Scott Morrison wins Australian Federal Election

Scott Morrison has overcome the attempt to re-introduce class warfare into the Australian electoral system with a “steady as she goes” campaign strategy.

Labor’s Campaign

In a carefully calculated attempt to re-invigorate union control of the Australia economy, the ALP set out a programme to target all Australians who were not unionists. This programme included the following “difficult to explain” elements:

  1. Eliminating Franking Credits for retirees in self-managed superannuation funds, but keeping them for retirees who are in externally managed Superannuation funds, which are mainly union-managed funds.
  2. Supporting the proposition that there should be an increase to the minimum wage without regard to the possible negative impact on jobs.
  3. Allowing lawless union activity and removing the “industrial umpire” in the construction industry.
  4. Radical action on climate change beyond that agreed at COP21 and beyond that committed to by other comparable nations, with little real consideration of the employment consequences of this approach. Given its rhetoric, and reliance on Greens preferences, the ALP were unable to articulate a policy fix to work around this. This did not trouble voters in Melbourne or Canberra, since they did not perceive a risk to their own jobs, but it did worry voters in Queensland.

Maximising Scott Morrison’s win

Continuing failure of the Liberals to win over Canberra’s voters (and the opinion-makers at the ABC and SBS) will be a cancer on future Liberal policy making. In addition, the time is approaching when the ALP will not be able to govern in its own right, but in a future time its only hope will be to govern in coalition with the Greens. Already, the ALP cannot win many seats without Green preferences.

For the Liberals, it will not be enough to point out the overt socialism of Green leaders or the economic dead-end of Labor’s class war. Furthermore, the Greens are already starting to show more pragmatism than the ALP on policies like the Franking Credits changes, with plans to protect less wealthy investors. The challenge for the Liberals will be to come up with their own version of “reasonable and easily defensible policies.” Here are some suggestions for immediate action:

  1. Fix the “wages drought” by arguing for a $1 hour increase in the minimum wage in this year’s Fair Work hearing.
  2. Make Mabo Day a Federal public holiday.
  3. Explain that Australia is cutting its CO2 emissions in accordance with its commitments to COP21.
  4. Explain that the Coalition has a policy to provide dispatchable electricity via Snowy 2.0.
  5. Protect jobs in vulnerable sectors, such as horticulture, via modest tariffs.

Wages Drought

The government and the Reserve Bank have already agreed that inflation should be between 2% and 3%, yet it is currently running below that level. We know that inappropriate across-the-board increases in wages are the main cause of runaway inflation. Surely the corollary of that is that inappropriate wage-freezes are the cause of inflation running at too low a level. Therefore, it follows that a significant minimum wage increase at this time is appropriate. Don’t drop the ball on this, Scott Morrison. If you do, you will be opening up the field to the ALP to foster discontent.

Most of Australia’s export industries will not be hurt at all by this change, as they operate at the other end of the wages spectrum, with mining, medical research and IT sectors paying well above the minimum wage to most of their employees. The tourism sector could suffer some short-term impacts, but it is a highly vulnerable sector in any case with many other factors playing a more important part than the wages paid to minimum wage employees.

The import-competing sectors could suffer some pain, but the government has the means to address this issue by another mechanism, discussed below.

A change in the minimum wage will be much more effective in restoring balance to the Australian economy than can be achieved by cutting interest rates since that is likely to have other and unmanageable consequences.

Mabo Day

Most Australians recognize the importance of Australia Day. It recognizes the beginning of European settlement in this nation; most Australians are Europeans. On the other hand, Mabo Day could be an equally important day in Australia’s calendar. It would be a day to remember when the original inhabitants of this land began to get legal title to the land upon which they are still living. It can be a day when Aborigines, Torres Strait Islands and the European and other immigrant peoples remember and celebrate the original inhabitants of this land. Scott Morrison, don’t you think it deserves to be recognized?

COP21

In Paris, Australia made a voluntary commitment to cut greenhouse Gases by 26% to 28% by 2025 from 2005 levels.

Since Australia only emits 1.3% of the world’s greenhouse gases, it is not possible for Australia’s action to have any measurable impact on global warming. Therefore, it is appropriate for Australia to be a follower, not a leader in this matter, especially since its commitments to COP21 follow that requirement. Certainly we can do more, provided it can be done without seriously damaging our own economy and without destroying the jobs and incomes of ordinary Australians. This is the lesson of the recent election, which was claimed to be a “referendum” on this subject. The nation’s action on climate change should bring the nation together, not divide it, as the ALP and the Greens wanted to do. On this point, Scott Morrison was clearly correct.

While many in the electorate like the idea of Australia leading the world on climate change action, and probably most of the voters in Canberra (which includes the civil servants advising the government and the nationally-funded broadcasters, the ABC and SBS), it will have a cost in terms of jobs, a point which voters in Queensland clearly perceived.

In addition, Australia should not be party to the worldwide green conspiracy to deprive India and other emerging nations of access to cheap electricity via Australia’s coal. When the West and China emit less CO2 than India it may have a moral right to dictate how India should proceed in this matter. Whether it should do so, even at this point, is a matter of geopolitics as well as moral arguments.

Snowy 2.0

Only the Coalition has a workable policy to turn generated electricity into dispatchable power. This important contribution to this subject was made by the former PM, Malcolm Turnbull, being a policy that Scott Morrison has retained. Of course, Snowy 2.0 is only a start, but this “solution” is likely to be repeated, with the Kidson power project in North Queensland also being indirectly supported by the Queensland Labor government.

On this question, Labor and the Greens have been very quiet, hoping not to give any credit for real action on climate change to the Coalition. Scott Morrison and the Coalition should not allow this policy vacuum in their opponents’ rhetoric to continue to go unchallenged.

Tariffs

All major parties have a blind spot on tariffs, believing for some reason or other that minimum wage Australians can compete with people overseas on half, quarter and even one-tenth of Australian wages and conditions without any problems.

This is a manifestation of the arrogance of the Canberra bubble and I seriously hope that Scott Morrison can burst this bubble.

Critiquing Some Labor Policies

Franking Credits

The system of Franking Credits is an innovative approach to avoid double taxation for Australian investors. It was introduced by a previous ALP government. It had the significant benefit that overseas investors in companies of all kinds were no longer better treated than local investors (since overseas investors are only taxed at a notional rate on dividends and interest earnings). The outcome of the ALP’s tinkering could have been the beginning of the end of this scheme in its entirety, a result in which Labor’s class-war warriors would have rejoiced, urged on by the Liberals’ hard-right “free trade” faction. A plague on both their houses!

Negative Gearing

The system of negative gearing for housing investments has been a thorn in the side for taxation system designers of all political persuasions. A previous ALP government tried removing it, but had to unwind the change because it immediately caused property rents to increase. Undeterred, ALP’s Bowen planned to try to do this again. The problem with this plan is that rents provide a very poor return on residential property returns, with the shortfall made up by immediate tax deductions for the loss on property investments and the hope of future capital gains. Ignoring the likely adverse outcomes of a policy platform is not recommended.

Capital Gains Tax changes

There is a fairness aspect to the Capital Gains Tax discount and there is an economic incentive aspect. The fairness aspect relates to the “lumpy” nature of capital gains since, for individuals selling a business and receiving a capital gain, this could be a once-in-lifetime event. In this case, taxing at the full marginal rate of tax applicable in that year would be unfair. Even though averaging could be introduced at this point, there is a more important element that should be included when considering capital gains taxes. This relates to the nation’s need for capital investment and capital accumulation in order to maintain the nation’s prosperity into the future. Encouraging investment via the capital gains discount should help to build up the nation’s capital; even negative gearing also serves this purpose. At present, Australia has a problem with insufficient capital investment. The need for more investment is a matter that does not appear to have been considered by the ALP when proposing to reduce the capital gains discount and their changes to negative gearing. While their proposals had a ready audience among those who do not invest for the future, the ALP has no excuse for not putting national interest ahead of a “cheap win” in these matters.

Conclusion

Scott Morrison is to be congratulated for running an effective campaign, highlighting some of the inadequacies in the “bold agenda” put forward by Labor. It is now up to the Prime Minister to lead a government that really does work for all the people, not just for those who voted for the Coalition.

COP24 Katowice – CO2 Emissions

CO2 Emission targets for COP24 naturally follow on from COP21, which for real contributors was a cut of about 1% of total CO2 emissions – 356,000 tonnes of CO2 per year – until around 2025.

Given the range of global disparity in CO2 emissions, a cut of about 356,000 tonnes of CO2 per year is probably as much as can be realistically achieved in this period, at least until new ways of cutting CO2 emissions are fully implemented or even new ones invented. This could then be a CO2 emission reduction target for COP24, out to 2025.

Energy-Related Emissions – Actuals

When the actual figures for total CO2 emissions come out we will know the truth about 2017, but at present we can say that energy-related emissions grew by 1.4% in 2017. However, it is noteworthy that emissions have not followed the growth in GDP.

CO2 Emissions vs GDP

While the USA continued the downwards march of its CO2 emissions, most of the increases in 2017 can be attributed to China (up 1.7%), European Union (up 1.5%) and the Developing Asia (up 3.1%). Developing Asia (i.e. excluding China) can be excused for its increase in CO2, since this region is well below the world average CO2 emissions per person.

COP24 – China’s emissions

Even though China’s emissions are below those of most western nations, they are well above the global average CO2 emissions. If CO2 cuts are to be achieved China cannot just stand on the sidelines and point the figure at other nations.

China cannot even say, “India’s emissions are also increasing.” The fact is that India needs to catch up on its electrification, and there is plenty of scope for it to do so. Global average emissions are around 5.0 tonnes per person per year. India’s emissions are running at less than 2.0 tonnes per year.

In regard to 2017, seasonal factors could have played a role if some emissions had “moved” from December 2016 to January 2017, (as movements in atmospheric CO2 readings seem to indicate). But the real question to be answered by China is, “What will be energy-related emissions in 2018?”

COP24 – Europe.

Europe’s failure to cut emissions in 2017 is very disappointing, particularly given the EU’s criticism of other nations (particularly USA) when the USA is actually cutting emissions.

Factors contributing to the EU’s setback include Germany’s partial loss of faith in nuclear and the dysfunctional EU ETS scheme. The question for the EU is, “What are you doing to remedy your failures?”

COP24 – Immediate CO2 Emissions target

COP21 Paris required nations to set their own targets for CO2 emission reductions. Leaving to one side China’s effective non-participation in any realistic way in the “commitment” process, it was an effective way to proceed, since non-binding commitments are likely to be more ambitious than binding commitments.

There does not appear to be any basis to change the COP21 overall target, since cuts of this magnitude will contribute significantly to the goal of decarbonising the world’s economy.

There are even ground to believe that unanticipated cuts have already been delivered. Two possibilities stand out:

  1. China’s well-publicized cuts in coal consumption and the move to use higher quality coal should have cut China’s emissions  – but did this happen?
  2. A cut in India’s inefficient use of fuel for cooking and other purposes due to an increase in electrification of that nation should have given rise to a cut in net emissions – has this been factored into the IEA numbers?

COP24 – Future CO2 Emission target

Even higher rates of CO2 emission reductions are possible in the medium term. At present, the most fruitful lines of future development, not fully factored into the current targets, are:

  1. Increasing penetration of pumped-hydro as a way of dealing with the problem of unpredictable supply of electricity from wind-farms, without bringing in its train the “CO2 cost” of using peak electricity gas-powered generators.
  2. Increasing the community’s confidence in the long-term safety of nuclear-powered electricity generation, possibly via new technology currently under evaluation, leading to a higher level of take-up of nuclear energy.
  3. Eventual replacement of all petrol and diesel-powered passenger vehicles with electric vehicles.

If these all came to fruition, along with others not yet considered, a doubling of the annual expected CO2 emission reductions to one million tonnes of CO2 per year is not beyond practical delivery. This could be target set at COP24 for after 2025.

COP24 Katowice – Real Issue

COP24 Katowice is danger of being strangled by non-central issues. The real issue for this international conference on climate change is understanding CO2 and the reduction in emissions required for effective action.

COP23 – Attempted Sidetrack

An attempt was made to sidetrack COP23 (2017) by asserting that CO2 emissions would increase in that year by 2%, with the strong implication that the stall in CO2 emissions since 2014 had come to an end. Yet it does not appear that the “stall in emissions” has really come to an end. Instead, cuts in emissions are continuing around the world. Despite disappointing results in a few places, there does not appear to be a good reason to abandon the hope that the commitments made at COP21 will eventually result in significant and continuous cuts in CO2 emissions.

GDP vs CO2 Emissions
Demonstrating the “Stall”

COP24 – Potential Side Issues

When we are discussing climate change as a result of global warming, the real issue must always be CO2 emissions. Unless CO2 emissions are eventually cut to around a net zero level, global average temperatures will continue to rise and the disruptions that are currently occurring in a number of regions throughout the world will continue to happen.

Some are worried that a significant rise in ocean levels is inevitable, since the upwards march of atmospheric CO2 is inexorable. While a number of islands and low-lying regions have reason to fear a significant rise in ocean levels, it is currently quite unlikely that the doomsday scenarios being put forward in scholarly journals have any basis in a realistic forecast of future CO2 levels. The reason for this is that CO2 emissions have now stalled and should be forecast to be cut, not to continuously increase.

However, the looming side-issue for COP24 is the subject of the fund agreed at COP21 to provide money to mitigate the effect of climate change. The decision to set up this fund was a mistake and it has already been shown to be ineffective and misconceived.

No matter how much money is provided to this “mitigation fund” and no matter how well the money is spent, it will not stop global warming or the climate change effects. The main aim of COP24 should be capping global warming by reducing CO2 emissions. A desirable end target is to cap atmospheric CO2 at 450 ppm. It is currently around 410 ppm. This should be the real issue at COP24.

Energy-Related Emissions – Actuals

When the actual figures for total CO2 emissions come out we will know the truth about 2017, but it is true that energy-related emissions did grow by 1.4% in 2017.

While the USA continued the downwards march of its CO2 emissions, most of the increases in 2017 can be attributed to China (up 1.7%), European Union (up 1.5%) and the Developing Asia (up 3.1%). Developing Asia (i.e. excluding China) can be excused for its increase in CO2, since this region is well below the world average CO2 emissions per person. On the other hand, China and the European Union have a case to answer for their increases in CO2 emissions in 2017. In China’s case, seasonal factors could have played a role if some emissions “moved” from December 2016 to January 2017, (as movements in atmospheric CO2 readings seem to indicate). Germany’s partial loss of faith in nuclear and the dysfunctional EU ETS scheme could also have played a role. Since Europe has claimed for many years a leading role in the climate change debate, this more recent increase in CO2 emissions in the EU is very disappointing.

COP24 – Immediate CO2 Emissions target

COP21 Paris required nations to set their own targets for CO2 emission reductions. Leaving to one side China’s effective non-participation in any realistic way in the “commitment” process, it was an effective way to proceed, since non-binding commitments are likely to be more ambitious than binding commitments.

One can summarize the proposal cuts as representing a goal of an overall cut of about 1% of the level of 2015 emissions from 2016 onwards. If this were achieved, it would mean a cut of 356,000 tonnes of CO2 per year until around 2025.

Given the range of global disparity in CO2 emissions, a cut of about 356,000 tonnes of CO2 per year is probably as much as can be realistically achieved in this period, at least until new ways of cutting CO2 emissions are fully implemented or even new ones invented. This could then be a CO2 emission reduction target for COP24, out to 2025.

Using this number as a base, one could expect atmospheric levels of CO2 (at Mauna Loa) to increase by 2.35 ppm per year in 2018 (standard deviation 0.41 ppm), yet for each month since June 2018 they have been increasing at a (rolling) annual rate of around 2.0 ppm per year. While there is reasonable skepticism about the usefulness of this statistic in a short-term context  (see the article “Real-time verification of CO2 emissions”), at least it is on the side of a reduction, not on the side of an increase.

Given that increases in atmospheric CO2 from previous years’ ocean warming (measured by the Oceanic Nino Index) should now have worked their way through the system, we can be hopeful that some significant, previously ignored, potential cuts in emissions have occurred. Some possibilities stand out: 1) China well-publicized cuts in coal consumption and the move to use higher quality coal; 2) A cut in India’s inefficient use of fuel for cooking and other purposes due to an increase in electrification of that nation.

COP24 – Future CO2 Emission target

Even higher rates of CO2 emission reductions are possible in the medium term. At present, the most fruitful lines of future development, not fully factored into the current targets, are:

  1. Increasing penetration of pumped-hydro as a way of dealing with the problem of unpredictable supply of electricity from wind-farms, without bringing in its train the “CO2 cost” of using peak electricity gas-powered generators.
  2. Increasing the community’s confidence in the long-term safety of nuclear-powered electricity generation, possibly by new technology currently under evaluation, leading to a higher level of take-up of nuclear energy.
  3. Eventual replacement of all petrol and diesel-powered passenger vehicles with electric vehicles.

If these all came to fruition, along with others not yet considered, a doubling of the annual expected CO2 emission reductions to one million tonnes of CO2 per year is not beyond practical delivery. This could be target set at COP24 for after 2025.

 

Global 20 per cent Tariffs – not a scary prospect

Reserve Bank modelling indicated that, if there were global 20 per cent tariffs on EVERYTHING,  the effect on Australia would be minimal. Clearly, tariffs are not a curse, or evil, or even a serious problem; and there are significant upsides to revisiting tariffs.

Reserve Bank of Australia

A recent freedom of information request resulted in the release of Reserve Bank modelling that concluded that, if there were a regime where every country slapped a 20 per cent tariff on every other country (global 20 per cent tariffs), the effect on the $A was not significant (it could appreciate or depreciate – implying it was a line ball). The effect on unemployment would be minimal – a 0.25% increase, and the effect on GDP would also be minimal – it would shrink by 1% by 2021.

This is not a proposition that is ever likely to been fairly considered by Australian Treasury, since it is ideologically committed to unrestrained free trade, as the relevant Australian government ministers make clear at every possible moment. However, it is a proposition that I presented for discussion in January 2018.

Consequences of Global 20 per cent Tariffs

While Reserve Bank modelling shows that global 20 per cent tariffs could be easily accommodated in Australia, such a change to the global tariff regime is also likely to have positive impacts on the body politic, which is the major interest of this blog. Two of these impacts are considered under the following headings:

  1. Reduced top-level income.
  2. Higher wages and more jobs.

Both of these movements in income will have the effect of reducing inequality across the Australian landscape. The question is whether this will be good for Australia as a whole. I would say “Yes,” but that is a personal and political judgment, not an economic one.

A regime recommending global 20 per cent tariffs would provide an economic model that aims to provide jobs for persons of every skill and education level, instead of the current model that leads to a winner-takes-all economy. Indeed, all western countries have a system in which some segments are able to compete very effectively, but with the rest of the population being left relatively worse off. This is source of current trend towards more inequality – it is not caused by a wicked capitalist plot. The source of this problem is the dominant economic theory, supported by major parties in most Western countries. (In Australia the strongest supporter of this economic theory was Prime Minister Malcolm Turnbull, a lifetime beneficiary of this approach. While it was not this Achilles Heel that brought him down, it did not help his cause, even though he was oblivious to this fact. The king is “dead;” long live the (new) king!)

Reducing Top-Level Income

Without being privy to the details behind the Reserve Bank modelling, one can be sure that the knock on GDP would primarily come from a decline in incomes of those who are currently winners in the current regime. These are globally competitive Australian firms, who would lose part of their first-mover-advantage. Since we do not have many of those, the impact would be relatively small. It would also impact on CEO salaries, since company boards would no longer have to select a CEO who can be the “best in the world,” in order to compete successfully with ever other CEO in the same industry. Competition would more likely to focus on finding a CEO who can compete within Australia. (Finding the “best CEO” is not always the best outcome, with Telstra’s and AGL’s unhappy experience being useful pointers in that regard.) This change would also have the socially desirable outcome of reducing inequality.

Higher Wages and more Jobs

Australia (and other Western nations obsessed with free trade) are currently following a view of an ideal world in which every country aims to do only those things that it is best equipped to do. Theoretically, a country does not grow its own food if someone is able to do it better; it does not make its own goods if someone else is able to make them cheaper; it even doesn’t educate its own people if they can get a better education elsewhere. It sells off all its businesses to the highest overseas bidder, ignoring the long-term consequences of this action.

Under this scenario, the government of each country allows the global market to have free play, based on the argument that, under this system, the collective entire global system is better off, in the (faint) hope that this will then trickle down to individuals in each and every country. At the same time, economists pay no attention to need for each nation to provide jobs for its own people, despite their respective education and skill levels. The world is considered to be a single pudding, with everyone having an equal chance to get their own piece (whether small or large).

The real world is not like this, thank God. In the real world most governments are responsible to their own people, not to some super-intelligent bureaucracy. (The EU is a notable exception, giving extraordinary powers to un-elected bureaucrats – a living lesson in the folly of delegating policy to a “super-intelligent” bureaucracy.)

The simple fact is providing jobs in a diversity of industries, businesses and government services provides better opportunities for everyone to get a job that suits his or her own talents. It is no good talking about Australia becoming a “knowledge economy” – not everyone has the talent to  be a part of this new dreamland economy that “our betters” are planning for us.

While there is a place for a safety net, wages are best set as a function of the demand for workers, so that when there are more jobs than workers, wages will rise for those workers. Australians certainly do not want to repeat the situation in France where restaurateurs are short of workers and want to employ migrants who currently do not have legal rights to work, rather than attracting more entrants into their industry by increasing the wages of their own workers!

Any reasonable and competent government would work towards ensuring that a virtuous situation of jobs for all continues to lift the income of lower paid workers, through education, and improved skills at work.

Efficiency & Global 20 per cent Tariffs

There is a lot of nonsense spoken about the improvement of efficiency as a result of removing tariffs from Australian manufacturing. The plan fact is that the combination of tariff cuts and the currency revaluation were so severe they led to the smashing of Australian manufacturing. The car industry is a case in point. The EU have a 15 per cent tariff regime for cars; Australian leaders thought that a 5 per cent tariff was so good it reeked of “economic virtue.” Yet the EU still has a car industry, despite competition from Asia. Add to this the failure to effectively manage the $A during a period of over-valuation of the $A against the $US, which meant an effective 40% negative tariff working against Australian manufacturing. We congratulated ourselves on our economic management while “Rome burned!”

Innovation

Australia’s political leaders hope that “innovation” will be Australia’s economic saviour in the coming uncertain times. Having smashed manufacturing in a search for impossible to achieve domestic efficiency – sufficient to overcome cheaper labour overseas and larger domestic markets – these leaders need to find something new.

There is some hope of this front. Australia’s mining industry is a world leader, and has generated sufficient profits to be able to fund continuous innovation. Australia’s innovation potential has delivered three world-competitive health product and service companies – CSL, Cochlear and ResMed. It has also delivered four world-class players in Information Technology.

In this way, we can see innovation has delivered good returns for those who are able to be central players in these fields. The profits generated mean that further innovations are able to investigated and pursued if they look promising. The same profits are also able to fund above average salaries.

Yet innovation of this kind is of little direct assistance to those who are not in the top 10% of ability and advantage. It is too easy for the government to just sit back and admire the success of those firms and sectors. The real challenge for the nation’s government is to aid the remaining 90% to achieve success appropriate to their own natural abilities.

Given the natural creativeness of Australians, and their aspirations for a “better” life, all the Australian government has to do is ensure that Australian firms can earn sufficient profit to fund their own innovation programmes. Yet it cannot do this by crushing employee wages and thereby helping firms to increase their own profits by that route. It must somehow increase the potential for higher margins between revenue and costs.

Insofar as governments have any role in this, the first step is to decide whether it wants to establish conditions that serve primarily to increase efficiency of firms – by making all businesses compete on a “level playing field” with the rest of the world – or by providing local firms with a small advantage over global competitors.

Australia had tried the “efficiency route” and delivered a very unpleasant smelling result. It is about time it tried the “innovation route” and then to see what this will deliver.

Global 20 per cent Tariffs & a Level Playing Field

There is no such thing as a “level playing field.” Each country is different, and the pursuit of a level playing field will just mean progressively lower wages for everyone except the most successful of our fellows. This is because of the current world surplus of labour; this means global capital can always seek out the lowest wage employee that can do the job that it wants to have done. Ironically, this is the course of action required by governance conventions – boards have little choice in this matter.

The current WTO objective of “lifting all boats” by lowering all tariffs to zero rating is entirely misconceived. Rather, this strategy will trap developing nations in a permanent dependency on the West. It is something that China will never countenance, nor should any nation, whether developed or developing.

A regime with a target of global 20 per cent tariffs would give emerging industries in developing and developed countries a chance to find a modest level of support so that they can find their feet. It never needs to be reduced below 20 per cent, unless there really is a compelling case for goods to be 20 per cent cheaper. What would be the argument for that? The wealthy getting luxury goods cheaper?

Conclusion

It is cringe-worthy for economists to cite 1930s protectionism as if it provided the evidence for embracing free trade. Don’t they know that the 1930s were a very difficult period because of the crash of the world economies from over-active speculative activities in the 1920s?  A similar thing happened in 2007 and 2008, and the worldwide rejection of protectionism did little to make recovery faster than in the 1930s. Food for thought, eh?

Don’t economists know that America’s economic powerhouse was established in the 19th century, building its strength behind tariff walls? Don’t they know that the world became a much more prosperous place at the same time as protectionist regimes were in place in most of the nations of the world, namely, in the 1950s, 1960s and 1970s?

Rather than protectionism being ridiculous, as opponents of Donald Trump seem to think, the arguments presented here are just standard economic principles. Unfortunately, free trade advocates  have stopped thinking from first principles, and have adopted a convenient, if bogus, theory.

If economists did a bit more original research, as well as looking at history, they would realise that an approach that led to global 20 per cent tariffs would benefit all nations, and certainly “lift the boats” of all developing nations. All that is required is for national economic leaders to seize the moment and the opportunity and argue the case cogently.

Argentina’s Economic Malaise

Argentina’s economic malaise is almost entirely due to blindly accepting prepared economic prescriptions, rather than finding its own way forward. It started with socialism and then accepting Ricardo’s theory about Comparative Advantage, leading to the collapse of a once thriving economy.

Argentina is in the unique position as a country that had achieved advanced development in the early 20th century but experienced a reversal. This has inspired an enormous wealth of literature and diverse analysis on the causes of this decline, but there is little evidence that this analysis has come close to discovering the reason for Argentina’s economic malaise.

Argentina’s Economic Malaise & comparative advantage

The history of Argentina’s economic health is littered with pointers to the unhealthy consequences of the “advice” of economists.

Economic historians point out the Argentina’s economic advantages, placing it squarely in the real of Ricardo’s “comparative advantage.” Here is a summary presented in Wikipedia:

Argentina possesses definite comparative advantages in agriculture, as the country is endowed with a vast amount of highly fertile land. Between 1860 and 1930, exploitation of the rich land of the pampas strongly pushed economic growth. During the first three decades of the 20th century, Argentina outgrew Canada and Australia in population, total income, and per capita income. By 1913, Argentina was the world’s 10th wealthiest state per capita.

Ignoring the economists’ mantra that each country should concentrate of its own comparative advantage, from 1930 to 1976, the various governments of successfully diversified the nation’s economy by engaging in a process of industrialization, behind a protective tariff regime.

To the amazement of economists and economic historians, “Despite this [Argentina’s protectionist regime], up until 1962 the Argentine per capita GDP was higher than of Austria, Italy, Japan and of its former colonial master, Spain.” So one economic historian amazingly concluded, “Beginning in the 1930s, however, the Argentine economy deteriorated notably.

So one can see, even though economic policies that do not respect Ricardo’s theory can serve a country very well, most economists are so blind they cannot see what stares them in the face.

What they cannot or will not see is that no country is better off in the long term by concentrating only on their strengths. Only a diverse economy can work for everyone, not just those who are occupied in the “advantaged field.”

Argentina’s Economic Malaise – Peronism

Part of coup that seized power in 1943, Juan Perón became Minister of Labour. Campaigning among workers with promises of land, higher wages, and social security, he won a decisive victory in the 1946 presidential elections. Under Perón, the number of unionized workers expanded as he helped to establish the powerful General Confederation of Labor.  This sowed the seeds for the later humiliation of Argentina’s economy.

Beginning in 1947, Perón took a leftward shift in economic policy, first breaking up with the “Catholic nationalism” movement. This led to gradual state control of the economy, reflected in the increase in state-owned property,  control of rents and prices. The expansive macroeconomic policy, which aimed at the redistribution of wealth and the increase of spending to finance populist policies, led to inflation.[95]

Thus it is with socialism everywhere! The Whitlam experiment is Australia’s practical demonstration, with unsustainable higher wages, out of control inflation, and leading (socialist) economists saying, “There is nothing to see here – all is OK.”

In the 1950s and part of the 1960s, the country had a slow rate of growth in line with most Latin American countries. Stagnation prevailed during this period, and the economy often found itself contracting, mostly the result of union strife.[50]  Is this not the story of Australia after Whitlam, until Labor’s Hawke and Keating brought it to an end?

The story of Argentina’s economic malaise can be repeated, with a varied story line in many countries.

Argentina’s Economic Malaise – After Peron

Arturo Frondizi won the 1958 presidential election in a landslide. He failed to restore prosperity to the nation. He was replaced in another coup in 1966, which sought to restore national prosperity, beginning with more state control of money, wages and prices.

After 1966, in a radical departure from past policies, no doubt encouraged by the “smartest economic minds,” the Ministry of Economy announced a programme to reduce rising inflation while promoting competition, efficiency, and foreign investment. The anti-inflation programme focused on controlling nominal wages and salaries. It had striking benefits, with inflation decreasing sharply, decreasing from an annual rate of about 30% in 1965–67 to 7.6% in 1969. Unemployment remained low, but real wages fell, as they always will once Comparative Advantage theory is allowed to take control of economic thinking.

By 1970, the authorities were no longer capable of maintaining wage restraints, leading to a wage-price spiral. The lower real wages that are inevitable under the new economic orthodoxy are completely unacceptable to the majority of the people. In a democracy there can be only one outcome – an change of government.

Despair over the incompetent economic management of the post-Peronist period led to the election of the Peronist, Hector Cámpora in 1973 and then Perón himself soon after. When he died in 1974, he was succeeded by his wife, until she was deposed in a military coup in 1976.

The new Perónist regime was characterized by an expansive monetary policy, which resulted in an uncontrolled rise in the level of inflation. Here we have the same problems being repeated again – when will socialists ever learn?

Comparative Advantage – Continuing Problems

The dominance of the economic theory of Comparative Advantage led to a process of continuous decline. Just how the Argentinian economists thought that Argentina could compete with the USA with its own comparative advantages, which are numerous, is incomprehensible. Holding up manufacturing firms via state support just was not an effective band-aid solution. Argentina’s industrialization fell to levels maintained in the 1940. So much for a diversified economy, full employment, high wages, and political stability.

Argentina’s Economic Malaise – Today

The socialists were thrown out in 2015 and Mauricio Macri became president. At least Macri rejected socialist lies, but nothing would be fixed since he had swallowed economists’ Free Trade Lies. When he tried to implement the economists’ prescription to get Argentina back on its feet, he failed and Argentina’s Economic malaise continues today.

Yet economists still think that the solution to Argentina’s economic problems is more of the same, with the Financial Times completely perplexed that Macri’s presidency has not solved Argentina’s problems.

Argentina has embraced economic orthodoxy before, only to be blindsided by financial markets. This week’s mounting panic, which has seen the peso plummet and prompted the central bank to raise interest rates to 60 per cent, is just the latest example, prompting many to wonder: what has President Mauricio Macri got wrong?

The Financial Times cannot accept that the problem is in the economic model that it pushes every day of the week. Instead, it comes up with the lame excuse that one answer is “poor communication.” Actually, it is the only answer that it is willing to offer.

The same article cites an Argentinian economist, who says that there is no explanation for the current crisis.

“There is no logical explanation for what is happening,” said Christian Buteler, an Argentine economist, who called on the authorities to explain this “alarming” situation that is “completely out of control”.

The article concludes with argument from another Argentinian (capitalist) economist, reminiscent of arguments that I heard from (socialist) economists during the Whitlam era, “There is nothing to see here – all is OK.”

“[The problem is small] compared to the size of the market fear,” he says, arguing that the financing gap was small for Argentina’s $545bn economy.

Capitalist economists seem to think that ordinary workers in developed nations should accept ever falling wages and less secure employment. If challenged, they say that automation is the problem and will be increasingly the problem. Yet this is another lie. National states coped with the automation of industrial processes, but they will never be able to cope the with automation of other process if the real economic levels are handed over to global corporations in a fit of ideological blindness.

Poverty in Africa can be Fixed

Poverty in Africa can only be fixed by African governments taking control of their own economies; welfare and aid will only ameliorate poverty: it will not fix it.

President Macron’s Prescription

As reported in The Times, President Macron said that Europe’s migrant crisis can only be solved in Africa, as he called on leaders from both Europe and Africa to find new ways to stop the flow of people to the Mediterranean.

“We need more Africans to succeed in Africa,” Mr Macron told a crowd in Lagos. Too many people were leaving peaceful countries such as Senegal, Ivory Coast and Nigeria because of “a lack of hope, a lack of opportunities”, he said. “These people, given the magnitude of this wave, cannot be accepted, at least, not all of them.”

Africa Needs More Than Just Talk

Of course only Africans can solve their own economic problems, but Macron’s devotion to Elite Capitalism will not help them.

We can use the world’s prosperity to lift nations out of poverty, via trade, but we have to do it differently. It is no good just using our prosperity to lift the incomes of the top 20% of the people of African nations, as has been happening for the last 30 years.

While increased trade has resulted in some improvement in living standards in some developing nations, in general the gap between the developing world and the rest has not narrowed very much, especially if you leave China, Taiwan and South Korea out of the picture. The difference in those places is that the leaders of these nations didn’t believe the more trade would be enough: they also decided to control the situation more tightly.

The government of each African nation has to realise that trade will not be sufficient to lift their people out of poverty. To lift a people out of poverty it is necessary to increase the income the people receive, either from their farms, or by making things for each other. Forget about a “leg-up” from global corporations; they must always first look after themselves.

An economy that does not make most of its own goods and supply its own services is in a very fragile situation. This is a change in thinking. It requires African nations to increase tariffs, with the explicit objective of increasing the incomes of businesses. Higher local prices will eventually mean higher wages. Less imports means more local work.

Increasing tariffs on luxury goods should keep more money at home, with those with money looking to invest locally as profitability of local businesses improve, rather than spending on expensive luxury cars and other obvious signs of wealth and individual prosperity.

Abundant jobs, not the lowest possible prices, are the key to economic prosperity for every nation.

 

Trudeau Supports EU Folly at G7

Justin Trudeau has said that the US President won’t be allowed to kick Canada around. He believes that the US should give up its strategic investment in iron and aluminium in order to keep the “rules-based trade regime” in place. He seems to think that Canada’s war efforts deserve that sacrifice by US workers.

Trudeau’s Trade Rules

In Trudeau’s world, a quota system for dairy imports, plus a 300% tariff on non-quota imports is “rules-based.” I wonder what rule is being invoked here.

Yet it is only natural that Canada doesn’t want to surrender its dairy industry to that in the milder climate US industry. So also in the USA, the steel and aluminium industries are being destroyed by cheaper imports.

Apparently, Trudeau is not sharp enough, nor are his advisers, to see the parallel between dairy and the US aluminium and steel industries. One could say that Trump doesn’t want to surrender his aluminium industry just because Canada has cheaper electricity (due to more plentiful supply of hydro-electric power in  Canada.)

EU’s Trade Rules

EU has a tariff of 10% on the import of motor cars. USA has a 2.5% tariff on the import of motor cars. I have not seen any suggestion from the EU that they would prefer a US 10% tariff on their car exports.

Rather, it would appear that the G6’s “rules-based-order” is intended to keep the EU’s tariff advantage unchanged.

Claiming the high ground when you are actually crawling around in the gutter makes interesting reading. If the press were not so obsessed with its anti-Trump bias it would quickly see the hypocrisy. However, it is hard for a hypocrite to see the hypocrisy in a fellow “pretender.”

A new Rules-Based-Order?

What no-one will consider is whether a new “rules-based-order” mandating a fixed 20% tariff on all goods & services will actually work more effectively than the current WTO aim of zero tariffs. Try answering this proposition without the usual “tariffs are bad” mantra, if anyone dares. I am still waiting for a mature response from an economic leader or advocate for more free trade, or even a humble academic.

Zero tariffs are loved by economists, since they believe in the creative destruction of any “weak” segment of the economy. I don’t think too many ordinary workers will agree with them in any country that is actually a democracy (once they realise that they have been dudded by their “friends”).

On the other hand, the economists’ “creative destruction” would not be accepted in China, which is growing at 5% per year.

Bring on Trump’s so-called trade war. Even though the excuses for its likely economic success will be deafening, I reckon the voters won’t care.

Sea-level Rise Nonsense

A new article, predicting the likely level of sea-level rise, is an example of academic nonsense on climate change, since it fails to deal with China’s opaque COP21 “commitment” and the fallacy of predictions based on IPCC’s deliberate obscurity.

Sea-Level Rise nonsense

The article in Nature Communications includes two significant misstatements, which together give rise to my charge of “Sea-Level Rise nonsense.”

  1. It assumes that CO2 emissions will not peak until 2020, when actual observations indicate that CO2 emissions effectively peaked in 2013. Since the impact of CO2 emissions on CO2 atmospheric levels is incremental this is not an insignificant misstatement. What makes this mistake even more egregious is the fact that the report makes much of the importance of cutting CO2 emissions earlier rather than later.
  2. The article makes no indication of the climate sensitivity implied in their report. Since the IPCC includes a range of climate sensitivity estimates from 1.5C to 4.5C, this is not an insignificant omission. One suspects that the report is using the top of the range estimate. Yet the only hint that they are using the highest level of climate sensitivity estimates is given in the wording “high warming.” The use of the 4.5C estimate seems to be assumed in the prediction that sea-level rise will continue until 2300 under all scenarios. The lack of clarity in outlining the assumptions adopted is common in most “scholarly” reports on climate change, even though providing clarity on the assumptions adopted is a necessary element in all articles with the implied claim of being “scholarly.”

COP21

The Paris conference on Climate Change, tagged COP21, did not define the level of climate sensitivity implicitly adopted. Yet this was necessary at a meeting that must represent a political compromise. However, it is clear from the wording of the conference that the 192 nations that endorsed its decision implicitly accepted a climate sensitivity estimate of 2.0C, not the 4.5C at the upper end of the IPCC range, and not the lower end of 1.5C. Since the predicted sea-level rise is directly related to the assumed climate sensitivity, this is not an irrelevancy.

On the other hand, it was acknowledged that the action agreed at that time was not sufficient to cap global warming at 2.0C, and that future action would be required beyond that agreed at the significant meeting. For the authors of this article to fail to acknowledge that fact exposes their intention to write a report which is not strictly scientific, but rather is deliberately intended to be the advocacy of the particular viewpoint they are promoting. It is not even intended to spark debate of the matters at issue.

China’s Opaque COP21 “Commitment”

The only obvious difficulty with COP21 relates to China’s “promise” to keep increasing emissions until 2030. If they deliver on this promise we are all sunk, since it will result in CO2 atmospheric levels that suggest a very bad outcome for world weather, even with climate sensitivity of 2.0C.

Fortunately, China seem to be reducing CO2 emission levels, not increasing them.

However, the opacity of China’s “commitment” makes it extremely difficult to conduct a rational discussion of the action required to mitigate the impact of increasing levels of CO2 in the atmosphere on global average temperature.

We need more articles on this theme, and not obvious beat-ups, like this article in Nature Communications, which for me is another example of Sea-Level rise nonsense.

Globalised Capitalism will kill Democracy

Globalised Capitalism will kill Democracy. This could not be clearer in the United Kingdom, where a majority of young people between 18 and 24 put capitalism at the centre of their public policy concerns, and communism at the bottom.

18-24 years olds in UK worry about Capitalism

Globalised Capitalism

The underlying reason for these concerns is obvious. Governments around the world have surrendered economic control of their nations to the ideal of globalised capitalism and its free trade handmaiden. They have forgotten that governments are elected to look after the interests of their own people, and that trans-national corporations can NEVER do that job.

In a sense, this transformation in thinking is a tremendous victory for UK economists. They have taught the doctrine of comparative advantage for 200 years. Now everyone believes them, despite the fact that getting some goods 20% cheaper means widespread under-employment, lower wages for ordinary workers, and a major loss in economic diversity for each nation!

The world of democratic capitalism is already beginning to be weakened by this economic ideology. Governments no longer feel that they can protect the jobs of their own people, but they must change their own economy to be able to compete on a level playing field with everyone else’s economy. The fact that $20 hour will never be able to compete with $20 a day never seems to enter their collective (ideologically blinded) heads.

The arrogance behind this economic thinking knows no bounds. Those promoting this ideology seem to think that those trained and inculcated in the West are so much smarter than those in low-income countries that, of course, the West will have the “smarter and well paid jobs” and the more ordinary jobs can be done by “lesser mortals.” Grow up! The world has changed! The West has always had its own share of “lesser mortals.” They represent the majority of the population of every country. They also represent the majority of voters, and if something is not done, capitalism will be thrown out at the ballot box by those who are willing to clutch at the straw of socialism and even communism.

As recently reported in The Times, an historian warned about the growing influence of communist thinking in British universities:

A leading historian has warned against the moral relativism promoted at some universities after a Marxist student claimed on the BBC that communism only failed in the Soviet Union because it did not have the “chance to develop”.

The article goes on to say that communism is a poison for the people, not its salvation:

Most historians accept that tens of millions of people died in forced collectivisations and famines during the decades after the Russian communists took power in 1917. Stalin’s Great Purge in the late 1930s is thought to have claimed more than a million lives.

On the other hand, one could say that globalised capitalism is poison for most developing nations. Making cheap goods for the West is not the way to develop the economy. At best, it will make a few capitalists in these countries rich, but they are unlikely to spend their new-found wealth in their own country. What is needed is a way to create a new middle class who will spend their money in their own country. This can best be done by ensuring new small businesses can thrive and make profits.

Only protectionism can help developing countries to truly develop. They may need protection from nations which already have a first-mover-advantage for the rest of the 21st century.  So what? If more people are locally employed, why quibble about imported goods being 20% dearer?

Alternatives to Globalised Capitalism

There are only two viable alternatives to the current dominant model of Globalised Capitalism:

  1. Communism of the Chinese style, which exploits the free trade policies of the rest of the world, while protecting and enhancing its own businesses and trade. This brings with it the “thought-control” of communist ideology and the inevitable excesses from not having a democratic government.
  2. Democratic Capitalism, where the interests of the citizens of each nation are put ahead of ideological principles, whether those of communism, socialism or the poison of unrestrained free trade.

Muslim Immigration

Understanding the place of Muslim immigration into liberal democratic states must begin with the recognition that the Koran has no place for a democratic government. Also, one needs to realise that it is not the place for Western governments and liberal thinkers to provide a way for Muslims to accommodate themselves to a democratic system of government: this is the role that Muslim leaders must discover for themselves, or as if often the case, to reject!

It is natural for Muslims to reject liberal democracy. Islam seeks to impose norms of behaviour on all members of its community via rules and conditions. It is a theocratic rule-based system at its very heart. Democracy, on the other hand, reflects the thinking of both the elite and ordinary people in a democratic society. Some of those ideas are informed by religiously determined norms, whereas others reject those norms. It represents a untidy consensus of numerous disparate ways of thinking. This consensus is arrived at via argument and more importantly, experience.

Muslim Immigation

Yet, as Jennifer Oriel, The Australian 1/1/2018, writes, “Opposition to liberal democracy is imported into the West by mass immigration programs that do not require adherence to Western values as a condition of citizenship. During the past decade, numerous surveys have found that between 20 and 50 per cent of Muslims living in Western countries want to be governed by sharia.”

She goes on to say, “The Pew ­Research Centre found that after a decade of US and ­coalition military action against terrorism in ­Afghanistan, 99 per cent of Muslims favoured making sharia the official law in their country. In Iraq, the figure was 91 per cent.”

Sharia primarily represents rules based on the 7th century Koran as interpreted by Muslim scholars in the years after that. Since Muslims believe that the Koran was dictated to Muhummad by Angel Gabriel, it can appear to modern non-Muslims that Islam is stuck in a prison of 7th century ideas. Part of this framework is sharia.

One could say that sharia is incompatible with a liberal democratic system of government, yet to ask all Muslims seeking to immigrate into a liberal democratic country to formally reject sharia is to effectively ban Muslim immigration.

Legal Reforms

Muslims seeking to immigrate into a liberal democratic society, and those who wish to bring in relatives via a family-reunion programme, can be required to declare their allegiance to certain fundamentals of such a society. These should include:

  1. Commitment to the rule of law, with these laws being established by democratically elected governments.
  2. Tolerance towards people of other faiths, or of no faith, and towards those who change their core belief system.
  3. Willingness to pay taxes as determined by democratically elected governments.

In addition, the family-reunion programme could be changed so that it is only open to those sponsors who naturally are, or who have formally become, citizens of the host nation.