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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
China`s next revolution
Date: Wednesday, February 29, 2012
Author: Henry Thornton

While Australia  squabbles over its political leadership, China's continuing strong economic growth is under question.


First there is the current weakness, the consequences of the recession in the North Atlantic nations following the global financial crisis.


As reported yesterday, one expert group sees a 10 % chance of a hard landing in China, and a 25 % chance of a soft landing. 


A hard landing would do immense damage here, with falling GDP, double digit unemployment and a massive shake-out in house prices.


Even a soft landing would create a local recession.


As the Rudd-Gillard-Swan governments have already spent the legacy  of Howard and Costello, and incurred large budget deficits and rebuilt government debt there is far less room for fiscal stimulus.


And, in any case, Mr Swan has already promised a return to a (tiny) surplus in 2012/13, with no caveats this writer could spot, and reiterated after news of slowing activity in China.


Now the longer term Chinese future is suddenly clouded also.


This comes courtesy of the World Bank and the Beijing's Development Research Centre, as told by Ambrose Evans-Pritchard.


'Few countries escape the middle-income trap', illustrated nicely by the following graph.


 Courtesy World Bank


From 1950, of many contenders, only Korea and Japan have broken from the pack, though for a while Iran looked promising.


Others (not shown) to have done well include Hong Kong, Singapore, Taiwan, Mauritius, Israel, and Equatorial Guinea.


'In the early 20th century Argentina and Australia were twin economies trading similar goods in the informal British Empire. Half a century later, the Australians were five times as rich. Shows what good governance can do.


'By contrast, the Peronists forced farmers to sell their produce to state export boards, at ever lower prices, until they killed the goose that laid the golden egg. The damage was gradual, but lethal'.


China has built its spectacular success partly on cheap labor, but that luxury (for business and political) leaders is nearing its end.


'Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland'.


There is also the issue of China's relaxed attitude to the acquisition of intellectual property. Evans-Pritchard says that when he was in Dalian in September he heard China’s software king, Lee Kaifu, warn that 'the economic prize will elude the country unless it cleans up its intellectual property laws. Firms are already going off-shore to protect their inventions, and the best entrepreneurs are already moving to states with a commercial rule of law, he said'.


"The role of the private sector is critical," said the World Bank less directly. "Innovation at the technology frontier is quite different in nature from catching-up technologically. It is not something that can be achieved through government planning."


There are powerful vested interests who will oppose the free market revolution that is required now.


China can no longer rely on imported technology to keep up blistering growth averaging 9.9pc since Deng Xiaoping began to throw open the economy in 1978 and unleashed the nation’s pent-up commercial energy. "China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for," the report said.


'The report has been seized upon by Politburo reformers battling hardliners and vested interests. Li Keqiang, groomed to take over as premier this year, offered his "unwavering support" for the findings.


'He faces tenacious resistance from factions within the party, who insist that the country’s resilience through the global capitalist heart attack of 2008-2009 has vindicated state control of key industries and banks.


'The report said China’s growth will slow to 7pc later this decade and 5pc by the late 2020s even if China embraces deep reform. Stagnation lies in wait if it clings to the dirigiste model'.


Ambrose Evans-Pritchard concludes: 'If all goes well, China will be a "high-income" economy by 2030 and perhaps as dominant as Britain in 1870 or the United States in 1945, or indeed as flourishing as the Qing Empire itself in 1820 before the onset of catastrophic decline. Politics will decide'. 


Australia's economic reform had better get kick-started again.  Clearly we cannot rely forever on pennies from heaven, correction, the Middle Kingdom.  As a immediate step, a competent Foreign Minister would help.  Pity Bob Carr is ruled out by the self interest of lesser politicians.


Related articles.


Here is The Economist's view, with useful links to other sources and the report itself.


And a local opinion, that of Rowan Callick.




Surprises galore
Date: Friday, February 14, 2014
Author: Henry Thornton

'Economists expect little improvement in the jobs market in the months ahead, after the unemployment rate hit six per cent for the first time in over 10 years'. Our headline, like Donald Horne's The Lucky Country is intended to convey irony.


Australia's jobless rate for January rose to 6 per cent in December, according to seasonally adjusted figures from the Australian Bureau of Statistics, from 5.8 per cent.  Thus reports the Herald Sun, whose headline says 'highest for 10 years'. The report fails to mention that 'Economists' expected no change, although it quotes St George chief economist Besa Deda: "The unemployment rate should continue to edge higher over the next six months or so and this expectation fits in with the Reserve Bank of Australia's outlook for the jobs market."  Nicely done Besa - what was your prediction, pray tell?


ABC Radio was brave enough to say the economists were shocked by the number of jobs lost, and one previously unknown economist from Charles Darwin said the 'real' rate of unemployment - assuming no drop in the participation rate - is 7.8 %.  'Struggling reluctantly to the truth', as others will soon begin to do.


Net jobs were down by a few thousand, so the major fact is the continued fall in people saying they are looking for work. Of course, regular readers will recognise that Henry believes the official numbers greatly understate the real situation - e.g. here.


In other news today, a large mining services company in Perth has been put into liquidation, meaning another swathe of jobs will be lost - now, not when the vehicle manufacturers quit in x years time. Incidentally, do you believe that Toyota and Holden will keep their current workforces until their final Australian-made car rolls off the production line?  If so, you presumably also believe in Santa Claus and the Tooth Fairy.


It is worth noting that both RBA and Treasury predictions put the rate of unemployment heading for, presumably peaking at, 6.25 %. This is another number still believed largely by believers in the Tooth Fairy.  Glenn Stevens is presumably resorting more heavily than usual in a something and water - hold the ice - as he winds down for the day. I can hear him saying in a puzzled tone 'The bloody glass is practically empty, darling. Would you like to top it up?'


The Napthine Government has stepped in to help save SPC Ardmona with a $22 million grant that is to be repaid if jobs fall below 500. ABC Radio early today reported that SPC Ardmona workers would cop, or were seeking wages frozen for 18 months - or someone thought this would be a good idea. Now that would indeed be a good idea, especially if the workers had suggested it. But perhaps Henry was still in dreamland, the very dry dreamland inhabited by serious economists.


In other (less surprising) news, the International Monetary Fund (IMF) has advised there is a big budgetary clean-up job to be done in Australia.  These people fly around the world at the front of big aeroplanes in order to pontificate in the most obvious ways.  Frankly, I'd prefer the real Pope to visit, at least his attempts to save souls might be somewhat useful, at least to saved souls, and men of religion have been known to break droughts.


 Cricket


The hardened warriors of South Efrica were expected to brutalise Australia's batters and then put Mitchell Johnson and his fellow bowlers to the sword. The hardened warriors got off to a good start with Warner, Rogers, Doolan (after a promising 27) and Clarke back in the shed for not many runs. But Messrs Marsh (the biggest surprise of the summer so far), Smith and Johnson wielded the willow to great good effect. Despite an unusually subdued effort from the tail, Australia made 397 runs.


Cap'n Smith started well, with 10 runs off the first over of the match, although 4 of the runs came from an edge between third slip and gully. Then he faced Mitch J, who bowled one of the all-time great bouncers, straight at Cap'n Smith's chest at 150 k an hour, or, more relevantly, 20 odd metres in 0.4 seconds. (Check the maths please, Bert.)  As the commentators put it, Smith was not just out, but humiliated. Henry forced himself to lie awake listening as the South Efrican's vaunted batting crumbled. It was never like this with the Mont Albert Fourths, gentle readers, but it was beautiful to hear. When rain stopped play the enemy was 6 for 140 and Mitch had fourfa.


Henry must repeat a crucial warning - for a modern nation, economic success is inversely related to sporting success. So enjoy the cricket, but do not complain when unemployment picks on you or your loved ones. And writers of complacent editorials, get real, boys and girls. It's bloody tough out here, as at least 10 % of you will discover before this recession is over.


The Road to Recession
Date: Tuesday, February 11, 2014
Author: Henry Thornton

'Road to recession' says the Age. 'The end of car manufacturing in Australia - confirmed with Tyota's announcement that it would shut local production in 2017, taking thousands of jobs with it - could tip Victoria and South Australia into recession, ...'.  They're sharp at the Age, taking up a theme discussed in these pages from various perspectives from twelve months ago. The RBA is still cheery, raising its forecast of real growth even as it raises its predictions about the course of inflation. Time will tell, but it is probably too late to stop the grim recession now staring Australians in the face.  Here is a link to our major contributions to this debate.


As well as the direct and indirect effects of the loss of jobs in vehicle manufacture and the associated componant manufacturers there is a tough budget to come, a savage drought in most of rural Australia and (most importantly) the ongoing effects of double digit cost disequilibrium.  While the dollar's fall to around 87 cents was hailed as helping make industry more competitive, higher than expected inflation has restored the dollar to 90 cents of a US dollar, reflecting a widespread belief that interest rate cuts are over and that the next move may be up.


Slower growth in China, the beginning of the end of the US Fed's monetary policy 'taper', slower than expected jobs growth in the USA and generally sluggish commodity prices are all reducing optimism in anyone with the ability to read the very large writing on the wall.  The latest edition of The Economist has a characteristically more cheerful interpretation.


 


Politics is returning to a measure of normality as the improbable post-election honeymoon of Bill Shorten and the Labor Party is waning. Perhaps due to the opposition leader's disinterest in wage restraint proposed by Paul Howes and his attempts to fend off the great big searchlight being applied to alleged corruption in the construction industry by Tony Abbott.


Hang in there, gentle readers.  Australian business is slowly learning that it needs to take a tougher line on business costs, the most important of which are labor costs.  When a key uninion official says 'Workplace culture is killing jobs', as Paul Howes did last week, one sees the arrival of a new era of moderation.  Depending on the severity of the looming recession, labor costs will decline fast or slow. It will be a recession we did not need to have, but blindness to basic economic forces has afflicted Australia's managerial class since the end of John Howard's government. Sadly, it is ordinary workers who will bear most of the burden, but that is the rules of the game in the second great global industrial revolution.


More here about the second industrial revolution.  Also more from Gary Scarrabelotti about the value of making workers into shareholders and the obstinate denial of Treasury about a fair approach to taxation of possibly worthless shares in new enterprises.


Saturday Sanity Break, 8 February 2014
Date: Saturday, February 08, 2014
Author: Henry Thornton

Well, who'd have believed it? The people smugglers are stopped, corporate handouts are severely curtailed, a Labor leader has called on his brothers to make love not war on industrial matters, drought has tightened its savage grip on much of Australia, the economy is picking up - and soon house AND common or garden inflation will be bothersome - and the AFR is writing about 'A New Age of Realism'.  Does Henry detect a new era is all this?  (See Laurie Oaks on Howes, Shorten and Abbott.)


1986 and now


It has been said that Australia handles prosperity badly but copes magnificently with adversity.  It is around the thirtieth anniversary of the Banana Republic crisis.  Then Treasurer Paul Keating, after hard advice from the RBA, that at first was violently resisted, turned a budget deficit into a surplus. Prime minister RJ (Bob) Hawke persuaded the unions to cop a cut in real wages by not demanding the full flow through of the effects of the large drop in the value of the Australian dollar that took hold when the full measure of Australia's lack of competitiveness was realised.  With the Treasurer's agreement, the RBA tightened monetary policy.  The trouble was, after a heroic recasting of economic policy, as the dollar recovered the RBA went easy in the mistaken belief that a rising dollar was tightening 'monetary conditions', against the advice of its then Chief Economist, who had earlier rung the Banana Republic bell. He resigned in disgust, and his successor went on to lay the foundations of 'the recession we had to have'.


The current situation is not unlike that in 1986.  There is a large and deeply embedded budget deficit.  There is a highly overvalued Australian dollar.  Monetary policy is too easy. The differences are important.  I suspect the underlying budget deficit is far larger. The labor market in is far deeper trouble, with realistic unemployment plus under-employment hovering near 20 % of the workforce. House prices are rising far more quickly than anticipated and common or garden (consumer) inflation on the RBA's preferred 'underlying' basis is for the past six months above the RBA's target range.  The RBA was warned of the risks of inflation exceeding predictions but those providing the warning - eg here - were effectively told to rack orf.


So far as Henry is aware, the RBA has not rung the warning bell - indeed until recently we were being lectured that the glass was at least half full. Presumably the Treasury, an organisation asleep at the wheel in 1986, has been believing its own misbegotten and overly optimistic forecasts, peddled so foolishly by Treasurer Swan, Australia'sleast competent holder of that high office in many economist's opinions.


I could go on.  The specific risk is like that in 1986.  Strong budgetary action is likely to stave off the crisis that is virtually inevitable, and the government's tough line on corporate and personal responsibility may take the place of Mr Hawke's 'Accord'. A premature recovery may be aided by easy money for too long, and then we shall see 'the recession we did not have to have'.  Henry's sober predictions about this matter are available on this site.  Here is one important example.


Here is a link to the latest RBA report on monetary policy.


Kulture


Henry has been to the movies; Twelve Years a Slave will bring tears to your eyes; Philomena ditto; and The Wolf of Wall Street will remind you of those glorious days when money was freely dished out by gormless youths working for badly managed financial jugganauts.  All three of these summer blockbuster  'based on a true story', incidentally. 'Wolf' far too long for most, but then that is the modern trend.  Young Bert Thornton has described American Hustle as the best movie I have seen in a long while'.


(The links are to trailers.)


And here is a link to a site devoted to Paul Keating's insults.


Footy'n'cricket'n'stuff


The Ashes are over, with Australia's 'best in world' fast bowling attack ruining the PP's summer downunder.  Now we even have a spin bowler who can turn the ball, and several rookie exponant of the same dark arts who have been coached by Shane 'Hogwarts' Warne.  Batting is a bit of a broblem, as we rely for too much on the wicket keeper and the ability of the bowlers to make runs when the top order has crumbled.


Now this promising outfit is in South Efrica, where rain has limited training and the warm up games.  The boasting about the bowling attack is a mistake, in Henry's humble opinion.  It did not work for the Mont Albert fouth eleven, and is likely to stir the South Efricans, whose team after all is the undisputed number one, and is playing on home turf.  


The more important news is the there are not too many sleeps til the footy season begins.  Henry has seen no news that suggests Caaaarlton! can finish higher than 6th (its result in 2013) but the Thornton family will live in hope, as always.


A lighter moment


A  young Sydney woman was so depressed that she decided to end her life by  throwing herself into the Harbour.


Just  before she could throw herself off Circular Quay, a handsome young man  stopped her.


"You  have so much to live for," said the man. "I'm a sailor, and we are off to  Italy tomorrow. I  can stow you away on my ship. I'll take care of you, bring you food every  day, and keep you happy."


With  nothing to lose, combined with the fact that she had always wanted to go  to Italy , the woman
accepted.


That  night the sailor brought her aboard and hid her in a small but comfortable  compartment in the hold.


From  then on, every night he would bring her three sandwiches, a bottle of red  wine, and make love to her until dawn.


Two  weeks later she was discovered by the captain during a routine  inspection.


"What  are you doing here?" asked the captain.


"I  have an arrangement with one of the sailors," she replied. "He brings me  food and I get a free trip
to Italy .."


"I  see," the captain says.


Her  conscience got the best of her and she added, "Plus, he's screwing  me."


"He  certainly is," replied the captain "This is the Manly Ferry  ..."


Image of the week


Courtesy Sun Herald


Let them eat gumleaves
Date: Friday, February 07, 2014
Author: Henry Thornton

Henry has been in the heart of Australia's drought-stricken country attending the memorial service for his much loved Father-in-law after the funeral in Sydney.  Both services were moving and strongly attended.  Dr John Prior was a seriously good man, and after time serving in the occupation force in Japan the young medico purchased a practice in Boggabri where he served the community for 50 years.


All the signs are clear. The paddocks were pale yellow, sometimes reddish-brown when all the grass had been eaten. In one place, the remaining foliage was a pale mauve color, but no-one in our car knew what it might have been. We drove carefully through herds of cattle, some with ribs highly visible, apparently looking after themselves on the long paddock that is the roadside foliage.  One old farmer I met in the street said he'd never known it so bad. 'The other day a large branch of a gum tree was blown down in the storm, and the cattle were eating the leaves - I've never seen that before' he explained.


Towns like Boggabri in northern NSW have been revitalised by coal mining.  Houses have been painted and the dry grass of their gardens is carefully tended, and other plants kept alive with waste water. At Boggabri there is a vast camp for the fly-in fly-out miners which I spent two night sleeping, the family house being overflowing with Dr Prior's children and their children.  Generally, the mining blokes were sitting on the small seats outside their rooms having a beer, while the mining wimmin were at corners speaking on mobile phones to (presumably) their loved ones.  The blokes one passed in walking to and from the dining hall almost invariably said 'G'day mate, how yer doing' or similar, while the wimmin mostly kept their eyes on the pavement for the usual female reason of not encouraging any unwanted contact.


The dining hall catered for all tastes and a special notice said customers could order steak, chicken or fish cooked anyway they liked.  The internet and aircom worked perfectly, in the latter case after one friendly mining bloke showed Henry how to rig up a piece of toilet paper to keep the motion sensor busy while the resident was away at the mines.  Nothing in the rooms except the bare minimum, and after a first inspection Henry headed for the local IGA to acquired orange juice, apples, tea bags and shampoo.  'I get a lot of business from the miners for those items' the IGA manager said. The camp already holds almost as many people as the population of Boggabri and a planned extension will double the capacity.


The current big city debate on wages and conditions of employment seems almost nonsensical in drought-stricken Boggabri.  The old bloke whose cattle were eating gum leaves has no income this year. 'Its not worth truckin' 'em back if you don't sell 'em', he told Henry, 'and prices are dreadful'.  Yet back in the bigger towns and cities, most people people have generous welfare payments for doing not much or jobs with lots of over-award conditions, including a 'shiny tin' allowance for forklift drivers at SPC Ardmona (forklift drivers who have the skill to pack unlabelled fruit at the highest level).  Failing companies live with ludicrously generously working conditions and then have the cheek to ask for help from taxpayers.  Joy Hockey is right on the money when he says we cannot afford current levels of corporate or personal welfare.


Check out Gary Scarrabelotti's latest column for another take on the same theme.


Paul Howes has cemented his place in Australia's economic history by his call for cooperation between unions and businesses to maximise jobs.  This was a theme of Simon Crean's father in the dying days of the Whitlan government ('One man's wage hike is another man's job) and again with Bob Hawke's Accord in the 1980s. Tony Abbott is surely right to say it is up to companies and workers to sort out employment conditions that reward both groups.  Any other arrangement is just not sustainable, and Bill Shorten's attempt to protect the role of unions may well make his party unelectable. Check out the proportion of workers who are unionists, Bill Shorten.


We drove through and then flew home over dangerously dry country and impoverished farming communities. There is already a jobs drought in the cities and it will get worse before it gets better.  Stronger retail sales and higher exports has injected some optimism into the corporate sector, but recovery will be limited by the large cost overhang and unsustainable budget.  It is indeed the end of the age of entitlement, and while-ever the Labor Party and Greens fail to see this they are condemning Australia to a mediocre future.


'Let them eat gum leaves', Bill Shorten and Christine Milne are saying in their economically illiterate way.


Saturday Sanity Break, 1 February 2014
Date: Saturday, February 01, 2014
Author: Henry Thornton

The debate on what will be called 'structural unemployment' has gone global.  Spengler writes: 'The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.


'The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?


'East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina'.


Read on here, from Spengler of Asia Times Online.


In the former 'miracle economy' of continent Downunder, debate rages also.


Henry's favourite journalist, Grace Collier, says in the weekend Oz that it is 'time to think again as players turn a blind eye to IR's corrupt heart'. Someone in the weekend fin has interviewed a builder, who says the government needs to erect a tougher barriers to union thugs before his colleagues will be willing to speak out. Fair enough, mate, but if there is a royal commission, you must be willing to stand up and be heard, as it will be the best chance in your lifetime to make a difference.


Judith Sloan, also in the Oz, has a nice - correction horrible - graph showing the decline in Australia's jobs from the peak in late 2008 (if I read the graph right) and the near parallel fall in workforce participation.  The decline in participation explains why the rate of unemployment as measured by the ABS has 'only' risen from 4.9 % in April 2011 to 5.8 % now.  As we have pointed out, if successively broader (and more realistic) measures are considered, there are 22 % of Australian workers who are actually unemployed (11 %), underemployed (another 8.6 %) or dropped out of the workforce (2.5 %).


Here is the data, courtesy Roy Morgan Research.


Ather key bits of analysis come from international sources - the Economist and Ambrose Evans-Pritchard (click on their names for Henry's discussion) as well as Spengler, linked above.


We make no apology for quoting from the best journalists in the world, because economics, business and economic policy have been for many years a global matter, and these writers are dealing with vast global structural forces that are influencing Australia demand to be heard.  Australia's jobs market was for a while protected by the China boom and then the mad, wasteful spending by the Rudd'n'Gillard'n'Rudd governments.  The cost was the build-up of a disasterous cost disequilibriun and a monster budget deficit.


RBA board


The RBA meets for the first time this year next Tuesday. RBA staff must now be feeling a bit shell-shocked due to the unexpected weakness of the jobs market, combined with higher than expected house price inflation and higher than expected goods and services inflation. The question members of the the board should be asking is this: 'Could the last couple of rate cuts, and the Governor's "glass half full" optimism have helped create the current mess?'  This will not be asked, of course, as Governor Glenn and his minions have highly effective ways of dealing with dissidents, but outsiders can ponder these questions as they observe the journalistic cheer squad in action on Wednesday morning.


Henry's expectation is that the board will decide that  the current 'bias to easing' should be removed, implying (even stating) that the next move of cash rates could be in either direction.


However, we should not be too harsh on the gnomes of Martin Place.  The RBA employs the most professional group of economists in Australia, and Henry is sure they do their best inside a rather insular culture.  More importantly, the problems facing the Australian economy are, in order of inportance, the double-barralled cost overhang built up in the mining boom and by the Rudd'n'Gillard'n'Rudd governments' indulgent vainglorious spending boom and the horrible budgetary situation now faced by the Abbott government.  Not much that the monetary gnomes can do except hold monetary policy firm and offer advice to the government, should Glenn Stevens feel that is part of his task.


Footy'n'cricket'stuff


Tennis has come and gone, and how good was it to see Li Na and Stan Wawrinka emerge victorious at the Australian Open.  The others will be back, but Henry enjoys an upset as opposed to the mechanical repetition of wins by the suprstars.


It is only 14 or 15 sleeps until the footy starts again, and we can begin to judge how our teaqms are likely to perform in the 2014 season. Caaaarlton!'s one rolled gold superstar Chris Judd is said to be raring to go, and will play more in this year's preseason NAB cup than last year when he was said to be 'underdone'.  Teams like Hawthorn, however, have 4 or 5 rolled gold superstars, and there is no evidence that Caaaarlton! can match those above them on the ladder in 2013.  Indeed, we have let go to players who would have been on Henry's top 22 this year, Betts and Hampson, and the preferred ruckman, Warnock has two clearly obvious bad habits that Henry feels should be eliminated if he and the team are to begin to trouble the top teams. (Memo Mick Malthouse: Henry is willing to help Mr Warnock overcome these habits.)


Cricket is almost over at home, and since it included something like 11 wins out of 12 against the pestiferous Poms, with one big bash event to come we can at least feel we are approaching our proper level in world rankings again.  But playing the number one South Efricans on their home turf is a truly great challenge, and if we win one test out of three with one hard-fought draw, it will be worth sitting up for.


Image of the week


Courtesy Sun Herald


A distopian future, even for Australia, former `miracle economy`.
Date: Thursday, January 30, 2014
Author: Henry Thornton

Well, what a surprise, the ABC has discovered that rorts, corruption, intimidation, even death threats are rife in the construction business. Warm congratulations to those brave souls who spoke out, and also to Grace Collier of the Oz who is pursuing IR matters like a hound from hell. As Ms Collier says today, it is not just the union but the big construction companies who are complicit in in the whole mess, and we must now hope that the police get on with the job of organising some really juicy prosecutions for the industrial version of the coward's punch that has been so much discussed in recent months.  Where does Bill Shorten and the parliamentary Labor Party stand on this one, folks, that is the political question.


Senator the Hon Eric Abetz, Minister for Employment, is also on the case, and his recent speech is getting some publicity.


The AFR reported as follows: 'The Abbott government has signalled a broad-ranging royal commission into the union movement following fresh allegations of corruption in the construction industry, setting the scene for a drawn-out assault on Labor’s traditional support base.


'At the same time, Employment Minister Eric Abetz upbraided businesses which habitually cave in to unrealistic union pay demands, jeopardising their viability and risking a wages breakout.


'In a blistering attack on business and unions for their roles in lifting wages to unsustainable levels, Senator Abetz called on companies to band together and resist spiralling claims'.


This continues the government's theme that if a company needs government support is should first put its house in order, and as we have pointed out labor costs are an important set of costs that are rendering Australian industry globally uncompetitive.  Part of labor costs are the rorts and corruption in the construction industry, which includes the out-of-control NBN


Here is a link. If past practice is a guide, a video of the event will eventually be provided by the Sydney Institute.


Last week's inflation shock has provided aftershocks as the analysts get onto the case.  For the December quarter, CPI inflation was 0.8 %, twice the predicted 0.4 %. 'Underlying' CPI inflation, the main guide to RBA action, is said to be at the top or even above the 2-3 % range for the past six months.  Worse, traded goods inflation and inflation of services provided by or heavily influenced by governments are running at almost twice the average.  On top of the unexpected strength of housing prices, this would seem to leave little room for any more rate cuts, and suggests in fact that the two previous rate cuts were a mistake.  Much egg to be wiped from the RBa's dial as this is the entirely predictable (and predicted) consequence of using monetary policy to reduce the overblown Australian dollar.


The various nasty economic currents include doubt about the strength of China's economy putting downward pressure on commodity prices, fears about the further 'taper' of American money printing policy putting downward pressure on share prices and problems for 'emerging economies' as money flows back to the USA.


We highly commend Gary Scarrabelotti's fine contribution on the theme of 'a floating dollar requires floating wages', published here on Tuesday.


However, the real global nastiness is the vast and accelerating change that is the result of the second great age of machines. A reader has drawn attention to an excellent diatribe by Ambrose Evans-Pritchard who asks the question 'Will the 2nd Great Machine Age be a frightening jobless dystopia?"


As the reader says, 'it puts our debate on the future of manufacturing to shame'.  But we are a small country far from the big centres where competition raises standards of debate on most matters, so we must borrow from the best in class when we can.  (This bodes ill for local journalists, incidentally, but that is another matter.)


The basic thesis is that machines have been displacing jobs for years and the rate is accelerating. 


Ambrose Pritchard: 'Phillip Jennings, head of the UNI global labour federation, said it would be a "miscarriage of justice" to blame the 32 million job losses since the Lehman-EMU crisis on the iPad or the driverless car.
 
"You can't put technology in the dock for 50pc youth unemployment in Greece or Spain. I blame the EU Troika. It was the economic and political decisions taken that have led to the collapse of jobs. In Greece it has gone beyond depression into a humanitarian crisis," he said at the World Economic Forum.


'He said some $2 trillion of corporate cash is on the sidelines in the US, $700bn in the UK, and another $2 trillion in the rest of the world. "There is an investors strike. This is a problem of demand in our economies, they are comatose," he said.
 
'This has a kernel of truth. The current policy settings are pushing the global savings rate to a record 25.5pc of GDP, creating a chronic surfeit of capital over labour. It is a Marxian world'.


Today we learn thanks to the ANZ bank that Australian investment is falling off a cliff and regular readers will recall that real (as opposed to ABS) unemployment has been rocketing up.  While the mining boom may have staved off the problems already endemic in other 'developed' nations, it seems distopia is finally reaching Australia.


Read on here, folks, and work as hard as you can to help get your children into jobs that cannot (yet) be done by robots.


This is a companion piece to those by the Economist reported on last week, and linked here.


Should we be worried?  You bet.


Floating dollar means (inevitably) floating wages
Date: Tuesday, January 28, 2014
Author: Gary Scarrabelotti

The truth about an iron law of economics must come out – and here it is: in a multi-dimensional economy the floating of the dollar was a one-dimensional reform – important in its own right and with many benefits - but a genuinely multi-dimensional reform would also provide for the “floating” of wages and salaries.

“Did he actually say that?”


“Yes, he did.”


Wages and salaries not only go up.  They can go down – sometimes with inexorable force.


And here’s another shock with which to end your Happy Australia Day Holiday: John Howard was right about Work Choices.


“What!”


Indeed he was. Because embedded in Work Choices was an important principle – the one I am now openly advocating – that wages and salaries are not on a one-way street north. They travel along a conventional two-way route and on the other side of the road traffic is heading south.


What was wrong with Work Choices was that it was a bridge too far at the time: industrially it was unnecessary; politically it was an error of judgement. 


Prior to the 2004 federal elections, Howard government IR legislation had already set in motion throughout the labour market forces that were likely to have achieved in time, and with a conservative caution, much the same result as Work Choices – the natural complement of floating of the dollar.


Do I hear outrage there on my Left?


Sure do. I have said the unsayable.


Do I have a theoretical argument?


No, I don’t. But I do have the observations of “real life experience”. Let me tell you about them.


Micro mugging


You see, I run a small business: a micro business, in fact. And this is what I have noticed: when my customers dry up, the business income dries up too; and when business income dries up, the wages that I can pay myself fall.


It has nothing to do with Theory of Money or “corporate greed”. It’s just a fact. Shrinking market, shrinking wages. Don’t ask me to explain it. It happens.


On one painful occasion I recall all too well, the market simply disappeared.  What then occurred happened with the inevitability of a physical law.  I had to stop paying myself a wage. To keep the business ticking over, I also had to stop making super contributions.  And to meet my personal needs, I had to draw on savings.  In other words, I took a gamble: I raided the Scarrabelotti Future Fund to pay for the present. Only time will tell, what the implications of that might be. For now I try not to think about it.


I did not come here, though, to write about me and my gambler’s decisions – after a certain point, me and mine had little to do with it. My business was like a tiny boat that had chugged out ignorantly upon a placid-seeming sea only to be picked up by a huge and unexpected wave and hurled mercilessly shoreward.


I also observed, as we sped toward our fate, that when my wages were cut – eliminated, actually –there was no respect paid to providing me with a living wage as defined by some industrial court or, more abstractly, by theologians and moral philosophers I have known. None at all! The wage was cancelled outright as if by an automatic principle imbedded in the universe. I was astonished by the shear amorality of it.  Hadn’t the “business cycle” heard of justice?


Now don’t get me wrong. I don’t deny that employers should pay workers a just wage. Let’s leave that for another time. For now, I want to focus on my personal encounter with the market place.  In the instance I am reporting, there was literally no space for justice.  It’s great to have it, if you have the means of delivering on it.  Sometimes – very often, indeed – the means can be snatched away from us.


Here’s your takeaway then: in markets values rise and fall, including the value of wages. That is a shocking thought in a society habituated to the notion that wages can only rise.  Unfortunately, a society that refuses to tolerate wage-and-salary falls is one committed – whether it appreciates it or not – to the long run destruction of work and employment.


You don’t believe me?Well, why not conduct an experiment? Go start a small business and watch what happens.


Coda


“OK. Been there, done that.  Cut my wages. Cut my employees wages. We survived. But today the employees don’t seem too grateful. What now?”


Well, think about this.  The employees who accepted the wage cuts have just acquired a stake in your business. They are like the venture capitalist. They have stumped up the new capital you needed to run the business. Now they have a claim to part of it.


“Whoa! Say that again.”


I will. Later.


“By the way, what happened when you hit the beach.”


I survived.


More from Gary Scarrabelotti - the inaugural winner of The Keating - here.


Australia Day Sanity Break, 25 January 2014
Date: Saturday, January 25, 2014
Author: Henry Thornton

Here's to a wonderful Australia Day long weekend, gentle readers, and congratulations to all those eminant Australians who have been 'gonged'.


 We are late to post this weekend because we have been 'camped' in Avoca celebrating a dear friend's eightieth birthday, disguised as an event to 'open' a grand new hay shed.  Little internet here, and Henry has not learnt to access it via his mobile phone. The 'camp' in our case was a nice 'Eco Lodge' about 7 km from the town centre and offering fine views, including bunnies, wallabies and stunning vistas of stars at night. For us the festivities started Friday night at a real camp beside a lake in the middle of a sheep'n'cattle run with a large fire, meat slowly roasting on said fire, dogs (and large bullants) running about and lots of red wine and fine scotch.


Henry had a mild traffic accident (BEFORE the drinking started), and the car was rendered driveable by the friendly owner of one of the local service stations.  A sideswipe was due to Henry's uncertainty about the double two lane highway through the town and he was quick to tell the young person who had been startled by Henry's sudden lurch to the right it was his (Henry's) fault. No-one was hurt, and both cars are easily repairable, and this will boost Australia's GDP, but Mrs T when phoned to report the event was quick to question Henry's competence as a driver. 'Are you ok', she demanded to know, 'you're slurring your speech'.  This is the latest line of attack on poor Henry, who over the years has been the recipient of most reasonable criticisms, as well attention being drawn to several (highly implausible) alleged weaknesses.


There were two copies of the Australian in the newsagent but no Age, showing the innate good sense of the residents of Avoca. The local news was of a bizarre murder, with the body dumped in an old mine shaft. 'This tipped the police off, as the perps must be men with detailed knowledge of the old mines and their locations', explained the bloke who kindly fixed Henry's car. 'They made two arrests almost immediately'.


On the national scene, we salute Adam Goodes, the official Australian of the year, as well as the five 'Champions of indigenous advancement' named as joint winners of a newspaper's similar award, one of whom was Adam Goodes.  Also we cheer Li Na, who should be made an honorary Aussie for her fine win in the Australian Open.  Coming as it did after two stoic losses, and thoughts of retirement, this is a rival for Mao's last dancer in Henry's heart at least.


Tony Abbott has been hailed for his speech of great economic commonsense at Davos and it has also been revealed that 'Jakarta rift won't deter PM on boats'.  The largely country folk at the birthday party were probably natural conservatives but several expressed the view that 'nothing much' has happened so far under the new government. We were seeking to understand the complex family interrelationships among the guests and in any case it would have been impolite to attempt to poll the other guests on their political views.


Our guest of honour was a distinguished medical man who is known for his pioneering work on the so-called Bairnsdale Ulcer, aka Mycobacterium ulcerans disease or the Buruli ulcer. As well as diagnosing this dread affliction, which is related to leprosy and tuberculosis, John Hayman also devised the theory that it originated on the Gondwana supercontinent before it split apart. Analysis of the genetic structure of the Bairnsdale ulcer and similar diseases on the former parts of Gondwana has supposedly disproved this theory, but the senior medical man who was MC for the day expressed his view that John's theory would eventually be proved correct.  Here is a link. 


John Hayman's career has another, even more distinguished, highlight. In a moment of inspiration, he suddenly realised the nature of the previously mysterious illness that afflicted Charles Darwin.  The symptoms included frequent vomiting, headaches and depression, hence the colorful name of the 'vomiting disease'. Previous theories focussed on depression, implying or stating outright that Darwin was a feeble person with a severe psychological problem.  Even if this was correct, it would be a major burden, making his achievements even more worthy, but John Hayman's theory has been published in a refereed journal and seems widely accepted.  There can be no definitive proof short of digging the body up and checking the DNA, although analysis of Darwin's (female) ancestors and their illnesses provides supporting evidence.  The abstract to Dr Hayman's definitive paper is available here.


The theme of Henry's talk was that John Hayman is a man for the ages due to the many achievements of his medical career and in particular his work on Darwin's illness. But he is also a very good bloke with a great talent for friendship and a great love for the members of his extensive family, his dogs and even his many trees.


The country around Avoca in summer is classic Aussie landscape. Bright yellow grass, gum trees in numbers far too numerous to count, wire fences and blue hills, one of which is named, presumably with a sense of irony, Mount Avoca. We were taken to see a massive Red Gum, estimated to be three or four hundred years old. It was in the middle of a large paddock, and had a ring around its trunk about four feet from the ground, which one expert said was evidence that it survived an attempted ring-barking. As there were the dead bones of similar enormous trees in the centre of many other large paddocks in the area, Henry speculates that the original idea was to provide shade for the stock, but a later fashion, presumably encouraged by the Productivity Commission, decreed that the shade trees be cut down to provide more pasture.


One of the speeches praised John Hayman for the large number of trees he has planted. 'But I feel sure Jack (real name surpressed, but a worker on the estate) will chop them all down once I am gone', John Hayman noted in his reply.


Image of the week


 


Henry arrives, disguised as a local, photo courtesy Tom Hayman


Inflation, cost disequilibrium blues
Date: Thursday, January 23, 2014
Author: Henry Thornton

Gor blimey, guv'nor, the mob has caught on.  Australia's cost base is way over a level at which we are competitive and a falling exchange rate is necessary but not sufficient to fix it. We was warned by the Gov'nor of this proposition very recently, only a year or so after it became bleeding obvious to the outsiders who try to help.


The RBA boss, Glenn Stevens, has now faced two strikes aginst his administration.  First the resumption of house price inflation came far sooner than he expected, and his only response was to point out that these hikes did not a bubble make.  Then goods and services inflation for the December quarter come in about twice the level expected by guv'nor Glenn and his forecasting team and all and sundry are giving advice that is intended to be helpful.  Even one of the old and bold bizoids, a former RBA board member no less, has pointed out, well after the inflationary horse has bolted, that Australia's double-barreled cost disequilibrium been building up for years.  Hope he will now reveal the warnings about the advice he gave the guv'nor along the way.  Here is one of  Henry's efforts, in May 2013.


'Australia needs wage restraint' say some, and the more enlightened people even say 'Australia needs wage cuts'.  Yes we do comrades, but how can this be done in an IR system that favours unions and with an absolutely poisonous political atmosphere?  That is the question and there is no easy answer.  Short of political and union cooperation the conventional answer is severe recession.  Here is Henry's most recent attempt to be helpful.


Hang on to your hats, gentle readers.


Innovation and new technologies - should we be worried?
Date: Monday, January 20, 2014
Author: Henry Thornton

'INNOVATION, the elixir of progress, has always cost people their jobs. In the Industrial Revolution artisan weavers were swept aside by the mechanical loom. Over the past 30 years the digital revolution has displaced many of the mid-skill jobs that underpinned 20th-century middle-class life'.  This is the introduction to an important lead article from this week's Economist.


 Courtesy The Economist


The revered mag puts innovation and technical change into perspective.  Henry's summary is as follows:


1. The big bursts of innovation have made the average inhabitant of modern western economies far better off.
2. However, gains took a long while to trickle down, and during the long adjustment period, many redundant artisans were unemployed - think the Luddites, who burnt the machines that were taking their jobs.
3. In addition, initial gains went to owners of capital, and real wages of workers took the best part of a century from the start of the first industrial revolution to rise.
4. The western world is now experiencing another bust of productivity growth that is disrupting workers and may yet cause substantial unemployment combined with people dropping out of the workforce.


The main facts quoted by the Economist demand careful attention.


* 'In the early part of the first industrial revolution the rewards of increasing productivity went disproportionately to capital; later on, labour reaped most of the benefits.
* 'The pattern today is similar. The prosperity unleashed by the digital revolution has gone overwhelmingly to the owners of capital and the highest-skilled workers. Over the past three decades, labour’s share of output has shrunk globally from 64% to 59%.
* 'Meanwhile, the share of income going to the top 1% in America has risen from around 9% in the 1970s to 22% today. Unemployment is at alarming levels in much of the rich world, and not just for cyclical reasons.
* 'In 2000, 65% of working-age Americans were in work; since then the proportion has fallen, during good years as well as bad, to the current level of 59%'.


And it will get worse, says the venerable mag: '... it seems likely that this wave of technological disruption to the job market has only just started. From driverless cars to clever household gadgets, innovations that already exist could destroy swathes of jobs that have hitherto been untouched. The public sector is one obvious target: it has proved singularly resistant to tech-driven reinvention. But the step change in what computers can do will have a powerful effect on middle-class jobs in the private sector too'.


Not mentioned, but perhaps implicit, is the rise of China, India, and the dynamic nations of South East Asia and South America.  There is also the relentless aging of global population, especially acute in China, Japan and the Eurozone. Whether these factors make for a larger and in proportional terms more brutal adjustment than that of the first industrial revolution is beyond Henry's pay grade to discern.  But the special article that accompanies the Economist's leader says: 'For much of the 20th century, those arguing that technology brought ever more jobs and prosperity looked to have the better of the debate. Real incomes in Britain scarcely doubled between the beginning of the common era and 1570. They then tripled from 1570 to 1875. And they more than tripled from 1875 to 1975. Industrialisation did not end up eliminating the need for human workers. On the contrary, it created employment opportunities sufficient to soak up the 20th century’s exploding population'.


However: '... across the rich world, all is far from well in the world of work. The essence of what they see as a work crisis is that in rich countries the wages of the typical worker, adjusted for cost of living, are stagnant. In America the real wage has hardly budged over the past four decades. Even in places like Britain and Germany, where employment is touching new highs, wages have been flat for a decade. Recent research suggests that this is because substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share going to labour has fallen.


'At the same time, even in relatively egalitarian places like Sweden, inequality among the employed has risen sharply, with the share going to the highest earners soaring. For those not in the elite, argues David Graeber, an anthropologist at the London School of Economics, much of modern labour consists of stultifying “bullshit jobs”—low- and mid-level screen-sitting that serves simply to occupy workers for whom the economy no longer has much use'. ...


'The case for a highly disruptive period of economic growth is made by Erik Brynjolfsson and Andrew McAfee, professors at MIT, in “The Second Machine Age”, a book to be published later this month. Like the first great era of industrialisation, they argue, it should deliver enormous benefits—but not without a period of disorienting and uncomfortable change. Their argument rests on an underappreciated aspect of the exponential growth in chip processing speed, memory capacity and other computer metrics: that the amount of progress computers will make in the next few years is always equal to the progress they have made since the very beginning. Mr Brynjolfsson and Mr McAfee reckon that the main bottleneck on innovation is the time it takes society to sort through the many combinations and permutations of new technologies and business models.


'A startling progression of inventions seems to bear their thesis out. Ten years ago technologically minded economists pointed to driving cars in traffic as the sort of human accomplishment that computers were highly unlikely to master. Now Google cars are rolling round California driver-free no one doubts such mastery is possible, though the speed at which fully self-driving cars will come to market remains hard to guess'.


These latest articles from the Economist, and the new books they cite, are are obviously well worth reading.  Even optimists concede the onrush of technology is likely to involve loss of jobs, with many older workers unable to acquire the new skills necessary for them to stay in the workforce. And during the adjustment phase of the new era of technical progress, inequality will rise, and perhaps the elite top 1 % will become a new self-replicating oligarchy, profoundly unsetting to many of the non-elite 99 %, most of whom have badly paid, uninteresting jobs.


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