Christmas Greetings

I leave tomorrow for Mt Hotham for the Christmas break and will resume posting on my return.

It's been a funny mixed-up year, beginning with economic crash and ending with Copenhagen.

The series I began and still plan to finish on problems in modern public administration was side-tracked by a felt need on my part to try to get a better understanding of climate change issues. I had left this one aside, but then found that parts of the debate were going down the familiar tracks that I was writing about here. So I spent some time writing a series of posts on my personal blog just trying to tease things out for my own understanding.

There is nothing especially profound in the posts, simply a personal exploration to aid understanding.

My economics writing has diminished, simply because I had less to say that was original. I think that my main contribution in the second half of last year and first part of this year lay in the fact that I was writing from a different perspective to most commentators, driven by an apparent gap between the commentary and the statistics.

Hopefully over the Christmas break I will have a chance to review and re-group.

To those to whom it is relevant, may you have a happy and safe Christmas and may we all have a safe and successful new year.

I look forward to talking to you again in a little while.   

The case for reform in Australian public policy - food prices and Australian primary production 1

Sunday Essay - food prices and Australian primary production, a post on my personal blog, is a very simple analysis of the discussion generated by the apparent fact that Australian food prices  have been rising at the fastest rate among major developed economies.

Outside shock-horror elements, the discussion generated by the OECD report has been one-dimensional, generally centred on competition policy and the Woolworths/Coles duopoly. There has been very little discussion of the broader contextual issues.

I am not unbiased on this matter. My personal support for the rural sector and the country will be clear from my writing. That said, the broader issues do bear upon some of the points I have begun to develop in this series.

As I write, the Liberal Party has been imploding over the Government's emission trading scheme. In Australian responses to climate change - a background briefing, I made a distinction between problem (climate change) and response. I also pointed to the way that climate change was being used to justify a whole series of decisions: if a (climate change), then b (stop irrigation or whatever), creating a growing wave of opposition in the bush.

Policy does not develop in isolation. To a degree, one of the causes of policy failures lies in the way that Governments feel obliged to respond to what they perceive to be popular opinion. I will deal with the institutional factors - the rise of the "stakeholder" in a later post.

I am not saying that Governments should not consider public opinion. However, real problems arise where there is a disconnect between those arguing for a policy change and those who will be affected by a policy change. Simply put, it is easy to support something if there is no apparent cost to you. This problem is compounded by the existence of policy silos.

The question of the gap between Australia's indigenous people and the remainder of the Australian community has been a topic of much discussion. You have a range of initiatives intended to bridge that gap. However, very little of the discussion addresses a single key issue: many Aboriginal people live in country areas that have been in economic decline. Action to address the gap is likely to fail if you cannot address that decline.

Consider the case of Tooralee Station (here and here), a major irrigation property purchased and turned into to a national park to release water for the Darling River. Leaving aside the question of whether or not the purchase was value for money, something that I doubted based on rough back of envelope calculations, the purchase took something like 100 full and part time jobs out of the local Bourke economy.

At the same time, the Federal and NSW State Governments who funded the purchase of Tooralee Station are trying to address Aboriginal disadvantage in Bourke through measures such as new houses and coordinated service delivery. The obvious inconsistency between the action on Tooralee Station and the improvement in Aboriginal conditions in Bourke was not recognised or, at least, not discussed. I doubt that it was recognised.  

I will continue this argument in my next post.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration. Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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The case for reform in Australian public policy – measurement and child welfare

In The case for reform in Australian public policy – introducing measurement I referred to the rise of the modern obession with measurement.

All Government policies and programs now come with cascading and generally very simple numeric perfomance measures. It seems so reasonable: if we don't measure, how can we assess perfomance?

As it happened, yesterday's Age carried an example of  the type of problem that can arise. I quote:

A scathing Ombudsman's report has identified gross deficiencies in Victoria's child protection service, with workers manipulating figures to cover up children neglected by the system.

The problem is that the performance measures become an end in themselves. Where, as is often the case, the figures are simplistic or even unachievable, then manipulation of results to meet targets or conceal the failure to meet targets can and does occur.

To my mind, this has now become something of a cancer eating away at the heart of Australia's system of public administration. Sounds extreme? Perhaps, but there is an increasing volume of evidence to support my position.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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A continued apology for slow posting

Sorry for the absence of posts. Normal service will resume shortly. I have just been heavily tied up on day to day issues.

Ramblings

No major post today, time is very short, just a few ramblings.

The bringing of a twelve year old Aboriginal child to court on the charge of receiving a stolen Freddo Frog (an Australian chocolate) plus sign makes an apparent mockery of the justice system. I say apparent because there may be things that I simply do not know. See Charged with receiving chocolate frog for details. See a news report here.

I cannot report on the accuracy of the following story because I have not investigated it. It was told to me by an Aboriginal colleague.

In the NSW juvenile justice system there are apparently mechanisms for avoiding the formal court process. These are designed to make the system quicker, fairer and more humane. The only problem is that they are time limited. Many Aboriginal people live in regional Australia in smaller settlements and do not have easy access to lawyers. By the time they can contact Aboriginal legal age and get a lawyer involved, the time for alternative procedures has passed. So they end before the courts where they are far more likely to go to jail.

Mr Rudd's apology to the forgotten children created very mixed feelings. You see, as part of my PhD thesis I investigated the history of NSW child welfare. I did so because my grandfather was a ward of the state who suffered at the Pokolbin Farm Home. Later when he became NSW Minister for Education and Child Welfare he had to suffer through the troubles and injustices at his beloved Yanco Farm Home.

I wrote a little of this in David Henry Drummond and the Importance of Compassion because the single most important thing that Drummond's experiences gave him was a sense of compassion. He never forgot what had been done to him.

When I investigated the NSW child welfare system, I did not do so from any perspective of right or wrong. The thought never occurred to me. Shit happens. Rather, I was concerned to understand what happened and why, how it influenced my grandfather.

I do not doubt Mr Rudd's sincerity, nor the hurt that has been imposed on people by past systems. I just think that responses are out of kilter. Of course we must try to improve. Yet the tensions in our current society are manifest.

My grandfather wrote that the phrase the child is the father of the man is one of the cruellest phrases in the English language because it condemned the child to suffer as an adult from youthful mistakes. How many children, he said, had committed suicide alone and in despair?

Modern Australian society stands condemned at two levels.

It is condemned because Prime Minister Rudd can apologise to the forgotten generation at the same time as a child is brought before the courts for receiving a Freddo frog. It is condemned because in its desire for law and order and for quick solutions. It brings in things such as three strikes and you are out. Then it wonders at exploding prison numbers.

Most important, and this is the second level, modern Australian society stands condemned because it is censorious and hypocritical, moralistic. It is prone to harsh and simplistic judgements without recognising the conflict between those judgements and its own stated fundamental values.

I am not negative about the future in the way some are. I still believe in progress and the possibility of change. I still see the history in part as a record of progress. Still, I do struggle sometimes.        

The case for reform in Australian public policy – introducing measurement

Think of this post as clearing a little ground.

So far in this series I have focused on unforeseen consequences flowing from policy changes. I now want to broaden the focus a little to bring in the current obsession with measurement.

Back in March 2007 in Changes in Public Administration and their Impact on the Development of Public Policy 2 - Notes on Major Trends I briefly discussed the rise of standards, the quality movement and the Importance of measurement. Then in another post, Changes in Public Administration and their Impact on Public Policy 3 - Publish or Perish Case Study, I looked at the rise of the citation index as an example of the rise of measurement.

Don't get me wrong. I am a great believer in the importance of measurement. Without it, you cannot assess progress. It's just that the whole thing has got out of kilter.

Over the next few posts I want to use a mixture of case studies and analysis to sketch out in a preliminary way the problems that we have created for ourselves though our obsession with measurement.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up.

Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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The case for reform in Australian public policy – a methodological note

Now that I have started this series, I have been thinking about the difficulties involved in demonstrating beyond doubt the need for change in approaches to public administration and public policy. We can see this if we look at my preliminary posts.

My focus to this point has been on unforeseen consequences, although other issues are already creeping in.

Consider the NSW child welfare case.

I have no doubt that the near collapse of the system as a consequence of mandatory reporting was unforeseen. No Government in its right mind would deliberately inflict such pain on itself. But could the result have been foreseen? After all, unforeseen results are common in public policy. I actually think that it could have been checked through the normal practical operational analysis that should be done in advance of such changes.

Whether this case was unforeseeable or simply unforeseen does not, of itself, support my case that there is a systemic problem that crosses Australian jurisdictions and requires major change to overcome. A few case studies does not make a case. They may be isolated examples of failure. Rather, I have to show that there is a pattern of behaviour and of results.

In doing so, I have to disentangle, categorise and simplify, a variety of interacting variables.

Staying with the unforeseen case, there is a difference between an unforeseen and an adverse effect. An unforeseen effect could in fact be positive. An adverse effect may not be really unforeseen. A Government may argue that you cannot make an omelet without breaking a few eggs, that the illegal detention of Australian citizens is a price worth paying to protect our borders. In this event, we have a new set of arguments. Did we in fact want an omelet? Did we have to break the eggs? Could we have achieved the same result in a different way?

I also have a problem in explaining how things work to a lay reader who does not understand the system and may indeed be part of the problem!

In demanding that the Tasmanian Government link drivers licenses to school attendance, the Tasmanian opposition obviously felt that it was playing to public opinion. The rise of issues politics, the increasing tendency to play too often short term public reactions, is one of the core reasons why we now have a systemic public policy problem.

I will be discussing this a little later in the series, again using case studies to illustrate my points. For the moment, I simply note that it adds to the difficulties in bringing about real change.

Postscript on drivers licenses

Just a personal postscript on the drivers license issue.

Youngest is working part time at the airport in Sydney, starting at 5.30am. This morning she drove.

Both daughters started to learn to drive under the fifty hour regime. When the NSW Government changed the rules from 50 to 120 hours, those who already had their learner's permits stayed on the old regime, but had to acquire their license within a certain time frame.

Eldest busy with university, sport and an active social life let her permit lapse. With parents, public transport and boyfriends with licenses, she did not need to drive herself. Now she is on the 120 hour regime, regrets not moving forward, but is kind of stuck for the present.

There is still a boy thing about cars in that boys are more likely to make the effort. In a very odd way, this has reinforced an old gender stereotype, boys who drive, girls who are driven.

On the way to the airport I asked youngest how many hours she now had up. She said twenty two. She has to get to fifty and her provisional license by 21 December or go onto the 120 hours. So there is now a fair bit of pressure.

At twenty two hours and expressed in skill terms, youngest is not ready yet to get her license. She can drive without turning my already grey hair greyer, but the skills aren't automatic.

Part of her problem is that her driving practice has been sporadic. As she said, you have to do it in solid blocks. A second problem is that she is learning on a manual.

On the way to the airport, I told her about the attempted car-jacking that failed because those doing it could not drive a manual - see A problem with gears. She laughed, and said that she must tell her friends, all of whom are learning on automatics.

Under the old regime, you got your license and then drove without restriction. There were a lot of crashes in my age group because people could drive, but actually pushed outside the envelope set by their skill sets and judgement. We now have quite restrictive provisional license requirements intended to address this problem.

In theory, the whole system was meant to be output (skills) focused. Once you got to a certain skills point, then you got you license. However, there were then restrictions on what you could do for a period to allow skills to build through practice.

In practice, the whole system has become quite rigidly time and input based. It is now actually easier and a lot quicker to get an unrestricted pilots license than a NSW drivers license.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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The case for reform in Australian public policy – a few straws in the wind

In the last few posts in this series I have looked at the unforeseen consequences of policy decisions, starting with rivers of grog in the Northern Territory, then looking at two NSW cases, mandatory reporting of child abuse and the extended hours required to get a NSW driving license

In this post I simply want to provide a few more straws in the wind.

One problem we face is the tendency to load unrelated things togther.

Back in July, the opposition in Tasmania was suggesting that young people should be prevented from getting a drivers' license if their school attendance was not good. How dumb can you get? School attendance has nothing to do with the question of how well can you drive. Those who most need their license for things like work also tend to be poorer school attendees.

A second tendency in a spin dominated world is to claim success for a single event or action.

Again in July, the headline of a NSW a story read P-Plate crashes down 45 per cent. The first paragraph said:

Following the introduction of no-tolerance law reforms in New South Wales, over 88,000 P-Plate drivers have been taken off the roads.

Fair enough you might say. What a good result, crashes down 45%.

A fact first. There has been a decline in the road toll for young drivers in NSW; 38 17 to 20-year-olds died in 2006, while 20 died in 2007.

So there have been over 88,000 license suspensions over two years for a saving of 18 deaths. I wonder where the extra time for a driving license fits?

Staying in NSW, there have always been fines for the growing volume of traffic offences. Then demerit points were added for each offence, so many points and you lose your license. Then demerit points for offences were increased. Suddenly so many ordinary middle class people were suffering license suspension for minor offences that the Government has been forced to back-off.

NSW locks up in jail four times as many young people relative to population size than Victoria. Seventy per cent of these re-offend within twelve months. In July, the NSW Government commissioned a study to find out why the State jails so many.

Part of the answer simply lies in criminal justice rules introduced to get tough on crime. Another reason lies (I think) in the increased numbers of people spending time for non-payment of fines.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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The case for reform in Australian public policy – NSW driving licenses

Continuing my analysis of the impact of unforeseen side effects on public policy, this post looks at the continuing impact of the NSW decision to increase the hours required to get a driving license from 50 to 120.

Again, this was one of those decisions that seemed like a good idea at the time. It also attracted public support because it was seen as a way of reducing the road toll on young drivers.

I first wrote on this issue back in May 2008 in Saturday Morning Musings - the burden of compliance, using it to illustrate a broader point. Leaving aside social and equity issues, my concerns were cost (at least $350 million annually to NSW parents or trainee drivers on my rough back-of-envelope calculations) compared to benefits. I wondered whether the same objective might not be achieved in better ways.

Twelve months later in The continuing insanity of NSW's approach to driving licenses I complained of the way that the extra hours were creating a growing social inequity (poor people could not afford the costs involved), together with a growing tendency of young people to falsify their hours.

All the anecdotal evidence is that both trends have continued.A further trend has also emerged.

Any trainer knows that concentrated practice is required to obtain a skill. The problem with the new rules on NSW driver licenses is that the sheer length of time involved means that kids are doing it in bits with gaps. Those sometimes lengthy gaps reduce the value of the practice.

Postscript:

The NSW Government has finally bowed to the inevitable and introduced two changes to the NSW driving license system.

Drivers over 25 will no longer need to keep log books. The practical effect is that the 120 hours no longer applies to them.

For drivers under 25, every hour of practice with a licensed driving instructor will now count as three up to a limit of ten hours. This means that middle class kids with access to a bit of money will now need to do only 100 hours, including ten hours of licensed instruction, to get to 120 hours.

Kids who do not have access to the money are still stuck with 120 hours. Mind you, if they wait until they are 25, then they do not need any hours at all.    

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming Australian public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.
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The case for reform in Australian public policy - NSW child welfare

In my last post in this series, The case for reform in Australian public policy - rivers of grog, I used a post by Bob Gosford to introduce the concept of unforeseen side effects. This post provides the next example.

It seemed like such a good idea at the time.

NSW had a problem with child abuse. To help overcome this, the NSW Government introduced rules making it mandatory for professionals such as doctors to report suspected child abuse.

Such a sensible idea. The only problem is that no one foresaw that the consequent volume of calls would bring the NSW child welfare system to its knees.

You see, there was no effective way of triaging the volume of calls to allow for effective follow up. Just as bad, the resource demands and pressures created actually reduced the capacity of the NSW Department to do its ordinary job.

The end result was scandal and a commission of inquiry.

Those interested can find further information in the following posts.

• 11 November 2007. NSW - Problems in Child Welfare looks at problems and a history of the early evolution of the NSW child welfare system.
• 2 January 2008. Australia - failures in public policy points to some of the reasons why child welfare had become a mess.
• 12 February 2008. Musings - Inflation, Volunteering, Child Welfare and Educational Standards includes a discussion of child welfare issues.
• 4 October 2008. Child abuse in Australia - a case of misused numbers? looks at the abuse of child protection statistics.
• 26 November 2008, Wood Commission Report into the NSW Child Welfare System provides a link through the report itself.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming public administration on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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The case for reform in Australian public policy - rivers of grog

Yesterday in We need to reform Australia's approach to public policy I said that I was going to dedicate writing on this blog for one month to just one topic, the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure. You have to decide whether or not I am right and, if so, what you think that we should do about it.

My first piece of evidence is Bob Gosford's How Canberra keeps the NT’s “rivers of grog” flowing. Bob lives in the small township of Yuendumu, 300 kilometres north-west of Alice Springs on the southern fringes of the Tanami Desert on land owned by people of the Warlpiri and Anmatyerre language groups.

In considering this piece of evidence, look at the way in which policies designed to be "tough" have in fact had the opposite effect.

This is an example of what are called unforeseen side effects. To some degree these are inevitable in public policy. The challenge is to find ways of minimising them, or of identifying and correcting them once they do occur.

Note to readers:

This is one of a month long series on the need for reform in Australia's approach to public policy and administration.

Consider yourself the judge or jury as I present the evidence. Most posts will be short, introductions to other writing. My argument is that we now have a systemic pattern of failure.

You have to decide whether or not I am right and, if so, what you think that we should do about it.

If you want to follow the whole series through, you can click reforming public policy on the side bar. This will bring the whole series up. Alternatively, if you want to follow the whole series through from the first post, click here and then click next at the end of each post.

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We need to reform Australia's approach to public policy

Back in September Economic planning for the longer term - introduction was meant to be the start of a new series. Two months later and I have still to get going, although I have written a fair bit of related material in the meantime.

So much has been happening.

In The Rudd Government's longer term success or failure - straws in the wind I tried to set out some of the process challenges that I thought the Australian Rudd Government had to meet. In a very short post, Ken Henry inspires Ross Gittins' four big bugs, I reported on a senior Australian economic commentator's deeply pessimistic view of the future.

In Saturday Morning Musings - a change in writing direction I provided an initial report on the thinking that I had been doing about my own writing. As part of this, I have decided to dedicate writing on this blog for one month to just one topic, the need for reform in Australia's approach to public policy and administration. This will give me a chance to pull together past writing, as well as set out new ideas.

This is quite a complicated topic, in part because so many people are locked into current thinking.

I hope that you will find the series at least interesting.

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Winton Bates' Freedom and Flourishing

One of the most thoughtful blogs around is Winton Bates' Freedom and Flourishing.It's not always easy to read. That's not a criticism, simply a refection of the subject matter.

Winton's most recent posts ( How do preferences relate to well-being? and Should we expect the rules of a good society to be good for everyone?) bear upon a topic that has worried me, the increasing tendency of Governments to make decisions "for our own good."  This is creating something of a policy and administrative mess.   

Australia increases official interest rates - again!

Today's official interest rate increase by Australia's Reserve Bank has received global coverage. Who would have thought it? We are just not used to this focus! 

Australia's remarkable economic performance

It's really very interesting, and it's also very unusual, for the Australian economy to decouple in the way it has from the developed world. It's also interesting to look back at previous forecasts.

The chart shows official Australian forecasts of GDP at the start of last November. At that stage, Australia was expected to be the only developed country other than Canada to stay in positive growth territory.

Following these forecasts,the global outlook worsened and Australian pessimism set in, something that I tried to fight against. All the forecasts went quite negative.

In recent times, Australia has been clawing back. Interest rates have started to rise, the Australian Government is looking to trim stimulus, and house prices have boomed.

The attached chart shows the latest Australian Treasury forecasts for GDP growth. Australian GDP growth in 2009 is now expected to be greater than that projected in November.

Australia is unusual as the only developed country now expected to show positive GDP growth in calendar 2009.

How real is all this?

It's real enough, although in Australia as in other countries Government stimulus packages played a major role in countering the downturn.

The issue that Australia now faces is what's next. And here there are some interesting variables indeed.                

Interest rate rises, the balance of payments and the Australian economy - August 09 trade figures

I watched the global reaction to the Reserve Bank's decision to raise interest rates with a degree of bemusement. To paraphrase one overseas story, it was a case of a one trillion dollar economic tail wagging the global market dog. I guess it shows how much concern is still around.

A key reason why I was more optimistic about the Australian economic position last year than most was the sudden strengthening in Australia's trade position. To my mind, this gave Australia an added economic buffer. The trade position has now gone into reverse.

   The August trade figures were released by the Australian Bureau of Statistics on 6 October. They confirmed a continued deterioration in Australia's trade position.

The attached graph from ABS shows the balance of trade on goods and services. You can see clearly how the trade position improved over 2008, then went into reverse in the early part of 2009.

The next graph shows Australia's imports of goods and is quite instructive. You can see how Australia's economic expansion led to the country sucking in increasing overseas goods. This went into reverse at the end of 2008.

Imports of services displayed a somewhat similar trend, although service imports are now displaying a stronger upward trend.    

Now the point here is that our balance on goods and services has deteriorated in spite of a decline in imports of goods.

The reason for this lies in a decline in the value of our exports of goods; service credits are essentially flat lining.

The next graph shows our exports of goods. You can see just how steep the decline in the value of our exports has been since the peak at the end of last year.

I haven't attempted to disentangle the price and volume effects in the figures, nor have I looked at compositional issues. I think that the raw numbers are sufficient for present purposes.

Just as the improvement in Australia's trade position provided a buffer leading into the global turn down, the deterioration now provides a constraint on economic growth.

As the Australian economy expands, additional imports will be sucked in. Without additional exports, the consequent deterioration in the balance on goods and services must constrain growth.

In theory in a world of floating exchange rates, the Australian dollar should depreciate to balance any deterioration. In practice, in at least the short term, the Australian dollar moves at variance to the economic fundamentals. Just as the fall in the value of the ozzie last year was not supported by the fundamentals, I would now question the size of the rise.

During the week I heard one commentator suggest that Australia was now, in economic terms, in a group of its own. Others suggested that demand for commodities especially from China was the proximate cause of Australia's better performance.

If you look at the numbers, it seems to me that Australia is in fact in the same position as most countries, if a little more fortunate. We are just as dependant as other countries on improved economic conditions if the current recovery is to be sustained.        

Economic planning for the longer term - introduction

This time last year we were in China. The global economic storm broke while we were in Shanghai and continued in Beijing. There was something a little eery about it all.

Twelve months later and with the economic outlook apparently improving all the time, political debate in Australia has switched to the right time and way of ending current stimulus measures.

The Government argues that now is not the right time. The stimulus measures have a natural phase down, while economic risks remain. The opposition counters that Australia is building debt and that the stimulus measures are no longer necessary. Even the Greens in an unusual display of fiscal rectitude have argued that a stimulus phase down should at least be considered.

The debate will work itself out through the usual political processes. A far more interesting question to my mind is just what Australia might do to strengthen its position in future downturns.

Australia has been remarkably lucky. The country went into this global downturn with a budget surplus and no net Commonwealth Government debt. Our balance of trade in goods and services went surplus at just the right time, while a depreciated exchange rate totally removed from economic fundamentals provided a further cushion. Export volumes, too, held up better than expected because of continued Chinese buying.

All this provided a cushion that made it easier for Australian Governments to respond to the crisis. We may not be so lucky again.

To set a context for this I want to point to a few things.

The first is the Australian sense of optimism as exemplified by this discussion reported by Robert Gottliebsen. I will comment on the detail a little later. For the moment, I simply note that optimism can blind Australians to the problems the country faces.

The second is climate change.

I remain sceptical about some aspects of the argument, but I do have to accept two things. The first is that the majority of the scientific community accepts climate change. The second is that, regardless of the accuracy of the majority view, most officials and opinion leaders accept the majority view, as does a substantial proportion of the world's population. This means that things will happen  

The third is timing.

The last major recession bottomed in the middle of 1991. That's a very long time ago, but major economic cycles take time. All the current official thinking appears to deal with ways of controlling/stopping crashes through additional regulation. It hasn't worked in the past. I see no reason why it should work in the future. Regardless of regulation, we will have another crash.

So we need to be thinking in a ten to fifteen year time horizon. And that is just the period during which policy responses to climate change will start to really bite.

We need to start planning now.    

Staff performance measurement in Australia's universities

According to a story in the Australian Financial Review (Monday 24 August 2009) by Joanne Mather, and I quote:

Vice-chancellors are deploying corporate style tactics to lift employee output and create leaner, more responsive workforces before a new era of performance-base funding agreements with the Commonwealth.

This example of modern corporate-speak took me by surprise. In the same story, Joanne quoted the VC of the University of Canberra, Stephen Porter. Speaking of the introduction of performance based at his university, he said: This wouldn't raise an eyebrow in the corporate sector.

I am sure that Professor Parker is right. My problem is that I am far from sure that the corporate sector is in fact the right model. I thought this before, but since then we have had to global financial crisis caused in part by by the combination of performance measurement and performance based pay.

To extend this argument consider the words used by Joanne Mather in her first paragraph quoted above.

Note, first, the use of the word employee. Of course university staff are "employees", but they are also more than this. I wonder how the focus on "employees" fits with other (perhaps outdated) concepts - community of scholars and academic freedom are two that come to mind.

Still continuing with Joanne's word, the aim of the new approaches is to increase "output". This got me wondering. Just how the universities are to measure this? How might this be related to individual performance?

I tried to think through just how I might measure output. Universities are complex multi-variate institutions. To really develop a working output model, you first have to specify the outputs, then determine the relationships between these outputs and the various elements (inputs) contributing to the outputs. I can see how I might do this in a general sense, but I find it hard to see how to it with the degree of specificity implied by Ms Mather's comment.

The use of the word "lean" in the way that Ms Mather uses it originally came from lean manufacturing, the slimming down of manufacturing systems to gain maximum value in process terms while minimising inventory. Later it became fashionable in corporate restructuring - getting rid of fat to create the lean organisation.

The results of this approach in the corporate sector have in fact been very mixed. A particular problem has arisen in balancing short term gain with long term risks and costs. In Australian electricity distribution, for example, the newly corporatised or privatised entities cut the number of linesmen. This did provide a short term gain that flowed to the bottom line, but later led to severe shortages with added costs in recruitment and training, as well as reduced operational efficiency.

Of course, a more responsive workforce is (in general) a good thing. Here, however, a question has to be asked: responsive to whom? In the university case, responsiveness to corporate demands can conflict with corporate objectives or indeed academic and professional responsibilities.

I actually do think that Australian universities need to be more responsive in meeting student needs and in the development and modification of courses. One project that I worked on involved the development and introduction of a new vocational course. This should have been relatively simple. The project failed because the university, a major metropolitan institution, simply could not get its act together.

The point about this example, however, is that the delay linked to the interaction between people and systems. This was the core reason for delay and final abandonment.

Apart from my own concerns about what I see as a decline in the real standards of Australia's universities, my experience as a consultant makes me very cautious. Speaking as someone who argued strongly for the adoption of corporate approaches into the public and not-for-profit sectors, I no longer see the gains I used to.       

China and the US - savings and investment

Interesting discussion at dinner last night with a member of the board of a major Australian retailer who argued that the Australian economy was far more fragile then people realised. I am not sure that he is right, but I found the conversation interesting.

There has been a fair bit of discussion since the global financial crisis began about over saving in Asia especially China, over consumption in the west, especially the USA. You will find a sophisticated version of the argument here on Michael Pettis's blog.

This argument confuses me. In this post I want to explain why.

If you look at China, you see a country whose average standard of living is still quite low. You also see a country where there are significant imbalances in wealth across the country. China needs to increase the standard of living for its people, while also ensuring a more even spread.

To do this, China needs to fund investment. This has to come from local savings or from overseas capital. A high local savings rate is not a bad thing in these circumstances.

Leaving aside export subsidies or an artificially low exchange rate, these are different issues, China's semi-centrally controlled economy has been investing in export related activities. This has generated a major balance on current account surplus, mirror imaged by deficits in other countries. To my mind, this is not a savings problem but an investment one.  

I left aside export subsidies and an artificially low exchange rate. To the degree that these things have occurred exports may increase, but China is also effectively subsidising consumers in other countries. I do not think that this is a sensible longer term strategy.

The suggestion that China should increase consumption for the sake of increasing consumption does not make a great deal of sense to me. Looking at the Chinese position through Australian eyes, the fact that China has been accumulating such large trade surpluses provides an opportunity for the Government to do new things.

This is a bit like what happened here, but on a much grander scale. Australia came through the global downturn so well because and only because our net trade position suddenly improved. This was a necessary but not sufficient condition.

In China's case, the challenges are far greater, but so are the opportunities. If I were an adviser in China, my focus would be on the best ways for China to benefit. Here I am worried by some of Michael Pettis's posts because he points to areas where some of the policy responses do not appear to be very sensible.

In all this, I would not be worried by the US except to the degree that it affected China.

In a post last November, Scoping the global downturn - a few numbers, I looked at relative shares of global GDP. The US has shrunk to a bit over 25%. China is a long way behind at a bit over 6%. My point then was that relativities meant that China could not be the type of universal  cure-all as often presented. This makes me very cautious reading some of the savings/consumption arguments.  

Dreamliner woes

I have been following the story of Boeing's Dreamliner with considerable interest, in part because I used to do consulting work within the aerospace sector, in part because it has clearly become a commercial and management nightmare.

In the most recent development, Boeing has apparently instructed the Italian company Alenia Aeronautica to stop making fuselage components after quality control problems were discovered. For those who are interested in reading back into the saga, Ben Sandiland's has been following it on his Plane Talking blog.

The slowly unravelling story is interesting because it combines so many elements. The Dreamliner is a large, complex project with plenty of scope for things to go wrong. However, Boeing has plenty of experience with this type of project.

I have a strong impression, I may be wrong, that Boeing's difficulties are due in part to the way the company has pushed the technical envelope to try to deliver specific benefits, more to the way in which marketing considerations in general have driven project dynamics.

The relationships between marketing people and engineering and production teams has always been complicated. Let the technical people have their heads and you may get an over-specified product that doesn't meet customer need. Let the marketing people have their way and you end with promises that cannot be met.

The problem for Boeing now is that the project has become a potential company breaker. I suspect that I am not alone in wondering whether the plane will ever enter commercial production.        

Australia's economic outlook - cautions and constraints

Just six months ago, Access Economics' Chris Richardson was all gloom and doom about the Australian economy to the point that his comments triggered a number of posts here and on my personal blog because I just couldn't see it in the numbers. I was far more positive. Now Chris is cautiously optimistic.

Chris' cautious optimism comes at a time of increasing optimism in general reporting in Australia and internationally. Just as the previous gloom and doom led me to check numbers and come to an opposite conclusion, now I am wondering about some of the current reporting. To what degree has the optimism/pessimism effect gone into reverse?

To assess this, I thought that the best way was to look at the reasons why I was more optimistic before, along with my expectations about future developments. I seem to have been pretty right on the first, what about the second?

To begin with, I saw the remarkable change in Australia's trade performance - the switch from deficit to surplus on the current account at just the time we needed it - as central. This, together with an unexpected and in fact unwarranted fall in the value of the Australian dollar, cushioned Australia to some degree and gave the Australian Government far more room to move.

Since then, the value of the Australian dollar has bounced back, while the balance on the current account has turned slightly negative. You can see the latter clearly in the attached chart from the Australian Bureau of Statistics. Remarkable improvement, followed by partial retreat.

I am not too worried by this, I had expected it, but again we need to watch because the current trend means that the balance of trade on good and services has turned from a positive to neutral, potentially negative.

So far as the exchange rate is concerned, I won't comment in this post beyond noting that whereas I had seen the balance of probabilities favouring an appreciation, after the last bounce I think that they are now neutral tending to negative. From my immediate viewpoint, that's not a bad thing.

In terms of my previous analysis, Australia's unexpectedly strong trade position was reinforced by other variables - a budget surplus, no net Australian Government debt - that provided the capacity for the country to manage through the downturn until the global economy recovered.

At the time I did not expect the global stimulus packages to have much immediate impact beyond band-aid until increased Government capital spending kicked in. I also expected capital spend to be far more lagged in Australia and elsewhere than projected by Government because of the nature of intuitional constraints. Overall, I think that the band-aid has been somewhat greater than I expected, the capital spend lags pretty much as expected.

My key concern about Australia and elsewhere lay in rapid increase in liquidity and Government debt. I thought that this was likely to choke growth to some degree as policies went into reverse. This remains my view.

If you look at the chart on the right from Stubborn Mule, you can see how Government gross debt came down and is still at very low levels by global standards. Australia still doesn't have a real problem. The colour bars, by the way, mark periods of Labor Government.

The problem lies in the steady rise in household debt, a lot of which is linked to house purchases.

I have been generally supportive of the Rudd Government's stimulus packages with the notable exception of the First Home Buyers grant for existing houses. This has triggered something of a price boom at the lower price end of the housing marketplace, holding borrowing levels up.

The difficulty with Australia's continuing high levels of household debt lies in the way that interest rate rises create downward economic pressures. Australian interest rates are going to rise over the next two years, and as they do there will be downward pressure on spending in other areas.

I am out of time. I will continue this post a little later.

I said that I expected Australian interest rates to rise over the next two years. At one level, that statement is almost a truism given how low they are now. However, there are still inflationary pressures in the economy.

When I looked at the Australian Producer Price Indexes for June, the thing that stood was the difference between the indices for domestic and imported products. It's quite noticeable that all the major price falls month on month are on the imported side. The year on year position is different, with the rise in price for imported final goods showing a dramatic increase despite recent monthly falls.

My gut judgement, and its not fully supported by the figures, is that price pressures are still there in the more sheltered non or part-import competing sector. On the import side, and excluding exchange rate considerations for the moment, recent price declines are likely to stabilise as the global economy stabilises.

If we now look at the latest CPI figures, the low year on year CPI appears to have been strongly influenced by falls in transportation and insurance and financial services costs. The big increases, all above the Reserve Bank's target inflation band, were education, health, housing, food and alcohol and tobaccos. What can we say about this?

Well, transportation is strongly influenced by fuel costs, so if fuel prices rise as the global economy starts to rise again, we can expect this item to rise. Insurance and financial services costs are strongly influenced by interest rates, and will rise with interest rates.

On the other side of the ledger, the majority of high rise items are in non-import competing sectors and will rise as the Australian economy starts to expand. Rents are already rising. In addition, there are built-in upward factors in education and health. So at least potential CPI and health pressures are still there.

I stand to be corrected on this very simple maths, but it looks to me as though potential inflationary pressures are still present. Should they emerge, then the Reserve Bank will have to think about interest rate rate rise. 

Then we have to factor in Government borrowings. The need to borrow in Australia and overseas to fund stimulus packages will of itself place some pressure on interest rates. So we have a whole set of reasons to expect interest rate rises, with consequent downward pressures on demand.

I now want to bring in a another variable, China.

I have previously expressed concerns about the hope placed on China. Part of this is due to to the relative size of the Chinese economy. It is simply not big enough in absolute terms to have the type of global pull-through effect expected in the absence of growth elsewhere. Part is due to what I see as the vulnerabilities in the Chinese economy itself. Here I am influenced by the writing of Michael Pettis.

I lack the direct knowledge to properly critique Michael's work. But at the very least, it suggests grounds for caution.

This has become quite a long post, so to summarise.

Just as I thought the early gloom about the Australian economy was misplaced, now I am cautious about some of the optimism. Australia is still well placed, that hasn't changed, but I do think that there are some risks and downsides that we now need to factor into our thinking.         

A Stubborn Mule's view of the world

That week I mentioned in my last post proved to be a very long week indeed.

My old friend and colleague Noric Dilanchian kindly pointed me to a Stubborn Mule's Perspective. The writer works in the financial markets in Sydney and is something of a statistical fanatic - a believer in graphs.

I stand somewhat in awe of his statistical skills. Like me, he is interested in patterns. Like me, he likes to test things. However, his statistical skills allow him to do things that I cannot.

Slow posting

My apologies for the absence of posts - other pressures. It will be another week before posting resumes.

Understanding global economic developments - introduction

This has been a remarkable few days.

On Tuesday 2 June the ABS released remarkably good balance of payments statistics suggesting that Australia's March quarter results would add 2.2% to growth for the quarter. The following day ABS released national account figures estimating that Australia's GDP had increased by 0.4% in the March quarter.

It is probably fair to say that the results took people a little by surprise. Coming on top of some other good stats, commentary was very positive. Then today the ABS released stats suggesting that Australia's balance of trade in goods and services in seasonally adjusted terms for April was negative $A91m, a turnaround of $A2,393m on a revised surplus in March 2009. With some other bad data, we had a sharp switch from positive to negative commentary.

Exactly the same thing type of thing happened in the run up to the release of the December national accounts. Some bad news led to negative commentary, then good trade figures reversed this, only to see negativity return when the national accounts showed negative growth. Mood swings have been so swift that positive and negative commentary over-lapped depending on print lags.

I am as prone as anyone else to be affected by changing data and the commentary on that data. I find that it has begun to create a fog in my mind, with the short term crowding out longer term trends and issues.

Looking back over the posts I have written over the last year or so, I don't think that I would vary much of my analysis in light of current events. I certainly wouldn't vary my analysis of underlying changes in management, public policy and public administration, nor my analysis of shifts in global structures that constitute shifts in global economic tectonic plates.

Over the last week or so in gaps in other things, I have been jotting down notes for some posts that might pull together some of this writing. A key aim is, like so much of my writing, to assist me to stand back from the current fog so that I can increase and test my own understanding of events.

I hope to publish the first post tomorrow. 

Turnbull soars then crashes

I have just listened to Australian opposition leader Turnbull's response to the latest Rudd Government budget. I insisted youngest listen with me. She is not a coalition supporter. 

The first half of Mr Turnbull's speech  was frankly magnificent. Sharp, incisive, some new ideas combined with critical analysis. Youngest was saying that this was the best speech by a politician she had seen. She also commented in the growing discomfort in the body language of ALP members. Then he (Mr Turnbull) lost it.

The dividing line came in Mr Turnbull's remarks on the medicare levy.

The proposal to oppose the Government's change in the rebate and instead compensate by increasing taxes on cigarettes may or may be right. After all, I am a smoker. But what was meant to be an example of an alternative view became instead the end of substance. From this point, rhetoric ruled.

What a missed opportunity. If Mr Turnbull had continued with the same analytical approach mixed with human example, he would have carried the day. In some ways, it would not have mattered what he said. If he had announced cuts, explained problems, presented choices, people may have disagreed , but they would have respected him. And in the lead up to the next election, that's really what counts.

Instead, this all vanished. He let the Government off the hook. He became another polly. I have never seen such a clear case of defeat snatched from the mouth of victory.     

Australian Budget 2009

Last night I listened to the Australian Treasurer's budget speech and to the initial commentary. At the end I was not much clearer than I was at the beginning.

When I first started listening to budget speeches they were on radio and ran for several hours. The speech itself contained the information you need to understand the budget. This is no longer the case. The information content is now very low, packaged for TV. You have to wait for the analysis from those in the budget lock-up or those who have time who have time to download and read the full papers. Alternatively, you can try to access the budget papers on-line once the speech is finished.

Those who are interested can find all the budget papers here. So many people wanted to access them last night that it was almost impossible to get through. One just had to sit and wait. I finally gave up and went to bed. 

It is now quite early. Traffic is less. I can get onto the site, but I don't have a lot of time.

The first point to note in the midst of all the hype is that it is projected revenues, not actual revenues, that have declined so sharply. Revenue is projected to decline from 303.7 billion in 07-08 to 290.6 billion in 09-10. That's a substantial decline, but nowhere as scary as the headline numbers based on previously projected revenue.

On the expenditure side, expenditure is projected to rise from 280.1 billion in 07-06 (24.8% of GDP) to $375 billion in 12-13 (27% of GDP), with a fiscal (accrual) deficit in that year of 30.3 billion.  Now this actually is a bit scary. By then, the economy is going to be expanding quite rapidly, so the policy focus will have to shift in the opposite direction towards reducing the budget stimulus effects.

I have written quite often about the difficulties most Governments face in quickly expanding capital spending because of the nature of the lags involved. Because of the nature of those lags, I suggested that capital spend in many countries was likely to be slower than projected and then to bunch together at a time economies had in fact begun to turn up. The risk as I saw it was that this plus washing liquidity might then force contractionary measures including rising interest rates.

From a purely Australian perspective, I have argued that our export mix meant that we were likely to see upturn in advance of a number of developed economies. This needed to be taken into account in planning. In simple terms, the window we had to take advantage of expansionary measures was likely to be less.

I haven't looked yet at the economic assumptions underlying the budget. The reporting I have heard suggests sharp downturn, followed by sharp upturn.

My view all along, and I have had to grit my teeth on this one, is that the Australian downturn was likely to be more moderate than allowed for by the Government and many commentators, including some comments from Access Economics.

This remains my view. If I am in any way right, the big economic policy challenge in the not too far distant future is going to be the management of current spend to accommodate rising capital spend at a time when the economy is once again growing quite rapidly.

I will comment in more detail once I have time to read the budget papers properly.

Economic Outlook - Early May 2009

Another long delay in posting. I have just been too busy, but I do need to post because this blog is partly my journal of record.

In a short post yesterday on my personal blog, Mr Rudd's budget deficit, I expressed some concern about the forecast size of the Australian budget deficit, setting this in the context of some of my previous views. In this post, I want to stand back a little and just muse about future economic directions.

My main reading time - I call it train reading - is travelling to or from work. Just at present much of this has been focused on local history. I am trying to make real progress on my long held dream of writing a full history of Australia's New England.  This has been a personal target for a very long time, and I am beginning to feel that if I don't complete it now I never will.

In the midst of my local history I took a break to read Robert L Heilbroners' The Worldly Philosophers:The Lives, Times and Ideas of Great Economic Thinkers (Touchstone, New York, revised seventh edition, 1999). I enjoyed this book. He really writes well. But it also reminded me how much economics is a creature of its time.

One of my key points in thinking about Australian economic policy is a simple one. Australia is too small to affect the global economy in any real way. We can only mange our response to global changes. I am wondering a little if the Australian Government has this sufficiently in mind.

During the week an Australian economist, I think it was Barry Hughes but only saw the reference in passing, made the very sensible point that we should not conflate output and sales.

The savage downturn in global production means that inventories, stocks, have been falling. This could only go so far before production started to turn up to meet base demand. I think that this is now happening, hence the many references to green shoots. However, this does not mean that sales are or will increase. We may, and this is the link to Helbroner, simply move to a lower equilibrium level.

The various global stimulation measures are intended not just to ease the downturn, but also to prevent the lower equilibrium by increasing sales, thus starting a real recovery. Frankly, I am coming to fear that we would have been better off letting the downturn bite and then inflating. I say this because the size of the stimulus packages is likely to leave many Governments' greatly enfeebled. The risk is a return to the 1970s.

Since September the Australian economy has performed much as I expected, although both the loss of domestic confidence and the size of the global downturn has been greater than I expected.

I said from the beginning that the key thing that I was watching was Australia's international trading position.

Our balance of trade in goods and services went positive at just the time we needed. We needed this, among other things, to give Government greater room to move.

The value of our currency also declined as just the right time. I thought that this was silly and said so because it did not reflect the fundamentals. Still, it did help from a narrow domestic viewpoint. Since then the Oz dollar has appreciated, if more against the US dollar than the Trade Weighted Index. The second is important because it is a broader measure.

The balance of trade in goods and services for March actually showed a further strengthening.

I was trying to explain to a friend why this was important. Like the US, Australia was living above its means. This was reflected in low savings and a deficit on the current account.

You can see this in the attached graph from the Australian Bureau of Statistics. back in 2007 we were in deep deficit. Had this continued, the adjustment impact of the downturn on Australia would have been very harsh.

The change in performance since then has been quite remarkable. Yes, the mineral boom helped, and we are being affected as existing contracts near their end. But we still have a real buffer.

We have in fact done a fair bit better than I expected. One of my concerns was that Government stimulus measures would spin over into deficit on the trade account. So far we have avoided this, in part because of an increase on exports of agricultural products. In global terms, this is a very good performance.

Now look at the next graph. This shows volume retail sales expressed in trend terms on a quarterly basis. Remarkable, isn't it, given the global downturn? You wouldn't know from this graph that Australia was in quite a deep downturn. You can see why I was worried about the trade figures in the context of the stimulus measures.

What is likely to happen now?

I have an absolutely dreadful forecasting. Based on savings rates and asset prices I forecast the latest downturn two years before it happened! Still, what can we say?

My feeling is that the global recession is bottoming because of the production/inventory cycle. So we are then going to see an up-tick in purchases and production. What happens then depends upon other things.

There is a fair bit of surplus capacity around, so this upturn will not immediately translate into sustained growth. However, there is a lot of Government capital spend starting to come on line. This will push demand.

This is where my thinking gets very unclear. I need to think some more!         

Management Perspectives - most popular posts 5

It has been several months since L last looked at the most popular posts on this blog.

Among my last 100 visitors, the most popular posts have been:

• Australian Government's new stimulus package has been by far the most popular post, scoring no less than 44% of visits. This was also the most popular post in November when I did my last check.
• The Importance of Demography and Demographic Change - update again came number two.
• Number three was Common Management Problems Series 1 - managing up. Nice to know that this one is still getting hits.

There was then a considerable gap, followed by five equal posts:

• The Balance of Payments, Australia and the sub-prime crisis
• Recession and the importance of fixed costs
• Economic implications of the Australian Government's Nation Building package
• The economics of the Rudd Government's $A42 billion stimulus package
• On-ground effects of the Australian Government's stimulation packages - March 2009

Interesting that only one of the many management posts I have written has been in the top group.

More Australian economic statistics - home finance, retail sales and employment data

On 8 April the Australian Bureau of Statistics released estimates of Australian housing finance for February 2009. The value of dwelling commitments rose by 1.7% in trend terms, 1.3% seasonally adjusted.

There was a fall in finance for investment properties, but this was more than offset by a solid rise in finance for owner occupied housing.

The influence of the first home buyers grant was clearly evident in the numbers. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments increased from 26.5% in January 2009 to 26.9% in February 2009, the highest proportion since the series commenced in 1991.

This fits with what I said in On-ground effects of the Australian Government's stimulation packages - March 2009, referring to the mini-boom in house prices at the lower end of the market.

An important feature of the statistics was a solid increase in the number of loans for both new construction and the purchase of newly constructed homes.

The graph from ABS shows the value of new dwelling commitments. The significant decline as the economy turned down in the first part of 2008 has been replaced by a clear upward trend.

This trend is likely to continue until the end of June when the extra home buyers grant comes to an end.

I did not comment on the February retail sales figures. These were released on 1 April and showed a drop of 2% in seasonally adjusted terms. This was to be expected after the big increase flowing from the stimulus package cash payments.

The ABS release included a fascinating graph that drew this out in a rather dramatic way.

The graph on the right shows retail sales. You can clearly see the big increase in December, with the effect then tailing away.

There is still debate in Australia about the value of the stimulus package because so much went into savings. To my mind, that is no bad thing.

Cheques from the next stimulus package are now in the mail, so to speak, with payments appearing in people's bank accounts. I don't expect this to have the same impact, in part because of the constant gloom reporting.

During the week the Australian Reserve Bank reduced the cash rate by a further 25 basis points to 3%. I had hoped that they would not.

Just at present reductions in official rates are not very effective because of a widening gap between the official rates and the banks' cost of funds, so official rate cuts are not necessarily passed on. Further, to my mind there is a strong case for greater stability in policy making. Governments including the Australian Government are a bit all over the place, driven by the latest data.

Finally on the statistics' front, the latest Australian employment statistics were released yesterday. As might have been expected, they showed some deterioration in employment conditions, with the unemployment rate in seasonally adjusted terms increasing from 5.2 to 5.7%. The participation rate remained the same, with a small increase in part time work more than offset by a fall in full time employment. 

I don't pay much attention to the monthly work force statistics because they are a lagging indicator. Certainly we still have some distance to go before we reach the levels set by the 1991 recession when unemployment peaked at over 10%.       

A further meander through recent economic developments April 09 - engineering construction, short term visitor movements

It is remarkably difficult at present to stand aside from the constant stream of comment and ever changing forecasts about the state of the economy. I try to adopt a longer term approach, but its quite hard.

I do wonder about the constantly updated national and international economic forecasts. Apart from anything else, there is always an optimism/pessimism problem. The forecasts have also become a factor in their own right because of the way they feed into expectations.

To start with a somewhat random update on the latest official statistics.

The value of Australian engineering construction activity for the December quarter 08 showed continued strong growth in both trend and seasonally adjusted terms, up more than 5% from the quarter before, well over 20% from the previous December quarter.

However, the value of work commenced in the December quarter at $A18.7 billion was down 17.5% from the September quarter 08.

The attached graph from the ABS shows trend estimates. You can see the way in which the long mining boom drove private sector activity. Now that has gone into reverse.

The thing to watch with these numbers is public sector activity.

Actions by Australian Governments to step up investment spend have still to flow through into increased activity. Government spend is up significantly in year on year terms - +24.3% in trend terms, just a little less than the private sector increase - but most of the measures are still in the final planning stages. There is likely to be a gap between the end of the private sector investment boom and further increases in Government activity.

The February statistics for short term overseas arrivals and departures were interesting. These figures are very variable, but do provide hints as ro activity.

In terms of arrivals, the side graph shows how short term visitor numbers have increased since October 2008 in both seasonally adjusted and trend terms and are now around the level they were in February 08.

Within the aggregate numbers, there have been very large falls in the number of Japanese and Korean visitors, about what you would expect given the economic position in both countries. However, these have been offset by a range of smaller increases including Chinese visitors.

The position is very different if we look at short term departures from Australia. If you look at the ABS graph here, you can see the drop in numbers over the second half of 2008. More Australians have chosen to stay at home.

In combination, there has been a fall in international movements. This is generally attributed to the international downturn. However, the numbers suggest that it is as much Australians' reaction to the downturn, rather than the downturn itself that, that has caused the fall.      

I am out of time this morning. I will continue my meander in my next post.

A first meander through recent economic developments

The twists and turns associated with the global economic crisis remain fascinating. Perhaps the most interesting thing beyond the economics itself are all the by-plays and sometimes unexpected side-effects.    

This post is simply a meander through some of the things that I have noticed or that have amused me. As a meander, it's probably going to be a bit disconnected. Still, I hope that it will be of some interest.

In On-ground effects of the Australian Government's stimulation packages - March 2009, I noted the market impact of the increased first home-buyers grant on house prices at a regional level.  In an interesting article in today's Sydney Morning Herald, First-home rush keeps prices on boil, Elicia Murray, Ellie Harvey and Josephine Tovey report on similar effects in Australia's largest metropolitan marketplace.

Apart from continuing the apparent disconnect between Australian and broader global developments, this must be one of the few places in the world presently experiencing a mini-real estate boom, the current situation poses an interesting challenge to the Federal Government. Will the Government be forced to continue the measure beyond 1 July?

Like a fair few commentators, I expressed reservations when this measure was announced. The original introduction of the first home-buyers grant had a somewhat similar market impact - prices at the lower end of the market rose sharply and then stabilised at a higher level that took the grant into account. The effects were actually quite distorting, arguably disadvantaging lower income renters in particular.

This time the extra grant on the purchase of existing houses is time limited. The Government obviously hoped that this would stabilise house prices at a time when world news was dominated by crashes in asset prices. It may have got more than it bargained for. Economics 101 suggests that the present mini-bubble is likely to be followed by falls in house prices once the additional stimulus is withdrawn.

The case illustrates the difficulty Governments' face in crafting integrated measures in the face of lags and uncertainties.

Before going on, the Australian Government has created a web site to promote its economic stimulus package. Unfortunately it does not cover all the measures, so the best way to check back-details remains the Media Hub on the Prime Minister's web site.

The increased first home buyer arrangements were announced last October as part of the Economic Security Strategy. At the time, the focus was on an immediate response to the global financial crisis; the scale of the effects on the real economy were not then clear. Then as the crisis unfolded, a stream of new measures were announced.

The Government hoped that the various measures would work in an integrated way, cushioning the economy against immediate effects while allowing time for longer term measures to come into play.

It hasn't quite work this way. The flow-through into the Australian economy of the downturn was faster than expected. Then, for reasons that I have written about at length, the longer term measures have taken far longer to implement than the Government originally allowed.

The end result has been something of a disconnect between the measures. In this, the increased first home-buyers grant has actually become a bit of an orphan measure.

It addressed a problem (possible collapse in Australian asset prices) that, in retrospect, was not as great as the Government feared. Further, economic movements together with lags in other measures means that the impact of the end of the increased grant may stand out like a sore thumb.

There is another issue here.

The opposition's attacks on the Government's economic measures have centred especially on the increased debt burden that will remain as a legacy and have to be dealt with. While there is some truth in this, there is actually a much more significant problem that has already started to bite.

There was a very interesting article, unfortunately I did not keep the reference so cannot give proper credit, pointing to the impact of the various Australian Government treasury and finance departments. I thought that it was a very good article because it made a point that I had not thought about, but which rang very true from my own experience.

The point was a simple one. The various treasury departments accept short term deficits so long as the budget remains in balance in the long term, taking projected growth rates into account. Sounds simple, I can hear Australian readers saying Dur!, but it has important behavioural implications.

Quite simply, the knives are already out looking for places to cut spending to ensure budgets come back into balance. Here the current crisis provides an opportunity to do some pruning of things that would otherwise prove politically impossible.

We can see this in Treasury Secretary Ken Henry's speech yesterday foreshadowing changes to the welfare system. Among other things, the Sydney Morning Herald report states:

 Dr Henry told a conference in Sydney yesterday that the pension and the public housing system discouraged people from joining the workforce.

Dr Henry is right, although the dynamics involved are beyond the scope of this post.

Accepting that I am taking Dr Henry out of context, he was speaking about reforms of the tax system, my point remains that the current situation provides an opportunity to introduce otherwise unpalatable changes.

There is, I think, a popular feeling that the current economic crisis provides an opportunity, indeed need, to spend. My point has always been that we need to spend wisely to minimise the loss of other opportunities a little down track.

One thing that has surprised me in recent economic developments has been not just the speed of transmission between countries, but more importantly the scale of the decline in certain activities.

The decline in car sales round the world, for example, has been far greater than could be justified on the simple indicators. We are dealing with a crisis driven by a consumer strike. In micro-economic terms, demand curves have shifted.

The Australian trade figures released during the week can only be described as quite remarkable.

Focusing first on imports, in February imports fell by one per cent in seasonally adjusted terms, two per cent in trend terms. Yes, Australian consumers too have partially joined the consumer strike (imports of consumption goods were down 13%), but this was largely offset by increases in other areas.

Think about it for a moment.

Around the world, imports have collapsed, mirrored by collapsed exports. In Australia, and as shown by the attached graph, imports are down, but not by all that much.

Turning to exports, in trend terms our exports were down by just 2%, up 4% in seasonally adjusted terms.

Australia's good trade performance was driven in part by a big increase in gold exports. However, Australia's rural exports also rose by no less than 6%. This is mirrored in New Zealand, I do not have the link, where agricultural exports also showed improved performance.

Very early, I focused on Australia's international trade position as the single most important determinant in the country's ability to ride out the global economic storm. Here I suggested that Australia's trade position had turned round at just the time required to help through the downturn.

If we now look at the overall position, and taking into account major adjustments to previous estimates that make the detailed changes a little difficult to interpret,  the ABS graph of the balance of trade on goods and services shows just how well Australia has done. 

Reflecting Australia's trade performance, the Australian dollar has risen from a bottom of 57 cents US to 70 cents US.

I thought that 57 cents was absurd taking the fundamentals into account, although it gave the country a rather nice buffer. Seventy cents? Mmm, here I am less confident.

I am in the business of explanation, not forecasting. The next crunch point will come with the ending of current export contracts for some key commodities this month. This is the point at which the Access Economics doomsday scenario is meant to come into play.

I can't really comment without detailed checking of the figures. That said, at this point my feeling is that Australia's trade performance has given us a very real cushion. A $5 billion monthly deterioration, a huge change, will now simply take us back to where we were in the early part of 2008.

Australia remains the lucky country.

I am out of time.

I had intended to finish by discussing some of the shifts in the global economic tectonic plates, but this will have to wait.