Differing situations and imbalances

Comments on Mohamed Ariff “World economy not quite out of the woods yet”, 6/10/2009, http://www.eastasiaforum.org/2009/10/06/world-economy-not-quite-out-of-the-woods-yet/

It is likely that the story of decoupling of developing economies at least some major Asian ones from developed economies in terms of recovery may be holding.

So as the author argued that "it is unsafe to make sweeping generalisations, as conditions vary from country to country", that argument applies equally to cautions for being too optimistic and being pessimistic.

In light of that, it could be argued that the G20 statement that it is too early to withdraw stimulus is problematic, because of the differences between the member economies in terms of their recovering status. It has given some activist governments the excuse to indulge in their unnecessary delays in prudently managing their economies that will leave future problems to those economies.

Another point is that the so called international imbalances seem to be red herring. It is more an issue of a blaming game to find a scapegoat for the financial and economic crisis that had a fundamental cause of mismanagement of the economy by irresponsible lending practices and the inability of the authorities to manage asset markets and government finance using the traditional macroeconomic policy instruments such as monetary and fiscal policies.

To argue that international imbalances were the causes is no different to arguing that everyone or at least every household should run a balanced income and expenses every year or more extremely every day. Isn’t that ridiculous? Or are there any differences between the two?

One of the main roles of financial and capital markets are to bridge the different situations between different participants, so that people can run “deficits” or “surplus” over a sufficiently long period as long as the longer term budget constraints can be satisfied.

The argument of imbalances ignores this simple financial principle or function and is illogical.

Depression unlikely but can't be ruled out completely

Comments on Adam Carr “Depression drivel”, 18/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-Depression-drivel-pd20090618-T4TR3?OpenDocument&src=sph

History will or will not repeat itself is an interesting question, but there are no automatically fixed answers.

Clearly there are very different institutions now as compared to back then in the great depression. It should suggest that we may not repeat the great depression. However, the financial and banking crisis a few months earlier was a stark reminder that history could repeat itself even under quite different circumstances. Also the lost decade in Japan may lend further support to that.

Expectations work in strange ways. Different sorts of expectations, adaptive, rational you name it, may co-exist and work together. If expectations of most people are that we are likely to have a quasi great depression in a different form, then it is likely that we will have one.

The problem is that we don’t know for sure how people form their expectations all the time. We have herd behaviours in the share market, housing market and some other market. We have bubble and bursting of bubbles. There are hardly perfect things in expectations.

So while I am confident that the world authorities should be able to deal with the current economic crisis, I cannot rule out completely the recurrence of another depression. I am not as confident as Carr is on this and I don’t want to be either. History is not necessarily always rational. Neither is the economy, and definitely the equity and housing market!

Peter Costello - a fine person and excellent Treasurer

Peter Costello, the longest serving former federal Treasurer, is retiring from politics. He will be best remembered for his enormous and unique contributions to managing very successfully the Australian economy and federal budgets during his 12 years as Treasurer.

During their rein, the Howard / Costello government eliminated the federal government's debt of nearly $100 billion they had inherited when they came to power in 1996, and accumulated net assets by the end of the Howard and Costello era.

While there was some luck involved, no one should underestimate Costello’s management of the economy and the budget.

Costello will also be remembered for his lost / foregone opportunities of becoming Prime Minster and the coalition leadership. Judged from his attitude towards a number of issues, such as climate change policies, national reconciliation, republic, Costello seemed to be a fairly moderate conservative and progressive liberal, with sharp intellectuals, though questionable killing political instinct and urge.

The most enduring contributions of the Howard / Costello government to the Australian economy have been the introduction of GST in 2000 that enabled the reduction in personal tax rates and the abolition of a number of State inefficient taxes.

The coalition government also introduced far reaching industrial relations reforms, but they became one of the factors that contributed to the coalition’s election loss in 2007 and the Rudd / Gillard Labour government is dismantling those reforms that are deemed unfair by Labour.

It is nice and pleasing to see that both Rudd and Swan have praised Costello's contributions. When a political figure like Costello is retiring from politics, it is time to put partisan politics aside and give due credit to every politician's contribution to Australian national affairs and welfare. By doing this, they are also doing credit to themselves. I command the Prime Minister and the Treasurer for their acts.

Let’s hope Costello will continue to use his enormous talents and make contributions to whatever he does in his pursuit of a private life and career.

Rudd/Swan stimulus - wasted opportunities and wasted taxpayers money

Comments on The Australian’s articles on Rudd government’s spending on schools as part of its economic stimulus program, “Schools infrastructure fund under fire” by Justine Ferrari, “Hall costs go through the roof” by Natasha Bita, “Rules bent as 'facelift' funds spent on laptops” by Pia Akerman and Natasha Bita, 13/06/2009

There are 3 articles in The Australian today on the federal government’s spending on schools to build school halls, libraries and so on, as part of Rudd/Swan economic stimulus package. There was also mentioning that The Australian has published a series articles on this topic, including one on Thursday by Professor Peter Newman.

I did not read Newman’s article, but have read the 3 articles today online. The first article reported concerns by several prominent education experts, including Professor Ken Wiltshire whom I happen to know. The other articles mentioned waste out of proportion in building costs and bending of rules for funding purposes.

From what they say I can sense that there is enormous waste. For example, the costs for building some school halls are now 2-3 times of experts’ estimates. Besides, some of them questioned whether the funding is of priority for education in general and those schools in particular.

This is another example that Rudd / Swan government is wasting taxpayers’ money in the guise of stimulating the economy. It is to the best a simplistic approach to stimulus fiscal policy through ignorance and a poor understanding of economics and government policies; and extreme reckless and irresponsible to the worst.

It might be a simplistic approach, because they might just thought if you increase government spending it will be stimulating to the economy. It is a poor understanding of the GDP identity where G is a component of the outputs. It could be due to poor economics, perhaps.

It might be extreme reckless and irresponsible, because that is Rudd’ one of revolutions. He has said a few revolutions, including education revolution. In their mind, if it is a revolution, costs of doing it does not matter any more because it is the right cause and justifiable.

So here they come, the school stimulus, the national broadband network to homes of optical fibber of the order of $43 billions without any prior proper business study, the cash handouts for stimulating the economy.

As a taxpayer, I have become concerned with the Rudd / Swan approach to these things. Today’s articles in the Australian appear to validate my concerns. The question is how Rudd / Swan can be made to change their approaches and start to be responsible.

How that question will be answered remains to be seen.

Rudd and Swan should heed this

Comments on Heather Ridout’s “Spend but don't squander”, 7/05/2009, The Australian, http://www.theaustralian.news.com.au/story/0,25197,25439460-5017272,00.html

While basically agree with most arguments of the author’s, I would disagree on one thing. Cash bonus handouts are unlikely to have the desirable effects to stimulate the economy, to minimise budget deficit, or to increase productivity. In other words, they will not achieve any meaningful policy objectives in the current economic environment. To the contrary, they are a inter-generational redistribution, leaving/increasing unnecessary debts burden for future generations.

We all understand that the world economy has been in big trouble and there will be an adverse impact on Australia. However, by its own reckless doing, the government has made its job to frame next Tuesday's federal budget much harder than it could and should be.

Two cash handouts wasting tens of billions taxpayers money are prime examples. The unrealistic and wishful thinking in terms of having a world most advanced national broadband network with ballooning costs to the proposed $43 billion dramatically escalating from its election promised about $4 billion public money is undoubtedly another.

Yes, few people are arguing against meaningful and prudent fiscal stimulus for the economy and jobs. It is right to invest in education, in productive infrastructure, in job creation, in the most productive way. But the public are certainly worrying the government’s poor performance shown so far.

The public has given the Rudd government a rather longer honeymoon period, after a long period of living with the previous stubborn government for its wrong and unforgiving mistakes in taking part in the Iraq war, in refusing to rectifying the Kyoto global agreement on climate change, in swing the industrial relations too far to the right at the neglect of most working people, even though they should be credited with good management of the economy and the budget. It will not take too long for the public to be fed up with an incompetent government if it does not improve its performance and lift its games. It is the public’s hope that the current government learns from its mistakes and does quickly.