THE DISTILLERY: Economics face-off

Kevin Rudd has changed the tone of the political discussion. But will he change the substance? The worry for some commentators is this will do nothing but hinder the push for further economic reforms and instead be a trigger for a new populism phase – this means protectionism.

Also in this morning’s edition of The Distillery the country’s embattled coal industry, so important to the government’s bottom line, gets a close look at.

But first, The Australian Financial Review’s economics editor Alan Mitchell believes Rudd and Tony Abbott will bring out the worst in each other and that the protectionist policies we so need to get away from will be reinforced in this election campaign.

“Rudd is signalling that there will be handouts aplenty. And, because Rudd is a powerful political campaigner, Abbott’s visceral response will be to at least match Rudd’s offers of assistance. Abbott’s interest in, and understanding of, the economy is as limited as Rudd’s. Both care more about the rust-belt jobs they can see than the jobs they destroy with their protectionist policies. Both happily confuse increased production generated by subsidies with the lasting productivity gains and innovation needed for Australia’s longer-term prosperity. Their political careers have been shaped by an era in which growth and prosperity were either inherited from the reforms of the 1980s and 1990s or rained on Australia from the China boom. Neither the public nor the major political parties put a high priority on strong economic management.”

How does this differ from Julia Gillard versus Abbott? Not very much, Fairfax’s economics correspondent Peter Martin appears to feel, arguing that Gillard’s narrative was misleading and indicated an incapability of adapting.

“Unveiled in the keynote address to the Committee for the Economic Development of Australia just days before the spill, she said the economy was ‘growing, stable and strong’. ‘Growing’ is the only one of those three words that is demonstrably true. ‘Stable’ is rubbish. Gillard herself acknowledged in the speech there were ‘some complex transitions underway’. And the economy isn’t ‘strong’. If it was, demand wouldn’t be shrinking in four of Australia’s six states and the Reserve Bank wouldn’t have cut interest rates seven times in 18 months and be weighing up the need to cut further. Gillard’s narrative went beyond the merely rosy. In last Monday’s speech she came close to branding as a traitor anyone who thought differently.”

Meanwhile, Fairfax’s Tim Colebatch looks at the gulf between the strong performance of the Australian economy compared to other developed nations and the extent to which voters are willing to give Labor credit for it. Perhaps some craft backbenches have nicked a few strong economic headlines over the last few years.

Meanwhile, The Australian Financial Review’s Jennifer Hewett suggests that Greens leader Christine Milne “should be delighted” at the continuing string of stories about company exits and retrenchments in the Australian coal industry.

“On the same day Julia Gillard lost her job, Resources Minister Gary Gray had already cited the 11,000 coal jobs lost so far in Queensland and New South Wales over the last year with the prospect of more to come. The latest decision by the Brazilian mining giant, Vale, to put a third coal asset up for sale in central Queensland is yet another marker in the great spiralling down of expectations for Australia, along with global prices. Add in the spiralling up of costs over the past few years and it’s no surprise that the canaries have stopped singing. No one now believes any recovery is coming soon. The rush to get coal out and on to ships has given way to the view that it’s hard to justify new projects and that existing ones have to savagely curtail costs and expansion plans just to survive.”

It should be pointed out that Milne has never suggested she takes any pleasure from seeing an individual coal industry worker lose their job. She just doesn’t believe coal is a justifiable fuel source given the potential she sees in alternatives. Sometimes the rhetoric can get a little out-of-whack, but name a political issue where that isn’t the case.

Oh, and coal mines aren't shutting down because of the Greens. They're shutting down because of the coal price.

This kind of criticism is also made, unfairly, about conservatives who campaign for smaller government. They don’t want to see a government worker unemployed; they just don’t believe taxpayer money can be justified on that job.

However, unlike a government worker, the coal industry is crucial the Australian economy. The Australian Financial Review’s Chanticleer columnist Tony Boyd notices that the country’s largest coal freight company, Aurizon, is seemingly undiminished by the pain the coal industry is going through.

“At a time when all the major coal miners are slashing jobs, winding back expansion plans or completely shelving greenfield projects, Aurizon is going from strength to strength. The company’s revenue protection mechanisms limit its exposure to patronage and volume risk. These protections include take-or-pay contracts, which mean that revenue flows even if a coal mine shuts down. Ironically, its stable revenue flows come from the very same companies that are under enormous pressure to cut costs, including Anglo American, BHP Billiton Mitsubishi Alliance, Glencore Xstrata, Peabody Energy Corp, Rio Tinto and Vale.”

Speaking of big mining, The Australian’s John Durie passes on the message from Western Australian Premier Colin Barnett that the resources boom was enough to power his state, but not the entire country. Some people thought it could do both.

Fairfax’s Malcolm Maiden gives his rundown on the performance of the Australian sharemarket this just-ended financial year.

Fairfax’s Elizabeth Knight reports on the crisis talks over at online retailer The Iconic, which is apparently bleeding cash and sacking staff.

The Australian Financial Review’s Karen Maley asks whether it is too late for Federal Reserve Chairman Ben Bernanke to avoid a Minsky moment, which is brought about by a long period of low short-term interest rates and long-term interest rates, which are brought about by monetary policy and quantitative easing, respectively.

“According to the theory first put forward by Hyman Minsky of Washington University in St Louis, this speculative frenzy eventually enters a Ponzi phase, where speculators need to borrow money just to meet the interest payments on their debt. At that point, lenders start to call in their loans, triggering what’s been dubbed a ‘Minsky moment’ – a sudden collapse in asset values as debt-laden investors are forced to sell even good investments to pay back borrowings.”

That just doesn’t sound very nice.