Paul Samuelson, the famous economics textbook writer, is reputed to have said that the stock market has predicted nine of the last five recessions.
Right now the market seems to be predicting a doozy of a recession.
The Australian stock market has followed global stock markets in shedding huge amounts of wealth.
In years gone by many might have observed the events of the last few days with some detachment. These days, with compulsory and defined contribution superannuation schemes, stock market losses hit close to home.
Those people currently living off their superannuation returns or planning to retire in the near future are in a world of pain.
There are a lot of things going on that explains the economic dislocation we're seeing. First and foremost the debt and deficit model of public finance is failing. It is failing both in Europe and the Unites States.
What is making matters worse in Europe is the euro. A single currency for such a diverse group of economies was always bad economics -- as many, including Paul Krugman, argued at the time. Yet the political pressure for monetary union was strong and so economic considerations got subsumed. Some European governments are willing to keep spending but unable to do so.
The United States is in a somewhat different position. The government is able to keep spending but the Congress is seemingly unwilling to authorise that spending. Like the Europeans, the US government has spent well beyond prudent or sustainable levels.
The solution in each case is to reduce spending. Given that much of that spending is social expenditure these spending cuts are very likely to be painful and it isn't surprising that elected politicians are loathe to inflict that level of pain on their constituents.
It is here especially that Australia is in a better position than Europe and the US. Our public finances are not under the same pressures and strains as other developed economies. Our economic challenges are different.
It is true that our budget is in deficit and the Federal Government has accumulated large debts over the past four years. Yet the policy default position is that the budget should be in surplus and debt paid down. Contrast that with the US where even after last week's agreement between Democrats and Republicans the default position was that the budget would still be in deficit and borrowings continue to increase.
The problem Australia faces is complacency -- I think of it as China-itis. Many policymakers have the view that as long as China is OK, we're OK. That it doesn't matter how poor our policymaking is, the Chinese will buy our stuff at any price and any inconvenience. By contrast, the response to economic turmoil in 2008 was pure panic.
That complacency leads to commentators arguing that our public debt doesn't matter because it is much lower than comparable countries. It is, but it can explode very quickly. Right now markets have an aversion to public debt. Australia should move rapidly to reduce that debt.
More importantly Australia is facing high levels of inflation. That the Reserve Bank can post a long-term forecast of inflation above its target band is a policy failure. At the same time, economic growth forecasts are being revised down and productivity growth is poor.
Federal government policies are not aimed at addressing any of those issues. Next year tax rates for low income earners will rise and effective marginal tax rates will be increasing too. That policy hardly encourages improved productivity. The carbon tax is designed to slow economic growth. The mining tax is a slug on smaller Australian mining organisations.
At a time when the economy is under external pressures, it hardly seems sensible to hobble ourselves with policies that make it harder for the private sector to generate wealth.
To improve our economic conditions the Government needs to be looking to lower taxes, provide greater incentives to work and increased productivity, lower spending, and cut business red tape. That won't restore stock market values in the short-run but it will make it easier for the Australian economy to weather the financial turmoil that is engulfing Europe and the US.
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