Economists are worriers… and warriors
June 2013
Economists worry about the next problem for the economy be it inflation, deflation, a recession or a boom. That worry extends to whether the central bank and government have the right policies in place to tackle these risks and challenges, which of course, according to the economists, they never do.
On the policy front, economists are warriors for reform, for change, for progress. They have views and ideas about the appropriate economic policy that they judge will benefit the economy on either efficiency or equity grounds and they are often quite vocal in expressing their views about the prescriptions that need to be followed to make things better.
These worrying and warrior themes from economists are showing up in the current economic and political dynamics.
From an economic perspective, there is currently a wall of worry that the end of the mining investment boom will risk Australia rushing headfirst into a recession. Until recently, the mining investment boom was the catalyst for the economy’s resilience.
One critical effect of the mining boom was its role in driving the Australian dollar to a record high above US$1.10. This elevated level for the dollar was in turn a worry because it was inflicting pain on the non-mining parts of the economy. There have been a swarm of stories about the dollar forcing manufacturers to close, tourism operators to change their marketing strategy and retailers to adopt new methods of selling if they were to compete with the overseas on-line sellers who were seeing a boom in business as the Australian dollar rose.
Now, as mining investment inevitably weakens, there is nothing much else in the economy that can stop the slide to recession, or so say the economic worriers.
But these worries seem overblown. The Australian dollar has fallen quite a lot in the past month or so, more or less matching the news that mining investment is turning lower. For the tourism operators, retailers and anyone else who has been squeezed when the currency was trading above parity with the US dollar, it’s a significant turn that will likely see them grow.
It is apparent that exporters will be getting a significant boost from the weaker dollar. It will also help those local businesses that were competing with importers whose import bill will start to rise as the dollar falls.
Add to all of that the quite substantial cut in interest rates and the business sector – outside mining – and consumers are set to maintain solid growth in spending.
These worries are all just part of the swings that inevitably arise over every business cycle. Some economists are starting to worry about higher inflation as the Australian dollar falls. Or that the very low level of interest rates will fuel a house price bubble.
There is always something to worry about While much of the election discussion is currently focused on a range of ephemeral matters, there is an undertone of economic policy issues that highlight the divergence between the two main political parties. The economic policy warriors are looking to a likely change in government and the election of the Coalition.
Industrial relations is something of a policy sleeper at the moment in terms of a public issue, but underneath the surface, the policy warriors at either end of the political spectrum have strong views about how best the regulation should work in the labour market.
On the right, there is an ongoing fight for greater labour market flexibility. They argue continually for lower wages, smaller and fewer penalty rates, greater ease in hiring and firing staff as the business cycle moves higher and lower. These warriors are unlikely to ever win, because on the left, the hard facts of more than a decade of low unemployment, moderate rises in real wages and low levels of industrial disputation are clear evidence that the current balance of work place practices is about right.
Policy warriors usually have a lot to say about tax. And wherever the tax system is at any point, policy warriors will always argue that it needs to be reformed. There is an unending discussion on the scope and level imposed on the goods and services tax. At the same time, the tax system needs to reform company taxes, the mining tax, negative gearing and income taxes, to name a few.
Like industrial relations, political bias will determine the stance of the policy warriors. It would not be possible, it seems, for the right to argue for higher income taxes or for the left to embrace a flat income tax.
And so the story goes.
There will always be something to worry about with the economy – it is never perfect. There will always be a business cycle and the economy is never in so-called equilibrium. For the warriors, there will always be a policy that needs to be tilted, changed or reformed.
This is probably why economists have and always will have a high profile in the political debate.
Stephen Koukoulas is Managing Director of Market Economics. He writes a daily column for Business Spectator.
Image courtesy: gaianeconomics.blogspot.com.au
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