Saturday 30 April 2011

Inflation? Where?

Last Wednesday (27/04/11) the RBA released its quarterly inflation figures. After a 0.4% increase in the previous December quarter, in the March quarter inflation rose 1.6%: shock, horror.

The reaction was immediate:

"The dollar soared [by an 'astounding' 0.5%!!!] to a new high yesterday [Wednesday, that is] after inflation increased by more than economists expected.  [emphasis added]
"The currency breezed past US108¢ to US108.52¢ (...)
"Analysts said the Reserve Bank might now consider raising rates.
" 'We've now seen the market pricing in a higher chance of a rate hike in the next 12 months,' a foreign exchange strategist at IG Markets, Chris Weston, said." (See here and here).

That increase puts the yearly inflation figure on 3.3%, against the 2.6% estimated for the year to last December.

So, people would feel justified to believe "soaring" wages are having the catastrophic inflationary effect mentioned in the last post, right?

Not quite. According to the ABS:

"The most significant price rises this quarter were for automotive fuel (+8.8%), vegetables (+16.0%), deposit and loan facilities (+4.6%), fruit (+14.5%) and pharmaceuticals (+12.5%). (...)

"Fruit prices increased by 14.5% in the March quarter 2011 mainly due to an increase of approximately 100% in the price of bananas during the March quarter 2011 due to shortages following floods and Cyclone Yasi. Vegetable prices increased by 16.0% in the March quarter 2011, driven by price rises in cauliflowers, broccoli, lettuce, pumpkin and potatoes due to damage to crops as well as the usual seasonal price rises." (Emphasis added).

In other words: largely supply factors drove these price rises, not a "soaring" demand caused by "soaring" wages. Thus, interest rate hikes would not solve the problem.

You don't need to take my word for it: among others, Ian Varrender and Michael Pascoe, from the Fairfax media, have made the same point. Prof. Bill Mitchell has argued along similar lines, but going into deeper details.

Mind you, both Messrs. Varrender and Pascoe (as Mr. Weston, above) see the need for at least one interest rate hike before the end of the year. I myself can't see any immediate justification, except for the "terrifying" labor shortage/"soaring" higher wages spectre, that is.

So, you might find this surprising, but these three gentlemen are among the inflation-targeting doves.

Believe it or not, at the other end of the spectrum, the inflation-targeting hawks appear to see an urgent need for immediate interest rates increases!

Terry McCrann, arguing for an interest rate increase next June: "They [the latest CPI figures] were seriously concerning in their own right. (...) Especially as the clear surge in inflation pressures came despite the anti-inflationary impact of the strong Aussie."

With due respect to Mr. McCrann, I have enormous difficulty getting around the idea of the Aussie dollar reducing the price of Queensland bananas. You see, I suspect QLD bananas are not imported.

Further, although the AU$ rose fast, oil and derived products prices rose faster, accounting for the AU$ failure to fully compensate the increase in oil prices.

For instance, in the month 30-03-11 to last Thursday, Brent crude oil spot rose from US$ 115/barrel (30-03) to 126.3 (ICE Futures Europe), for a 9.86% increase. In the same period, from US$ 1.0309, the Aussie increased to US$ 1.0974, in London: +6.45%.

Another inflation targeting hawk, Christopher Joye, has also argued about a likely interest rate hike, maybe as soon as May. His main argument is that core inflation has increased more than expected last year

He is right on that: nobody, last year, foresaw the Libyan crisis, or Cyclone Yasi. But this, to me, is irrelevant. The relevant questions are whether a higher interest rate would counter their effects, whether those effects are sustained and whether those effects are not simply adding noise to the series.

Mr. Joye does not consider those points, and I don't blame him: the answer could be negative to him.

But Prof. Mitchell (see link above) did consider these subjects. Speaking on noise::

"The special measures that the RBA uses as part of its deliberations each month about interest rate rises – the trimmed mean and the weighted median – also showed moderating price pressures.

"So what has been happening with these different measures?

"The annual growth in the weighted median was steady at 2.2 per cent in the March quarter having been at 3.1 per cent in the March 2010 quarter. The trimmed mean rose modestly from 2.2 to 2.3 per cent the same period.

"What that means is that there is no underlying price spike. The factors driving the headline rate (which I analyse next) are all volatile and ephemeral (food prices and petrol)."

Surely, this means that I believe the RBA will keep interest rates steady for much longer, right? Unfortunately, I fear Messrs. McCrann and Joye could very well be right.

Being an autonomous body, with unelected leadership, the RBA doesn't need a sound argument to make a decision, just like Messrs. McCrann and Joye seem to hold their views without a sound argument.

In other words: the RBA might lift interest rates for no other reason than "that's what central banks do when there's too much money", just like physicians used to prescribe leeches when patients had "too much blood".

Guillaume van den Bossche.
"Historia medica, in qua libris IV". 1639.

Or maybe, as Dean Baker said, it's just because workers could be getting uppity; except this time it would affect not only workers and small businesspeople, as I remarked in the previous post, but mortgagors, because housing prices are falling across the board in Australia.


03/05/2011. In its May meeting, the RBA Board decided to leave interest rates unchanged at the current level of 4.75%. See here.

Apart from the natural disasters affecting Australian agriculture in January, producing a short-term shortage of produce (yes, you guessed it: largely Queensland bananas) and sudden spikes in commodity prices (read here: oil), the Governor statement says:

"Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest further growth in employment, though most likely at a slower pace than in 2010. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn." Emphasis added.

So, dear commentators, journos, talking heads, pundits and bloggers, for the sake of everything that's sacred, stop selling the nonsense that workers in Australia are making cartloads of money.

Like, pretty please, with sugar on top?

To the RBA guys: I love to be proved wrong. Keep it up. At least until the end of this year.

Thursday 21 April 2011

On Work, Dignity and Booms

Last night (Wednesday April 20th 2011) the ABC's 7:30 Report contained a segment entitled "Skills Shortage Crippling Rural Australia".

I found that the segment illustrates perfectly the mythical character of meritocracy... even leaving aside anything said by Karl Marx.

The ABC journalist, Leigh Sales, reporting on "long-term problem: not enough workers", used the town of Roma, QLD, as example.

There are some problems with imprecise terminology (are we talking about a labour shortage or a skilled workers shortage?); the report involves unions, but no union spokesperson appears in the report. Perhaps a bit more surprising, the report seems to be all about workers and workers even appear in the footage, but none is interviewed. Migration and skilled migration are mentioned, but only an employer's perspective is considered.

I will not dwell on these problems and focus on a more basic problem. All quotations are verbatim and appear in italics, with indentation, so that my comments are clearly distinguished.

From the transcript:

LEIGH SALES, REPORTER: (...) Thanks to the resources boom, the town of Roma, with its 7,000 residents, has unemployment hovering around 2%, but that's not as ideal as it might first sound.

LEIGH SALES: In this story, we'll use Roma as a snapshot to show you how Australia-wide shortages of skilled workers are challenging everyone from the biggest multibillion dollar mining companies to the smallest mum-and-dad businesses.

LEIGH SALES: Welcome to a sort of modern-day gold rush, where workers fly in and out of towns around Australia, like Roma, to take advantage of the resources boom. (...) Workers are in hot demand, and it's small businesses really feeling the pinch.

LEIGH SALES: Spare a thought for Sandy Kelly and her husband Brett, trying to run the local pizza shop.

Ms. Sales is a respected and competent journalist, I want to make that clear from the start.

What follows is the part of the report I would like to focus on:

BRETT KELLY: In the first 18 months we had 96 people come and go.

LEIGH SALES: In just a little local pizza shop?


LEIGH SALES: That's more than one a week. Roma's growth means they've never had so many orders for pizza, but they can't hold on to staff.

SANDY KELLY: There are a lot of other jobs out there that have better long-term prospects, probably a higher pay rate, and we're probably seen as the bottom of the chain in the employment ...

LEIGH SALES: In desirability of ...

SANDY KELLY: In desirability.

This part of the report deserves a deeper consideration than what I can offer now.

Here I will limit myself to the following considerations:

The obvious question is whether this couple tried increasing the wages offered, so as to better retain staff. Although the report seems to suggest otherwise, one might assume they did, at least to some limited extent (see Sandy Kelly's second last statement).

Regardless, several things are clear from this passage:

  1. This couple does not require skilled staff, understanding for that staff with a trade qualification. That is probably the case of many other small businesses (in another part, the report mentions "pubs, shops, small businesses, they're all struggling to find workers").
  2. Not every businessperson or worker is benefitting equally from this mining boom and associated "labour shortage".

It's evident that this couple is having problems running their business. It's not evident whether the increased volume of sales compensates for these problems.

It's also quite likely that the unskilled workers they require have not benefited greatly from increased wages.

Furthermore, is not clear that one can speak of labour shortage in Australia in general. Currently unemployment has fallen to 4.9%, but underutilization is still 11.9% (as of February 2011). See here.

However, as will be seen shortly, both small businesses and unskilled workers will be required to front up the costs of a situation it's dubious they benefit greatly from.


SAUL ESLAKE, GRATTAN INSTITUTE: But given the long-term nature of any effective solution to this kind of problem, it's one that the Government ought to be working on solutions to over the next two or three years because if they don't, then some of those consequences in terms either of opportunities foregone or unsustainable upward pressure on wages could come home to bite us in a very nasty way.
Here Saul Slake tangentially refers to the reason why small businesses and unskilled workers will be affected by the need to manage the mining boom and "skilled workers shortage". I will repeat and clarify the specific passage: [the mining boom creates] "unsustainable upward pressure on wages [that] could come home to bite us in a very nasty way".

The report demonstrates that, indeed, some skilled workers (essentially those directly or indirectly employed by the mining industry), are seeing their wages increased, as a consequence of the mining boom. The report doesn't provide evidence of this happening to most workers, in most of Australia. In fact, prima facie, I suspect this to be false.

Furthermore, for reasons I will not treat here, it is allegedly only workers' wages that have the inflationary effect Mr. Slake warns us against, not executives' compensation or capitalists' profits.

Regardless of the truth (or falsehood) of this assertion, the fact remains that RBA's monetary policies designed to fight inflation (i.e. inflationary targeting: essentially, higher interest rates) attempt to contain workers' wages and/or employment, not executives' compensation, or capitalists' profits.

In other words: low inflation requires systematically lower wages and higher unemployment from workers alone (not from executives or capitalists), even when only a minority of workers are likely being paid higher wages.

Similarly, low inflation requires higher interest rates, which make small business investment more expensive.

What do these two considerations tell the reader about meritocracy?

In this context, PM Gillard's statements in her "The Dignity of Work" address sound remarkably ironic:

"And we have a policy framework aimed at ensuring all Australians benefit from the opportunities created by the boom."
Especially considering that social security will be targeted, once more.


The RBA Governor's pay rise:

Workers' increasing wages, due to a "labour shortage", may be highly inflationary; however, as stated above, executives' compensations are not. In fact, high ranking bureaucrats' compensation packages aren't inflationary, either.

If they were, I am sure the RBA would not have risen Mr. Glenn Stevens' yearly package (to AU$ 1 million), as they did. Or would have at least bothered to inform the Federal Treasurer right away, not a year after the fact.

And, let's be fair with Mr. Stevens, private sector compensation packages are a lot higher, without creating any fear of inflation.

Further reading:

Baker, Dean. The Conservative Nanny State. Chapter II: The Workers are Getting Uppity.

Baker's work explains and quantifies, within the American context, the effect of inflationary targeting over wages and employment.

This post was inspired by Baker's work.

Tuesday 19 April 2011

The First Trumpet

Dürer - The seven angels with their trumpets.

"And the seven angels which had the seven trumpets prepared themselves to sound.
"The first angel sounded, and there followed hail and fire mingled with blood, and they were cast upon the earth."
(Rev. 8:6-7)

That's it, folks. Brace yourselves, because the end is nigh: the first angel sounded his trumpet.

Mind you, the prophecy was slightly wrong in its timing: the end came before May, 21st 2011. The first trumpet sounded on April, 18th, 2011 (US East Coast time, Tuesday 19th, Australian local time):

"Shortly before the market open, Standard & Poor's revised its outlook on US sovereign debt to 'negative' from 'stable' - the first ever challenge to Washington's top-line AAA grading." (see here)

However, before running for the hills, buying canned food or preparing your bunkers, please read this excellent post by my friend the always Stubborn Mule:

"So, there is no need for panic. Once again, the rating agencies are showing that we should not be paying too much attention to them. After all, as they all repeatedly said in hearings in the wake of the financial crisis, their ratings are just 'opinions' and not always very useful ones at that."

That's a sound, sensible opinion. In fact, if the Mule has a problem is that he is way too moderate and level headed.

As a raging Magpie, I am not nearly as constrained: financial institutions have a long history for manipulating their "expert" advice. Referring to the IMF, Rosnick and Weisbrot (from the Center for Economic and Policy Research, headed by the renowned economist Dean Baker) concluded:

"The IMF's large and repeated errors in projecting GDP growth in Argentina since 1999 strongly suggest that these errors were politically driven. The large overestimates occurred during the country's 1998-2002 depression, when the IMF was lending billions of dollars to support policies that ultimately ended in an economic collapse. Similarly, the underestimates took place at a time when the IMF had an increasingly antagonistic relationship with the Argentine government, and opposed a number of its economic policies. (...)
As this paper shows, the IMF's public documents and statements regarding Argentina lend support to the idea that its errors were related to political considerations.

Of course, S&P would never do this kind of things, right? Particularly when such crass manipulation would hurt the always weak Obama administration.

Well, as I am feeling rather apocalyptic, let's remember an often forgotten passage of the Revelations:
"And I saw three unclean spirits like frogs (...) out of the mouth of the false prophet." (Rev. 16:13)

I edited some parts of the text, to make my meaning clearer.

And talking about hurting the Obama administration. The latest Washington Post-ABC News Poll (a sample of 1,000, taken before last Monday, April, 18th), concludes that:

"In the survey, 47 percent approve of the job Obama is doing, down seven points since January. (...)
"Driving the downward movement in Obama’s standing are renewed concerns about the economy and fresh worry about rising prices, particularly for gasoline. Despite signs of economic growth, 44 percent of Americans see the economy as getting worse, the highest percentage to say so in more than two years."
Obama seems highly vulnerable, from the point of view of his credibility as economic manager. Ironically, Obama's reluctance to confront the indiscriminate Republican opposition could be making things worse, as argued by Mike Konczal.

This gives the S&P move an entirely new relevance.

Monday 18 April 2011

Post-Election NSW (II)

So, will they or won't they? (cut NSW public sector payroll, that is).

So far, as reported, signs about an eventual "slash-and-burn" campaign against the NSW public service seem mixed.

At one hand, there was talk of an unexpected budget "black hole" of $4.5 bn and a negative to rule out future budget cuts (which sounds ominous).

At the other hand, public sector unions seemed cautiously confident that the newly elected NSW government would keep a reasonable stance on this matter (which sounds somewhat reassuring).

However, considering that the Commonwealth has been warning of an impending tough federal budget, so much apparent moderation from the State Government is weird.

Last week Prof. Peter Shergold was appointed chairman of the board of the recently formed NSW Public Service Commission, to scrutinize "the role, size and direction of the NSW public service":
"One of his first tasks will be to oversee the review, which is expected to cover all aspects of the public service, including staff numbers, what they are paid and the way directors-general are appointed. It will take between three and six months."
Does it mean that a "slash-and-burn" campaign is about to be unleashed against the NSW public service?

Not necessarily, according to some observers:
"Forecasts that Shergold's appointment heralds a slash-and-burn campaign appear premature, however. Indeed, it is generally agreed that Shergold's five-year tenure as top public servant (he left after Kevin Rudd won the 2007 election) silenced many critics..."
However, the fact that Prof. Shergold has described his career "as a mandarin could be typified as that of an economic rationalist", who was the secretary of the Commonwealth Department of Workplace Relations during the waterfront disputes appears far from reassuring.

Update on election results:

The seemingly definitive results, after preferences, seem to indicate a better result for the Greens. They did indeed get their first seat at the lower house of the State Parliament, at the expenses of Labor; and the independent Pauline Hanson finally was left out of the upper house:

Monday 4 April 2011

Credit Where Credit is Due (III)

God knows that I disagree with Gerard Henderson. I've criticized his opinion pieces before. I'm sure I will have to do the same in the future.

Today, to my surprise, I feel obliged to applaud a piece by Mr. Henderson.

I'm not saying it was 100% balanced (for instance, Andrew Bolt and Greg Sheridan are mentioned as targets of insulting criticism, not so much as frequent sources of it), or that there were no loose ends (what does the opening paragraph have to do with the rest of the piece?).

However, if the results were less than perfectly balanced, the reader can, at least, appreciate the effort.

So, good on you, Mr. Gerard Henderson.

There, I said it.