Management Perspectives

Management Perspectives merges with Managing the Professional Services Firm

2011-02-17T17:51:00.000+11:00

I have been mulling over how best to maintain my professional blogging. I have found it increasingly difficult to maintain two professional blogs with any semblance of regular posting.

After a lot of thought, I have decided to merge this blog with Managing the Professional Services Firm.

The two blogs were intended to serve two different purposes, one a specialist blog, this one with a broader management and economics focus. Given that I can't do both, I have decided to broaden my professional services blog. I hope that this will add interest without completely losing the professional services focus.
Feel free to visit.

Problems with maintenance

2011-02-15T17:37:00.000+11:00

I had hoped that Paul Barratt as a former head of the Australian Department of Defence would comment on this one. However, while he has tweeted on it, he has so far not said anything substantive.

The Australian Navy faces a problem, quite a large one. Maintenance on its main transport ships was so neglected that it is now too expensive to fix them, so that they have to be taken out of service. While the Minister is, rightly, blaming the Defence organisation, the Navy's problems are a symptom of a bigger issue.

Let me illustrate with two Australian examples.

When funds for social housing were reduced, Housing NSW diverted funds from maintenance to new supply. That was fine, it maintained its performance measures for new housing stock. Then, suddenly, the maintenance backlog go so large and so urgent that the Department had to seek special funding.

Or take the University of New England. There funding cut-backs led the University to divert money from building maintenance to other activities. The university now faces a a huge bill for back maintenance for its residential colleges that it has no way of funding.

These are public sector examples, but I am sure that you can think of private sector equivalents. The electricity industry comes to mind.

As managers at whatever level, we all face immediate short term performance demands. We also face budget constraints and cut backs. The problem with periodic maintenance is that is is one of those areas that is easy to cut back, to defer to meet an immediate need. Gain now, pay later.

I mention this one now because it seems to have become something of a pattern over the last ten years.

Changing hats and looking at it from the perspective of an investor whether private or business, it creates another uncertainty in judging immediate business performance that has to be properly investigated.

Google targets Australian web service providers

2010-12-03T16:46:00.000+11:00

I see from IT Wire that Google Australia is offering free training in its products and free AdWords advertising to companies and individuals that offer web services to SMBs in a bid to get them promoting Google's offerings to their customers. I quote:

In a blog posting, product marketing manager, Richard Flanagan, said: "If you're a webmaster, digital agency, freelancer, IT consultant, or provide any other web services to Australian small businesses, you can apply to join the program starting today.

I am a bit surprised that Google hasn't tried this before. The web has become a very crowded place. While Google dominates the search marketplace in Australia, the range of competitor offerings on different platforms grows all the time. Facebook is an obvious example.

Back in January 2008 in Google's growing market share I made a passing reference to Google's business model, including the way that Ad Sense arrangements provided a pool of working capital. I have a strong feeling that Google's revenue from Ad Sense has been under a degree of pressure.

Blog performance November 2010

2010-12-01T16:04:00.000+11:00

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of November.

Over the last month, the most popular posts were:

The Importance of Demography and Demographic Change - update 84 page views
Slow posting 39 page views
Economic implications of the Australian Government's Nation Building package 27 page views
Hilary Clinton and web 2.0 24 page views
Digital Intelligence 20 page views
Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 18 page views
Common Management Problems Series 1 - managing up 16 page views
A thought for Andrew Laming 14 page views
A continued apology for slow posting 14 page views
Paul Kelly's The Hawke Ascendancy 14 page views

A thought for Andrew Laming

2010-11-29T15:03:00.001+11:00

Andrew Laming is the LNP member for Bowman in the Australian Parliament. Checking my stats, I found a visitor from Andrew's site. Checking, I found that Andrew had listed one of my posts, The Rudd Stimulus Package - Andrew Laming's view, under the In the Press segment on his web site.

I was very pleased. Let me explain why.

Back in February 2009, More economics 101 - the economics of Malcolm Turnbull looked at the differing economic approaches of the Rudd Government and the opposition. I said then that I was not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

This post drew a long and thoughtful comment from Andrew, so thoughtful that I actually turned it into a guest post without inserting my own views. This was the post listed above. Andrew then, rightfully, included it in his In the Press segment.

Now from my experience it is fairly unusual for a politician to treat a blog post sufficiently seriously to engage in discussion. As a blogger, I am obviously pleased. However, I also have a thought for Mr Laming.

He clearly has ideas. He is also prepared to support individual causes such as home birth. I wonder whether it might not be worth his while to do more writing.

I wonder whether Mr Laming is aware of the case of the NSW Parliamentarian Davis (Bill) Hughes. First as a back bencher and then as Leader of the NSW Country Party, he found it a little difficult to get publicity in the Sydney media. However, he did not respond with a multiplicity of press releases of that short form we love so well. Instead, he focused on more substantive material.

He did not get immediate publicity, indeed he wasn't seeking it. What he did do, was build a reputation with journalists as a thoughtful man who actually had something to say.

Later, when he wanted publicity he got it because he had built a reputation.

Just a thought.

Australia capex stats September 2010

2010-11-26T11:45:00.001+11:00

Yesterday the Australian Bureau of Statistics released Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2010.

This graph shows volume estimates. You can see how the numbers climbed and then dropped, only to recover.

On the surface, the expectations data also shows strength.

The release includes a range of other information that I am currently working through. However, to cut straight to the chase.

On the surface, the numbers are good. However, the growth appears to be driven pretty much just by WA.

More later.

State of the Blogosphere 2010 a note

2010-11-13T14:01:00.000+11:00

Just a short note so that I can delete the email and not lose the link.

Technorati has release its annual survey of the blogosphere, in this case State of the Blogosphere 2010. From a quick scan, the survey's results contains a range of interesting material.

Paul Kelly's The Hawke Ascendancy

2010-11-11T18:17:00.001+11:00

I use the term train reading to describe the reading I do travelling to and from work. This applies even where the travelling is by bus!

The thing about my train reading is that, quite consciously, I use it as an opportunity to read things that I might not otherwise look at. Inevitably, this translates into a series of posts under the train reading banner.

My present train reading is Paul Kelly's The Hawke Ascendancy: A definitive account of its origins and climax 1972-1983 (Allen & Unwin, Crows Nest, paper back edition, 2008). I originally bought this book as a present for my wife because I knew that she would be interested; she worked as one of the advisors to Minister John Button, a key player in the events of the time.

Originally published in 1984, the book itself is a gripping account of the rise to power of Bob Hawke as leader of the Australian Labor Party and then, from March 1983, as Australian Prime Minister. It is also the story of the rivalry of three men: Hawke, Liberal leader and PM Malcolm Fraser and Bill Hayden, leader of the Labor Party before Mr Hawke. I found the book especially interesting because it is entwined with elements of my own life, providing a very personal perspective.

I will write about some of the personal elements in due course in a post on my personal blog. Here I want to deal briefly with two professional elements: the way in which our differing positions affect our perceptions, along with the rise of professional campaigning and what it means.

I have spoken before about the way our position in an organisation affects our views.

For the individual manager, I have emphasised the need to manage up and sideways as well as down. In so doing, I have also emphasised the need to understand the perception from the other side.

For the senior manager, I have emphasised the need to recognise that their perception of the world is almost certainly not shared, or shared only in part, by their staff. They actually need to know what their people think, not just assume.

How does this fit with Paul Kelly's book? Well, for part of the time I was a player in events.

In 1976, for example, I was an acting branch head in the Commonwealth Treasury when Malcolm Fraser decided to split the Department into two. In my acting role, I attended the last drinks put on by Secretary Sir Frederick Wheeler for senior staff of the combined department. I still remember Sir Frederick's distress and anger.

Later I was Assistant Secretary Economic Analysis in the Department of Industry and Commerce. Here my role was to act as a sort of Treasury in Exile for our Minister Sir Philip Lynch, a former treasurer who still wished to play an economic policy role. When Paul Kelly talks about the mining boom of 1980 and the way it affected policy, I was there as one of the official players.

By contrast, at other times I was a mere external observer, back at University undertaking post grad studies. Here I saw events from afar.

Reading the book, I realised just how little I knew of certain developments, but was also struck by the way my varying positions affected my perceptions of the time.

I have also written a fair bit on organisational change, most recently in Scoping the decline in organisational performance. As part of this, I have looked at the professionalisation of politics, and the way that this has adversely affected public policy. Many of these posts have been on my personal blog where I can be more opinionated, less objective.

As I write, NSW Parliamentarian Joe Tripodi has announced his intention to resign. Mr Tripodi is a NSW Labor numbers' man, part of the group that has effectively controlled the party and has led it to almost terminal decline. He is, in fact, the fifteenth NSW Labor Party Parliamentarian to announce retirement in recent months. Everybody knows that this Government will go in next March's elections, but the scale of retirements is still staggering.

In his book, Paul Kelly reports approvingly of the strength and professionalism of the NSW right. He also reveals clearly the way in which opinion polls plus qualitative research including focus groups affected policy and approaches. Mr Hawke became leader because polls showed that he had the best chance of winning.

Reading the book, I was struck not by the rise of professionalism in politics, but by the way each of the key protagonists had different views and values.

Each was an ambitious man, each wanted to win, but their views and values affected their approach. Professional political approaches including market research set a context, but the outcomes were determined by the interaction between individuals and the market research. This is very different from an environment where the market research itself comes to set, to control, the political and policy agenda.

I will finish here. I know that I will have more to say later.

Hilary Clinton and web 2.0

2010-11-07T09:24:00.001+11:00

A short post to record something for later reference.

Over at Club Troppo, Nick Gruen has long been banging the drum for web 2.0 as a way of making more Government information available and in a more useable form. For reasons that I will discuss in a later post, I think that the work done by enthusiasts such as Nick is very important.

At this point, I simply want to note that that Danielle Cave's post on the Lowy Institute blog, Chasing Hillary Clinton, provides an interesting example of the use of various web tools for political and public policy purposes.

Digital Intelligence

2010-11-06T08:17:00.001+11:00

Last month Thomas, one of my blogging colleagues, discussed in The future the possibility of doing a PhD on digital intelligence. Thomas wrote:

Howard Gardner’s multiple intelligences theory has always had me interested and somewhat of a believer. I certainly believe in the essence of the theory as he wrote it, but I feel that the theory has been abused and diluted and manipulated in wrong ways over the past few years (having read research about it for the past 6 years). But, yes, I do subscribe (as many probably do) with the notion of different intelligences.

What I would like to investigate is whether with this massive explosion in technology in people’s (see; children’s) lives, is there a new branch of the ‘intelligences’ that Gardner came upon emerging that we could term ‘digital intelligence’? That is to say, are people now developing new and distinct ways to comprehend technology, the new ways technology is creating and presenting information, and the way the digital world works?

For those who don't know Thomas, he is just completing an honours degree in education at the University of Sydney. I promised to provide a comment.

Much of the focus on the application of computing and communications technology in the classroom or in business has been on ways to better use the technology. I say computing and communications technology rather than just digital because the focus appeared well before the internet.

You can see this focus in the various Australian school curricula. There acquisition of various types of computing skills, the use of technology to do things, is built into every subject and every stage. You can also see it in teacher's blogs such as that of Maximos62 who is an enthusiast about the possibilities opened up by the digital technologies.

The actual impact of the technologies on the way that students, and people in general, think is less well understood.

We already know that technology shapes thought in often unseen ways. The rise of the motor vehicle is a classic example. It fundamentally reshaped the structure of life in country, town and city. It also changed the way in which we look at the world. It actually altered our mind settings, imbedding new perceptions of space and time.

We know that computing and communications technology is having similar effects. Indeed, we talk about it all the time. Yet the actual affects on the way we think are not well understood.

The initial stages of the computing and communications revolution focused on the storage, transmission and dissemination of data. Initial applications were business focused. The rise first of the PC and then the internet, added access and presentation to the original focus; the concept of interactivity emerged; the digital world became personal.

There are considerable tensions between the old and the new.

The use of the new computing and communications technologies in organisations, the desire to achieve uniformity and processing efficiency, led to the emergence of what I call command and control organisations. The bounds of individual authority were reduced, replaced by central decision rules and various types of performance measurement. My last post, Scoping the decline in organisational performance, is concerned in part with what I see as the adverse effects of these changes.

The internet and the associated new tools including social networking pose a fundamental challenge to the command and control paradigm because they transfer power from the organisation to the individual. To a degree, organisations including Governments that have used the technology to improve processing efficiency and to assert central control now struggle with changes that threaten that control. You can see this play out in, for example, the debate over internet filtering.

At individual level, people are still coming to grips with just what this new world means not just in terms of the use of the technology itself, but also in the impact of the technology on ways of thinking and acting. The debate over Facebook and privacy is an example.

Whether all this translates to a new type of intelligence, digital intelligence, is open to question. My problem here lies in the use of the word "intelligence". Quite clearly, new ways of thinking and acting are emerging. Quite clearly, people's ability to access and use the new technology varies enormously; the digital divide originally foreshadowed in this country by people like Barry Jones is here. However, does this constitute an "intelligence" in the way referred to by Gardner? It may, but it's also a question of definitions.

To my mind, the more interesting question is the way the technology is actually affecting the way children think. If you look at the debate in this area at present, it seems to be generally problem focused. Cyber bullying is an example. There is, I think, much less focus on changes in structures of thought and of perceptions, on the way this affects learning and behaviour.

This is, of course, a huge topic. It may be that the use of Gardner's concept, a discussion of what constitutes digital intelligence and how we might measure it, is one way in. Whichever way Thomas goes, the topic is an important one.

Scoping the decline in organisational performance

2010-11-04T10:56:00.001+11:00

Sunday Essay - why who signs what is important, a post on my personal blog, discussed two examples of changing approaches to management that I thought had contributed to declines in organisational effectiveness over recent decades. This drew a comment from an old friend and colleague, Winton Bates.

Winton was a senior official with the Industry Assistance Commission/Productivity Commission. There was, he suggested, some improvement in public service management in Australia during the 1980s and early 1990s when there was effective delegation of responsibility to a more appropriate level. Unfortunately, this had not been maintained.

For background purposes, I have repeated the post and the comment below in full. In this post I want to make a few general points and then ask for help.

One of the points about management theories and concepts is that their validity or otherwise finally depends on their practical application. Anybody who has worked for an organisation, or started a new business for that matter, knows this. It is the nuts and bolts, the systems and practices, that finally determine effectiveness.

My continuing discussion about what I perceive to be a decline in organisational effectiveness in the private as well as public sectors rests rests on this point.

So far as the public service is concerned, I think that Winton is right in suggesting that there was some improvement in public service management in Australia during the 1980s, although I would put both the start and end dates earlier than he does. So we had improvement, and then decline.

I am not alone in talking about this perceived decline. Just at present, a considerable number of my older colleagues are are following similar lines, although the reasons given vary. One could argue that we are just getting old, but I think that it's more than that. There is a feeling of general unease, nor is this limited to the public sector, although it seems to be most pronounced there.

This brings me to the help I am seeking.

I would be interested in comments from fellow managers. Do they also perceive a decline? If so, when and why did they first form this view? Here I am especially interested in specifics, actual dated cases or examples, that might allow us to both test the argument and plot the process.

My original post follows:

"As a manager and adviser over a now considerable period, I have worked through a number of different sometimes overlapping management fashions. I think of them in my own mind as authoritarian, delegated, entrepreneurial, corporatised and now command and control.

I mention this because of a conversation last week over lunch during which those present returned to a common theme, a perceived decline in both the efficiency and effectiveness of modern organisations.

Organisation and management always takes place in a social context set by the society or societies within which the organisation works. That context plays an important role in the decline as we see it. However, put that aside. In this short essay, I want to look at just two features internal to organisations themselves.

I asked one of my colleagues, a former senior public servant, at what date he stopped being responsible for pieces of paper going to the Minister. He blinked, and said he always remained responsible. I rephrased the question: at what date when you were a branch head were you first required to get your Division Head's signature on it before you could send a piece of paper to the Minister? He then took the force of the question, and thought that it was around 1992.

A year or so back, I first had cause to do some work inside the NSW Public Service system. I found a multiple signature system on briefing notes, author, manager, branch head, division head, even CEO.

So what do we have? In the period that I was a Commonwealth Public Service branch head or acting division head (1980-1987), I made the decision as to who signed the piece of paper to the Minister. My ability to sign myself was critical to getting things done. By around 1992, my colleague at the same level had lost that ability. By 2008 in NSW you had multiple signatures.

A small thing? Maybe, but let me ask you two questions.

First, on this type of paper, who has final responsibility? I think that the answer has to be the highest signature level appearing. As organisations have become more centralised, more command and control, final responsibility for many decisions has moved up the line. The practical effect is a reduction in flexibility, in the capacity of the organisation to respond quickly to the myriad of changes taking place in the world around.

Secondly, on this type of paper who now has ownership? Ownership is important because it is directly related to another question: who is going to make things happen? No sense of ownership, no drive. The problem with multiple signature systems is that no one in fact may take ownership. At one end of the chain, the nominal originating staff member may feel no ownership because he/she is just a drafter whose words and ideas may have been changed many times. At the other end of the chain, the final signatory is likely to be just too busy to take real ownership.

The second related feature that I want to look at is formal systems of delegation. Delegation systems are very important because they determine who has authority for what. They also provide part of the basis for financial control.

One of the things that I did in the two years I was CEO of the Royal Australian College of Ophthalmologists was to introduce new budget systems along with financial delegations that gave the CEO power to approve things within budget, subject to monthly management reporting. This replaced the previous system where individual expenditure items no matter how small required Finance Committee approval. The net result was a considerable improvement in College efficiency.

I make this point because I am in fact a strong supporter of properly structured systems of delegation. They can really aid efficiency as well as accountability.

One of the things I have noticed over recent years, and this parallels the process I was talking about in regard to who signs what, is an apparent rise in the detail and complexity of formal delegation systems. This gives rise to several problems.

One is simply the time and complexity added to decision and reporting processes. A second is a growing disconnect in some cases between formal statements as to who can approve what and the realities of authority and responsibility in centralised organisations. No matter what the formal delegations say, managers will not approve something where they feel that decisions might conflict with the realities of decision making power within the organisation. They will try to shift it upstairs.

More difficult still are cases are where managers are expected or directed to approve something in their power when the actual and specific decision has been made above them. Most sensible managers will simply protect their backs by documenting the decision/direction, "I approve this because", but it remains an issue and a risk.

One of the practical realities of management is that concepts and theories are always tempered by what actually happens on the ground. My purpose in this essay is to document two practical examples that show why modern organisations may, as I and my colleagues argue, have become less effective."

Winton's comment was:

An excellent post, Jim.

The only point I would like to make is that I think there was some improvement in public service management in Australia during the 1980s and early 1990s. For a period I think we had effective delegation of responsibility to a more appropriate level.

It is unfortunate if that hasn't been maintained.

Perhaps it is in the nature of public sector activities that responsibility tends to drift upwards. The success of the program manager is judged on the basis of vague criteria, including protecting the Minister from criticism. It is a lot easier to hold a manager responsible for decisions when she is responsible for a profit centre within the firm.

Blog Performance October 2010

2010-11-03T17:25:00.001+11:00

With only 27 posts this year and no post since 15 August, this blog has been a real Cinderella. This is reflected in the stats.

The attached graphic shows visitors (yellow) and page views ) yellow plus red) for the year to the end of October.

The slump in numbers is easy to see. Current traffic is all search engine from previous posts.

Over the last month, the most popular posts were:

The Importance of Demography and Demographic Change - update 65 page views
Slow posting 57 page views
Economic implications of the Australian Government's Nation Building package 24 page views
Common Management Problems Series 1 - managing up 19 page views
A continued apology for slow posting 15 page views
Mechanistic Management - the sometimes fallacy of planning 14 page views
Global Demographic Trends - Asia 11 page views
Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction 10 page views
Australian Government's new stimulus package 8 page views
Increase in the New Zealand cash rate 7 page views.

Pettis, China and the nature of structural imbalances

2010-08-19T12:15:00.001+10:00

I have a lot of time for the views of Professor Michael Pettis. However, I am struggling a little with some elements of his analysis: it may be simply a lack of understanding on my part; it may be that we have different perspectives on time horizons; or perhaps a combination. Since I think that the issues are important, I decided to set down my confusions.

Let me start by outlining Professor Pettis's arguments as I understand them. I accept that I may be guilty of gross simplification; readers please correct me.

China has been following an Asian development model. This involves a focus on export led growth combined with a strong focus on capital investment. Consumption is squeezed to fund capital investment. The outcome in the Chinese case has been rapid growth combined with large export surpluses.

All this sounds pretty good, but there are problems. With time, structural imbalances emerge in the economy. Both capital investment and export activities are effectively subsidised from other parts of the economy. With time, these subsidies become more difficult to maintain: real returns on capital investment fall and may in fact become negative; investment and exports become so large relative to the rest of the economy that simple maths make it increasingly difficult to maintain the process; exports themselves become a problem.

By definition, trade surpluses in one country have to be matched by deficits elsewhere. When a country is small, this is not a problem. However, when the volume of exports and the consequent surplus becomes large relative to the size of world trade, surpluses are harder to maintain. In the Chinese case, the very large Chinese surpluses are especially matched with US trade deficits. The Chinese surpluses on the current account then flow into the US on the capital side; China effectively funds US consumption.

The logical answer to the growing structural imbalances is an expansion in Chinese consumption, thus increasing the size of the consumption share of the economy and of imports. The Chinese surplus declines, as do deficits in other countries. However, the sheer size of the structural imbalances makes this difficult to achieve. It is easier in political terms to continue with current policies even though this creates a growing risk of disaster.

Other factors are involved as well. One is the high Chinese savings rate, itself a mirror image of the investment process.

Accepting that my analysis of Professor Pettis' views may be simplistic , the confusion that I have links to the nature of the adjustment process. It is not clear to me that a simple expansion in consumption is the answer.

There are, I think, two very different sets of issues involved. One is the the nature of the structural imbalances that have emerged in the Chinese economy, the second the trade adjustment process. Let's leave aside the structural imbalances in the Chinese economy, focusing instead just on the trade adjustment process.

On the capital side, and as happened with the UK in the nineteenth century when it had a major funds surplus, I would expect long term Chinese overseas investment to rise. This means that an increased proportion of Chinese funds would be invested in specific off-shore activities rather than US denominated securities. This investment will lead to increased economic activity in other countries that will, of itself, affect trade flows. Those countries will buy more international goods and services as a consequence.

On the current side, and again as happened with the UK in the nineteenth century, rising Chinese living standards will lead to increased consumption. However, there is a scale and timing issue here. The sheer scale of the economic transformation including urbanisation taking place in China dwarfs anything seen before. I haven't attempted to run any rough numbers, but if you add an extra 400 million urban dwellers to a regular % increase in Chinese consumption associated with rising living standards, then you get some very large numbers indeed in the medium term.

This process may not shift the ratio between consumption and investment as usually measured as much as might be expected simply because so much capital investment is required. However, it will certainly lead to shifts in the trade balances. My feeling is that current Chinese surpluses may be more ephemeral than people currently realise.

None of this says that the short to medium term impact of structural imbalances in the Chinese economy is not important. I just think, and I am sure that Professor would agree, that we need to look at all the factors involved.

Cloud computing, risks and returns

2010-07-10T11:40:00.001+10:00

I have watched the growth in cloud computing with interest. Wikipedia defines cloud computing this way:

Cloud Computing is Internet-based computing, whereby shared resources, software, and information are provided to computers and other devices on demand, like the electricity grid.

The ideas behind cloud computing are not new. What is new is simply the question of scale facilitated by technological and market change.

Despite the growth, I was interested to see an article by Gordon Peters on IT Wire suggesting that almost half of Oceania IT professionals say that the risks of cloud computing outweigh the benefits, according to the first ISACA Oceania IT Risk/Reward Barometer survey.

ISACA says that CIOs are increasingly interested in cloud computing because of its potential to deliver lower total cost of ownership (TCO), higher return on investment (ROI), increased efficiency and pay-as-you-go services, and that IDC has said that cloud services will outpace traditional IT spending over the next five years, representing approximately $51 billion by 2013.

“Yet IT professionals see risks in entrusting information assets to the cloud,” according ISACA which recently surveyed 218 Australia and New Zealand-based IT professionals who are members of the global, non-profit professional association.

I can understand the cautions, but also think the short to medium term economic benefits will continue to drive market growth. What we all do if entire systems go down is, however, a bit of a nightmare.

Is Australia's trade position as good as it seems?

2010-07-08T12:33:00.001+10:00

On 6 July 2010 the Australian Bureau of Statistics released the latest Australian trade in international goods and services figures.

You can see from the attached graphic how the balance of trade on goods and services has returned to positive. This was greeted with a degree of glee. However, the results are not as clear cut as that.

A very significant contributor to this result was a rise in non-monetary gold exports. These rose in seasonally adjusted terms by $772m or 66 per cent.

We can compare this with:

an increase in rural exports in seasonally adjusted terms of $235m, up 11%
An increase in exports in seasonally adjusted terms of non-rural goods of $385m, up 2 per cent.

The main components contributing to the rise in seasonally adjusted estimates for non-rural goods were:

coal, coke and briquettes, up $329m (10 per cent)
metal ores and minerals, up $157m (up 3 per cent)
other manufactures, up $52m (up 4 per cent).

If you look at these numbers, you can see just how important gold was.

If we now look at other aspects of trade performance, I have had a particular interest in services, in part because of the importance of Australia's international education sector. I have been monitoring this closely because I expect this to drop by at least a third over the next year.

The adjoining graphic shows just how flat Australia's service exports have been. The country is simply not doing very well here.

While the overall return to surplus on trade in goods and services is welcome at this point in the cycle, it seems to me to be vulnerable.

In do try to adopt a slightly contrary position in my analysis. By this I mean that I like to test common assumptions and views. I am been concerned for a little while that the structure of our trade has been increasing Australia's economic vulnerability. However, detail here is a matter for another post.

Australian employment increases May 2010

2010-06-10T14:35:00.001+10:00

This graph from the Australian Bureau of Statistics shows the increase in Australian employment since May 2090. As a consequence, the Australian unemployment rate as measured by the statistics has dropped to 5.2 per cent.

In a post on my personal blog, Economic clouds gather, I wondered about the sustainability of the current Australian recovery.

I am still wondering. However, for the moment things remain positive.

Employment is generally a lagging indicator. The continued increase in employment should feed into further growth through increased demand.

Increase in the New Zealand cash rate

2010-06-10T14:20:00.001+10:00

The New Zealand Reserve Bank has increased the New Zealand cash rate because of the strengthening of the domestics economy. Of more interest, was the Bank's perception of the economic outlook. This is broadly positive.

Profits, performance measurement and management

2010-05-26T11:27:00.001+10:00

Over on my personal blog, I have had two posts looking at profits (here and here). Here I just wanted to flag a specific point.

My problems with our current focus on profit fits within the concerns that I started to outline in my reforming Australia's public policy series: the combination of focus with systemic rigidities.

Profit is a good thing. No profits, the business goes down, the economy suffers. In any market system, there will be businesses that can't make enough money and will go the wall. That's part of the economic adjustment process. But what happens when a focus on short term profits starts building instabilities into the whole system?

My view is that we are at this point now.

Lessons from the national school build program

2010-05-06T09:54:00.001+10:00

The Australian National Audit Office's report into the operations of the National school build program makes for fascinating reading for someone like me interested in the details of management. While the report does not provide the type of smoking gun that the Australian opposition would have liked, it does provide an insight into the problems created by the Rudd Government policy approach and associated administrative structures and styles.

Although no-one so far has looked at the connections, this is in fact the second report into the operations of what are called National Partnership Agreements. The first came with the release by Indigenous Affairs Minister Jenny Macklin at the end of August 2009 of a report reviewing the initial operations of the $672m Strategic Indigenous Housing and Infrastructure Program. This program became part of the National Partnership Agreement on Remote Indigenous Housing and was intended to deliver 750 new houses by 2013 in Northern Territory remote indigenous communities. My then analysis of the report can be found here.

The ANOA report describes the overarching framework that is meant to guide Commonwealth-State arrangements in these terms:

Delivery of programs that span Commonwealth, state and territory
jurisdictions has been the subject of recent Council of Australian Government
(COAG) reforms. The reforms aimed to enhance public accountability for
service delivery by clarifying roles and responsibilities between levels of
government and improving collaboration. Rather than dictating how things
should be done, the new framework focuses on the achievement of mutually
agreed outputs and outcomes, providing the states and territories with
increased flexibility in the way they deliver services to the Australian people.

National Partnership Agreements are one element in this. These generally involve:

Negotiation between Commonwealth and States of a framework agreement setting out objectives and broad approaches.
Development of an agreed implementation plan setting what will be done and how, along with reporting arrangements on progress.
Both agreements and implementation plans contain provisions for variation.

On the surface, this all seems very sensible. However, problems can arise where:

The Commonwealth as funder actually dictates the detail of what is to be included in the partnership on a like-it or lump-it basis. The problem is compounded where terms dictated ignore regional diversity, with a one size fits all approach. The only thing that the states can do in these cases is to try to negotiate on points of detail.
The Commonwealth essentially dictates what must go into implementation plans. These may include, for example, requirements that require Commonwealth approval of particular and detailed expenditure plans before any action can commence. They may also include a plethora of requirements and sub-objectives.
The Commonwealth is inflexible in implementation.

Problems are compounded because all states and territories have their own rules and accountabilities regarding expenditure that must be complied with, including formal legal requirements. These National Partnerships often involve very large sums of money. The central coordinating agencies in the states and territories are concerned not just with efficiency and probity issues, but also with the management of cash flows.

Very real problems can be created for things such as state budget processes when the timing and scale of payments from the Commonwealth is uncertain. Further, coordinating agencies are concerned about ancillary costs that can arise in implementation that are not covered and which can affect other parts of state budgets.

If we now look at the Northern Territory report into indigenous housing, we find that program delivery there suffered from, among other things, from a multiplicity of sometimes conflicting and unranked objectives with over-complicated decision structures including no less than six decision layers.

Turning to the school building program, the ANAO summarised some of its criticisms this way:

The program design and funding variation process, which is focussed at project/school and ties funding to individual projects within schools, has not allowed the states to manage BER at a program level. The complex and constantly amended funding variation process has not enabled states to readily transfer funds between schools in order to achieve the agreed outcomes. The variation process and adherence to a narrow definition of approved project is considered increased input control, which is at odds with the principles of the IGA (Inter Governmental Agreement) to focus on outcomes.

Without going into the full detail in the report, some of the problems that arose can be summarised this way:

The use of bands based on student numbers to determine project size created inequities between schools at the margin (a shift of a few pupils could have dramatic funding impacts), as well as an incentive to manipulate student numbers.
The way that funding was announced meant that was meant to be a maximum spend per school actually became a target spend.
The requirement that the Commonwealth approve spend on a school-by-school, project-by-project basis, together with over-complicated objectives and reporting requirements, increased administrative load and reduced flexibility. This was further complicated by a ruling that spend below maximum on particular school projects could not be transferred to other projects in the same jurisdiction but must be returned to the Commonwealth. School systems had no flexibility in adjusting spend between schools to achieve maximum value.
Conflict arose between the Commonwealth's approach and the centralised approaches to public education in the various states. This was complicated by Commonwealth rules that created tensions between principals and their state employers.
Budget confusions arose. In preparing costings, the Commonwealth Finance Department worked on the basis that spend would equal 90% of the maximum per school. This was interpreted by the Department as 90% of schools participating. Since the Department's aim was 100% participation, while the maximum spend had actually become target, it quickly became clear that spend would be greater than budget. This led to financial adjustments, including transfer of funds from social housing, to try to keep spend within aggregate budget approvals.
Given the size of the program, variations in Commonwealth payments created cash flow problems in the states. While these were resolved, it cannot have helped state budgeting.
In addition to difficulties associated with transfers of money between school projects, initial Commonwealth inflexibility created on-ground difficulties because of varying on-ground conditions. The intent was that all schools and areas should benefit from stimulus spend and in broadly the same time horizon. However, the actual impact of the downturn was quite variable across Australia, while there were also considerable variations in the available supply of skilled labour.
Not only were reporting requirements overly complicated, but the data provided inevitable contained so many variations and was based on so many assumptions as to be unusable in measuring progress.

I said at the outset that the report was unlikely to provide the type of smoking gun desired by the opposition. Despite building delays of the type I forecast at the time, the report concludes that the program did broadly meet the stimulus objectives. Further, in criticising both the Department and other Commonwealth bodies involved, the ANOA explicitly recognised the size of the program and the difficulties involved. The analysis makes it clear that the Department did try within its limits to be flexible and responsive.

To my mind, and putting aside the inevitable problems always associated with the delivery of such a huge program, the problems that arose were due to the combination of failures in the way the way the program was specified in combination with the broader systemic features such as inflexibility, over-complication, over-specification and over-control that mark the general Rudd Government approach to public policy.

You can see why some of us are so cautious about things such as the Health proposals. Regardless of the general in-principle arguments involved, there has to be a question mark over the likely effectiveness of the proposals in the absence of a change in the Commonwealth Government's approach to public policy and administration.

Puzzles with the Henry Tax Review

2010-05-04T12:52:00.001+10:00

You can find the full Henry Report here. The Government's promotional web site here.

At the moment, we are dealing with two very different things. The first is the Henry review itself, the second with things that the Government has accepted, rejected or left up in the air.

With taxation matters, the devil always lies in the detail. You also have to look very carefully at the language involved.

I simply don't have a view on much of this at the moment. My assessment of the Resource Rent tax as proposed strikes me as a bit gimmicky with a complicated and still unknown pattern of winners and losers. Further, I am not sure that the proposed Commonwealth investment of 40% in new mining infrastructure makes a lot of policy sense.

I am sure that details will change as consultation proceeds. I don't think that the use of the Government bond rate as a benchmark from which to calculate "super profits" is in any way sustainable, ignoring risk among other things.

We can be sure that the various interest groups will pick over the entrails. I will read with interest.

Australian house prices rise further

2010-05-03T15:10:00.001+10:00

While there is anecdotal evidence that the boil may be coming off, the rise in house prices in Australia has been quite remarkable by world standards.

This graph from the Australian Bureau Statistics shows the weighted quarterly average increase in house prices in Australia's capital cities.

You can see how prices came of the boil during the global financial crisis, only to start ramping up again. Average weighted prices in the March quarter 2010 were up no less than 20% from 12 months before.

The biggest increase came in Melbourne (27.7%), followed by Sydney (21%).

According to ABS, both the Melbourne and Sydney increases in the most recent quarter came especially at the high end of the marketplace.

ABS does not give non-metropolitan figures. However, while not rigorous, the numbers I have seen suggest significant rises in regional Australia as well.

Non-tradable's and the Australian CPI

2010-04-28T15:36:00.001+10:00

At 0.9% for the March quarter, 2.9% for the full year, the Consumer Price Index figures released today by the Australian Bureau of statistics were a little higher than forecasters had expected.

One thing that interested me was the difference in price performance between the traded and non-traded sectors.

The tradable component where prices are largely set on the world market makes up around 42% of the CPI basket. Prices here rose by 0.2% in the March quarter, up 1.1% over the year. This compares to 1.4% in the year ending in the December quarter 2009.

By contrast, the non-tradable component (58% of the CPI basket) rose by 1.5% in the March quarter, up 4.2% over the year. The equivalent figure for the year ending in the December quarter 2009 was 2.6%.

As you might expect given Australia's relatively good growth, the price pressures are presently on the non-traded side. This can be expected to continue.

Leaving aside issues associated with the definition of core inflation, the CPI is now very close to the Australian Reserve Bank's target range of 2-3%, above it in some capital cities and in non-tradable goods.

The Bank may or may not raise interest rates at its next meeting, but the raw numbers do suggest that Australia is facing inflationary pressures. The real sleeper is the tradable side since world economic growth is accelerating.

Hawke report into Australia's home insulation program

2010-04-22T16:58:00.001+10:00

One of the problems that the Rudd Government has faced in Australia, one that I have commented on before, is simply that of delivery. In this context, the troubled home insulation program has finally been axed.

The Australian has provided an on-line copy of the Hawke report into the program. The report is worth a browse for those interested in the practical processes involved in program delivery.

Conundrums in the Australian economy

2010-02-17T18:44:00.001+11:00

The release of the minutes of the Reserve Bank Board monetary policy meeting of 2 February 2010 contained no real surprises.

In terms of the economic outlook, the global economy was strengthening, if with some downside risks; underling Australian inflation was declining; while the medium term outlook for the Australian economy was good, the immediate picture was still mixed. In these circumstances, the Board felt under no immediate pressure to shift the official cash rate.

While the minutes are interesting and provide a useful summary of the current economic position, the 16 February speech by the Bank's Guy Debelle (Assistant Governor (Financial Markets)) is far more interesting.

In that speech Guy Debelle discusses the unfolding of the global financial crisis and the Bank's response. Certainly the Bank had a far easier time of it than its overseas counterparts simply because the crisis was less here. However, it also appears that the Bank's operating mechanisms - its experience, policies and processes - proved to be more robust. Crisis it may have been, but it could still be managed.

I found the description quite fascinating.

Looking to the longer term, Debelle made a clear distinction between the financial markets in the major Northern Hemisphere economies and those in Asia. To his mind, To his mind, there was still some distance to go before the effects of the asset bubble (my words) were fully unwound. This was likely to affect the US financial system outside the major banks. By contrast, Asian was expanding faster, while bank balance sheets were better there.

This brings me to the first conundrum in the Australian economy, China.

Reading Michael Pettis, I get the strong impression that Chinese banks are by no means as secure as Guy Debelle's analysis would suggest. The huge expansion in bank credit has been associated with something of an asset bubble, especially in real estate much loved by so many Chinese. The numbers I have seen quoted are staggering.

I just don't feel confident about China.

The second conundrum lies in the Australian data itself. Some economic data is good, some not. What does seem clear, but subject to China, is that a two stream economy is re-emerging again.

Management Perspectives - most popular posts 6

2010-02-15T21:58:00.001+11:00

It is again a number of months since I looked at the most popular posts on this blog. Then the economics posts dominated because of the global downturn.

Looking at the last 100 visits, the most popular post by a considerable margin was Problems with computer lock-in, an economics/management post explaining what I meant by computer lock-in and its implications.

A way behind came two equal posts:

The Importance of Demography and Demographic Change - update, a post from February 2007 now badly in need of updating.
Common Management Problems Series 1 - managing up, always a reasonably popular post.

Then came three equal posts, again a bit behind:

In all, a reasonably mixed bag combining economics, management and public policy.

Friday Economics and Management Review 12 Feb 09.

2010-02-12T19:16:00.001+11:00

This post reviews some of the economics, management and professional issues that have interested me over the last week.

The announcement of the opening in Australia of UK law firm (here and here) interested me because of the sheer size of the raid (14 partners) on Australian national firm Clayton Utz. While I don't expect A&O's opening to have the same impact on the Australian marketplace for legal services as some of the breathless commentary would suggest (the story made the front page of Australia's Financial Review, for example, with supporting material later), it is still an interesting development.

I spoke of the troubles affecting Australian environment minister Garrett in Insulation, pressure cookers and Minister Garrett.

While the problems that have arisen in the national home insulation scheme are in fact an example of the type of systemic problems that I have been talking about in current public administration, I am more sympathetic to Minister Garrett than you might expect. The genesis of the trouble lay in the pressure cooker atmosphere of Canberra at the time the scheme was developed, decided and first rolled out, a time when people feared an economic Armageddon.

Just looking at the economic stimulus side of the package, this one pumped money into employment far more quickly than any of us (me included) expected. The very speed of take-up was central to later problems.

Unfortunately, one outcome is likely to be a reinforcement of concerns about risk as opposed to risk management. I still see this as a major impediment to improved management, especially in the fish-bowl world of the public sector.

This links to the post I wrote on Will proposed international bank regulations cost all Australians?.

Most business people are worried about the increasing burden of regulatory compliance. There are two different types of costs here. One are the transaction costs directly associated with compliance. Apart from costs to individual firms, the higher the proportion of national resources tied up in this, the lower the proportion available for directly productive activities. The net result is reduced growth. The second costs are those that flow from distortions to the market place and economic activity more generally.

My problem with the proposed international bank regulations lay in the possibility that they might increase interest rates, while actually increasing sector vulnerability, I accept that this was based on very simple, some may say simplistic, analysis. Still, it at least there is a basis there for further thought.

Monday in Problems with computer lock-in I looked at some of the effects of what I call computer lock-in, the way in which past investment in IT and all the systems based on It could adversely affect economic performance. This discussion was triggered by question on an earlier post by one of my old Commonwealth Public Service colleagues Winton Bates, formerly a senior official with the Australian Productivity Commission.

Winton suggested that I should look at some of the later material on institutional economics for another economic explanation of some of the things that I have been talking about. As I admitted to Winton, I am very out of touch here, but he has given me some leads to follow up to re-educate myself.

One of the points I made about IT and communications technology is the way they could facilitate cost shifting as compared to cost reduction. Your costs go down, but this is actually at the expense of someone else, often the customer. Measured by cash and opportunity costs for all, overall system costs may not fall at all and may even increase.

In the commercial case, this type of cost shifting may yield immediate profits after taking into account any adjustment costs. However, the sustainability of the profit then depends upon customer and competitor response. Where customers make some gain, then they are more likely to accept the costs and frustrations involved.

A related problem is that one set of costs can be seen and measured, the other less so. This can be a significant public policy problem, for in cost shifting associated with the delivery of centralised services you have defined gains to the taxpayer on one side, sometimes hidden if unmeasured costs to taxpayers on the other. The issue is further complicated.

I became interested in the Bellingen Hospital case because I noticed a new Facebook page Tuesday this week. I have been interested for quite some time in the way that different social networking tools can be used and the dynamics associated with them. In this case, an un-official Save Bellingen Hospital Page was started Tuesday morning asking people to say why the Hospital should be saved. By the time I noticed it later that day, it had already gathered over 200 fans.

To provide some background information, Bellingen is a small town on the New South Mid North coast with a population a bit under 3,000. Health authorities are considering closing certain service there requiring people to travel instead to the bigger Coffs Harbour hospital. This is a bit over half an hour away from Bellingen by road.

I know Bellingen quite well, was sympathetic and very interested in the comments. So on Thursday morning I wrote a sympathetic supporting story about it on my New England Australia regional blog, Bellingen organises to save hospital. By this morning, the Facebook page had 812 fans, and I followed up with a second story, Bellingen Hospital, Facebook and the costs to the community, looking at some of the community cost issues.

These are the type of cost issues that are generally not measured. One side effect - and this is not unique to Australia - is the way that service centralisation has in fact had a quite devastating on the economic and social life of many smaller communities.

As I finish, the number of fans on the Save Bellingen Hospital Facebook Page has just reached 1,046.

Australian unemployment falls to 5.3% in January 10

2010-02-11T13:10:00.002+11:00

Figures released today by the Australian Bureau of Statistics show a fall in the Australian seasonally adjusted rate of unemployment to 5.3% on a steady participation rate. Aggregate hours worked also increased slightly.

The numbers suggest a continued strengthening in the Australian economy. The Treasury November forecast of 6¾ peak unemployment that I mentioned yesterday in Australia's financial outlook February 09 sure looks a long way away!

Postscript::

A number of commentators have suggested that aggregate hours worked have fallen, whereas I said they have increased. The reason lies in the difference between the trend numbers (just up) and the seasonally adjusted numbers (down).

Overall, commentators appear to be correct when they suggest that average hours worked had declined slightly (no of jobs worked, aggregate hours much the same).

Will proposed international bank regulations cost all Australians?

2010-02-11T10:55:00.001+11:00

There have been several things that have caught my eye over the last day when it comes to interpreting the economic entrails. This post deals with one.

Jaime Caruana, general manager of the Swiss-based Bank for International Settlements, is reported as saying that Australian banks could not expect to be quarantined from changes taking place across the global system.The thing that really caught my eye is the requirement that mortgage lending be funded using long-term debt.

Now depending on the meaning attached to this, this would actually lead to a fundamental change in Australian banking. Older Australians will remember the Australian savings banks, banks who used generally short term deposits to fund housing. This is actually the Australian pattern.

In system terms, short term funds withdrawn from one bank simply went into another, so there was no system wide risk associated with short term lending. There could, however, be risks for individual institutions that might then translate into system wide risks if everybody tried to store their money under the bed. We saw this in the 1890s' crash and the associated asset bubble.

Now looking at the implications for Australia from the proposed change and working just from first principles. I stand to be corrected, of course, if I get things wrong.

If Bank A cannot use its retail deposits for mortgage activity including housing and has to borrow longer term, then on the surface it will pay more for funds, a cost that will have to be passed on.

Given the banks control over deposits, and excluding international borrowing, Bank A will actually need to access funds held by other banks, say Bank B, directly or indirectly. Bank B also wants to lend for housing, but also cannot use its deposit base. So Bank B will, directly or indirectly, lend Bank A money on a longer term basis, in turn borrowing from Bank A. We have a round robin in which interest rates go up, inter-bank dependency increased.

I accept that this may be simplistic, so please correct me if I have got things wrong.

Australia's financial outlook February 09

2010-02-10T19:08:00.001+11:00

In November 2009 in its mid year estimates, the Australian Treasury was forced to alter its its projections to take into account better than expected economic performance. Even then, Treasury was forecasting that unemployment would still peak at at 6¾ per cent in the June quarter 2010.

Since then, the economy has continued to strengthen. As a consequence, the Australian Government financial statements for December 2009 show a further strengthening in the Government's financial position with expenses lower, revenue higher than expected. That's good.

There were two especially interesting things in all this.

The first was the increasing probability that the Government would run up against the 2% real spending cap far sooner than anyone had expected. As I understand it, once Australian economic growth returns to trend, then the Government has committed to capping increases in real Government spend at 2% to speed the return of the budget to surplus. Given other pressures, this is going to be interesting to say the least!

Quoting Peter Martin from the Sydney Morning Herald:

Speaking to central bankers from around the world gathered to celebrate the Reserve's 50th birthday Happy Birthday RBA), Mr Stevens speculated about how monetary policy should be handled if governments restrained spending to pay off debts, creating a drag on economic growth. ''The straightforward answer is presumably that it would remain more accommodative than otherwise,'' he said.

Apparently in this speech, the RBA's Stevens mused about the problems that might arise should the combination of Government fiscal restraint, low inflation and consequent low interest rates encourage future asset bubbles. Perhaps the RBA should take this into account in setting rates, taking pre-emptive action?

I remember a speech a number of years ago from Australian economist Don Stammer in which he suggested that now we had entered a period of sustained low inflation, we could no longer expect the increased asset values of the past. Ha!

Don's arguments actually made a lot of sense. It was a bit hard to forecast the way in which plentiful liquidity in combination with low interest rates might lead instead to asset bubbles. Mr Stevens' comments make a degree of sense.

Rudd Government's problems with green policies

2010-02-09T09:29:00.001+11:00

Nick Perry had an interesting post on New Matilda, Another Rudd Green Plan Bites The Dust?, that gives some further examples of the type of thing I have been talking about in my reforming Australian public policy series. A post on my personal blog, Education and Australian skilled migration: a policy catastrophe? gives a further example.

Oddly since it is such a big failure, I am a little cautious about arguing that the skilled migration example necessarily supports my case that we have a pattern of systemic failure in Australian public policy and administration. I suppose I say this because as a former senior public service manager, I am not sure that I would have spotted the particular outcome from the 2005 expansion of MODL, the Migration Occupations in Demand List, while I might well have argued for hard responses in dealing with the problem.

To the degree that I might use this example in future, then I will be looking at three things:

the nature of and reasons for the lag in recognising that a major problem was emerging.
the wording of this announcement and the way this affected events.
the extent to which the Government has plans in place to respond to the problems likely to emerge from this decision.

Problems with computer lock-in

2010-02-08T10:02:00.001+11:00

In a piece on my personal blog, Sunday Essay - why it's hard to break out of the box, I said at the end:

If I was asked what was the biggest single impediment to change today I would say the computer.

The adoption of computers and IT more broadly has been one of the greatest causes of economic growth because it allowed existing things to be done more efficiently, new things to be done that could not be done before. Yet, as any IT professional knows, there is a considerable difference between simply computerising existing systems (this will certainly make them more efficient) and the design of completely new systems likely to yield the greatest benefit from the new technology.

I first came across the problem of computer lock-in a number of years ago when facilitating the development of a strategic plan for the Australian subsidiary of a global IT company.

Everybody at the workshop agreed that the company's IT and knowledge management systems no long properly reflected either company needs or the marketplace. Everybody also agreed that the sheer cost of changing the system meant that senior management would not agree. They just had to work around it.

You see, once entrenched, the computer protects what is at the expense of what might be.

In a comment, my old friend and now blogging colleague Winton Bates sought further clarification of just what I meant by computer lock-in. I started to respond by way of comment, and then decided that I should discuss the matter here because it is an important and interesting issue from both a management and economics perspective.

The discussion that follows does not address the claim that I made above that the computer has become the single greatest impediment to change today. My purpose is purely explanatory.

Meaning of Computer Lock-in

By computer lock-in, I simple mean the way in which existing IT systems and approaches can actually impede change, reducing efficiency by locking in past approaches.

This type of lock-in can occur in different ways.

To begin with, lock-in occurs when the cost of making the changes to systems exceeds the costs associated with system dysfunctionality. Lock-in can also occur where computer based standardisation across the organisation impedes organisational flexibility and response. Lock-in may occur or be intensified because of the interaction between systems, decision processes and budget structures. Finally, because systems affect the way we think, the term might also be applied to thought patterns created by or at least maintained by IT systems.

A Simple Amplification

To begin our discussion, cast your mind back into the past and consider computerisation of existing systems.

The processing power of the computer allowed existing systems to be standardised and automated with consequent savings. This helped drive major gains in productivity, leading (among other things) to faster economic growth.

No system is perfect. Needs also change over time.

The computerisation of existing systems may have allowed substantial savings, but it also locked in systems as they stood at a point in time. Administrative and processing systems moved from people to capital intensive. Future changes to processes whether to remove existing weaknesses or to meet changing needs now faced a new cost, the cost of altering IT systems.

Fundamental process re-design had to take into account the write-off of existing investment, as well as new investment costs. This made incremental changes at the edges easier. Where fundamental change did occur, then those changes were locked in in the same way because of the capital and other costs of future change.

A Big Enterprise Example

In the case I was referring to above, a large global IT company, we had a very large, integrated enterprise wide information system that had given the company significant advantage at the time it was introduced. As marketing, production and distribution needs changed over time, the system had been altered at the margin, patched.

At the point in time we are talking about, a growing gap had opened between business needs and system performance. This was recognised. However, the sheer costs involved (cash plus business disruption) in what would be an enterprise wide system replacement made action difficult.

The position was further complicated by the fact that the enterprise, then a household name in computing, had recently been acquired by another, much larger, organisation.

The two enterprise information systems were very different. Both organisations were wrestling as well with just how the two systems might be merged or, at least, interfaced.

Impact on Mergers and Acquisitions

This is actually an example of another lock-in effect, the way in which differing computer systems affect mergers and re-structuring. This one is quite important because system differences have become a significant reason for the failure of mergers to achieve the expected benefits.

To amplify, consider a professional services example, two law firms. Each has different IT systems covering accounts, time keeping and precedent management. Effective merger requires common systems to ensure integration. This comes at a cost, since one single system (new or existing) must be selected. Existing investment must be written off, new investment made, the cost of disruption accommodated.

The sheer size of these costs has been sufficient to prevent some mergers.

Interface with Conventional Economics

In one way, the type of effects that I have dealt with to this point that link to the rise in capital intensity fall within the field of conventional economics, although the focus on physical capital may have made economists initially slow to recognise the rise of capital intensity intensity in the services sector.

Take my law firm example. At one level, this is no different from one box manufacturer taking over another. The box manufacturer faces similar choices in deciding when, if and how to rationalise its expanded production capacity.

I will return later to the issue as to whether IT investment has different effects from other types of investment. For the moment, I simply note that expressed in conventional terms, the new computing and communications technologies shifted the production function to the right. However, now that the IT investment has taken place and in the absence of further technological change, my analysis suggests that returns on future investment will be more akin to moves along the production function rather than shifts in the function. This is part of the reason I have argued that future productivity gains from IT are likely to be lower.

Cost, Benefits and Standardisation

Another example of lock-in arises where costs and benefits are not evenly distributed or perhaps even properly identified.

Consider, for example, a case where a particular unit has a need that is not being met by the existing information system. They have the need and will benefit from the change. However, the cost for any such change must come from another budget bucket, while the proposed change itself must meet standardised enterprise requirements, including the need for protection of the existing network.

Here we have an example where the lock-in effects lie in the need to maintain a degree of central control over systems once established. We can think of these effects along a number of dimensions. I accept that one can argue as to whether these should truly be classified as lock-in effects in the way I am using the term. However, I would argue that we need to consider the effects in combination.

communications: emails provided an enormous initial productivity boost, but the sheer volume of email traffic created storage demands, risk management issues and retention and access issues. This meant that after the initial gains, organisations then faced added costs in managing and maintaining its email systems. There are also continuing problems with the inappropriate substitution of emails for other forms of communication including the telephone, personal contact or simply a hand-written note.
internet and intranet: the increased use of the internet and internal intranets for communication and to access information yielded substantial productivity gains. Like the email, these gains have peaked with the need for rules on use, greater filtering against inappropriate use and network protection adding to complexity and costs.
access and retention: the ever increasing volume of often useless data, along with storage on individual hard drives, has created real problems for access and retention. In extreme cases that I have seen, up to forty different versions of the same document can be found. Just knowing which is the latest version is a problem, let alone the pain of key word searches as the computer chugs away trawling through the mass of material.
protection: the need to protect networks means that all organisations have had to develop rules as to what can be attached to networks and by whom. While necessary, this has its own costs such as delay and support costs, as well as individual frustration.

Cost Shifting vs Cost Reduction

A very particular problem has arisen with IT systems that I call cost shifting.

We all know about things such as call centres that centralise client service. This is actually cost shifting because it reduces the paid time to required to service customers, while increasing the amount of time the customer has to spend accessing the service. Of course there are cases where the customer benefits, but anybody who has spent long times trying to get an answer will know what I mean.

What is less well recognised is that cost shifting is alive and well within organisations from the measurable to the not so easily measurable.

Consider, for example, the replacement of word processor operators by individual authors. This does offer productivity gains. However, for certain types of documents, a word processor operator is far more skilled and can produce a document quicker and at a higher standard than any individual author. The problem here is that the costs of the word processor operator are easily measured in budget terms, the opportunity and quality costs of author production less easy to measure.

Very similar issues arise in other areas such as the substitution of on-line HR kiosks for HR staff. This can be far more efficient. However, it can also result in highly paid managers spending time on tasks that could be done more quickly by a lower paid HR person.

All this is in fact testable. However, and this is the connection to computer lock-in, once the on-line system has been set up, it can be very difficult and expensive to introduce an alternative.

Computer Lock-in and Innovation

All successful organisations depend upon a combination of people who do their ordinary job as well as possible with innovators who bring about change.

There is always a balance issue here. Too many of the first and the organisation will struggle to really improve. Too many of the second, and the organisation may become unstable, unable to deliver efficiently.

The problem with the computer is that it in facilitating standardisation and control it has switched the balance between the two.

Conclusion

Returning now to my point as to whether IT investment has different types of effects to other investments, I would argue that it does because it is just so pervasive.

The nearest equivalent that I can think of is the invention of the production line. Its impact on industrial efficiency was huge, yet it also had costs. The production line is still with us, but has now been part replaced by far more varied production systems in themselves based on computers.

I wonder whether the same thing will happen now with computer based systems themselves. Certainly I feel the current computer lock-in is past its use-by date.

Australian wholesale bank guarantee to be withdrawn from 31 March 10

2010-02-07T20:10:00.001+11:00

A bit over twelve months ago, on 19 January to be precise 2009, I was fulminating over Access Economics dire predictions on the Australian economy. On 5 February I wrote Are all the Australian economic forecasts wrong? I followed this on 23 February with A very odd recession.

My problem at the time lay in the fact that I was struggling to match the economic data with the dire predictions, something that had been worrying me for a little while. I was right, of course.

As the economy turned, Australia was one of the first if not the first major economy to start raising interest rates, full-stopping a sharp shift in economic perceptions. Now the Government has announced the withdrawal of its Guarantee Scheme for Large Deposits and Wholesale Funding to come into effect on 31 March 2010.

Simply put, the Government feels that Australia's banks can now borrow internationally without that support. This would have been inconceivable last February.

The guarantee has been a sweet little income earner. The Government was not required to make any payments, so the $A1.1 million collected from the banks to this point for the guarantee is straight profit. This is expected to rise to $A5.5 million over the life of existing guarantees. This represents a small but useful offset against the total cost of the various stimulus packages.

When I wrote A very odd recession last February I had no idea just how odd a downturn this was going to be. At this point, it is as though the Global Financial Crisis did not exist so far as Australia is concerned.

It would pay Australia not to forget, of course. But for the moment, everybody is enjoying business as usual.

Surprising surprise at the RBA's decision to keep interest rates on hold

2010-02-03T07:15:00.001+11:00

One of the most interesting things about the Reserve Bank's decision to leave Australian official interest rates on hold lay in the way it wrong-footed so many commentators as well as market participants. Pretty much everybody, me included, thought a rise was likely. In fact, so likely that the Australian on-line bookmaker Centrebet had apparently refused to take bets on this month's move for the first time since it started covering Reserve Bank decisions because it said the odds were so skewed towards a rise.

Thinking about it, I'm surprised that we were all so surprised. Here Michael Pascoe had a reflective piece in the Sydney Morning Herald that is worth reading.

By its nature, the RBA operates with a longer term perspective than most commentators or market operators. It has too because of the time lags and uncertainty inevitably attached monetary policy.

The decision by leading Australian banks to raise interest rates by more than the last official rise increased the economic impact of the rate shift. Little has changed in economic terms since the last rise. So a rate hold isn't all that surprising.

I suspect that there may be another issue as well.

The Reserve Bank has been quite clever in managing expectations, something that's important in policy where expectations can be more important than actions. It's dramatic decision to first increase official rates had global impact on economic confidence. Australian opinion certainly swung towards greater confidence in the economic outlook.

Keeping interest rates on hold this time has the useful effect of making market participants a little more cautious when it comes to pre-judging Bank decisions.

Problems with the definition of governance

2010-02-02T10:46:00.001+11:00

Towards the end of my introductory post Problems with the concept of governance I said:

I have a particular personal problem with the way that the concept is now used because I find that in some of my professional roles, project management is an example, it actually interferes with effective service delivery. This leads to great personal frustration.

One of the reasons why governance has become such a difficult concept is that there is, in fact, no agreement on the just what the word means. People use it in many different ways. You can see this if you look at some of the definitions of governance on the Web. You can also see why I say that governance has become conflated in some ways to management, in fact a very different concept.

administration: the persons (or committees or departments etc.) who make up a body for the purpose of administering something; "he claims that the ...
government: the act of governing; exercising authority; "regulations for the governing of state prisons"; "he had considerable experience of government"
wordnetweb.princeton.edu/perl/webwn
In grammar and theoretical linguistics, government refers to the relationship between a word and its dependents. ...
en.wikipedia.org/wiki/Governance_(linguistics)
Governance relates to decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems.
en.wikipedia.org/wiki/Governance
The process, or the power, of governing; government or administration; The specific system by which a political system is ruled; The group of people who make up an administrative body; The state of being governed; Accountability for consistent, cohesive policies, processes and decision rights
en.wiktionary.org/wiki/governance
The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization ...
www.theiia.org/guidance/standards-and-guidance/ippf/standards/full-standards/
Measures put in place in order to ensure smooth functioning and control of a company. Such measures reinforce the importance of transparency of information.
www.alstom.com/_looks/alstomV2/frontofficeScripts/index.php
Means in which the leading authority, often the board of directors in foundations, guides and monitors the values and goals of its organization through policy and procedures.
www.pfc.ca/cms_en/page1112.cfm
In the context of SOA, governance defines the model to ensure optimal reuse of services and enforcement of corporate policies (eg, business design, technical design, and application security).
www.skywaysoftware.com/resources/terminology/
issues related to the involvement of stakeholders - scientists, industry, consumers and public authorities - in the process of innovation policy design, implementation and evaluation
www.et.teiath.gr/tempus/glossary.asp
Governance describes dynamic distribution of power, learning and benefits among firms in a value chain Governance refers to the inter-firm relationships and institutional mechanisms through which non-market co-ordination of activities in the chain is achieved. ...
www.naarm.ernet.in/NAIP/Consortia%20concepts.doc
governance Governance is exercising authority to provide direction and to undertake, coordinate, and regulate activities in support of achieving this direction and desired outcomes. Source: Glossary – Framework for the Management of Information in the Government of Canada
www.tbs-sct.gc.ca/cioscripts/gloss/gloss-alpha_e.asp
is the process of overseeing a work activity at a level higher than direct managerial control. Governance processes provide executives and staff with clarity on stakeholders expectations. ...
www.marketright.co.nz/Site/definitions.aspx
shorthand term for political, social, economic and administrative institutions and policies that affect the supply of public services. ...
194.242.113.59/index.php

If you look at all these definitions, governance is used to refer to both structures and processes. It can be used in a top level sense, or can be cascaded down through the organisation. It can be used in terms of provision of a framework in which decisions are made or the process of making decisions. Or it might include the lot.

From a purely professional viewpoint in the delivery of services to clients or if acting as a manger, if the word governance is used in any of the documentation, then you must clarify just what the word means in that context.

Problems with the concept of governance

2010-01-31T17:36:00.000+11:00

I have been bogged down by a combination of professional pressures with an almost obsessive interest on the Australian Government's My School web site. The main posts here are:

If you look at what I have written, you will see that my main focus beyond understanding the site is on the likely dynamic effects of the changes. There is actually some very muddy thinking here at official levels, similar in some ways to the things that I talked about in my last post, Why Jenny Maklin's standards approach to child welfare is likely to fail.

Turning to other matters, on 12 January Paul Barratt had an interesting post, ASC Board: changes ill-advised. The core of the post deals with the suitability of the new appointments to the Board of the Australian Submarine Corporation.

As a former head of the Australian Defence Department, Paul has a certain expertise in Defence matters. In terms of my own experience with complex technical projects, a board without a core of people with relevant technical expertise does strike me as risky.

In announcing the appointments, Australian Finance Minister Lindsay Tanner stated:

... the appointees bring a range of skills and experience in legal and financial matters to the board, and will enhance the board’s high level of expertise and standards of governance.

The emphasis on governance that now surrounds so many official appointments, statements and processes is actually highly problematic in an organisational sense. Simply put, governance has become confused, conflated, with management, a very different concept.

I was trying to work out the other day when the word came into popular vogue. As best I can remember, it really emerged as a very popular concept after the US Sarbanes–Oxley Act of 2002. I am sure that it was around before then, but that was the time that I first noticed it becoming a popular service area among a range of professional services disciplines.

I have a particular personal problem with the way that the concept is now used because I find that in some of my professional roles, project management is an example, it actually interferes with effective service delivery. This leads to great personal frustration.

I must try to spell this out at some point.

Why Jenny Maklin's standards approach to child welfare is likely to fail

2010-01-22T09:36:00.001+11:00

My heart sank as I read newspaper reports about the latest Federal Government moves on national child welfare standards, more precisely on those living in care. To quote Minister Jenny Macklin:

We need national standards of care so children who cannot live with their families can grow up in a safe, secure environment. National standards will provide a benchmark for the care of these children no matter where in Australia they live.

Before going on, you can find the Minister's press release here, the standards consultation document here, the Australian Institute of Health and Welfare report here.

Why did my heart sink? To my mind, it is yet another policy move doomed to almost certain failure, another example of the weaknesses in Australian public administration that I started to address in a series of post last year. I have not pursued this series as actively as I had intended in part because of time, in part because I became depressed. Now I need to return to the issue.

My argument in the series was a simple one. Current Australian approaches to public administration do not and cannot work. To establish this I had to demonstrate a pattern of systemic failure, to establish the reasons for that failure, and then to suggest alternative approaches. In the first instance, I adopted a case study approach.

In considering the latest Federal moves, I think that we need to begin by recognising two things.

The first is that kids are placed in care because they are experiencing personal problems. These may be behavioural or, more likely, the family circumstances threaten the child in some way. The first and key judgment to be made as to the success or otherwise of the placement is whether or not the kid is in fact better off, more broadly whether the totality of kids in care are better off. The question of how much better off is a further question to be asked once the first is answered.

The second is that all child welfare systems throughout Australia have been experiencing problems. I have written especially on the NSW system. There the loads and expectations placed upon the system by things such as mandatory reporting brought it to the point of collapse. So there is a problem.

The idea that national standards of themselves might bring benefits can be a very slippery one, in part because there is a lot of confusion over the meaning of the word standard.

Of itself, a standard has nothing to do with good or bad. The focus is on fitness for purpose. A standard is designed to achieve uniformity, to ensure that the product or process does a specified set of things or meets a specified set of criteria. So in child welfare terms, a national standard for children in care means specifying a set of things that the child welfare process must deliver for those children in care.

A standard is fixed. It says nothing about the value of alternative standards, nor does it deal with cases that may exceed the standard in some way. It just is, freezing certain things at a point. Here standards often impose costs because they preclude alternatives. The usual justification for a standard is that the benefits from standardisation exceed those costs. This often is, but may not be true.

Compliance costs are one of the of the standard standards' costs. This is especially true for process standards, including the attempt to create management standards. Whole systems have to be set up to enforce the standard. In management standards, this includes process material along with compliance measurement. One of the reasons that the fashion for management standards peaked in the 1990s is that the compliance costs proved to be high, the actual benefits lower than expected.

Against this background, the success or otherwise of a national child welfare standard rests on the assumptions that setting a specified set of things that the child welfare systems across the country must deliver to children in care will deliver a better set of results taking compliance costs into account than an alternative process. This is, in fact, quite uncertain.

Problems begin with the definition of the standard itself, the purpose of the current discussion paper.

Take, as an example, the inclusion in the discussion paper of the need to recognise Aboriginal cultural values. This is very much current public service think.

Those who read this blog will know that I write a lot on Aboriginal issues and policy, including the need to focus on Aboriginal history and the Aborigines as varied peoples. I make this point only because I fear that I am about to get into serious trouble.

Aboriginal children are many times more likely to end up in care than non-Aboriginal kids, reflecting social dislocation within the Aboriginal community. It is, I think, current policy in all jurisdictions that Aboriginal kids are better off placed with Aboriginal families for cultural reasons. This policy has already led to some tragedies and has bound the hands of child welfare workers, forcing them into what they know are second best solutions.

To my mind, the sole issue is whether or not kids at risk would be better off in care. The question of Aboriginal cultural issues is one thing to be considered in the context of this primary aim.

Similar issues arise with so called CALD kids, culturally and linguistically diverse, another example of modern public service speak.

Problems become more intense when we look at the detail of the areas to be addressed by the proposed standards. They simply mix together too many things. They can also conflict. I am not saying that we should not have them - who could argue with regular medical checks? - just that they lack clarity and balance considering the primary aim.

Generalised standards areas then have to be translated into measurable standards. This is usually done via some form of statistical measure. Another set of problems arise.

To begin with, the standards are system wide standards. I have no problem with system standards. However, they generally do not recognise variance within the system, the extent to which the system actually fails individual children. Here a system may meet broad standards yet in fact be failing individual children worse than another, apparently better performing, system. In theory you can set up measures to accommodate this, but the process is reasonably complicated.

Then, too, the measurement of standards performance at national level is strongly influenced by the availability of statistical data. The relationship between the data and the actual on-ground position can be quite uncertain. This is complicated by a further variable, the nature of linkages and relationships between elements within the system.

Consider this as a simple example. One jurisdiction may in fact take a higher proportion of children into care than another jurisdiction. Its stats will show this and may well, depending on the way standards are measured and defined, count as a negative. However, that jurisdiction may also show better performance for children in care than other jurisdictions because the proportion of children with very serious problems is less.

Assuming that all these problems can be overcome, at least two further problems arise.

The first links to the question of compliance costs, including jurisdictional responses to problems as they arise.

The collection and presentation of data to meet national reporting requirements has its own costs. These costs link to the initial definition phase and then to the reporting and compliance stage and are not insignificant. Unfortunately, the data so collected is rarely useful from an operational viewpoint. It is simply too generalised.

The standards and data reporting requirements also twist agency responses to problems as they arise. They impose a need to respond to shortfalls as measured by the standards or indicators involved. These may but need not be linked to key delivery challenges as they stand at the time.

The final problem is simply one of resources. There is no point in setting either standards or targets if the resources are then not available to ensure delivery. Even if the target or standard is in fact achievable, and that is often not the case, it will fail if resources cannot be found. We have seen this happen many times; it is a major reason for policy failure.

While I think that the approach is systemically flawed, I would be more confident if Minister Macklin and her Department had a better record of service delivery. I dealt with one aspect of this in Jenny Macklin and problems in NT indigenous housing.

So what do I expect to happen in all this?

I really hope that I am wrong, but my feeling is that a lot of time and resources are going to be devoted to the standard setting exercise and then to reporting and responding without a single tangible gain where it matters most, improved care for Australian kids.

The importance of crowding out

2010-01-18T07:07:00.001+11:00

Economists generally use the term crowding out to describe the way in which Government spending can reduce private sector activity. However, the term can also be used more broadly to describe the way in which any form of Government support can reduce - crowd out - other activity.

In Australia, the provision of Government guarantees favoured the bigger banks. This support may have been necessary, but the end result was a big bank dominance of the Australian financial system at a level not seen since the 1950s or 1960s. In China, Michael Pettis suggests that one effect of Chinese Government stimulus support was to enhance the position of the SOE (State Owned Enterprise) sector at the expense of small and medium business.

I am phrasing all this in broad terms because crowding out is actually a very useful concept in describing the way in which Government activities that favour one sector or activity can affect other immediately related sectors.

Australian December 09 employment statistics and their implications

2010-01-15T12:19:00.001+11:00

The release yesterday by the Australian Bureau of Statistics of unemployment data for December attracted a fair bit of global attention with the seasonally adjusted unemployment rate down slightly from 5.6% to 5.5%. Mind you, this is still up 0.9% from a year before, but that's still not bad.

These statistics bounce round all the time, so its the trend that's really important. Here the first graph from the ABS shows trend and seasonally adjusted monthly employment data since December 08. You can see how the decline in total employment reversed itself over the second half of 2009.

The second graph shows the movement in the unemployment rate. You can see how the rise in unemployment slowed and then started to decline.

One very interesting statistic is the stability in the participation rate, the proportion of the working age population actually in the workforce. This was the same in December 08 and 09, around 65.2%. Often in times of economic downturn the participation rate falls, thus reducing the apparent rise in the unemployment rate.

The next graph shows total hours worked, all people. The period December 1999 to December 2001 covers the bottom point in the last major economic downturn. This is followed by a steady rise, and then a fall with the latest downturn.

The 1990-1991 downturn coincided with a period of economic restructuring. This was the period of downsizing, restructuring and process re-engineering, a trend that continued into the nineties. This fed into and accelerated the downturn.

This downturn followed a period of significant and growing labour shortages. Many firms tried to preserve staff, reducing working hours rather than total employment. This provided something of a cushion, but was also a wise decision in most cases given the bounce-back in the Australian economy.

Men and women, however, had different experiences.

The next graph shows female hours worked. While the overall pattern is broadly similar, the downturns are less pronounced, while the percentage increase in hours worked over the period from December 1999 is somewhat higher.

By implication, the shifts in male hours worked must have been greater.

The next graph also from ABS shows this quite clearly. The decline in male hours worked in both the 1990-91 and present downturn is far more pronounced.

One sad-side effect of the earlier downturn was that many men who lost their jobs were effectively forced into first long term unemployment and then, in many cases, premature retirement. The effect this time appears less pronounced.

A second side-effect of the last major recession was a very significant increase in long term unemployment among young people. I do not have statistics at present to justify this assertion, my views are based on personal observation, but I believe it to be true. This accelerated a trend towards long term generational unemployment, something that was quite new in Australia.

The effects here of the current downturn are likely to be less pronounced.

Australia retail sales and trade performance, November 2009

2010-01-07T12:39:00.001+11:00

Slowly getting back into it after the break. I hope that those celebrating Christmas had a happy time. May 2010 be a good year for all of us.

This morning the Australian Bureau of Statistics released released Australian retail sales figures for November 2009, up 1.4% in seasonally adjusted terms over the previous month, a very substantial increase.

The graph shows both trend and seasonally adjusted numbers since November 2007.

You can see the impact of the Australian Government's stimulus package in the seasonally adjusted estimates. The trend estimates flatten these out. What global financial crisis you might ask.

The ABS also released the trade figures for November.

My key concern here is the trend. You can see from the attached graph the way in which balance of trade on goods and services went positive when Australia needed it and then declined.

I have been monitoring this trend because I think that Australia's trade performance sets a key constraint on growth.

I was thinking over Christmas about global economic trends. My key concern remains my perception that the economic imbalances that triggered the global economic down turn remain and that, consequently, the recovery is still fragile.

This is before factoring in the effects of climate change.

In saying this, I do not want to get drawn into a debate on climate change. Here, and at the very least, we can say that actions by Governments to address climate change will have economic effects. Further, for planning purposes we at least need to consider what might happen in economic terms if the scientific projections are in any way correct.

Christmas Greetings

2009-12-22T07:43:00.001+11:00

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

2009-11-30T06:43:00.000+11:00

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.

Next

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

2009-11-27T06:50:00.004+11:00

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.

Next

A continued apology for slow posting

2009-11-26T06:29:00.000+11:00

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

Ramblings

2009-11-16T22:48:00.001+11:00

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

2009-11-14T21:08:00.002+11:00

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.

Next

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

2009-11-13T06:00:00.003+11:00

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

2009-11-12T06:00:00.002+11:00

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.

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

2009-11-11T06:00:00.003+11:00

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.
Next

The case for reform in Australian public policy - NSW child welfare

2009-11-10T06:00:00.001+11:00

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.

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.

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

2009-11-09T06:00:00.003+11:00

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.

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.

We need to reform Australia's approach to public policy

2009-11-08T14:49:00.002+11:00

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.

Winton Bates' Freedom and Flourishing

2009-11-07T06:55:00.001+11:00

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!

2009-11-03T21:32:00.001+11:00

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

2009-11-02T20:53:00.001+11:00

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

2009-10-08T06:46:00.001+11:00

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

2009-09-08T21:03:00.001+10:00

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

2009-08-26T21:36:00.001+10:00

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

2009-08-22T19:01:00.001+10:00

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

2009-08-18T06:34:00.001+10:00

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

2009-07-23T06:30:00.001+10:00

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

2009-07-16T06:04:00.001+10:00

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

2009-06-19T06:39:00.001+10:00

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

Understanding global economic developments - introduction

2009-06-04T20:11:00.000+10:00

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

2009-05-14T20:28:00.001+10:00

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

2009-05-13T06:38:00.001+10:00

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

2009-05-06T19:35:00.001+10:00

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

2009-04-14T15:54:00.000+10:00

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:

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

2009-04-10T20:11:00.001+10:00

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

2009-04-08T06:01:00.001+10:00

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

2009-04-04T08:24:00.001+11:00

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.

Odd disconnects in global economic discussions

2009-04-02T06:35:00.001+11:00

Re-reading an earlier post, Australia's fascinating economy, I saw one thing that I need to correct, a case of loose wording. I wrote on 3 March 2009:

I do not have time today to look properly at the numbers. However, nothing that I have seen causes me in any way to switch my previous position (on the economy). To my mind, the real crunch point is still some months away.

I had been discussing the way in which rapidly changing data had affected commentary on almost a daily basis, positive one moment, negative the second.

My core position for many months has been that it was just going to take time for current economic problems to work themselves though, that the effects of the various packages intended to stimulate consumption in different economies were likely to be limited, that on the Government side we had to wait until the capital spend measures kicked in and that this would take time.

I have also generally been more positive than most of the commentary, especially so far as Australia is concerned. In December I summarised my position this way in a magazine article:

The problem with economic statistics is that, by their nature, they tell us what has happened in the past and with a lag.

It is now clear that the US and international economies were already slowing rapidly at the time the global financial crisis broke. This explains in part why the financial crisis flowed through so quickly and dramatically into contraction in the real economy. However, the scale of the existing slow down was not clear at the time the global financial crisis broke.

All Governments responded to the crisis with action to prop up their banking systems to try to break the credit gridlock that had brought world financial markets to a halt.

As the scale of the crisis in the real economy became clear, Governments then responded through fiscal policy. This took two forms – actions to try to encourage consumption and consumer confidence, followed by stated plans to expand capital investment especially in infrastructure.

From an Australian perspective, several important things should be noted about this global response.

The first is that actions to encourage consumption have not been very successful to this point because they do not address the underlying causes of the problem in the first place. They are best thought of as an asprin to try to ease the immediate symptoms, one that will leave most Governments with high medical bills in the form of increased budget deficits.

Capital spend is different because, sensibly done, it adds to productive capacity and social infrastructure. So there is an immediate economic impact from the spend, followed by a longer term pay-back.

The difficulty is that capital spend takes time to ramp up. The trillions of dollars now committed to capital spend will really begin to affect the world economy about eighteen months out.

The world is now awash with liquidity that nobody wants to use, interest rates are at historic lows, while the global inflation that seemed such an emerging problem only six months ago has vanished.

As global Government capital spending really starts to kick in, the stage is set for quite rapid economic expansion. In the meantime, the economic flue is likely to continue.

Against this background, I wanted to qualify and amplify my use of the words "crunch point". By this I simply meant that it would still be some months before we would know whether the optimists like me or the pessimists were right.

If I am right in my analysis, we will see a growing stream of good news in the midst of the continuing bad leading to a clear bottoming of the downturn and then growth. Here my main expressed concern has been that the liquidity washing round in the global system might then force governments into contractionary action, prematurely curtailing the upswing.

I am not opposed to stimulatory measures. However, I do think that we should be paying more attention to ways of managing the after affects of the combined stimulation measures.

On-ground effects of the Australian Government's stimulation packages - March 2009

2009-03-31T06:23:00.001+11:00

It has taken me much longer than expected to start catching up from the effects of the move. I say start, because I am still running behind. I will continue the series I started on Problems with modern mechanistic management - introduction, but I wanted to do a catch-up post first on the on-ground effects of the Rudd Government's various stimulus packages as I see them working their way through.

As you might expect, the effects have been variable. We talk about the Australian or US economies as though they actually exist. In one sense they do of course, but they are also averages concealing great local or regional variation.

For other reasons, I spend a fair bit of time monitoring the media and especially the press in regional Australia. At this level it is much easier to see specific impacts because they attract reporting in a way not possible in the metropolitan media.

The comments that follow are necessarily impressionistic. There are no statistics to measure the things that I am talking about.

As you might expect to begin with, the effects of the economic downturn itself vary greatly at local level. Some regional centres dependent on mining or with significant local manufacturing have been hit quite hard. In other less trade exposed centres, the recession has had little impact. Whereas at a macro level, people are worried about unemployment, the problem for these centres remains attracting the skilled labour they need.

It is often forgotten in Australia that most of our booms are linked in some way to real estate and construction booms in the major cities. Downturns are actually quite helpful to some other parts of the country because it makes it easier to attract staff.

The higher first home buyers grant on existing homes has created something of a mini-real estate boom in some of the larger regional centres, with quite noticeable increases in sales and in prices at the lower end of the market. Because regional real estate prices are lower than city prices making it easier to buy, demand has spilled over into mid-priced homes.

The direct payments made to pensioners and others just before Christmas had quite a pronounced effect on retail sales.

On-ground effects here were always going to be variable because the proportion of recipients varies between communities. Many regional centres have a higher proportion of people on Family Tax Benefits as well as an older population. Some of these centres saw a very large boost to sales, with clear record trading.

It was always going to be the case that capital spend items would take longer than the Federal Government allowed. The grants to local councils were the first to have an impact simply because the councils were better geared for action. Local newspapers have been full of stories about small individual projects.

This appears to have cushioned another effect of the global financial crisis that I was insufficiently aware of. Many local councils invested reserve funds in triple A rated instruments such as CDOs that proved to be far from triple A. Armidale City Council, for example, faces a financial loss of up to $A12 million, a very large sum given the council's size.

I haven't seen this much reported, but on a surface skim it appears that the consequent legal class actions - including actions against the ratings agencies -are likely to be quite significant.

One of the most interesting things is the way in which the initiatives in the social housing area have started to feed through.

At least in NSW, the local papers have been full of Housing NSW advertisements seeking, among other things, DA (Development Approved) medium density sites. The intent here is to partner with local developers, including especially those who have been unable to find funding.

I have been meaning to do a macro assessment of this in terms of scale relative to the size of the sector. Looking at the micro-level, I think that one effect will be to empty the existing development pipe-line.

Replicated across the country, this is likely to draw new development planning forward. The key constraint is likely to be - as it was before - the availability of suitable land.

Now add in the initiatives intended to address the maintenance backlog in social housing. This uses the same trade skills as new construction. Again, the local affects are likely to be significant in many regional centres that have significant existing social housing stocks.

Turning again to the macro level, leading indicators such as new dwelling finance commitments (see chart) are now showing a clear upward trend.

All this means that the residential building sector at least is now showing all the signs of a very substantial surge.

This will still take time to feed through into increased construction activity.

I am not absolutely sure of the lags here. On the surface, we are likely to see a steady ramp-up in building activity in the second half of the 2009, with something of a surge in 2010.

Problems with modern mechanistic management - introduction

2009-03-08T11:40:00.004+11:00

The Australian state of Queensland is presently in the middle of an election. Here I heard the leader of the Liberal National Party opposition say that he expected to be able to help pay for his election promises by enforcing a "productivity dividend" on the Queensland public sector.

This is exactly the same approach that Prime Minister Rudd announced before the last Federal election and then enforced. Now the Commonwealth is struggling to deliver on its programs and policies.

NSW, too, has the approach in place, in this case further compounded by a freeze on new appointments. Again, the State is struggling to deliver.

The concept of a productivity or efficiency dividend sounds so sensible.

Competition improves efficiency. The public sector is not subject to competition, therefore use small rolling budget cuts on agencies to provide a proxy for the type of efficiency gains achieved through competition.

The problem is that it does not work in the long term. It is in fact an example of what I call mechanistic management.

As a bit of a break from economics, I plan to explore this issue over coming posts. You will still get some economics, but I feel the need for change.

December quarter 08 - Australia's real net disposable income increases by 1%

2009-03-04T20:57:00.001+11:00

I quote from the Reserve Bank of Australia:

A broader measure of change in national economic well-being is Real net national disposable income. This measure adjusts the volume measure of GDP for the Terms of trade effect, Real net incomes from overseas and Consumption of fixed capital (see Glossary for definitions). The graph below provides a comparison of quarterly movements in trend GDP (volume measure) and Real net national disposable income. During the December quarter, trend Real net national disposable income increased by 1.0%, with growth over the past 4 quarters at 6.4% compared to 0.6% for GDP.

So Australians have more money even if GDP as conventionally defined has fallen. My my.

I do not have time tonight to do a proper analysis of the national accounts. I will try to do so tomorrow.

Australia's fascinating economy

2009-03-03T19:46:00.001+11:00

What a fascinating beast this Australian economy is just at present. It has also been fun watching commentators twist themselves in all directions as they try to adjust their forecasts to apparently diverging statistics.

Economic data released yesterday (Monday 2 March) led to gloom and doom, with Australian Treasurer Wayne Swan suggesting that last night that the global slowdown would have a “dramatic impact” on the local economy, with commentators downgrading their forecasts. Then today with good data, many commentators hastily revised their forecasts again.

Today also the Australian Reserve Bank decided not to reduce interest rates, suggesting that further monetary stimulus was not necessary. Yet the Government is still talking gloom. As I write, Mr Rudd is revealing his seven principles for fixing the global economy – I lost count around eight at the use of the words “toxic assets”. We appear to have moved from war to medical analogies; the virus of toxic assets must be fixed.

I know that I should not be enjoying this so much, but I cannot help myself. I make no pretence of understanding short term movements. What I have tried to do is to establish a longer term position against which I can test immediate movements.

I do not have time today to look properly at the numbers. However, nothing that I have seen causes me in any way to switch my previous position. To my mind, the real crunch point is still some months away.

On-line problems

2009-03-02T05:04:00.002+11:00

I have been effectively off-line because of a house move. Even now, the internet connections are not fully back in the home office. All very frustrating. It will still be a little while before I can post properly again.

In my last post A very odd recession I spoke of the divergences between Australian and international economic performance, of the gap between the negative official commentary and the apparent picture of domestic economic activity revealed by the statistics.

Statistical data released since I wrote including ABS capital expenditure data has continued to surprise commentators with its strength.

This week will be a big one from a data viewpoint, with a whole series of releases including balance of payments data, January retail sales figures and the December national accounts estimates. For the benefit of international readers, the ABS data goes on line at 11.30 am in the morning Australian Eastern Daylight Saving time.

A very odd recession

2009-02-23T15:36:00.000+11:00

I have been off-line because of a house move, making it difficult to both write and post.

I find this a very odd recession, both globally and in Australia. Australia may well avoid a “technical” recession, but for all practical purposes at least parts of the country feel as though they are in recession.

Why then do I say odd? Well, the economy is all over the place, with a now somewhat incredible gap between domestic and international economic performance.

At a time of global real-estate declines, the Australian Government’s first home buyer grant in combination with reduced interest rates have triggered something of a mini-real estate boom in at least at the lower end of marketplace. In real estate mad Sydney, real estate investment is again a topic of interminable conversation.

One side effect of this is that rents appear to have risen at the lower end of the market place.

The best data on both rents and sales in NSW is provided by Housing NSW’s Rent and Sales Reports. The latest sale reports are for the June quarter 2008, the latest rent reports the September Quarter.

The sales reports show year on year real estate price declines in most localities. This in combination with lower volume of sales led to a marked drop in State Government revenues from stamp duty. By contrast, rents generally increased.

Since then, house lending has started to move up, with a seasonally adjusted increased for housing finance for owner occupation of 7.1% in December over November. This was associated with a major jump in December for the seasonally adjusted value of dwelling commitments.

The next NSW rent and sales reports may not show this increase because of lag effects – the sales data will be for the September quarter – but should still be interesting.

I had major reservations about the extension of the first home buyers grant on existing properties, a view I still hold. However, one practical economic effect has been the creation of another buffer for financial institutions and for ordinary wage and salary earners owning their own homes.

Australian bank bad debts have increased. However, this has been focused on the commercial side, not housing. This makes it much easier for Australia’s banks to absorb losses without adverse balance sheet effects.
Still on the odd side, only a little while ago Australia’s major banks were seen as global minnows, too small to compete effectively. I find it hard to come to grips with the fact that they now have market capitalisations greater than many major international banks including Citigroup.

Clearly bank shareholders are concerned about the statements from the various major banks that their profits are under pressure and that they may need to reduce dividends. However, there is a major difference between worrying about dividend reduction as compared with worries about sheer survival.

Like US consumers, Australians have clearly been trying to save more and have reduced spend on particular items. Reflecting this, the January figures for motor vehicle sales showed a further small decline in both trend (-0.8%) and seasonally adjusted (-1.1%) terms, continuing a downward trend that began at the start of 2008. December on December sales show a decline of 16.9% in seasonally adjusted terms.

In addition to ordinary shifts in consumer demand, motor vehicle sales have also been pulled down by lower fleet sales. Still, both the December reduction and the year on year numbers are still relatively mild by global standards.

All very interesting.

Crowding out and the Rudd stimulus package - still more economics 101

2009-02-15T07:15:00.001+11:00

This post continues the discussion I began in More economics 101 - the economics of Malcolm Turnbull. Since then I have added The Rudd Stimulus Package - Andrew Laming's view to provide a Liberal Party view. This post focuses on the crowding out issue.

As with all these posts, I am trying to think my way through the issues. Feel free to disagree.

Economists use the term crowding out to describe the way in which one set of actions - an increase in Government spend, for example - can reduce other activities, thus crowding them out.

It may seem strange to talk about crowding out at a time the Australian economy has spare capacity. Yet it is an issue to my mind because of the way the package is being funded.

If the Government had funded expansion in the old-fashioned way by issuing Treasury bills thus expanding the money supply, then the increased spend would flow through into increased economic activity. The position is far less clear-cut when the extra spend is funded by increased borrowings from the market.

Increased Government spend pumps one dollar into the economy. The immediate effect is the same regardless of how that dollar is financed.

The Government then borrows one dollar from the market to fund its dollar spend. That dollar is no longer available to do other things. If there is a lot of liquidity around sitting idle as there is just at present, the effect may be small. However, these are very big borrowings.

One potential effect is an increase in market interest rates. Should this happen, then extra funds may be attracted to Australia, leading to appreciation of the currency. In turn, this would encourage imports, discourage exports, placing downward pressure on economic activity.

This is the type of effect that led Harry Clarke to write Pointless fiscal expansions that swamp us with debt but don't reduce unemployment, a post brought on-line in the wee hours of this morning.

However, there is another problem as well.

We presently have a thoroughly constipated financial system with banks still reluctant to lend to business. There is a lot of liquidity around, so Government borrowings may not of themselves shift real interest rates a great deal. Nevertheless, they could well further reduce the availability of loan finance for business.

Still keeping it in simple terms that I can understand, cash has to go somewhere. At present, there is a very high weighting in the market for risk, so available cash flows to the safest investments, reducing cash for perceived riskier investments, and that includes loans to business.

Government borrowings of the type Mr Rudd proposes increases the supply of high quality financial assets, potentially further reducing (crowding out) the cash available for loans to business.

In theory, this might lead to increased interest rates on business loans, widening the interest rate spread until funds are attracted. However, we already have credit rationing. So long as risk assessments remain as they are now, interest rates are unlikely to shift much in the short term.

We can already see some of these types of effects in the housing market place. For a number of reasons, housing is still seen in Australia as a relatively safe longer term investment.

This perception is not clear cut. There is downward pressure on property prices in the more expensive segments of the market place. However, at the lower end house prices have moved up, in part because of Government incentives. This is reflected in the statistics, with loan approvals for housing now increasing.

Banks are lending for housing because they still see it as a relatively safe investment offering a higher yield. Barring unexpected changes, they will continue to do so. So we have credit rationing for business, while housing lending expands.

The Rudd Stimulus Package - Andrew Laming's view

2009-02-14T05:05:00.000+11:00

My post More economics 101 - the economics of Malcolm Turnbull drew a thoughtful response from Andrew Laming, the Liberal member for Bowman. I have been remiss in not bringing this up before onto the main blog - it gets lost in the comment section.

The latest Rudd stimulus package has passed. However, Andrew's arguments are still relevant to the longer term.

Andrew wrote:

Dear Jim,
Just a note on your excellent analysis.

This is not a debate between a small Coalition and a large Government stimulus package. It is not about supporting a larger intervention if you are bearish about Australia and smaller if you are optimistic.

This debate is about whether $42 billion spend AS PROPOSED is appropriate in quality and quantity.

Once committed, the $42 billion becomes opportunity cost. That's why Mr Turnbulls's proposed scrutiny of the package in the Senate is so vital.

This debate is not about whether the world will recover from the recession. Of course it will. The real argument is whether the stimuli, as proposed represent cost-effective recession aversion.

Highest level analysis asks - how and when is each stimulus dollar of GDP deployed to pre-empt economic threats and have maximum impact maintaining jobs, and in turn, Australia's GDP growth.

Judge the package not on the social infrastructure it delivers or that people are "paying down home loans and that is no bad thing." This is akin to treating a skin cancer patient with a weight loss program.

We all want nation-building, but in a recession, a specific set of measures are prescribed to maintain economic activity (reduce the length and depth of recession), and to position the economy to achieve the most sustainable growth recovery (so that we are better placed than our competitor economies when we all enter the post-recession phase.

Readers will know of those elements: PREVENTION: high-multiplier expenditure, targeting the most vulnerable domestic sectors to job losses, and ADAPTION: where losses occur, reducing frictional unemployment through rapid retraining and redeployment into economic infrastructure - which reduces costs to business, builds confidence and prevents further job losses.

Finally, with the current fiscal fixation, don’t underestimate the ultimate power of monetary policy. Australia's comparatively higher interest rates allow significant room for stimulus which is not available to other economies, which will restore confidence and entrepreneurialism without sending Australia into generational debt.

As an aside...
Your excellent graph was part of my analysis of ABS retail sales for December. It is irrelevant that December was $700 million more than November. To understand the stimulus, four factors enter the calculations;
1. Temporal factors. Treasury now says they only expected 10% of the stimulus to enter the economy in December (they didnt say that back in December). Most (they hope will turn up in Q1 and Q2 this year).
2.Annual cycles: because every year, Australians spend remarkably close to 11.1% of their annual retail spend in December (as they did in 08, despite stimulus),
3. Year by year comparison: the degree to which December 08 increased from the 4 Decembers before it, relative to the annual growths in each of those years.
4. Monthly trends (your graph), because even with all the pessimism post-Lehmans, it shows that retail sales held up July-November. Too many people grasp at November's slip and infer trends. Remember the stimulus came before we even had the ABS November 08 figures.

My case is that Dec 2008 WAS ALWAYS GOING TO BE SOLID. That position is supported by all four points above, together with the confidence of falling interest rates, particularly cheap fuel and the Christmas effect (where people spend irrationally at Christmas (even at tough times), then compensate, with a rational slump in the first three months of the following year(see Xmas 2007).
It is difficult to argue that the December stimulus saved/supported/created any jobs, because department stores and the household sector (big winners from the stimulus), can and did further discount to maintain sales volumes and retain staff.

In the end, massive discounting plus the stimulus - achieved sales volumes of $300 - 850 million above expectation.

I argue that such a result neither justifies the stimulus, nor assisted much in averting what lies ahead for Australia in 2009.

Andrew Laming
ps: It was the tax cuts announced in May 2007 which "introduced a structural element into the deficit." Bringing those cuts forward is merely a one-off tax expenditure.

End Observation

In posting Andrew's comment in this way, I am treating it as a guest post. For that reason, I am not going to comment on it at this point, but leave it stand as a contribution to discussion.

I left my own post hanging on the issue of crowding out. I will discuss this further in my next post.

February 2008 - so far so good for the Australian economy

2009-02-12T19:10:00.002+11:00

I am conscious that I still have to finish More economics 101 - the economics of Malcolm Turnbull. I will do so. However, I wanted to make a comment on the latest economic statistics.

As I write, the Rudd Government's economic stimulus package has been voted down in the Senate through the vote of independent Senator Nick Xenophon. He wanted more Murray Darling water for South Australia and the Government would not budge sufficiently. And a bloody good thing too, although this goes to some of my own biases. I will deal with this later in a separate post.

The latest ABS data that has been released supports my view about the performance of the Australian economy.

On 10 February, the ABS released data on the Value of Principal Agricultural Commodities Produced, Australia, Preliminary, 2007-2008. This suggested the value of agricultural production was up 24% on the previous year.

Yes, this is 2007-2008. Further, the previous year was badly affected by drought. Yet this better performance does feed into our trade stats.

The following day, 11 February, the ABS released housing finance figures for December 2008.

In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions increased 5.9%. Owner occupied housing commitments increased 7.1%, while investment housing commitments increased 2.9%.

This is not a bad result and shows the effect of the Rudd Government stimulus measures.

If you look at the attached ABS graph, you can see the sharp decline from December 2007 and then the recovery.

The Rudd Government measures are not all good. Home prices at the lower end of the market have started to move up, as have rents.

This is what happened before with this type of measure. Lower income renters were disadvantaged as a consequence.

Now turning to the unemployment numbers released to day.

Employment in January increased by 1,200 to 10,742,100. Full-time employment increased by 33,700 to 7,670,700 and part-time employment decreased by 32,600 to 3,071,400.

The drop in part time employment did not come as a surprise. The rise in full time employment did.

The participation rate, the proportion of the working age population wanting to work, increased. This increased the unemployment rate by 0.3 percentage points to 4.8%.

The attached graph from ABS shows how unemployment has risen. You can see the steady increase since the start of 2008.

Coming on top of the retail sales statistics, none of these statistics show an economy entering serious recession. However, the numbers are lagged and a little misleading.

I have no doubt that the economy is in downturn. My point has always been that the economic fundamentals are pretty good.

I support some variant of the Rudd stimulus package because I see it as important in getting us through to the second half of 2009. By then, some of the longer term measures will be starting to feed through.

As someone who has been watching the economic entrails for quite a long while, I am struck by the apparent disconnect between Australia and apparent global trends.

Victorian Fires

2009-02-11T07:04:00.002+11:00

I really haven't felt like posting because of the Victorian fires. I find it hard to focus.

The fires have revealed the best in Australians, as well as some of our weaknesses. While I write a lot on this blog about economics, I also focus on management and public administration. There is so much in the Victorian fires that bears upon this.

Some of the stories out of Victoria are absolutely inspirational. Later on this or my personal blog I will write about this.

More economics 101 - the economics of Malcolm Turnbull

2009-02-07T11:57:00.001+11:00

This post looks at the differing economic approaches of the Rudd Government and the opposition. I am not especially interested in the differing rhetoric of the two sides, just trying to understand the variations in the economics.

Mr Turnbull's web site carries his various statements. Again, I am not concerned with the detail, but with key concepts.

The Two Sides

Using the language of war, the Rudd Government has argued that the Australian Government must act now to protect Australia against global economic catastrophe. Having protected the banking system, measures are required now to provide short term stimulus while longer term investment measures start to come into effect.

Mr Turnbull agrees that the economic outlook is grim.

Using another set of rhetoric, he suggests that the Rudd Government is behaving like the early Whitlam Government. After a long period in opposition, the Whitlam Government rushed through a series of measures, an over-spend that was to prove unsustainable.

According to Mr Turnbull, the stimulus packages have been ineffective and will leave Australia burdened with debt. There has been too much haste. Beyond the debt, spending now at the sale proposed must reduce the Government's capacity to respond to later developments.

The opposition proposes instead a much reduced stimulus package under which:

the tax cuts to come into effect from 1 July should be brought forward, backdated to 1 January.
The Commonwealth should pay a portion of the Superannuation Guarantee Levy on behalf of small employers (those with 20 or fewer staff) for the next two years. This measure would directly improve the cash position of small firms, directly reduce the costs of employment, and so directly contribute to preserving jobs.
there would be smaller, targeted infrastructure spend with $3 billion committed to school upgrades by reinstating the Coalition's very successful Investing in our Schools Programme.

Two rather different approaches.

My Own Views

While my focus in this post is on the underlying economics, I should make my own views clear so that you understand where I am coming from.

There is some truth in Mr Turnbull's comparison with the Whitlam Government. It has seemed to me that that Mr Rudd is in a rush for other reasons. I have suggested that we should take a deep breath - less haste, more speed. I have also pointed to what I see as specific weaknesses in Mr Rudd's initiatives, weaknesses linked in part to current administrative and public policy systems that create delivery problems.

The international downturn has been faster and wider than I expected. The impact on domestic confidence has also been greater than expected, given the underlying strength of the Australian economy. For that reason, I have been inclined to support the Rudd measures.

I do not share Mr Turnbull's stated concerns about the deficit so long as we do not create a structural deficit. I am also less worried about Government debt.

Overall, my view has been that the downturn provides an opportunity to do new things, to catch up on past neglects, thus laying the basis not just for future growth, but also for long term improvements in our social and physical infrastructure. Part of my argument for less haste, more speed it to ensure that we get the best results.

Finally, I have argued that the various stimulus measures taken round the world will pull the world out of recession. As that happens, the Australian economy will boom again. However, I have also expressed the concern that the global stimulatory measures will overshoot, creating problems in the opposite direction to those we face as present.

The Economics - tax cuts vs government spending

Mr Turnbull's views and those expressed by his colleagues such as Julie Bishop link to a global economic debate.

In economics, the term consumption function is used to describe the relationship between income and consumption.

As developed by Keynes, it includes two elements, a base or autonomous consumption that occurs independent of shifts in income, together with a second or induced element that shifts with income. As income increases, some is spent, some saved. The term marginal propensity to consume is used to describe the amount spent out of every extra dollar in income.

The marginal propensity to consume links to another concept, the multiplier.

In spending a dollar, you give someone else that dollar. Part of that dollar is spent, part saved. The part spent is then further part spent and part saved. And so on in ever diminishing amounts.

Some of this money is spent on imports and hence lost to the process. The size of the multiplier - the final spend for every initial dollar of spend - depends on the marginal propensity to consume together with the marginal propensity to import.

The Rudd Government's first big stimulus package deliberately targeted some of those most likely to spend. The size of the effect depended on how much they did spend, then the subsequent multiplier effect.

For reasons I outlined in The Australian economic stimulus package - distributional and timing issues, there was always going to be some leakage. However, Mr Turnbull goes further than this.

Drawing on overseas work dating back to US economist Milton Friedman, he suggests that the marginal propensity to consume is determined not by immediate variations in income, but by expected permanent income.

This is quite important. The permanent income hypothesis suggests that a one-off stimulus of the Rudd type will simply be saved or used to pay off debt.

Further, to the degree that expectations about future income and the value of household assets (people have been spending all their immediate income because they expect the value of their assets to rise) are affected by by the downturn, the incentive to save will be increased.

So the argument now runs, there is no point in one-off stimulus packages. We are better off lowering taxes, since this affects permanent income.

We can now break our argument into two parts.

On the first, the multiplier, Mr Turnbull argues that the stimulus package failed because December retail sales were only $700 million more in seasonally adjusted terms than the month before. This led him to ask "What happened to the other $8.9 billion of the cash splash?"

The Liberal member for Bowman, Andrew Laming, went further. He suggested that a closer look at the figures suggested that was not much improvement on the previous December: "Around $300 million extra turned up in retail sales and that's tiny - around 5 per cent of the stimulus package actually ending up in the retail sector".

I don't think that one can make this type of categorical statement.

To begin with, the impact on spend is likely to have been spread, beginning in November and then extending through December into the new year.

The Australian Bureau of Statistics was forced to abandon its trend estimates for December because the size of the retail bounce distorted trend estimates.

If we look at the previous trend estimated (graph) you will see that November showed a decline, resuming a downward trend. We cannot say what the December number would have been in the absence of the stimulus package. This is the real benchmark

Beyond this, we can (I think) say two things.

The first is that there was a very clear and large bounce. A 3.8% increase in seasonally adjusted terms is no small thing at a time of global downturn. The second is that if people did save or reduce debt, then that is not necessarily a bad thing at personal level in current circumstances.

The flow on multiplier effects are unclear and will certainly be lower than the traditional theory suggests. The only thing that we can say with a degree of certainty is that imports of consumer goods did not increase. This suggest that stocks were cleared, again no bad thing.

The second issue is the relative merits of a tax cut versus direct payments. At this point, Mr Turnbull is only suggesting that the tax cuts should have been brought forward. However, internationally the permanent income hypothesis is being used to support arguments for tax cuts as a stimulatory measure.

Bringing the tax cuts forward would, I think, have had very little short term impact on consumption because the actual cash impact would have been relatively small in the current financial year.

More broadly, I have a real problem about the use of permanent tax cuts as a fiscal stimulatory device because they then build a structural element into the deficit.

Government borrowing and the crowding out effect

In that lost world of the past, the Government would have funded a deficit by issuing securities to the Reserve Bank, thus expanding the money supply. Then, as economic conditions improved, the Government would have used the extra tax revenues to pay the Bank back.

Current orthodoxy does not allow this. Instead, the Rudd Government proposes to issue Government bonds to the market to fund the spend. This, Mr Turnbull, suggests will create a burden for the future.

At one level, this is true just as it would have been in the traditional approach. However, there are two quite separate issues involved.

First, the cost has to be set against the extra national income generated during the downturn. If the Government spends one borrowed dollar and gets a five dollar increase in national income, then it is in front because the extra tax revenues cover the cost.

Conversely, if the Government spends one dollar and gets, say, just one dollar back, then it is behind.

Secondly, returns from capital investment are spread over time. There is absolutely nothing wrong with borrowing longer term where this is linked to a longer term return.

The best world would be one where stimulation measures generate a profit in their own right from increased economic activity, leaving the long term income stream from capital investment as pure cream.

Despite the Government's rhetoric, it is not clear to me that that current stimulus packages will in fact generate both the immediate stimulus and the longer term return.

There is also an immediate problem in possible crowding out.

Note to reader: I am out of time. I will continue this post a little later.

Are all the Australian economic forecasts wrong?

2009-02-05T20:46:00.003+11:00

In a post on my personal blog, Confusions over current economic forecasts, I explained why I found some of the current economic discussion so personally confusing. A key reason was the growing divergence between my own judgements and various forecasts and rhetoric.

In this post I want to look at just one variable, Australia's trade performance. Concerns here were a feature of both the recent Access Economics report and the Australian Government's own forecasts.

But is the position as bad as everybody says? Let's test this with some rough back-of-envelope calculations. I am doing these as I write, so that I am not sure just what my end point will be.

The latest Government projections forecasts a current account deficit for 08-09 of 41/2% of GDP. Exports are projected to go down sharply, imports to decline at a slower rate.

Australia's GDP is a bit over a trillion dollars, so this equates to a current account deficit of around $47 billion. All figures are in Australian dollars.

In the six months to end December, Australia had a trade surplus of $4.8 billion dollars. So to get to a 08-09 $47 billion trade deficit, we "need" a deficit in the second half of the year around $52 billion. This equates to a monthly deficit of $8.7 billion.

In the six months to end December, Australia's exports totaled $111.5 billion. To "achieve" the 08-09 projections, and assuming that imports remain constant, exports need to fall by $52 billion or by 47%.

I just don't believe this.

Look, I may be wrong. If so, please show me where my error is. I may just have committed a maths stupidity. I have done so before.

Until I am shown to be wrong, I just don't believe the forecasts.

Update

The thing that I had forgotten in writing this post was, of course, financial payments. I will deal with that in a moment. First to answer a question from SA.

SA, both the Access Economics forecast and some Government commentary has placed great weight upon our deteriorating trade position. To quote one example:

This is not just a recession. It will be the sharpest deceleration Australia's economy has ever seen," said a director at Access Economics, Chris Richardson....

The current account deficit is predicted to rise, from $65 billion this financial year to $100 billion next year, as exports fall faster than imports. With the international spotlight back on debt, Mr Richardson said a large current account deficit could leave Australia exposed, should other countries prove unwilling to continue lending us the money needed to finance the deficit.

Our trade stats improved at just the right time, so I found the gloom about the current account odd. This post was a very rough back-of-envelope calculation to test this:

The latest Government forecast suggested a deficit on the current account for 08-09 of 41/2% of GDP. This roughly equated to a deficit of over $47 billion.
To the end of December our balance of trade in goods and services was credit $4.8 billion. Given this, a deficit on the current account of over $47 billion seemed to imply a deficit on the balance of trade for the December half year of around $52 billion. Projected deficit (47 billion) = December half surplus (4.8 billion) -June half deficit (52 billion).
In turn, this seemed to imply a fall in exports of around 47%.

In running this calculation, I was ignoring net current financial flows - interest paid and received, dividends paid and received, royalties paid and received - that are added to the balance of trade to get the balance on current account. These are affected as well by current events.

Australia has borrowed quite heavily to fund past trade gaps. These borrowings have been largely private sector through the banking system and are generally denominated in overseas currencies, and especially the US dollar.

Two issues arise.

The first is one of risk. What happens if, as Chris Richardson suggests, other countries stop lending to us? This was the reason why the initial sub-prime crisis affected Australia - domestic liquidity was affected because bank overseas borrowings were affected.

Barring catastrophe, I think that we can already put this one aside because of the impact of the bank guarantee. Our banks are borrowing internationally.

The second issue is the impact of the depreciation of the Australian currency. This increases the Australian dollar value of interest payments, thus adversely affecting the balance on current account. The final effect here depends upon the combination of future movements in the value of the currency with movements in interest rates.

Again, all this shows the importance of shifts in our trading position and the importance of our move into surplus at just the right time.

According to the latest RBA statement, a far better document than the official Government forecasts, the improved trade position moved the current account deficit from over 6% of GDP to 3.2% in the September quarter to around 2.5% in the December quarter. So the Government forecast of a deficit of 41/2% still implies a substantial shift. The Bank figure is 31/2%; this seems more reasonable.

The economics of the Rudd Government's $A42 billion stimulus package

2009-02-04T06:58:00.002+11:00

The announcements yesterday on the Australian Government's latest stimulus package were very thin on detail, although today's Australian press provided more information. In addition, the Commonwealth Government has released a new economic statement that I had not seen. This provides supporting information.

The announcements deal with something of a rag bag of measures. Accepting this, I think that it is possible to say something useful if we stand back from the detail.

Australia's Economic Position

The global economic downturn has been deeper than expected and has, I think, affected Australia more then expected.

Part of the reasons for the impact on Australia are real. Exports are down, while Australian firms with operations overseas are also being hit. It is also clear that the Australian economy had already turned down, so international turn has added to existing domestic economic decline.

Part of the reasons for the impact on Australia are psychological. People's behaviour has changed, creating real economic effects. Here my complaint about the Access Economic Report and some of the Government's own commentary is that it adds unnecessarily to the fear, creating its own behavioural effects.

The initial stimulus elements and especially the pre-Christmas cash payments clearly had a stimulatory effect.

The Australian Bureau of Statistics estimated released today suggest that seasonally adjusted December retail sales jumped no less than 3.8% as compared to November, the largest seasonally adjusted increase since August 2000. So big was the increase that the ABS has had to abandon its trend estimates for the present.

However, some elements of the various measures and especially the big COAG development package have, I think, taken longer to implement than the Government might have expected. The Australian Government tried to front-end proposed spend, but so far this has not been very effective.

There are particular reasons for this linked to the mode of operation of our current systems. The practical effect is that it will be the 09-10 year before spend really starts, probably 10-11 before it hits full stride.

This opened a gap between immediate stimulus and longer term measures. This package is designed in part to fill that gap. However, despite the PM's views expressed on TV last night, I think some of the measures are going to take longer to implement than he expects and for the same reasons as earlier measures. Some of our administrative systems and processes are simply overloaded.

For that reason, and independent of international developments, I would expect at least one and possibly two further economic stimulatory packages to bridge the gap.

Discussion of individual measure follows, broken into groups by their likely impact in time. The small business tax measures are discussed separately because their impact is uncertain.

The Measures: immediate stimulation - three months

The immediate stimulus measures are five one off cash bonuses. The announcement describes them as:

Tax Bonus for Working Australians of up to $950 paid to every eligible Australian worker earning $100,000 or less. This will support up to 8.7 million individuals at an estimated cost of $8.2 billion. Payments will be made from April.
$950 Single Income Family Bonus to support 1.5 million families with one main income earner. This will cost $A1.4 billion and will be paid automatically in the fortnight commencing 11 April to recipients of the Family Tax Benefit part B.
$950 Farmers' Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners receiving exceptional circumstances related income support. This payment will be made in March and cost $20.4 million. So this is a fairly minor element in the whole package.
$950 per child Back to School Bonus to support $2.8 million children from low- and middle-income families. This will cost the Government's $2.6 billion and will provide a one-off bonus of $950 per school age child (age 4 to 18) to families who are eligible for Family Tax Benefit Part A as at 3 February 2009. No date is provided for this payment.
$950 Training and Learning Bonus paid to students and people outside of the workforce returning to study to help with the costs of education and training. This will cost $511 million, with part of the payments made in March.

In all, these items represent around $12.7 billion in direct cash payments in the June Quarter.

Without being too precise about it, Australian retail sales are around $78 billion per quarter, so the payments are around 16% of retail sales during the same period.

The Measures: medium term stimulation - three months on

The next group of measures will take a little longer before they

start to come into full effect. They include:

up to $200,000 to every Australian school for maintenance and renewal of school building to be paid on a sliding scale at a cost of $1.3 billion over two years. While this one will take a while to sort administrative arrangements through, schools already generally know their most urgent maintenance details.
urgent maintenance to upgrade around 2,500 vacant social homes. Housing Departments know their maintenance needs. $400 million is allocated for this over 08-09 and 09-10. I am unclear as to the extent of overlap between this and already announced COAG housing measures that agencies are working on. I would expect the majority of spend to take place in 09-10.
installing ceiling insulation in 2.7 million Australian homes. This is projected to cost $2.7 billion over three years. Again, there will be some administrative delays. More importantly, I simply don't know how long it will take existing suppliers to gear up. One installer interviewed on radio commented that this would take time.
Increased funding for local community infrastructure and local road projects at a cost of $890 million. This extends over several years. it is included because part of it represents acceleration of existing pr0jects.

The Measures: longer term stimulation - six months out

Most of the measures fall in this group.

Dealing with education first:

Funding of $12.4 billion over three years for the construction of assembly halls, 21^st Century libraries, indoor sports centres, performing arts centres and similar major improvements for all Australian primary schools, including combined schools and special schools.
Funding of $1.0 billion in 2009-10 the construction of science and language laboratories in secondary schools. Funding will be allocated to up to 500 schools on the basis of assessed need for new or upgraded facilities.
The Government will also bring forward $110 million of funding for the Trade Training Centres in Schools Program, from 2010-11 to 2009-10.

Turning now to housing. The Commonwealth will provide

Up to $6.0 billion to fund the construction of approximately 20,000 new public and community housing dwellings, to be largely completed by December 2010.
$252 million to fund the construction of new Defence Homes.

Business tax measures

I will leave these aside for the present because I have not not had time to analyse them properly.

Discussion

The following chart sets out Treasury estimates of the economic stimulus effect. I just don't believe them for reasons set out after the chart.

The white component represents the effect of this latest package. At least part of 08-09 spend will flow over to 09-10 for reasons outlined above.

It is hard to see how the COAG components of the 1st half 2009 can be achieved in real terms, although they may be achieved in budgetary terms by pre-payments to the states.

The Commonwealth and states are still involved in implementation planning. As best i can work out, first contracts are unlikely to be let before April.

This post has focused on the detail of the package. I will return to some broader issues in my next posts.

January front page - a data month

2009-01-30T17:19:00.000+11:00

Earlier in January in Has Access Economics done Australia a grave disservice? - 1 I started an analysis of Australian economic performance. Events since then have intervened.

I remain of the view that Access did do us a grave disservice despite the gloomy discussion since. However, I have felt the need to do a more detailed check of data before writing any more. It is absolutely impossible to rely on reporting in the current climate.

I am keeping this post as the front page until the end of January. I am also going to bring up a series of past-dated posts based on the date of events. I feel the need to create a time based record to provide a proper base for subsequent analysis.

I don't know about you, but I get very confused, finding it difficult to maintain any form of stable equilibrium in the face of constant variability. I will provide summary details of the posts as they come up on this page.

Has Access Economics done Australia a grave disservice? - 1

2009-01-19T21:34:00.001+11:00

Early this morning in a post on my personal blog, Is the Access Economics report right?, I noted the language used in the latest Access Economics report on the Australian economy.

I have a high opinion of Access. As I said in this morning's post, they have a better feel for the numbers. But this time as I listened to or read the coverage during the day I decided that they have really gone over the top in crafting their language to get major media impact.

So let's look at some of the data. Because this is an opinion piece, I am not giving all the links. I am sure that my errors will be corrected.

The firm (Access Economics) says the Government's cash handouts to households will not be enough to save the retail sector from a bleak Christmas. ABC story 15 December 2008.

Back in December, Access suggested that this Christmas's retail sales would be bleak. They were not, going up slightly overall. In some parts of the country, Armidale is an example, retail sales set new records.

So far so good.

Let's turn to employment. This is a lagging indicator in that firms hang onto staff in the first instance, then let them go later if market conditions continue to worsen

The December stats from ABS essentially showed a steady unemployment rate. However, this average concealed a significant deterioration in that full time employment fell by almost 44,000, while the participation rate declined slightly.

No surprises here. We already knew job ads had declined sharply. But let's keep things in perspective. At a time of global crash it is a quite remarkable feat to hold the raw number steady.

So far so good.

Bank bad debts are rising, but our banks remain sound. The big banks have used the Government guarantee to raise something like $A60 billion on global markets. No major liquidity problem here.

Of greater interest, the regional banks who were expected to be the main users of the guarantee have made almost no use of it. They have not needed to because the rise in retail - mum and dad - deposits has been adequate to fund their lending.

In another qualitative sign,the banks are trying to sell loans on TV. Some at least want to lend.

So far so good.

Home building approvals, a leading indicator, have been in decline for twelve months, down 26 per cent. We knew that this sector was sick. No surprises there.

So let's look at the lending figures, an even more leading indicator. The November figures for housing finance for owner occupies dwellings showed an increase over the previous month of 0.4% in trend terms, 1.4% in seasonally adjusted terms.

Lending for personal consumption was down, and a bloody good thing too.

Commercial finance was down 1.6% in trend terms, a large 10.4% seasonally adjusted. No real surprises here. Business is reluctant to borrow just at present.

Still, in all, so far so good.

The Access Report apparently predicted that the current account deficit would rise from $A65 billion this financial year to $A100 billion next year as exports fell faster than imports.

Perhaps.

Over the second half of calendar 2008, the balance on goods and services actually moved from a long term deficit to a surplus, the first for some time, providing us with a buffer.

If the newspaper reports are correct, then the Access numbers suggest that we will move from the current surplus to an average deficit of over $A8 billion per month. Yes, our commodity exports are falling, but $8 billion?

The most recent trade stats on merchandise imports show a 4% fall in original terms in December. We will just have to wait to see.

I hesitate to say so far so good. Certainly I thought that the previous turn-round was was much better than so far so good.

I don't have time to continue tonight. I will try to finish this post tomorrow.

Sales of Australian wine and brandy November 2008

2009-01-10T21:00:00.000+11:00

The Australian Bureau of Statistics has released details of Australian wine sales for November.

The trend estimate for domestic sales of Australian produced wine by volume was 34.7 million litres in November 2008, a decrease of 0.5% from October 2008, down 3.3% from November 2007.

The chart shows domestic sales. Down, but relatively stable.

The export position is a little different. Australia is now a major wine exporter. The chart below shows our wine exports by volume. You can see the huge increase over the last decade, the sharp down turn in recent times.nt times.

The fall in the Australian dollar means an increase in the price of local imported wine, although the price of my Spanish tipple has yet to shift. However, falling export demand means that we Australian wine drinkers are going to get a local bonus in terms of lower prices.

Australia's trade performance - November 2008

2009-01-08T22:02:00.000+11:00

In Australia's improving trade performance - October 2008 statistics I commented on the remarkable turn-round in Australia's trade position, a move from deficit to surplus, at just the time Australia needed it.

The Australian Bureau of Statistics has just released new trade figures. How did Australia go?

The table below sets out seasonally adjusted exports and imports in $A million.

If you compare the numbers with the previous table you will see that they vary. This happens because of subsequent adjustments by ABS. I must say that the number of variations surprised me.

Month	Exports	Imports	Balance
2007
September	17,765	19,919	-2,154
October	17,251	20,268	-3,017
November	18,318	20,569	-2,251
December	18,822	20,646	-1,828
2008
January	19,514	21,795	-2,282
February	18,742	21,819	-3,076
March	19,960	22,153	-2,493
April	21,659	21,980	-321
May	22,224	23,249	-1,025
June	23,320	23,099	220
July	23,556	23,965	-409
August	24,736	23,375	1,361
September	26,105	24,994	1,111
October	27,934	24,974	2,960
November	26,932	25,484	1,448

The pattern is similar to that outlined in my last report, with the balance of trade going into surplus at just the time we needed it to do so. That said, and as you might expect, the seasonally adjusted figures do show a weakening in Australia's trade position.

Imports continued to rise, while exports declined.

As an indicator of the effect of the global downturn, if we look at the original data, exports of non-agglomerated iron ore declined by 24% in volume terms, while prices were down 3%. Exports of metallurgical coal decreased 15% by volume, although here prices were up by 8%.

The following table shows Australia's trade performance in financial year terms, original data. Figures are in $ million.

Year	Exports	imports	Balance
2005-06	196,274	210,794	-14,520
2006-07	215,696	228,452	-12,757
2007-08	234,418	255,372	-20,954

You can see that we have had a fair size deficit. This compares with a surplus in the first five months of this financial year of $4,590 million. A substantial turn around.

The effect of the global downturn on our balance of trade position depends upon the net effect on imports and exports.

As you can see from the iron ore and coal examples, export volumes have already dropped sharply. This is reflected in mining lay-offs. We can also expect price falls.

On the other side of the ledger, we can also expect some fall in imports.

It all depends upon the scale of the two effects taking exchange rate movements into account.

Take the 07-08 figures and assume that the dollar value of exports drops by a third. The trade deficit would blow out by $78 billion. This would be unsustainable. The exchange rate would decline to the point that exports and imports were once again in something approaching balance.

Australian building approvals November 2008

2009-01-08T19:21:00.000+11:00

ABS statistics released today suggest that In November the total number of dwellings approved in Australia fell by 4.2 per cent as compared to October in trend terms. More importantly, the total number of dwelling units approved was down 26.1 from November 2007.

The chart shows the pattern in both trend and seasonally adjusted terms.

The important point to note is that the downward trend was in place long before the global financial crisis.

I make this point because of the tendency to blame every piece of bad economic data on the global crisis.

Australian retail sales - November 2008

2009-01-07T18:24:00.000+11:00

According to the Australian Bureau of Statistics, Australian retail sales in November (trend estimates) were $18.4231 billion, up 0.1% on the previous month, up 1.9% on November 2007.

The attached graph shows that the rate of growth in retail sales weakened steadily over 2007-2008 before recovering somewhat.

INDUSTRY TRENDS

In terms of the detail, ABS notes that the food retailing industry had a period of weak growth from November 2007 through to April 2008, followed by seven months of moderate or strong growth. Other retailing had four months of moderate trend growth. All other industries have had a decline in the trend estimate for at least three months with:

Department stores and Clothing and soft good retailing, three months of decline in the trend estimate preceded by four months of either no change or weak growth in the trend estimate
Household good retailing, six months of decline in the trend estimate preceded by three months of weak growth in the trend estimate
Cafes, restaurants and takeaway food services, a decline in the trend estimate for 13 months.

You can see why firms like department store David Jones have experienced a degree of trouble.

STATE TRENDS

The trend estimate has been in decline in New South Wales for ten months. No surprise there.

Western Australia had a decline in the trend estimate in November 2008 after no change in the trend estimate in October preceded by two months of weak trend growth. Queensland, South Australia and Tasmania have had three, two and three months of weak trend growth respectively. Victoria (five months) and the Australian Capital Territory (three months) have had moderate growth. The Northern Territory has had seven months of strong growth.

Happy Christmas to all

2008-12-24T07:42:00.000+11:00

As I write, my last post was Economic implications of the Australian Government's Nation Building package on 14 December. I have in fact several part completed posts, so don't be surprised if several posts suddenly appear dated prior to this post! Here I am going to take advantage of the Christmas break to complete some writing.

This blog began simply as a way of recording some of the writing that I and other Ndarala colleagues had been doing on management issues. More recently, I have been using it more as a place for discussion on economics related issues.

I have really enjoyed this, although I do not want to lose total sight of the management content. The change in focus has also led to a sharp increase in the number of visitors. This obviously pleases me.

To all my readers of all faiths and none, I wish you a happy and peaceful Christmas.

Economic implications of the Australian Government's Nation Building package

2008-12-14T20:23:00.001+11:00

This photo shows coal trains passing in the Hunter Valley.

For the benefit of international readers, the Hunter Valley lies north of Sydney and is one of Australia's major coal provinces. If my memory serves me correctly, it is now the largest coal producing area in the world.

Introduction

On Friday 12 December 2008, the Australian Government announced the latest economic stimulus measure, a $A4.7 billion national building package. I will discuss this in a moment. However, first I wanted to summarise the key steps that the Australian Government has taken so far. I don't know about you, but I am starting to lose track.

To do this, and despite my complaints about dreaded text tables, the following table summarises some of the measures.

Date	Measure	Comment
12 October	Government guarantees all bank deposits plus new international borrowings by Australian banks to preserve liquidity, overcome loss of confidence, protect the bank's international competitive position	Achieved its objective at one level, but also triggered a run on mortgage funds
14 October	$10.4 billion Economic Security Strategy with two key elements, one-off payments to certain social security recipients from 8 December to boost demand plus increased first home buyers' grants for a defined period intended to increase home building over 08-09 and especially 09-10.	With the cheques just going out now, too early to judge impact.
10 November	Green car plan - $6.2 billion plan to make the automotive industry more economically and environmentally sustainable by 2020.	While the Government is now including this in its list of stimulus measures, it actually reflects different policy drivers.
18 November	$300 million to fund immediate new capital spending by local Government, with funds to be committed by end June 2009.	A broad based measure designed to have impact in the second half of 08-09 and 09-10.
29 November	COAG package - $15.1 billion to stimulate the economy and drive significant reform in health, education, housing, business deregulation, and closing the indigenous life expectancy gap. Claimed to create 133,000 jobs.	This measure replaces existing measures and is not all new spend. The economic stimulus component lies in a weighting of spend towards the front end to achieve a stimulus affect.
12 December	$4.7 billion nation building package to fund capital projects and encourage business investment.	This fund includes a mix of new spend plus planned spend brought forward in time.

Despite the problems I outlined in Australia's economic stimulus packages - the practical difficulties in cranking up spend, and despite too the inevitable degree of double counting and spin in some of the wording, there can be no doubt that the Government is trying to boost economic activity especially in 08-09 and 09-10.

The new measures

Those interested in the detail of the latest measures can find them here. Ministerial statements can be found here and here.

I noted, first, that the Government is including specific job creation estimates for this and previous measures:

75,000 jobs through the Economic Security Strategy
133,000 jobs through the COAG Package
plus 32,000 jobs through the latest nation building package.

The Australian workforce is about 11.2 million, so we are looking at projected job creation of a bit over 2 per cent of the current workforce. In theory, this should more or less off-set the economic down turn, if with a lag.

The second thing I noted about the latest measures is that the projected $4.7 billion spend is made up of:

$2.5 billion in new planned spend plus $2.2 billion in planned spend brought forward. The significance of the second is that the money is already allocated; spend will go up now, down later on.
$1.5 billion to be spent in the current financial year, $2.7 billion in 09-10, $500 million in 10-11. Again, we have the biggest impact in 09-10. The Government projects that this measure will add between 1/4 and 1/2 per cent to GDP in that year.

The proposed spend incorporates a number of very different things

Rail: $1.2 billion to fund 17 railway infrastructure projects. Of this, $580 million will be spent on Hunter Valley rail upgrades, increasing coal export capacity from 97 to 200 million tonnes per annum.

I blinked at this, because the big infrastructure bottleneck at the moment is the port itself, with coal ships often lined up waiting. In April 2007, for example, there were no less than 72 coal ships waiting to enter the port. Presumably, this will be sorted out in future spend.

Other rail spend is designed to remove bottlenecks on the major rail trunk routes between capital cities.

Road: $771 million will be invested in road projects, almost completely made up of accelerated spend on existing projects.

Kimberley development: $195 million has been set aside to fund irrigation and social infrastructure around Kununurra in the Kimberleys in WA.

Education infrastructure: $1.6 billion has been set aside for education. Of this, $581 million will go to fund eleven projects put forward by metro universities, with a further $1 billion to fund teaching and learning capital in TAFEs and universities.

In addition to this planned infrastructure spend, there are two further business stimulation measures.

Pay as You Go payments by small businesses for the 08-09 year will be deferred, with a 20 per cent deferral in the payment due for the December quarter. This is essentially a cosmetic measure providing a short term benefit of $440 million.

More importantly, there will a short term investment allowance of 10 per cent on capital investment over $10,000 in tangible depreciating assets by business in the period up to end June 2009. This measure directly targets business investment at an estimated cost to revenue of $1.6 billion.

Comment

In announcing the new measures, the Government stated that it expected the budget to remain in surplus. We must be getting quite close to the line here, given previous announcements.

The infrastructure announcements strike me as generally sensible because they should yield a direct economic pay-back over and beyond the immediate stimulus effect.

While the part deferral of PAYG payments will yield a short term cash flow benefit, I do not think that this is of any real economic significance. However, the new investment allowance is of more importance.

The problem with this type of measure is that it yields a wind-fall gain to businesses that would have invested anyway. This has to be offset against the gains in investment flowing from the stimulus. That said, the measure does directly target one of the main economic drivers, business investment.

I do not have access to Treasury's econometric model. I would be fascinated to see projections as to how the various bits fit together in economic terms. Without this, it is hard to make sensible judgements as to collective impacts.

In all this, I come back to two key points.

The first is that we remain in a strong position simply because the budget position has been so sound. So long as any Government measures do not create a structural deficit, there remains considerable scope to expand Government spending.

There is no exact science in economic policy in circumstances such as this. To a degree, it comes back to trying things to see what might work.

The second is the continuing importance of the balance of payments. If the stimulatory measures create a serious deficit here, then stimulatory policy will be constrained. Fortunately, and as I argued in Australia's improving trade performance - October 2008 statistics, our position here is quite good.

Australia's economic stimulus packages - the practical difficulties in cranking up spend

2008-12-10T11:53:00.000+11:00

One of the interesting side-effects of the various Rudd Government measures intended to stimulate the economy is the delivery pressures created.

In recent years, Australia's public sector has been under constant pressure to do more with less. Now the funding taps have been turned on, with pressure to spend in the 08-09 and especially 09-10 financial years for counter cyclical purposes.

This pressure flows from Canberra down through the COAG (Council of Australian Governments) process to individual state agencies. Throughout Australia, thousands of public servants are working on spend proposals, negotiating supporting arrangements with the Commonwealth, developing implementation plans.

From a public service perspective, there is a great feeling of liberation to know that you can now do some of those things that were clearly necessary but were simply out of court because of lack of funding. However, there is a very real problem here.

There is absolutely no point in developing plans when you know that those plans cannot be implemented. Here one side-effect of the past budget constraints, the need to do more with less, is that the development pipeline has thinned over time. Now when we want to spend, we are actually starting from scratch in many cases.

Inevitably, there will be some waste. By this I do not mean that project spend itself will be inefficient in a financial sense, although this may occur. Rather, that our lack of forward planning means that we will not get the best results from the spend in a longer term economic sense.