Posted: March 02, 2005

CD1201403 - macro policy reality

We did some spatial research yesterday using the ABS 2001 Census data. The following Table presents the results. It provides a range of socio-economic indicators for both the state of NSW overall and a particular location in NSW which is geo-coded CD 1301403. A CD (Collection District) is the smallest unit of geography that ABS uses to collect and publish data and represents around 200 dwellings. Have a look at the data and then before you read on write down what you might think life in this spatial area is like. Go on, ponder a little, form some images. Would you like to live in this CD?

Socio-economic indicator	CD 1301403	NSW
% Post school qualifications	17.6	41.3
% Owner or purchaser private dwellings	7.1	68.0
% Public housing	89.6	5.1
% Born OS	21.2	23.4
% Indigenous	7.9	1.9
% postgrad, degree or diploma	4.5	22.6
% Sole parent families	53.1	15.5
Median Age	24	35
Median weekly individual income	$200-$299	$300-$399
Median weekly family income	$500-$599	$800-$999
Median weekly household income	$500-$599	$800-$999
Mean household size	3.5	2.6
% internet usage	14.7	38.3
Labour force participation	48.6	62.2
% unemployment 15-19 years	18.8	16.2
% unemployment 20-24 years	24.0	11.3
% unemployment 15-24 years	21.1	13.3
% unemployment rate total	17.8	7.2

Now, yesterday in the Sydney newspaper The Daily Telegraph one Piers Ackerman wrote in his opinion piece We will not travel the road to anarchy that "NO MATTER how many wreaths are laid on Eucalyptus Drive, Macquarie Fields, or how many rocks and molotov cocktails are thrown, there is one indisputable truth ... [the two boys - one aged 17 and one aged 19] ... were killed last Friday night because they were in a stolen car. Had they not chosen to go joyriding, had they not chosen to engage in criminal activity, they would still be alive today ... The butcher's bill for this incident was avoidable. The choice lay with the dead. Those who feel they might joyride in the future should take note."

CD 1301403 is Eucalyptus Drive, Macquarie Fields. The press coverage of the deaths and subsequent riots have focused almost uniformally on the 'lawlessness' of the rabble and the need for more police and harsher sanctions to be applied. Talk about focusing on the manifestation rather than the cause. What should be applied immediately is a Job Guarantee accompanied by case workers and other mentors to help this exceedingly disadvantaged community. Joblessness promotes social exclusion and poverty, is highly correlated with mental health issues, criminal activity, family breakdown and other social problems. If we do not give a community hope then how can we be surprised that the same community will react to us with anger. Why did these boys die? What care did the system that deliberately runs macrocroeconomic policy such that approximately 12 per cent of willing labour cannot get enough work and probably 1 million are without any work at all have for these boys? That is the major issue that arises out of these problems. Unemployment and the social exclusion it generates should be the media focus rather than the symptomatic cries of the angry.

Meanwhile, the Reserve Bank proved how mindless monetary policy has become in this country. They put the interest rates up today to stop the credit boom and to reign in imports. However, the current account, as I have written before reflects a desire of foreigners to accumulate financial assets in our currency. Higher interests rates probably increase that desire and thus will push the exchange rate higher. If there are trade effects arising from this they will injure exports - exactly what the RBA and the Government are claiming they want to increase. Note that the construction being placed on the record current account figure yesterday is mainly a beat up. As long as the world wants to ship more things to us than we have to ship to them to satisfy their desire to save in AUD then we gain.

Of-course, a few hours after the rates went up, the ABS told us what we knew already that the real economy - the economy that generates employment and reduces unemployment - has stalled. December quarter growth of 0.1 per cent, annualised 1.6 per cent. That is a major slowdown and it should be the last time that the RBA should think about hiking rates. Normally, I think the effects of short-term interest rates on real demand are overplayed - the elasticities are complex and not necessarily negative. But you also have to continually remind yourself that the years of federal surpluses combined with the energetic financial engineering that has assaulted households in the last 10 years or more has led households to be more in debt than ever. Anecdotal evidence now indicates that many (a higher proportion than ever!) families are on the limits of liquidity - rate rises of even today's magnitude will impact severely on their ability to maintain their nominal commitments. And I bet the RBA has no real idea of when the next rate rise will tip significant numbers of indebted households into insolvency. Then the house of cards collapses and once again we will know who to blame.

Even the Government is talking down the need for more rate rises. The Treasurer said today that "I don't see any evidence of inflationary pressures." Talk about central bank independence. The Treasury will put as much pressure on the RBA as possible to stop any further nonsensical behaviour as we have seen today from the bank. But it still does not look good. The PM reacted today by saying "Nothing alters the fact that we have the lowest unemployment in 30 years, we have a Budget strongly in surplus, we have low inflation, we have low interest rates, despite the quarter of a per cent lift today" But we now have much higher labour underutilisation rates than 30 years ago and a precariously indebted household sector. The last thing we need now are budget surpluses.

And what of the federal opposition. Is there one you say? Sorry for reminding you. The opposition leader told Sydney radio today that "We've been hit with a double whammy, low growth and rising interest rates" So far I agree with this. But in his press conference he got into a bit of economic theorising "A $66 billion punch on the budget bottom line by the Howard Government to re-elect itself has played no small part in the rising interest rates we now confront. That expenditure, like its previous expenditure, has not gone into creating future prosperity for the Australian economy." First, Kim, please understand that net government spending puts downward pressure on interest rates. Second, the RBA sets interest rates at whatever level it sees fit. Kim, please read my latest paper with my co-author Warren Mosler and stop making public statements about 'financial crowding out'. They are ill-informed (wrong) and dangerous to the cause of full employment.

But we have more. The opposition shadow treasurer warmed up for today on Lateline last night saying that "As these problems have been emerging we've had the Howard government spending like a drunken sailor, $66 billion through the election campaign, and restricting our future capacity to invest in the skills development of the nation." That is, he is accusing the Government of spending too much and claiming that this is draining our savings. Please! Today in an official press release (I will not link to it because I do not actually want to encourage Internet traffic to the ALP site), he really went into gear saying "Over the past two quarters economic growth has been only 0.3 percent, this means the Government's forecast of 3.0 percent growth for 2004/05 is unlikely to be met. The lower than expected growth rate jeopardises the budget surplus and demonstrates the foolhardiness of the Coalition's $66 billion election spending spree. This spending spree represents a squandered opportunity to invest in the drivers of economic growth." First-year macro students please note: Do not write this sort of drivel in your examinations.

Sure enough, the GDP forecasts will not be met and if labour force growth and productivity stay roughly on trend then official unemployment will rise again - and when it rises it does so sharply. And the last thing you would be aiming for is to 'protect' the 'surplus'. What we need now is deficit spending - to build public capital infrastructure, get our higher education system producing top quality graduates, and to provide for a Job Guarantee. Kim and Wayne, ring me if you want some more details.

Blog entry posted by bill