Henry: The US economy is estimated to be growing at around 2 per cent annually, which is about half its usual rate.  Unemployment has fallen but so has the American ‘participation rate’, and the prospect is for a long, slow recovery even if there are no further shocks.

The shock everybody is worrying about, of course, concerns America's 'fiscal cliff'. The ever amiable and constructive Economist magazine, says this week.

'In less than two months’ time, unless a deal is struck, America will fall off a “fiscal cliff” that will, through a combination of automatic tax rises and spending cuts, subtract as much as 5% from GDP in a year. That would be a disaster for an economy growing at an annual rate of barely 2%. But behind this immediate crisis is the deeper one: America taxes itself like a small-state economy, and spends like a big-state one. Add in an ageing population, and it is going broke. ...

'In his first term, Mr Obama broadly got the economics right, but his White House waged a destructive war of words against business. If he wants to help America’s poor, he would do better to embrace a truly progressive agenda, based on competition, reforming government so that it targets spending on the most needy, and reforming taxes. ...

'All this is plainly in Mr Obama’s interest—and that of his country, too. ...

'Plenty of independent voters, and this newspaper, yearn for a more pragmatic Republican Party. Doing a deal on the deficit with Mr Obama would signal its rebirth.

'Above all, though, a bipartisan deal over the budget would be good for America—and the world. It would encourage business to invest, thus strengthening America’s economy and raising the country’s standing, and indeed the standing of market capitalism'.

Henry: The Eurozone leaders are far from united, and we all know that disunity is death. Germany and other ‘northern’ Eurozone nations are preaching austerity but this may change as their own economies begin to sink under the pressure of retrenchment and austerity elsewhere. The ‘southern’ Eurozone nations are attempting to impose austerity but finding their people, ie voters, are fighting back.

Ambrose Evans-Pritchard wonders who will stop the Sado-monetarists of Europe: 'I agree with the IFO Institute’s Hans-Werner Sinn that upholding euro membership has by now become an act of cruelty. It not being done in the interests of Greeks. It is being done for the Project, by enforcers of the Project. Only by breaking free can Greece restore a minimum of economic vibrancy and national dignity.

'Everything we know from labour studies is that the early twenties are crucial years, shaping lifelong career paths and earnings ten to fifteen years beyond. The worst economic crime you cannot commit is to leave 58pc of youth grinding away their days in frustration in cafés, if they can afford the coffee'.

Henry: China's State Owned Enterprises have been operating in a system that values job creation over making profits, and many have racked up debts that have been financed by China’s banks. The transition to a world of largely profitable enterprises and banks with only small and predictable bad debts will not be easy.

'Nomura's early warning signal for the Chinese financial system – the China Stress Index – is flashing amber again', says Ambrose Evans-Pritchard.

'Its case against China: "overinvestment and excessive credit; a rudimentary monetary policy architecture; too many privileges for state-owned enterprises; unintended consequences of financial liberalisation; the Lewis turning point; and growing pains from worsening demographics and increasing strains on natural resources."

'Could matters get worse? Of course, if the shadow banking system is as unsafe as critics fear.

'The long-term story may come off the rails if the Politburo shrinks from real reform at this week's Party Congress and condemns the country to the middle income trap'.

And today we must add a big fall in Japanese GDP to the list of major concerns.

'Japan’s economy shrank an annualised 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011, as exporters suffered big falls in shipments to key markets such as China and Europe.

'Prime Minister Yoshihiko Noda described the gross domestic product figures as “severe”, while Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”.'  More here.

In conclusion ...

The world's free press can see the problems, and are saying that the current approach of 'the powers' is dangerously out of touch with the views of the free press.

We must not forget that in most parts of the world the people who produced the crisis, or other similar people who failed to protest about the trends that produced the crisis, are in charge.

The various issues discussed here can with credibility be described as making the global economic scene 'edgy and uncertain'. Vigilance, gentle readers!

No chance of that is you read the long account by Paul Kelly and Patrick Walters of the great victory at Al Aaemein and Australia's magnificent role, and heavy losses, in that victory.

'Churchill's message to prime minister John Curtin after the 9th Division's return ... reflected the recognition among British elites that, at the fulcrum of the war in the Western Desert, the Australians had done something special.

'In his March 6, 1943, cable, Churchill said: "As I told General Morshead in a letter I gave him before his departure from Cairo, this division has left behind it a record of energy, courage, enterprise and daring which will be an imperishable memory among all the nations of the British Empire who fought in true comradeship in the Western Desert".'

 Courtesy The Oz

RBA predictions and the next rate cut.

The RBA released its monetary policy review yesterday while Henry was watching the cricket and feeling increasingly despondant about the summer's sporting disctractions.

Here is the link, and it is a 'must read' for anyone interested in Australia's economic future. Terry McCrann has done a fine forensic job, showing the deep uncertainty surrounding (any) economic forecasts at present and the critical importance of the key labor market data, including jobs growth and wage increases.

'... the mix of jobs and wages data has become ... critical to the RBA's rate decisions, in the context of a still-strong dollar and projections of slowing resources investment. Just as that highish 0.75 per cent underlying inflation number eliminated any possibility of a Melbourne Cup day rate cut, a high wages number (around 1 per cent) would -- other things being equal -- do the same for December.

'A lowish wages number (0.7 or 0.8 per cent), with a continuing strong dollar, would make a December cut very possible'.

Treasury leaks and other political games

Henry's immediate outrage about the Treasurer's leaking of a Treasury review of some coalition policies has been repeated to varying degrees by several of the more conservative commentators.

Peter Van Onselen today continues the protest.

He concludes: 'The person who has been damaged most by this week's events, however, is the innocent bureaucrat who has been mixed up in the government's gamesmanship: Parkinson. Because Labor attempted to pit him against Hockey, cries for Parkinson's removal if the Coalition wins the next election have got louder within the partyroom.

'Hockey might hold on to Parkinson until his contract expires because he is competent and such people can be few and far between at the upper echelons of the public service. But no one should expect him to be around for long after that.

'If Parkinson was the individual loser from the costings debate this week, the public is the collective loser. There is now no way that the Coalition will submit its suite of policies to the Treasury for costing in the lead-up to next year's election. That means it will instead use its own accountants - hopefully this time not ones who are fined for breaching professional standards in their work on the costings, as occurred at the 2010 election'.

Image of the week

Courtesy The Oz

On the jobs data which may have helped Mr. Obama to win, the venerable mag said: 'NEVER has higher unemployment seemed so good. America's jobless rate edged up to 7.9% in October from 7.8% in September. For a change, that is not a reason for despair, because it rose for the right reason—more people are looking for work—and because it reinforces other signs of healing in the labour market, including last month's sharp and unexpected fall in unemployment'.

The looming 'fiscal cliff' will be much in the news, but Henry confesses that going over it may be no bad thing.  Such a result would provide a big wake-up call for Americans, and the resulting recession would remind them all that it is hard work and thrift that are the bedrock requirements for a strong economy.  Might even provide some lessons for other profligate governments, although too late for Ms Gillard and Mr Swan.

Serious riots in Athens followed passing of a fresh round of austerity legislation by the oldest (if not the most continuous)  democratic parliament in the world. The Eurozone remains in an unsustainable state with rising tension between debt reducers/ austerity imposers and anti-debt reducers. Latest reports suggest that 'Northen' Eurozone populations are getting restive as they get their own taste of austerity as exports to 'southern' Eurozone nations dry up.

China's week long process of appointing new leaders begins. No vicious debates, no offensive and intrusive television ads and no idiots door-knocking and leaflet stuffing. Just the occasional show-trial of leading candidates and (no doubt) quiet resort to the garrotte.

'Corruption may be Chinese Communist Party's death knell', Hu Jintao warns as he passes on his farewell message to the comrades.

 Australia's economic news included another jobs report showing modest net new jobs growth and official (ABS) unemployment at 5.4 %.

We remain of the view that the RBA economists, even (gasp!) Glenn Stevens himself, are far too committed to the rosy picture shown by official statistics. And also have ignored the news from surveys by banks showing a widespread fear of rising unemployment among households (Westpac) or business conditions declining during the September quarter (NAB).  More here.

(Further reading.

David Uren, 'Worrying Signs of a softer Economy', The Australian, November 19, 2012.)

It was good to hear Treasury Secretary Martin Parkinson say Treasury did not leak its advice to Wayne Swan about costs of coalition policies.  But we were gobsmacked to hear that Treasury feels bound to provide such costings after a referral from the Treasurer.  Surely this is inappropriate, and it is inappropriate even if Treasury once accepted such a referral from Treasurer Costello.

Speaking of politics, did anyone else feel, like Henry, that Governor Romney's concession speech, and President Obama's acceptance speech, both set standards for political rhetoric that can only be dreamed about in Australia. What about a bi-partisan agreement to behave like American politicians until after the next election, Julia and Tony?

At last, a replacement for the disappointing (for Henry, a Caaaarlton! supporter) footy season. 'Openers as green as the pitch' says the Oz, burning as it is with patriotic fever.

The cliff concerned is a set of automatic tax hikes and spending cuts that over the best part of a decade would fix America's budget woes at the cost, so the Keynesians, even some of the monetarists, say of creating an almost immediate severe recession.

Henry is not so sure. Remember Paul Volcker's supposed 'change of operating procdures' for US monetary policy, actually a 'short sharp shock' that restored sense to American monetary policy.  To be sure, there was a short sharp recession, but non-inflationary growth resumed within a year or so.

The benefit of a 'short sharp shock' for America now would be to capture everyone's attention and drive home a point made by Mr. Obama in his magnificent acceptance speech.  The answer to America's woes lies with households and businesses. The challenge is to abandon the creeping sense of entitlement and the reliance on bailouts on both a large and a small scale, and to reemphasise the need for innovation and entrepreneurial go-getting as the core values in American business.

Just a thought, gentle readers. Comments welcome.

The Economist said: 'So Barack Obama won—and by a larger margin than many expected. In our cover leader we argue that he must now swallow his pride and work with the Republicans. A budget deal would help the president, his opponents, his country and the world'.

Read on here.

The fact of the leak, of the financial impact of several coalition policies, seems not to be in dispute.

But other questions remain - who referred the policies to Treasury; who within Treasury authorised the analysis; what is the standing policy with respect to actions that obviously seem to serve the interests of the Treasury?

People who live and work in Canberra seem, almost by definition, to support the left-leaning side of politics.  Left-leaning Treasury officials naturally favour the government of a party, like the Australian Labor Party, that favours increased government spending and increased taxes to pay for the increased spending.

In Australia. the ALP when in government, takes every opportunity to appoint its own supporters, ar at least sympathisers, to key positions. 

Traditionally, the Coalition when in power has adhered more strongly to the 'Westminster' tradition in which high government officials appointed by Labor are retained in office, thereby supporting the natural tendency for 'pro-government' officials to serve governments of both varieties.

Australia currently has a compromised 'Washminster' system of public service.  If the Coalition wants a fair go in matters like support for government it needs to endorse in government a move to the Washington system, where key officials change when government changes.  No more 'I'm not going to follow orders by some dick-headed minister', the phrase so memorably used by RBA Chief, ex Treasury chief, Bernie Fraser.

On 9/11 we added: 'It was good to hear Treasury Secretary Martin Parkinson say Treasury did not leak its advice to Wayne Swan about costs of coalition policies.  But we were gobsmacked to hear that Treasury feels bound to provide such costings after a referral from the Treasurer.  Surely this is inappropriate, and it is inappropriate even if Treasury once accepted such a referral from Treasurer Costello.

Later ...

Henry's immediate outrage about the Treasurer's leaking of a Treasury review of some coalition policies has been repeated to varying degrees by several of the more conservative commentators.

Peter Van Onselen today (10/11/12) continues the protest.

He concludes: 'The person who has been damaged most by this week's events, however, is the innocent bureaucrat who has been mixed up in the government's gamesmanship: Parkinson. Because Labor attempted to pit him against Hockey, cries for Parkinson's removal if the Coalition wins the next election have got louder within the partyroom.

'Hockey might hold on to Parkinson until his contract expires because he is competent and such people can be few and far between at the upper echelons of the public service. But no one should expect him to be around for long after that.

'If Parkinson was the individual loser from the costings debate this week, the public is the collective loser. There is now no way that the Coalition will submit its suite of policies to the Treasury for costing in the lead-up to next year's election. That means it will instead use its own accountants - hopefully this time not ones who are fined for breaching professional standards in their work on the costings, as occurred at the 2010 election'.

 Courtesy Lobbecke, The Oz

Is the RBA biassed?

Is the RBA similarly biassed? It certainly reflects the natural tendency for people in favour of government action to join irs ranks and remain there throughout a career.  It also benefits from the tendency for Labor governments to appoint their own (think Bernie Fraser), and for conservative governments to appoint insiders such as Ian Macfarlane who spent all of his working life as a government employee.

That said, the RBA has a far clearer focus than Treasury, meaning it is far easier for critics to judge whether or not it is acting within the strict terms of its brief.

I do not regard yesterday's decision to leave monetary policy unchanged as influenced by political bias. It is more a mtter of how connected is the bank and its board to the reality of the economy.  My hypothesis is that the answer is that the board and the staff of the bank is insufficiently aware of the situation with two groups.  The first is 'small business', a group it is awfully hard to be closely aware of, but which in present-day Australia is doing it hard. 

The second overlooked group is households, esapecially battler households.  RBA officials these days are paid well, have strong job security and receive the benefit of large housing loans that, with their high salaries, enable them to live in securely middle class suburbs in considerable comfort.

RBA Chief, Glenn Stevens said after his board's 'no rate cut' decision: 'Further effects of actions already taken to ease monetary policy can be expected over time. The Board will continue to monitor those effects, together with information about the various other factors affecting the outlook for growth and inflation'.

Full statement here.  

One wonders if the board even stopped to consider the three points pulled out of the mass of economic data released in the past month:

* Westpac survey of consumer sentiment: ' The vast majority of consumers have been expecting and continue to expect unemployment to rise’.

* NAB survey of business customers: '‘Based on a comparison with monthly survey results, conditions appear to have deteriorated through the [September] quarter’.

* Roy Morgan survey of unemployment and underemployment, showing a far worse labor market than official (ABS) data.

These reports were key input to Henry's call for a further rate cut and may be of little significance to the grand picture surveyed from the commanding heights of Martin Place. But how embarrassing for Glenn Stevens and his merry men and women if they turn out to have been prescient warnings that were ignored.

Like a blue moon, such an opportunity rarely comes around, and we feel honour bound to try our hand. 

RBA board - strong case to cut rates again, and we notice market has been drifting that way, so we hope our readers got set early - eg after last month's analysis.  This month is merely the logical follow-up.

The Cup - we never bet on the GGs, but our tip today is ETHIOPIA.

Here is the full field, so readers can decide for themselves.

US presidential election

Here are the thoughts of Henry's man on the ground in DC/Virginia, Harsh Voruganti, who says Obama will win.

And for your next punt

If you get all these punts right, you may wish to put your winnings on Caaaarlton! for the AFL premiership next year.

Supercoach Mick Malthouse started work yesterday and his death stare was well to the fore.

IMAGE OF THE DAY

There are two unlargely overlooked indicators of extreme stress, from the latest surveys conducted by Westpac and National Australia bank.

Westpac survey of consumer sentiment: ' The vast majority of consumers have been expecting and continue to expect unemployment to rise’.

NAB survey of business customers: '‘Based on a comparison with monthly survey results, conditions appear to have deteriorated through the [September] quarter’.

The mid-term budget revised  tax receipts down and saved a wafer thin (projected) surplus only by assuming large companies would be required to pay tax monthly in future, along with a number of other fanciful changes. Practically no-one Henry respects believes that the government will actually deliver a surplus, and the weasel words are beginning to enter the government’s lexicon. Memo Wayne Swan – these word games destroy confidence rather than enhancing it.

Now Access Economics have confirmed that a more sensible budget projection would see around four billion added to the deficit.

The ‘official’ (ABS) measure of unemployment jumped from 5.1 per cent to 5.4 per cent in September. This is a tiny move in the direction of reality, as revealed for years by Roy Morgan surveys. This is another disconnect that ordinary Australians are aware of that destroys confidence rather than improving it.

Productivity remains low, and there is no plan to improve the situation, and in particular no plan to address features of the ‘Fair Work’ legislation that hamper productivity. The hard times now facing many Australians will enforce productivity improvement, but the real economic reforms that would help lift productivity more decisively, are conspicuously absent.

Most of our Saturday Sanity Break this week was devoted to Paul Kelly's account of retiring Productivity Commission Chairman, Gary Banks', considered advice on what needs to be done to improve Australia's dismal productivity performance.

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.

Further reading.

David Uren, 'Worrying Signs of a softer Economy', The Australian, November 19, 2012.

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.