{"id":13059,"date":"2011-01-07T16:52:24","date_gmt":"2011-01-07T05:52:24","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13059"},"modified":"2011-01-07T16:52:24","modified_gmt":"2011-01-07T05:52:24","slug":"flooded-with-nonsense","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13059","title":{"rendered":"Flooded with nonsense"},"content":{"rendered":"

\t\t\t\tAs the days go by we begin to realise the huge scale of the problem that the floods in Northern Australia are presenting our country. Whole communities are being forced to leave their homes and major disruptions to economic activity (in very important regions) are being experienced. The floods are being labelled the worst in Australian history (well the white European occupation of indigenous land history) although that depends on the area – certainly the worst since the early 1950s. The areas that are affected are major sugar, coal, iron-ore and food production regions. So real GDP growth will be reduced and this will exacerbate the already slowing economy. What should be the correct federal government response? Answer: to expand the budget deficit (via discretionary spending increases) to ensure that essential public infrastructure is replaced and private economies are able to function again. What is the current federal government contemplating? Answer: spending cuts. My assessment of this: they have no credibility as fiscal managers.
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\nHere is one of many pictures taken from the floods in Northern Australia at present. This one is actually from the Gascoyne region<\/a> in Western Australia. The other bad flood areas are in Northern Queensland – at present around Rockhampton<\/a> and further south near St George<\/a> – but as the waters flows south through the river system into NSW the flood areas will broaden considerably.<\/p>\n

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When I see photos like this one I draw several conclusions among them being that there has been a massive destruction of public and private infrastructure which will require billions of dollars of outlays over several years to repair and\/or replace. Further, given these are major food production and mining (coal and more) areas and many crops are destroyed and mines closed due to flooding, real GDP will be lower in the coming several quarters.<\/p>\n

The federal and state governments are obviously responsible for the replacement of the public infrastructure and ensuring that the private insurance companies do not rip their policy-holders off in the reconstruction.<\/p>\n

Bloomberg<\/a> reports that the state of Queensland “produces 95 percent of Australia’s sugar, is its largest coal exporter and accounts for about 20 percent of the A$1.3 trillion ($1.3 trillion) economy”.<\/p>\n

Major mining companies have “declared force majeure” which means they are unable to meet their supply contracts. Bloomberg reports that since the floods began in early December they have “cut production of coal by about 4.5 million metric tons” <\/p>\n

Even conservative estimates predict the loss of export revenue will be “quite substantial”.<\/p>\n

Estimates of the impact on real GDP growth suggest that in the fourth-quarter 2010 and the first-quarter 2011 (at least), the floods will “cut growth as much as 0.5 percentage points”.<\/p>\n

To put that in perspective, the third-quarter national accounts showed that the Australian economy was already slowing as the fiscal stimulus was being withdrawn and monetary policy was being tightened. Australia’s growth rate slowed to 0.2 per cent in the September quarter which was the weakest pace since a contraction at the end of 2008. Please read my blog – The Australian economy loses to the snail<\/a> – for more discussion on this point.<\/p>\n

Add to this the fact current broad ABS labour underutilisation rate is around 12.4 per cent – which is a horrific rate of wastage of our most vital resource – labour power. Please read my blog – Labour force data – most signs good<\/a> – for more discussion on this point.<\/p>\n

While exports have been relatively strong courtesy of the commodities boom being driven by the growth in China, the contribution of net exports to real GDP growth was negative last quarter (imports stronger than exports). I have no problems with imports growing faster than exports. It means that we enjoy the labour of other nations more and have to ship less to them in value terms for these benefits. As long as the “real terms of trade” are in our favour and the foreigners are willing to exchange real goods and services in our favour in return for bits of paper denominated in Australian dollars then why should we complain about that.<\/p>\n

But from a growth accounting perspective it put a greater responsibility on private domestic spending and public spending to support stronger domestic growth rates. There has been a modest recovery in private spending over the last year but not enough to keep the economy growing anywhere near strong enough to put a significant dent into the labour underutilisation rate.<\/p>\n

Come in … public spending. The problem is that the federal government is so neo-liberal despite their progressive worker-oriented pretensions that they are already pursuing a fiscal rule that aims to put the budget into surplus by 2012, limit real spending to 2 per cent growth per annum, and restrict tax revenue as a share of total GDP to 2007 levels.<\/p>\n

Why? No reason, other than they have somehow bought – hook line and sinker – the mainstream economic gibberish about crowding out (higher interest rates); future tax burdens (to “pay back the debt”) and the primacy of private spending (which is no where near strong enough to support adequate growth rates at present).<\/p>\n

There has also been some speculation that the central bank (the Reserve Bank of Australia) would have to tighten interest rates given that the floods will increase the Consumer Price Index via the food shortages. Food prices (fruit and vegetables) are already rising and once winter comes and the southern states stop supplying a lot of similar products, then prices will really shoot up.<\/p>\n

How much? Not that much in terms of their overall impact on the CPI – about 0.2 per cent.<\/p>\n

While the bank economists – totally entranced with inflation targetting – always cry out for rate rises when there is a sign of any economic growth, even they are starting to realise that the Australian economy is slowing and inflation has been falling<\/strong> in recent months notwithstanding the hiccup that the floods will cause for a little while.<\/p>\n

Bloomberg did a survey<\/a> of economists today about the desired policy response and representative of the responses was this one:<\/p>\n

\nThe RBA is likely to tread more carefully than it otherwise might have … It’s tough to hike when one of your states is suffering a natural disaster.\n<\/p><\/blockquote>\n

The economist who made those comments said he had now changed his forecast for a rate hike in February to at least May as a result of the crisis.<\/p>\n

So, even in mainstream logic, which considers all aggregate demand management to be the domain of monetary policy, there is no inflation threat and the real problem is likely to be slow (or declining) growth.<\/p>\n

Quite apart from their narrow conception of the capacity of the aggregate policy instruments what this tells us is that the “hawks” are even advising against any aggregate demand contraction being induced by policy changes.<\/p>\n

Later in 2011 as the reconstruction phase begins there will be some growth support. We must remember that in the recent downturn one extraordinary aspect was the fact that the construction industry, which typically is badly impacted by a recession maintained growth. Why? The large public infrastructure spending that formed part of the second federal fiscal stimulus package. If the federal government had not intervened – that is, followed the advice of the conservatives and let the market sort it all out – then the economy would have followed the path of the US and UK economies.<\/p>\n

But as the fiscal stimulus is being withdrawn, construction is a casualty as recent data releases show. The ABS also released the latest data for Building Approvals<\/a> yesterday (January 5, 2010) which reinforces the sluggish nature of the Australian economy at present.<\/p>\n

The summary of those results is:<\/p>\n