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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Dark clouds gathering
Date: Tuesday, April 19, 2011
Author: Henry Thornton

Dark clouds are gathering over the global economy.  'Double dip' recession is being discussed.

Standard and Poors are deeply concerned at how the USA will resolve its monster budget deficit.

Euro debt gets worse, with the so called PIGS (Portugal, Ireland, Greece and Spain) all struggling with excessive debt, high unemployments and who knows what is the true state of Euroland's banks.

China's giant investment fund head worries publically about the flood of western liquidity that has produced inflation is China and other emerging economies.

'Emerging economies are particularly concerned about the effects of the loose monetary policy in developed economies that is driving capital to their shores in search of higher returns, boosting inflation and creating volatility in commodities markets.

'Policymakers in these economies are struggling to balance the need to propel domestic growth amid an uncertain international environment against the dangers of mounting inflation'.

If any of this sounds familiar, it should do so.  These disturbing trends and policies to improve matters are discussed in the author's Great Crises of Capitalism. 

And in distant Australia ...

Australia, the so-called 'miracle economy', has been propped up by the China boom.  Before long, even the Rudd/Gillard government's Treasurer Wayne Swan will wish so much money was not flushed away during the Keynesian panic of 2007-08.

Now Treasurer Swan has a massive budget deficit and is slicing and dicing government spending (including spending on medical research).

Clearly Treasury under the benign leadership of Great Helmsman Ken 'wombat' Henry lost its traditional role as guardian of Australia's fiscal probity.

Now Michael Stutchbury wages war on Wayne Swan's 'Keynsian fantasy', while athe global stormclouds gather.

If there is a 'double dip' global recession anytime soon, the reputations of Messrs Swan and Ken Henry will be trashed, along with the jobs of hundreds of thousands of Australians.

Also trashed will be the NBN, meaningful tax reform and great big new taxes of any variety.

Such is life, as someone once said.  But we should have been capable of managing the first and second resource booms of the early twenty-first century so much better.

Political retribution will be severe - the government will change and Wayne Swan will no longer strut the global stage.

We must also hope that Treasury regains its traditional role of guarding Australia's financial independence.

Global house prices looking frothy
Date: Wednesday, September 10, 2014
Author: Henry Thornton

Sensible central banks have accepted, following the lead of New Zealand, Canada (and therefore the Grand Old Lady of Threadneedle Street) and the US Fed, that monetary policy is to be used for maintaining overall economic stability and low goods and services inflation. Attempting to control house prices depends on what is called 'macroprudential policy', which some people of limited vision have lampooned as the revival of direct controls on the banks.

With global house prices, including Australia's, looking frothy, this is more than an academic matter. We do not know the RBA's attitude to this matter, except the Governor seems to think monetary (interest rate) policy will do the task, while the Deputy-governor is more likely (given his academic writing) to be sympathetic. (If pressed I can find evidence to support these statements)

But first to the facts, provided by The Economist. 'In June', says the venerable mag, 'the IMF called on policymakers to do more to curb housing prices around the world, pointing out that valuations looked high in many countries (see article, and note in particular the degree of Australian froth). In May the European Central Bank singled out sky-high prices in Belgium, Finland and France; in July Moody’s, a ratings agency, said that Britain showed signs of a new property bubble. The trend is all the more remarkable given that many of those economies have not fully recovered from the financial crisis and are growing feebly if at all'.

The classic Greenspan/Bernanke approach was to say 'We cannot tell if it is a bubble, so all we can do is wait for the crash and clean up afterwards' (and after the two last share crashes this involved near zero interest rates that set up the next share boom.)

Now a more sensible approach is being used. The Economist quotes an expert: “You cannot know you’re in a bubble, but you can know that debt has moved too far,” says Urban Backstrom, a former governor of the Riksbank, Sweden’s central bank. However, expectations that borrowing will stay cheap and not enough new homes will be built continue to push prices higher.

Then we come to the critique of those, like the RBA, who have said that their approach is to use higher interest rates than needed for economic stability and low goods and services inflation to 'lean into' asset inflation. (Henry has already confessed that until early 2013 this was his recommended approach also.) The Economist again: 'Central bankers cannot use interest rates to deflate the housing bubbles since, asset values aside, the economies of the countries concerned remain so sickly. Sweden’s attempt to cool the market with an increase in rates in 2010 backfired: unemployment stopped falling and the country headed towards deflation, forcing the Riksbank start reducing rates again in 2011. If anything, monetary policy is likely to provide a further spur to house prices in the euro zone, since the ECB is toying with the idea of buying bonds in an effort to bring borrowing costs down yet further'.

There's more: 'Macroprudential tools, to discipline both banks and borrowers, are a subtler set of instruments. Setting stricter limits on the amount people can borrow relative to the purchase price (the “loan-to-value” ratio, or LTV) or to their household income (loan-to-income ratio) helps to curb buyers’ irrational exuberance; increasing the amount of capital that banks must hold against mortgages checks theirs.

'The Netherlands has applied strict limits of this sort, with striking results. In 2011, with the euro crisis in full swing, the average new mortgage in the Netherlands was 112% of the property’s value, putting Dutch household debt among the highest in Europe. The authorities hastily introduced a host of restrictions: LTV was capped at 106% in 2012 and is due to fall to 100% by 2018; capital requirements for banks were raised immediately. The government is also gradually reducing the tax break for interest payments on mortgages. These changes, along with the economic downturn, were enough to push prices down 20% in three years in real terms (after accounting for inflation, that is)'.

So there you have it gentle readers. To make matters worse, Australia has another 'macroprudential' issue, the excessively high Aussie dollar.  While the economy needed monetary (ie interest rate) stimulus, the RBA could comfort themselves that cutting interest rates would also encourage a lower exchange rate. But now that house prices are getting frothier, 'leaning in' to house inflation is only possible if maintaining overall economic stability and low goods and services inflation requires higher interest rates, and at present this is not obviously the case.

So the RBA needs 'macroprudential policy', in fact two such policies.  The first is to help contain house prices, though the government could help by appropriate reform of rules for negative gearing. The second it to help reduce the overvalued dollar, which requires a tax on capital inflow, and, incidentally, a subsidy if the rate falls too low.

No doubt Messrs Stevens and Lowe discuss this matter over their elegant morning tea at least once a week. Get on with it chaps or you will be battling on three fronts with only one weapon. Not smart, comrades.

More here for masochists. 

The Australian says 'Wildly imbalanced housing market poses danger'.

Stimulating innovation
Date: Monday, September 08, 2014
Author: Tony Peacock, CRC Association

The British public has voted for antibiotic resistance research to be the subject of the 'first' Longitude Prize. The Longitude Prize 2014 is a prize fund of £10 million to tackle one of the biggest issues facing humanity, with the British public voting for antibiotic resistance over the field that also included flight, food, paralysis, water and dementia. The Longitude Prize 2014 commemorates the 300th anniversary of the Longitude Act of 1714, which was eventually awarded in 1765 to John Harrison for his chronometer (as well as sparking many other innovations).
The announcement of the public vote was made live on the BBC by British Prime Minister, David Cameron last month. The award is administered by the innovation charity Nesta, with the prize fund being put up by the UK's Technology Strategy Board. Lord Rees, the English Astronomer Royal, chairs the Longitude Committee, which is still working out final rules for awarding the prize.
What a magnificent way to capture the public's imagination and highlight the importance of innovation. Terry Cutler recommended Australia explore this approach in his 2009 report on the innovation system. To my knowledge, nothing came of that recommendation. But it remains a valid approach: kind of the ultimate in terms of priority setting.

Australia has an interesting history in science prizes. Henry Parkes offered £25,000 in an international competition in 1887 for a microbiological 'fix' to the rabbit plague. Louis Pasteur was one of the 1,500 entrants and sent his nephew to Sydney to try and secure the prize. Even though the rabbit prize was never awarded, you can draw a line from Pasteur's work to Dame Jean McNamara's proposal for myxoma virus to be applied in 1908 through to when it was eventually applied by CSIRO in 1951 (and still knocks off half of the rabbits born in Australia today). You can even argue that Australia's historic science strength in microbiology which persists today dates from the rabbit prize.
You never know where innovations might occur. Pasteur's nephew, Adrien Loir, spent two weeks at the Victoria Brewery, teaching Pasteur’s yeast cultivation techniques. Victorian Bitter continues to be brewed in the same method today.
Science prizes can open up an area to real innovation. John Harrison was a completely self-taught Yorkshireman. Then unknown Charles Lindbergh won the Ortieg Prize in 1927 for the first successful Atlantic air crossing. Lindbergh continued to be an innovator, adding hundreds of miles of range to US fighters in the Pacific War. The Virgin Earth Challenge has named 11 finalists vying for a $25 million prize for whoever can demonstrate a commercially viable design which results in the permanent removal of greenhouse gases.

For a really difficult challenge, I think the Michelson Prize is the best designed. Spinal surgeon, Gary Michelson and his wife Alya have made $75 million available with $25 million for an innovator who can come up with a single-dose, nonsurgical sterilant for male and female cats and dogs.  Recognising the difficulty, Michelson has made up to $50 million available in grants to make progress towards the prize. To date, the charity Found Animals has committed over $14 million in Michelson Grants to more than 30 approved projects worldwide, including to 2012 NSW Scientist of the Year Professor John Aitken at the University of Newcastle.

Perhaps it is worth revisiting Terry Cutler's 2009 recommendation and include an element of public involvement and grant funding? Of course, that option is open to anyone, not just governments.


Saturday Sanity Break. 6 September 2014
Date: Saturday, September 06, 2014
Author: Henry Thornton

National income is falling due to the fall in the terms of trade, and further falls are likely.  It is the anniversary of the Abbott government and business and household confidence is subdued by international turmoil and the government's failure to get all of its budget repair job done. While the RBA's plea for us all to focus on the half-full part of the glass has been taken up by government leaders, the economic water level is falling and people do not like that. More here.

It looks as if Australia is becoming embroiled in the madly diverse cultural and tribal conflicts in the Middle East. No choice really. People who oppose educating girls, and rule by intimidation and atrocities, including murder by sawing off the heads of hostages on videos released for the world need to be controlled. And did I really hear the raddled leader of the Greens say we should not describe those people as 'terrorists'. Glory be, madam, what are you smoking?

National debt is predicted to grow until the end of the decade in a best case. The falling national income level will limit vast spending schemes by governments and make reforms harder rather than easier to get approved by the unprecedented bunch of eccentric cross-bench senators. For the battlers, it is a case of batten down the hatches and hope things improve before our glasses are dry.

We can be a great nation. To avoid being a mediocre one, we much get our act together on monetary policy, fix the budget, find ways to greatly upgrade infrastructure, including defence spending, and devote much time and effort to freeing up the national regulatory systems. The tax and welfare system has to be rejigged to encourage saving, working and innovation far more consistently. Greatness will come only when we regain our reputation as an economic power to back up our newly rediscovered brave and confident foreign policy.


What is shaping as one of the best rounds of footy seen for years is unfolding. Hawthorn and Geelong played a corker last night. Sydney against Freo will answer questions about both teams. North Melbourne vrs Essendon should be a goodun, and Richmond agin Port Adelaide may be a game for the ages. Many Melbourne-based fans will be cheering for the Tiges, and if they can continue their form of the last half of the regular season there is a possible fairy-tale ending for the season to cheer all but the supporters of the Super-clubs.

The sad case is Essendon. They have coped brilliantly with the pressure of the ASADA investigation, at least on the playing field. But now players are considering sueing the club and/or using an obscure rule that will allow key players an easy escape to another club because of proven lack of care for the player group.

The Rugger bu**ers face the Springboks this weekend, still suffering from the severe beating handed out by the All Blacks. Still, we wish them well for a happier outcome.


Henry's editor has posted two new paintings, linked here.

The tree-line on the top of the Waterfall looks a bit faint and some remedial work may be indicated.

The Lost Boy was painted to offer a specific challenge at the Melbourne Savage Club's annual art show, but missed being included due to the artist's failure to note the date by which entries had to be presented. Ah, well, as they are saying at Caaaarlton!, there's always next year.

Image of the week

Reality breaks in
Date: Friday, September 05, 2014
Author: Henry Thornton

Shiver me timbers, comrades, the AFR has awoken to the fact that the Australian economy is in strife.  'National income pie shrinks' was yesterday's headline, with supporting articles by Chris Richardson (Golden age of living standards is now passing) and Maximillan Walsh (History ... has returned with a vengence).  Ross Garnaut ('who foreshadowed the hit to incomes in his 2013 book Dog Days') said , correctly, that this state of affairs was 'no surprise'.

Indeed, it must be noted that Professor Garnaut has been talking and writing about Australia's 'Great Complacency' for years now, and finally the chickens are coming home to roost. We have to hope the next step is that the vultures that are international currency speculators do not abandon Australian investments in a flock, or a seriously overvalued Aussie dollar will be replaced by a greatly undervalued dollar. This would hand out a far larger cut to Australia's living standards than yesterday's complacency-busting articles were about.

Today's screaming headline is 'economy enters danger zone'. Australia's 'former top resources forecaster' says the economy faces a 'painful downturn' as a property crisis in China accelerates and produces 'the biggest hit to Australia's export income in more than two decades'.  The RBA, having failed to jawbone the currency down is now trying the same trick with the housing boom. The RBA's unofficial spokesperson, John Edwards, has conceded that, as a last resort, a home loan cap might be needed, preparing the way for another policy backflip. Yet the Bank of England and the mighty US Fed have both conceded this case, and New Zealand and Canada have inplemented such 'macroprudential policy'.

With appropriate modesty, Henry admits to have :

* in January 2013 explained why  monetary policy cannot both help maintain overall economic stability with low (goods and services) inflation and contain asset inflation or a more suitable exchange rate; 

* in May 2013 debated the issues with Professor Garnaut at Melbourne University under the heading of 'Monetary policy at the end of the mining boom'.

* in August 2013 warned of the 'Recession we did not have to have';

* in July of this year, explained the US Fed's change of approach to dealing with asset inflation. 

Henry is no genius, just an independent voice who over a long career has maintained a keen interest in economic management with an open mind that is no longer constrained by blind loyalty to RBA dogma or even his own wrong previous policy advice. (Eg in advising using monetary policy to 'lean into' asset inflation.)

In the May 2013 debate I asked the following question: 'Can it be helpful for key industries to be discouraged for years by an excessive exchange rate, then encouraged for years by a low exchange rate? The market will ultimately decide these things, but discouraging a clearly over-valued currency, as now, by allowing completely free trade in capital is like a fanatical observance of the Ten Commandments'.

There is also a more technical matter that deserves to be mentioned. As implied in the above question, at some stage the dollar will plunge. The continued fall of the price of iron ore brings that day ever closer. This will present the RBA with a serious dilemma.

As I said in May 2013: A large fall in the dollar could be triggered by the spread of information about Australia's worse-than-expected fiscal position, or by further weakening of the Chinese economy, with further falls in commodity prices, or expectations that the Reserve Bank has gone soft on inflation, or by a wage break-out by unions attempting to improve their members' wages before the arrival of a new government expected to take a tougher line on matters industrial.

Whatever the precise cause, or mix of causes, a large fall in the dollar would create fresh dilemmas for the Reserve Bank.

In recent times, the strong dollar and low global inflation has kept traded goods inflation low. Low traded goods inflation has coexisted with non-traded goods inflation of around 4 per cent. The net result has been overall goods and services inflation comfortably within the RBA's target zone.

But a large fall in the dollar would mean traded goods inflation would jump, and non-traded goods inflation would also rise more quickly. The RBA might well find that its target 'inflation zone' was unable to be achieved by modest increases of interest rates under official control.  A generally weakening economy would sharpen the dilemma.

The Reserve Bank struggled to find a good answer when the effects of financial deregulation destroyed its ability to achieve the 'money growth projections' imposed by government from the mid-1970s to the mid-1980s.

The Bank now, following a large fall in the value of the dollar, would have to at least suspend the inflation target, or exclude traded goods (assuming non-traded inflation was not too high for policy to reduce it quickly), risking red faces or worse.

The remainder of the May 2013 article offered some more general policy advice. The main point then was to abolish complacency.  That has been achieved almost 18 months after it should have been achieved. Better late than never, no doubt. But, as various eminent people have been warning, the longer it takes for corrective action the worse the coming downturn will be.

Australia`s housing boom.
Date: Wednesday, September 03, 2014
Author: Henry Thornton

Is it a boom or a bubble?  Who cares, comrades, it has made many Australians rich - at least on paper, and will cause grief to those people who have purchased houses, especially as investments, in the recent past and currently.

Christopher Joye provides some useful historical data spanning other house-bedazzled nations, linked here. We are the global champions - gold medal performers in the 'Housing' sport at the Economic Olympics.

Nice video available here, focussing in potential 'macroprudential policies' to help contain the housing boom. The speaker says the RBA is not in favour of such policies, used by Canada and New Zealand, and now part of the US Fed's box of tricks. Que?

ANZ Chairman, David Gonski has warned Australia’s booming housing prices cannot go on forever and the market will eventually impose a correction. But when will the boom be gonski?, David.  And how bad will it be?

Henry has to rush and will provide his answer later in the day. Meanwhile, if you own a copy of Great Crises of Capitalism, you can find his fearless prediction in the chapter on Marvellous Melbourne's great housing boom of the 1880s and its horrible aftermath. RBA says 'let it rip, colleagues'. Que?

Extract from Great Crises of Capitalism

'It may be that Australia does well in the second decade of the twenty-first century.  The correct comparison may be one that equates 1980 with 1850, meaning that 2010 is the modern equivalent of 1880.  If this analogy holds, modern Australia is now entering the last, maddest decade of a forty-year boom. Despite the global trauma of the past two years, Marvellous Melbourne, with the mining areas of Northern and Western Australia, is growing quickly, working well (despite infrastructure bottlenecks) and playing hard.' (P 166)

Mixed results = turning point
Date: Monday, September 01, 2014
Author: Henry Thornton

The economy pot continues to bubble, sending vastly mixed messages.  In my time as a forecaster, confusing, mixed messages were regarded as indicating a turning point.  The question is whether the economy is rising or falling.

The Brotherhood of St Laurence reports that Australia's youth under-employment is above 15pc, highest level in almost four decades.

This confirms Henry's reports of youth under-employment even in middle class Melbourne.

Roy Morgan Research reports that its (more accurate) measure of unemployment fell to to 8.7% in August. This is the net result of 39,000 more jobs but a much larger 162,000 Australians have stopped looking.

More here.

David Uren asserts that economy is doing better than GDP numbers suggest.  Also nab's business survey shows that business confidence is 'very strong'. Business investment is falling sharply in mining and mining-related supply chain companies (think shovels and picks) but improving in non-mining construction. 'Manufacturing is still a disaster zone. with planned investment over the next 12 months representing a 20-year low'.

A warm start to winter (think Al Gore) and the poor response to the budget (think Joe Hockey) depressed retail spending, but there was some revival in June.

RBA Chief Glenn Stevens told the relevant parliamentary committee, that low interest rates were 'simply leading to a rise in asset values ... but were not encouraging businesses to invest.' While Mr Uren does not ask it 'Why is this so?' should be the question du jour.

Elsewhere is seems the banks are still protesting at APRA's demand for higher asset ratios. But the way to prevent, or at least inhibit, excessive asset inflation is to require 'prudential ratios' to rise when asset inflation, or overall credit ratios. are rising, and vice versa. You can call this 'dynamic macroprudential policy', Glenn, and you will be a hero, as is Mr Abbott in confronting the Russians.

While I am at it, 'dynamic macroprudential policy' applied to capital inflow would also do a lot to help the trade exposed industries. If you cannot see the point, phone or email and I can offer help.

[On 2 Sept, the RBA anmnounced that interest rates are on hold. Note that the currency is far too high but also house prices, especially in Melbourne and Sydney have kept rising (approx 6 % in the winter months), This is a major dilemma for the RBA, but there is no analysis or even mention of this that Henry can find in the RBA hymn sheet. Such is Life, as Ned Kelly said just before he was hanged from the nect until dead.]

Australia's monetary policy will face unhelpful stasis unless and until our chronically overvalued exchange rate is tamed and we have 'dynamic macroprudential policies' in place.

And Henry's money (literally) is on the economy turning down from here.  The recession we did not need to have, as foretold in August 2013.


Saturday Sanity Break, 30 August 2014
Date: Saturday, August 30, 2014
Author: Henry Thornton

It's been another week with more bad news than good news. Australia's budget is still unfulfilled and experts are warning that business and household confidence involves risk that becomes worse the longer this situation drags on. One imagines that geopolitical risk should also begin to have an adverse effect - the messes in the Ukraine, Syria, Iraq and other sadly serious places that seem likely to draw in Australian fighter planes at a minimum. Unemployment is rising, Qantas has lost almost $3 billion and mining companies and their suppliers are slowing and shedding staff, or have already done so. Except for slow growth of Australian wages there is nothing being done to reduce the cost overhang that if not fixed will drive Australia into recession - oh, we did notice a new approach to allowing organisations in remote places (eg Darwin) to hire foreign workers at a 10 % discount to Aussie wages when there are insufficient locals to fill jobs.  If this is not a sign that our cost structures are excessive what would be? A serious recession?

Do the government's economic advisors agree there is a cost overhang? Do they have a plan to reduce it? What about the seriously overvalued currency?  The ongoing housing boom?  To be fair, RBA and Treasury chiefs have warned that the budget must be fixed and the sooner the better, as it will get progressively harder and involve more pain the longer the current impasse continues. How come New Zealand's budget is fixed and its airline is making profits rather than losses?  Does anyone in authority ask these questions? Do they get answers? So far as we know, apparently not.  Yet there is a massive government machine whirring away. A big dose of cuts to government functions would fix the budget and put remaining officials on notice they had better get their stuff together.

I pass the questions to Tony Abbott, Joe Hockey and Mathias Cormann. more in frustration than in hope. But we need answers, and please know that brute reality will eventually demand answers from someone on 'The Hill'.

Mr Palmer and the Chinese

One bright spot rhis week was the grovelling apology of Australia's would-be answer to Italy's bunga-bunga man.

Rowe of the Fin provided by far the best comment, and I post it here in admiration for his magnificent ability to sum up a situation in so few words and with such humour.


With the sad end to Caaarlton's late run at some sort of redemption last week, Henry is mourning another fruitless footy season. But Richmond's magnificent late run for a spot in the finals and various other important games this weekend, with many vying for a spot in the '8'. will provide some diversion. Already the old enemy Collingwood have been smashed by Hawthorn and now cannot sneak into the finals. Richmond beat the Sydney Swans by a few points to take the number 8 spot in the finals. Caaarlton! drew with Essendon with no great effect on he finals but good news for the Blues.

Henry is very sorry to see the departure of Karmichael Hunt from AFL. Still, he gave it a red hot go and presumably is more suited to some form of Rugby.  Big news this week is Rugby's (Union not League) plan to let nominated superstars like Israel Falau play off-season for the vast rewards available in Japan or Europe. After the belting handed out by the All Blacks, Henry asked young Bert, a sometime code-hopper himself, what would happen if Australia's Rugby League team played the All Blacks. Bert replied that the League stars would fail because the Union Rules are too different to those of League. What if there were hybrid rules, gentle readers, or one match with Union Rules and one match with League Rules, with the world champion of 'Rugby' the team with the greatest aggregate of points?

Both games would fill the 'G' and New Zealand's biggest stadium, I am prepared to bet and would be a massive money-maling opportunity.

Australia's swimmers have again showed their improvement, this time at the Pan Packs.  Bring on the Olympics, comrades.  and our young tennis players are doing well, and how good it was to read that 'Tennis wunderkind Nick Kyrgios has continued his captivating grand slam run with a straight-sets win to storm into the US Open third round". Sad to see Lleyton Hewitt out in the first round, and Sam Stoser in the second round.

This week Henry has lost a few more friends with his powerful (Ahem) attempt to help Australia's university sector. His offer to present on the subject of 'Monetary policy and asset inflation' was turned down by a rising lecturer with a derisive snort: 'I had a quick look at the link you sent us and my impression is that, unfortunately, it is not going to be of much interest to the regular group of macro seminar attendees here (so much the worse for them, you may say)'.

Indeed, young fella, and I admire the thoroughness of your analytic approach - 'quick look', 'impression' - is this how your professors go about their business? But you'd think 'the regular group of macro seminar attendees here'd enjoy sharpening their minds showing an old codger like Henry just how out-of-date he is.  And at least the subject would be important, indeed highly relevant to the state of the global situation of near recession combined with a share bubble that is certain to pop.

Image of the week

 Courtesy AFR

University reform, #1
Date: Wednesday, August 27, 2014
Author: Henry Thornton

It is wonderful seeing the Vice Chancellors (VCs) of Australia's 39 universities getting interested in reform.  As I see the debate, they are keenest on fee deregulation, though there are other manifestations of a new enthusiasm for competition.  There is, on the other hand, concern that funds for research might be cut, and this is an area where the VCs are distinctly less interested in reform.  This is the subject of today's blog.

One approach to research funding is that taken by all governments with any sense, which is to limit research funding to areas where Australia has a distinct advantage or could create such an advantage. Medical research is one such area, which is manifestly likely to provide large benefits to many Australians, and indeed people with unmet medical needs around the world.  (Think of the potential benefits of finding better treatments for Ebola, or Malaria, making a case for funding of the relevant research from Australia's budget for foreign aid.) More generally, this is is why the current government wants to boost medical research, and the only problem with this is paying for it.

Other areas in which (and not by accident) both research and industry performance are world class include mining, agriculture and sport, and as funds are available I would like to see scarce research money allocated more to these areas, especially to programs, like the Cooperative Research Centre (CRC) program that emphasises the application of research to the needs of business. (*) Areas where we badly need to improve our performance include manufacturing, infrastructure and transport, and in the modern world success will be helped greatly by focussed research. (A recent paper for the Newman Inquiry, linked here, suggests other ways to help our trade exposed industries, and includes the case for more industry focussed research).

Sadly in my own area of social sciences the case for government support of research is far less compelling.  In economics and business, where Henry's knowledge is greatest, Australia's research output is rarely of global significence.  A former eminant professor at a 'G-8' (Research heavy) university explains the system with brutal clarity. 'The ambitious social scientist scans the relevant journals with infinite care to discover exactly what they want, including current fashions, footnote style and references to the work of all likely referees. He or she then sets to work to produce articles that are highly likely to be published. Naturally small problems are chosen, but de rigueur is the use of the most 'advanced' statistical techniques possible, mostly equivalant to attacking a walnut with a steam hammer, or a synchrotron. Naturally hard or big problems are almost never addressed as the chances of getting published in a globally relevant journal are virtually zero. This process produces little that is new, or important, but under current terms of engagement is the main basis for promotions'.

Another close friend, a man of substantial achievement in several fields, is on the mailing list for a different G-8 university. 'In my field of economics', he reports, 'only once in the past two years have I seen a seminar topic that I believed was on a serious matter, with an abstract that explained the approach and key findings with clarity. Deeply depressing, actually'. This, while possibly true, is a tad unfair. I exempt a number of policy-oriented Australian economists, including those in the bureaucracy, and some in universities, who helped promote Australia's highly effective economic reform in the 1980s and 1990s. Their research, incidentally, did not require much, if any, special funding.

So here is a reform proposal. Abolish all government funding for research on subjects in which Australians are not in the top rank of world experts and allocate half of the savings to boosting research in the areas where we are clearly in the top rank, or could be, or acutely need to be.

While I am on the general subject of university reform, I should mention the fact that there is at present a vast, I expect unprecedented, mismatch of courses and market needs.  My barber today was telling me that both her children won degrees in 'media studies' but have had immediately to retrain involving further degrees or diplomas. Most of the Thornton family's friends are grappling with the consequences of this problem, and regard the vast oversupply of lawyers (for example) as baffling, and the list could go on. Here is a challenge for an ambitious social scientist. Do the research that explains this puzzling anomaly. My hint is that it will probably be due in large part to lack of any effective market mechanism for allocating places in courses, which is the problem market-based fees is designed to help solve.

Unless and until such research is available and accepted, and should the Senate refuse to acknowledge this point now, here is a more radical suggestion for a top law student who cannot find an acceptable job. Sue your university for enticing you into their law degree with lavish publicity that outlines the wonderful prospects awaiting you. You will make your name if you win, and may gain a large amount of money in the process.

Henry, as usual with controversial subjects, invites comment.

Contact Henry here.

* Henry's editor acknowledges his interest in the CRC Program, as a participant for many years, including five years as Chair of the Commonwealth government committee that oversees the program.

Saturday Sanity Break, 23 August 2014
Date: Saturday, August 23, 2014
Author: Henry Thornton

Central bankers from the four corners of the globe are meeting at Jackson Hole. They key point is likely to be how nations can raise real growth.  A second question is whether super-easy monetary policy (near zero cash rates set by central banks) are creating asset bubbles rather than promoting growth. A third question is whether current and mooted changes to 'macroprudential policies' are capable of preventing asset inflation out of control and ending in asset bubbles that burst with awful consequences.

The US Fed's Janet Yellen is likely to dominate debate. She recently outlined the Fed's decision to leave monetary policy to manage overall economic stability with low [goods and services] inflation. And to use 'macroprudential policy' - lampooned by some as a return to the dark ages of controls over banks - to contain asset inflation or other developments that threaten financial stability.  Henry has no doubt this new approach is correct, though devising effective macroprudential policy will be hard and likely at first to be introduced with considerable timidity.  Various articles from this list are relevant here. (Click on a title to open the page.)

Growth is a largely separate issue. The US saw negative growth in the first quarter of this year, 'explained' by the severe winter, and a large bounceback in the second quarter, with strong employment growth in both quarters. This implies overall low productivity growth, dominated perhaps by the fact that shovelling snow is a low-productivity process.

The hot money is on super-easy monetary policy for a fair time yet, which means rising asset prices at least until the US Fed deems it is time to take away the punchbowl. Investors have been enriched by record interest rates which have been lower (near zero) for longer (since early 2009) than ever before.  Conspiracy theorists might well ask, 'what else would you expect when the Fed is privately owned' - as revealed in the latest Raff Report.

On the current market boom, Henry's favourite fund manager says he has a fair bit of faith on the 'three strike' rule.  This rule says share prices only start falling in a systematic way after the third increase, though Henry believes it will be sooner this time.

Mrs Thotnton has suggested that the Thornton superannuation fund puts another tranch of equities offshore. Her reasons are clear: the American economy is improving while the Australian economy is getting worse and the Australian dollar is too high and must fall dramatically before too long. 'After all, she advised, 'iron ore prices are 30 % below the peak, and China's housing industry is struggling'. One can easily discern in this matter the effects of educating women and letting them have serious jobs!


The news of the week was the barbarous beheading of an American journalist and promise of more to come. Britian is said to have 500 British people fighting beside the terrorists in Syria, and perhaps with 150 Australians. Des Moore and Henry's blind seer reported and opined respectively in the blog immediately below this.  One sincerely hopes Australia and Great Britain have decided to cancel the passports of these people and that they will be refused entry, as will their families, if they try to return home. What would an Aussie teacher make of a seven-year-old who had posed with someone's head in his hands?  And what might be the actions of such a boy in an Aussie school?


Henry's Caaaarlton! were unable to even slow down a raging Port Adelaide in last night's game at the wonderfully refurbished Adelaide ground. The brave captain, Marc Murphy, was stretchered off and taken to hospital, in yet another nasty injury, in this case diving for a mark (which he took) despite an opposing player also diving. Beaten by over 100 points!  Coming after a run of glorious nail-biting defeats by other top teams, Mick the Merciless's analysis consisted of - 'Port are a top side and our boys are very tired'.  At least there will be few illusions at Princes Park over the summer and the coming pre-season.

The Wallabies fought out a brave draw last Saturday in blinding rain, in a game many thought was there for the taking. Tonight they are at Eden Park in New Zuland, where Australia has not won since Moses was a lad. Israel Falou, however, is confident our boys will give it a red hot go and CAN WIN.

Regular readers will be delighted to learn the Fiona Prior's medical problem has been remedied and that she will be in full flight in a few weeks. Henry is devastated that he failed to deliver on time a painting specially prepared for the Savage Club's annual art show. 

Image of the week

Courtesy The Oz

The barbarous beheading
Date: Friday, August 22, 2014
Author: Des Moore

US Response to Beheading

The best that Obama has so far been able to say following confirmation of the beheading of a US journalist by Islamic State  is that airstrikes will continue and “the US would do what it must to protect its citizens”. However, it now appears that earlier on Obama had approved an attempt by special forces to rescue Foley and, as previously announced, he had also contemplated the use of military to “rescue” the Yazidis on Mount Sinjar.

It is also reported that the Abbott government had considered involving an elite Special Air Services regiment if such a US rescue-mission had eventuated. It seems clear that Australia and some European countries would be prepared to send troops to Iraq if Obama were to decide to do so. That the beheader appears to have been British would likely confirm the implication that Cameron would join in.

With the continuation of US air strikes, it seems likely that the other US journalist held by IS will also be beheaded. But will the continuation of the now widely condemned barbarism, and the appeal from Iraqi Christians, lead Obama to reverse his decision not to put troops on the ground?

An article published in the Wall St Journal suggests a connection between what is being allowed to happen in Iraq and in Ferguson, US, where police forces have acquired military equipment to use in controlling the riots there. The author argues that, in both cases, the failure to prevent or control disorder has led to violence. He refers to the recognition in New York that “broken windows” sent a (successful) signal to the police force there that  neglecting disorder leads to crime. But he expresses no confidence that Obama will act to help restore order within Iraq.

Reactions in Australia and Indonesia

Abbott’s strong adverse reaction to the beheading has been widely reported, except in The Age which did not report his statements at all. Labor’s Tanya Pilbersek reportedly said it highlighted the brutality of the Islamic State and “the terrible risks faced more generally by foreign correspondents reporting in war zones”.

Abbott has also criticised the failure of some Muslim groups to attend the talks he held. With the heading “Evil threatens Australia” the Herald Sun editorial is also critical.

Encouragingly, in an interview with Greg Sheridan Indonesian President Yudhoyono has been very critical of IS and urged international leaders to work together to combat radicalism. He indicated that Indonesia is not an Islamic state (small s).

ED. Tiresias adds: 'What exactly is Team Australia? Who belongs to it and who doesn’t? Tony Abbott’s use of the expression suggests a sound-bite crafted by a ministerial staffer, possibly a graduate with a degree in media studies. It means nothing and stands for even less. Worst of all, it reveals the insecurities which we scarcely dare to acknowledge'.

If they chose to do so, Australian politicians can discriminate ruthlessly: Muslims who meet Western and Australian values half-way should be made welcome, Muslims who seek to reproduce the cankerous and bitter politics of Western or Southern Asia or North Africa should not. If Australia can cheerfully discipline political dissent from One Nation, it can do the same with supporters of even more rancid and inflammatory politics. Mainstream politicians can make it clear that illiberal, antiliberal and extremist politics have no place here, that those who support extremist causes (including jihad in any form or irredentist and revanchist Palestinian nationalism) cannot hope to exercise any influence on Australian policy. If Muslims wish to take up humanitarian causes overseas, by all means let them do so … but advocacy for violence against non-Muslims (such as we see at the so-called ‘peace protests’) should remain beyond the pale of mainstream politics.

 Read on here.


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