Sadly, we can all look forward to a year of vitrolic mud slinging in Canberra, a matter explored in the Oz today by Peter van Onselen

Monetary policy

Terry McCrann has come back from holidays full of vim and vigor.  He presents an amusing but not always accurate history (but who cares about accuracy) but gets to the current problems at the end.

'The RBA wrote a more robust OS version for this new world, RBA7.0. To set the cash rate into a world of weakish growth and a strong Aussie dollar. That may still be what's needed. But there's an emerging alternative -- stronger growth and an even stronger Aussie. The software would have to be tweaked: RBA7.1

'A huge change in this direction was the decision by the Japanese to join the Fed and the ECB in massive money printing.

'The first would see the cash rate cut by something like 50 basis points in the first half of the year. It would simply be a question of timing.

'The low CPI enables the RBA to start on February 5, if it so chooses. The second would see the RBA needing to cut even more aggressively, and at the same time even less inclined to do so. It would be skewered on the horns of an impossible dilemma'.

There is an answer to the RBA's 'huge dilemma'. Read on here.

And by the way, Terry, Japan's switch to printing money was initiated by government.  There is a global backlash against 'independent' central banks. RBA7.2, perhaps.

Dirty business, mining.

Like many others, Henry was glued to the idiot box while SBS dissed Australia's mighty mining industry.

One of the themes of a wonderful book that hit bookshops yesterday, Ian McLean's Why Australia Prospered, is that it was mining that made Australia rich.  My review will appear in the next edition of Quadrant.

The SBS series was good television but very unfair history.  Apart from its nation building role, mining in the past twenty years or so has cleaned up its act.  There is great concern for safety, keen interest in employing indigenous Australians (and paying for access to their land) and a source of technological advance.

Trevor Sykes in the fin, himself part of the SBS production, comments today in the fin. 

My recent visit to the Pilbara is reported here. 

Consider offshore investments, says John Wasiliev of AFR fame.

'In a year of never-ending debt dramas overseas, it will be a surprise to many Australian investors that European and American companies dominated the top 50 global share performers last year.

'Who would have thought with all the trouble and strife in Europe that, as a group, European companies did exceptionally well? There were nearly as many in the top 50 global blue-chip performers as American companies – 20 to 21.

'The lesson for Australian investors is that just because there are problems in certain parts of the world, it doesn’t mean the local underlying shares are not performing well. Local investors benefiting from the excellent performance of the Australian market last year would have been doubly rewarded overseas.

'But they would probably be surprised at which listed companies delivered the best returns – Bank of America (107 per cent), the UK’s Lloyds Banking Group (91 per cent) and Gilead Sciences, a US pharmaceutical company specialising in AIDS and hepatitis cures (77 per cent)'.

Read on here.

Image of the week, correction, the coming year.

  Courtesy The Oz

I should say urban Australia is waking up. In the countryside, emergency workers have been at it since urban Australia left for the summer holidays.  Counrty folk have been busy bringing in the crops, or some cases missing the seasonal festivities battling fire and flood, and property owners are trying to decide whether to stay or go.

Could climate change be causing more extreme weather? 'Naaaa!' say the skeptics, 'ain't no warming anyway'.

On the economic front, Japan's new Prime minister has said 'heel, Rover, heel' to Japan's central bank, perhaps a sign of things to come.

China's industrial production has risen further and the US economy continues to show signs of life.

This plus general optimism has boosted the price of oil, always a sigh that oxygen is being pumped into the coal mine.

Nevertheless, the IMF has reduced its growth forecast from 3.6 to 3,5 %, or was it 3.5 to 3.4?  And warned the risks are more downside than upside. This is 'on the back of' Eurozone weakness, and to emphasise the point, Spanish unemployment reached a modern record on 26 %. Gor Blimey, gov'ner, where does this end?  Revolution anyone?

No particular joy in the Australian economy, but China's resurgance has boosted iron ore prices, but not to the point that the big mining companies are making a 'super profit'. Ergo, no revenue from Mr Swan's mining tax, and a bloody good thing too.

Nice article in the Oz about the RBA board stacking undertaken so zealously by the Labor guv'mint. The incomparable Jillian Broadbent's third term is up soon.  Where will they find a left-leaning female economist with RBA and financial markets experience? Why not another term for Jillian?

At last, a journo who gets it, well most of it.

Adam Creighton says 'enough' to rate cuts. 'CALLS for the economy to be more "actively managed" - code for cutting interest rates and embarking on further "stimulus" - should be ignored.

'Whether debt-fuelled government spending boosts measured economic output in the short run is debatable, but that it undermines long-run prosperity is a certainty.

'Public debt crises in the US, Japan and Europe should be stark reminders of the folly of decades of Keynesian "active management". In the month Nobel economics laureate James Buchanan died, it is timely to remember that even if it works in theory, the central Keynesian thesis is a disaster in practice'.  More here.

The bit Mr Creighton does not (yet) get is what to do if the currency remains stubbornly high.

He has not bought into Henry's argument that what we need is a variable tax on capital inflow.  

Neither has organised Labor, whose message to manufacturing industry is 'adapt or die'.

Henry cannot record all the times non-economists have supported the idea, and we believe careful thought would lead many people (= voters) to the same position.

Professor Warwick McKibbin has responded as follows: 'I agree with your identification of the problem but disagree with the solution. The problem with taxing capital flows is that it raises the cost of capital throughout the economy and hurts capital intensive industries. ...  A better solution in my view is to reduce input costs of labor, capital and energy by focusing on productivity enhancing reforms particularly increase flexibility of labour markets, less government regulatory costs and reduce taxes on energy to reduce domestic input costs.

'At the same time you also need to produce a massive supply of long term (50 year) government bonds to sell to foreigners to soak up the demand for Australian asset to avoid a domestic asset bubble. The funds generated should go into infrastructure that reduces input cost for business. This second policy does not change the strong dollar but it generates returns over time to offset the costs of restructuring and it gives us a wealth transfer that is pure capital gain and a once in a lifetime opportunity fir significant nation building at almost no cost.

'Taxing capital for a capital scarce country makes less sense to me than dealing with competitiveness at its source which is domestic costs'.

Henry agrees with the desirability of reducing input costs of labor, capital and energy by focusing on productivity enhancing reforms particularly increase flexibility of labour markets, less government regulatory costs and reduce taxes on energy to reduce domestic input costs.

Indeed, for most of last year Henry's column on monetary policy was saying such policies were needed and the RBA should not need to cuts to interest rates if such reforms were introduced. (For example in August 2012.) 

Henry also applauds the massive nation building program McKibbin suggests.

But the chance of both those policies – actually an entire set of new policies – being implemented any time soon is about zero.  If by a miracle after years of debate we got such policies then the capital inflow tax could be reduced to zero and we would probably be coping well with an Aussie dollar far higher than at present.

More feedback here. 

We must soldier on, gentle readers, until the powers come to their senses.

Saint Augustine supposedly said 'Lord make me pure, but not yet', or words to that effect.  Our current political leaders are sticking to an ideology of perfectly free trade, whatever the consequences.

Oh, except for people, that is.

If you really want to be pure, Prime minister Gillard, ponder the advice of Lord Desai and open the borders. Think of all the lovely lolly - correction, tax revenue.

Henry wishes anyone who has read this far a safe and productive Australia day holiday.

'Intellectual fashion is changing. Central bankers around the world no longer command the charisma of a high priesthood. 

Central bankers stoked a global bubble and then tightened monetary policy just as the money supply was collapsing in mid-2008.

This was exactly the complaint of the Federal Reserve Bank if New York when its request to raise the discount rate to curb the share boom in 1928 was denied by the Federal Reserve Board in Washington. 

Approval was finally given just in time for the rate hike to deepen the developing recession, and help turn it into a global depression.

'Too little, too late' is an ongoing criticism of modern central bankers, perhaps familiar to Henry's readers.  What is it that happens when people do not learn from history?

 'The onus is falling on [modern central bankers] to justify why monetary independence is self-evidently a good thing', Ambrose-Pritchard continues,' and why central bankers should operate beyond democratic control'.

'The humbling of the Bank of Japan (BoJ) this week is just the start, as Bundesbank chief Jens Weidmann warned. “It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” he said.
 
'One could say that “alarming infringements” are in the eye of the beholder. The European Central Bank that he serves is itself a political operator of unbounded power'.

Ambrose-Pritchard quotes Professor Richard Werner, a monetary expert at Southampton University, who says the men of Maastricht misread German history very badly when they created a central bank that answers to nobody. “They thought they were modelling the ECB on the Bundesbank, but they weren’t. They have instead replicated the Reichsbank, which was not accountable to any democratic institution, and led to disaster.”

Ambrose-Pritchard quotes two further authorities with relevent recent research: 'Princeton professor Gauti Eggertsson has long argued that independent central banks have a “deflation bias” by their nature. This was fine during the quarter century after the Great Inflation of the 1970s, but as the inflation rate fell ever lower with each business cycle it eventually became dangerous, for there lies the dreaded “liquidity trap”.

And: 'A new paper by Paul McCulley and Zoltan Poszar argues that the taste for independent central banks goes “hand-in-hand with secular private debt cycles”. It becomes faddish during credit upswings such as the era of “monetary supremacy” from 1978 to 2008. The appeal wears off as the “deleveraging cycle” gathers force and the economy slides into slump. The US Employment Act of 1946 was the low point for the Fed. The bank was entirely harnessed to US Treasury purposes until its “emancipation” in 1951'.

Earlier this week I reexamined Henry's advice, and that of the RBA, in the lead up to and during the credit crisis of 2008.

In Australia, the mining boom was creating inflation. By tightening policy too little, too late the RBA was eventually created tight money just when it should have been easing. While Henry was on the ball (and ignored) about early tightening, and worrying about global pressures from 2007 onwards, I was not quick enough to see the need for easing. I confess to a 'deflationary bias', a judgment the RBA, by acting too slowly to head off inflation, may escape.

Indeed, the world's major central banks may now be labelled inflationists because of their reckless money printing, which is stoking currency wars and asset booms and may well stoke goods and services inflation before history of current monetary policy history is written.

'The greatest indictment of modern central banks is that they chose to target the consumer price level, one variable among many, and a bad one to boot. They took their eye off credit growth and asset prices'.

Evans-Pritchard has entered an important debate.

I do not yet subscribe to his 'heel Rover' model, but I do think the world's central banks, including the RBA, are excessively insular and arrogant.

Perhaps some good old-fashioned dog training would do no harm, and might do some good.

Inflation fooled all the economists by being far lower than predicted.

That is good news for the RBA and the government.  As Treasurer Wayne Swan says, it 'makes room' for further rate cuts.

It is also a clear sign that the Australian economy is weaker than generally believed, and that is bad news for the RBA and the government.

Still, they will be buoyed by Alan Kohler's 'Five good reasons to be optimistic about 2013'. Nice one Alan, and we agree the five factors you mention - risk again becoming thinkable in global markets, China, the US, Japan and even old, near irrelevant Europe, are positive factors.

The RBA's problem, and the government's, is that the miracle economy is struggling badly.

This plus lower inflation makes further rate cuts possible, but then there are the currency wars to consider.

In case you missed it, here is Henry's solution - latest person who may have taken notice is Heather Ridout, RBA board member, who says the economy needs 'active management' in 2013.  Isn't what it already gets?

What can she be thinking of?, gentle readers.

Consumer inflation for the December quarter is available later today, 23/1.

Ben Bernanke was the dove, and Janet Yellen - Bernanke's likely successor a year from now - was the hawk.

Read the engaging account from the Wall Street Journal.

How well did Henry call it?

Here is a detailed account, Chapter 1 of Great Crises of Capitalism.

And here are some later reflections.

In late 2006, we were worried that inflation was getting out of control here.  See for example ' The case for a pre-emptive (50 basis point) strike'.

There was a 25 basis point rate hike in that month, and that was it for the year.

In April 2007 we explained the likely bias of hawks and doves among the staff of the RBA.

We concluded: 'We have disposed of the two main arguments of the doves.  The Reserve should raise cash rates tomorrow by 25 basis points.  This would be a case of better late than never.  If they do not, inflationary pressures will continue to build in the Australian economy'.

In May, 2007, the RBA was still happy, boasting in the relevant monetary policy review that: “Despite the general strength in demand and activity, the evidence from producer and consumer price indices is that inflation has moderated recently … [A]n appreciable tightening of policy had already been implemented during 2006, and the more benign recent inflation outcomes also lowered the starting point from which any future pick-up in inflation would occur."

Henry, needless to say, wanted stronger action to curb inflation.

In June it was clear that asset prices were seriously out-of-control. 'House prices have soared, share prices have rocketed, resource company shares have glowed in the dark, but consumer prices are subdued.  The graph shows the extent of the dislocation between asset inflation and consumer inflation in Australian markets'.

By July it was clear that the party was over.

'Henry’s column last month was about the global asset boom (which Henry sees as a bubble).  “The problem's global, we’re feeling nervous” is a fair summary.  The period since has included a plethora of warnings by financial market practitioners, including Henry’s “Lexington”, a former Merrill Lynch executive and advisor to three presidents.

'Henry’s Lex summed up one of several columns as follows: "A critical mass has been reached, only awaiting a detonating event ... be vigilant, have an action plan and, most important, know your investment time horizon (when you must use the capital) and your risk tolerance".'

We ended 2007 still worrying at the great surge in credit issued by banks and the increasingly shakey asset bubble.

In July 2008 the BIS dropped a bombshell: 'The fundamental cause of today's problems in the global economy is excessive and imprudent credit growth over a long period ...'

The world economy is near a 'tipping point' that is likely to eventually slow inflation, and may even create a severe slowdown, even a global depression that converts inflation to deflation.

Finally, this unhappy situation is due to lax monetary policy allowing an unprecedented credit and asset bubble.

July 2008 saw Henry sympathising with RBA Chief, Glenn Stevens, but being disagreeable on a key point.

August 2008, it was baseball bat economics in Australia.

'Australian shares are down 30% from their peak, US shares 20%.  Bank shares everywhere have fallen further.

'The US economy is in far worse shape, with major falls in house prices and many people walking away from homes they cannot now afford, leaving mosquitoes to claim the swimming pool'.

'RBA to ease the Squeeze' was Henry's headline in early September, and the RBA followed through with a 25 basis point rate cut.  In retrospect, clearly inadequate, but by October, that dire month for Australian markets, it was time for serious action. The issue was unlocking frozen credit markets, and the RBA waded in with the first 100 basis point rate cut.

By March 2009, it was a clear case of 'Après moi le deluge!'

''In every stock-jobbing swindle every one knows that some time or other the crash must come, but every one hopes that it may fall on the head of his neighbour, after he himself has caught the shower of gold and placed it in safety. Après moi le deluge! is the watchword of every capitalist of every nation'.

John Stone, former head of Treasury, said of the massive 'Quantitative easing' program: '[It is] "irresponsible, verging on the criminal".

Roderick Dean, former Deputy-governor of the New Zealand Reserve Bank, said: [It is a] "highly worriesome policy designed to avoid addressing the fundamental issues of extremely large national fiscal deficits".

We said last weekend: 'Important nations are deeply indebted, with highly inflationary monetary policies whose effects are masked by the deep recession induced by the global crisis'.

 China recovery

The economics team at nab have concluded that China's growth is again rising: 'Today’s economic data releases for China came in broadly in line with expectations, providing evidence that the economic slowdown may have bottomed in the September quarter. The national accounts show that the economy expanded by 7.9 % over the year to the December quarter, up from 7.6 % in the June quarter, which is the first time growth has accelerated in two years.

'However, revised q-o-q growth rates suggest the economy’s growth momentum stabilised around the June quarter and has remained relatively steady; q-o-q growth was 2 % in the quarter (from a 2.1 % revised rate in Q3). The outcome was slightly stronger than our forecast for 7.6 % y-o-y growth made late last year, largely reflecting the much stronger than expected foreign trade result. Average growth for 2012 came in at 7.8 %, slightly stronger than our previous forecast of 7.7 %.

'This year we expect growth to recover to around 8¼%, with the PBoC possibly commencing monetary tightening later in the year if inflation pressures start to return'.

Henry says: Tiny changes really, well within the standard error band, but moving in the right direction.

Market improvement.

Andrew Cornell at the much improved AFR asks is 2013 going to be positive for equities, or another year of pain.

'It’s not yet quite Pamplona but there are bulls on the loose. The thundering of hooves may still be distant but they can be distinctly heard in equity, risk and currency markets. The latest HSBC survey of global fund managers shows 75 per cent hold an overweight view towards equities in the first quarter of 2013. That’s up from just 40 per cent in the fourth quarter of 2012. Significantly, none of those surveyed are underweight in equities, while 60 per cent are now underweight in cash – the safety net allocation of recent years.

'A similar survey from Bank of America Merrill Lynch found investors’ appetite for risk at its highest in nine years, while an increasing number of investors judge equities as undervalued – particularly in Europe'.  More here.

Cricket'n'tennis, and then footy

At the start of the 'one day' season, Australia's 'B' team caught the Sri Lankans snoozing, it seems.  The 'A' team was last night humiliated by Sri Lankan pace and swing.

Such a gutless performance will save Henry from the bother of watching cricket for the rest of the summer, and before long the pre-season footy stories will begin popping up. Even today, we learn that Essendon are leaner and fitter than ever before, but that probably means they will (again) run out of gas well before the finals.

Still, before then we get to see Roger Federer demolish Berbnard Tomic, then admire Novak Djockovic as he demolishes everyone he meets.

Image of the week

'Nation ablaze' says The Oz and one must say that a picture tells the story.

Here is a link to the article.

Courtesy The Oz

It is certainly the year in which the gilt is coming off the economic gingerbread in the miracle economy, and new policies are needed urgently.

Now even the official labor market statistics are looking worse, and will look more worse as the year wears on.  More here.

Yesterday, Professor Warwick McKibbin commented on our attempt to cap, or even reduce, the Aussie dollar by taxing capital inflow.  His comments outline exactly the wide-ranging policy revamp that Australia needs.

We replied in part as follows: 'The chances of both those policies – actually an entire set of policies – being implemented is I fear about zip.  If by a miracle after years of debate we got such policies then my tax could be reduced to zero and we would probably be coping well with a dollar far higher than at present'.

Here is a link to McKibbin's comments, and our reply, along with comments of others.

Overnight's news is that mining giant RIO has sacked a much respected CEO and his head of strategy, presumably for overpaying for assets in the boom. True blue Aussie Sam Walsh is to take over.  Having delivered the 80 % of RIO's total profits from his iron ore empire, Mr Walsh is well placed to keep the show on the road, and potentially to restore the sizable slice of Henry's retirement income lost in the massive fall in RIO's shares during the GFC. RIO had already announced sizable cuts to costs (ie jobs), and presumably this was Tom Albenese's last hurrah.  Job losses in Australian manufacturing continue to rise and, as previously reported, the smaller mining companies and most other small businesses are retrenching staff or going broke at a hefty rate.

It seems Boeing's Dreamliner has dud componants that put the plane at risk. Fingers are being pointed at the 30 % of the product made offshore, in some cases in unregulated sweatshops. I can hear the confident bloke from XYZ-consulting saying: 'Boeing is spending too much on safety. You could raise your EBIDTDA by outsourcing, and while you are at it reducing safety checks to global best practice'.

The world's greatest Treasurer, Wayne Swan, has been giving advice to his betters. The USA, he said earlier this week, should get its fiscal house in order. And China should press ahead with its currency reforms. Surely he has some sage advice for the Eurozone leaders, or is that problem just too hard even for Swannie?

Mr Swan is certainly no shrinking violet when it comes to giving messages to the RBA. He was reported to have told a meeting in Hong Kong that he 'has deliberately built Labor's budget strategy on Reserve Bank of Australia rate cuts'. This presumably means that he is very confident that the Bank will continue to cut interest rates, since he is also reported as having told the same meeting that it 'was unlikely that the budget will be returned to surplus this financial year'.

Like Bernard Tomic and that American president, it would be far better if Mr Swan spoke softly (and prudently) and carried a big stick (raquet in Bernard's case).

Yesterday's AFR says that Wayne Swan has told a meeting in Hong Kong that he 'has deliberately built Labor's budget strategy on Reserve Bank of Australia rate cuts'. This presumably means that he is very confident that the Bank will continue to cut interest rates, since he is also reported as having told the same meeting that it 'was unlikely that the budget will be returned to surplus this financial year'.

The front page of the Australian says 'Big projects ordered to buy local'. Nice idea, but if the government does not know the owners of 'big projects' are not good Aussies but rather capitalists red in tooth and claw, they haven't taken seriously the fiasco of the mining tax. 

Meanwhile, Henry has had some interesting academic feedback on his solution, which is to add a variable tax on capital inflow to the RBA's armonary, but no response from the powers.  Olympian detachment is, of course, the first refuge of the incompetent.  If previous form is followed, it will be followed - eg an independent, inflation-fighting central bank -  by the powers claiming ownership of the idea, then implementing it.  (Comments here, including from Professor McKibbin of ANU, and former RBA board member.)

Boral is the next big manufacturing company to announce retrenchments - 700 in Australia and 2,400 around the world.  These numbers were extracted from a cautious CEO on PM last night, along with reports from analysts suggesting it may be too little, too late to save Boral.

New 'official' labor market numbers released today, shows the rate of unemployment at 5.4 %, a net loss of jobs and still declining participation rate. There was a fall in full-time jobs of over 16 K, partially offset by a rise in part-time jobs of over 8 K.  These trends will get worse, and the earlirr prediction of 'most economists' of an unemployment rate of 5.5 % is rapidly being replaced by 6 %, still highly conservative in Henry's view. 

And, as Alan Kohler demonstrated on the ABC news ('Its as simple as ABC') last night, hours worked are falling faster than job numbers, and hoursa worked are not far off the low levels of the GFC.  The good news is that companies are (again) protecting jobs by having people work shorter hours.  The bad news is obvious.

Of course we know from the Roy Morgan survey that matters are far more grim than these trends suggest.

'JOB advertisements are at their lowest levels for three years after falling for the tenth straight month in December, a leading employment survey says. ANZ senior economist Justin Fabo said weak jobs ads, coupled with an economy expected to grow below trend in 2013 and a high currency, paved the way for further interest rate cuts from the Reserve Bank of Australia (RBA).

'The total number of job ads placed in major metropolitan newspapers and on the internet fell 3.8 per cent in December, according to the ANZ job advertisements series published today.

'Mr Fabo said the number of job ads in December was 20 per cent below the most recent peak in February 2012 and were almost half the level reached before the global financial crisis'.

Not many jobs being advertised at BlueScope Steel, which has just told its workers that there are to be another set of redundancies and dismissal of contractors.

This is why Australia needs to revamp monetary policy.

The US Fed is sticking to its promise to keep interest rates low until the rate of unemployment is 6.5%, not expected until 2015.

Investors remain convinced that a 'great rotation' from bonds to stocks may this time be for real.

Read on here, if you subscribe to the Wall Street Journal, or read the story in the fish'n'chips version of the Oz.

As if to underline this theory, overnight news from the USA saw blue chip equities surge.

Despite the playful cover - see image below - the venerable mag is quite serious, and summarises the academic debate well.

The summary is equivocal - 'Fears that innovation is slowing are exaggerated, but governments need to help it along' - but you will be confused at a higher level when you have absorbed the analysis.

By chance, Henry spent some time over the weekend reading the articles recommended for an economic history course at Melbourne U, provided to Henry's younger son by the estimable Professor Jeff Boreland.

These articles discuss the sources of Australia's economic growth over the more than two centuries since Captain Cook claimed our wide brown land for Britain.  They also discuss the productivity debate as it impacts on us all.

Historians such as Boris Schedvin, Rod Maddock, and Ian McLean, and many others, contribute to the debate, and in fact I am also reading (and will shortly review) Ian McLean's very recent book Why Australia Prospered.  But I have gotten the idea from his articles that it had a fair bit to do with mineral discoveries as well as happy accidents - including more or less wise decisions by the British Colonial Office (officials it seemed learned from losing America) and most of the representatives of the crown in the days before federation.

However, the article that comes closest to answering questions about Australia's recent productivity performance is that by David Gruen of Treasury and Glenn Stevens of the RBA, 'Australian Macroeconomic Performance in the 1990s', written for one of the RBA annual (?) conferences.

Both labor productivity and multi-factor productivity (excuse the technical terms) grew faster in the 1990s than in the 1970s and 1980s, exceeding or almost matching (depending on the measure) fast productivity growth in the 1960s.

While US productivity surged in just four years in the late 1990s, Australian productivity increased throughout that decade. And in the USA, it was productivity in manufacturing that grew especially rapidly, while in Australia it was across the whole econmomy, and especially in the non-traded goods sector. 'The 1990s Australian experience appears to be one of more rapidly approaching the technological frontier, rather than benefitting directly from the rapid productivity growth in the componant parts of the new economy'.

Given dismal recent productivity performance, one is forced to ask if the 'technical frontier' stopped growing in the 2000s, or if Australians lost the urge to play catch-up. Or perhaps under the benign policy advances claimed by Gruen and Stevens all progress has stopped, after a nice boost in the 1990s?

The Economist is concerned, along with leading US economists such as Robert Gordon, that the really big technological advances may have run their course in the late nineteenth century and in the the early tewntieth century.

But, as with the French revolution in politics, it is probably still too soon to say.

The venerable mag says: 'The productivity gains after electrification came not smoothly, but in spurts; and the drop-off since 2004 probably has more to do with the economic crisis than with underlying lack of invention. Moreover, it is too early to write off the innovative impact of the present age.

'This generation’s contribution to technological progress lies mostly in information technology (IT). Rather as electrification changed everything by allowing energy to be used far from where it was generated, computing and communications technologies transform lives and businesses by allowing people to make calculations and connections far beyond their unaided capacity. But as with electricity, companies will take time to learn how to use them, so it will probably be many decades before their full impact is felt'.

Readers who need more on this importent subject will find several related articles in this week's economist. Ian McLean's fine book will provide interesting material on the Australian experience in an historian's framework.  Henry's sometimes playful interventions are available here.

See also 'Australia's productivity close to last', August 2012.

 Courtesy The Economist