17/06/2010 - 00:00

Take confidence over stimulus any time

17/06/2010 - 00:00


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A little confidence goes a long way when it comes to business.

PERHAPS the most unbelievable part of the debate raging around the resource super profits tax is the argument over who saved the economy.

It seems the same economists who back the theoretical purity of the resources tax have signed up to the argument that it was government’s stimulus package that kept our heads above water, not the mining and petroleum sector.

I have no doubt that the federal government played an important role during the global financial crisis, but to deny the role of our major exporters is way off the mark.

The socially conscious portray business leaders as ivory tower dwellers who don’t understand the impact of their decisions on the people on the ground.

Well it is clear that people buried deep in spreadsheets analysing theoretical outcomes, and their political masters bunkered down in Canberra, are equally out of touch with the real world.

Mining was and still is a very important part of this economy and the digging kept on going at the depths of the GFC, even if a few projects were stalled for a time.

The graph above shows very simply how much economies overshot or undershot the International Monetary Fund’s forecasts done as late as April 2009, well after the GFC was under way.

It shows that the size of the stimulus and the reliance on resources had little to do with the outcome. A strong resource economy like Brazil did little stimulus and fared better than expected, South Africa and Russia piled on the stimulus and would probably bemoan the fact.

It is worth adding that, in the federal budget, Treasury used these numbers to show that the stimulus worked. The problem was, as some other boffins like the Institute of Public Affairs found out, they didn’t show Russia, Mexico, South Africa, Argentina, Turkey or India. You can see in the second graph how the trend line looks without those countries.

Despite this, Treasury still said the following: “Several contributing factors help to explain the better performance by Australia, including the strength of our financial system, the timely and substantial monetary and fiscal stimulus, and the support provided by our close links to Asia, where growth was supported by China’s large stimulus.”

The latter part can only mean resources demand – we don’t sell cars, computers or plastic toys to China.

Anyway, locally, we know different. In spite of Treasury secretary Ken Henry’s claim that resources companies laid off comparatively huge amounts of workers, Western Australia sailed through the GFC better than the eastern states.

After a six-month hiatus many people here wondered what all the fuss was about and got back to business, confident that China was still buying.

Even last week, with unemployment falling across the nation, WA outperformed. We all know stimulus has nothing to do with that.

So it’s ridiculous for Dr Henry to claim that stimulus alone was all that was needed. This is an economist rewriting history – and ignoring the words of the department he runs – to suit his own theoretical argument.

And this is where I come to the point of this exercise.

Theory has always struggled with markets because they really don’t act rationally all the time. So-called animal spirits get whipped up into collective frenzies and make the crowd do dumb things – like buying things they shouldn’t and selling them when it’s too late.

Retailers distil this concept down into one word – confidence. They understand that consumers need to feel confidence before they’ll spend freely. This is what Harvey Norman founder Gerry Harvey, Coles boss Ian MacLeod, Bunnings chief operating officer Peter Davis, and Woolworths chief Michael Luscombe showed during a business briefing held last week.

“Uncertainty’s not good for retail businesses because consumers want to be confident about the future,” Mr Davis said.

“And seeing governments make the sort of decisions they’ve made around insulation and the schools and that hasn’t been great.”

But can economists really grasp that? My question relates to both the stimulus and the resources tax.

While we can measure what was spent, can we ever understand how much just the promise of spending helped buoy consumers and business? Could the government have got away with saying they had a $40 billion war chest, if needed, but actually only spending $10 billion?

I think another part of the stimulus package – the bank deposit guarantee – and the more recent resources tax announcement prove that consumer and investor confidence are more important than actual spending.

The bank deposit guarantee was put in place due to a fear that there might be a run on banks. I think it was an astute move. There was certainly no run on financial institutions or any bank collapse, despite rumours of failure. The move created confidence and the problem was avoided.

The opposite can be said of the resources tax. The way it was announced and the outrageous scope of it have eroded confidence in the market. Resources stocks around the world have fallen, but Australia’s have dropped further. Those with high local mining exposure have fared worst while those with an offshore focus have been left comparatively unscathed.

In the case of the resources tax, the government has done nothing but announce a policy, and it has scared the horses.

There is no reason to assume that the stimulus package would have been any different, albeit with the reverse effect. In my view, a much smaller amount of spending backed up by a public promise to spend much more if required was all the market needed.

We could have kept $30 billion in the bank, held our national debt down and been able to avoid a late-term lunge for cash by the federal government which has clumsily undone much of the confidence created last year.

Working hard

ONE thing that has bugged me about Prime Minister Kevin Rudd since his election win has been the stories, egged on by him, about driving staff to work long hours that match his own prodigious stamina.

I always thought that was a strange thing from the leader of a government that has rewritten the laws on industrial relations, which in part endeavour to stamp out excessive hours and their impact on families.

Why are those who work for the prime minister any different than other employees? And why should the prime minister expect his staff to do more than those nasty corporate bosses and rich capitalist fat cats he likes to deride?

The naked hypocrisy is unbelievable. And where is the union picketing our national parliament as a result? Or are people who work for a federal government more able to make individual decisions than the rest of the poor befuddled masses?



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