tickleandrose wrote on Dec 3
rd, 2015 at 11:56am:
I believe it really depends on what kind of economy is growing, and that a country should gear towards growth in sectors that benefits it.
For example, ever increasing and expansion of money into real estate may not be good if its not geared towards producing new dwelling. But keep increasing in price through easy credit on existing stock is just going to create bubbles that eventually have to burst.
True. You could say that existing dwellings are not technically GDP. All you're doing is passing a product from one person to another.
You could also say that real estate is
negative growth. I.e, when you become a home-owner, you go into debt.
This issue alone is the big problem with the Australian economy. Per capita, Australians owe debt of 150% of their annual salaries - among the highest debt levels in the world.
By comparison, government debt is among the lowest in the OECD. It sits at around 20% of GDP, as opposed to US debt, which is over 100%.
The way we think about these two kinds of debt - public and private - is striking. We have come to believe that government debt is inherently bad, while household debt is somehow virtuous. Buying a home or maxing out your credit card through a bit of retail therapy: good. Government investment in schools, infrastructure, home insulation, etc: evil.
The housing boom is what currently keeps the eastern states awash with stamp duty revenue. The NSW Treasury is currently loaded thanks to the Sydney property market.
But the debt that fuels this boom leaves Australia in a very precarious situation. It would not take much to collapse, but what's more likely is a slow economic decline, driven by rising terms of trade and low wage growth. As our money is tied up in debt, less money gets spent and invested. With low interest rates, investment makes little profit. Much of that debt is foreign, so it goes back out of the country - with interest.
In the current economic environment, encouraging spending, as governments generally love to do, encourages debt. This shifts the burden of debt from the government onto the individual.
Mind you, if it works, businesses employ and wages rise. Wages and capital are finite, but demand is illusive. Governments can make small changes that have a big impact on business and consumer confidence, and this is the current Turnbull strategy.
Governments can increase revenue in a number of ways, but there are broadly three: cut services, raise taxes, or encourage growth. These strategies need to be balanced and applied to economic circumstances.
Take the Abbott approach. Abbott talked the economy down both in opposition, and then in government. He manufactured an economic crisis that he then meant to solve. The solution? Cuts to government services.
Abbott wasn't successful in getting his cuts through, but he created economic gloom, shadowed by the end of the mining boom and the dearth of manufacturing. In his next budget, Abbott did a reversal. His aim? To stimulate the economy through generous family payments and small business rebates. Abbott wanted small business to "have a go".
The mixed messages here confused business. Business groups had no idea where Abbott was going. It was clear that the Abbott government was purely reactive and had no long-term plan. This was one of the main reasons why Abbott was deposed.
The day after Abbott's sacking, the dollar rose by two cents. Surveys showed business confidence improving after only a few weeks. By doing absolutely nothing, Turnbull achieved a minor boost in confidence. It's difficult to measure so close to Christmas, but employment has also risen.
Government money in Australia accounts for around 25% of the economy, so small shifts in direction can have a huge impact. The Abbott government, with Joe Hockey as treasurer, was a textbook example on what governments should not do.
Just think how ludicrous Abbott and Hockey's message was about home ownership and wages. Abbott said that high house prices are good. Hockey followed up by saying the best way to afford a home is to get a higher paying job. Abbott ruled out changes to negative gearing or capital gains tax, which artificially stimulate house prices. By talking up a wages auction, Hockey was pushing for wages growth, which causes inflation (and higher interest rates) - as if this could even be possible, given employment levels.
The messages made no sense, but they were the government's message on home ownership. As Hockey acknowledged, the Abbott government failed to get its message across on so many different levels. There was no coherence, but ultimately, there was no shared purpose to begin with. The Abbott government was doomed by its own words in opposition. It could not possibly provide a solution after talking up the problem to such a degree. The Abbott government was hung by its own rope.
The Turnbull government has a task on its hands, but "paying off Labor's debt" is the least of its problems. Reducing private debt is crucial to getting the economy going again.
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