Western Sauce may spoil Peking Duck

July 28, 2009 at 1:28 am | In economic crisis, international relations | Leave a Comment
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This is my latest article in The Age.

PREDICTIONS of economic tsunamis always accompany downturns in Asia. Yet these economies remained resilient through the major economic meltdown of 1997 (with the possible exception of Indonesia) and subsequent reductions in growth. Does the Asian economic model have something to teach the West?

Business Out, Government In

February 18, 2009 at 11:58 pm | In economic crisis, free market economy | Leave a Comment
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For too many of us the political equality we once had won was meaningless in the face of economic inequality. Franklin D. Roosevelt, 1935

As the Federal Opposition snarl and gnash their teeth and ardent neoliberals sigh and shake their heads, it seems that the Rudd government is willing to reclaim the role of government as the provider of social investment. The Federal Government’s stimulus package provides long overdue funding to schools and housing, social infrastructure long neglected during the Howard years. As business is unable or unwilling to sustain its social investment with the global economic crisis, in the style of ABC Learning and Rio Tinto, it becomes clear that government has an important role to play in providing this. But not only during crises. Government’s investment in social infrastructure must be ongoing and significant and if business cannot sustain its input during bad economic times then they need to be forced to provide in the good times.

Despite pleas from the government to maintain employment, Rio Tinto abruptly closed its WA mining operations and sacked 2000 workers in spite of WA government money put into the project. Until recently the orthodoxy has been to reduce the size of government to a far smaller percentage of GDP. One argument is that governance functions can be performed by other institutions such as corporations, non-government organizations, and communities. The collapse of ABC childcare and the current Connex debacle seems to demonstrate quite clearly that the private sector has a limited role to play in the provision of public services. This is clearly the role of government. The government is finally showing some leadership in this direction but they must go further.

This package reverses the trend of the last 10 years of transferring government debt to personal debt. The government instead of expecting individuals to carry the burdens of the State is shouldering these responsibilities and ultimately the government has greater resources, particularly if it requires business to make a fair contribution. In 2005 the Senate Economics Committee found that the large current account deficit in 2004-5, which exceeded 7% for the first time, was primarily driven by household debt in housing finance. The household sector made a dramatic move between 2000 and 2005 from saving to borrowing, resulting in a large rise in household debt. In the same period, credit card debt also increased by a similar order of magnitude.

According to associate professor Steve Keen from the University of Western Sydney, Australia’s debt has grown rapidly from less than 80% of gross domestic product (GDP) in the early 1990s to now stand at almost 170% of GDP. Forecasts of rising unemployment and a slowing economy mean an increasing number of Australians will come under pressure due to problems repaying debt. And to top it off, a recent Dun & Bradstreet survey showed that many people expect to increase their level of indebtedness over coming months.

And while Australia’s level of household debt continues to increase, in common with many other nations, Australia has been running down its stock of public assets. The public investment share of GDP has declined quite dramatically from just less than 8 percent in the 1960s to under 4 percent in the 2000s. This reflects the diminishing priority given to government investment into electricity, gas, communications, infrastructure, education and health over recent decades. Numerous empirical studies have demonstrated the shift from productive to unproductive government spending negatively impacting on productive private investment. Productive government spending tends to crowd-in private investment, while unproductive provision of transfer payments for subsides and handouts crowd-out private investment. Thus, Australia-along with the US, UK and others- has insufficiently built a public regime of accumulation for long-term investment.

Government spending in Australia is the third lowest of the 30 OECD countries and our tax collection, as a per centage of GDP, is the eighth lowest in the OECD. Dr Richard Denniss argues if Australian tax rates were equal to the OECD average, tax receipts would increase by about $50 billion dollars per year. We could use that to pay for the government’s stimulus package.

The corporate tax rate has been reduced from 49 per cent in 1987 to 30 per cent in 2001. In 2008, the corporate tax rate was 21st lowest among OECD countries. While lowering the corporate tax rate may not impact on tax revenues, they do little to bolster social infrastructure. For every $1 billion spent on reducing the corporate tax rate, three quarters of it is captured by the wealthiest 20% of citizens.

Speculation and private investment have failed to deliver solid sources of revenue for public investment. As the tide turns in the coming years, we would do well to move away from the ‘masters of the universe’ mentality. It is time to repair the damage of the past years of madness and the government’s stimulus package takes a few small steps in that direction.

Shorting the Regulation

February 15, 2009 at 12:23 am | In economic crisis | Leave a Comment
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Innovation is the salient energy; Conservatism the pause on the last movement.
Ralph Waldo Emerson The Conservative (1842)

Biblical images of people scrabbling through the dirt for food in Colorado seem to capture the essence of this economic downturn. Lines stretching down the street for charity food parcels certainly remind one of images of soup kitchens during the Great Depression. But unfortunately Western leaders look more like Nero than FDR. The best they can come up with is more interest rate cuts to encourage people to borrow more and spend more; more tax cuts so once again people have more money to spend. It’s time to introduce the ‘R’ word: Regulation on financial markets. If banks cannot decide what is in their own best interest (as was pointed out by the guru of the free market, Alan Greenspan), let alone the broader public interest, it is time for the government to step in and tell them what is.

None of the $US700 billion ($1 trillion) financial rescue package provided to US banks will be used to assist homeowners facing foreclosure or business even though the legislation authorises it. US Treasury Secretary Hank Paulson, who has made about half a billion dollars from the deregulated system, has clashed with Congress, telling them it was designed to stabilise the financial markets, not as a panacea for economic difficulties or to help beleaguered homeowners and automakers.

Deregulation means that we have wildly fluctuating markets operating on rumour and sentiment rather than hard data. Michael Heffernan, senior client adviser at Austock argues that the sharemarket drops have ‘a lot more substance to them that we thought 6 months ago.’ Many commentators claim that the market is suffering from a loss of confidence as if there were no structural reasons like deregulation, speculation and over-leveraging causing instability in the market.

The G-20 Study Group on Global Credit Market Disruption concluded in their report last year that regulatory gaps encouraged the increased use of securitisation and the spread of the ‘originate and distribute’ mortgage model that resulted in insufficient attention being paid to credit quality. Weaknesses in risk management systems and regulatory oversight saw these lending practices continue even as credit quality continued to decline and risk exposures increased. The spread of these losses was caused largely by high levels of leverage in the system, including insufficient capital held against loans. This in turn was partly a product of failings in the regulatory system to apply adequate risk capital to the off-balance sheet entities that securitise loans on behalf of the banks. The complex nature of structured finance products also resulted in some investors having an over-reliance on credit ratings instead of undertaking adequate due diligence. This complexity also meant that exposures to subprime lending were difficult to determine, which contributed to difficulties in assessing risks. Weaknesses in accounting rules meant that off-balance sheet entities did not require clear and transparent disclosure. It seems a significant part of this problem is a lack of regulation.

The main reforms being offered are patently inadequate. The G20 countries advocated greater oversight of ratings agencies and stronger regulation of hedge funds. Consumer protection is to be bolstered and international financial institutions should be reformed. In addition, there should be clearer accounting standards and a review of the way managers are paid.

Many observers believe that Obama will be more open-minded about regulations that strengthen international institutions or that put an end to tax havens. But the incoming president will likely resist ambitious plans for a global financial regulator. ‘Even under a President Obama, the US government would not accept any kind of global supervisory authority for the financial markets,’ said Brad Setser of the Council on Foreign Relations. It seems America remains committed to free trade and deregulated markets.

Proposed changes to financial regulation require brokers to ask their clients whether an order was a covered short sale, and market operators to publicly disclose short-selling data they received from brokers. David Enke, Associate Professor of Finance at the University of Tulsa, argues that by making short data public, others might be tempted to increase their short positions, and so too the selling pressure on the shorted security. In the end, this may do nothing to decrease market manipulation, while still allowing the funds to profit from the falling prices.

According to AEF Rofe, Chairman of the Australian Shareholders’ Association, the new regime fails to address the past failure by the market operator and the regulator to effectively monitor and enforce the disclosure requirements. Advisers at DLA Phillips Fox also seem doubtful about the veracity of these changes. Traders have been selective about disclosure laws for years so asking them to disclose more appears rather pointless. At bottom financial institutions have shown themselves to be exercising reckless judgment when they think there are easy dollars to be made.

It is clear that short selling is a problem and needs to be regulated, but focusing on extreme speculation practices fails to take account of the myriad other causes of the financial meltdown. Companies which collapse due to high leveraging, such as Rubicon, have nothing to do with short selling. Deregulated lending resulting in shoddy lending practices and the inclusion of these bad mortgages as part of investment packages, which was not disclosed, has not even made it onto the agenda. The markets have run away and are now causing the economy to collapse, throwing thousands of people out of work, destroying local businesses, forcing people to seek charity. Markets need to be controlled by governments, not the other way around.

The Road to Child Neglect

January 19, 2009 at 9:44 pm | In economic crisis | Leave a Comment
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When I read George Orwell’s extraordinary essay on poverty The Road to Wigan Pier in 1982, the world it displayed seemed a sad remnant of the 19th century. However after 25 years of economic liberalisation as a global movement the infamous scenes of human degradation are reappearing. Shocking cases of child neglect demonstrate that the social fabric has become so threadbare under the strain of the subprime crisis that we can no longer hide the squalor in which some live.

Orwell’s essay recognises the structural nature of the degradation he describes. Our answer to neglect is not to ask why did this happen but to criminalize and gaol individuals. The woman arrested for neglect in Adelaide recently was living in a house with her sister and their numerous children. Having worked in the community housing sector, I have found her story is a common one. So many are evicted because they are unable to pay the rent due to the ridiculously low level of Centrelink benefit. Emergency housing is often unable to help due to the parlous state of their service delivery owing to chronic underfunding. They may have encouraged her to move to Adelaide to live with her sister. Unable to cope, with inadequate income, little social support, the family descends into the sort of poverty and deprivation not seen since the 19th century. She ends up being arrested for being unable to care for her children in a system which no longer cares for the weak.

These cases are the tip of the iceberg. Maree Faulkner from the National Association for the Prevention of Child Abuse and Neglect says, ‘There are enormous numbers of families that are just not coping and providing and caring for their children.’ With almost 310,000 notifications each year and 58,000 substantiated cases of abuse or neglect, Brian Babington from Families Australia says child protection workers are overwhelmed.

The Australian Institute of Health and Welfare’s ‘Child Protection Australia 2005-06’ reveals some serious trends. Over the last five years, the number of child protection notifications in Australia has almost doubled from 137,938 in 2001–02 to 266,745 in 2005–06. Between 30 June 2005 and 30 June 2006, the number of children in out-of-home care in Australia rose 7%. South Australian Families and Communities Minister Jay Weatherill is calling this a crisis which is worsening. With the rising costs of food, petrol and rent are we really surprised by growing figures of child neglect?

The institution of economic liberalization and its associated welfare reforms has played an important role in creating and criminalizing an underclass in Australia. Dr John Falzon, Chief Executive Officer of the St Vincent de Paul Society, draws a connection between the 25% increase in numbers in custody over last decade and the welfare reforms of the Howard years.

Economic liberalization has created a welfare system based on narrow notions of individualism and self-reliance. In the early 2000s Australia’s welfare system became centred around the concepts of ‘welfare dependency’ and ‘mutual obligation’. Dependence on welfare is constructed as an addiction like dependence on drugs or alcohol. Supporters of economic deregulation construct welfare recipients as fundamentally different from the rest of the community. The policy of mutual obligation relies on the 19th century distinction between the deserving and the undeserving poor. The deserving poor — those who have become briefly dependent on poverty relief through no fault of their own, and who with some assistance, could return to independence — are to be cared for. However, the undeserving poor whose poverty is the result of laziness or moral failure are to be disciplined and punished. Mutual obligation has been associated with a punitive approach to the unemployed, applied in withholding social security benefits and heavy fines. Income security is considered a privilege rather than a right.

Supporters of economic liberalisation are hostile to state-guaranteed income security and have had a consistent preoccupation with returning the provision of welfare to families, private charities and churches, some of which emphasise the moral rather than the structural causes of poverty. Consequently, the Howard government placed charities at the centre of a number of government projects including the Job Network. These measures demonstrate opposition to reducing poverty or promoting greater equity. Social expenditure has been channeled into the Family Tax Benefits system, the Maternity Payment, and the Childcare Benefit: much of which ends up in the pockets of middle and upper income earners.

Not only is the individual demonisation of welfare recipients having a detrimental impact on child welfare, it is well recognised that factors associated with poverty and social inequality, such as a sense of powerlessness, lack of money and other resources, parental stress caused by unemployment and financial problems, in themselves, increase the likelihood of child abuse and neglect. Parents under stress can transfer their feelings of frustration onto their children. The stress can also affect their judgment and decision making as a parent. Political and economic decisions which increase poverty and worsen its effects, particularly in times of economic difficulty, have a significant impact on child welfare.

The presence of protective factors may reduce the risk of abuse and neglect. One of the best recognised strategies is to provide community support for children in socially isolated families and to weave a protective social fabric around them. Such measures include income support and supplement, access to information, advice and support from a wide range of health, education and community services, child care and respite care, and accessible public transport. Repressive welfare measures undermine social programs by isolating and shaming people and driving them to despair. People are extremely reluctant to beg from the charities. Instead, they will hock their furnishings, their personal possession and turn to loan sharks and payday lenders: entre the subprime crisis.

Repressive welfare measures also compound the impact of the subprime crisis. The Consumer Price Index hit 4.2 per cent for the year to March, but wages rose only an average 3.2 per cent in a comparable period. ACOSS estimates that two million people live in poverty today – one in ten Australians – (based on a poverty line of 50% of average disposable income, as used in UK &Europe). NATSEM research about the poorest 20% of families in Australia indicates most of these families are jobless and rely on social security payments as their main source of income.

Fuel price rises come amid estimates that almost 25 per cent of homebuyers are under mortgage stress, contributing more than 30 per cent of their income to repayments. Last year, the Institute for Social Research at Swinburne University of Technology reported that there are 1,186,000 or 15% of Australians in housing stress, defined by the bottom 40% of income earners paying more than 30% of their income in housing. Of these, 52% are renters and most of these are on Centrelink payments. To cope people are forced to sell or pawn possessions, forgo adequate dental or health care and have sometimes gone without meals. 120,000 homeless people in Australia. In 2006, the UN declared Australia in a state of housing crisis.

People teetering on the brink are now plunging over into degradation and squalor. Having overcommitted ourselves on mortgages and credit, the impact of rising interest rates is being felt, even among the aspirationals. Families in new development areas such as Kellyville Ridge, Rouse Hill and Bella Vista in NSW are increasingly accessing emergency community resources such as food packages, clothing and cash hand-outs. Jennifer Tisdell, executive officer of The Hills Community Aid and Information Service, said 16 per cent of her clients since the beginning of 2008 had come from such new estates. The NSW government has been required to provide emergency funding to community services which is used to provide vouchers for food, transport, medical prescriptions and assistance with rent/accommodation, and part-payment of utility bills. With the sudden spike in the cost of living there is a substantial shortfall for families.

The severe erosion of community services, health care and education in Australia under the mantra of fiscal responsibility and economic liberalization is having a devastating impact on families. Without policies to redistribute wealth, increased economic growth has a very limited capacity to alleviate poverty and social problems. The market will not help a family who cannot afford to pay for child care and even food for their children. In the language of the market, the poor are silenced. We can blame the parents and boggle at the carelessness and irresponsibility of ‘some people’ but we are all to blame for this situation. We elected the leaders who refuse to maintain adequate funding to our communities. It is time to make a real investment in our communities again and it is well beyond time to increase welfare payments, dump Centrelink breaching policies and improve services.

Super Big Bang

January 14, 2009 at 10:57 pm | In economic crisis | Leave a Comment
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Written on 18 November 2008

Believing in an ever-expanding economic and financial system is like believing in a perpetual motion machine which will keep going forever. But this idea is central to Australia’s superannuation scheme. The current market reversal is like slamming a car at full throttle into reverse. The financial system and retirement savings have buckled under the strain of the market slalom causing considerable losses to retirees.

With the current economic crisis, returns on superannuation have fallen more than 6 percent. People who have worked all their lives now see their retirement savings disappearing and some are worried about a future of hardship like that experienced by their parents. This is not welfare dependency as some would claim but a system of dependence on extremely unreliable financial markets. It’s like betting your life savings at the race track.

Falls in the share price index of around 14 per cent have battered share value and superannuation. The market slump has carved an estimated 20 per cent from the average savings of self-funded retirees since August last year. For the 2006-7 financial year, the number of retirees receiving pensions increased. Government benefits, primarily the age pension or veterans’ payments, remain the principal source of income for three-quarters of Australians aged 65 and above. Only 10 per cent are able to rely on superannuation. The Hobsons Bay City Council revealed that 80 per cent of its residents aged 65 and above are reliant on the age pension.

The Australian superannuation fund is the largest in Asia and the fourth largest in the world after that of the US, Luxembourg and France. Between 2000 and 2004, superannuation fund assets doubled from US$342 billion to US$635 billion. This figure is expected to top US$1 billion by 2010. If we are to avoid the budget blow out of thousands of baby boomer retirees on the pension, it is crucial that superannuation funds are protected.

The 2002 and 2003 negative industry fund returns of up to minus 17 per cent should have been seen as a warning sign. Our system of superannuation is dependent on a cycle where more mandatory savings entering capital markets cause asset price rises. This asset price bubble, based on speculation and excessive debt, has now burst due to the subprime crisis in the US and the guarantee of adequate retirement income is threatened. The theoretical faith that capital markets serve to create wealth and hence provide in principle the foundations of self-funded retirement has been shown to be fantasy.

Battlers and veterans expecting a comfortable retirement based on super contributions are watching it being eaten up due to bad financial advice. Financial planners and accountants have been unable to resist lucrative commissions offered by retail funds and consistently recommended them, even though, as a class, they are underperforming. The wealthy also benefit more under this system receiving generous government assistance to build up their superannuation savings. This is a real cost to ordinary working people and a real cost to the nation’s total savings pool.

This faith in the capacity of capital markets to deliver perpetual asset growth to fund retirement (the magical powers of compound interest) is attacked in studies into the exposure of ‘multi-sector’ superannuation funds. These funds make up the biggest number of superannuation funds (38% of the total number of funds) with investments in equities, bonds, and properties in domestic and foreign markets. Their portfolios can be highly exposed to the movements of domestic and international equity and bond markets.

Due to poor management skills, superannuation fund returns are most exposed to US equity markets when the markets are down and when returns are lowest, but least exposed when returns are highest. Maybe fund managers lack market timing skills. A successful timing strategy would be to reduce exposure during down market condition and increase exposure during up market condition. Regulation also plays a role with the Australian Prudential Regulation Authority (APRA) suggested asset allocation benchmark of about 50% into equities and 25% in bonds. A greater weighting of equities in fund portfolios means that the funds are more influenced by the equity market than bond market movements.

The myth that private savings would be invested in the capital market and, given effective and prudent management, they would accumulate over time and savings sacrifice now would be working for you, and compound into a tidy retirement package has been exploded. So-called market discipline and efficient management has been exposed as simply a rich few benefiting at the expense of everyone else.

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