Thursday, October 16, 2008

On the QT: I have a Yen for Walking on Both Sides of the Street.

Today in QT the opposition again went after the Government to come up with the forecasts on which it based its decision to spend $10.4 billion.

Obviously they think because the Government hasn't it makes Rudd and Co look rash because they spent money without any concrete forecasts. They may be right, but I think they're just showing how short term they are.

They figure of $10.4 billion doesn't need a concrete forecast. Here's why. On Tuesday, in interview with ABC journo Chris Uhlmann, the one and only genius of all things financial, Malcolm Turnbull, when asked about the rumoured Government economic spending package, said the following:

UHLMANN: How much money do you think would be needed to make a difference in the economy? If we are expecting a slowdown next year, how much would be needed?

MALCOLM TURNBULL: Well the Australian economy’s GDP is around $1.1 trillion and most people, well most economists would say that fiscal stimulus needs to be of at least half a per cent of GDP to make a difference. So you’re talking about something in the $5 billion range. Anything less than that, I mean everything has an impact but to have a meaningful impact it would have to be in that $5 billion plus range.

So just off the top of his head, Turnbull was able to say $5 billion was the minimum - anything less and it'd get swallowed up with no impact.

Now let's see what the most recent forecasts going around (bear in mind you don't just whip up an economic forecast each week) were saying. The IMF World Economic Outlook released only last Friday revised down the growth of pretty much the entire world. It revised down the major advanced economies' growth to fall from 1.2% in 2008 to 0.1% in 2009. For the newly industrialised Asian economies (ie India and China among others) the growth fall is now predicted to go from 4.0% t0 3.2%.

Now that was last Friday. Also last Friday (now known as Black Friday) the Australian Stock market went down 8.2%, the Japanese stock market fell 9.62%, the US Dow Jones - nearly 10%, and London 9%.

Now remember "the world and everyone in it are going down the sewer" figures projected by the IMF were worked out before Black Friday.

You don't need to be an economic Nobel Laureate (or even the great Malcolm Turnbull) to know it means the IMF figures suddenly start looking optimistic, and in reality likely to be too high.

So the Government could have done two things. It could have waited for a report done on the Australian economy - maybe wait a month till the revised budgetary figures, or it could actually do something now, so that any monies expended could get put out before Christmas (it may surprise some to know, but it does take a certain amount of time to get $10 billion out into the economy).

All year the opposition has criticised the Government for holding reviews. This was Brendan Nelson in his Budget Right of Reply speech:

this Government, puts media spin ahead of substance, bureaucratic doublespeak ahead of people and more than 100 reviews, inquiries and committees ahead of decisions.

Now I happened to think reviews are good (even if the PR is bad) - it's a nice change to have decision based policy. But this is not a case of normal times. The house is on fire - start turning on the hose and letting rip with the water; don't wait to be told by the fire department how bad the fire is.

And so the Government would have looked at the IMF Report on the weekend (remember it held an emergency meeting of senior figures on Sunday), noted the pretty much 1% fall in growth across the western world; thought, well the IMF was predicting a drop in growth for Australia of 2.5% to 2.2%, let's assume that's probably now out of date given what's happened. In short, we need to do something.

But what? Well it would have looked at the same IMF Report which stated:

On the assumption that it can be implemented immediately and efficiently, government investment has a larger effect than other measures. This is because it has a direct effect on aggregate demand, whereas the effects of taxes and transfers depend on propensities to consume. (It also noted, this is also true for government investment, but in this case the effect on output is much more long lived, because government infrastructure capital has productive
benefits that depreciate only slowly over time.

So the Government knows it must do something immediately to increase aggregate demand. Hmmm ok...who spends money rather than saves it? I know! Pensioners and low-income households! Righto lets give them a payout. Now you know the other problem... the housing market has gone to hell, what will encourage people to buy houses? I know! Raise the first-home buyer's grant - a terrible idea in good times, but great now as we'll only let it last for 9 months.

Alright let's do the figures

I'm betting they said right, 1/2% of GDP would be a stimulus in normal times, this ain't normal, we need more. So let's go with 1% of GDP (especially given the standard expectation of about a 1% drop in growth) - so that's around $10b.

Hmm, ok how about we give single pensioners a $1000 payout, and couples $2000, $1000 per kid for low-income earners, and how about we double the home-buyer's grant?

Ok what does that give us? Not quite there yet? Ok let's make it $1400 for single pensioners, and couples can get $2,100.

What?! We're still short?! Well hell we don't want to create another dopey housing bubble... but I know, let's triple the home buyer's grant, but only for those who are buying a new home.

Let's see what does that look like?
$4.8 billion for an immediate down payment on long term pension reform.
$3.9 billion in support payments for low and middle income families.
$1.5 billion investment to help first home buyers purchase a home.

Hmm lacks something... ok let's make it look like we're doing something for jobs - ok:
$187 million to create 56,000 new training places in 2008-09.

But damn, we are Labor, so we better not forget infrastructure, and the IMF report did say that is needed for long term growth. Ok how about:
Accelerate the implementation of the Government's three nation building funds and bring forward, the commencement of investment in nation building projects to 2009?

Beautiful. Ok, what's the price tag on this sucker? $10.4 billion? Is that 1% of GDP?
Yep. I like it! - Lock it in Swannie.

Now look maybe we need more info, but personally, in this instance, I'm quite glad to see the Government criticised for doing something, rather than being criticised for having sat around waiting for a report.
Chris Bowen is the Assistant Treasurer, and is pretty good in QT. Today he was on fire, and then he had a slip up. He was referring to how Costello had last year predicted a financial tsunami if China floated its currency; he then pointed out that China had not floated the yen. Ooops, he recovered somewhat, but the damage was done. Yen/Yuan, it's pretty close, but in QT pretty close doesn't cut it, especially when you are letting rip at the incompetence of the opposition.

I will give Bowen some points though. Yesterday he referred to Turnbull's economic strategy as the Kath'n'Kim strategy - "ie Look at moi! look at moi!". Today he followed it up by saying of Turnbull: Even the American version of Kath and Kim had more credibility than the leader of the opposition last night; it was a joke.

But alas, the Yen/Yuan slip up robbed him of the moment.
The phrase of the Government today was that Turnbull is "trying to walk both sides of the street". Rudd said it, Swan said it, Tanner said it, Gillard said it, Roxen said it, Bowen said it. Geez guys, come up some different versions. How about "like the investment banker he is, Turnbull is hedging his bets", or "Turnbull has so many positions on the stimulus package he's a one man kama sutra manual".

But, in truth the man is an economic pretzel. Here's what he said on Today Tonight on Monday:
Well you know they’re all estimates, there’s no doubt the Government forecasted a decline in employment, an increase in unemployment in the Budget back in May and there’s nothing that’s happened since then that would make one feel more optimistic. So having said that we are in a very unpredictable situation, nothing that’s happened in the last month would have been forecast three or four or let alone six months ago

Now let's see what he said on Wednesday in his speech to the nation:

"With the benefit of hindsight, government should have acted a lot earlier. Regrettably, Mr Rudd's government missed the warning signs at the beginning of the year".

Yep the Government should have seen warning signs at the beginning of the year on things that no one could forecast even three months ago.

Explain the logic of that one to me Malcolm and you got my vote.

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