Doubts about jobs and growth

Greg Jericho posted a good article HERE covering the growing doubts about the policies that are being foisted upon us. The following is a shortened version  without the charts.

As developed economies such as Australia’s struggle to encourage growth, even the disciples of austerity are admitting that they might have it wrong. For Malcolm Turnbull the election is all about jobs and growth and a belief that a company tax cut and reducing government spending is the way to achieve both. But in light of the failures of such standard economic thinking after the GFC to provide economic growth, new research is finding that policies that fail to consider other aspects such as inequality are actually undermining long-term economic performance.

Prior to the GFC, the pervading view was that neo-liberal polices of lower regulation, more competition, budget surpluses, increased trade and lower taxes had delivered the economic sweet spot.

And then the world with low regulation, budget surpluses, open markets and low taxes was blown to hell.

And yet the same thinking continues. The Liberal party pledges to cut company tax (to encourage foreign investment), crackdown on welfare spending (to reduce the budget deficit) and encourage more open markets (mostly through the talisman of free-trade agreements).

And certainly such openness has led to benefits – cheaper products that lift overall standard of living and improved the efficiency of local producers. But the neo-liberal strain of economic thought is one that would have us believe the GFC didn’t happen (ALP inherited a surplus, and then the blew it), that pursuing austerity or more open markets has no downside and that the benefits should just be taken as a given.

It’s the same thinking that underpins the Treasury’s justification for the company tax cut: it will eventually improve productivity via increased foreign investment and thus real wages will go up (despite it having virtually no impact on employment growth).

Productivity is a wonderful thing – increasing it improves all economic outlooks. The problem is over the past decade productivity growth has been falling and no one is really sure why.

It’s a bit of a worry (OK, a great worry) that no one is really sure that they are able to accurately measure what is basically the foundation of most economic “reform”.

Perhaps it is little wonder then that in light of the hits to economies from the GFC and the subsequent continued adherence by governments to pre-GFC thinking that the neo-liberal path is being more and more questioned – whether it be by supporters of Bernie Sanders in the USA , or more surprisingly by economists at the neo-liberal heartland of the International Monetary Fund.

An article in the IMF’s latest issue of is journal Finance and Development notes that “instead of delivering growth, some neoliberal policies have increased inequality” and jeopardised “durable” growth.

The authors note that there actually scant proof that the standard policies of encouraging foreign investment and reducing deficits and debt levels has improved economic growth.

They found that it’s tough to actually establish “the benefits in terms of increased growth” from these polices but that the costs from “increased inequality are prominent”. Even worse for those who desire economic growth above all else, they found that the “increased inequality in turn hurts the level and sustainability of growth.”

The authors note that their study of economies found that “austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment”.

As I have noted (repeatedly) lack of demand is a massive issue for our economy. Right now Malcolm Turnbull would have you believe that it is an absolute given that more foreign investment and lower taxation and government spending will deliver economic growth. The reality is such belief is based on a model that struggles to deliver proof that is actually works and which crucially ignores factors such as inequality that can actually undermine their goal of economic growth.

Nearly a decade on from the GFC it perhaps it time to acknowledge the neo-liberal model might have a few cracks in it.

Back on track?

(As published in The Mercury 28th May 2016)

Treasurer Peter Gutwein says we’re back on track.

So how come spending will exceed revenue for each of the next three years?

The claimed surplus of $77 million for 2016/17, an accounting figure derived after a few book entries, obscures the fact that the government will spend $134 million more than it will receive.

The next two years thereafter will see similar excesses. In each of those two years revenue will be less than for 2016/17. A few years ago we had a minor dip in one year but it’s been a long time since the dip stretched over three years.

The Treasurer was determined to deliver a surplus as promised, whether by hook or crook. Revenue was brought forward, additional capital grants from the Feds were negotiated and a transfer from TTLine was arranged. All are one off items that don’t indicate a sustainable position as implied by the ‘back on track’ reference.

Jobs and growth within our means

It’s not long since Prime Minister Turnbull promised an end to three word slogans and the start of a mature conversation with voters.

Alas we are still waiting.

Many were hoping the PM would pinpoint the problems as he sees them and explain why his policies offer a solution. He’s now using a three word slogan, jobs and growth, to promote a solution to the problem he didn’t bother to explain.

We all know the symptoms of the problem, too many borrowed funds devoted to buying and selling existing houses instead of investing in the real economy, private debt sky high, real wage increases slowing down, oodles of unused supply capacity both capital and labour. Unused capacity and unmet demand. Nobody’s buying.

What to do? Cut penalty rates? That may increase the supply of lattes but where will the extra demand come from? From other industries? But won’t all industries suffer if wages share of the national pie falls? What if café owners reduce their high private debt instead of employing more staff? The economy will be worse off. The paradox of thrift may strike again. Cutting wages may have some effects at the margin but the case is not overwhelming. Government austerity suffers from the same drawbacks. The comprehensive rejection of the 2014 Federal budget shows the general sentiment in the community. People struggle to understand the underlying assumptions of proposals when politicians present them.

How about more jobs and growth by cutting company taxes as the PM is now promoting? If there’s unused supply wouldn’t a better solution be to find a way to introduce Mr Supply to an eligible Ms Demand? How will cutting company taxes promote jobs and growth if nobody’s buying? What comes first, the cart or the horse?

The jobs and growth plan is just another name for a two hundred year old economic theory known as Say’s law that economists used to explain how the economy works……… supply creates its own demand. The Great Depression revealed that an economy was a liitle more complicated than Say’s Law assumes. But it has never disappeared completely. Thatcher and Reagan revived it. Recently it’s been variously described as supply side economics or trickledown economics. It fades from view from time to time, and then reappears after its failings are forgotten. The jobs and growth plan is the latest reincarnation.

Even if new supply creates its own new demand, what about those who became underemployed or unemployed because of low demand before new supply created new demand? What do we do about them? Give them new skills? Apply a supply side solution to expanding VET courses and job placement agencies? Has it worked? Build bigger universities? The suppliers are building their own businesses funded almost entirely by governments but will the supply of a more skilled workforce be enough? It’s as if all the problems are on the supply side. Fix that and you’ll fix the economy? If that’s what the PM believes he should say so. After all he’s supposed to be the Great Communicator.

Underpinning the jobs and growth plan is the constant chant of the need to live within our means. It’s this falsehood, that there is a finite supply of funds the Federal government can lay its hand on that is condemning the economy to a sub-optimum future.  Sure a household may have to live within its means. It needs money to survive, income or maybe even loan funds. Any politician who says the country is like a household and has to live within its means, doesn’t understand banking at the macro level.

Budget tricks

Treasurer Gutwein has found something new in his budget bag of tricks.

Establishing a fund to receive amounts from TTLine to enable replacement of the two Spirit vessels in 10 years time as announced with much fanfare is just an accounting ruse.

TTLine has been planning to replace the ferries for years and has been setting funds aside.

Borrowings on Spirits 1 and 2 were finally paid off in the 2010/11 year. Prior to then,TTLine was paying $25 million a year off the debt owed to Tascorp and it was a bit of a struggle.

Since then the cash surpluses have been allowed to build up in TTLine as it was exempted from paying any returns to the Government.  Since 2010/11 cash at bank has increased from $16 million to $90 million in 2014/15. The increase in the latter year was only $9 million as the refurbishment of the two Spirit vessels commenced in Feb 2015.

The government now plans to transfer cash reserves from TTLine to a special Fund run by the Department of Finance.

Why?

Can’t the Board of TTLine be trusted to look after such a large amount of cash?

The answer is the payment of two special dividends of $40 million in each of 2016/17 and 2017/18 by TTLine is recorded as income by the government and will boost the bottom line by $80 million, a bottom line sadly suffering from Hydro’s Basslink woes.

When the replacement vessels are eventually purchased the accumulated funds will be transferred back to TTLine, but as an equity contribution which won’t affect the bottom line in the year of transfer.

It’s just an accounting trick.

Hydro CEO's reassurances

It was good to see Hydro’s CEO Steve Davy belatedly addressing a few of the concerns that have been raised about his company’s financial position in today’s opinion piece in The Mercury titled It's a huge hit but it won't sink us. He emphasised a keenness to ensure commentary is accurate and based on facts.

Factual accuracy doesn’t necessarily preclude attempting to lead a reader to erroneous conclusions.

Take this statement:

“Hydro Tasmania’s financial position is sound. Its net debt balance of $826 million, as at March 31, was less than the balance at the end of each of the previous five financial years. We are projected to have enough liquidity and debt facilities in place to fund the implementation of the Energy Supply Plan without extending existing borrowing arrangements with the state’s borrowing arm Tascorp.”

Factually correct no doubt.  Hydro will cope without extending existing borrowing arrangements. Most readers will think this means debt won’t increase. But what’s actually said is that existing arrangements are adequate. If that’s the case why not say what those arrangements are?  

Hydro’s current arrangement with Tascorp is a borrowing limit of $1.055 billion meaning a further $229 million can be borrowed. Why not say the costs of the outage are not expected to exceed the $229 million extra borrowing facility already in place?  Maybe even say what increase in borrowings is likely

Then we have this statement:

“Over the past five years, Hydro Tasmania has achieved an average underlying result before tax of $149 million. For the same period, average cash flows from operations have been $160 million, well in excess of the average core capital expenditure of $108 million during the same period. “

To dredge up five year averages covering the carbon tax years is bordering on wilful deception. The only historical figure of any current relevance is the post carbon tax operating cash flow figure of $26 million in 2015. Whilst the latter includes returns to government, it is considerably boosted by income from renewable energy certificates which won’t occur at that level for a while. Why not explain this to the punters instead of attempting a Pollyanna imitation?

The five year averages were used to suggest Hydro was not insolvent. It probably isn’t but past averages are irrelevant to proving the case. Future ability to pay debt is the key as Mr Davy knows, but he’s not about to take punters into his confidence. Yet anyway.

Then we get this:

“Hydro Tasmania’s gearing ratio, which provides an indication of the amount of debt held by the company, was lower in June 2015 than in 2011, and lower than its peers in the National Electricity Market such as AGL, Snowy Hydro and Origin Energy. As at June 30, 2015, our total equity was $2.06 billion, which represents a strong net asset position.”

The book value of assets at June 2015 is of little relevance, nor is the gearing ratio based on that book value. AGL and Origin aren’t hydro generators after a period of drought so why introduce them into the picture? The crucial question is the interest cover provided by operating cash and whether there’s any left over for annual capex. Why not explain this to the curious instead of a one line assertion about profits resuming in the 2018/19 year? Maybe  include the costs of fixing the interest rate portion of the Basslink facility fee, the Macquarie swap deal, to get a more accurate assessment of interest cover?

The factors that will impact on the revised book value of generation assets are given a good coverage:

“As in previous years, the valuation will take into account a range of factors, of which the need to rebuild storages is but one. Given the long life of the assets, the valuation will also be impacted by current and forecast energy and large-scale generation certificate prices, and estimates regarding the level of investment required to appropriately maintain the assets. While the reduction of generation to rebuild storages will, in isolation, have a downwards influence on the valuation of assets, the final valuation figure included in the annual accounts will be the product of a number of factors.”

Except there’s no mention of the fact that asset values will have to be written down further if the cause of  the outage remains unknown and the link is not fully restored and capable of fully delivering what was originally intended .

The following would have left a few readers puzzled:

“Another issue that has been used to question our financial strength was last year’s debt transfer to Hydro Tasmania of $205 million from TasNetworks. What is not said is that amount counterbalanced what had been transferred to Hydro Tasmania in 2012-2013 when we were given responsibility for the Tamar Valley Power Station.”

Talk about a debt transfer from TasNetworks and a counter balance to the transfer of the Tamar Valley Power Station (from Aurora Energy incidentally) might make sense to Mr Davy but is pretty confusing for most readers. Sure the amount of $205 million originally came from TasNetworks but from Hydro’s viewpoint it was a cash injection used to pay a $118.5 million dividend to the government with the rest used to fund capex which couldn’t be met from operating cash flow. The transaction didn’t highlight Hydro’s financial weakness, rather the shareholder’s greed. But I guess the CEO can’t say that.

The CEO’s contribution, the first real attempt in five months to accurately and factually describe the financial ramifications of the Basslink outage was more honoured in the breach than the observance.

It was anything but reassuring.

Panama papers background

Economist Dr Michael Hudson describes how the money laundering and tax avoidance practices revealed by the Mossack Fonseca documents have been a reality ever since the oil and mining industries ably assisted by the US State Department created Panama in the early 1900’s specifically for that purpose.

Why are we so shocked?

Read the full transcript or watch the 17 minute interview HERE.

Budget: A wish or a plan?

(As published in The Mercury 5th May 2016)

It’s difficult to detect an economic plan underpinning the Turnbull government’s budget.

It’s a hotchpotch of measures ostensibly designed to fix the tax system, to  target jobs and growth and maybe even win an election, not necessarily in that order, all bundled together with the usual narrative of living within our means, balancing the budget and reducing the burden of long term debt.

Smokers will be hit with more tax than multinationals. Reform of the tax system is off to a shaky start.

Jobs and growth rely on increasing aggregate demand, the missing ingredient in our sluggish economy. Without measures to address this problem the target of jobs and growth becomes a wish rather than a plan.

The major change to the tax system is a commitment to reduce the company tax rate to 25% over ten years. The jury is still out on whether reduced company taxes will lead to more jobs and growth.