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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Warnings and forebodings
Date: Monday, December 19, 2011
Author: Henry Thornton

Warnings and forebodings about the global economy are spreading like wildfire or a really nasty virus.

Better to get a realistic view on the table rather than some Panglossian fairytale, like an old geezer delivering gifts down the chimney. 

Realism will spoil Christmas for some, perhaps including the two medical scientists Henry dined with last night.

'What is going on' was the question, and the tutorial was intense.

It is hard for well qualified and experienced professionals in fields other than economics to comprehend just how uncertain are some of the big issues of economic policy.  Lack of effective action to solve the crisis in Europe, and lack of political agreement about economic policy in the USA, are exhibits one and two in support of this statement.  Australia provides exhibit three.

Henry explained  to the scientists as well as he could that the Club Med nations of Europe need two things to begin getting back onto their metaphorical feet.

The first is a good dose of debt reduction, and the second is a substantial depreciation of their currencies.  The third, unavoidable, remedy is hard and sustained fiscal austerity, which will be part of the solution in any scenario.

Making austerity the whole solution, as seems to be the strategy of the Eurozone leaders so far, would be to impose great misery for at least a decade on the Club Med nations of Europe.

Morally this may satisfy those who ignore the banks and others who so enthusiastically promoted Club Med debt and sold it to investors. But the promoters of Club Med debt and their clients were equally (in Henry's view) morally culpable.

Taking a serious haircut to existing debt levels to allow less misery for the Club Med peoples would seem both fair and economically expedient.

Market forces should enforce the first of these classic remedies, but so far as Henry is aware it has been suggested only for Greece. The second classic remedy is ruled out by the membership of the Eurozone itself and will only become relevant as Club Med nations quit the currency union that is almost literally choking their economies to death.

'What happens when these countries quit the Eurozone?' asked one of the medical scientists. 'No-one knows for sure' I replied. 'There will be a lot of legal argy bargy, as the rules of the Eurozone are apparently silent on this possibility. The big difficulty is the Eurozone banks.  The likely outcome would see assets in new Drachma, new Lira, new zloty, etc, etc, and liabilities in Euros, meaning bankruptcy.  I doubt there is any body that could rescue all the major Eurozone banks.  Widespread bank failure means Great Depression, that is an iron law of economics, or at least of economic history'.

The discussion continued - what happens to US and Chinese exports if there is a Depression in Europe, what does this mean for Australia and its programs to support medical science and other undoubtedly worthwhile causes?

I suspect there will be many such conversations to dampen the festivities this Christmas.

Thanks to The Australian's David Uren we learn today of a fine speech by the Governor of the Bank of Canada, Mark Carney.

(Here is Mr Uren's account, and here is a link to the speech itself.)

'ONE of the world's most respected central bankers has warned the world economy is at a tipping point beyond which forcible debt reduction will bring collapsing asset prices.

'Bank of Canada governor Mark Carney said last week that the "global Minsky moment has arrived", referring to the work of American economist Hyman Minsky, who proposed in the 1960s that financial markets were intrinsically unstable.

'During periods of growth, excess cash generated speculative booms that encouraged people to borrow beyond their ability to repay. When markets turned down they would be forced to sell assets in a falling market to pay down debt'.

"Debt tolerance has decisively turned. The initially well-founded optimism that launched the decades-long credit boom has given way to a belated pessimism that seeks to reverse it," Carney said, in a speech underscoring the great challenge that confronts the world economy, achieving growth while trying to pay down debt. "Current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over."

'The change can be seen clearly in Australia, where households and business have stopped borrowing and are working hard at lowering debt. The key vulnerability is household debt, which remains high'.

I strongly urge you all to take the time to read Mark Carney's sobering speech for for yourself.

His concluding thoughts are as applicable to Australia as they are to Canada.

'When we found ourselves in fiscal trouble in the 1990s, Canadians made tough decisions, so that on the eve of Lehman’s demise, Canada was in the best fiscal shape in the G-7.

'We must be careful, however, not to take too much comfort from these experiences. Past is not always prologue. In the past, demographics and productivity trends were more favourable than they are today. In the past, we deleveraged during times of strong global growth. In the past, our exchange rate acted as a valuable shock absorber, helping to smooth the rebuilding of competitiveness that can only sustainably be attained through productivity growth.

'Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging.

'We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.

'It is better to rebalance now from a position of strength; to build the competitiveness and prosperity worthy of our nation'.

Here's to a sober as well as a deeply thoughtful Christmas holiday.

Those interested in a more detailed discussion of Henry's views on the reasons for the current crisis and the lessons for economic policy might find this presentation - with a link to the relevant chapter of Great Crises of Capitalism - of interest.

Those who do not understand history ...
Date: Thursday, April 03, 2014
Author: Henry Thornton

'The Reserve Bank of Australia has dumped its overt strategy of talking down the dollar and has ramped up warnings about steep rises in property prices.

'As the central bank’s board left the cash rate at a record-low 2.5 per cent for an eighth straight month, governor Glenn Stevens pointedly declined to describe the currency as “uncom­fortably” high – a term he used in December when the dollar was several cents lower than US93¢, which it hit on Tuesday.

'Mr Stevens said the currency’s recent gains reduced the benefit to the economy. At the same time, low rates are expected to boost economic growth, helped by a surge in new home construction.

The shift in tone is a significant acknowledgement recent attempts to “jawbone” the dollar lower have ­floundered and threaten to undermine the bank’s credibility'.

Curiously, Jacob Greber, AFR's 'Economics correspondent', whose full story is available here, (including a nice video comment), fails to note Henry's clearly articulated explanation of the inconsistency in the RBA's views, posted Monday and available here.

Henry's view is based on the fact that 'monetary policy cannot serve two, [or even three], masters'.

That is, moving cash rates might have a reasonable effect on the economy, and should if managed appropriately, keep goods and services inflation controlled, as in the RBA's agreement with the government.

But moving cash rates cannot, except by chance at particular times in the economic 'cycle', also control the exchange rate or house prices.

Henry's editor's submission to the Murray Enquiry spells this point out as clearly as Henry is capable of doing, and is linked here.

Sadly, those who do not understand history are condemned to repeat it.

Memo Jacob Greber: Henry may be contacted here if you feel a tutorial may be useful.

Youth unemployment - a baffling jigsaw
Date: Wednesday, April 02, 2014
Author: Henry Thornton

No decent person can fail to be moved by the plight of contientious youngsters, with excellent qualifications and aptitude, who cannot get a decent job. The Global Financial Crisis must take a lot of the blame, since 'flight to quality' includes hiring processes. But in Australia's case I also blame the policy of letting 'higher ed' rip, encouraging far to many people to go to universities while downplaying the virtues of good technical training for people who are unsuited to Eng Lit, Maths or Physics or who find Economics boring.

Today's announcenment that the Victorian opposition will rescue a redundant Swinburne Campus from developers and turn it back into a good old-fashioned TAFE is likely to be a small step back to reality with the mix of types of education to match demand in Australia.  I predict it will be very popular with voters.

One of Australia's finest economists - of the non-boring variety - is Jeff Boreland of Melbourne University. Jeff is on a one-man crusade to explain the facts of Australia's labor market, and today I present his summary of the youth unemployment, with a link to all articles in his series so far.

Key points

• A substantial decline in the employment/population rates of the younger Australian population (aged 15- 19 and 20-24 years) has occurred since 2008.
• The decline has been concentrated amongst those not in full-time education who are working full-time and those in full-time education who are working parttime.
• The main explanation for the decline has been a slow-down in hiring during the current downturn, which has disproportionately affected young workers.
• Employment growth for the younger worforce has been much lower than for the aggregate workforce in manufacturing, construction, retail trade, accommodation and food services, professional services, and health care and social assistance.

Read on here for the full presentation.

Professor Boreland's 'Labour market snapshots' are available here.

Many years ago, when Henry was a visiting Professor at the University of Rome, we met over dinner a lady professor.  She explained that jobs like hers were very hard to get in Italy, and she had to work for seven years without pay to get on the academic ladder, which she then climbed with great success.

In the past two years we have been helping our kids, and some of their friends, to get jobs, with a success rate of 5 out of around 8 so far.  It goes without saying that all were highly credentialled, well presented and had been coached by friends and relatives in how to approach the dreaded interview. In three of the five cases, it was it seems the practical experience in a real but unpaid job as an 'intern' that seemed to make a difference.

The Roman lady professor's husband, the man who invited Henry to visit his university, explained that the magnificent apartment we were dining in had not been purchased on two professor's salaries. 'In Rome', he explained, 'you only own a property like this if you inherit it'.  Australian house prices are headed up again far too quickly for this homeowner-with-children's comfort.  Could we be headed for Italy's real estate problems as well as their labor market constraints and practices? 

Monetary policy stuff-ups
Date: Monday, March 31, 2014
Author: Henry Thornton

'Monetary policy should be conducted with clear focus and without surprises that confuse people in the financial system or more generally'.  That is the advice given to the young Henry Thornton by the former RBA governor Sir Harold Knight.

Consider the current RBA's recent three-stage approach to currency management.

1. When the currency was initially well above parity with the US dollar, senior RBA staff delivered the unreasonably brutal message - 'What doesn't kill you makes you stronger'.

Perfectly reasonable, you may think. However, for businesses that were unable to become stronger, liquidation or substantial downsizing was the outcome.  Manufacturing, inward tourism, exports of educational services all suffered significent overall shrinkage, while most survivers were weaker, not stronger.

2. Then there was a phase in which domestic interest rates were cut, arguably lower than was ideal, combined with gubernatorial exhortation, so-called 'open mouth' policy. This phase of policy had some success and for a while the currency seemed headed to 85 cents, a level 'mentioned' as better than levels in excess of parity. This phase of policy reminded Henry of the (unannounced) aims of cutting interest rates in the late 1980s, despite explicit board recognition that monetary policy needed to be tightened, not eased. Nemisis came when cash rates had again to be raised, this time very substantially, leading to the early 90s 'recession we had to have'.

3. Now we have moved to a 'no comment' or 'don't mention the war' in which the RBA has let it be known cash rates are likely to be stable for some time. Since the housing boom suggests the next move in interest rates is likely to be up, the Australian dollar is again moving up.

In short: no consistency of purpose, confusing changes of approach, and further squeeze on exporters  and those domestic companies struggling to compete against imported products and services.  Verdict - 'failure, a weaker economy, not a stronger economy, and confusion.

The current RBA management will no doubt say 'Sir Harold Who?' and 'Henry Who?' should this Blog ever come to their attention.

Yet Sir Harold's advice remains the gold standard of monetary policy, and the mistakes of his sucessors RA 'Bob' Johnstone and Bernie Fraser should resonate with Glenn Stevens and other current senior officers who were watching and in some cases advising in the late 80s and early 90s.

Maintaining a clear focus on low goods and services inflation and a viable industry structure, and to lean into excessive house price inflation, requires additional policies.

* A variable tax on capital inflow to tame the excessive Australian dollar, as argued here in January 2013; and
* A pro-cyclical bank prudential capital ratio regime in which bank lending is reduced as house prices rise.

Without these additional policy 'instruments' , RBA governors will simply lose credibility and 'clients' will remain confused about the gameplan being followed.

Not a good look, and not a good outcome for the 'clients' - which means the rest of us Aussies, especially who do not have highly generous salaries and wonderful defined benefit superannuation schemes.


The latest RBA pronouncments has nothing about the (rising) currency, but a reminder that house prices can fall as well as rise.

If you miss target A, aim at target B seems to be the game.

More reading:

'Tax capital flows to tame dollar', The Australian, 12 January 2013.

'The messages of boom and bust', From Great Crises of Capitalism, 1 January 2011.

Submission to Australian Financial System Review, March 2014.

Saturday Sanity Break, 20 March 2014
Date: Saturday, March 29, 2014
Author: Henry Thornton

The general view of the economy , lead by the RBA, which is Australia's most reliable (but far from omniscient) forecasting agency, is that things are pretty good - glass half-full sort of view.  The evidence is in the RBA leader's recent speeches, and in particular by Gov'nor Glenn Stevens' latest, 'The Economic Outlook'.

Yet, in Australia at least, today's headline about the early rollout of the NDIS that applies equally to Qantas, Toyota, Holden, Forge and many other failed or failing companies. 'NDIS trial costs blow out by 30 per cent'. The problem of what we have called 'double-digit cost disequilibrium' has nowhere been acknowledged by our leaders, including the RBA, although business leaders do talk about high costs and ask the government/IR bureaucracy to keep wage hikes to a minimum, or in some cases, to do away with overtime loadings or even to freeze wages.

Mr Stevens said of the global scene: 'The United States continues its recovery'; 'The euro area has resumed growth, albeit in a somewhat hesitant fashion'; In China 'Recent indicators have shown possible signs of slower growth in the early part of 2014 (Ark!!! says the petshop parrot); and 'Around the Asian region generally, at this stage, our sense is that economic growth is continuing at about its trend pace'. ('Sensing' a result implies some sort of sensing device, perhaps a really bright young economist from Malaysia.)

Coming to Australia - the speech was in Hong Kong - 'Australia certainly weathered the financial crisis well, and with a real GDP some 13 per cent larger than it was at the beginning of 2009, compares well with many other advanced countries'.

* 'There have been very strong conditions in the natural resources sector' though the terms of trade have fallen and investment has dived.
* 'In the rest of the economy, ... consumption and residential construction have been soft for a while. And ... many businesses exposed to those sectors, including retailers, builders and banks, have found the going harder'.
* 'In addition, because the mining boom was associated with a very high exchange rate, other trade exposed sectors have also faced more challenging conditions'.

Now comes the crystal ball: 'Looking ahead, as the resources sector's capital spending continues to fall, it will be desirable to see some other sources of growth strengthen'. (Ark, Ark!!! says the parrot, his version of Hear hear!.)

* 'export volumes for resources, ... are already growing strongly'.
* 'It will be helpful if some of the other areas of domestic demand that have been subdued start to grow faster'
* 'Businesses outside of mining would need to have made some progress in containing costs, and raising efficiency'. (At last, a nod to the unspoken problem. Ark, Ark, Ark!!! says the parrot as he dances a jig on his perch.)
* 'Measures of business confidence have improved over the past six months. Businesses seem, so far, to be taking a cautious approach to investment, however: they are waiting for stronger, more persistent signals of improved conditions before committing to significant increases in capital expenditure'.(The parrot is downcast.)

The cagy Mr Guv'nor points out that there is a 'very substantial' degree of uncertaintly surrounding his mildly positive central projection. 9The parrot gets lost in the detail and begins to nod off.0

Gov'nor Glenn continues, however.  He acknowledges the housing boom, seems to have given up his attempts to talk the dollar down and mentions as an aside: 'There is, of course, the full panoply of other ‘risks’. (The parrot twitces a wing, but by now if sleeping upside down on his perch, snoring gently.)

And, most importantly: 'Other conditions need to be right for growth. These include ensuring the environments for competition, innovation and investment, including in human capital, are sound. In those areas, various other government policies must come to the fore'.

Read the full speech here, without the intrusive reports on the response of the parrot. 'The bloody parrot's dead', asserts Mrs Thornton, who has arrived with a cup of coffee. 'Its not dead, merely sleeping' Henry replied, but he may have just been dreaming. Coffee? Delivered by Mrs T? 'You've been dreaming Henry', asserts the parrot.


The over-hyped Aussie T20 team got beat by the West Indies, who recaptured their form of the sixties following some trash-talk by the aussies. Memo to George Baliey: talk softly and carry a big bat, mate, much better than the opposite approach. Now the swaggering Aussies have a must, must, must win match against India.

Luckily the shielas seem to be doing a bit better in their world cup. What about a female chief editor at these newspapers, comrades, then we'd might get a fair suck of the sauce-bottle on sport.

Sadly, Caaaarlton!'s gross inconsistency meant a loss to Richmond on Thursday night, leaving Mick the Merciless to ponder the two-zip start to the season. Time to make them drink Ovaltine when they go to bed at 9 PM coach, or slip some other useful substances into their breakfast muesli. And it was heart-breaking to see Eddie Betts kick three goals in the second quarterfir Adelaide against Port Adelaide.

Essendon to come next week.  Henry caught the final minutes of Hawthorn's stirring victory over Essendon last night, and clearly Bomber Thompson is not a bad stand-in for Mr Hird, now one hopes happily reconciled with Mrs Hird. Essendon Chairman, Paul Little, may well have learned a thing or two about industrial law - ie an employer cannot punish a player for comments made by his or her spouse. Free speech is still a core value of Australian society. Still no charges from ASADA, and it is beginning to look as if the while supplements affair has been a storm in a sample bottle.

Very sad about that young man who got his neck broken in what one old salt on a sports show called a 'legal tackle'. Wonder how said old salt would cope with being driven head first into the ground by three beefy young blokes who look as if they've spent all their lives in a gym, with help from Steven Dank.

And Israel Falou is not playing this weekend and did Henry hear he was suffering from an injury to his neck?  It one way to try to win a game. Ask Mone Morkal.

Image of the week

Courtesy The Oz

Downtown Abbey on the Molonglo (The Bunyip aristocracy).
Date: Thursday, March 27, 2014
Author: Tiresias of Canberra

Mr Abbott has made a very grave mistake restoring knighthoods and damedoms. Reintroducing chivalric honours, complete with archaic honorifics, will allow Mr Shorten to paint the Coalition as the party of snobs and frustrated, wannabe, Brits. It emphasises Abbott’s personal nostalgia for a world that is past. In the UK knights now mostly decline to use the honorific ‘sir’. The only British knight I know personally insists on first names. Peers, both hereditary and life, largely do the same … unless they are travelling to the USA where would-be sophisticates and rubes adore what passes for European aristocracy.

Australian knighthoods were defensible in the days when we were an Old Dominion and those who held public office could not expect high remuneration during their working life or after it. Today it is very different. We are a republic in all but name, the monarchy plays no real role in national life and senior people in the judiciary and the public sector do very nicely, and the most eminent can expect highly lucrative commercial appointments in retirement as well. There is no principled case why any Australian who has climbed the greasy pole should ape the styles and titles of their 'betters' from days past or why they should receive any greater deference than either money or personal reputation already makes available to them. As for the choice of Cosgrove and Bryce: Peter

Mr (Sir Peter) Cosgrove is worthy enough, but does Abbott think his grassroots constituency (conservative, suburban, Australia) seriously wants to honour someone like Ms (Dame Quinten) Bryce who embodies many of the least likeable features of our smug and snide national elite?

The ABC, SBS and the Fairfax press will mock many of the men and women who will be chosen to receive the new quasi-imperial honours. Who will blame them for doing so? The creepy succession of party donors, spivs, racing industry types and celebrity sportsmen who will inevitably receive such honours over time will destroy public esteem for the whole thing.

Most seriously of all, by making a fuss about the bullshit of knighthoods, Abbott has thrown away a great rhetorical advantage that was available to him: the ALP and the trade unions are the only truly feudal political institutions in the country, that is, they are institutions in which family background and hereditary ties continue to play a truly significant role. This is an Achilles heel of the labour movement – the sheer number of gormless, useless and mediocre, types who continue to rise through the ranks on the strength of their family ties is a disgrace. It goes to the heart of what the trade union movement has allowed itself to become.

Now that Abbott has made himself the champion of chivalry and defender of archaic class distinctions, Shorten shall have undeserved and very suitable cover for the culture of nepotism that plagues the labour movement. Any time that Abbott wishes to focus attention on this nepotism, Shorten shall be able to change the subject merely by alluding to one or other of Abbott’s knights or dames.

Mr Abbott should wise up. University debating and student politics may have been fun, but they are over now. Every day in office is a privilege, every day must count and every punch has got to hit and hit hard. Wasting energy, attention and truly irreplaceable political capital on the honours system in the government’s first term is indefensible. Either Abbott re-sets the national focus where it counts or he is lost.

Other views

'Restoring knights and dames, The Oz.  

'Queen’s man John Howard would refuse Abbott’s Sir John title', AFR.  


The coming global asset bust.
Date: Wednesday, March 26, 2014
Author: Henry Thornton

'Legendary investor Jeremy Grantham says the US Federal Reserve is killing the recovery of the world's biggest economy and the "next bust will be unlike any other".

We applaud Jared Lynch of The Age for sharing this gloomy prosnostication with Henry and his readers.

His article continues: 'Mr Grantham – the cofounder and chief investment strategist at the $US112 billion ($123 billion) Boston-based fund manager GMO –said he wouldn't invest his clients' money in US stocks for at least the next seven years because of the Fed's "misguided policies".

'Mr Grantham has an impeccable track record, having called both the internet bubble and then the US housing bubble. In November he said he believed the US sharemarket could rise another 30 per cent, although he believed it was overvalued, before crashing again.

"We invest our clients' money based on our seven-year prediction," Mr Grantham told Fortune.

"Over the next seven years we think the market will have negative returns. The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before.

"Assets are overpriced generally. They will become cheap again. That's how we will pay for this. It's going to be very painful for investors".

A close friend, and Goldmember, sent us a link and asked what we thought of this scary prognostication.

I replied as follows: believe ultra loose US monetary policy has fuelled the last two asset booms. When the late 90s boom ended, Greenspan reversed policy to make money again cheap as chips.

Another substantial asset boom started after some time, and it was a doozy. Bernanke did the same when the GFC hit the world.

US monetary tightening now under way will produce another bust, but history says if it gets serious the Fed will then reverse engines again.

If one is willing to bet that the next bust will again be reversed one can sit and take one’s medicine, then enjoy the recovery.

At some time, global investors will however cotton on to the thought that this game cannot go on forever.

Whether this makes for the worst bust ever is uncertain, but one cannot rule it out.

I plan to reduce my equity holding before the next bust, but timing is something no-one is very good at.

In case you missed it, here is our latest report of discussion essentially similar to Mr Grantham's but in modest, non-scary language.

Memo to self: must lift game.

Is Australia's growth doomed to slow?
Date: Tuesday, March 25, 2014
Author: Henry Thornton

The inter-related topics of 'Demographics, Productivity and Innovation' is the subject of a fine speech by Philip Lowe of RBA fame, as reported yesterday. Australia's population is growing faster than those of other developed nations and numbers of Australians born overseas are rising to nineteenth century levels.  These are two trends that may help make Australia relatively innovative and relatively productive.  Offsetting this, our population is growing older and older people are costly to look after and (mostly) less innovative even while they are still working.

Productivity growth (and therefore standard of living growth) in almost all developed nations has declined markedly since the mid 2000s compared with that in previous decades, possibly as an effect of the Global Financial Crisis which severely limited business investment.  Australia is no exception.  As Mr Lowe says: 'Looking back over the past two decades or so, we have enjoyed faster growth in real per capita income than almost any other advanced economy. In the 1990s, we benefited from strong productivity growth. Then in the 2000s, our collective living standards were boosted by a very large rise in commodity prices. And over much of this period our national income was further increased by the rise in the labour force participation rate that I mentioned a moment ago.

'Today things look a little different. Productivity growth over the past decade has been lower than it was in the 1990s, commodity prices are high but no longer rising, and the share of the population in employment has fallen recently. If these trends continue we face the prospect of considerably slower growth in our living standards than we have become accustomed to.

'The solution here is to lift our productivity growth.  Mr Lowe did not add 'but this is easier said than done'.

He did however provide brief summaries of the main thesis of two of the books referred to by Michael Folie, plus a more optimistic view.

'Professor Robert Gordon from Northwestern University ... argues that the first three-quarters of the 20th century was a golden period in terms of productivity growth for the advanced economies. During that period, we worked out how to take full advantage of the transformational inventions of electricity and the internal combustion engine that occurred at the end of the 19th century. While there have been many breakthroughs over recent years, Gordon argues that they pale into insignificance compared with the huge advances made possible by these iconic inventions at the end of the 19th century'.

'Another sombre assessment is offered by Nobel Laureate Edmund Phelps. He argues that the problem is not so much that we have run out of really great things to invent, but that western societies are now less able to invent them. He argues that cultural changes, including the changed role of government, have stifled the desire and incentives for innovation. As a result, our economies have become less dynamic and less likely to find, develop and make use of the major technological breakthroughs that are the source of much productivity growth.

'As is usual in economics though, there is a counterview and it is much more optimistic. This view is that the so-called techno-pessimists are fundamentally wrong and, rather than facing a future of much slower technical progress, we are on the cusp of a new era of great progress in science. A prominent advocate of this view is Robert Gordon's colleague at Northwestern University, Joel Mokyr, who argues that the technological advances of recent times have given scientists a dazzling new range of tools and instruments. These advances have also greatly lowered the cost of accessing information. His argument is that, as a result, a new age of great scientific advancement is now possible'.

Which view, or which mix of views, is nearest to being correct, is impossible to tell in the current state of economic knowledge. However, Mr Lowe notes that 'if we are to improve efficiency and advance technology then innovation is required and innovation requires someone to take a risk – the risk of trying a different process, the risk of changing workplace organisation and management practices, or the risk of spending scarce resources to explore a new idea'.

This brings us to the question of how to create a more innovative economy. Mr Lowe asks 'How has our society's attitude to risk and innovation evolved over time and what are the implications for productivity growth?'

His 'tentative answer is that there has been a subtle, but important, shift in the way we think about risk and innovation. In particular, our preferences appear to have shifted in such a way that we increasingly focus on risk mitigation and risk control. There are examples of this in a whole range of activities in our society – from the nature of the legislation that parliaments pass, to the increase in compliance activities in the nation's boardrooms, to the amount of money we are prepared to spend to limit the probability of blackouts and even to our attitudes about the design of children's playgrounds. In each of these areas, our society has been prepared to limit options or to spend more of our scarce resources to reduce risk'.

While I am attracted to this view as a structural influence to add to the net effect of technical matters or low recent investment levels, it certainly cannot explain the recent almost halving of the growth of productivity in almost all developed nations.

This must remain a matter for further thought and perhaps for further testing, ideally in the more rigerous manner used by real scientists such as physicists.

My own pet theory is that Australia's tax and welfare system suffers major anti-innovative biases relative to those of the USA, a famously innovative society.  One reason for this is because taxes on start-up companies are far higher here, and the ATO zealously tries to kill plans to reduce this bias.  The ATO's insistence, for example, that shares issued in lieu of cash must be taxed at full nominal value, so that staff and directors of cash-strapped start-ups must pay full tax on a value that may, statistically will on average, be greatly overstated is a ridiculous obstacle to an innovative economic culture.

So too is Australia's relatively generous welfare system.  But would we really want to make things far harder for the battlers, as it is in the USA?  Logically, however, if normal jobs are hard to get and welfare is low and also hard to get, some people will create new businesses, even if it is mowing lawns or minding otherpeople's children, or walking other people's dogs.

But we must accept that America's history was in important respects far more innovative than ours. The relentless drive to the west, buying or capturing massive new territories, the massive influence of mining booms (which we share), acceptance of migrants who had to make it or fail with little help, the war between the states, the influence of colonial masters, who Americans threw off over the issue of excessive taxationwhile we outwaited ours, the differences mostly work in the direction of a more self-reliant, harsher and more entrepreneurial culture.

And, as Mr Lowe says, perhaps being rich makes a nation less innovative, or allows a rich nation to be more risk adverse.  My own writing on these matters is available here.

They raise questions such as the role of gambling in creating an innovative culture, what would Australia would do if a young Albert Einstein popped up or what does the research on the mainsprings of economic growth really show?  Questions a Deputy Governor is probably trained not even to think about.

But adding all the evidence and opinion (except that of the optomistic Joel Mokyr), it seems that unless something big changes, standards of living are likely to grow more slowly in developed nations like Australia.  Countries, like Australia, whose standards of living have grown faster than productivity may even need to undego a reduced standard of living.  Difficult to handle, especially it is only a few conomists on the recored to warn Australians of this gloomy possibility.

RBA Speech - Demographics, Productivity and Innovation
Date: Monday, March 24, 2014
Author: Michael Folie

I have over the last year been mulling and reading about the need for economic policy to focus primarily on growth policies and this leads to the question of how do we incentivise productivity. The usual macro response is to upgrade skills and training and spend money on bureaucratic innovation councils and hence how to get venture capital mobilised.

Several eminent economists have notable treatises on this topic. Michael Spence .. Technology convergence helps Emerging Economies.   Richard Gordon points out that productivity gains in the future will be much less than historical. Edmond Phelps (my favourite) argues that productivity stems from a widespread attitude encouraging creativity, try something different at the individual level . This means a very flexible workplace without all the prescriptive rules such as Fair Work Australia.

The attached link is to a speech given 10 days ago by Phillip Lowe, Deputy-governor of the Reserve Bank of Australia.  I draw it to your attention because it is the first time I have seen such a serious discussion in Australia. Mainly the Phelps book which I think offers an interesting angle towards supporting workplace reform.

Ed: We encourage others to comment on this important speech, providing a fine discussion of an issue that effects us all, and on which economics is a long way from being definite about.  Contact Henry here.

My own writings on these matters is available here.

They raise questions such as the role of gambling in creating an innovative culture, what would Australia would do if a young Albert Einstein popped up or what does the research on the mainsprings of economic growth really show?

The role of 'bourgeois dignity’

Thanks, Michael. I had the pleasure of hosting Deirdre McCloskey recently in Adelaide. Her explanation of the Industrial Revolution, which she generalises, has to do with what she calls ‘bourgeois dignity’: entrepreneurs saw themselves as doing (a social) good; and the dominant groups in the society grew to appreciate the contributions of those who upset the status quo. This is very like the phrase Michael quotes from Phelps, ‘a widespread attitude encouraging creativity’. Ideas and attitudes, along with interests, shape outcomes.

Jonathan Pincus

Sunday Sanity Break, 23 March 2014
Date: Sunday, March 23, 2014
Author: Henry Thornton

Russia grabs Crimea, someone or something grabs Malaysian Airlines flight 370 and rumour, smear and innuendo grabs Australia's Assistant Treasurer. It been a grabby kind of a week with Russian Grandmaster Vlad (the Impaler) Putin the biggest winner and, apparently, the passengers and crew of Malaysian Flight 370 the biggest losers.  We apologise that Henry's site was unavailable this weekend and that this popular column was therefore delayed.  The reason is mysterious, but got fixed on Monday am when the server was rebooted.

Like the friends and relatives of the possibly hi-jacked aeroplane, we hope at least that the passengers have been released on a military airfield somewhere in the mountain country North of the Indian subcontinent, a theory being propounded on CNN by a retired but supposedly 'well connected' American general.  Seems unlikely to Henry, but the whole lost plane saga has a weirdly strange air about it.

Arthur Sinodinos has certainly been entangled with some unsavoury people, and how could he not know who were the shareholders of the company that he chaired, or the  generous donations from Arthur's company to Arthur's political party?  Henry had a searing learning experience with his first attempt to become a professional director, before he had formed the fully critical approach that is one's best defence in the wilder seas of corporate life.  Mr Sinodisos should not be damned for the rest of his life for what seems to this outsider most likely to be gross naivety, but it is in the hands of ICAC now and its process could go anywhere from here.

The Prime minister is being congratulated by the Australian for an IR policy that is not an IR policy in the normal sense.

'PM vows to bust union stranglehold' is the page one headline.  It is all about the construction industry that seems to be a festering mess of restrictive practices, intimidation and rorts, whose economic effect is to slow down and raise the costs of construction. This rat's nest must be cleaned up and doing so would make a noticable contribution to Australia's economic well-being.

The union movement will of course fight reform like the kilcanny cats it most resembles.  Readers should recall the amazingly bad behaviour during the last great war, brilliantly documented by Hal Colbatch, with an extract from his book available here.

And do not miss Grace Collier's opinion that union membership in Australia might halve overnight if all state governments outlawed patroll deductions of union fees and the Federal government outlawed the forcible unionisation of small business by big business.

China's economy

Analysts everywhere have been worrying themselves silly about a potential hard landing in China's economy. The worries are about corruption, a possibly mismanaged banking sector and the state of China's many government owned corporations.

Fear of retribution for correcption may have accelerated the inflow of wealthy people and capital into safe-haven nations like Australia, Canada and the USA. 

Australia's renascent property boom, especially in Sydney and Melbourne, is attributed in part to increased flow of Chinese money.

Now the inflow is said to include the market for art and rare artifacts, as conveyed to Samantha Hutchinson of the AFR.

The strongest warning that Henry has seen is that by Ambrose Evans-Pritchard, reported here.


Fiona Prior has the rare delight of experiencing Handa's Opera on Sydney Harbour, Madama Butterfly.


Australia's cricketers are in foreign climes fighting to their first T20 World Cup.  We wish them well, but it is a style of cricket no-one, like Henry, raised on the timeless serenity of test or shield cricket, where 4 or five days in the blazing sun often failed to reach a clear result, can easily adapt to.

Instead we turned to the footy, and the curiously crafted first round - split so last week we got a taste and this week we have to sit it out.  Last week we rejoiced when the Giants flogged the Swans, Collingwood got flogged by .... and the Suns dealt with Richmond.  Then on Sunday evening, Caaaarlton! came out fighting and seemed to have Port Adelaide on the ropes.  But the gritty boys from the port fought back and in the final quarter blew the Blues away, seven goals to one.

But there is little interest in the actual footy this weekend.  Instead the AFL has again been alleged to having bullied, in this case the former Essendon golden boy, James Hird.  The alleger (sic? - should that be allegater?) was Mrs Hird, a lawyer who 'takes lots of notes'. The Essendon President said this was disappointing and that James Hird's position would need to be reviewed.  Andrew Demitriou put on his face intended to suggest that margarine would not melt in his mouth and said it  was disappointing and he did not have sex with that women, correction, did not tip off the Essendon Club that charges were to be laid, as Mrs Hird alleges.

Here is the question.  Spouses of businesspersons can be banned from buying or selling shares in the 'closed' period for the bizoids. But can the behaviour of a spouse lead to an employee's position being 'reviewed'? And if the review caused said spouse, James Hird in this case, to be told 'Don't bother to return when your time in the sin bin is over' can this create a legal problem, and requiring large damages paid to the employee?

The ramifications of the the drugs'n'supplements saga have a long way to run yet, and Henry advises the Essendon footy club to tread carefully.  Believe it or not, Mr Little, things would get worse, much worse, if you are fighting with Mrs Hird, or disadvantaging Mr Hird because of allegations made by Mrs Hird. Last time we checked, free speech was still the case in Australia, and women are no longer required to 'obey' dictats from their husbands.

In Henry's view, the fact that Doc Reid refused to buckle to what seemed to this outsider to be unfair roughhouse tactics, and had all the charges dropped, suggests there are already legal problems in this case, and that lack of formal charges from the drug Tsars after more than a year may be telling us something important.

Image of the week

Global interest rates to rise
Date: Thursday, March 20, 2014
Author: Henry Thornton

Monetary policy is rarely out of the news, and today is no exception.  The US Fed is considering its bond buying 'taper' and the future of global interest rates. The general question is how fast to remove the strongly inflationary US monetary policy, and whether the rate of unemployment is a good indicator for forward guidance. The relatively new guv'nor of the Bank of England has revamped his executive team and warned of 'risks to the financial system'. Australian interest rates are set to rise by 1 %,  or possibly 2, over the next year or so, say (well briefed) local economists.

We ask two questions today. Will rising cash rates control goods and services inflation? And will they also contain asset inflation?

To start with the Big Bank, the USA Federal Reserve. 'FEDERAL Reserve chairwoman Janet Yellen said interest-rate increases could begin in the first half of 2015, around six months after the US central bank winds down its bond-buying program.

'The Fed, in its policy statement, said the benchmark federal-funds rate will remain near zero for a “considerable time” after its signature bond-buying program ends. For the first time, Ms Yellen attempted to define that term, saying it is “hard to define” but “probably means something on the order of around six months.”

'The Fed has been reducing its bond-buying program in $US10 billion increments and is on track to wind it down this year.

'The central bank altered its guidance on the likely path of interest rates, putting less weight on the unemployment rate as a signpost for when rate increases will start'.

Do not miss the video of Chair Janet Yellan.  And if you stay on the line you will see a thoughtful contribution about the lost Malaysian aeroplane.

The AFR's website, in an article posted after some thought about what Ms Yellan really meant.  The summary headline is 'Fed sets stage for sharply higher interest rates'.

The Bank of England was the world's Big Bank in the nineteenth century, and for most of the twentieth acted as if it still was. It new boss, Canadian  Mark Carney, has radically changed its structure, which you can read about here.  Mark Carney's crucial point is about so-called 'macroprudential' policy. 

Mr Carney's explanation sends, or should send, a loud message to RBA boss, Glenn Stevens. 'Criticising the BoE’s failure under former governor Lord King to focus on financial stability when it had inflation under control, he said: “It doesn’t take a genius to see similar risks exist today.”

'Mr Carney warned there were risks brewing because of the current long period of ultra-low interest rates, saying this could breed “potential complacency and excessive risk taking” in financial markets.

'With the BoE pledged to keep interest rates low for a long time, he added there was now a “tremendous burden on microprudential supervision and macroprudential management” to preserve financial stability'.   Read on here.

Henry's research points to the tendency for share prices to get out of control when goods and services inflation is under control.  In the 1920s USA, the 1950s/60s USA, the 1980s Japan, and the 1990s USA.  More here, but be warned - this is an article for a stiff whisky and a damp towel around the head.

The implication is that outlined by Milton Friedman, that 'monetary policy cannot serve two masters', discussed here more than a year ago.

Mr Carney's emphasis on 'Macroprudential policy' shows he understands the point, but sadly it appears that Glenn Stevens does not.

As evidence I would quote from an article in today's AFR 'Rates may hit 4.25pc by end of 2015: economists'.

In Australia,it seems to Henry,  'economists' who feed the chooks of the press rarely say anything that is not approved by Glenn Stevens and his merry men.

Note the opening three sentances of Jacob Greber's article, where the emphasis is that added by Henry:  The official Reserve Bank of Australia cash rate may be at least 1 percentage point higher than its record low 2.5 per cent by the fourth quarter of 2015, and as high as 4.25 per cent, economists say.

'That would mean the central bank would have withdrawn almost all of its interest rate stimulus by the end of next year  The official Reserve Bank of Australia cash rate may be at least 1 percentage point higher than its record low 2.5 per cent by the fourth quarter of 2015, and as high as 4.25 per cent, economists say.

'That would mean the central bank would have withdrawn almost all of its interest rate stimulus by the end of next year to prevent an inflation blowout and potential housing market bubbles'.

It is impossible, except by accident, to control both [goods and services] inflation and asset inflation by varying interest rates,  and different types of asset inflation may need to be controlled (to the extent possible) by different macroprudential policies.  In Henry's view, a variable asset ratio for house prices and a variable tax on capital inflow to modify a currency too feisty for the overall health of the economy.

You should ask the RBA for its opinion on this important matter, Mr Greber.  Do not be deflected by reference to comments on its website about 'Macroprudential policy' in general.

Henry's answers

Raising cash rates often comes 'too little too late', so there is a clear danger that goods and services inflation will get away before the stable door is locked.

Rising cash rates may dampen asset inflation but cannot be relied up to do so in any reliable way.  Far better to use independent policies, such variable asset ratios on financial institutions, which rise when lending approaches some historically derived danger zone, or taxes on financial transaction, such as the so-called 'Tobin tax' to put 'sand in the wheels of finance'. In the case of a small open economy like Australia, both approaches may be needed.

'Enough, Henry', I hear you cry, 'She'll be right, mates'.

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