Month: September 2018

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.