In his book Dog Days, economist Ross Garnaut includes a convenient critique of his own thesis, under the heading ‘How will you know if I am wrong?’
In that section, he reminds readers that he predicts one of two possible futures for the Australian economy.
The better path would be “an early and large real depreciation, with a hard start but better outcomes.” By that he means the dollar must fall, and wages must not rise to offset that fall.
In short, Australians must start paying themselves at levels that reflect the value of what they produce vis-a-vis our major trading partners.
It’s a difficult future, but the other alternative is much worse.
The other option, writes Garnaut, is to continue pretending we don’t face an economic crisis (note: not a fiscal crisis) and stick to “business as usual” policy settings.
“This gives us economic growth well below our capacity of 3-and-a-bit per cent per annum, slowly deteriorating employment conditions for a growing population, and a slow squeeze on real incomes.
“The [at the time of publication] officially projected budget surplus in 2016-17 does not materialise. The modest economic growth is worse than it looks because it is dominated by increased resource exports that contribute relatively little to Australian jobs and incomes.”
According to Garnaut, then, we are already some way along one of those paths.
With the AUD/USD exchange rate stuck at 94 cents rather than Garnaut’s preferred 63 cents, can you spot which one?
The latter scenario of the Dog Days thesis is supported by several current indicators that have not been helped by the chaotic rollout of the Abbott/Hockey budget plans.
There is the too-high currency, low consumer confidence, low business confidence, weak investment, weak credit demand, the resources ‘capex cliff’ and inadequate job creation for a growing population.
The last of these is becoming an urgent problem. This week’s ABS labour force data showed the disappointing result of unemployment rising to a headline rate of 6.0 per cent seasonally adjusted, or 5.9 per cent in trend terms.
However, this does not fully tell the story of stalling employment.
Aside from the relationship between participation and the headline jobless rate, explained by Callum Picking on Thursday, (The RBA must ease Australia's labour pains, July 10) it’s also necessary to consider growth in population, incomes, GDP and productivity to see where things are headed.
Let’s start with GDP. The demand for labour, goods and services during the construction phase of the resources boom has added several points to GDP, and thus has kept GDP growth at about trend levels right up to the present day.
However, as completed resources projects go into production -- particularly iron ore mines -- the workforce required to run them is substantially less, meaning between 75,000 and 100,000 jobs will go in the next year or two.
That’s great for the labour productivity of that sector -- more output per hour worked -- but the ‘GDP’ counted in all those resources sales will not prevent the jobless queues lengthening.
On the positive side, it will be a good source of corporate tax revenue, even without a proper resource rent tax. It is too late for the MRRT to be redesigned to reimburse Australian citizens for the one-off sale of their mineral assets, something royalty rates have not been responsive enough to capture.
But shareholders of the big miners will do well, and as they supplied the capital to build the mines, that’s largely fair.
Booming iron ore sales should be seen in this light -- more than two-thirds of the Rio Tinto and BHP Billiton shareholders are overseas, and it is they who will accrue the profits in return for risking their capital.
Meanwhile, as noted previously, the Department of Immigration and Border Protection has no plans to curtail current levels of immigration -- about 220,000 per year. That combines with low mortality rates (we’re living longer) and still-high fertility rates to mean a strongly growing population.
Immigration may need to be looked at, because although migrants usually do well in finding jobs and also add to aggregate demand, the currently weak employment market may not accomodate new Australians as well as it previously did.
Specifically, one of Garnaut’s favourite metrics – total hours worked per month – is in trouble when seen in the context of a growing population.
As the chart below shows, the number of hours worked per Australian resident has varied in a range of about 5.5 hours a month since the Howard government came to power in March 1996.
That might not sound much, but based on current average full-time weekly earnings of $1437 per week, that range would equate to about $210 per month in gross earnings. And remember, that’s per resident, not per worker.