Roy Hay

For two weeks before the Federal budget, the commentariat focused on the Reserve Bank’s misreading of the economic entrails arguing that it has overestimated the rate of inflation which was occurring and hence kept interest rates too high.

When we have a two-speed economy with a mining boom in the north and west and virtual stagnation in the manufacturing and services that dominate the south and east, it is very difficult to use a single lever, bank rate, to influence its behaviour.

The Bank may have overestimated the rate of inflation, though the underlying rate it is still within their preferred range, but high interest rates, in international comparison, is not the sole or even the primary cause of the current malaise.

It is equally likely that the federal and Victorian government’s shared obsession in returning their budgets to surplus in the next financial year has already had an impact, even before the significant cuts they are going make to their spending to do so.

The deflationary impact of public spending cuts is likely to kill what little optimism was beginning to surface with the prospect of interest rate reductions.

The international evidence is accumulating that the austerity measures adopted in Greece, Spain, Ireland, Portugal and other European countries are causing their economies to contract.

There is little sign of the promised restoration of confidence which is supposed to be a precondition for renewed, sustainable growth.

Why should Australia be different?

Unemployment is over 5 per cent and likely to rise judging by the sackings which have already occurred and the others which are in prospect.

No doubt both Western Australia and Queensland are going to continue to have shortages of skilled workers for their mining and energy projects, but these are capital rather than labour-intensive industries.

Their ancillary and support industries and suppliers are often overseas so the multiplier effect of their investment may not all translate into more domestic Australian jobs.

The mining boom has helped sustain the Australian dollar, though it has come back from the highs it reached a few months ago.

Australia’s terms of trade have been very much in our favour and imports have seldom been cheaper.

But this has put real pressure on our domestic manufacturing and though this will provoke change and possibly a resilient response in time, the immediate impact may well be a rise in unemployment.

So it is inaccurate to focus on the Reserve Bank and interest rate settings as the main cause of current difficulties.

There is no doubt that a reduction in rates is called for and that the protected major banks need to pass this on in full, rather than squealing about the rising cost of borrowing overseas.

They continue to say that they are not making an outrageous return on the capital they employ, but their absolute profits, which are underpinned by the security they have under current policies, are rightly regarded as obscene.

If they really want to sustain their future profitability and success they should bear some of the pain which has fallen on other sectors of the economy in the short run.

Finally, there is a sense in which we are all responsible for some of the current problems.

Before the global financial crisis we were all spending and borrowing for finance spending and investment well beyond our means.

Now our savings habits have changed and we are collectively rebuilding our reserves.

That means less consumption spending and hence less employment in the sectors affected by lower levels of demand.

While a return to the pre-GFC pattern is not called for, it would help the overall economy if we loosened the purse-strings a little.

Roy Hay

(This article appeared in the Geelong Advertiser,  28 November 2011, p. 18 as’ Red, white and blue in the top End.’)

A great deal has been made of the decision by Australia and the United States to have a training base for American troops in the top end.

Tandberg summed up a common response with a cartoon in which a US soldier says it is great to be in a country which offers no resistance for a change.

The old stories about Australia as the deputy sheriff in the Pacific got a good airing as well.

Then there were those who thought this was the USA throwing its weight around and setting up an imperial base in a client state so that it could dominate and contain China and probably India as well.

Barack Obama certainly set out to cheer up his regional allies with his affirmation that the United States would henceforth be a Pacific power and that  it would continue to show leadership in the years to come.

Yet there is an alternative explanation for all of this which is perhaps nearer to the truth.

The United States is now entering a phase when it can no longer project its force in the way it often did in the last century.

Its aircraft carriers are now vulnerable to attack by Chinese weapons systems.

Even its nuclear submarines are no longer as safe as they were,

So the need for a land base astride the main sea lanes from the Pacific to the Indian Ocean rather than a maritime presence becomes pressing.

Moreover the United States cannot afford to maintain standing patrols and mobile forces on the scale it once did because of the huge costs of the Iraq and Afghanistan wars and the impact of the global financial crisis and its aftermath.

It might like to put its unemployed to work in war related industries as it did at the end of the Great Depression and during the early years of the Second World War before the Japanese attack on Pearl Harbor.

But that would be economic nonsense unless a war was imminent and there is no sign of that at present.

So the United States, whatever its leadership might claim, is probably trying to fend off the evil day when its economic capacity will be overtaken by China and this will no longer be able to be compensated for by superior technology.

The implications for Australia are also significant.

It is possible that Australia will become more valuable to the United States and thus have a greater capacity to influence United States policy than it does at present.

If Australia can maintain good relations with its northern neighbours, Indonesia and China, then it might be able to achieve the position of a force for peace and compromise when United States and Chinese interests diverge.

This is not going to happen overnight but in the longer term it is certainly possible.

In the meantime it is in Australia’s interests to take seriously the Indonesian President Susilo Bambang Yudhoyono’s suggestion that involving the Chinese military in the exercises with the United States in the Northern Territory would help defuse suspicions that the scheme is solely aimed at containing China.

There are those who want to divide the world into competing blocs and who see conflict between them as inevitable, but this is a despairing and desperate view of human relations.

There is just as much evidence in history of compromise and the ability of groups to maintain relatively peaceful relations as there is of hot wars between the leading powers of the day.

American and Chinese relationships can develop peacefully and Australia can play a part.

The fact that all parties have the capacity to end peace by resorting to conflict can have a sobering effect on each of them.

Predictability and openness are the keys and Australia, facing both ways, can have an influence for good in this uncertain and developing world.

Published in the Geelong Advertiser, 28 September 2011, p. 22 as ‘Reconciling price, real vlaue is just trouble.’ Roy Hay

This column does not offer financial advice. Nor is it very good at predicting the future. Trained as an economic historian with twenty-twenty hindsight, I can tell you how we got into this mess, but I cannot pretend to know how we will get out of it. All I can do is outline some of the issues in play, in the hope that you find that useful.

We are still feeling the effects of the global financial crisis (GFC) of 2007–2009 and the excesses which led to it, and we have not learned all the lessons therefrom or applied the remedies we thought were appropriate. That crisis came about essentially because significant players in financial markets had cut the links between any conceivable value of assets they held and the price at which they were trading them. They were simply doing what always tends to happen in a boom, gambling that they could make money on the trade before the collapse in prices occurred.

Thought the cant phrase is ‘nothing is inevitable except death and taxes’ the reality is that speculative bubbles always end in tears and consequences which take much longer than you might expect to unravel. Governments tried with varying degrees of success to mitigate the effects of the GFC by strengthening prudential measures affecting the lending policies of banks and other institutions and by a variety of stimulus packages to prevent economies falling into recession. Australia came through this phase better than most, in part because the Howard government had used the previous boom period to pay down national debt to historically low levels, though private borrowing had grown significantly. The skyrocketing demand for Australian raw materials thanks to the growth of China and the fact that Australian banks were not committed to a large extent to some of the more outlandish complex financial transactions going on in the United States home loan market also helped. Many other countries were not so lucky and it was not just the banks but national treasuries which were now under pressure.

Sovereign debt was believed to be safe because governments could always use taxation to raise internal funds to meet their obligations. This was the case when national debts tended to be a small proportion of the gross domestic product of most countries. The ones that exceeded these ratios were usually small, peripheral nations whose dodgy practices hardly threatened the international system and when they defaulted the impact was limited. There were exceptions such as the first Baring crisis in the 1890s when the bank was brought to its knees by overextending itself in loans in Argentina.

However, in the 21^st century some major countries have built up very substantial debts during the era of easy money that preceded the GFC. In the case of Greece, joining the European community and the Eurozone, the single currency now used by all members except the United Kingdom, was supposed to introduce some fiscal discipline but it did not curb Greece’s binge on debt to the point where no conceivable measure of austerity can enable it to meet its short-term obligations. So it looks as if a partial default on its debt is being considered with the banks that are holding the Greek debt being supported out of a general European fund, probably backed by the International Monetary Fund. Will this so called ‘orderly default’ calm the market jitters or simply transfer the focus of concern elsewhere, perhaps to Spain or Italy? That is a real risk.

But debt is not just a Greek problem or even a European one. The United States has an economy that is just on the brink of recession and it has less room for fiscal stimulus thanks to the level of debt it has incurred. Much of this is held by China and that has consequences for the rate of growth of the economy that has been underpinning Australian resource exports.

Though there is much gloom in the current economic outlook and a high level of risk that the world economy will grow more slowly in the next few years, there are some amazing opportunities in the development of new technologies to meet the challenge of global sustainability. Collectively these have the potential to institute a new era of economic and social development if people could lift their focus for a moment. So I remain a glass-half-full economic historian.

(This article was published as Roy Hay, ‘Biblical plague that failed to arrive,’ Geelong Advertiser, 28 July 2011, p. 28.)

What happened to the locusts?

Roy Hay

Last August the papers and the airwaves were full of locusts, or to be more accurate, stories about an imminent plague of locusts which was going to come down from New South Wales and Northern Victoria to the outskirts of Melbourne and Geelong. So what happened? Did someone cry wolf? Did the locusts never appear or were they stopped in their tracks by human agency or natural causes?

Locust

The Department of Primary Industries (DPI) was very concerned at the time. Their website announced ‘Scientists estimate that Victoria could be facing the worst locust plague since the 1930s’. This was enough to set the media mills spinning and you could have been forgiven for thinking that your backyard was going to be full of the critters almost overnight.

The Victorian government, not surprisingly, was very alarmed at the threat to farms and orchards and the income, employment and food supply which depended on them. It embarked on a $2 million multimedia campaign to urge Victorians to help combat the threat. Interactive maps on the DPI website allowed locust sightings to be reported, a rebate of 100 per cent on insecticide was provided to landholders in the affected areas and community meetings were organised. Special sites on public land were opened to protect the State’s $100 million bee industry. Organic farmers were given assurances that a suitable insecticide would be available to meet their needs.

In September floods were inundating large areas of New South Wales and Queensland but the Plague Locust Commissioner thought initially that this was unlikely to affect eggs buried underground. Social media came into play as the DPI set up a locust twitter page. SMS updates were available. Landowners were reminded of the critical couple of weeks between the hatching of locusts and their gaining the ability to fly. That was the moment for the most efficient spraying. Incident-control centres were set up and by the end of September over 750 square kilometres had been sprayed from the air in New South Wales and Victoria geared up to follow.

Wild and cooler weather early in October helped delay the onset of locust development, but hindered spraying. By early November locust hoppers were at point of flight in the Mallee and there were reports of locusts in some residential areas in the north of the state. The Australian Plague Locust Commission (APLC) provided DPI with locust information, advice, images and support as well undertaking aerial spraying in the Mallee. ‘Their efforts and support to minimise the damage caused by locusts in Victoria has been exceptional’, the DPI reported. In early December heavy rain once again slowed locust activity. The DPI was now worried that vigilance would fall off and cautioned that a second generation of locusts might now emerge. But the rain continued to fall and floods occurred across the north of the state into the new year. By June 2011 the DPI could report that ‘locust numbers have returned to near normal levels in most areas’.

So a combination of an almost military effort by the DPI, APLC, and local communities and landowners, and the spectacular breaking of the drought in one of the wettest, coolest and windiest summers in recent years in the areas most at risk helped scotch the locusts this time. The Federal Department of Agriculture and Fisheries continues to monitor locust activity and to forecast likely outbreaks and their timing.

A few locusts did get through into Melbourne in December 2010, sparking a brief upsurge of stories, but that soon petered out. The worst plague since the 1930s did not eventuate this time.

Good governors of the game or dictators?

By Roy Hay

The administrative leadership of major sporting bodies comes in for a great deal of criticism these days, some of which is warranted and some perhaps not. When you scan the newspapers, you sometimes wonder whether there are parallels with what is happening in other contexts and, while it may be regarded as totally fanciful, I got to thinking there was something in common between our sports administrators and another group in the news.

These sports leaders share certain characteristics with middle-eastern dictators currently under challenge by their populations. They have mostly insulated themselves from popular election, at best being chosen by a relatively small coterie of insiders to the sport. They use their power or influence to extract very large sums of money from the taxpayers of the countries in which they operate, some significant proportion of which goes to reward them and their henchpersons with disproportionately large incomes. They use their political power to bend other sources of authority to their will.

They have privileged tax status in their countries and receive massive overt and covert public subsidies. Take a couple of local examples. The new stadium at Carrara on the Gold Coast cost roughly $140 million. Of that the federal, state and local governments put up $130 million and the AFL contributed $10 million. The Football Federation Australia received $45 million of public money for its failed bid to host the World Cup in 2022, losing out to a middle-eastern politico-sports leader who is currently under investigation for bribery. Qatar, to general surprise, won the competition despite the higher technical merit of both the United States and Australian bids as determined by FIFA’s own assessment process.

Of course there are differences. These sports leaders are not in unfettered control of their countries. They are subject to the laws of the land in a way that the dictators are not, though the sports which they govern have many dispensations in practice from those laws. Think for instance of Richard Pratt whose firm conspired to run a cartel to force up prices in the paper packaging industry for which he and his firm were heavily fined. At Carlton football club, on the other hand, he took part in a sporting cartel whose regulations constitute a major restraint of trade, justified in terms of its necessity for the operation of the game of football.

The sports leaders project themselves and their ‘industries’ as contributors to the economic well-being and social and cultural development of their respective countries, just as dictators do. Countries fall over themselves to attract major sporting events, the legacy of which is often at considerable variance to the pre-event puffs of its advocates. The leaders shamelessly spin their bone fides and value to the communities in which they operate. They treat their players and fans with thinly disguised contempt while professing that both are the life blood of their activities. Players in major sports give up many freedoms the rest of us take for granted and are subject to regulations which treat them like serfs, well-paid serfs so the administrators would have us believe, but is it true?

Andrew Demetriou can tell the media constantly that his players are misled when they seek 27 per cent of the football’s revenue they help generate. In the United States, players in the National Football League receive around 58 per cent of revenue. The average across American sports—baseball, basketball, ice hockey and football—is between 55 and 59 per cent. In European soccer, apart from the German Bundesliga at 51 per cent, the range is from 63 per cent in Spain to 73 per cent in Italy, with the English Premier League at 67 per cent.

In Australia the AFL players’ share of revenue has fallen from 27 per cent in 2001 to 20 per cent in 2011. In the NRL the players’ share has been constant around 22 per cent of revenue in the last four years. Rugby Union between 2005 and 2008 paid its players between 18 and 20 per cent of total revenue. Australian elite soccer players have received between 21 and 29 per cent of total revenue including government grants between 2006 and 2010. This calculation includes the separate agreements for the Socceroos and the A-League. The share of A-League players alone is higher at 48 per cent in 2009-10. Ordinary workers in Australia have seen their incomes rise in the last decade, whereas footballers have gone backwards in relative terms. All this data is taken from a detailed study undertaken by Dr Braham Dabscheck, on behalf of the Australian Athletes Alliance, who concludes, ‘To the extent that leagues experience financial problems it is not due to the payments made to players.’

Then there are the fans, who are expected to pick up increased ticket prices, to succumb to high-pressure merchandising of replica shirts which change every year and to be bombarded with artificial noise and exhortations at games which drowns out the atmosphere they used to create themselves. While Australians may feel that the right to gamble is part of their heritage, it is worrying when sports now aggressively promote gambling on and during matches and need gambling revenue in the way they used to depend on tobacco.

Perhaps it is time for a bit of participatory democracy in sport on the part of the players and the fans.

(Published in the Geelong Advertiser, 15 June 2011 as ‘Growth scare tactics.’

By Roy Hay

Throughout history there have been times when far-seeing people have argued that there are finite limits to the growth of human numbers and the economies which sustain them. Thomas Malthus in the eighteenth century asserted that the food supply could never keep up with the growth of population and that positive checks—wars, pestilence and disease—would result, unless human beings voluntarily postponed having children; something which he thought was highly unlikely. At the end of the nineteenth century, William Stanley Jevons, argued that the supply of raw materials, particularly coal, the key mineral of the industrial revolution, was running out and that growth would come to a halt as a consequence. In the 1930s economists worried that the world was entering a stationary state, where growth would not take place. At the time unemployment was extraordinarily high in the industrial world as the Great Depression took its toll. This last phase was followed by the catastrophe of the Second World War, but that was succeeded in turn by more than a quarter of a century of rapid and sustained economic growth. When that came to a shuddering end in the 1970s with the first oil price shock, calls for zero population growth resurfaced.

Now the global financial crisis and the fears about the risks of irreversible climate change have brought predictions about the limits to growth to the fore once again. These take many forms. Some argue that the requirement to cut the output of greenhouse gases to prevent or ameliorate global warming imply that we have to switch to a model of sustainability rather than growth. Others point out that the growth of world population is now outstripping the availability of water and food—perhaps a neo-Malthusian scenario. The Australian entrepreneur and philanthropist Dick Smith, who used to consume lots of scarce resources in daredevil exploits, is now a convert to the notion that this country, and the world as a whole, must limit its population growth if it is to survive. He quotes Sir David Attenborough, ‘I’ve never seen a problem that wouldn’t be easier to solve with fewer people, or harder, and ultimately impossible, with more.’

Smith’s approach is apocalyptic, selectively quoting statistics, reports and individuals to create a picture of an imminent catastrophe unless something is done to limit population growth in Australia and the world as a whole. So he discusses the future of food supply, availability of water, renewable energy supplies, and climate change coming to somewhat pessimistic conclusions about the capacity of Australians or the people of the world to tackle these in a satisfactory way. He recommends Kelvin Thomson’s 14-point plan for population reform and prints it as an appendix to the book. Thomson argued for a long-term population management plan and limits to the growth of Australia’s numbers.

Some of Dick Smith’s suggestions are very sensible, including the idea that a greater share of national resources should be put into educating our young people so that a higher proportion of them will have the skills necessary for industrial and manufacturing employment. This should reduce the need for the import of skilled labour from overseas, which denudes other countries of their trained personnel.

However a number of Smith’s claims are just plain wrong or misleading. Australia’s population has not been growing as fast as that of India. It is not clear that limits to population growth in Australia would result in a better environment or higher living standards for Australians. In general, it is the poorer countries which have the highest rates of population growth, because the high death rates are exceeded by higher birth rates. When economic development kicks in then life expectancy increases and the need for larger numbers of children—to ensure that some survive—diminishes. On the other hand, a recent Oxfam New Zealand survey found that poor and developing countries are planning to reduce their carbon emissions and greenhouse gases faster than most developed economies.

The nub of the problem is the sheer complexity and interconnectedness of it all and the uncertainty as to whether all the human ingenuity available is more likely to be overwhelmed by some geological/atmospheric or galactic event. I know that that way lies fatalism and passivity, but it is not absolutely clear which way is up. The limited historical evidence so far is that economic development tends to be associated with slower population growth, but whether this translates into a sustainable future based on better technology generally available in a peaceful way is a very moot point.

(Published in the Geelong Advertiser, 5 May 2011, p. 16.)

By Roy Hay

If you were one of the lucky ones who chose to travel to the United Kingdom for the Royal wedding you will have done well out of the high value of the Australian dollar relative to the pound. Similarly if you go for a holiday in the United States or Europe you will find that the Australian dollar will buy you more. Also, imports of consumer goods are cheaper than they have been, helping to curb inflation in this country.

If on the other hand you are UK pensioner living in Australia you will have seen its dollar amount fall by one-third since 2006. Australia is one of a group of countries where the initial value of such a pension is fixed at the time it begins. This has reinforced a push for the indexation of UK pensions by pensioner organisations in this country. Among the arguments they use is that this would reduce Centerlink payments as top ups in this country, but the current government in the United Kingdom will not be keen to do anything while it is engaged in cutting back on expenditure at home.

These are just a couple of examples of the ways in which the current high value of the local currency has costs and benefits for different groups of Australians. In a recent column I pointed out that many of our export industries, particularly in manufacturing are struggling with foreign competition. Those where foreign demand is extremely high, and the mining and energy sector is in this position, benefit from the high dollar until such times as alternative sources of supply become available.

In recent times there have been calls for the setting up of a sovereign wealth fund to secure some of the profits of the current boom in energy resources.  Several countries have such funds including many of the Middle East oil producers, Singapore and Norway. These government funds siphon off some of the temporary gains from economic activities and use them for investment in long term projects at home or overseas direct or portfolio investment.

This would be a good time to have a serious debate on a sovereign wealth fund. The terms of trade, the ratio of price of what we export relative to what we import are the most favourable they have been in a generation, thanks largely to the mining boom. Taking some of the funds generated out of present circulation could put downward pressure on inflation in the rest of the economy. It would permit the build up of resources for future investment. Norway has done this successfully with its North Sea oil bonanza. Here in Australia however, the current government has painted itself into a corner by its shambolic handing of the resources rent tax imbroglio.  Today, the miners are making big profits and paying less tax in the investment phase of operations. They would not be enamoured by any attempt to extract some of these windfall gains for a sovereign wealth fund.

One of the problems of a sovereign wealth fund is that it is potentially subject to political raiding when the government of the day needs revenue for current purposes.  Look at the Future Fund set up by the Howard government to meet long-term public service superannuation liabilities. It was supposed to be quarantined. But such a fund is always a huge temptation to cash-strapped treasurers.

Another issue with sovereign wealth funds is that of picking winners when investing public funds. Can governments outperform the private market or even match it in the long term? The respected economic commentator Ken Davidson always argues against attempts to share the risks through public-private partnerships arguing that governments can always borrow more cheaply than private companies. But that is only part of the story. If the government continues to operate the economic entity it risks becoming bureaucratic rather than entrepreneurial as has happened to some of our major utilities in the past.

As always this means that any economic decision has costs and benefits and what you may gain on the swings, you may lose on the roundabouts. Good policy requires a careful assessment of potential gains and losses and in a dynamic world this is not an easy exercise to perform.

By Roy Hay

Except in an election year, the run-up to a Federal budget is usually filled with horror stories about tough times ahead. This time the underlying story is the current minority Labor government’s commitment to return the budget to surplus in the next couple of years. Because it feels it still needs to prove its economic credentials and cannot risk breaking any more pre-election promises the goal has not changed though economic circumstances certainly have.

The budget’s income side has been hit by natural disasters including the cyclone in Queensland and the floods along the east coast.

The mining and energy sectors are going ahead rapidly, but at present they are in a major investment phase so that in the short run companies can claim substantial tax offsets, which means less net contribution to revenue. They also managed to stop the resources rent tax that was designed to draw off some of the profits which they are currently generating.

Manufacturing is doing it tough, especially in the export or trade exposed industries in Victoria and New South Wales. Companies like Ford, still major employers in Geelong, are laying off workers. The cries for subsidies, incentives or protection grow louder from backbenchers in marginal seats.

Retail is flat as people save and/or reduce their debts rather than spending. It is not so long since governments and many economic analysts wanted to see this happening but now they are worried about the employment implications.

Some commentators have suggested that the government is just setting us up to expect a tough budget so that when it is handed down there will be relief that it was not worse. Others point out that floating possible cuts by inspired leaks is a way of judging the extent of public concern and hence the potential voting impact. The reaction to expected cuts to medical research could be seen as one example.

Leaving the politics and cynicism aside for the moment it is worth asking whether returning the budget to surplus quickly is an appropriate way to deal with the problems of a two-speed economy. Is cutting the deficit a blunt weapon in these circumstances? It can be argued that government borrowing should be reduced to avoid crowding out private investment in the west and north. That assumes, of course, that the Australian economy is the only source of funds for such investment. Now, as part of a global financial system, multi-national companies like BHP and Rio Tinto can move funds around within the organisation and borrow virtually where they wish. Overseas countries seeking access to Australia’s natural resources are often keener to invest than governments are to allow them to do so.

Cutting spending and programs in the manufacturing and service orientated areas of the country, on the other hand, risks pushing these parts of the economy into reverse. Reducing investment in research and development on the grounds that all parts of the system have to contribute, could easily be sacrificing long-term benefits for a very marginal short-term gain.

Australia’s public debt has grown significantly since global financial crisis, thanks largely to the stimulus package introduced to head off recession, but it still remains relatively low in international comparison. Governments cannot risk a loss of confidence in their ability to manage the economy but postponing the return to surplus until such time as the overall growth of the economy provides the revenue to do so would not be a heinous thing to do.

Public bodies and private corporations throughout Australia have been engaged in a massive restructuring of their operations. It has been going on for some time and in the case of the operations in publicly funded institutions involves an apparent reversal of a strong trend of the previous generation. There are various names for what is happening, outsourcing, off-shoring, sub-contracting, public-private partnerships, focusing on core business and so on. There is even an outsourcing institute with free membership to supply firms with information on how to do it and contacts in a whole range of activities. Outsourcing is not new of course. Manufacturing has been involved in it for decades. The process is in the news today because it is white-collar jobs that are most affected.

At heart is a shift from the production of goods and services within the organisation to buying these from other suppliers. The argument from within is that it is cheaper to buy these services than to produce them. Sometimes this is reinforced by the claim that concentrating internal resources on certain specific activities and sloughing off peripheral ones enables the business or the public body to be more efficient for the benefit of its shareholders or the citizens and voters respectively. Many public utilities have been privatised and others have sub-contracted or outsourced a range of activities following the example of private companies. Services outsourced include information technology, customer relations (hence the growth of call centres in countries like India), cleaning and various subsidiary parts of manufacturing.

So it seems like the whole economy is being restructured with a relatively smaller number of large enterprises and a host of medium- and small-sized suppliers of services which have to respond to the demands of their markets. This applies to the supply of both goods and the labour force. For consumers this may result in a reduction rather than an increase in choice.

Many of the costs of change and flexibility are being outsourced as well. And that is where we, as workers, customers, consumers and citizens, come in. What about the people who are being retrenched? In many, if not most, cases they bear the costs of retraining and relocating. When we are made redundant we might be lucky to win on the lottery and get some government support, as the South Australian Electrolux workers are promised, because of electoral considerations affecting the federal government? More commonly we will be left to our own devices and our own savings.

While it may be true that moving production to its most efficient location will result in higher levels of total employment, there is no guarantee that that employment growth will happen in one city or one country rather than another.  We have relatively free movement of capital in this global economic system, but we do not have free movement of labour. Does outsourcing cause unemployment? Not according to its devotees. As Daniel Drezner, an American writer put it, ‘Believing that off-shore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth: intuitively compelling but clearly wrong’.

If we broaden our perspective, what happens to those who may be indirectly affected when outsourcing takes jobs right out of Australia? Are we getting value for money or the kind of services we require? If the outsourcing is overseas then our import bill, already large and growing much faster than exports, expands further.

At a deeper level have we lost some of the advantages of a collective provision of the optimum level of services to the whole of society which was one of the key reasons why many public bodies were set up in the first place? Ken Davidson is one of the few public commentators who keeps hammering the point that it is cheaper for governments than private firms to borrow funds to build infrastructure projects. Also, though one of the arguments for public–private partnerships is that some of the risk is shifted to the private sector, in the last resort it is the state that has to step in, as we have seen in Victoria with much of Melbourne’s transport system.

Some firms and public utilities are discovering that they lose some degree of control of their operations when they outsource, that cost savings may be less than anticipated and that customer relations are adversely affected. So it is not self-evident that outsourcing as a strategy is the best way to go.

The Australian stockmarket took a dive earlier this week. A needed correction or the end of the most recent long boom? That is the question, as Hamlet might have said, had he been an economist and living at this hour. Are Australians living in a fool’s paradise, believing that they have found the secret of sustained economic prosperity, or are they teetering on the edge of a precipice? It is equally easy to be Pollyana or the merchant of doom, but the current economic situation is, at the very least, more volatile than it has been for some time.

Australia’s current expansion is underpinned by four elements: the growth in demand for raw material resources primarily emanating from China, the continued health of the United States’ economy, a massive current account deficit produced by large-scale borrowing from overseas to finance current consumption and investment in real estate, and the fiscal and financial policies of the Federal government which have permitted this skewing of domestic investment. You could almost foresee a visit from a modern Sir Otto Niemeyer with the message that Australia should get its house in order, as happened at the onset of the Great Depression in 1930. Mind you he would also have to visit the United States with a similar advice. Alan Greenspan, the recently retired head of the Federal Reserve Board, hinted at a depression on the way if the United States did not cut its own expenditure and its dependence on foreign resources and on the willingness of other countries to finance its own current account deficit.

In the short run the growth of the Chinese economy can be expected to be slower than that which has occurred in recent years. Though fears that it would introduce a capital gains tax have receded, there are indications that government policy in that country will have to be directed more to improving the efficiency of energy use and reducing greenhouse emissions, which will impact on economic growth. It will also reduce demand for Australian mineral exports. The United States goes into an election year with a hugely unpopular civil war in Iraq and a potentially critical situation in Afghanistan costing billions in resources and a significant toll in American lives not to mention the far greater numbers of Iraqis and Afghanis who are dying. Though Al Gore may not be a candidate for president, his message about the effect of the United States on climate change may be gaining some traction in his own country. If both China and the United States experience slower growth there is no way that Australia can be unaffected.

Here in Australia the Federal government has paid off its debts, which is a good thing, but largely as a result of windfall gains in taxation thanks to the boom. Despite pre-election handouts, the combination of bracket creep and the underestimation of revenue growth has enabled the government to generate huge surpluses in most of the last several financial years. The government prides itself on its economic management, but in reality much of this gain has come from export-led growth which owes little to domestic settings. Until very recently little of this extra revenue had been devoted to infrastructure investment, building the capacity for future growth. We have not used the good times well. Even the current plans for the Murray-Darling basin are driven more by political than economic concerns. So investors might want to be cautious about the short-term future, though the paradox is that a decline in overall investment would probably increase the likelihood of a recession.