Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Not all GDP growth is good

Posted by Dave Bath on 2006-11-12


Economic growth as measured by an increasing GDP is like measuring the growth of a child in kilograms: sometimes increases are bad, falls are good. All political parties are guilty of not informing the public about this, despite the political advantages to anti-government forces of explaining this, and more importantly, providing plans to improve Australia’s economic fitness.

Any growth in Australia’s economy under Howard has been of flab, “super-sized” by debt, rather than by developing muscle.

Most of Australia’s growth has been due to consumer over-confidence in increasing house values leading to increased consumer spending through overseas borrowing. It is ironic that the Liberal party under Howard, through the home-buyers grants, and now the baby bonus, has used the pump-priming theories of Keynes, so demonized by neo-liberal economic theorists. Howard has applied the Keynes psychological insights, and maintained the appearance of rectitude in the government budget, at the cost of a radically increased current account deficit, without the normal benefits of co-ordinated Keynesian spending on productive capacity.

Consumers have ignored the fact that their increased wealth is illusory, inflated by the housing bubble. This bubble is perhaps worst in Australia, where (based on a Price/Earnings ratio used to estimate the value of normal stocks), “The Economist” estimates that Australian houses are between 55% and 75% overvalued.

Remember too that the same dollar changing hands five times increases the GDP by five dollars. The increase in activity can be seen as running in ever-decreasing circles, as 5% of the economy has been leaving the country every year. Looking at 12 years of Howard’s current account deficit, rather than constant economic growth, it is more accurate to say that half of the economic strength of the country has been bled away.

We cannot even manage a trade surplus despite our exports of raw materials in a seller’s market. To a large extent, we have been relying on inflated prices because of demand from China, which is now managing to get some control over it’s growth and also getting increasingly tough in negotiations for the prices of the raw materials they import from Australia.

Subtracting activity based on overvalued housing, taking into account the increasing current account deficits, the constant drops in industrial production, and the shift of the economy to discretionary domestic services, the country has been bled dry by the Howard years. Without illusory growth that can disappear overnight, we have probably been undergoing a recession of approximately 3% per year every year since Howard took office.

During this time, the constantly increasing GINI coefficient (a measure of inequality of household income) shows that the richest are getting richer, everyone else poorer. In this too, we mimic the US.

Meanwhile, the Australian stock market is similarly fragile. Growth in stock market indices have relied on superannuation funds boosted by Keating’s innovations, seeking limited Australian stocks as required by legislation. The simple laws of supply and demand mean that these stocks are grossly overvalued, and vulnerable to collapse as baby-boomers draw on these funds to meet their retirement needs. Since Keating, the rules should have been fine-tuned to bias investment into Australian stocks that increase production or create innovative tangible products. Such opportunities have been wasted.

Now lacking the ability to devalue our currency to achieve balance, the only way forward is to trim down consumer spending, unless we can provide government investment in production of value-added goods and the infrastructure to delivery them, which might help repair our trade without the odium and risks for retaliation from directly subsidized exports or tariffs.

As “The Economist” (2006-09-07) asked, “Fancy a Swedish model?”, praising the low-GINI, high-tax, high-welfare, high-value export economies of the Scandinavians, and this not from a leftist journal, but one from the centre-right with the core mission of promoting free and equitable trade as the route to a happy world!

Do we try to emulate those countries that assure citizens of better services by growing high-value exports, high standards of governance, with the blessedness of peacemakers? No, we only approach world’s best practice in the implementation of the discredited theory of trickle-down economics.

We have been losing our money, soil, skills and souls. Not a single politician, of any persuasion has the courage to make the Australian people accept this truth, nor the brains to show us a better future, even when the Scandinavians show how to do it.

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