U.S. nonfarm payrolls increased by a seasonally adjusted 171,000 jobs last month, the Labor Department said Friday. The politically important unemployment rate, obtained by a separate survey of U.S. households, rose one-tenth of a percentage point to 7.9%.

'Fresh from the lashings of last week's Superstorm Sandy, Wall Street took a battering over the weekend amid renewed fears about the US economy.

'A bigger-than-expected increase in October non-farm payrolls was offset by sharp declines in the Dow Jones Industrial Average, which was down 139.46 points on Friday night, or 1.1 per cent, to 13,093.16.

The drop reversed the gains Dow Jones had made over the week for an overall loss of 0.1 per cent, its second consecutive weekly loss.

The presidential election still looks too close to call, although President Obama's sterling efforts to look in charge and deeply sympathetic during the worst of the storm crisis are believed to have ended Governor Romney's previously strong momentum. Obama is said to be ahead in a majority of the key swing states.

'Deluded nation' fails to raise productivity.

The Melbourne Institute-Australian talkfest has provided plenty of copy. Paul Kelly provides a masterful summary today. Of most interest are his comments on retiring Productivity Chairman, Gary Banks', farewell oration.

 '"There have been important omissions and 'blind spots'," Banks said of our productivity efforts.

'He produces a long list of failures that reflect badly on Labor but also the Howard government. He attacks remaining tariffs and huge industry subsidies "that cannot deliver demonstrable net social benefits" but cost taxpayers $9bn annually. He targets "green technology" scams worth more than $3bn, government procurement preferences to favour local suppliers, pharmacy ownership restrictions, taxi licence quotas, Labor's shipping protectionist policies, its ban on parallel book imports and calls for another round of competition reforms.

'Banks advocates reform and privatisation of public utilities. He wants transparent cost-benefit analysis before major infrastructure projects (think NBN among others) and proper pricing policy in water and electricity utilities.

'His most lethal critique, unsurprisingly, comes on industrial relations. This is the great ALP denial. Banks now sees the labour market reforms of the 1980s and 90s as "no brainers" addressing "obvious anti-productivity" aspects of a centralised, adversarial system (yet he overlooks the intensity of these reform battles).

'He said the commission's recent work on education, retail and electricity industries highlighted the need for reform. Addressing ALP and trade support for re-regulation of the IR system, Banks said: "Recently I found myself being condemned by union leaders for suggesting that such regulations should be treated no differently to other areas of social regulation that have potentially adverse economic impact." This is the entire point.

'For Banks, proponents of such policies "should be required to demonstrate that there are public interest benefits that exceed the economic costs." Indeed, Banks says the hostility provoked by his "unexceptional proposal" in the public interest merely reveals the need to have IR reform on the list.

'He warns of areas where regulation may inhibit productivity: native vegetation, heritage regulations, renewable energy targets, stamp duties, planning and zoning controls, rural water and waste management.

'Taking Labor's favoured arena of productivity enhancement, education and human capital, Banks says early education should be re-focused on the disadvantaged, salary differentials must play a greater role in getting the best teachers, school principals need more genuine authority, and the industrial system in schools and colleges must be more flexible.

 'Why has Australia not done more on productivity? For Banks, the answer is many proposals are unpopular and strike vested interests. Take tax reform: fewer taxes with broader bases and lower rates. This would assist productivity but the outstanding items are "the hardest political nuts to crack".'  More here.

Read Chairman Banks' speech for yourself here.  If you fail to detect any correspondance between the advice of Australia's leading expert on productivity and government policy, you've grasped the core of Henry's concerns about the Australian economy.

Image(s) of the week

Click here for the Air New Zealand-Hobbit extravaganza - 16.5 million views and counting.

'The Dow Jones Industrial Average gained 136.16 points, or 1 per cent, to 13232.62, on its second trading day after megastorm Sandy forced two days of market closures. The average marked its biggest one-day advance in both points and percentage since September 13'.   More here. 

China's manufacturing data also remained slightly on the positive side of neutral.  With the better US news, the Aussie dollar also rose.

'Preliminary estimates for October indicate that the RBA index of commodity prices fell by 3.5 per cent (on a monthly average basis) in SDR terms, after falling by 2.2 per cent in September (revised). The largest contributors to the fall in October were declines in the prices of coking coal, thermal coal and oil, which were partly offset by increases in the price of iron ore. The prices of base metals also declined. In Australian dollar terms, the index fell by 2.2 per cent in October.

'Over the past year, the index has fallen by 16 per cent in SDR terms. Much of this fall has been due to declines in the prices of iron ore and coking coal. The index has fallen by 19.1 per cent in Australian dollar terms over the past year.

Check out the graph - it is beginning to look a bit scary.

'PROPERTY prices fell in all capital cities except Perth and Darwin last month after four months of modest gains, as recent interest rate cuts failed to ignite the market.

'Across Australia's capital cities, property prices fell 1 per cent over October, after a 1.4 per cent increase in September, according to the RP Data-Rismark home price index'.

At the Melbourne Institute-Australian 'Securing the future' conference, Ross Garnaut is reported to have said: 'An Australian soft landing will require effective action on a number of fronts, all of them canvassed as being necessary for Australia doing well in the Asian century'.

The Australian described Professor Garnaut's offering as his 'most blistering critique yet of the Gillard government's White Paper'.

Institute Chair, Tony Cole, and Professor Ross Williams kicked off the 50th birthday celebrations for the Melbourne Institute by launching the latter writer's fine history of the Institute, published by Melbourne University Press and presumably available at a bookshop near you.

But, with an election to be called within a year, and important programs to protect, it was time to haunt the halls of parliament.

The plane to Canberra filled rapidly and then sat quietly for 15 or twenty minutes before the Captain announced that the starter motor would not work, and the airport staff were dusting off a 'manual starter'. After another 15 minutes the plane backed out and again sat quietly for a while.  Then the Captain said one engine had been started, and it would now be used to start the other one; he added that some vibration would be noticed, presumably as with a car with a dodgy battery.

Finally, only 45 minutes late, we took off, to proceed smoothly to the national capital. 

The first impression is that prosperity reigns in Canberra. The newish airport is a thing of rare beauty, on a scale and of a style of which Mussolini would have been proud.

No taxis from the airport this morning, as there was a big pile-up on the single road between the airport and the CBD. Memo to security forces - build an alternative emergency road for when pizzas are urgently needed, or some larger emergency requires rapid access in either direction.

We hire a car and head for the parliament on the hill.

Naturally, there is very limited public parking, at the parliament, deliberately designed, one assumes, to make visitors feel properly unwelcome.  Even without a struggle to find a place to park, making one late for one's first appointment, many people would be cowed by the style and scale of the seat of Australia's government, another structure of which Mussolini would have been proud.

The parliamentary building reminds one that Canberra is exceedingly good at spending money.  Did anyone think of containing the role of government to what would fit into the charming 'old parliament house'? Not bloomin' likely, comrades.

At the airport, after several productive meetings with generally polite (opposition) politicians, one checks out the newspapers.

Tax reform is in the air, mainly discussions of how Dr Ken Henry's review has been ignored. (As his Asian Century review will be ignored.)

Cutting spending is the key to tax reform, gentle readers, and will be a priority for the next government.

The smart money is on an election in March next year, so there is no need for the Gillard gummint to fess up to its failure to bring in a modicum of spending restraint.

Or another policy backflip.

We can't wait.

All three offspring studied Mandarin at school, and it was bloody hard yakka, especially for the parents.

All three have been to China with parents, seeing the usual sights and trying to use their language skills (?). Emily Rose successfully completed a university subject involving three weeks on the ground in China with classmates and teacher interviewing factory owners about their businesses.  Fortesque hopes to do this subject next year.

Our oldest offspring, Bert, has a Chinese-Malaysian girlfriend, and the respective families have met here and in Malaysia.  Mrs Thornton recently visited Malaysia to help with setting up there a course on corporate governance she presents in Australia.  Earlier this year, Mrs T led a group of friends on a private tour down (or was it up?) the silk road.

Henry once led an Australian delegation (of two) to a large conference in Beijing on innovation and converting science and technology into businesses. The essence of his core idea idea has been adopted in Hong Kong, no doubt as a test for wider application. (The core idea failed to be understood by Australia's innovation bureaucrats, and has not been supported here.)

As a central banker, Henry was closely involved in various interactions with people from Asia's central banks.  This reminds one that the RBA's first chief, 'Nugget' Coombs went to China about a decade before Henry Kissinger and Gough Whitlam. A later governor, Sir Harold Knight, also visited China before it was fashionable, and returned to tell a hair-raising story about landing in an old plane with a strong cross-wind, and other tall tales but true.  No doubt these old traditions are maintained by the current gnomes of Martin Place.

Nowadays Henry mainly sits on company boards for a living.  One such company is currently involved in showing movies in Singapore, making films in China and investigating building and operating theme parks there. A medical start-up Henry chairs is in conversations about fund-raising in Asia, which may involve finding a strategic partner to help in marketing the new drug that we hope will emerge from current Australian research.

I do not think for a moment that this experience is atypical. Surprising, perhaps, to Dr Ken Henry and his colleagues, and to government ministers who think nothing is real until they have issued a portentious paper on the subject.

The response from various commentators has been similar to that presented here yesterday. 

'Where is the plan?' asks Paul Kelly.

'This document must not be forgotten in today's disposable politics. It is a test for the nation and a test for Labor. It needs to become a permanent measuring stick. In order to prove her commitment, Gillard should unveil a credible implementation strategy. It is her first test'.

'We're already engaged' says Australian business representatives, 'while relevant government budgets have been slashed.

Here is a view from Jakarta. 

And Henry's very own blind seer, Tiresias of Canberra, starts to fill the gap between vision and reality by presenting a realistic plan to promote skill in Asian languages and cultural awareness more widely defined.

The government's 'twenty-five national objectives' are all worthy, especially if Australia was far more competitive in a far wider proportion of industries with focussed support for activities in which we can readily achieve global best practice. Rather than report the views of others, I report what the document says and comment until exhaustion sets in.

'We aspire to be in the top ten on wealthy nations, which requires greatly increased productivity'.  What is the plan for much higher productivity?

*** 'We aspire to better early childhood education, schools, universities and training systems', but what is the plan?  Throwing money at these objectives is only part of the answer, and in any case in the middle of the biggest resource boom in our history we are struggling to produce a break-even budget. What is the plan to improve educational standards? Take a look at the selective high schools and the best of the private schools. and ask how do we build the traditions that drive that success across the board.

The government sees an increased role for the IR practices enshrined in its 'Fair Work' legislation, that give the whip hand in IR to the old IR club, even to the point of banning use of individual contracts.  This is no way to build a workplace culture of excellence and high productivity.

'Articulate an ambitious industry and innovation policy agenda for Australian business to create new jobs and seize new market opportunities'. Excuse me, the whole thrust of government is to institute regulations to stifle  bucaneering innovation, and a carefully crafted innovation statement will do nothing to help.

'Provide a framework for investment in Australia’s scientific capabilities'. Rubbish. Far better to double funds for industry-relevant research awarded on a tough competitive basis, provide meaningful tax breaks for innovators (at least equal to negative gearing for property development) and stand clear. The Australian Treasury has long opposed such an approach.

'Improve financing options for Australia’s innovation system'. How? See comments immediately above.

'Work with States and Territories to increase private sector involvement in new infrastructure projects, ... to 'Improve the productivity, amenity and liveability of Australia’s cities', ... and 'Sharpen rules governing infrastructure provision and use, including by promoting greater competition in retail energy markets, ensuring energy network investment is efficient and avoiding unnecessary costs ...'

You have to be joking.  You cannot even work with States and Territories to improve the Murray-Darling Basin, electricity is a mess, and the National Broadbank project is way behind plan and way above cost.

'Australia’s communications infrastructure and markets will be world leading'. Please see previous comment.

'Australia’s tax and transfer system will be efficient and fair, ...' Great idea, worthy aim, but what is the record?  How many pages have been added to the tax act since 1955?  Or since since 1975? or since the current government's win in 2007?

'Continue the national conversation about tax reform with business and community groups, including through processes such as working groups and roundtables'.  Like you did with the carbon tax? 'No, never, nyet'. Some conversation, nice working groups, wonderful roundtables.

'Australia will be among the most efficiently regulated places in the world, in the top five globally, reducing business costs by billions of dollars a year. This is a cute new idea, but exceeds desirable aspiration to reach the heights of the Big Rock Candy Mountain.  How much have business regulations increased since the Rudd government was elected? Why should we believe there will be a change of trend?

'The Australian economy and our environmental assets will be managed sustainably ... we will be well on our way to securing a clean energy future in which emissions are 80 per cent below 2000 levels by 2050 ... Australia will be a world leader in implementing sustainable food production methods, in sustainable energy and water use, and in biodiversity conservation'.

How are we doing on each of these admirable objectives since Mr. Rudd was elected Prime minister in 2007? Leopards do not change their spots, and even leopards are an endangered species.

'Australia will have a strong and sustainable fiscal position and will continue to have a triple-A sovereign credit rating'.  Please see comment *** above.

'Australia’s school system will be in the top five schooling systems in the world, delivering excellent outcomes for all students of all backgrounds, and systematically improving performance over time'.

Please see comment *** above.

'Every Australian student will have significant exposure to studies of Asia across the curriculum to increase their cultural knowledge and skills and enable them to be active in the region'.

Numbers of children studying Asian languages are less than the were years ago.  These languages are hard, and most of the less than 6 % of children studying Asian languages in Australia are from Asian families. Far better to build respect for other cultures, which will happen anyway as more Australians travel to Asia and people from Asia travel here.  Tourism is one of the things we do well and could do far better - let's encourage that.

Asian languages as a 'core requirement'? Utter rubbish. People must be free to chose what they study.

Did I see reference in the press to striving to get ten universities into the top one hundred in the world?  Could not see this in the twenty-five aspirations, and in any case it is simply impossible. What is not impossible would be to achieve,say, five faculties each in the top twenty in the world, if our leading universities could agree on which universities would specialise in which areas of importance, with a bias to areas where Australia's already has a leadership  position - eg mining, agriculture, medicine, and have a serious debate about the next few spots.

'One-third of board members of Australia’s top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions), and one-third of the senior leadership of the Australian Public Service (APS 200) will have deep experience in and knowledge of Asia'.

Boards in the private sector will get the experience and expertise they need without silly quotas - 'deep knowledge' of business law and practices, accounting standards, the multiple regulations of various agencies, the tax system,  and so on and so forth is now demanded by the lawmakers, and most potential boardmembers have natural limits.  Public sector organisations should do what their leaders think is appropriate.  There is more than a whiff of the soviet five-year plan in all this.

'Australian communities and regions will benefit from structural changes in the economy and seize the new opportunities emerging in the Asian century'.

Great idea, but do we penalise real or supposed supposed failure - eg ASIC's persistent and expensive attack on Andrew Forrest's allegedly premature announcement of a deal with an Asian entity, which, if he had not made it, might well have been an attack on his alleged failure to disclose a material event.

'Australia will be a higher skill, higher wage economy with a fair, multicultural and cohesive society and a growing population, and all Australians will be able to benefit from, and participate in, Australia’s growing prosperity and engagement in Asia'.

Great idea, but all these good things will only come from higher productivity economic activity, and one does not discern a plan to boost productivity.  Handouts to consumers, pink batts in the ceilings of houses and new classrooms in schools during the global crisis (which is far from over, incidentally) did not encourage productivity.  Why should the situation be different forthwith?

It is getting late and I must stop now, or risk being seen as a nay-sayer.  In any case, the core ideas have a sameness that palls well before one has reached the end of the list.

A strong, vibrant society and economy will only be built by people who are prepared to challenge the ideas of people, like most of the Gillard government ministers and Dr Ken Henry, who have only ever worked in union or government jobs of one sort or another.

Dr Henry once reported that he had gotten his best ideas on tax reform from a bloke in a bar in North Queensland.

The ideas on how to make Australia an economic and social powerhouse seem to this writer to be long on modern business-school theory and good-natured aspiration and very short on practical issues of earning a good living in the real world of business.

And we haven't touched except very indirectly on the needs of our defence forces in such a rapidly changing and volatile world.

But do read it all for yourselves.

Here is a link to the Executive Summary.

You might also want to read 'Australia's twenty-five national objectives' and then decide whether to dive into the mass of well-meaning but largely meaningless words.

The slightly bigger-than-expected increase in U.S. economic growth offset investors' concerns about a lackluster corporate outlook, and the US equity markets finished with a small gain.

Australia's economy.

Two Fridays ago, we discerned some flickers of good news amongst the doom.

Yesterday it was back to a glass less than half full.

The energy-led increase of inflation for the September quarter, released last week, has apparently (according to the ABC news, (which might be part of a socialist plot - just joking), claimed it meant the odds on a rate cut on Cup Day had greatly lengthened.  Henry doubts the sense of that, and said so in the energy inflation blog.

Middle class welfare has been fulminated against by Adam Creighton.

I was especially taken by the thoughts of Helen Hughes quoted by Adam.

'Helen Hughes, emeritus professor of economics at the Australian National University and a mother, dismisses the idea children are a "social resource".

"People had children long before welfare came along and, in any case, children are only good for society if they work hard and don't drink too much," she says.

"It is outrageous that single people are forced to pay for the children of others."

Read the full article here.

The Tolpuddle Martyrs and the birth of the United Nations.

Geoffrey Robertson, Q.C., discusses in his INTRODUCTION TO TOLPUDDLE MARTYRS, October 2009, the role of Australia's Herbert Vere Evatt in analysis of the case of the Tolpuddle Martyrs and his later involvment in the creation of the United Nations.

On the martyrs, 'Doc' Evatt wrote in 1924:

"The Dorsetshire case illustrates the fact that oppression and cruelty do not always fail. Indeed, they sometimes succeed beyond the hopes of the oppressors. Unless trade unionists throughout the world are always ready to sacrifice their personal interests, their safety, or even their lives for the amelioration of the lot of the poor, their elaborate organisation may perish overnight either in a holocaust of terror and force or in the slower process of legal repression.”

After discussing the Tolpuddle case, Robertson goes on to discuss the role of the great jurist in the formation of the United Nations in 1945.

'Evatt made his – and Australia’s – first international mark in 1945 at the San Francisco Conference which founded the United Nations. My friend Michael Foot, then a young journalist, still remembers his sense of awe at this gravel-voiced Australian who emerged to dominate it. Evatt became the de facto leader of the small and medium sized nations who sought to build an institution that would assist their development as well as their security. He led the fight against the Soviets in an attempt to limit the “great power” veto, and the fight against the US to secure a pledge of full employment in the Charter, a document which benefitted in many ways from his drafting suggestions. At the end of the conference Ed Stettinius, the American Secretary of State, publicly declared that “no-one had contributed more to the conference than Mr Evatt” and the Peruvian delegation even moved a resolution by small powers to “pay homage to their great champion, Mr Evatt”. In the words of the New York Times, the conference had seen the exercise of two kinds of political power, the first packed with heavy national muscle and coercion and the other purveyed by force of ideas, argument and intellectual effort – and the paper hailed Herbert Vere Evatt as the epitomy of the latter'.

Mr Robertson's full paper is well worth reading for deep insight into two vital aspects of modern history. Here is the link.

Stockmen of the North

In a rare good news story, the Oz today features a story about the return after a generation of two doing nothig much productive of indigenous stockmen.

Some great images in the gallery (includes nice sequence starting from image below), as well as in the page one story linked here.

Image of the week

 Courtesy The Oz

The analytic point is whether, even with a floating exchange rate and a vigilant central bank, a small country can keep inflation under control in a highly inflationary world. Henry's long and somewhat technical blog this week quoted the great Austrian economist, von Hayek, as follows: '

“There is no rational basis for the separate regulation of the quantity of money in a national area that remains part of a wider economic system;”  arguing that independent national currencies cannot insulate a country from foreign shocks; and that fluctuating exchange rates would be bad.

Inflation exceeds expectations but economists (including Henry) say RBA can still cut rates. American research says energy costs - inflated in Australia by utility rorting, 'gold-plated infrastructure catch-up and the dreaded carbon tax - spread their tentacles right through an economy.

Treasurer Swan quacks (or is it honks?) about the underlying strength of an economy in considerable trouble.

Mid-term budget update seeks to collect a lot of extra taxes by making firms pay income tax monthly rather than quarterly.  Spending cuts are trivial, and experts say there is 'no hope' of achieving the amazing shrinking budget surplus, nor should the gummint be trying to do so. Trouble is, a switch from a $44 billion deficit to near balance is just too great a burden on an already weak economy.

Henry offers a far better plan than Wayne Swan's fiscal policy on the run.

The US Fed again promises to keep interest rates near zero, but this time shares decline in value. After a while, some mildly positive manufacturing and jobs data cheers the market again - the screen jockeys sure are twitchy.   Mit Romney seems to have crept into the lead in the US presidential election, and now it is going down to results in the swing states and whether or not women and hispanic youth turn out for Predident Obama.

China approaches its own change of administration with its banks under pressure and State Owned Enterprises in trouble.

The Eurozone crisis struggles on, with German industrial production the latest battlement to crumble.

'THE European debt crisis could weigh on the world economy for years', the World Bank's new chief economist, Kaushik Basu, says.

What fun for economists, what cause for concern for the rest of the people.

Details here from the ABS. 

Greg Combet on the 7.30 Report last night smiled his lovely smile, communicated in the tones of a sweet (non-misogynist) cabinet minister with a star and generally obfuscated, as good politicians do.

Even the promising polly-basher Leigh Sales could not penetrate his chummy 'we're all girls and boys together' persona.

By chance Henry this morning stumbled upon a highly relevant bit of analysis, courtesy the American Enterprise Institute (AEI).

The opening sentance might have been crafted to explain two of the greatest contributions to Australia's soon to be difficult inflation.

'Nearly half of what people pay for energy comes "embodied" in the various goods and services that they use, and about half of that comes down to two things: food and health care'.

Americans are probably world champion energy consumers, but the aggregate figures are scary.

'According to the last Residential Energy Consumption Survey, the average American household in 2005 spent about $1,800 on non transportation-related energy use, including electricity, natural gas, fuel oil, kerosene, and liquid petroleum gas. About $1,122 of that was spent on electricity, $471 was spent on natural gas, and $115 was spent on fuel oil. The amount spent on kerosene was relatively trivial. On top of that, the average American household in 2005 paid about $2,000 per year for gasoline. Considering that the average household income was about $46,000 in 2005, direct energy expenditures would have consumed a little over 8 percent of the household budget'.

But indirect energy use adds greatly to the direct energy useage numbers.

'The American Enterprise Institute calculated just how much energy is used indirectly as a component of the various goods and services that we consume in our daily lives. What we found surprised us. For example, it turns out that nearly half (46 percent) of what people pay for energy comes “embodied” in the various goods and services that they use, and about half of that comes down to two somewhat important things: food and health care. Transportation, another important part of our economy, comes in third'.

  Courtesy AEI

Minister Combet denied that the carbon tax had anything but a tiny affect on Australia's rocketing energy bills. Rather 'gold plating' of electricity infrastructure - poles and wires - is to blame. Supposedly, energy distributors lagged in their infrastructure building for several years (immediately after privatisation, one assumes) and now are playing catch up bigtime - nice time to do it, xxx-Energy, when your customers might blame Julia Gillard or, if she is lucky, Tony Abbott.

But everything is regulated to within an inch of its life under the current government, so why did the distributors get away with such foolish behaviour?

Henry has another suggestion to throw on the table. The energy 'suppliers' (do I mean 'distributors'? - there are more layers than a sponge-cake in the energy business) are rorting their customers. Henry still has not resolved his dispute with xxx-Energy reported here.  I bet that a competent regulator will get to the bottom of the billing procedures quick smart, and in fact Henry is awaiting their ruling as we communicate.

The nice man at the AEI points out that 'It has long been known that the poor spend a greater share of their income on energy than do the better off. It is not simply that the poor have less income — an aggravating factor is that the poor often live in older, less energy-efficient houses and apartments, drive older, less energy-efficient cars, and often have to drive them longer distances to work'. ...

'The implication of this finding is that government policies that raise the cost of energy have the greatest impact on the poor, not only directly as they gas up their cars or flip on their lights, but also as they consume goods and services across the economy.

'We should remember, too, that affordable energy isn’t only important to us as consumers of both direct and indirect energy. As a prime input to economic productivity, energy costs affect the entire economy. From the time we awake to the time we go to sleep, we’re consuming energy both directly and indirectly. If energy costs go up, so do all other costs. When that happens, consumption declines and unemployment rises. As with many things, the poor are the most harmed by actions that undermine energy affordability in the United States, and still more are harmed in the most poverty-stricken reaches of the world'.

I do not think that the impact of higher energy prices should cause the RBA to hold back from cuts to interest rates it otherwise think are warrented. When the GST came onstream, the RBA 'looked through' its immediate effects, and one expects consistency in such matters. But, allowing for both direct and indirect effects of rising electricity prices, everyone, but especially Australia's battlers, are already taking a beating.

Kenneth P. Green is a resident scholar at the American Enterprise Institute. This essay is derived from the introduction of Abundant Energy: The Fuel of Human Flourishing, a supplementary text for college students, published by AEI Press.

FURTHER READING: Green also writes “Homo Sapiens or Homo Igniferens?” and “Energy Abundance vs. the Poverty of Energy Literacy” and coauthors “Presidential Power: Obama vs. Romney on Energy” with Elizabeth DeMeo. Pierre Desrochers and Hiroko Shimizu ask “Locavores or Loco-vores?” Mark J. Perry adds “President Obama's Some-of-the-Above Energy Policy” and “Unleash Private Sector to Produce Energy, Create Jobs.”

Politics

Alan Kohler today says an early election is on the cards. If you are in Tony Abbott's inner circle you may wish to ponder Niki Savva's column in the Australian today.

'The conjuring trick', says Evans-Pritchard, 'is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

'Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

'The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument'.

Here is a link to the IMF study itself. Also a link to a paper presented to participents in a 2005 conference of the American Monetary Institute by Stephen Zarlenga.

Zarlanga describes the plan, and the problems it was designed to handle, chiefly the recurrent tendency for privalety owned banks to overlend, creating asset booms followed by inevitable busts, in severe cases including bank failures and deep depression. In this sense, those of us like Martin Wolf and this writer are seeking in different ways to control more effectively the private banks' ability to derail modern capitalism.

Evans-Pritchard continues: 'The key of the Chicago Plan was to separate the "monetary and credit functions" of the banking system. "The quantity of money and the quantity of credit would become completely independent of each other."

'Private lenders would no longer be able to create new deposits "ex nihilo". New bank credit would have to be financed by retained earnings.

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

'The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money'. (Emphasis added)

Zarlanga also delves into the views of other former great economists.

'Can we learn from what John Maynard Keynes was doing during all this? He was squarely behind the bankers and against such real reform. Yet he knew that he had to break out of orthodox economics or the whole system was in danger of being overturned. Keynesianism was a way to allow banks not government to keep control over the money-creation process, and while the more narrow minded economists fought Roosevelt’s attempts to create money and jobs as inflationary, during the nations worst deflation, Keynes knew better.

'KEYNES APPROACH WAS DIRECT TO THE PUBLIC: The New York Times in December 1933, working with Felix Frankfurter, (who wrote a rather poor book called Other Peoples Money, and later became a Supreme Court Justice), got Keynes to write an open letter to Roosevelt, which they published. Keynes wisely advised Roosevelt that “Only the expenditures of public authority” could turn the tide of depression. Well, that was obvious enough!

'However, Keynes inappropriately warned Roosevelt not to create the money for this, but only to borrow it, and wrongly advised him that there was already enough money in circulation, and that: “increasing the quantity of money…is like trying to get fat by buying a larger belt”.'

'What were the Austrian economists up to? Frederich Hayek was arguing against national currencies – arguing for in effect an international control over all economies through the gold system incredibly writing:

“There is no rational basis for the separate regulation of the quantity of money in a national area that remains part of a wider economic system;”  arguing that independent national currencies cannot insulate a country from foreign shocks; and that fluctuating exchange rates would be bad.

'Hayek tried to twist hundred % reserves to covering them 100% with gold. A deflationist. This is the position supporting the creditors and usury and plutocracy; the normal outcome of Austrian Economics. They talk a freedom game, but promote serfdom. Psychologically they remind me of those middle ages cults that used to whip their own backs with chains'.

Why did this approach fail? Zarlenga suggests three points: no widespread support among the voting public; mishandling of the politics; and the premature death (in a plane crash) of Senator Bronson Cutting, its strongest advocate within the administration.

Reformers should ponder these issues afresh. The choice is between the radical 'Chicage Plan' or widespread use of flexible reserve ratios for banks (rising in booms, falling in recessions) plus responsible control of global money, most certainly by introduction of a modern version of the gold standard, or perhaps widespread use of a paper currency, backed by gold, which may be the evolving Chinese plan.

This is budgetary policy on the run, and there is a far better way to do things.

Fiscal policy should be set as follows.  First take a long-term view of what is most needed and can be afforded, allowing for contingencies.

For a Federal government, what is most needed and must be funded includes: national defence and national security; basic foreign policy; a Federal contribution to law and order and national policing; any Federal contribution to health and education deemed necessary, and indeed to projects like nationally important infrastructure, plus ... [Readers interested in entering politics or lobbying politicians fill in as you see fit.]

Then a prudent government would choose the efficient taxes to fund necessary spending  – taxes that are hardest to avoid and do least damage to important national objectives like saving for a rainy day, hard and productive work by citizens, or even encourage such activities. There should be a premium for taxes that flex automatically – rising in good time and falling in bad times. Crucial point, the set of taxes should be designed to cover costs of the Federal government (including all items on the spending list) on average during the foreseeable ups and downs of business, with a modest allowance for contingencies.

This approach is similar to that of a prudent household, with ‘earnings’ replacing ‘taxes’ on the positive side of the ledger. As Charles Dickens said of such households, an annual budget surplus spells delight, a modest deficit spells doom, or words to that effect. The Federal government’s borrowing power is such that it does not need to balance the books year by year, but should do so on average over the decades.  This writer would have taxes that are modestly progressive – taxes that are higher for those with higher incomes, or whose spending is greater than the average. ‘Modestly’ because too ‘progressive’ blunts incentives. Tea Party conservatives may have a different view on this matter.

Extreme situations aside, maintaining spending in the lean years and, the tendency for taxes to fall, will produce budget deficits. Not expanding spending in the fat years, plus the tendency for tax receipts to rise, will produce surpluses in fat years. Both aspects of our reformed fiscal policy provide what economists call ‘automatic stabilisers’ for the economy.

In a sufficiently serious downturn, it would be both possible and wise for a prudent government to do more, in what Professor Max Corden calls ‘Ambulance economics’. Knowing when to unleash ‘discretionary’ stimulus is a matter for judgment. A cool government with faith in its people’s ability to manage their own finances prudently, would be slow to provide discretionary stimulus in hard times, and would avoid adding stimulus stimulus during good times. A more ‘active’ government might seek quickly to add (discretionary) stimulus in a downturn and be equally quick to remove stimulus (above the ‘automatic stabilisation’ provided by the structure of spending and taxation) during good times. If running for office, one should have a view on how ‘active’, or how ‘cool’ you plan to be.

But the crucial point is that both types of government should aim to produce balanced budgets on average of good times and hard times so that government debt is zero on average. A modest amount of government debt might be acceptable, allowing perhaps for the funding of unavoidable wars or major infrastructure projects judged necessary for national development and too great to pay for out of the annual budget.  Conversely, in a time of unexpected plenty, a prudent government should be expected to save the excess tax receipts in a ‘Future Fund’, or Sovereign Wealth Fund of some sort.

The Howard-Costello government passes the test of balancing its books over its life, as demonstrated by the graph on page 5 of today’s Australian. It clearly felt that the times were better than average as it repaid the debt accumulated by earlier governments and established a ‘Future Fund’ to offset the liabilities represented by unfunded pensions for public officials and politicians provided in lieu of appropriate salaries by a succession of governments, including its own. Its surpluses were modest and, especially toward the end of its tenure, it played the game of throwing goodies to the voters. Throwing goodies to voters is a fairly standard ploy for modern governments, despite long-standing laws against bribery in respect to elections. (Recipients of goodies provided by governments rarely go to the law in an attempt to stop the goodie handouts.)

Goodie handouts also encourage people to adopt what has been called an ‘entitlement mentality’, a mindset unlikely to encourage hard work and self sufficiency in the populace. Such a mindset is a vital ingredient in any nation that plans to do better than average, or to aspire to gold medal economic performance.

Perhaps Messrs Howard and Costello deserve seven out of ten for their budgetary performance.

Readers are invited to rank the Rudd-Gillard-Swan governments by the standards of this analysis. Specific questions to ponder are as follows:
• Were they sufficiently cool under pressure when the Global Financial Crisis (GFC) hit?
• Did they repay debt and build a nest egg during the ongoing boom in commodity prices that hardly flagged despite the GFC?
• Did their actions in providing goodies encourage hard work and a culture of self-sufficiency in all Australians, or the opposite?
• Is this government likely to balance its budget over its life?

Henry welcomes comment and will post all but the abusive or potentially defamatory.

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