If it’s not value adding it does not add to growth

Let me go back to something I have managed to avoid for a while, the absence of penetration in modern economic theory. Governments waste spectacular amounts of our productive resources on projects that will never turn a dime and are then surprised when the economy goes nowhere. This is from yesterday’s Oz: After the boom, pay packets are on a flatline for all. And this is what it said:

Our wage growth, the third weakest in the developed world, is fuelling simmering political discon­tent about everything from house prices to inequality and energy prices. This will have profound political consequences.

The living conditions of Australians are rising at the slowest pace in more than a generation. Wage growth fell off a cliff in 2012 as the resources boom petered out, and it hasn’t recovered. The torrent of foreign cash washing over the economy has receded, leaving a high-wage, heavily regulated economy struggling to compete. . . .

Australian private sector wages rose only 1.8 per cent last year, not much above consumer prices, which edged up 1.5 per cent. That’s the slowest pace since the Australian Bureau of Statistics started tracking hourly wages in 1997. Average weekly earnings, which don’t factor in changes in the number of hours worked, rose 2.2 per cent for full-time workers to $1533, the slowest pace since World War II.

According to the OECD, a Paris-based club of rich countries, Australians’ average real wages, which adjust for inflation, shrank by 1.1 per cent in 2015, more than any of the other 33 countries bar Portugal and Mexico.

Real wages can only rise if we are producing the goods and services wage earners wish to buy, or can trade what we do produce with others for these kinds of things instead. The NBN is merely an example of the kinds of government unproductivity that leads to what you see.

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31 Responses to If it’s not value adding it does not add to growth

  1. RobK

    It is confounding that the Pollies and policy makers hamstring the economy with the likes of RET, NBN, ever increasing water, vegetation, wetlands and exploration restrictions and still expect growth because they’ve Pissed some money against the wall promoting tourism. That’ll save us.

  2. Biota

    Desalination plants. And the inverse, prohibition on CSG exploration and extraction.

  3. Cui bono

    Yet Public sector wage growth continues. Hopeless Libs continue to feed the tiger.

  4. RobK

    The best thing the government could do for tourism is to facilitate a vibrant economy. The place would practically sell itself.
    If the taxes are a bit hard to get rid of in the first place, then start with the regulatory impediments but do it in a way that looks like you mean it.

  5. classical_hero

    The answer obviously has to be an expansion of government to solve this. Not like this has been tried before.

  6. Andreas Brown

    Course increased competition for jobs via immigration and 457 visas, might also have an impact.

  7. Dr Fred Lenin

    Everyone knows that the PS and career pollies know what is best for them,sorry us ,governments are good at running economies look at the late Soviet onion ,North Korea Cuba ,Venezuela this is a proven fact ,u,n,communists are good at poverty for the people ,except the nomenklaturaa,well they work so hard destroying capitalism they deserve a little extra

  8. t

    Tell me more about penetration, Professor.

  9. stackja

    ALP/BS don’t want growth.

  10. candy

    Real wages can only rise if we are producing the goods and services wage earners wish to buy,

    I don’t understand that. There’s plenty of stuff plenty of people would like to buy, but can’t because real wages are not enough. A wish does not translate to action if you don’t earn enough.

  11. Roger

    The answer is clear:

    The government needs to stimulate the economy.

    [sarc off]

  12. Howard Hill

    It was all spelled out in Agenda 21 years ago, that they were going to bring the richer countries down and the poorer ones up because equality. It’s being done on purpose.

    You can either string the bastards up or prepare for serfdom.

  13. Russell

    The resources boom hasn’t petered out..its gone from construction to exporting. Coal , Iron and Gas are being exported at greater tonnes than ever before. Agri. products , are being exported at huge tonnes and numbers and some at record prices. Even education is earning export dollars, something not seen 20 years ago. Tech. companies like Cochlear and ship builders like Austal have grown . Yes car companies , battery companies have left or are leaving but the biggest brake on Aust. is the 3 levels of Govt. Wanting more Govt. spending or Govt. support is our downfall.

  14. duncanm

    I don’t understand that. There’s plenty of stuff plenty of people would like to buy, but can’t because real wages are not enough. A wish does not translate to action if you don’t earn enough.

    Candy – so lets give everyone $900 cheques. That works.

  15. Adelagado

    “Real wages can only rise if we are producing the goods and services wage earners wish to buy”.

    Shouldnt that read…
    Real wages can only rise if we are producing the goods and services wage earners OVERSEAS wish to buy.

    Ultimately we must import fresh money into the country.

  16. Joe

    Candy – so lets give everyone $900 cheques. That works.

    Yes because $0 buys you so much. That works t00.

  17. Faye

    Impotent Prime Minister – impotent Australia.
    Look at Trump, he hasn’t drawn breath and produced more in his 50-odd days than Turnbull has done in 18 months. If the Prime Minister is a dud, the whole country suffers and I am sick of it.
    It’s like kindergarten listening and witnessing the politicians. If they keep talking about renewables as if they are feasible and want carbon? emissions capped whilst shutting down viable coal powered electricity stations, the country’s doomed. All they have to do is cut ALL taxpayer government money to the fraudulent industry and it will disappear. Simple. Let the believers put their own money in!
    Please, please, please we have to find a leader who has the GUTS to speak the bleeding obvious and to chuck out the crap. Plus having a few brains would help.

  18. Howard Hill

    Real wages can only rise if we are producing the goods and services wage earners OVERSEAS wish to buy.

    Seems they only care about the big industries, mining, agriculture.
    When I was a youngster I was taught to look after the cents, the dollars take care of themselves. It would seem they only care about the dollars and are doing everything in their power to destroy the cent earners.

  19. NewChum

    Shouldnt that read…
    Real wages can only rise if we are producing the goods and services wage earners OVERSEAS wish to buy.

    Ultimately we must import fresh money into the country.

    Bingo.

    While minerals and education and tourism are nice, they are in commodity businesses. You don’t get high growth businesses from any of these industries.

    Someone bring u the performance of bhp vs Intel and see the differences in industries that throw off capital.

    All the while we believe that diggin up dirt or selling sunny beaches is the way forwards we are doomed against countries with properly profitable businesses.

    All the while we are delusional that a bit of hard work and luck is what is needed we are doomed.

    The entire country is in thrall to dead economists and going nowhere.

    Your wage growth is going to be dictated by your most productive industries profitability.

  20. King Koala

    Candy – so lets give everyone $900 cheques. That works.

    Are you really so stupid or just deliberately misunderstanding Candy’s point? If someone’s wage goes up 900 a month they are going to buy more things. Every has things they would buy but cannot afford. Increased wages lead to more demand.

  21. Roger
    #2331064, posted on March 19, 2017 at 8:12 pm

    The answer is clear:

    The government needs to stimulate the economy.

    [sarc off]

    If real productivity is like having sex to make a baby, stimulating the economy is like having a wank. Short term pleasure with no productive result.

  22. Ray

    King Koala.

    Our problem is not consumption. People today are consuming more than ever thanks to sweat shops in Asia which are flooding the world with cheap consumer durables.

    However, despite this rising consumption, we are producing less with the result being less jobs and slower real wage growth. Flooding the economy with increased consumption, whether it be via $900 cheques or big government programs such as the NBN, pink batts, school halls or even grand hydro-electric projects may stimulate demand, but it will not stimulate production, not when these are funded by budget deficits which destroy output in the wider economy.

    A budget deficit must be funded in one of two ways. First you can print money but that will simply mean more money chasing the same production and so result in inflation with no growth in output. Second, you can borrow from capital markets. If there is a domestic savings surplus then the government can soak this up and stimulate the economy in a traditional Keynesian policy response. However, if there are not sufficient domestic savings lying idle, then the borrowings will come from offshore, which will raise demand for the Australian dollar and hence lead to an appreciation. A rise in the value of the currency makes our exports more expensive and imports cheaper which in turn means production falls across the economy.

    It needs to be noted that we do not have surplus savings in the country and we have probably never had such a savings glut. In other words, the traditional Keynesian policy response does not work and cannot work. As a result, any attempt by government to stimulate the economy via consumption can only end in lower output somewhere else in the economy and lower output means fewer jobs and lower wage growth.

    We have now had a decade of government trying to use fiscal policy to stimulate the economy and all we have for our trouble is sluggish growth and weak household incomes. At what point do even the most stupid amongst us come to realize that this demand focused approach just isn’t working? When will we wake up and accept that it is this deficit funding which is putting the brake on economic, jobs and wages growth across this country.

    It is time that the imbeciles in Canberra acknowledge that they are the problem and not the cure. Rent seeking public servants advising politicians who are blinkered by their need to sell short term solutions to an ill-informed electorate is a recipe for building expectational hip-pocket politics. Every dollar we spend on the ever expanding self serving bureaucracy and every dollar spent by self serving pork barrelling politicians is a dollar which is lost to production somewhere else in the economy. This cannot continue, not if we want to be the first generation of Australians to leave our children worse off than ourselves.

  23. Yohan

    If you looked at economics trends just after the GFC it was obvious Australia was heading for decades of a lower growth, productivity and real wages.

    Every government action since the GFC has exacerbated the problem, all for the political expediency of avoiding a recession. The response to anemic economic conditions, by both political parties, has been to fuel ever higher household debt to GDP as a way out of it.

  24. King Koala

    Ray, thanks for that TL;DR but I never said anything about government make work programs. I know production is where it is at. What the government could do is stop all foreign labour which would greatly shrink the numbers of unproductive as they rush to fill the gap in productive labour. Employers would also be forced to offer competitive wages and cut out middlemen (labour hire companies, a dozen levels of unnecessary contractors etc.

  25. Ray

    King Koala. What absolute twaddle. We may have a problem with unproductive labour, but it is not because we have immigrants. Instead it is because we choose to employ unproductive labour in countless public sector jobs scattered about the country who do nothing more meaningful than shuffle paper. Worse, these paper shufflers force productive companies to divert some of their labour into unproductive effort by filing submissions and returns to feed the insatiable appetite for regulation within the bureaucratic and political classes.

    Add to this the myriad of jobs generated in industries which are denied the benefits of an open and free market because of government intervention such education and healthcare, both of which guarantee considerable inefficiencies.

    Of course, immigrants can work in both productive and non-productive pursuits. The choice of how many non-productive positions are available is not within the purview of these migrants but in the hands of government which decides the number of public sector jobs as well as the level of work disincentives inherent within the welfare system.

    It really comes down to a very simple equation. If migrants gain employment in productive enterprises, they can then be considered to be productive. They will, by adding to output, generate more for society than they extract.

  26. Lutz

    Candy: Look up the term ‘opportunity cost’ to enlighten yourself. Every one of us has a certain amount of income available and, after looking after essentials like rent or mortgage, electricity etc., you can spend the rest of your money any way you like. At this point you have to decide what is most important to you and what you can buy in lieu of other things you can then not buy. Most of us do not have unlimited funds and have to constantly choose what is most important to our happiness. Raising wages endlessly simply leads to inflation since the raised wages can only be paid for by higher product prices.
    Also note that the same article quotes “leaving a high wage, heavily regulated economy”. It leaves out high wages only in certain sectors such as civil service and union dominated areas. The rest of us have to make do.
    If inflation and wage growth is matched then wealth is increased by increased productivity, that is producing more goods for the same cost. Technology has been looking after this aspect very well, since in this country, as opposed to many Asian countries, people don’t seem to be willing to work extra hard to make things better (and the various governments constantly interfering in production does not help either).

  27. John Bayley

    In other words, the traditional Keynesian policy response does not work and cannot work.

    That’s basically all you needed to say.
    Keynesian policy = government meddling in the economy = inferior outcomes.
    It cannot be otherwise.
    And the ‘savings glut’ is another Keynesian nonsense, just like the ‘paradox of thrift’. Both were disproved decades ago, but like zombies in B-grade movies, they just keep coming back.

  28. Entropy

    It isn’t just public servant clipboard warriors, Ray. Any corporate area in large businesses, or the poor small business operator themselves, fills endless reams of forms and compliance reports, which is not only resource and energy sapping, it ultimately takes that time away from productive activity, revenue earning and profitability.

  29. Entropy

    And the ‘savings glut’ is another Keynesian nonsense, just like the ‘paradox of thrift’. Both were disproved decades ago, but like zombies in B-grade movies, they just keep coming back.

    The purpose of the general theory is to provide a justification to allow politicians to get away with what they want to do.

  30. Ray

    The purpose of the General Theory was not to allow politicians to get away with anything. On the contrary, Keynes had a fundamental distrust of politicians and understood that granting them a license to spend money would invariably result in significant structural problems. This is why Keynes suggested that any fiscal stimulus be reserved for capital works rather than recurrent spending.

    Unfortunately, Hicks wrote his book before anyone bothered to read Keynes and thus provided the fundamental misinterpretation of the General Theory. Of course, it may be worthwhile suggesting that nobody reads the General Theory for the simple reason that the book is basically unreadable, although that is as an aside.

    Keynes argued there was a diminishing return to capital which would mean that not all capital would be spent such that there would be a savings glut and so consumption in the economy would be insufficient to maintain activity. In this context, he suggested that the government step in to boost consumption via the use of increased spending on infrastructure. However, Keynes considered such intervention as a temporary measure only and that spending over the cycle should be balanced.

    In theory, it is possible that Keynes was correct, however, no one has yet been able to identify the diminishing return to capital. That being said, we have experienced a couple of occasions where savings gluts have occurred due to a collapse in confidence in the economy, 1930 and then again in 2008. However, neither case was due to the diminishing return to capital, rather both occasions were due to a massive increase in perceived risk such that the hurdle rate of return to investment went so high that there was a flight of capital to risk free assets. Indeed, you could argue that in both 1930 and 2008, any Keynesian response was too slow to resolve the underlying problems and that they merely contributed to a delay in the recovery. The reason for this is that a savings glut, if it does occur, is of such short duration that it will be over before governments can respond effectively.

    In other words, I would argue than Keynes is technically correct but that the crisis of capital he predicts has never actually occurred and if it did occur, his brand of infrastructure spending could never be relied upon to solve the problem.

  31. King Koala

    Ray, what a load of shit.

    Bringing in 200,000 people a year without job growth keeping up simply leads to increased unemployment and has created stagnant wages, and in some industries, actually driven down wages lower than they were a decade ago while productivity has not changed.

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