Tuesday, June 1, 2010

The dirt on dodging the GFC

THERE was a time when the Organisation for Economic Co-operation and Development had clout in Australian politics. Its forecasts and its advice used to be treated as statements from an oracle. Not any more.

Last week, the OECD's half-yearly forecasts passed almost unnoticed here not because they were bad news, but because they were good news, and good news no longer rates.

The OECD forecasts that over the next two years, Australia and Canada will share the second-highest economic growth among its 25 rich-country members (South Korea coming first). Australia's output gap the gap between the level of economic activity and our potential level would be the lowest of all 25.

Australia's government deficit, the OECD predicts, would be the sixth lowest of the 25. Its unemployment rate would be the seventh lowest. The only negatives were that our current account deficit would be the seventh highest in the rich world and our interest rates the second highest, behind Iceland.

OK, you say, it's good news, but it's old news. We all know Australia has been among the best-performing OECD economies over the past two years. Kevin Rudd and Wayne Swan keep telling us we're leading the "major advanced economies" (a flexible term which seems to mean anything they want it to mean). What's new?

What's new is the conflict between the OECD forecasts and the Lowy Institute's 2010 poll, released yesterday, which asked Australians to give the government a mark out of 10 for its handling of the global financial crisis. On average, we gave it a mark of just six out of 10: a pass, but no credit, no distinction, let alone the high distinction Rudd and Swan think they deserve.

This is worth exploring. What we think of the government's economic management is a central issue in any election campaign. I suspect it will have more sway on this election outcome than Labor's tax on mining profits (which will hurt Labor in mining seats and in Perth, but have little effect elsewhere). If you asked the OECD and the International Monetary Fund to rate Australia's performance, I have no doubt they would give it much better marks.

Both have praised the government and the Reserve Bank for the speed and direction of their response and now, for moving early to rein in the stimulus once it is no longer needed. And I suspect most of Australia's market economists would give similar marks.

So why don't Australians in general give the government high marks for steering us out of the crisis? I can think of several reasons.

The first is that Australia's rapid population growth disguises the reality: we suffered more damage that the growth figures suggest. The bottom line is not growth in GDP, but GDP per head. It fell 2.1 per cent over the 15 months to September 2009. Real consumer spending per head has barely grown in two years.

Unemployment rose by 220,000 during the crisis, and is still 185,000 higher than in February 2008. (And remember, the dole for single workers is just $231.40 a week.)

The labour force has grown by 400,000, yet full-time employment is still 40,000 below pre-crisis levels. Parts of the economy are booming. Most are not.

The second reason is that Australians are among the world's most highly indebted people and the cost of that debt has risen sharply since the Reserve Bank and the big banks started raising interest rates last October. We owe the banks 156 per cent of our disposable income (a dramatic rise from 45 per cent two decades earlier). Our mortgage bills have risen 40 per cent in the past year. They are still lower than they were before the crisis, but many voters don't feel grateful.

Third, the Rudd government's stimulus spending has become badly tainted by all the evidence of massive waste, overcharging by contractors, poor regulation of contractors, and general incompetence, as getting value for money was ignored in the rush to roll out programs. That alone would be enough to explain the low marks we gave the government. It was our money they were spending.

But there is a fourth factor. The Coalition and its rusted-on supporters contest the idea that the stimulus spending helped Australia avoid the slumps seen in Europe, the US and even (briefly) Asia.

They've argued that we survived because Labor took over an economy in such good shape that we were never going to go into recession. Now Tony Abbott has introduced another twist, telling us it was the mining industry that saved us from recession.

Treasury secretary Ken Henry has not helped the debate by arguing that, on the contrary, the mining industry itself suffered "a deep recession", basing his claim on figures that show mining jobs falling by 15 per cent in six months.

These figures come from a survey too small to be reliable. They tell us that in 2008, mining jobs shot up by 30 per cent in nine months, then fell 15 per cent in six months, then rose 15 per cent in the next nine months! That is sheer rubbish.

The recession was concentrated in manufacturing, where output fell 11 per cent: mining output fell just 1 per cent. Mining didn't save us from recession. The impact of China's stimulus certainly helped us recover, but only after the worst had passed.

Australia dodged the worst of the global slump for two main reasons. The banks' lending was kept within sensible limits by the Australian Prudential Regulation Authority and their own management teams. And the Rudd government's stimulus measures put a floor under retail spending, housing and construction activity when it was most needed. Let's give credit where credit is due.