John Quiggin

Hi John,

Not sure if I am using this message board correctly. I was wondering whether you had any thoughts on the bank funding issue that is getting some airplay at the moment? Guy Debelle says here that the link between current account deficits and bank borrowing is tenuous http://www.rba.gov.au/speeches/2011/sp-ag-080711.html . One reason to think there is that the increase in domestic credit + the increase in net foreign debt equals the money supply. So domestic credit = money supply less the increase in net foreign debt. The money supply equals deposits and currency. The banks’ funding gap is the non deposit funded increase in domestic credit, which the banks “have to” finance because the banks dominate the Australian credit market. But this story is not clear to me at all. I would have thought we could have a smaller banking sector without decreasing the CAD because bonds and equity are close substitutes for loans. If households cannot borrow from the banks they can find another way to aggregate and issue a loan or sell house equity. But then I suppose any sale of a claim on an Australian asset has to be transmitted through the banking system. Would appreciate your view on how these issues are related.

The BER final report has been released with a pretty damning overview of the value for money achieved. As stated in the ministers release, of the 80 additional projects investigated, 23 did not achieve value for money and a further 26 were of marginal value.

My local primary school did not formally complain so it is officially counted amongst the successful projects. However, locals who care are totally disdainful of the cost and outcome of the multipurpose hall at around $2.5m.

I see two issues here. The first is that the state education department appears to have had virtually no oversight or accountability for the project, contracting out the job to one of Australia’s largest engineering and construction firms who then used an out-of-town builder to construct the hall. The outcome was that the project had public sector waste written all over it. With support for comprehensive public education on the back foot the department could not have achieved a better foot shooting result with its primary constituency, the local school community.

The second issue affects local builders. In an area where domestic and infrastructure builders are doing it tough there were two flow on effects, the first being resentment at missing out on the money, and the second of raising false expectation that buildings should cost this much, thus justifying their unrealistic expectation of earning up to $1000 per day for trades and semi-skilled work. With falling local house prices and talk that houses are now ‘below replacement cost’ (at the inflated cost expectations of both builders and suppliers) it would seem there will be a lot of pain for the building trade before capacity and demand in the local area are again aligned.

I know the Australian newspaper drove the BER campaign, with the effect that the campaign has been howled down by the left on several occasions. However I think in this case, and despite all their hyperbole, that they were in fact doing what a national paper should do. Shame really. It would be simpler if they were just vile.

Maybe cheap Solar Power is not so far away:

web.mit.edu/newsoffice/2011/printable-solar-cells-0711.html

You might like to read Billy Blog on Governmernt waste Gipsyland.

http://bilbo.economicoutlook.net/blog/?p=15211

Slightly dfifferent spin to what you will read in the Murdoch press.

@Gipsyland

Well, we went through the GFC without a recession. Maybe it was well worth it? A recession similar to those in Europe or the US would have cost a considerably more. All in all a very successful stimulus which also managed to do something for schools and insulated a few homes. Of course, the unregulated private sector let everyone down by overcharging for building and setting fire to some homes. Maybe these shonks shouldn’t be relied on to ‘self regulate’.

@Lloyd Lloyd I agree with Bill Mitchell’s definition, but again take the oft quoted 3% with a grain of salt. The argument is not overall economic efficiency, which is the oft stated purpose of the stimulus, but the more common sense efficiency of a fair payment for a quality outcome. Sure, the government could have achieved stimulus US style by cutting taxes on millionaires, or, in line with their program, by giving $20k cash to everyone earning more than $50k pa. That would probably have achieved the same macroeconomic outcome in terms of efficiency with a correspondingly negative outcome in terms of social justice. (Btw, my wife who work’s full time an artist did not get the $900 as she claimed a tax loss in the relevant year, while my bosses wife who does the occasional shop work did… go figure).

The people round here see paying too much for too little as waste. It’s a ‘common sense’ argument. As the old saying goes, you only get what you pay for, but in Australia we’re very lucky because we often don’t get all the government we pay for.

@Gipsyland

The government usually gets more than the public gets when members of the public buy from the unfettered private sector, precisely because with government there is more oversight. Home owners were responsible for choosing and organising who would put insulation in their homes, and as we know, despite having their most valuable asset at risk, many of them did not choose wisely.

As for the assertion that the Australian government could have achieved the stimulus the way the US did and it would have had the same macroeconomic outcome… Well, the US didn’t achieve the same macroeconomic outcome. They had a recession and they have close to ten percent unemployment even now. Instead the Australian government chose to do it properly and it worked.

Of course, because we all missed the bullet many foolish people now believe there was no bullet to miss. Unfortunately there looks to be another bullet coming, and I doubt the government will have the steel to do it right a second time. So, for the benefit of doubters, we may be able to experience what we missed the first time around.

Things might be beginning to heat up for Murdoch in the US. There is even a site dedicated to keeping an eye on his empire: newscorpwatch.org They seem to be an excellent site for keeping track of all the revelations.

I found the article about printable solar cells in comment #3 interesting. Because there are still plenty of useful innovations that can be made in solar cell design, I am confident the cost of solar power will continue to decline. (And even if there were no further innovations to be made, the cost of PV would still decline due to economies of scale and reduced installation costs.) I have no idea if the printable on paper solar cells in the article will turn out to be useful, but even if they only achieve a few percent efficiency they could be very helpful, especially for off grid uses, provided they are cheap enough. Currently there are millions of people in poorer countries whose only source of electricity is PV solar and lowering its cost could greatly improve living standards for the more than one billion people in the world without access to electricity.

@Lloyd

Sorry about jumping from the BER to the ‘Household Stimulus Package’ for my example, I sort of equate them as peas off the same pod, but that is not really the case.

@Freelander

I don’t have a problem with you contention that the public is often better served by government rather than private providers. In particular I think the misinformation campaign over the HIP component of the stimulus was atrocious as pointed out in pollytics recently. But my real issue with this is whether the government understood what was happening, was Kevin Rudd fulfilling a subconscious desire to kneecap Peter Garrett (aka. the very tall poppy syndrome) or had the government totally lost the ability to put any argument to the electorate more complex than a simple sorry (which I think was required)?

For the record I follow the herd on the belief that our stimulus worked and the US stimulus did not. Bailing out the banks while holding the toxic debt is the post-Japanese bubble experience writ large, and there is an interesting correlation between falling US unemployment and the relatively small US stimulus package that is finishing now. That is, US unemployment has been falling slowly while the stimulus funds flowed, and is now flat lining with a tendency to regrow with the funds exhausted.

And as for the neoliberal agenda…. For starters, there is the growing inequality as the share of income going to the corporate sector increases, and then there is privatisation of tax (as in government lowers taxes, taxpayers use disposable income to borrow to capacity to buy assets such as houses, private banks and their owners tap the excess disposable income stream as interest payments both now and into the future) . Neither of these issues is being addressed by any western government, and certainly not by any of our economically neoliberal political parties. (and yes, that includes the Greens as well).

But that does not change my contention that the BER left much to be desired. And while my impression is that the Household Stimulus Package was largely view on the ground as positive, the other two programs were largely viewed as good (or at least necessary) but incompetent. I’m not saying private enterprise could or would have done better, just that the commonwealth and the state education departments should have done better.

Boy, what if someone had hacked Rupert’s phones and dumped the last 10 years of phone logs onto WikiLeaks?

If it happened, I’d certainly be laughing at the richness of the irony.

Is it regular JohnQuiggin.com regular commenter Fran Barlow that features on the Andrew Bolt blog?

http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/comments/carbon_pollution_is_a_lie/#commentsmore

Congratulations JQ for the Distinguished Fellow award from the Economic Society.

How believable is it that Murdoch’s other papers in the UK did hardly any phone hacking compared with “News of the World”?

@TerjeP

It is indeed Terje …

The “only democracy in the middle east” passes a law banning dissent!

http://www.nytimes.com/2011/07/12/world/middleeast/12israel.html?hp

Apparently it is now against the law in Israel to speak out. Surely, as Israel’s ‘greatest friend’, Australia should follow suit? It would be the democratic thing to do.

Perhaps someone will ask our PM about it in the next day or so as she makes herself available to every journalist in the land.

And if there is any doubt about the reaction to Murdoch, check out the comments on this story:

http://community.nytimes.com/comments/www.nytimes.com/2011/07/12/world/europe/12yard.html?sort=oldest&offset=3

Pages and pages of it and NOT ONE comment trying to seriously defend Murdoch.

It gives me hope.

@boconnor
Yes, congratulations John.

@Gipsyland Gipsyland appears to object to the lack of cronyism in the implementation of the BER.

@rog

@rog. Cronyism is what it is, corruption by another term. What I don’t understand is why bureaucracies rarely work, even though they’ve been around for ever, and there are sufficient examples of relatively efficient bureaucracies (A few of the smaller European nations come to mind). As some of the comments on university management on the other thread show, an outstanding organisation can exist despite its management. And why are individuals, manager’s et al key to a bureaucracy’s effectiveness? Surely our complex interactive and interdependent civilisation has learnt to do better than that? Not singling out any particular bureaucracy here, just commenting…

Gipsyland – All of the school communities in my region have been very grateful for the new school buildings that they have been able to build as a result of the BER and education has been immeasurably improved because of the increase in the range of activities available. To avoid waste your school could have refused the money. It would seem that your community was too busy looking the gift horse in the mouth to actually value what has been provided.

@Gipsyland

You seem to miss the point. The BER and the insulation were provided by the private sector, and it is the private sector that let everyone down. Better government oversight could have reduced the patent deficiencies that in this case, and regularly the private sector displays. The reason why that did not happen is the fashionable, at all levels of government, economic theology that calls for self-regulation (which is simply another way of saying no regulation). If self-regulation worked why don’t we apply it in the criminal area and empty all our jails. Let the crooks regulate themselves and, indeed, decide if what they are up to is criminal. Many undesirable activities by business, are nowadays, not even illegal, so there is no recourse.

I feel bad for poor Bernie Maddoff who fell victim to anti-Ponzi legislation, which had been passed in less enlightened times.

With inadequate regulation and atrophied mechanisms for oversight what happened in insulation could be expected. Economic theology suggests that home owners would not let shonks poke about in their attics with the consequence that their house burns down, because doing that is not very rational. Economic theology suggests that people without the knowledge and training needed would not go poking about in roofs trying to lay insulation when they didn’t know what they were doing and end up electrocuting themselves, because doing that is not very rational. But, unfortunately, the world doesn’t seem to operate according to the strictures of economic theology.

With the BER, economic theology suggests that school principals, boards, concerned citizens like yourself, would provide good oversight at the coal face so the job would get done right by the builders and for reasonable cost. Well, economic theology might suggest that but that is not what happens.

Same story recently with cattle exported to Indonesia. Economic theology suggests that farmers wouldn’t let things get so bad that the public demands a halt to exports, because doing so is not rational given what they stood to lose. But the farmers did and then bleated that it is all the governments fault. Plenty of idiots in our society, like the farmers, and others need to be saved from themselves. Unfortunately, the idiots are not confined to the private sector and include some public servants and a surprising number of politicians, so even government cannot be expected to save every idiot from themselves.

As for your analysis of Japan… A large problem the Japanese have had is that the US has not allowed their exchange rate to fall. And as for the implied not bailing out, the trigger for the freeze in world credit was the US government letting one institution fail. When that happened, and given the toxic assets that had been globally distributed, no one trusted other financial institutions because people lost faith in them, and faith in government to back them up in a crisis. If the US and others had let a series of financial institutions fail we really would have had a great depression.

Money, property and commerce rely on a network for beliefs and trust. When those are shaken we are really in trouble.

Gipsyland, aren’t you simply deploring the fact that it is a complex world and everything can not work out perfectly for everyone involved eg local builders lacked the skills to build these buildings therefore they didn’t get the work, end of story. As Jill Rush said, stop looking the gift horse in the mouth.

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