run effectively, the market's ability to affect prices must have a neutral - rather than inflationary or deflationary - effect.

But in order to maintain Absolute Price Stability, central banks must essentially set their inflation targets to zero ("zeroflation") and work hard at maintaining that goal. In practice, this means that interest rates will have to increase while inflation drops to zero. While small amounts of inflation or deflation may be tolerated in the short term, the overall long term goal is to have prices remain where they are. Rather than measuring inflation via the traditional CPI, inflation could be measured as the number 100 in an index. If Absolute Price Stability is achieved on, say, 1 August 2010, then the index would read 100. As inflation or deflation is experienced, that number will go up or down slightly (eg 99.85, 100.25). The long term goal for central banks, however, would be to keep the index at 100, with monetary policy (the raising or lowering of interest rates) being used to achieve this.

So what has Absolute Price Stability got to do with preventing contractions?

Well, since APS requires that interest rates remain relatively high in order to keep inflation low, the natural effect upon the economy would be to dampen economic growth. Rather than investing in shares or in property, or spending money to buy consumer goods, people are more likely to save money. Why? Because they will be in an environment with higher than usual interest rates - the high interest rates reward those who put their money into savings accounts. Keeping money stored in savings accounts and term deposits gives households and businesses a "buffer" against any unforeseen events. Moreover, it means that companies who employ people are more likely to have a cash buffer protecting their business and thus the job security of its employees. Together, this means that both households and businesses have their own form of safety net in case of problems.

To be sure, such practice will hardly speed up the economy in the short term - and that's exactly the point. Any economy who practices Absolute Price Stability will discover that the first few years will be hard. Moreover, the most obvious short term effect of APS will be a dampening of economic activity - even a recession - as higher interest rates begin to bite. It also means that any recovery will be rather slow. From that point on, however, Absolute Price Stability - which is essentially a contractionary policy to start with - will ensure that the economy grows at a slow and steady rate while unemployment drops at a steady rate as well. This process is pretty much covered by Keynesian economics.

It may seem strange that I am advocating a policy that will cause an economic downturn and result in higher levels of unemployment. It may seem even stranger that my reason for advocating this policy is to protect employment. But the reason is that APS is a dynamic policy that results in a downturn first and a sustained recovery later; it results in higher unemployment first and then long term low unemployment later. It is the sacrifice of the now to ensure that the future is better prepared for.

APS will, all things being equal, prevent the economy from contracting - and thus keep the economy running well enough to provide long term job opportunities. Will APS erase contractions enitrely? Will it remove "peaks and troughs" in economic growth? All things being equal, APS will, I believe, be able to achieve this. However, any form of supply shortages (such as oil) will cause the economy to contract, in spite of the practice of Absolute Price Stability. Thus all things are not really equal, although I would still argue that maintaining zeroflation is essential even if the economy is contracting due to any supply shocks.

I need to point out that zeroflation is not deflation - it is simply keeping prices stable, neither rising nor falling. Nor will APS necessarily result in a static or declining money supply - zeroflation is essentially supplying exactly enough money as the economy demands, no more (inflation) and no less (deflation). Zeroflation is quite achievable in an economy in which the money supply is growing.

The only country that has managed to experience zeroflation is Japan, and that only after their mid 90s "long recession", which included a period of destructive deflation. Since Japan's recovery, GDP growth has been quite modest compared to other nations, but their unemployment rate has remained low (and at around 4% is lower than the US) and the standard of living remains high (as shown by GDP per capita - US$33,800 in 2007 - and a high placing in the United Nations Human Development Index). Yet despite the fact that Japan's society is benefiting from its zeroflation economy, many in the US continue to believe that Japan's economy is a "basket case" and is unable to grow at its full potential. (The fact that Japan's economy has long recovered from its 1990s recession seems to have eluded many American commentators).

This combination of zeroflation and low growth has allowed Japan to have a more sustainable economy that has provided long term jobs for its people. While the Japanese are hardly choosing zeroflation (it has essentially been forced upon them by circumstances and does not exist by design) and while the economy still has some major imbalances (namely massive public debt), current economic conditions are reasonably good. Of course, this is not to say that exogenous factors won't affect them - they export to the US so they will obviously feel some pain from the US recession - but their current zeroflation environment will help them cope with any changes they will experience.

At this present time, monetary policy is being questioned. Here in Australia the Labor government has vowed to cut spending in order to control rising inflation, a move back to pre-1996 behaviour whereby Australian governments would aim to use fiscal policy as the way of attacking inflation, rather than the Howard years of paying off debt and leaving it to the Reserve Bank to control prices. In America, the Federal Reserve under the chairmanship of Ben Bernanke seems to have jettisoned any concern about inflation altogether and seems to be trying to create as much money out of thin air as possible in order to prevent a recession. Meanwhile the European Central Bank continues its strict anti-inflationary policies inherited from its immediate predecessor, the Bundesbank, all the time while European unemployment levels remain stubbornly high in comparison to other industrialised nations.

With inflation rising worldwide and economic stagnation a certainty, many will wonder at what influence central banks will have in the future to influence the economy. I don't think it is time to ditch the lessons we learned from the 1970s just yet - strong, independent central banks with an exclusive focus on price stability are more important that this generation realises. If Absolute Price Stability is to be introduced, these central banks need to be trusted more, not less, than what they are now.


© 2008 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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Advantage Australia?

From the department of slightly:

Commodity exports from Australia, the world's biggest shipper of coal, iron ore and wool, are forecast to gain to a record for a fifth straight year driven by demand for steelmaking raw materials led by China.

Sales may reach A$189.1 billion ($178 billion) in the year ending June 30, 2009, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in a statement. That compares with a revised A$145.6 billion this fiscal year.

Prices for the nation's top five commodity exports, iron ore, coking and thermal coals, gold and crude oil have risen to records this year, benefiting producers including BHP Billiton Ltd. Robust economic growth is expected in China this year along with strong demand for Australia's resources, the bureau said in a report.

``China is far and away the biggest underlying force'' driving sales, Peter Arden, an analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co., said by phone from Melbourne. ``The outlook is very, very rosy.''

This is obviously good news, not just because it is "good" that people overseas want our commodities, but because it will help to reverse one of Australia's economic imbalances - the current account deficit. This will, however, be a case of "I'll believe it when I see it" because the current account deficit is one of Australia's most intractable economic problems.

Australia's economy, like all modern economies, buys goods from overseas. It also sells goods overseas as well. The problem is, however, that Australia buys more than it sells. So where does it get the money to buy overseas goods? It borrows it from overseas lenders. In the September quarter last year, Australia borrowed a total of US$49.9 billion. This is called a current account deficit, and that figure represents some 5.4% of GDP. Australia has been borrowing money from overseas for a long time, and the amount of money Australia owes to overseas lenders is now around 53.5% of GDP - over US$610 billion.

Now I'm a great believer in balance when it comes to economics. A deficit is not "bad" but continual deficits are "bad". Similarly, a surplus is not "good" but continual surpluses are, in fact, just as "bad" as continual deficits. The idea is to get things in balance.

In order to reverse Australia's net debt and reduce it to zero, the current account must, at the very least, be reduced to zero as well. In short, this means that Australia needs to export more and import less, to save more and borrow less, to produce more and to consume less.

Since Australia's economy is heavily dependent upon commodities (like coal, iron, gold, copper, etc) as well as agriculture (like wheat and rice), the current commodities boom and increase in grain prices will act to increase the price of the goods we sell. This will, in turn, act to reduce Australia's current account deficit.

One of the more fortunate results of a conservative government that wasn't influenced by voodoo economics is that Australia's public debt (the amount of money all of Australia's governments owe) has basically been erased. Eleven years of fiscal prudence by Howard and Costello has meant that the government can now actually afford to do things like cut taxes and/or increase spending. This is where Australia and America differ.

Nevertheless, there are some weaknesses in Australia's economy.

The first is that inflation is increasing. It is expected that the Reserve Bank of Australia will raise rates to 7.25% today. Australia's economy, unlike America, is still showing signs of strength so our central bank is right to increase rates. Moreover, this increase in rates will do exactly what is needed to reverse the current account deficit - it will curb domestic spending, making us less likely to consume and more likely to save. If things work out okay (and they probably won't), this decrease in domestic spending will be balanced out by the increase in overseas exports mentioned in the news report quoted above.

The second is that, while Australia does not have the same subprime mess that the US has, our housing market is still significantly overvalued - perhaps more so than the US market ever was. I am astounded that housing prices here in Australia have remained stratospheric while they have been crashing in America for over 12 months now. Today's interest rate rise will, at the very least, deflate the bubble slightly. Hopefully it will pop it, and an Australian economic downturn is a possibility.

The third is that it is China and Japan that are buying all the commodities we produce... and both Japan and China turn those commodities into goods that are then sold to America. With the American dollar now low and its economy in recession (face it, it is), it is only a matter of time before Chinese and Japanese industry is affected by America's recession... which will, in turn, reduce the need for Australian commodities. It is this last point which is important because it assumes that the commodities boom will eventually end, leaving Australian mines and mine workers with less work and money.

Regardless of what happens - whether the commodities boom pops earlier or later - the right thing to do is to discourage domestic spending and to reduce the current account deficit accordingly. This will result in, hopefully, higher interest rates over the medium term. Over the long term, however, it will be dependent upon tighter monetary policy which targets inflation at a lower rate - something which has yet to become policy anywhere, mainly because it is my proposal for Absolute Price Stability.

In short, Australia is probably more likely to weather the brewing economic storm than America, but still has some serious shortcomings that need to be addressed sooner rather than later. The current account deficit is the key - reduce that and you will reduce a whole range of economic problems. Increasing interest rates and cooling the economy down is exactly what is needed at this point, even with a global recession heading our way.

NSW Labor - as corrupt as you can get

Morris Iemma was battling an escalating corruption scandal last night that threatened to draw in two of his most senior ministers and to bring down one of the state's biggest Labor-controlled councils.

Joe Scimone - a close ally of the Minister for Ports and Waterways, Joe Tripodi, and a friend for 30 years of the former Wollongong lord mayor and current Police Minister, David Campbell - stood down from his job managing property within NSW Maritime yesterday pending the outcome of an Independent Commission Against Corruption inquiry.

There are allegations before the commission that Mr Scimone, a former Wollongong Council officer, paid $30,000 last year to conmen posing as commission officers who were offering to destroy evidence against him.

Mr Tripodi's office confirmed last night that Mr Scimone, a former federal Labor preselection candidate and Labor branch president, had been stood down on full pay.

The future of Wollongong City Council was in doubt last night as some of its ALP councillors were further implicated in the growing sexual and corruption scandal inside the council.

And that's why I don't vote for the ALP. I am sick of how easy it is for corruption to infiltrate politics. I may be down on John Howard and his government, but at least there was little evidence of this sort of corruption. If the Rudd government gets drawn into a corruption scandal in the next few years, I wouldn't be surprised.

Sorry Day coming up

From the department of it's-a-good-beginning:

The Federal Government has set the date for a formal apology to the members of the Stolen Generation.

The apology will be the first item of business for the new Federal Parliament.

It will be delivered by Prime Minister Kevin Rudd on February 13.

Indigenous Affairs Minister Jenny Macklin says the apology is on behalf of the Australian Government and will not be attributing guilt to the current generation of Australians.

Ms Macklin says the content of the apology is still subject to widespread consultation, but she says it will form a necessary step to move forward.

A traditional Welcome to Country will be held as part of the Parliament's opening ceremony by members of the Ngunnawal people.

It will be interesting to hear what Rudd has to say. I'm hoping that his "formal apology" is neither trite nor overbearing, but simple, heartfelt and to the point. Obviously, though, I am hoping for actual, measurable changes rather than just mere words - but at least it's a start.

Indigenous Australians are this country's poorest people. How they fare under the Rudd government over the next few years will help define whether this new government is a success or a failure in the eyes of history. After 11 years of Coalition rule, history will not be kind to John Howard when it comes to his dealings with Aboriginal people.

The importance of cold, hard, facts

What drives you? Ideology? Pragmatism? Or maybe a bit of both?

When it comes to issues of faith - which arguably could be defined as ideology - there is much that can't be tested or prodded scientifically. God can't be proven to exist in a lab, or via some form of empirical testing. Of course the fact that God can't be proven to exist in this manner does not mean he doesn't, since there are limits to what science can achieve (although it can achieve quite a lot).

It's when ideology (not faith) hits the real world that its advantages and disadvantages are shown up. Imagine ideology like a tyre built for motorcycles in the MotoGP - if built correctly it serves brilliantly, but one small mistake could end in a crash.

Communism is a classic case of ideology driving a society into poverty. Soviet central planners, in their desire to remain ideologically pure, instituted economic processes that fitted with their ideology - namely, that supply, demand and price is set by the planner rather than the horrible "market" that those dreaded capitalist countries used. The problem was that central planning just didn't work. Too much of one thing was made, resulting in warehouses full of unused products (like spare parts for steam trains), while too little of other things were made, resulting in shortages, and prices were set by committee, resulting in queues and black market profiteers.

Soviet Communism worked quite well from about 1950 until 1970. But from 1970 onwards, it was obvious that a limit had been reached. Economic growth stagnated, people's standard of living drifted downwards and ordinary Russians began to quietly grumble. It took the Soviet Union about 15 years to realise that its ideological practices were simply not working. A change was needed. Then Gorbachev arrived, Perestroika was introduced, and the rest is history.

Ideology that is unsupported by cold, hard, facts becomes useless. One of the reasons why economic neoliberalism (a freeing up of markets) has become so popular over the years is that it has worked. Yet, even now, free market ideology is blinding many people as to its limits. Facts - cold hard facts - need to be assessed and digested in order for ideology to work. Ideology itself needs to change by the presentation of objectively sourced facts.

Back in either 1981 or 1982 a group of Greenies came to Epping Boys High School. These greenies were worried about oil. Our teacher allowed them into our class where they presented their facts and got us to discuss them. The facts were obvious - oil was running out and there may not be enough oil to power our cars by the year 1990. They presented graphs and gave compelling evidence that this was occurring. Of course, I was about 13 at the time so I wasn't really looking ahead to 1990 and the international calamity that was going to befall us.

It was in 1990 that I vaguely remembered those strange greenies. "These guys said we were going to suddenly run out of oil" I said to myself, "What a bunch of losers! There's plenty of oil out there". And so was my opinion - my ideology - created out of cold, hard, facts.

So when in 2004 my friend Dave emailed me about this thing called "Peak Oil" that the world was running out of oil, I was scarcely in the mood to listen. I had read in the Economist magazine that the world had about 100 years of oil reserves left in the ground. While Dave was going psycho, I was just nodding my head and telling him what I knew.

In hindsight, Dave's refusal to give up his argument was the best thing to happen. The reason was (and still is) that I am a firm believer in cold, hard facts. So rather than just dismissing Dave as a raving looney, I sought to discredit his argument. I read up about Peak Oil. I visited the ASPO site. I eventually came to grips with the science behind Hubbert's Peak.

And, armed with all this information, what did I do?

I changed my mind.

Why? Why did I embrace the idea of Peak Oil when my first experience of oil doomers was so negative? Well, first of all, was the removal of an important assumption - that these people were saying that the world would suddenly run out of oil. No. After looking at Peak Oil and understanding the concepts behind it, I realised that the world was never going to suddenly run out of oil - it was going to slowly run out of oil.

It was then that I realised that those greenies back in 1982 were actually correct in theory, but wrong in their predictions. The reason why their predictions were wrong was that the facts they relied upon were going out of date. These greenies were looking at proven oil reserves and average oil consumption at the time - both of which changed drastically during the 1980s (oil reserves grew, oil consumption dropped). These early peakniks may have left me (and others) with the impression that oil was going to suddenly run out, but, the truth was, that they were early adopters of a real problem, but had not been given the correct information. In other words, cold, hard facts.

These days it is different. Peak Oil has entered the mainstream. Moreover, there are cold, hard facts behind it. Oil production levels worldwide have been at a plateau for the past 12-18 months while the price of oil has skyrocketed - proof that something is preventing oil supplies meeting demand. Then there's the cold, hard facts about American oil production, which peaked in the early 1970s and has been in decline ever since - empirical proof that Hubbert's Peak is good science.

This same phenomenon - cold, hard, facts - is what has also turned me into a "believer" in anthropogenic global warming.

The thing is, I was interested in global warming and its potential effects long before it became a political issue. Back in the late 1990s and early 2000s I remember examining all the potential explanations - that warming was a cyclical phenomenon, that sunspots were to blame, that "urban heat islands" were distorting temperature measurements. I looked at them all and still came away convinced that, while world temperatures were affected by exogenous phenomena (sunspots, Milankovich cycle), there seemed to be very clear evidence that a) CO2 levels in the atmosphere affect global temperatures (the more CO2, the warmer it is), and b) that CO2 levels in the world's atmosphere have been rising substantially since the industrial revolution. Years before Gore did his film, I was a believer.

And it wasn't as though I didn't go through doubts - I did. For a time I became a denier - but, again, this was before the whole issue became political. Talking to science teachers helped too. In fact, one science teacher in a science staffroom spoke out in favour of global warming, arguing that it was a good thing and created life - much to the surprise of the rest of the staffroom, who couldn't believe that the guy's arguments were anything but bunkum. But all this was before it was political. The science teachers who were "believers" so many years ago were not left-wing communist greens, and the science teacher who was a "denier" was not a free-market, small-government conservative.

These days it is much more difficult to maintain a position on global warming without somehow siding on one side of the political fence, or at least being accused of doing so.

One problem, of course, is the Green movement itself. Back in the 1990s, Greenies had a broad environmental agenda. They were more cognizant of global warming than the rest of the population, but they also focused upon the Ozone layer, the extinction of plants and animals, as well as encouraging people to become vegetarians. So, as global warming became more part of international consciousness, those who spoke up about it were generally greenies - which meant that they automatically alienated a significant portion of the population to the message since it then became political. These days greenies focus very strongly on global warming.

Back when John Howard came to power, I was very much a hater of greenies and lefties, strange as it might seem. This view was backed up by my very limited exposure to university politics at Macquarie University. In the late 1990s, Australia was definitely moving in a conservative direction, and all the whining, bleating, feminists and environmentalists and political activists were yelling the most at Uni. For a while under John Howard I became quite politically conservative as well (and I voted for him).

It seems strange now that I vote for the Greens when I have such bad memories of them. There is something quite uniquely distasteful about leftist political protesting. I remember when a bunch of feminists protested against the introduction of the GST by complaining that tampons would be taxed - they turned up at a political meet wearing women's underpants on the outside of their jeans, with red paint smearing the nether regions of the underwear as they claimed that the GST would make tampons less affordable, thus making the GST anti-women. It was a very low point in my opinion towards lefties.

But the reason why I vote Green these days is not because of these strange anti-GST feminists, or the freeway protester who flipped her middle finger at me as I rode by on my motorbike (they were protesting against the freeway's existence on a pedestrian bridge. As I rode closer to them I waved and the woman flipped me off in response). No. Even though I don't like their choice of clothes or even the fact that their economics is too left wing for me, they were right about global warming. They were convinced by the cold, hard facts and came to the same conclusion that I did.

I'm not a "greenie". I eat meat, I drive a car, use disposable nappies and think that capitalism is not all evil. But I can't get away from cold, hard, facts.

I contacted a friend of mine last week. He's a godly man from my old church. He's just completed his M.Div and is currently looking to join a missionary organisation. The idea is that he go to a developing nation as an academic and become a tent-maker. What sort of academic is he? He has a Ph.D in earth sciences, specifically in studying the effects of tropical cyclones in flooding Fiji. Not only is this guy a conservative evangelical who knows his Koine Greek and has an M.Div from Bible College, but he is also a climatologist with a doctorate. When I asked him about anthropogenic global warming, he comes down firmly on the "believer" side. I don't know what party this guy votes for, or whether he considers himself politically left or politically right. What I do know is that his opinion on global warming matters, and his expert opinion matches the opinion of my own - "informed amateur" I may be.

Let me finish by talking about Al Gore quickly. Al mentioned in his film that there were no peer reviewed scientific papers that disagreed with anthropogenic global warming. This statement is based upon a paper released by Naomi Oreskes (link, pdf, 71.2kb), in which she examines every single peer reviewed scientific paper on climate change between 1993 and 2003 - a total of 928 articles by climatologists and other experts - and finds that none of them expressed any doubt whatsoever that the current phenomenon of global warming has human activity at its basis. Moreover, reputable scientific bodies all over the world have released statements affirming their belief in anthropogenic climate change (read more here).

Al may be a Democrat. Al may have his own political ambitions. Al may even have ulterior motives behind his film. But he is right. Global Warming is a truth that is very, very inconvenient.

The Liberal Party is not history

From the department of even-I-know-that-making -wild-predictions-can-be-silly:

So what will be the new polarity in future elections? It's the ecology, stupid. The Greens will emerge as the new opposition, though this will take probably two election cycles. By the 2010 election, 20 per cent will vote Green, simply because peak oil and climate catastrophe will have proven them right, and thinking people will see the need for austerity now for our children's tomorrow. The Liberal Party will be lucky to attract 30 per cent, which is the habitual, rusted-on portion of the community that thinks greed is good.

By 2014, we will have a struggle between a new left and right - Labor and Green - and the issue will be simply how green, how to balance the need for a much simpler and more communal kind of life, with the need to give people comfort and amenity now. This issue will continue to define life for the rest of this century.

Climate change will bring horrific costs this century unless a global effort is rallied in a way that has never been done before to regulate our gluttonous use of the air and water. Perhaps a billion lives are at risk, let alone 2 to 3 billion refugees, as agriculture and water supplies collapse across southern Asia and elsewhere, and producer countries, like Australia, find they can barely feed themselves.

The big lie of Liberal supremacy was economic management. In fact, they knew how to generate income, but not how to spend it. We could have been building what Europe built in this past decade - superb hospitals, bullet trains, schools and training centres, low cost public transport of luxurious quality, magnificent public housing. We pissed it all away on tax giveaways and consumer goods. On bloated homes that we will not be able to cool or heat, or sell, and cars we won't be able to afford to drive. A party based on self interest may evaporate along with our rivers and lakes, and have no role to play in a world where we co-operate or die.

This article was written by Australian psychologist Steve Biddulph. Having a psychologist wax lyrical about politics may sound a bit silly, but then, if you're reading my blog you can accept that ordinary people can have opinions on things (even if they're crazy).

Biddulph's article has been dissected slightly by both Byron and Dave who make note of Biddulph's mention of Peak Oil and Global Warming. Of course I agree with all three (Byron, Dave and Steve) yet I can't help but feel a little concerned about Biddulph's very specific prophecies. He states, for example, that 20% of voters in 2010 will vote Green, that the Liberal Party will struggle to get 30% of the vote and that a new political order will eventually exist between a left-of-centre Labor party and the leftist Greens.

Biddulph is correct in that there will be a movement towards the left - but this is not so much due to economics or the environment but simply socio-historical factors. All nations around the world have swung towards the left and to the right since the industrial revolution and the birth of modern democracy. Australia has gone through a conservative phase and is now due to go through a progressive one. Eventually we will move back towards conservatism. Other nations, like the US, Britain and Europe, go through the same process, although there will often be a disconnect between when nations do this. The US, for example, is becoming progressive while France, for example, is becoming more conservative.

The problem with Australia's experience with conservatism is that, economically, it has been quite successful. Take out the problems with Workchoices and housing market overheating caused by Negative Gearing & the First Homebuyers grant, and you will find that the handling of the economy by the Coalition government was probably the best in the entire world. At no point during the Coalition's reign did a recession hit (even though the world went through two major economic crises in 1997 and 2001), government spending was reduced (but not enough to hurt badly) and average income rose (without sacrificing median income - until workchoices hit that is). Moreover - and I will say this until I am blue in the face - Australia's public debt is now effectively zero, a unique accomplishment in the industrialised world, and not dependent upon government owned oil companies (as is the case with Norway). While Biddulph is correct when he laments over the lost years of not investing in things like education, health care and public transport, the fact is that any move towards these sorts of things under the new ALP government is more likely to be economically sustainable.

(I need to point out that although the Coalition managed to pay off public debt, the debt which had accrued under the Hawke and Keating government was much less than what people realise. At its peak, public debt in Australia reached the equivalent of 20% of GDP, which is quite mild compared to places like America, currently at 40% of GDP, and Italy, currently at 100% of GDP. It's facts like this that make me trust the ALP fiscally since they didn't mess up as badly as the Liberal party would like us to believe. A friend of mine, a former young Liberal, told me in all earnestness that Australia in 1996 was on the verge of begging help from the IMF, such was the problem with public debt. In hindsight, that sort of belief was very much incorrect.)

So while the Howard government and the Liberal party have been thrown out of office for everything but economics - and deservedly so I might add - the underlying belief will be that, if Australia faces an economic crisis, the Liberal party will be popularly seen as being good stewards of the economy. That will be enough to keep the Liberal party in people's minds for some time to come.

Of course, much depends upon what happens over the next few years as to whether the Liberal Party's public perception is altered, and whether or not the ALP and the Greens will become more popular. So far, global warming has not made any massive changes yet. While we hear of Greenland melting, we have yet to actually see any form of sea level rise. That may come suddenly or it may come in many years. There's no doubt that if Australia suffers economically and socially as a result of global warming then the Liberal Party will lose out terribly, since it was they who refused to do anything solid about it in their eleven years in government. If things keep going the way they are over the next three years, with greater public acceptance of global warming influencing government policy, then we can expect quite a few more votes going towards the Greens, but nothing like the 20% that Biddulph predicts. As I pointed out the other day, the Greens would be lucky to get beyond 9% of the vote in 2010, all things being equal of course.

But what about Peak Oil? Will the reputation of the Liberal Party suffer because of the effects of reduced oil supplies and higher petrol prices? I doubt it. Despite government inaction, Australia is one of the few nations lucky enough to be well suited for the Peak. With an agricultural surplus and vast coal reserves, Australia stands to gain much economically during the coming crisis. Moreover, the economic conditions that have prospered under the coalition government will respond well to increased overseas exports.

So while Biddulph is correct in his assumption that Peak Oil and Global Warming will affect Australian politics quite strongly for years to come, I don't think we can assume that the Liberal Party will simply disappear of the map, and nor can we assume that the Greens will be able to capture the mainstream vote.

Of course, I could quite easily be wrong and Biddulph could quite easily be right if a sudden global environmental disaster - such as the melting of Greenland's ice sheets - occurs within the next few years. I fully expect some level of crisis occurring within the next 20 years, but there is no way to find out which is more likely.

The most soothing words I have heard in a while...

"My fellow Australians, a few moments ago I telephoned Mr Kevin Rudd and I congratulated him and the Australian Labor Party on an emphatic victory." - John Howard.

A nice picture of John Howard

He's in line to vote at Ermington. It's a nice scene. Howard is smiling at the camera while others in his electorate line up in front of him, thus communicating the idea that all people are equal in a democracy. Behind the smiling Howard are posters of a smiling Kevin Rudd, the man most likely to replace him as Prime Minister, thus adding an ironic tone to the picture.

If you don't like your job, quit and get another one

From the department of all-jobs-are-equal-apparently:

Federal Health Minister Tony Abbott says workers who are unhappy with their employment should just look for a new job.

Mr Abbott was captured on amateur video speaking at a local electorate function earlier in the week, and admitted that workers' rights have diminished since WorkChoices was introduced.

The footage was screened on ABC TV's Lateline last night.

Mr Abbott said the best option for aggrieved workers was to find alternative employment.

"That is the best protection. Not going off to some judge, or industrial commission, that might order your employer, who you don't like, and he doesn't like you, to keep you in an unhappy partnership forever," he said on the video.

One week to go, the Coalition government is trailing significantly in the polls and then Tony Abbott has to say this. Honest? Yes. But his entire attitude comes across as blinkered and arrogant. With this sort of thinking, the Coalition deserve to lose.

People don't just want jobs, they want security, of which a steady job is an essential part. A worker would much rather stay and fight for his rights in one job than simply quit and find another one, especially if the pay is lousier, the hours worse and the location difficult to get to.

The entire IR legislation that the Coalition government imposed on Australian workers has resulted in higher employment levels (see the section on the Labour Market here). Yet since the legislation was passed studies have been showing a drop in median income levels. The statistics look good, but the people feel bad, and the reason is that unemployment stats don't recognise how important "feeling secure" is in a job.

Having studied the IR laws a bit more over the past few months I have to say that, while a change from the old system was necessary, the model imposed by the Coalition has not impressed ordinary Aussie workers. Certainly some businesses and employees have ended up happy with it, but the majority have not.

As a result, the people have abandoned the Coalition in droves. Rudd and co. aren't going to provide a Socialist utopia, but obviously people are sick of Howard.

John Howard - Political Opportunist

From the department of politics-at-its-very-base:

A contrite John Howard has reversed a decade of opposing symbolic gestures towards Aborigines by promising constitutional change to begin what he calls "new reconciliation".

In an important shift, he promised last night that if re-elected he would hold a referendum within 18 months to incorporate a "statement of reconciliation" into the preamble of the constitution.

It would recognise the history of indigenous people as the land's first inhabitants, their culture and heritage, and "their special, though not separate, place within a reconciled, indivisible nation".

At any other time in the history of the Howard government, this sort of announcement would be as unexpected as it would be welcomed. Spending on Aboriginal welfare dried up after 1996, partly as a response to corrupt activities by some Aboriginal groups, but mainly as a response to Pauline Hanson's rising popularity and desire to punish Indigenous Australians for not having the common courtesy to die out like the history books of yesteryear claimed they would.

But, at this point, the decision to hold some sort of referendum on the issue, along with admissions of care and concern for Indigenous Australians, smacks of simple political opportunism. Moreover it is a grasping of straws in the face of an oncoming election defeat. The sad thing is that most Aussies will see through this.

Terrorism vs Global Warming

From the department of I-never-knew-there-was-a-choice:

Prime Minister John Howard says terrorism is a more immediate security threat than climate change, but both are major issues facing Australia.

Defence Minister Brendan Nelson has rejected Australian Federal Police Commissioner Mick Keelty's view that global warming is the greatest challenge to Australia's national security, instead naming terrorism as the key threat.

Mr Howard told Southern Cross Radio he does not automatically agree with Mr Keelty's assessment of the scale of threat posed by climate change.

"They're both big issues," he said.

"I think terrorism and Islamic fundamentalism are far more immediate threats to Australia than the mass movement of people in China as a result of water storage and water shortage.

"But both of them are important, and I don't think that it's a question of an either or.

"They're both big challenges and they're both things that we should worry about."

I find this line of argument from Howard and the coalition quite offensive.

First of all, there is no "choice" between engaging one and not the other. Both threats need to be handled correctly.

Secondly, the Howard government's concern for terrorist attacks led us into an illegal and immoral invasion of a sovereign nation which has made the world even more threatened by terrorism.

Thirdly, the Howard government has only just recently decided that climate change is actually happening, having moved from scepticism to acceptance faster than you can say "election soon".

What this tells me is quite clear - the Howard government has been reactive, rather than proactive, on both issues, and have failed to address either of them constructively.

Howard spends $400 million

From the department of everyone-knows-an-election-is-coming:

Prime Minister John Howard has announced more than $400 million in new funding for drought-affected farmers.

Mr Howard has extended exceptional circumstances funding until September next year for 38 drought-declared areas in southern Australia.

He says extra money has also been set aside for a large part of Tasmania, as well as Western Australia.

"We are expecting to receive from the Tasmanian and Western Australian Governments respectively applications for exceptional circumstances declarations," Mr Howard said.

"I'm making the interim declaration so that some of the assistance can begin to flow from those areas immediately."

The rights and wrongs of Howard, 1996-2007

I've railed against Australia's Coalition government enough on this blog for you to realise that I'm not exactly fond of them. Yet there are times when I have praised their work since 1996. What is going on?

For starters, I consider myself an independent leftist. I am not a member of any political party so, for me, supporting one party or another blindly has no merit. What I like is results.

The Howard government, now coming to an inevitable and hubristic close, has done much to harm our country. In response to Pauline Hanson's influence in the late 1990s, the Howard government abandoned much of the compassionate attitudes our country was trying to develop. Under Howard we had refugees being sent to Nauru and blamed for tossing their kids overboard. We had internment camps for illegal immigrants. Moreover, we had Australian troops participate in an unjust invasion of Iraq and make us complicit in the deaths of over 650,000 Iraqis since 2003. Lastly, despite eleven years to get things right, the Coalition's lack of concern for indigenous Australians has resulted in a continued level of suffering and deprivation, knee-jerk responses to this notwithstanding.

But what have they done right? The reforming of the tax laws and introduction of the GST was something I always supported - I never saw the GST as some impost on the poor but rather a sensible taxation measure. This new tax has rebalanced our economy and made it stronger - and a strong market economy is important when it comes to redistributing wealth to ensure equality.

The other thing that Howard and Costello did was to be fiscally prudent. Although I would have preferred tax increases rather than budget cuts (and the shrinking of the size of government along with it), the result has been a complete elimination of government debt. While countries like Japan, Italy and Belgium have government debt the size of their GDP (or greater), Australia has no net debt to speak of. And this is not (as some have suggested) the result of good luck, since if luck was equally apportioned out to other world governments then the government debt of selected countries would be paid off as well. The fact is that Australia is unique in the industrialised world in that its debt levels are non-existent. If Australia goes through a recession (and it probably will in the next two years), then any fiscal or monetary policy used to stimulate economic growth will be more effective simply because our government is not burdened down with debt.

The ALP will not, I believe, squander this good work. Under Hawke and Keating, the ALP's economic reform between 1982 and 1996 was just as important as anything Howard and Costello achieved. In fact, economists like Ross Gittins often point out that the economic gains of the Howard government would not be so great without the ALP's pre-1996 reforms. It is therefore likely that Kevin Rudd (Australia's next Prime Minister) will not turn into a free-spending, union-obeying, market-hating idiot (although he does have time to do that if he chooses).

I'm a "social-market economist" - not a Marxist or Communist. I believe that a balance needs to be sought between the natural actions of the marketplace and the importance of redistributing wealth to ensure equality and equity. There is no doubt that our nation has become richer under Howard and Costello, but there is also no doubt that there is a greater gap between rich and poor. WorkChoices, which has skewed the advantage against ordinary workers and favours bosses, has been an unmitigated social and political disaster.

I am hoping that the ALP will use the current good economic conditions to spread the wealth more evenly. More money needs to be directed towards public health and public education; towards helping indigenous Australians to become self-sufficient; towards encouraging new forms of energy and promoting public transport in the face of the dangers posed by Global Warming and Peak Oil. Yet I want them to do this intelligently and make few (if any) financial decisions based upon gaining votes and political power.

Washington Post on Howard and Australia

By E. J. Dionne Jr:

MELBOURNE, Australia -- In describing the average voter's view of the economy, which opposition party politician said, "If things are going so well, why am I finding it so tough?"

Guessing Hillary Clinton, Barack Obama or John Edwards would be reasonable but wrong. The words are those of Kevin Rudd, the leader of the Australian Labor Party, who, if current polling numbers hold, will be elected this fall as Australia's next prime minister.

The "if" is important -- the 11-year incumbent, John Howard, is one of the toughest politicians in the democratic world and will not go down without a fierce fight. The election campaign here is an important test of whether good economic numbers are enough to reelect an incumbent party when, even in the midst of affluence, voters feel stressed, overly in debt and time-poor in their personal lives.

Julia Gillard, the Labor Party's deputy leader, cites all these factors in casting the campaign as a choice between the Howard government's economic record and "fresh ideas, a government in touch with people's needs and fairness at work." She and just about everyone else expect the government to run "a fear campaign based on the economy," as she puts it, a strategy rooted in the claim that Rudd's Labor Party would wreck what Howard has achieved.