11/07/2013 - 15:27

US gets policy setting right, to a point

11/07/2013 - 15:27


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Labour market inflexibility and over-regulation are among the cultural issues retarding developed economies’ ability to maximise their potential.

Labour market inflexibility and over-regulation are among the cultural issues retarding developed economies' ability to maximise their potential.

The falling Australian dollar is welcome news to anyone in the export game or local services businesses that compete with international alternatives.

The dollar’s slide from $US1 to around US90 cents has been dramatic, although many wondered how the Aussie could stay so high so long when commodity prices were falling. Normally the two are linked.

That is big news for miners such as Panoramic Resources. As I wrote a few weeks ago, every US1 cent drop in the value of the Aussie dollar against the greenback amounts to a $2 million increase in revenue, most of which flowed directly to the bottom line because its cost base is not heavily reliant on currency linked expenditures.

Panoramic will welcome the fact that everything points to our currency settling further to about US85 cents, a level most pundits suggest is normal because it reflects the long-term value of what we offer the world – a place where people come to buy raw materials.

So we earn a reprieve. Not just miners, but farmers, tourist operators, and our varied manufacturers that were struggling most.

Instead of getting smarter and getting into the premium end of the value-adding business, we can again earn a decent living from our natural strengths in resources and avoid the hard decisions – like ensuring that our people are productive and our politicians don’t spend like drunken sailors.

At least that’s what we might think.

The danger is that the world has changed, especially the ego-driven world of global politics. Having the strongest currency used to be a political asset; now it is a liability.

After five years of financial difficulty in major markets, and signs that may continue for a lot longer, politicians now recognise that creating local jobs is the most important ambition for those who want to be re-elected.

Expanding the workforce to pre debt-binge days is challenging. Only the US, it appears, has the policy settings to make this work. Scant unemployment benefits, relaxed labour laws, and expensive health care (typically paid by employers) are well known and much derided in Australia. Less obvious have been the tax relief for gas exploration and absence of unnecessary green tape for gas extraction, which have created the cheap energy that has helped American business respond to the debt crisis created by Wall Street.

Of course that’s only half the story. There has also been the printing of money, which lowered the value of the $US and helped its exporters.

US policy is almost alone in the developed world for having these responsive settings. Only the last one, packaged up as quantitative easing packages, is something the rest of the world can easily indulge in. The rest require significant discipline or complete cultural change.

The problem for the rest of the world, including Australia, is the political inability to tinker with labour markets, over-regulation, and the cost of government to reduce the burden on business so it becomes more competitive. Lower wages hurt employees and affect living standards, as does reduced state services, but they create a climate conducive to investment in new business ideas.

That doesn’t have to mean a race to the bottom in wages, but I admit it does mean the unskilled and underemployed in the workforce have a tougher time earning a living.

I occasionally read US economist John Mauldin, and particularly enjoyed a line he used while writing about Japan’s woes. He was speaking about all developed economies when he said the following.

“The problem today is that politicians, labour unions, and businesses everywhere want to use exchange rates as the tool to manage their balance of trade, rather than focusing on improving their own competitiveness and manufacturing skills, not to mention controlling their own spending and fiscal budgets,” Mr Mauldin said.

“The problem as they see it is the competition from abroad, which is always seen as doing something unfair.”

Using exchange rates as weapons to fight ‘unfairness’ could lead to a different kind of race to the bottom.

I should also note how finite these alternative pathways appear to me. Redistributing wages to workers in businesses operating in sectors of the economy where they are most productive is a relative issue that has a very clear floor. There are clearly points at which people won’t work for nothing, or its national equivalent, but it is possible to set a clear line in the sand, such as unemployment benefits and minimum wages.

By comparison, devaluing currencies relative to others could be an endless process if everyone plays that game. There are plenty of examples of countries whose currencies have become so worthless you need a wheelbarrow of bank notes to buy a loaf of bread.

None of those stories was a good one.


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