Monday, March 03, 2008

An economic vision

Even as an old cynic I’m well capable of recognizing some exciting potentials in the newly emerging political changes. I’ve often been on about regulation, and it looks like a regime that might be about to re-emerge, with differences.

"We should consider employee morale and satisfaction as a major output of the labour market. Classical economists joined the fight against slavery by showing how misery and oppression depressed productivity.

"In a similar spirit, reformers today should be excited by strong links between employee morale, work satisfaction and productivity. Improved information about employee experience inside workplaces would intensify competition between employers to provide satisfying jobs, [thus] improving productivity and labour market efficiency." Dr Gruen Lateral Economics

Dynamically flexible regulation

The point is regulation, properly used, provides enormous social benefits. Dr Gruen talks about dynamically flexible regulation. To be effective we need to accept the basic requirement for a regulatory regime, otherwise all the energy is spent simply putting mechanisms in place. A dynamic regime needs to shift the focus to continual tuning of regulations to ensure they are meeting the whole range of needs.

Regulation can promote beneficial innovation where it addresses clear problems with markets. For instance, where it internalises the cost of pollution, regulation will send firms scurrying to find new ways to avoid those costs. The resulting market in pollution abatement will underwrite technology development and innovation more broadly directed towards pollution abatement.

The mechanics are background, the general populace are hardly going to engage with detail, only with results. It seems to me the results required by the new wave of political leader we find in Rudd and Obama can only be achieved by some new economic thinking.

The big end of town won’t like it, they are now well used to bulldozing cash into their personal piggy banks without consideration of others. This emerging perspective does not stop individual wealth creation, but it should ensure that wealth is created without undue harm to the wider community.

Take the money and run

The US has a particular problem introducing any impediments to big money and their games. Apart from a few short periods the rape of the wider community has been an acceptable behaviour for entrepreneurial spirits. Any measures designed to share the wealth are considered socialist or even communist.

Australia is an easier proposition. Those US CEO’s who are currently dominating our corporations are already considering grabbing their cash and heading back to a market they believe can’t be regulated. There won’t be many tears here when they head home.

Making Money

If you ask most of today’s business leaders what their company’s core activity really is the honest ones will tell you variations on ‘making money.’ There should be no issue with the making money, as long as we are making or providing other things of real value.

For example regulators in Australia are currently looking at the need to regulate margin lending, company directors borrowing to cover their stock holdings. I guess it is the idea of getting rich, or richer, using other people’s money.

Smart traders who recognize the highly geared directors then start manipulating sales, pushing prices down and triggering margin calls. So the markets are preying on each other, using money to make money without producing anything else but heartache for those trapped in the middle.

It is a similar story with property. A house used to be a home, now it is a wealth generating vehicle. So we build lots of overpriced, shoddy accommodation, not to be lived in, but to be traded and virtually gambled with. That is the neo-con dream and with a little luck it is running out of steam.

Illusory economics

The whole thing is illusory; unless you are a drug dealer or pimp you rarely ever carry any amount of real cash. Even if you did you can’t eat it and it doesn’t keep the rain out. To use the market jargon, it is a bubble due to burst! It is a bout attitudes and perceptions and we must change them back to realities.

If it takes regulation to make the changes happen I’m all for that as well. I like the concept of dynamically flexible regulation, responding to the real world. We have the technology to make that work, now we just need the will.

5 comments:

lindsaylobe said...

HI cart
Here a few ideas on regulation.
Carbon trading, properly administered will provide a mechanism for ensuring we immediately turn to sustainable energy sources by taxing carbon ( CO 2 . It’s a relatively straightforward mechanism as your probably aware involving the taxing of outputs to ensure ( because of the added cost) there is an incentive to invest in alternative non polluting energy sources. Companies can purchase carbon units to pollute, but its gong to make them uncompetitive. Hence I think it’s an orderly way of mainatining a market based regulatory environment without the need for large administrative burden, since the market will quickly allocate resources into energy saving incentives and create new industries and achieve worthwhile results, albeit it’s going to more expensive for everyone and add to inflation. Having said that 50% of CO 2 comes form coal fired power stations, so anther task is to move to alternatives including temporarily clean coal technologies
On the question of Directors shareholdings I am in favour of Directors owning shares in the companies they administer, what I am against and what causes the problems are short term options with very easy price hurdles. I also agree margin lending to allow directors to buy shares is not such a good thing, it should be disclosed in the Accounts and currently we have a problem needing resolution with the forced selling of shares (Bank initiated) when the market was not informed. However Directors, having to fund their own outlays are usually a good thing as they stand to lose is the company loses so it’s ok with me. The USA is choked up with regulation, but its prescriptive type regulation and they seem to lurch from one new bubble to the next. As each bursts another is blown up. Add the twin deficits, Budgetary and Current account, you can’t keep writing out IOU' forever. Sovereign debt markets will eventually go on strike!! The picture in Australia by comparson is relatively rosy althogh our curent account deficit remains stubbornly high and their remains a penchant to overborrow for consumption and not invest in the future.
Best wishes

Cart said...

Thanks Lindsay. It is a big subject and I appreciation you colouring some of it in.
US regulation is more inclined to corporate welfare, or national socialism.
I really like the more equitable models coming up for discussion under Rudd. Not his ideas particularly, but he is certainly open to a fairer system.

abi said...

New economic thinking is definitely what we need in the US. It sounds like Rudd is actively pursuing it there. But whether Obama can or will move in that direction if he wins in November is still an open question.

Interesting post, Cart.

lindsaylobe said...

As an update it was just reported today the adjusted current account deficit widened to $19.349billion (representing an unsustainable 7.0%GDP) in the December quarter up from $16.352bn (6.0%GDP) in the September quarter which was considered bad enough.

This was much worse than both consensus expectations(eg $17.8bn)and indeed outside most ecomonomic forecasters worse case scenarios.

The important trade deficit widened by $2.071Billion to $6.860bn (representing 2.5% of GDP). This was as result of a 3.2% (now +7.4% year on year)increase in import values in the quarter, while nominal exports actually fell for a second consecutive quarter, down 0.3% and up only 1.1% for the year.

Meanwhile, the net income deficit( eg the dividends and interest we pay to foreigners) widened to $12.440bn, driven by an 11%decline in foreign income flowing into Australia, largely due to the credit crunch.

At 4.5% of GDP, the NID has returned to recent highs.

After two consecutive falls, the terms of trade increased 0.7% in the quarter.

Volumes of imports + 3.6 % compare a fall of 0.6% in exports implying a drag of 1.0% on GDP in the quarter.

Although there has been significant appreciation of the Aussie dollar import prices only fell by 0.3% in the quarter and 2.6% lower over the year – indicating importers are fattening their margins.


The credit crunch has seen a significant deterioration in the way Australia funds its current account deficit.

Foreign flows are reducing in a unhedged market.

These figures suggest difficulty in the funding of this deficit (5.9%GDP.

Hence policy options are rather limited. What would have been preferable is for the $30 billion in tax cuts to be diverted and preserved into super savings in lieu of wages, but politically the die was cast irresponsibility( labour in reality politically did not have much option other than to follow on and agree with the tax cuts) by both parties in the lead up to the election.

But we wil suffer because of it. That is why interest rates are high, and will remain so, until such time as the curent account comes back into a more sustainable situation, brought about by reduced demand forces.

It also indicates a lack of previous investments in infrastructure to support the current demand, the shortfall must be filled by imports.

I think the new Govt understands this, pity they are stuck with the tax cuts which will be wiped out by interest rate increases and demand driven inflation.

Best wishes

Cart said...

abi, we really need some creative approaches just now, here and the US.

Lindsay, the bearer of terrible news... I'll never understand why people get excited when the Aussie dollar rises in value, it is always bad news for us.
I'll really need to look closely at your comment, it seems very comprehensive. Thanks