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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Light on the hill?
Date: Wednesday, July 20, 2011
Author: Henry Thornton

Wall Street surged by 200 points overnight, mainly it seems because of a new US deficit reduction plan discussed here by the Wall Street Journal.

'WASHINGTON—President Barack Obama on Tuesday backed a $3.7 trillion deficit-reduction plan as "a very significant step" after it gained fresh momentum from a bipartisan group in the Senate.

'Mr. Obama said the proposal, designed by a group of lawmakers known as the "Gang of Six," represents a balanced approach to cutting the deficit that he has pushed for all along.

"The framework that they put forward is broadly consistent with what we've been working on here in the White House," Mr. Obama said.

Compelling television is was (yawn!) but the 'we knew nothing' stonewall by Messrs Murdoch Snr and Jnr left us little the wiser. News Corporation shares recovered some ground, and Wendy Deng illustrated her martial arts expertise in dealing with a pie chucker who attempted to bespatter Mr Murdoch snr.

Apple Inc.'s third-quarter earnings more than doubled as the company reported surging sales of the iPhone and iPad device, another factor no doubt helping create the market surge.

The Eurozone crisis for a change took a lower profile, but will resurface with regularity until this problem is solved, most likely by partition into Big-Euro and Little-Euro country blocs - see yesterday's blog (below) for more on this matter.

RBA monetary policy

The biggest gamble of the career of Westpac chief economist, Bill Evans, has moved the markets, which are now betting that the next rate move will be down.  Most of Mr Evans' fellow bank economists, however, have stuck with the view that the next rate move will be upward, thought perhaps taking longer to occur.

The June quarter consumer price result, available shortly, will decide the immediate outcome and if it exceeds expectations will leave Mr Evans deeply regretting his 15 minutes of fame.

The minutes of the previous Reserve Bank board meeting included the following gem: 'The extent to which these forces would strain the economy's productive capacity over time would be a key determinant of inflation. Members noted, however, that the flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time. Members noted that the CPI outcome for the June quarter, to be published later in the month, would be important in helping to shape views about inflation, and therefore the future path of interest rates. Accordingly, members considered that the current mildly restrictive setting of monetary policy remained appropriate'.

Michael Stutchbury of the Oz yesterday accurately reflected Henry's view, for what that is worth.

'Australia needs to maintain a tight ship and concentrate on lifting our economic game while all this is playing out'.

But, as we said in early June, while there is the mother of mining booms underway, most of the rest of the economy is mired in recession. Collins Street opinion leaders are inclined to be in the rate cut school, and Henry has had to offer some modest bets on the matter, some of which have been accepted.

And one should at least mention Mark Bouris and his Yellow Brick Road initiative.

'Time for the RBA to get real' is the headline, and the theme is confusion.

'I talk to a lot of business owners and I can't recall a time when there has been so much confusion. In the early 1990s, when unemployment was high and banks wouldn't lend to small businesses, the landscape was very clear. The pain was spread evenly.

'Today it's a different story'. Here is a link to my advice in the early 1990s. Mark, some more substance would be useful if you really want to change the game.

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.


It's a bloodbath, comrades
Date: Wednesday, August 20, 2014
Author: Henry Thornton

'What fun, comrades.  Mr Palmer insults us and his running dog (Ahem, (correction inserted) ), suggests our mighty People's Army might be deflected by a few missiles, even supposing the cash-strapped Australian government could afford to buy them. 'Mongrels', 'bastards', these are terms of endearment in Australia, are they not? Palmer, Clyde's iron ore is not that good anyway, so let's just buy more from Brazil.  But cancel the FTA, it seems too complicated for the Ozzies anyway.'

Henry awoke with a jolt.  Was this just a dream, or a message from Beijing for all of us? Being uncertain, there is is, gentle readers, hot from Henry's fevered brain, stoked by fine single malt from the Highlands of Scotland.  More here, and do not miss Culloden.

The morning news was equally baffling.  The 'budget emergency' is now just a little local issue, to be fixed with several months of negotiation (correction, 'vicious wrangling') with 'cross bench' Senators. Will keep Smokin' Joe off the streets for a bit, and it seems he's getting a bit of help from his colleagues, especially that nice Finance minister.  And, in any case, we are told that 98.7 % of the budget has been agreed by the Senate, and the budget emergency has been solved.

But the 'cost overhang emergency' has not been solved, and will become seen as the big challenge for the Australian people. Wages growth is already low and unemployment is rising, more sharply (Henry asserts) than allowed for in official forecasts.

The mighty BHP is going to shed its unstrategic assets, including unstrategic workers and perhaps even uncompetitive directors, improving the mother ship's productivity and giving investors a new plaything. Can Qantas take long to figure out the same strategy, shedding the highly unprofitable overseas routes in a last bold attempt to keep the domestic flight aloft. Or RIO? They must have made a few dud investments during the boom, surely. And perhaps the Finance minister will discover that some remote place, Tasmania or Northern Queensland, is not pulling its weight and propose a national spin-out.  Someone once said one cannot shrink oneself to greatness, but is Palmer, Clyde a counter example?

Henry apologises from the unserious approach to the economic news. But watching a slow motion train wreck, predicted two years ago, eg here, will do that to a bloke. One of Henry's fellow worriers said last night: 'Its a bloodbath in corporate Australia'. Do not be fooled by record profits, dear readers, this is a lull before the storm.

Saturday Sanity Break, 16 August 2014
Date: Saturday, August 16, 2014
Author: Henry Thornton

Joe Hockey shedding a tear for his own insensitivity on national television was the political high point of the week, and may represent a turning point for what was beginning to look like an economically inept government. The call now is for the government to recast the budget. However, the first task is to provide a believable narrative.

Once a believable and plausible narrative is in place, there are two things to get right.  Make the budget genuinely 'tough', and make it much fairer.  Henry's call for direct action to address the 20 % or so national cost overhang (and in the process create a plausible, because truthful, narrative is probably a bridge too far, but is linked here to remind readers about Australia's true 'economic emergency'. 

On the issue of welfare dependency, it is alleged by experts that 40 % of Australians contribute to helping the other 60 % who get assistance, and that Australia helps the bottom 25 % more than any other developed nation.  Surely 60 % of Australians are not 'battlers' and if they we have the balance wrong. But how to end the Age of Entitlement is far from obvious, but it must be done, dear readers, or we shall indeed achieve Banana Republic status, with all but a priviledged elite 'battlers'.

'Tony Abbott to step up budget sales job' is one relevant headline today, but there are others of equal importance.

Adam Creighton warns that 'If we're not careful, we'll have a full-blown jobs crisis on our hands'.

He points out that Australia's rate of unemployment is rising when in most countries it is falling. So much for the 'miracle economy', with even the tenured, highly remunerated men of the RBA pointing out that the jobs scene will be dismal for some time yet.

But the jobs crisis has been with us for years now, as pointed out here for an equally long time - and most recently in the blog immediately below this.

Mr Creighton nails the key point is a beautiful piece of economic prose: 'Economic theory says involuntary unemployment is impossible in a free market — if someone is out of work at the prevailing wage rate someone can simply offer to work for a $1 less and thereby become employed. But the reality could not be more different. Vast welfare states and bureaucracies, heavy taxation, transport and job search costs, and in some cases byzantine labour market regulations, dramatically dim prospects for full employment'.

Read on here and weep for official ignorance, gentle readers.

The political crystal ball

Henry's favourite journo, Grace Collier, has pointed out 'Labor's looming disasters'. First she summarises the government's recent blunders with enthusiasm, showing that Murdoch's minions understand 'balance' far more than do employees of the taxpayer-funded ABC.

'But speaking of Labor, here is the brutal truth: within the next year, three processes will be finalised and disaster is bound to strike. These processes are two police investigations and a royal commission into union malfeasance'.  More here, and google for more on the alleged police investigations.

Who owns the US Fed?

And does it matter?

The August Raff Report tackles these extraordinary questions. 


Caaaaaarlton! finally pleased its supercoach and gave til it really hurt.  Again narrowly beaten by a top side, Geelong, thanks to a dodgy free kick when the Blues were 8 points ahead with 3 minutes to go, Henry's heroes were gutted when the final bell sounded, having finished with three injured players and only one fit player on the interchange bench.

Henry is beginning to believe that better days are ahead for his beloved Caaaarlton!  And now supports the reappointment of Mick the Merciless and hopes that Juddie will stay on for years as a goalsneak and occasional midfielder.

Henry has heard, thanks to a taxi driver called 'Lucky', a Geelong supporter, that there is an international game of footy this weekend in a Northern suburb.

The game is between Pakistan and India.  The Pakistan team is made up by local lads of Pakistani origan, while the Indian team was said to have flown in from India. In what will clearly be a scoop, the result will be posted if 'Lucky' fulfills his promise to email them.

Tonight sees what should be a titanic struggle between the All Blacks and the Wallabies in the first game of the Bludisloe cup.  Henry will be glued to the screen, and asks readers not to feel sorry for Mrs T, who always has little mates to chat with by telephone, and books to read.

We commiserate with Henry's kultural advisor, Fiona Prior, who is having the cause of blinding headaches fixed in hospital. Fiona's many contributions are available here, and we look forward to her return soon, fit and well.

Image of the week

Courtesy The Oz

Creating jobs requires radical action
Date: Wednesday, August 13, 2014
Author: Henry Thornton

'The crisis the unemployment statistics don't reveal' is the headline for another expose of Australia's dismal labor market performance. The estimable John Black writes: 'Rather than join the ranks of those formally unemployed, these [middle class, middle aged] men and women, who had lost established jobs in industries such as wholesale, retail, hospitality, media, finance and recreation, joined the hidden unemployed while they worked out how to find a replacement job within a viable commuting distance for which they were qualified. But in May there were no jobs for them to find.

'The number of hidden unemployed has been steadily increasing, because the labour market in 2014 is generating only enough jobs for 100,000 persons every year, instead of the 210,000 needed to maintain employment levels. Most of the 110,000 persons not finding jobs have been joining the hidden unemployed'.

This revealing discussion strongly supports the alternative measure of unemployment developed by Roy Morgan Research with help from Henry Thornton.  Our results are summarised in the graph that is part of this Blog. The early part of Mr Black's article provides the best discussion I have seen on the reasons why the official (ABS) measure of the rate of unemployment greatly underestimates the real rate of unemployment.  It should be read by every senior bureaucrat and politician in Canberra, and interested academics.

As Mr Black concluded: 'At the heart of the problems for the labour market is the lack of any substantial industry drivers for jobs growth in an economy over-encumbered with regulation and on-costs and a lack of political leadership and meaningful vision'.  Read on here. 

Today Senator Day suggested that the young unemployed should be allowed to seek jobs and agree with an employer on the wage to be paid.  Immediately the cry of 'exploitation' want up, and 'remember Henry Bourne Higgins',but one must ask who are the exploited here. Currently it includes young people who cannot find jobs in a wealthy and supposedly dynamic country like Australia.

This Henry can report that all of his kids, and several of their friends, got jobs after gaining valuable but unpaid work experience, doing real jobs.  This is a common practice in Europe, while in America young people, and many adults, work for very low wages.  The philosophic question is whether it is better to get work experience for low wages or no wages and then a job that pays a living wage, or whether no job at a theoretical high wage is better. I have no doubts about the answer.

Of course, in a civilised nation, society needs to provide the basic elements of an income sufficient to live on for those who cannot earn a wage to do so without supplementation.  This must be provided after careful scrutiny to keep those who seek to bludge on society honest.  But the idea of forcing unemployed people to write 40 serious job applications a week is simply nuts.  It involves lots of wasted effort and much demeaning of the job seekers. I know how demeaned our kids felt, with 5 good degrees between them, useful parental 'contacts' and relevant work experience until they landed jobs with some chance of turning into careers.

I do not know how to solve all the problems inherent in the current system.  But I do think Senator Day's idea should be tried somewhere, perhaps in Tasmania where the plight of the homeless is particularly acute.

Come on Minister Abetz, stop peddling 1950s 'medical science' and try something radical in your area of actual responsibility.

Saturday Sanity Break, 9 August 2014
Date: Saturday, August 09, 2014
Author: Henry Thornton

Economic news this weeks included a surprise (to most economists) leap in the rate of unemployment. The image of the week at the end of today's blog shows the latest jump in the 'official' (prepared by the ABS) rate of unemployment and the more realistic measure prepared by Roy Morgan Research. Draw your own conclusions, gentle people. We thank Des Moore for his incisive analysis immediately below this blog.

The state of the labor market is far worse than believed in official circles, and officials are generally maintaining a 'glass half full' posture, although the RBA this week somewhat reduced its economic forecasts. With the budget stranded in the Senate, and no plan B, Australia's 'miracle economy' is struggling and the government is also struggling. Paul Kelly continues his criticism of Tony Abbott's leadership, and Joe Hockey is doing the rounds trying to get a budget, any budget really, up. He has started to whinge that no-one, not even business, is providing support.

Smoking cigars with the Finance minister started the process of self-destruction and release of a 'semi-authorised' biography that restated his ambition to lead the nation, and revealed his secret wish for a tougher budget, would have been unwise if the budget had been applauded by all, but instead it is becalmed with almost no-one from among business leaders, the economists of Australia or drinkers in the front bars of Australia's pubs is prepared to back it.

Leaving Malcolm Turnbull out of the loop on the discussion of new anti-terror policies, leaving more favoured but severely less competent ministers to try to explain, was a catastrophe. Time for a shake up, Tony, or continued unpopularity? 

Meanwhile, we are being warned to prepare for a hundred year war with radical Islam. Tony, you have proved you have the right stuff to be a great war leader, and Julie Bishop has shown similar mettle.

For goodness sake get the team together that can win the economic war.

Footy'n'other stuff.

Caaarlton! belted the Gold Coast Suns (minus Gary) in the first half and coasted for most of the second half.  With nothing to play for but the good opinion of their fellows, and perhaps the chance to play for the blues next year, one might have expected a red hot go from all players for the full 100 minutes.

For the rest, Hawthorn and Sydney look like runaway favourites, with a young Geelong and a puzzling Freo maling up the final four, members of which all have some chance of winning a grand final in which luck and the net result of character on both finalists sometimes throws up an unexpected win.

Features of Henry's week included a fine seminar at Melbourne Uni with a superstar Spanish economist discussing asset bubbles and what to do about them.  Read on here folks, you will find support for some notions you may have seen in the hallowed pages of Henry's folly

The RBA brains trust seems not yet to have absorbed either the Fed's new approach of the visitor's clever theoretical thinking. Rather they sit like rabbits in the headlights, wondering whether to cut interest rates to help the currency to fall or raise them to head off a housing boom.  'Don't panic' shouts the resident Mr Jones, but one suspects there is no old soldier (like Aussie Holmes in Henry's time) to help their key people see the blooming obvious. Sigh!

And do not miss Henry's geopolitical writers - Gary Scarrabelotti on the Ukraine and Tiresias on Israel and the Garzans.

Image of the week

Labor market shock
Date: Friday, August 08, 2014
Author: Des Moore

The increase in July unemployment to 6.4% seasonally adjusted rate (from 5.6% in July last year), and the accompanying small fall in employment since last month, highlight the need for reduced regulation of workplace relations in circumstances where the economy is growing below trend.

Unless regulations are reduced the Abbott government’s budget forecast of a 1.5% increase in employment in 2014-15 will not be achieved and productivity growth will remain sluggish.

The regulatory problem is highlighted by the fact that the growth in the working age population (WAP) is twice as fast as the growth in employment over the past 12 months – employment up by only 0.9% while the WAP increased at double that rate (1.8%).

Before the Fair Work legislation employment was growing faster than the WAP and the participation rate was growing. Over the past three years that rate has fallen from 65.4% to 64.8%.

On top of the twelve months increase of about 15% in numbers unemployed, this indicates continued large increases in those who have given up actively looking for work – the so-called drop outs

Labour Force – Increases Since July 2013 (Original Data)

                                                   000s               Percent

Employment                                1,041                0.9

Working Age Population                 3,421                1.8

Unemployed                                   96                14.9 

WAP is civilian population aged 15 years and over     

It is now abundantly clear that urgent changes must be made to the existing regulatory legislation, and the administration of it, just to reach the “sensible centre” and remove the bias evident in the existing arrangements.

Sufficient evidence of the monopoly position of unions has already been given to the Heydon Royal Commission to warrant immediate reforms and allow employers much greater freedom to determine employment conditions. It is anomalous, for example, that the MUA has to be taken to the Federal Court in an attempt to reduce its monopoly powers.

The proposals to reform the ABBC and other minor reforms are welcome but have yet to be implemented and will not themselves change the behaviour of militant unions.

Henry comments: We agree with Des moore, and the HR Nicholls Society, that Australia needs serious labor market reform.

We have long argued that the labor market is in far more trouble than generally recognised (EG here).

We have also warned of 'The recession we did not need to have'.  With the budget jammed in the Senate, and a worsening labor market, the 'miracle economy' is headed for real trouble.

The latest RBA Quarterly Report on Monetary Policy is linked here, and presents a significently happier picture. Time will tell whether my relatively gloomy view or the RBA's far happier view is closer to the mark.

The main difference between us is my concern for Australia's competitiveness, which I believe we cannot overcome with current policies.

Asset/credit bubbles - advice to the RBA
Date: Thursday, August 07, 2014
Author: PD Jonson

There is justified credit and 'bubble credit'. The former is fine, indeed it is how the capitalist world makes progress, but bubble credit is not so fine and can, and often does, lead to asset bubbles that inevitably lead to asset busts.  As in the world learned at great cost in the 1930s, a sufficiently bad asset bust can influence the world and may lead to global depression.

That is the message of Professor Jaume Ventura, a visitor to Melbourne University. Last night Professor Jaume delivered the twelth Corden lecture, introduced by Professor Max Corden, who is still working and is a rolled gold superstar of economics.  He described Jaume as his best student and a brilliant academic. I agree, and would add that Jaume is a genuine macro-economist who admits this part of the profession has learned it knows less than it thought it knew about how economies work and about appropriate policies to control 'bubble credit'. As Mark Twain is alleged to have said: 'It's not the things you don't know that get you into trouble, but the things you think you know that ain't so'.

Jaume Ventura started with a graph depicting the global ratio of credit to GDP since 1970. This ratio fell below trend in the 1970s, rose sharply in the late 1980s, fell again and then set new records in the late 1990s. If 1970 is 100, after the fall associated with the Global Financial Crisis, the ratio is now 160. That is, since 1970, credit has on average grown faster than GDP. Worse, the growth has been variable, and associated with increasing ups and down.  Asset prices have followed a similar pattern.

We were shown similar graphs for a number of countries.  The booms and busts of credit were not unifom, but all showed a strong upward trend and decided volatility.  'Worst' were Spain, Italy, Island and Greece. These countries were the worst hit during the GFC, unsurprising given the size of their preceeding credit binges.

Then we saw data on gross and net credit flows by country.  The stunning fact is that all OECD countries both import and export credit. It is import and export of credit that dries up when something goes wrong for a country. 'In crises everyone goes home' said Professor Ventura. 'During crises, countries go back to the closed economy model'. Already we learned a reason not to rely too heavily on overseas credit and I recalled James Tobin's call for 'sand in the gears of global finance', or indeed the logic of taxing capital inflow to protect local industry.

Professor Ventura was careful to point out that lots of good things happen when credit grows quickly. Booms are good for countries. Indeed, he has drawn a distinction of 'collateralised credit' (backed by real assets) and 'bubble credit' (resulting from chaims of credit ultimately backed only by hype and overoptimism).  It is bubble capital that we should try to contain.  But there is no consensus among macroeconomists about this matter, and Professor Ventura is trying to clarify this vital matter.

In short, Professor Ventura has discovered by sheer logic and some mathematical analysis that there is an optimal mix of the two sorts of credit. So the problem for central banks is to find that optimal mix for a given nation and devise policy or policies to drive their economy toward that optimal mix, 'leaning into the wind' of asset credit.  This is because there is no way for the economy unaided to find this happy outcome.

As the lender of last resort, a central bank should be able to do this.  The basic idea is if a boom is based on 'real things', let it rip. If it is based on irrational exuberance, lean into it.  My own view is that as asset prices, or credit (as a ratio to GDP), get too far from their long run trends, action to 'lean into' the growth are needed, but this should be in the form of macroprudential policies, not (except perhaps in extreme cases) using interest rates.  This is because normal development - take GDP itself - suggests that fundamental forces of productivity and population are always close to a reasonable steady trend, so as asset values or credit depart greatly from trend, this is surely a sign of an asset/credit bubble.

Professor Ventura said there are three ways to contain asset/credit bubbles.
1. Improve law enforcement and contract design,
2. Improve corporate governance, and
3.  Macroprudential policy.

Macroprudential policy includes reserve requirements of lending institutions and capital controls.  These should be 'owned' by the central banks and be seperate from monetary policy.  Given the key role of overseas credit - both inward and outward - there is a potential role for taxes on capital inflow, or if the economy is on the nose with international investors, subsidies.

As we walked out of the lecture, I said to one old friend 'I rest my case'. He observed that Professor Ventura had brilliantly made my case.

Further reading, from Jaume Ventura

Economic Growth with Bubbles (with A. Martin)
American Economic Review, 102 (6), 2012, 3033-3058

 Bubbles and Capital Flows
Journal of Economic Theory, 147 (2), 2012, 738-758

 Understanding Bubbly Episodes (with V. Carvalho and A. Martin)
American Economic Review: Papers & Proceedings, 102 (3), 2012, 95-100 

 Theoretical Notes on Bubbles and the Current Crisis (with A. Martin)
Read a non-technical summary on VOXEU
IMF Economic Review
, 59 (1), 2011, 6-40

By PD Jonson

Monetary policy and asset inflation, July 2014

Asset inflation and monetary policy (with Elizabeth Prior Jonson and Ka Mun Ho), June 2013

Great Crises of Capitalism, January 2011

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