Welcome to QETA Newsletter 9 2012.

QETA NEWSQETA EVENTS19 July UQ Student Economics Day20 July QUT Student Economics Day21 July QETA State Conference Brisbane23-27 July QETA UQ School of Economics Student Economics Competition2-8 September National MoneySmart Week4-5 October BEA National Conference Sydney21 November QETA Annual General Meeting

1. QETA STATE CONFERENCE: Have you put Saturday 21st July 2012 in your diary for the QETA Conference? The Conferencewill have it all – great keynote speakers, outstanding workshop sessions, great food, great company and opportunity to networkand a trade display.Details have been sent to all members via email. Updates will be posted on our website and included in each newsletter. It’s agreat opportunity to get Professional learning hours for QCOT – and even more importantly, a great opportunity to continueyour development as a teacher of Economics!Look forward to seeing you there!And please remember, when registering, refer to the updated program that will be sent in a separate email!

2. QETA QUT AND UQ STUDENT ECONOMICS DAYS: The UQ Day on Thursday 19th July and the QUT Day on 20th July arealways of great benefit to teachers and students. Cost is just $5.50 per student, which also includes lunch. Programs and detailswill be available shortly. Make sure your students attend one of these days and experience University life for a day!

3. QETA UQ SCHOOL OF ECONOMICS STUDENT ECONOMICS COMPETITION: The Annual Student EconomicsCompetition conducted by QETA and sponsored by the University of Queensland School of Economics will be held Monday 23rd

July – Friday 27th July 2012. Entry details have been forwarded to all schools and all members. Plan on having your studentsenter – last year there were over 2200 entries – more than 50% of students studying Economics in Queensland entered! Didyours?

4. ECONOMICS WEEK: This is 23rd-27th July 2012. Please make an effort to promote the subject of economics to yourstudents and others in the school. A great library display, a debate, a presentation on a school assembly – or any other idea. Weneed to be very active to promote the value and worth of our subject.

5. BEA TRAVEL SCHOLARSHIPS: A reminder to those with 5 years or less teaching experience – BEA is offering twoscholarships to attend the National Conference in Sydney in October. Applications through QETA. If you are eligible, this is anoutstanding Conference to attend, and I would urge you to apply! Details on QETA website.

6. QETA TRAVEL AWARD TO ATTEND BEA CONFERENCE: QETA is offering to travel awards to attend the BEA Conferencein Sydney on 4-5 October 2012. This is open to any member and applications close 31st May 2012. Details forwarded previouslyby email.

7. CEDA BUDGET FUNCTION: QETA was invited by CEDA to have a table of eight at the CEDA Budget function with WayneSwan on Friday 11th May. Places filled quickly as I’m sure you can imagine. QETA will be developing some links with CEDAhopefully in the next few months. Not sure what CEDA is? It’s the Committee for Economics Development of Australia. Want toknow more. Then visit their website www.ceda.com.au

8. ECONOMICS SOCIETY: QETA and the Economics Society have re-established some contacts as well and are currentlyexploring ways that we might work together in the future. More on this at another time!

NEW RESOURCES AVAILABLE FROM QETA

2012 STUDENT ECONOMICS BULLETINS

These resources are produced by Exam Preparation Services and are always great value – they are current, up-to-date andinformative and written at a suitable level for Year 11 and Year 12 students to understand. They are written by Gavan Forster,formerly Director of Economics for Master Builders Australia.

There are eight books in series, costing $14.25 each + postage for members. (postage for 1-3 titles is $9.90, 4-8 titles $13.20).Non-members please add $2 per title.

The 8 titles are:1. Foreign Debt and Current Account Deficit 20122. Monetary Policy in Australia 20123. Fiscal Policy in Australia 20124. Inflation in Australia 20125. Wages Policy in Australia 20126. Unemployment in Australia 20127. Microeconomic Reform in Australia 20128. Globalisation and Economic growth in Australia 2012

These items are available from QETA, P.O. Box 254, RED HILL

INTERNATIONAL AIDWritten by Justin Healy. Australia is a global citizen with an interest in enhancing stability and prosperity in the Asia-PacificRegion and improving the lives of the world’s poorest people, particularly in Africa. Australia currently spends almost $5 billionper year on development assistance, and is committed to increasing its aid budget from 0.35% of Gross National Income to0.5% of GNI within the next 3-4 years. This book reviews Australia’s current aid commitments and reforms, and explores arange of factors including the reasons for aid, how it is delivered to partner countries, and issues in the debate over aid levelsand effectiveness. The role of NGO’s in delivering development assistance is also examined.Price: 24.00 (print version) Also available in digital format for $24.00 (price incl GST) Add $9.90 for postage and handling.Available from: QETA, P.O. Box 254, RED HILL Fax 07 3236 9240 Email info@qeta.com.au

PROFESSIONAL LEARNINGQETA Conference Saturday 21st JulyDetails have been sent to all schools by mail and all members by email. We hope to see as many Economics teachers as possibleattend the Conference. QETA Conferences have always been valuable and enjoyable and this one promises to be the same!

One Just WorldTackling global poverty with the Olympic spirit 17 JulyWhen: 6:00 pm, Tuesday 17 JulyWhere: The Ian Hanger Recital Hall, Queensland Conservatorium, Griffith University, Southbank, BrisbaneWebsite: www.onejustworld.com.au

Asia Education Foundation study programsThe Asia Education Foundation study programs provide participants with experiences normally off limits to tourists and introducethem to people with a different world view.Riding the iron rooster: economic reform in China 1–12 JulyClosing date: 11 MayIndonesia uncovered 1–14 JulyClosing date: 11 MayKorean studies workshop JulyChina in the footsteps of Chairman Mao 22 September – 7 OctoberMyanmar 5–17 January 2013Contact details: studytours@asialink.unimelb.edu.auWebsite: www.asiaeducation.edu.au/for_teachers/study_tours/travel_landing_page.html

Global Education and the Australian Curriculum - SustainabilityIndigiScapes, 17 Runnymeade Road, CapalabaDate: 17 May 2012 4:00 PM

This professional development session will offer teachers an opportunity to explore;* the Australian Curriculum* the Cross Curriculum Priority of Sustainability* the role of global education in developing the cross curriculum priorities within the Australian Curriculum* how organisations, such as IndigiScapes and the Global Learning Centre, can assist teachers within the region.

All attendees will receive FREE classroom resources as part of the presentation.

More information and online registration: Global Education and the Australian Curriculum - Sustainability

RESOURCES1. FROM THE ABS:6427.0 Producer Price Indexes, Australia, Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/6427.0?OpenDocument6401.0 Consumer Price Index, Australia (Media Release), Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/MediaRealesesByCatalogue/902A92E190C24630CA2573220079CCD9?OpenDocument6401.0 Consumer Price Index, Australia, Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0?OpenDocument6310.0 Trade union membership remains steady (Media Release), August 2011http://www.abs.gov.au/ausstats/abs@.nsf/MediaRealesesByCatalogue/9F48D6BD3EAF15FACA25742A007C0E8F?OpenDocument3413.0 Migrant Statistics News, Apr 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/3413.0?OpenDocument6310.0 Employee Earnings, Benefits and Trade Union Membership, Australia, August 2011http://www.abs.gov.au/ausstats/abs@.nsf/mf/6310.0?OpenDocument1350.0 Australian Economic Indicators, May 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/1350.0?OpenDocument6416.0 House Price Indexes: Eight Capital Cities, Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0?OpenDocument6463.0 Analytical Living Cost Indexes for Selected Australian Household Types, Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/6463.0?OpenDocument6467.0 Pensioner and Beneficiary Living Cost Index, Mar 2012http://www.abs.gov.au/ausstats/abs@.nsf/mf/6467.0?OpenDocument2. FROM THE IMFIMF Survey: Tailored Approach to Debt and Growth Challenges in Europe’s Crisis Countries A build-up of debt afterjoining the euro zone led three very different countries to the doors of the International Monetary Fund as the global economiccrisis took its toll on the Greek, Irish, and Portuguese economies.http://www.imf.org/external/pubs/ft/survey/so/2012/car042412a.htmIMF Survey: Asia Faces Stronger Growth, but Further Rebalancing Critical Growth in Asia is expected to pick up thisyear, after slowing in the last quarter of 2011, but Asian leaders now face the difficult task of adjusting policies to supportstable, non-inflationary growth, say IMF economists.http://www.imf.org/external/pubs/ft/survey/so/2012/car042712a.htmRegional Economic Outlook: Asia and Pacific -- April, 2012: Barring the realization of downside risks to the global economy,growth in the Asia and the Pacific region is expected to gain momentum over the course of 2012, according to this report, andnow projected at 6 percent in 2012, rising to about 6½ percent in 2013. Stronger economic and policy fundamentals havehelped buffer the region's economies against the global financial crisis, by limiting adverse financial market spillovers andameliorating the impact of deleveraging by European banks, but a sharp fall in exports to advanced economies and a reversal offoreign capital flows would have a severe impact on the region. The region's policymakers now face the difficult task ofcalibrating the amount of insurance needed to support stable, noninflationary growth. Some Asian and Pacific economies canafford to lengthen the pause in the normalization of their macroeconomic policies that was initiated when the global recoverystalled late in 2011; others may need a faster return to more neutral policy stances. Similarly, the pace of fiscal consolidationshould be calibrated to country-specific circumstances. Additional chapters in the report discuss whether China is rebalancingand the particular challenges facing Asian low-income and small island economies.http://www.imf.org/external/pubs/ft/reo/2012/APD/eng/areo0412.htmIMF Survey: IMF Opens Its Doors to Wider Dialogue The crisis in the euro area, natural resources management, regulationof international capital flows, inclusive growth, and poverty reduction were front and center as the IMF heard from a cross-section of society.http://www.imf.org/external/pubs/ft/survey/so/2012/new050212a.htm Press Release: Asia Faces Stronger Growth, butFurther Rebalancing Critical, Says IMF’s Asia-Pacific Regional Economic Outlookhttp://www.imf.org/external/np/sec/pr/2012/pr12152.htmIMF Survey: Don’t Demonize Finance After Crisis, Says ShillerDespite the widespread repercussion from the global financial crisis, finance should be embraced rather than demonized, says

economist Robert Shiller. In a new book, he argues that access to finance should be enlarged.http://www.imf.org/external/pubs/ft/survey/so/2012/int050112a.htm IMF Survey: Learning from Crisis Key to RestoringEconomic Growth With many countries still experiencing an uncertain economic outlook, charting a course back to economicprosperity might prove to be difficult, but not impossible, delegates of a conference said.http://www.imf.org/external/pubs/ft/survey/so/2012/pol050312b.htmAsia's key trends, potentials, opportunities and outlook, Speech by Naoyuki Shinohara, IMF Deputy Managing Directorhttp://www.imf.org/external/np/speeches/2012/050212.htm

3. THE GLOBAL SKILLS GAP Three-quarters (74%) of the 500 business leaders polled by ICMResearch worried that young people's horizons are not broad enough to operate a globalised andmulticultural economy. Employers agreed with the statement that: “Unless we better support schoolsto teach young people to think more globally, the UK is in danger of being left behind by emergingeconomies such as China, India and Brazil”. The survey conducted on behalf of the British Counciland Think Global gauged the extent to which business leaders saw global thinking as an importantskill amongst employees and potential recruits. 93% of businesses thought it was important forschools to help young people develop the ability to think globally. 80% said schools should be doingmore; only 2% said they should be doing less. In recruiting employees, more employers (79%) saidknowledge and awareness of the wider world is more important than: degree subject and

classification (74%); A-level results (68%); or A-level subjects (63%). Read The Global Skills Gap here: www.think-global.org.uk/resources/item.asp?d=64044. FROM FEDERAL TREASURYConsumer Price Index - March Quarter 2012 Today's inflation data show a moderation in both headline and underlyinginflation through the year to March, with underlying inflation remaining well contained at the lower end of the Reserve Bank'starget band after falling to its lowest level in well over a decade. Read moreTreasurer's economic noteAustralia's economy punches well above its weight - although we have only the 51st largest population in the world, we havethe 13th biggest economy. This has never been more the case than over the past few years. The value of our economy is nowmore than $1.4 trillion, up from just $1.1 trillion when Labor came to office.Read moreEconomic Roundup Issue 1, 2012Issue 1, 2012 contains two articles prepared by Treasury staff, and one recent speech by Dr Martin Parkinson, PSM.Read moreTreasurer's economic noteAustralia's economy punches well above its weight - although we have only the 51st largest population in the world, we havethe 13th biggest economy. This has never been more the case than over the past few years. The value of our economy is nowmore than $1.4 trillion, up from just $1.1 trillion when Labor came to office.Read morePrime Minister to host Economic ForumA major forum on the Australian economy will be held next month to continue the national discussion on the challenges to oureconomy posed by the high dollar, and how we can keep our economy strong into the future.Read more

5. CURRICULUM RESOURCES TO SUPPORT IMPLEMENTATION OF THE AUSTRALIAN CURRICULUM CAN BEFOUND IN SCOOTLEScootle is a one-stop shop for students and teachers for digital curriculum resources. This interactive website, developed byEducation Services Australia, provides access to more than 8000 digital resources and its search facility links to the AustralianCurriculum web site.Scootle now contains a number of new features. The ‘Find by Australian Curriculum’ tab has been added to allow users to findresources that match curriculum content descriptions in the Australian Curriculum. Users can further refine their search toinclude the General Capabilities and the Cross-Curriculum Priorities.On the resources page users can now view curriculum content descriptions, elaborations, general capabilities and ScOT termsused for a specific curriculum resource.

6. PRODUCTIVITY COMMISSION NEWSThe following publication has been released.Barriers to Effective Climate Change Adaptation (draft inquiry report)View Report View Key Points View Media ReleaseThe following publication has been released.Schools Workforce (research report)View Report View Key Points

7. FROM RESERVE BANKFor your information the Reserve Bank of Australia issued the Financial Aggregates for March 2012. You can view thisstatistical release at:http://www.rba.gov.au/statistics/frequency/fin-agg/2012/fin-agg-0312.htmlFor your information the Reserve Bank of Australia issued the Index of Commodity Prices for April 2012. You can view thisstatistical release at:http://www.rba.gov.au/statistics/frequency/commodity-prices/2012/icp-0412.htmlThe latest quarterly Statement on Monetary Policy has been released by the Reserve Bank of Australia.http://www.rba.gov.au/publications/smp/2012/may/html/index.htmlThe Reserve Bank of Australia has released the May 2012 issue of the Chart Pack.You can view the Chart Pack at:http://www.rba.gov.au/chart-pack/index.html

8. FOOD PRICES RISE AGAIN ON HIGHER OIL PRICES AND ADVERSE WEATHER World BankIncreases reverse downward trend that began in October 2011

WASHINGTON, April 25, 2012—Global food prices increased by 8 percent from December 2011 to March 2012 due to higher oilprices, adverse weather conditions, and Asia’s strong demand for food imports, according to the World Bank Group’s latest FoodPrice Watch.

The World Bank’s Global Food Price Index was only 1 percent below a year ago and 6 percent below the February 2011 historicpeak. If the current forecasts for increased food production do not materialize, global food prices could reach higher levels,underscoring the need to remain very vigilant.

“After four months of consecutive price declines, food prices are on the rise again threatening the food security of millions ofpeople,” said Otaviano Canuto, World Bank Vice President for Poverty Reduction and Economic Management (PREM). “Puttingfood first must remain a priority for the international community and in our work in developing countries.”

According to the quarterly Food Price Watch report, prices of all key staples increased between last December and March of thisyear, except for rice, due to both abundant supply and strong competition among exporters. Maize prices increased by 9percent, soybean oil by 7 percent, wheat by 6 percent, and sugar by 5 percent. Crude oil prices rose by 13 percent.

In addition, domestic food prices remain high, especially in Africa as the result of a combination of large food imports and localfactors, such as trade restrictions between neighbors, hoarding, civil unrest, high fuel transportation costs and bad weatherconditions.

In a global context, domestic food price increases have been larger than price declines across countries. Wheat prices fromMarch 2011 to March 2012 rose 92 percent in Belarus, while the price of maize increased by 82 percent in Malawi, 80 percent inEthiopia, and 71 percent in Mexico.

Production outlooks remain strong for 2012/13 and a number of factors have kept pressures on prices at bay. Record prices inlate 2010 and early 2011 led to increased production of major crops worldwide, and are a key factor in the strong projections forthe 2012/13 season. The slowdown in maize use for ethanol production in the U.S. and weak global demand due to the eurocrisis are contributing to keeping upward price pressures on check.

How the World Bank Group (WBG) is helping to put food first

* In response to drought in the Horn of Africa, the WBG is providing $1.8 billion to save lives, improve social protection, andfoster economic recovery and drought resilience.* A first-of-its-kind risk management product, provided by the International Finance Corporation (IFC), will enable protection fromvolatile food prices for farmers, food producers, and consumers in developing countries.* The Global Food Crisis Response Program is helping 40 million people in 47 countries through $1.5 billion in support.* The WBG is boosting spending on agriculture to some $6 to $8 billion a year from $4 billion in 2008.* Supporting the Global Agriculture and Food Security Program (GAFSP), set up by the WBG in April 2010 at G20’s request.Seven countries and the Gates Foundation have pledged about $1.1 billion over 3 years, with $612 million received.* The WBG is coordinating with UN agencies through the High-Level Task Force on the Global Food Security Crisis and withnon-governmental organizations.* Advocacy for more investment in agriculture research -- including through the Consultative Group on International AgricultureResearch (CGIAR) – and monitoring agricultural trade to identify potential food shortages.

* Supporting improved nutrition among vulnerable groups through community nutrition programs aimed at increasing use ofhealth services and improving care giving. As part of its response to the food crisis, the Bank has supported the provision ofsome 2.3 million school meals every day to children in low income countries.IFC will invest up to $1 billion in the Critical Commodities Finance Program, aimed to support trade in key agricultural andenergy-related goods, to help reduce the risk of food and energy shortages, as well as improve food security for the world’spoorest

9. WHITE PAPER ON AUSTRALIA IN THE ASIAN CENTURY: SUBMISSIONS SUMMARY CALLS FOR IMPROVED ASIARELEVANT CAPABILITIES

The Australia in the Asian Century Task Force have released a high-level summary of all submissions received to the WhitePaper consultation, showing 50% of respondents have called for improved Asia relevant capabilities and enhancedpeople-to-people connections with Asia.

The Submissions Summary brings together many of the ideas raised by the more than 250 submissions made by organisationsand individuals to the White Paper. The call for greater Asia relevant capabilities and greater people-to-people connections withAsia have been identified as two of the four major themes identified in the submissions. Additionally, a large number ofsubmissions noted that being “Asia literate” required broader skills than language fluency, with the need for broader culturalliteracy / studies of Asia emphasised.

The summary can be read at: http://asiancentury.dpmc.gov.au/submissions/summary.

10. FROM THE ACCCACCCount details the ACCC's activities in the enforcement of the Competition and Consumer Act 2010, merger reviews,compliance actions, adjudication issues, economic regulation and international involvement.

ACCCCount 1 January to 31 March 201211. GLOBAL EDUCATIONDo you want to know more about global education?The first item in the top navigation bar of the Global Education website, ‘Global education’, links you to a summary of the keyfeatures of global education. For a more complete overview, you may wish to download the PDF Global Perspectives: Aframework for global education in Australian schools that is also contained in this section of the website.The second item in the top navigation bar, ‘Teaching and learning’, has information about global education professional learning,and a link to an online professional learning module.Contacts for the global education professional learning providers in each of the states and territories can be found under‘Contact us’ at the very bottom of each webpage, on the right-hand side.www.globaleducation.edu.au

12. TEACHING AND LEARNING FOR A SUSTAINABLE FUTURETeaching and Learning for a Sustainable Future is a multimedia teacher education program published by UNESCO. Its 27modules are grouped under four themes: Curriculum rationale; Sustainable development across the curriculum; Contemporaryissues, and Teaching and learning strategies.www.unesco.org/education/tlsf

13. UNICEF AUSTRALIA TEACHER RESOURCESUNICEF Australia has topical education resources for primary and secondary students. Free lesson plans are available for topicssuch as child rights, child labour, climate change, maternal health (Mother’s Day focus), Millennium Development Goals, poverty,and water and sanitation. The resources contain advice for those wanting to develop the skills of advocacy, fundraising, publicspeaking and teamwork. Schools can be involved in the UNICEF Day for Action on 24 October and other special events duringthe year.www.unicef.org.au/Discover/Teachers.aspx

DAMN LIES AND SURPLUS STATISTICS

Ugo Panizza & Andrea Presbitero, Vox EU

Published 8:17 AM, 23 Apr 2012 Business Spectator."It ain’t what you don’t know that gets you into trouble. It’swhat you know for sure that just ain’t so." – Mark Twain

Do high levels of public debt reduce economic growth? This

is an important policy question. A positive answer wouldimply that, even if effective in the short-run, expansionaryfiscal policies that increase the debt-to-GDP ratio mayreduce long-run growth, and thus partly (or fully) negate

the positive effects of the fiscal stimulus.

Most policymakers do seem to think that debt reducesgrowth. This view is in line with the results of a growingempirical literature which shows that there is a negativecorrelation between public debt and economic growth, andfinds that this correlation becomes particularly strong whenpublic debt approaches 100 per cent of GDP.

Debt and growth, what causes what?

Correlation, however, does not imply causation. The linkbetween debt and growth could be driven by the fact that itis low economic growth that leads to high levels of publicdebt. Establishing the presence of a causal link going fromdebt to growth requires finding what economists call an‘instrumental variable’.

In a new paper, we propose a novel instrument variablethat allows us to reject the notion that debt causes slowergrowth in OECD countries. We do confirm the oft-notednegative correlation between debt and growth, but showthat debt does not have a causal effect on growth. Thediscussion of the instrument is somewhat technical, so weomit it here; interested readers can find all the details insection two of our paper, "The “Austerity Myth" GainWithout Pain?", published in the National Bureau ofEconomic Research journal "Fiscal Policy after the FinancialCrisis".

To answer the question "Do high levels of public debtreduce economic growth?" we follow the econometricprocedure of trying to reject the proposition that “debt hasno growth effects”. Our research shows that this propositioncannot be rejected, so it may well be that it is true. Wecannot, however, be sure. Think of a murder trial where thejury finds the man has not been proven guilty “beyond areasonable doubt”. This certainly suggests that he isinnocent, but establishing innocence is not what the trialwas about, so technically, we cannot claim that the jurydeclared him innocent.

Indeed, none of the papers in the literature on debt-growthlinks can make a strong claim the debt has a causal effecton economic growth.

In this light, we refer readers back to Mark Twain’s wisdom.There is a value in assessing the degree of our economicignorance.

Policy implications

We believe that our findings are important for the currentdebate on fiscal policy. There might be many good (or bad)reasons for fiscal austerity, even during recessions. We donot want to enter that debate here. However, we do notfind any evidence that high public debt hurts future growthin advanced economies. Therefore, given the state of our

current knowledge, we believe that the debt-growth linkshould not be used as an argument in support of fiscalconsolidation.

The fact that we do not find a negative effect of debt ongrowth does not mean that countries can sustain any levelof debt. There is clearly a level of debt beyond which debtbecomes unsustainable, and a debt-to-GDP ratio at whichdebt overhang, with all its distortionary effects, kicks in.What our results seem to indicate, however, is that theadvanced economies in our sample are still below thecountry-specific threshold at which debt starts having anegative effect on growth.

We believe that there is a subtle channel through whichhigh levels of public debt can have a negative effect ongrowth. In the presence of multiple equilibria, a fully solventgovernment with a high level of debt may decide to put inplace restrictive fiscal policies aimed at reducing theprobability that a change in investors’ sentiments wouldpush the country towards the bad equilibrium. Thesepolicies, in turn, may reduce growth, especially ifimplemented during a recession (such policies may even beself-defeating and increase the debt-to-GDP ratio). In thiscase, it would be true that debt reduces growth, but onlybecause high debt leads to panic and contractionarypolicies.

While such an interpretation justifies long-term policiesaimed at reducing debt levels, it also implies that countriesshould not implement restrictive policies in the middle of arecession. These policies are the reason for the negativeeffect of debt on growth. Yet, policymakers under pressurefrom market participants might not have an alternative. Thisis why we need prudent fiscal policies and lenders of lastresort that can rule out multiple equilibria.

In summary, our reading of the empirical evidence on thelink debt-growth link in advanced economies is:

– Many papers that show that public debt is negativelycorrelated with economic growth.– No paper that makes a convincing case for a causal linkgoing from debt to growth.– Our new paper suggests that such a causal link does notexist (more precisely, our paper does not reject the nullhypothesis that there is no impact of debt on growth).

We realise that our results are controversial. While we areconvinced of the soundness of our findings, we know thatsceptical readers will find ways to challenge ouridentification strategy. However, the first two points areuncontroversial. The case that public debt has causal effecton economic growth still needs to be made.

Originally published on www.VoxEU.org. Reproduced withpermission

PRAISING INDIA’S ECONOMIC PROGRESS, BAN CALLS FOR MORE INCLUSIVE DEVELOPMENTUN News 27 April 2012Secretary-General Ban Ki-moon today praised India’seconomic development and called on the country to buildon it by implementing policies that reduce inequalitiesamong society and take into account environmental andsocial factors.

“Growth is not enough. The world needs inclusive growththat reduces inequalities – growth that moves people fromthe margins to the mainstream – growth that integrates theeconomic, social and environmental instead of growth thatpits these goals against each other,” Mr. Ban said in hisremarks at Jamia Millia Islamia University in the capital,New Delhi.

Mr. Ban noted that as one of the largest economies in theworld, India has a key role to play at the UN SustainableDevelopment Conference (Rio+20) in Brazil in June, whereissues such as food security and universal access to waterwill be at the top of the agenda.

In particular, Mr. underlined that Rio+20 will provide anopportunity to advance on the goal of achieving sustainableenergy for all, a crucial concern in a country where 55 percent of the rural population lacks electricity.

“We cannot power a 21st century economy withoutsustainable energy, which is why I am making sustainableenergy a major focus,” he said.

Mr. Ban emphasized that innovative partnerships among

India’s various sectors and with other countries will be anessential component to achieve inclusive development andaddress some of its most pressing needs, such as improvingwomen and children’s health.

“Every week, more than 1,000 Indian mothers die frompregnancy or childbirth. Every 20 seconds, an Indian childunder five dies from a largely preventable cause,” Mr. Bansaid. “This is one of the most difficult developmentchallenges we face anywhere around the world.”

Mr. Ban also praised India’s multiculturalism and hailed it asan example of how various cultures, religions and languagescan come together and not only tolerate and understandeach other but collaborate on a daily basis.

During his visit, Mr. Ban met Prime Minister ManmohanSingh, with whom he discussed the role of the South Asiannation in the region, as well as the latest developments inpeace and security in Syria. They also talked about therelationship between India and Pakistan and of ways tofurther the democratization of Myanmar, ahead of Mr. Ban’svisit to the country on Sunday.

Mr. Ban thanked Mr. Singh for India’s extraordinarycontribution to peacekeeping efforts around the world, aswell as to the UN Democracy Fund. India is the world’s thirdlargest troop contributor to UN peacekeeping, and thesecond-largest contributor to the Fund.

CLOSING THE MINING BOOM GAPIan HarperPublished 3:46 PM, 26 Apr 2012 The Business SpectatorAustralia’s stark comparative advantage in mining is both aboon and a bane to our economic development. Investmentin the mining industry as a share of Australia’s GDP hasalready reached unprecedented levels and looks set todouble in coming years.

The mining industry is almost single-handedly responsiblefor Australia experiencing close to trend annual growthwhile the rest of the developed world languishes.

Yet the mining boom unleashes mighty structural forcesthat bear down on the Australian economy. A stronglyappreciating Australian dollar – driven by high commoditiesprices and strong demand for Australian mineral exports –undermines the competitiveness of non-mining exportactivities, including manufacturing and services exports, andencourages local consumers to prefer imports over locally-sourced goods and services.

Shortages of skilled labour – in fact, any labour at all – inmining regions drives wages and salaries to stratosphericlevels, in turn bidding up prices for accommodation, foodand local services. This makes life very difficult forindividuals and families who do not benefit directly from

inflated incomes and yet also face inflated prices for basicgoods and services in regions affected by the mining boom.

Broadly speaking, investment has moved from the southand east of Australia, where most people live and work, tothe north and west of the continent, where most of themineral wealth lies. There is a parallel movement of capitalaway from low-productivity sectors like manufacturing andretail trade towards high-productivity mining and relatedservices. This is not only to be expected but also welcomed,as Australia struggles with declining average productivitylevels.

How we cope with the changing pattern of demand forlabour, especially skilled labour, will determine how well wemanage the mining boom. Ways must be foundsimultaneously to meet the needs of the mining sector andto ensure that the non-mining sector realises improvementsin efficiency and productivity sufficient to allow it to survivethe boom.

Indeed, this is the non-mining sector’s best hope: thatproductivity levels can be raised so that labour is releasedto serve the mining industry without harming output levels

in the rest of the economy.

It’s not only the economic fabric that is stressed andstrained by the booming sector 'problem'. Social challengesalso arise when investment and jobs move away fromwhere people live and community life is established. Onetrend is the rapid take-up of 'fly in/fly out' (FIFO)employment patterns.

One respondent to a recent Senate inquiry expects FIFOemployment to increase six-fold over the next 20 years,while relocation and local recruitment will barely double.FIFO might represent a handy way to avert the cost ofrelocating workers and their families to remote regions, butit comes at a cost to family relationships and community lifemore broadly.

It also stymies the broader economic development of theregions blessed – or cursed – with mineral wealth. It is theequivalent at a local level of wholly imported capital andlabour working the mines in Africa, leaving local residentswith little if anything to show for their 'development' apartfrom higher food prices.

There are numerous alternatives to FIFO as a means ofclosing the geographic and skills gaps opened up by themining boom. In a recent report entitled Where’s your nextworker?, Deloitte explored twelve alternative strategies forbringing workers to jobs and jobs to workers.

Promoting the use of shared services is clearly one of them.This includes but is not limited to offshoring. “Near-shoring”– that is, accessing shared services providers locatedinterstate within Australia rather than overseas – can oftenbe a more competitive alternative when full account is takenof management costs and cultural differences. Either way,there is a pressing need for productivity improvements inthe non-mining sector as there is for services to be suppliedto the booming mining sector, and shared services modelshelp to satisfy both needs.

Beyond shared services, there are other ways to augmentthe supply of skills without moving local workers around so

much. Boosting skilled migration must continue as a priorityand, in this vein, the government’s recently announced US-Australia Bilateral Employment Initiative is to be welcomed.Here is a way of tapping unemployed or underemployedtradespeople in the United States for short-termemployment in Australia, where demand outstrips supply.

'Crowdsourcing' skills is yet another and more innovativesolution. Digital communications and social media are intheir infancy, yet the potential for tapping expertise overthe internet is huge. Australian internet start-up, Kaggle, isjust one example of what is possible, where technicalproblems are thrown to the crowd with little more than thethrill of the challenge offered by way of motivation.

Other solutions include enhancing opportunities for retirees,home-based carers, people with disabilities and indigenousAustralians to participate more actively in the paidworkforce. In the case of indigenous Australians, at leastone of the gaps – the geographic gap – is generally alreadyclosed. But others, including skills and disadvantage, stillloom large.

More can be done to improve employee engagement as wellas re-engineering jobs so that workers are more effective inwhat they do.

Delivering more and better skilled labour is not just aboutmoving workers around, although this will be part of anysolution.

Importantly, measures which improve the productivity ofthe existing workforce, including at a distance from theworkplace, will help resolve the tensions born of ourprodigious mineral endowment.

The measure of how successfully we manage the miningboom is how well we respond to the resulting structuralpressures placed on labour markets.Ian Harper is a Partner at Deloitte and a director of DeloitteAccess Economics Pty Ltd. This formed part of a addressIan gave at the Shared Services & Outsourcing Conventionin Melbourne.

SURVIVING A SUPERMARKET PRICE WARRobert GottliebsenPublished 8:06 AM, 26 Apr 2012 The Business Spectator

The supermarket price war is an important contributor tothe looming interest rate cuts. But that price war is alsogoing to be a significant contributor to the transformation ofthe Australian enterprise supply chain. Most non-government enterprises will be affected.If you are a service or goods supplier to a manufacturer, oryou actually make things, this change will almost certainlyaffect you.

I strongly urge you to view these two videos – the firstdescribes a culture of constant cost reduction that can

actually be used in Australia (Cost cuts well done, April2012).The second describes how a food supplier is prospering inthe new supermarket environment, with the productivity-boosting combination of flexible (albeit high paid) labourand a new plant (Operational efficiency: how onemanufacturer is winning, April 2012).Let me discuss the food supplier. Jackson Hewett and JasonPallant analyse the remarkable Coles mailing campaign(Productivity Spectator: How to win a food fight, April 24;How many loaves of bread make an iPad, April 24).

Suffice to say at this stage that both Woolworths and Coles,through their loyalty programs, either know or are going toknow exactly what customers are buying. So, like it or not,suppliers are going to have to work with them.In previous decades a series of very weak managers ofAustralian food suppliers to Woolworths and Coles madeagreements with the food unions that saddled their plantswith inflexible labour and low productivity. That discouragedplant investment, further lowering productivity. They knewthey could pass those costs on to the supermarkets, whodutifully passed them on to the public – and they allcontributed to inflation.Those days are rapidly ending, spurred by the supermarketprice war and the high dollar. As a result, the successors tothose bad managers must either bring the unions andworkers together to change the game and lift productivityor, in time, close the plants. Both workers and managerswill lose their jobs if they don’t change the productivitygame. It will almost certainly require investment in newplants.In many cases the unions negotiated amazing payouts onclosure, so the owners are hanging on – but it will not last.Heinz is a typical company that rid itself of badmanagement and labour practices by going to New Zealand,where labour is cheaper and very flexible. Most of theinternational food processors in Australia who are suffering

from bad past management will do the same because theycan’t stand the heat in the current kitchen.Does that mean the end of Australian food processing? Insome areas it will but if the Nationals come to power via acoalition with the Liberals they will turn up the Australianmade burner in the supermarkets.And so we come to the subject of our second video: BreadSolutions. Many of the major bread-making companies fitinto the traditional food-processing pattern – bad work andmanagement practices, older plants and low productivity.In theory they should have done a “Bread Solutions” andinstalled modern plants and enlisted a flexible labour forces.But they didn’t have the management able to do it. So Colesfunded Bread Solutions to buy modern plant and take asegment of the fresh bread market. They will almostcertainly fund more food processing so modern plant andwork practices can be used to lift productivity.Unfortunately, because they are as much to blame as theunions, managers of food processors rarely tell the wholetruth to the public as to why they are closing a plant. As aresult a great many communities will be very upset at plantclosures – particularly when they take place in ruralcommunities.Many closures can still be avoided by using the BreadSolutions model. It's not easy and the high dollar can affectthe sums. Nevertheless I hope the two videos will inspiremanagers and workers to wake up and have a try.

AUSTRALIA, THE GLOBAL COMMODITIES COP?Daniel WokerPublished 11:18 AM, 26 Apr 2012 Business Spectator

In his wide-ranging and insightful contribution of 20 April,Bandid Nijathawan cites 'gatekeeper for the internationalcommodities market' as potentially Australia's most usefulcontribution to Asia.

This important remark shines a spotlight on a widely knownbut rarely discussed fact: an important percentage of allcommodities produced worldwide are not brought to marketby the producer but by little-known and partly unregulatedtraders. These traders either 'do God's work' by bringingmuch needed commodities in time and to the requiredquality to where it is needed, or they are 'bloodsuckingspeculators' needlessly pushing up prices for the consumerand depriving producers of their just remuneration.It depends on who looks at their activity.Where more and more experts and an increasing number ofgovernments agree is on the necessity to better know,regulate and where necessary police these trading activities.This should preferably be done through internationalagreements.Impossible, you say? Probably not, as shown by the recentprocess of bringing (somewhat) under control another vastarea of previously unregulated international economicactivity: offshore banking. Following the global financialcrisis of 2008, national and international legislation – fromthe Volker Rule to Basel III – brought under control bankingactivities hitherto unregulated and mostly escaping nationalregulators. Some such activities were eliminated altogether.

Switzerland was the world's numero uno in this activity, butthis country at the crossroads of Europe, with excellentconnections worldwide and a business-friendly climate, hasover the last couple of years become the global hub forcommodity trading.Figures are hard to come by, but all agree that traderslegally located in Geneva and Zug have the largest shareglobally of all privately-traded commodities (as opposed totrade under direct government-to-government agreement),from coal to pork bellies and from grains to oil and gas. The2011 IPO of the world's largest trading company, the Zug-based Glencore, and the ongoing process of mergingGlencore with the world's fourth-largest miner, Xstrata, alsobased in Zug, brought this point home to the Swiss public,which is now asking its government to provide more clarityand eventually prepare legislation.This should be accompanied by intergovernmental activityin a structure such as the OECD (which is losing itssobriquet as the rich men's club and quickly becoming aglobal institution with a proven track record in regulation).And this is where Australia comes in: because of thelocation of its economic activity and by the nationality of itsemployees, Xstrata is much more an Australian (and SouthAfrican, and Colombian) company than a Swiss one. And soit goes for many Swiss-based traders; their centre ofactivity is global, and concentrated in the large producingand consuming countries.

Shouldn't these countries get together, across all G20versus BRICS divisions, and start looking at commoditytrading? How many instant billionaires will be created (asthe IPO of Glencore did for its core management) before

the spoils of commodities start to be distributed moreequally?Dr Daniel Woker is the former Swiss Ambassador toAustralia, Singapore and Kuwait.

PRODUCTIVITY SPECTATOR: Shifting up in a two-speed economyJackson HewettPublished 7:09 AM, 30 Apr 2012 Business Spectator

There’ll be plenty of data on the desks of the RBA boardtoday as they gather the facts ahead of Tuesday’s ratedecision.

A relatively new indicator but a forward looking one,suggests that in the retail sector, things are heading off theboil, at least in the non-mining economy.

The AFGC CHEP Retail Index tracks pallet movementsaround the country, and as a result is a pretty goodindication of what purchasers are planning. According to theindex, growth in the June quarter is likely to be 2.1 percent, a slowdown from the previous quarter. It particularlyhighlights the two-speed economy.

Retail is forecast to grow by 10 per cent in the boomingwest and by 4 per cent in Queensland and the NorthernTerritory. In the South, it’s a far gloomier picture. Victoriawill only see 2 per cent growth, while NSW and SouthAustralia are unlikely to see much growth at all.

The Australian Food and Grocery Council, which partneredwith CHEP on the report, says that the slowing conditionswill add to the pressure on manufacturers who have beenhit by rising costs and a squeeze on price by the majorretailers.

As Robert Gottliebsen points out in his article today(Derailing Australia's gravy train), that could mean we arelooking at a wave of job cuts. In the food sector, we havealready seen a number of manufacturing plants close downand ship operations offshore.

The AFGC says that manufacturers are turning back to theirsupply chain for productivity and efficiency gains. Thatmeans a greater emphasis on technology and data analyticsas we featured last week (How to win a food fight, April24).

Other smart companies are not just looking at their ownsupply chain but also where they fit on the supply chain

path themselves.

Jan Vydra at Australian Fresh Leaf Herbs used hisbackground in logistics to analyse the path from producer toconsumer and realised that a huge market gap existedbecause the traditional process of sending raw produce togreengrocers was filled with inefficiencies. Herbs were beingsent in bulk to wholesale markets, subject to the vagaries ofspot pricing, and became damaged due to the extrahandling steps required.

Vydra analysed each step along the supply chain andworked out that by addressing customers’ pain points, hecould not only grow his revenue (up 2000 per cent in fiveyears) but also reduce his costs by eliminating areas ofstock loss from overhandling.

He also applied new technology to how his workforce picks,packs and ships the product. His 40 staff members areequipped with iPads that deliver customer orders in realtime, eliminating paperwork from the packing shed, andreducing the amount of mistakenly packed produce to lessthan 10 per cent. Jan Vydra says he has increased hispacking capacity tenfold, without having to add more staff.Watch the video above to see how easily his mostlyVietnamese staff use the technology.

Taking the time to analyse the steps in the productionprocess can drive big gains in productivity. For atremendous account of how effective it can be, it’s worthreading “My week at a private equity bootcamp” thatappeared in Businessweek last week. It explains howprivate equity firms turn around struggling manufacturersusing the Japanese Kaizen technique for continuousimprovement.

Next week on Productivity Spectator, we’ll be looking athow a service firm used something similar to eliminatepaperwork and saved $180 thousand in overtime alone,while delivering far superior customer outcomes.

MINIMUM WAGE PANEL MUST PUT A SAFETY NET FOR THE LOW-PAID ABOVE ALL ELSEPublished: 30/04/2012A $26 a week wage increase should be granted to low-paidworkers to maintain a safety net and ensure they do not fallfurther behind average income earners.

In its reply submission for the 2012 Annual Wage Review byFair Work Australia, the ACTU is urging the Panel toremember that its priority must be to provide and maintaina fair safety net for the one in six workers who are

dependent on award wages.

ACTU Secretary Jeff Lawrence said the panel shoulddisregard applications by employer groups that would cutthe real wages of the low-paid to maximise business profits.

The Panel must also “look through” the impact of theintroduction of the carbon price package when making itsdecision, and ignore calls by some employer groups to granta smaller increase because of the compensation associatedwith the package, the ACTU submission says.

The ACTU’s reply submission restates the case for a $26 aweek increase to lift the National Minimum Wage to$615.30 a week. This would mean a 68c an hour increasefrom $15.51 an hour to $16.19 an hour. For other award-reliant workers above the benchmark tradesperson’s rate,unions will seek a 3.8% increase.

Mr Lawrence said that since 2005, minimum wages havefallen further and further behind overall wages growth, andthe purchasing power of the low-paid was now less thanhalf-a-decade ago.

“It is grossly unfair that the low-paid in our economy arebeing left behind the rest of the workforce. The wageincreases awarded in 2010 and 2011 have stopped themfalling even further behind, but it’s now time to make upthe ground that was lost under WorkChoices.

“If the National Minimum Wage had kept pace with overallwages growth, then it would be $617.50 a week today,rather than $589.30.”

The ACTU submission says that the claim of $26 is modestand appropriate for the current state of the economy.

Mr Lawrence said the Fair Work Australia Panel should alsoignore calls by some employer groups to award a lowerincrease in minimum wages because of the householdcompensation tied to the carbon price package that willbegin in July.

“We believe the Panel should “look through” the carbonprice package,” Mr Lawrence said. “The package willeffectively have a neutral impact on the incomes of the low-paid with the compensation cancelling out any expectedincrease in the costs of living.

“To the extent that some low paid households have beenovercompensated for cost of living increases, this is adeliberate policy decision by the Government that shouldnot be undermined by the Panel awarding a lower minimumwage increase than it otherwise would have.”

More informationPDF of media releaseACTU reply submission to Annual Wage Review 2011-2012View the article here

Two rate cuts likely: economistsPublished 10:04 AM, 29 Apr 2012Business SpectatorAAPA May interest rate cut is a certainty and borrowers can lookforward at least another two cuts in coming monthsbecause of weak inflation, an AAP survey shows.The Reserve Bank of Australia (RBA) would cut the cashrate at its May 1 board meeting, said all 16 economists thatAAP surveyed.Ten said they expected a second consecutive cut in Juneand two said that the RBA would cut three times in 2012.

The RBA last cut the cash rate, by a quarter of a percentagepoint, in December 2011.RBC Capital Markets senior economist Su-Lin Ong said themuch lower than expected March quarter consumer priceindex (CPI) this week provided the central bank with scopefor two rounds of easing."We have always been of the view that the economy herehas been trading at a sub-trend pace for a while, that theRBA has scope to ease."And given that inflation report, it probably has greaterscope that previously thought," she said.Ms Ong said the global outlook and the possibility that themajor banks may not pass on all the rate cut would beweighed up by the RBA in its rates decision.The RBA kept the cash rate on hold at 4.25 per cent afterits April 3 board meeting but is expected to cut in May asthe CPI data showed inflation remained under control.

The Australian Bureau of Statistics data showed the CPIrose 0.1 per cent in the March quarter, which was far beloweconomists' predictions of a 0.7 per cent rise.Annual inflation was at 1.6 per cent compared to the 2.1per cent market forecast.CMC Markets chief market strategist Michael McCarthy saidthe federal government's aim of a budget surplus wouldalso be important for the RBA's decision-making process."There are two different scenarios: If it's a slashing(spending) budget, that will bring in a June cutimmediately," he said."If its a more moderate structural adjustment to the budgetdeficit being made over a number of years, it pushes thepotential (cut) back to November."HSBC chief economist Paul Bloxham said the RBA would bereluctant to cut more than once this year, given a steadyperformance in the domestic economy and the morecomplex inflation story.We remain of the view that the RBA would only cut by 25basis points (quarter of a percentage point) in May, he said."Any more would 'frighten the horses' suggesting thatconditions were far weaker than the RBA had beenexpecting."It would also be highly unusual for the RBA to cut by morethan 25 basis points unless there was an emergency, andwe are currently far from that.

"Indeed, the latest labour market data and business surveyssuggest conditions are improving."While overall inflation is low, the key drivers have beentemporary factors - food prices fell sharply in the first

(March) quarter as the boost from last year's naturaldisasters to food prices unwound."

THE DISTILLERY: RATES WAITPublished 6:42 AM, 2 May 2012 Business SpectatorAnyone still criticising the Reserve Bank for reducinginterest rates by 50 basis points need only wait until theend of next week. By then, the big four banks will haveshown how many of those 50 points they plan on holdingfor themselves and Treasurer Wayne Swan will haveslashed billions from the nation’s economy. That’s the broadconsensus of the nation’s business commentators thismorning, with additional thoughts on how the cuts mightaffect the fortunes of our property firms and buildinggroups.

Firstly, Business Spectator’s Stephen Bartholomeuszstresses that the Reserve Bank has ongoing dialogues withthe major banks and would have been well aware that a 25basis point reduction yesterday would have resulted inmaybe 10 to 15 points being passed on the mortgageholders.

“By opting for a 50 basis point cut the RBA has effectivelyensured that it will probably get 35 basis points to flowthrough to borrowers, which would have a much moresignificant impact on the psychology of borrowers and theirreal interest costs. In the process it has practically invitedthe banks to hang onto some of the reduction. One way tointerpret the move would be to say that it indicates someconcern by the RBA about the state of the economy but notthe kind of fear that drove those percentage pointreductions during the worst of the financial crisis. Thatmight change if Wayne Swan actually delivers the $40billion-plus contraction in the economy implied in hispromise to bring the budget back into surplus.”

This is a point picked up on by The Sydney MorningHerald’s Michael Pascoe, who noticed a lack of commentaryin the RBA’s statement about the coming fiscal tightening.

“There's a hint there between the lines and there should bemore in the quarterly statement on monetary policy onFriday. The immediate key is that the governor specifies theRBA is cutting ‘to support demand’ – not because outputgrowth ‘was somewhat below trend’. And the need to‘support demand’ is ‘notwithstanding that growth indomestic demand ran at its fastest pace in four years’. It'sthe RBA's job to look forward in setting monetary policy, notto be a captive of the last quarter's performance in thosesectors of the economy that are flat. Thus the unspokenimportance of next week's budget and its promise to be adrag on domestic demand.”

As we’re all well aware by now, interest rate politics isabout the mortgage belts. So what should we expect forreal estate prices? The Sydney Morning Herald’s ElizabethKnight noticed that just as the RBA was cutting rates, two

of Australia’s largest property players were dropping hints.

“Two of the biggest residential housing builders, Stocklandand Mirvac, gave a market update yesterday adding detailfrom their own experience. While neither predicted a boomin the sector, there was some small degree of optimism.Stockland chief executive Matthew Quinn sees the propertymarket as a tale of two demographics. The middle and topend of the market is falling, but at the lower end wherethese companies operate there is plenty of latent demand.Quinn said that a couple of years ago, based on the trafficthrough Stockland's display homes, 24 per cent ofinterested buyers were then renting. Today almost half thepotential buyers are renters. Stockland hopes a rate cut willburst this dam… Mirvac sees some good fundamentals inNew South Wales because of dwelling shortfalls and strongrental growth. It said Victoria remained soft with volumesand prices easing through 2012. The experience of thesedevelopers does not mirror Bureau of Statistics numbers,but reflects the fact that they are operating in a market thatsupplies residences worth less than $500,000.”

And The Australian Financial Review’s Chanticleer columnistTony Boyd noticed that Dulux Group chief executive PatrickHoulihan was a quick mover in response to the ReserveBank’s rate cut.

“Houlihan, like everybody else, would have been planningon a rate cut but not the aggressive 50 basis points cut thattook the RBA official cash rate to 3.75 per cent. He quicklygrabbed a 19 per cent stake in Alesco and is well placed towin control of a business that should benefit from lowerrates. Lower official cash rates mean lower home loan rates,which should mean a kick-along for a housing market thathas been characterised by falling prices at the top end,weak demand from new home buyers and softness in keymarkets in Victoria, Western Australia and Queensland.”

As you’d expect, we’ve got quite a bit more interest ratecommentary in this edition of The Distillery. The AustralianFinancial Review’s economics editor Alan Mitchell makes thebrilliant point that cutting interest rates next month, after afiscal tightening from Canberra, could encourage adangerous impression that governments can effectivelybully the RBA into cutting rates. Hence, the RBA shouldn’tmove next month. With eyes still on the horizon, TheAustralian’s John Durie says ANZ Bank boss Mike Smith cansit out the shenanigans of the other bank rate decisionsuntil Friday week when his bank will make their call. TheAustralian Financial Review’s Matthew Stevens says similarlythat we should be in for an interesting few days.

The Age’s Malcolm Maiden argues yesterday’s budget from

the Victorian government is a useful example of why theReserve Bank had a compelling domestic case to cut by 50points. However, The Australian’s economics correspondentAdam Creighton reminds readers that the two main dragson the Australian economy – debt-laden consumers and ahigh Australian dollar – won’t be significantly helped by therate cut.

Meanwhile, The Australian’s economics editor David Urenasks how Treasury’s forecasts for the Australian economythree years ago could have been so very, very wrong. TheSydney Morning Herald’s Ross Gittins finds a study from thePew Research Centre reveals him to be more of a European

thinker than an American thinker. The research shows amajority of Americans believe individualism is moreimportant than the state making sure no one is left in need,whereas in Europe the reverse is true.

In company news, The Australian’s Bryan Frith says Duluxhas been bold in its bid for Alesco, while Fairfax’s Insidercolumnist Ian McIlwraith takes a look at the accounts ofUBS’s Australian arm. And finally, The Australian’s BarryFitzgerald digs into the shallow history of Kula Gold and themuch deeper history of the goldfields it taps in Papua NewGuinea. Let’s hope the interest rate commentaries die downfor just a day or two.

ECONOMIST SAYS NO NEED FOR BUDGET SURPLUSPublished 11:53 PM, 1 May 2012 Business Spectator

One of the country's leading economists says there is noeconomic imperative for the government to return thebudget to surplus so quickly.Labor has constantly pledged it will have a surplus,projected to be about $1.5 billion, in the budget it handsdown on May 8.Bank of America Merrill Lynch Australia chief economist SaulEslake says the "accounting chicanery" that will be done toproduce a surplus in 2012/13 is a "bit silly".

That includes moving spending measures forward orbackward, and pushing revenue that might have beencollected at a different time into that financial year.But this kind of moving things around wouldn't have anyadverse impact on the economy, Mr Eslake said."To me what it underscores is that the objective of having abudget surplus by 2012/13 is more of a political objective ...

than it is an absolute dictate of economic management," hetold ABC Television on Tuesday.He said that in fact, the headline budget balance would stayin deficit at least until 2014/15 and probably beyond thenbecause of the way the government was treating thenational broadband network rollout.It would be only the underlying budget balance - describedby Mr Eslake as an "artificial construct that was invented byPeter Costello" - that would be in surplus."But we've all been trained over the last 12 years or so tofocus on the so-called underlying balance rather than theheadline balance, which is what in every other countrywould be the focus of public attention," he said."If the government was paying for the NBN throughStephen Conroy's department rather than by subscribing toshares ... then it would be an even bigger task again tohave the budget in surplus."

GLOBAL TREMORS FROM A US GAS EXPLOSION Robert Gottliebsen & Alexander Liddington-coxPublished 8:09 AM, 4 May 2012 The Business Spectator

The plunge in US gas prices has caught out miningcompanies that jumped on the shale gas train. But it hasgifted America with a much needed chance to reduce itsenergy costs, while cutting emissions and formidablyincrease its competitiveness.Every US president since Richard Nixon has promised toreduce America’s reliance on foreign oil. The difference nowis that the winner of the next presidential election actuallyhas a compelling path to achieving this.

The plunge in US gas prices – not to be confused withpetrol, which they call ‘gas’ – has come about by a flood ofresource majors jumping on new shale gas technology,driving the supply through the roof and the supply throughthe floor.The likely emergence of the US as a lower energy, lowercarbon fuelled, higher technology nation is a global event ofconsiderable significance. The long-term impact on Australiawill be dramatic.Among the likely repercussions are:– The US will not export its gas like Australia. As pointedout the The Economist in recent weeks, the Third Industrial

Revolution – where manufacturing becomes a high-tech,automated process – will require greater access to cheaper,cleaner energy. Low cost gas will speed up this revolution.Combined with the European downturn, the UStransformation will slow the export growth rate of China.The Chinese will have to develop less mineral intensiveactivities, like consumer demand, to maintain growth levels.– Low priced US gas will make Australian LNG exports toChina and Japan very expensive compared to US energy.Prices may be much lower than currently anticipated.– The US gas boom will create a surplus of coal capacity,which will put a ceiling on world coal prices. Given therapidly escalating mining and mine development costs inQueensland and New South Wales it also puts a ceiling onthe coal boom in both states. The mining resource tax oncoal and iron ore will become an iron ore tax.– Longer term, this means the Australian dollar is extremelyvulnerable at current levels.Below is a pair of graphs from the US Energy InformationAgency. On the left is America’s current electricity portfolio.On the right are future capacity investments. As you cansee, gas is proving its viability while coal is nowhere.

click the image to enlarge

Dr Bruce Piasecki, founder of energy, materials andenvironment consultant firm AHC Group, says it used to bethat energy sources were determined by price alone.“So in the grand scale of things, oil would be favoured overnatural gas because you could make a better margin on oilglobally,” Dr Piasecki tells Business Spectator. “That haschanged in the 21st century.” Now, convenience andcleanliness are being seriously factored in.The EIA estimates that shale gas will make up almost halfthe country’s gas consumption by the year 2035. In theprocess, it will more than compensate for the decline inother gas production methods and effectively eradicate theneed for imports of LNG.This picture from the EIA shows the 48 major shale basinsaround the world – thankfully, Australia has been blessedwith a handful of them.

click the image to enlarge

While LNG for electricity generation threatens theeconomics of coal – indeed, the coal industry has beengetting skittish about price outlooks recently – the mostenticing opportunity for the US is in transportation. Could

the US convert enough cars and trucks to run on LNG fromNorth America rather than oil from the Middle East?

Texan investor T Boone Pickens has been pointing out,most recently in his TED talk, that the US could reduce itsOPEC oil imports by 60 per cent simply by converting itsfleet of heavy-duty trucks to gas – it’d also be cheaper,cleaner and safer (LNG evaporates when spilled). Granted,the US imports oil from more places than the Middle East,but his point still stands. There’s plenty of room for gas inUS transportation.

At the moment, LNG trucks cost a premium and theinfrastructure for refuelling is limited. However, more gasengines are being manufactured at a cheaper cost and theUS gas industry is unsurprisingly very committed to rollingout refuelling points along key freight corridors – truckiesdon’t need a gas pump on every corner.

Running cars on LNG would be trickier, given that it wouldrequire a far more expansive infrastructure. Dr Michael DNoel from Edgeworth Economics also adds that trucks havethe greatest incentive to switch when a vehicle breaksdown, which means Middle East oil will not be hit hard forquite some time. However, the greater the price gapbetween gas and oil, the higher the incentive to make theswitch.

And Money Crashers Personal Finance co-founder AndrewSchrage tells Business Spectator it’s not just the truckies.“The ground transportation industry at airports could alsobenefit by switching fleets to compressed natural gasvehicles,” Schrage says, adding that the airports in Atlantaand Tampa in the state of Georgia have already done this.“The construction industry could also save money byconverting to natural gas forklifts and other heavymachinery.”

The other industries that look set to benefit are, of course,manufacturing and industrials. Manufacturing is probablyset for the most dramatic shift. Not only will America’sfactories of the future be able to rely more on gas as a formof energy, they’ll also be much more automated and requireless energy to begin with – lowering costs further.

Indeed, it’s just as important for the US to reduce itsconsumption of energy as it is the price of that energy. DrPiasecki, author of Doing More With Less, argues threestructural issues drive this global shift towards gas – energytechnology has advanced, oil is more difficult to find andextract, and sustainability is rapidly becoming a necessity.

You can already see the major energy companiesdiversifying their portfolios away from a reliance on oil.They’re waiting for policy instruments from government tospeed up the transition.

To fully take advantage of this development America needsan energy plan from Washington. So far, President BarackObama has favoured alternative forms of energy.Presumptive Republican Nominee Mitt Romney has stated a

much greater enthusiasm for more drilling, whether it’s foroil or gas. What the country needs is a combination of thetwo.

This article is part of a continuing series on the changes inthe US and their affects on Australia and the world. Seealso: Skilling up for a US revival (April 27) and Obama andRomney's Australian reach (April 20).

TEARING UP THE BUDGET TEXTBOOKGraham WhitePublished 8:22 AM, 4 May 2012 The Business Spectator

The former governor of the Reserve Bank, Bernie Fraser, hitthe nail on the head the other night when he found itabsurd that the Reserve Bank could be reducing interestrates one day, while a week later, fiscal policy is set to betightened in an attempt to bring in a budget surplus.

And it is absurd! Part of the RBA’s justification for its ratecut on Tuesday was that since inflation showed no signs ofgetting out of the RBA target range, if there was a need toadjust interest rates in the interests of preventing a furthersoftening of the Australian economy, they had the room todo it.

The RBA’s action therefore could unambiguously be read asa view by the RBA that there was a danger of furthersoftening in the Australian economy.

One would have thought on this reasoning that theappropriate setting for fiscal policy was either mildlystimulatory or else standing still: namely, if the economy issluggish, and the RBA has cut rates, you want a fiscal policysupportive of any stimulus that the rate cut might give toactivity.

It is difficult then to see the justification for a budgetstrategy which, if it has any effect at all, is likely to softenactivity (unless one subscribes to the bizarre view that hassometimes does the rounds in economic discussion, thatfiscal expansion is contractionary). This is precisely theincoherent economic thinking Bernie Fraser was referring toin his comments about bringing the budget back to surplus.

If the attempt to bring in a surplus is accompanied downthe track by further interest rate cuts, then it won’t be forthe reasons the supporters of this strategy think.

Rather the tightening of fiscal policy may do this byweakening the economy and putting further pressure on theRBA to cut rates. But this would be a rate cut coming at thecost of a slowing economy and potential risingunemployment: somewhat of a hollow victory.

The Treasurer, in his various justifications for moving thebudget back to surplus, has argued that a surplus wouldprovide an economic safeguard in a fragile world economy.He has also argued that in an economy returning to its

trend rate of growth, bringing in a surplus is appropriate.

Neither of these arguments are particularly convincing andare barely more than spin.

Regarding the surplus as a safeguard, the argument ispresumably that if in the near term fiscal stimulus is againrequired, the bigger the surplus now, the less of a deficitwhich would be created by any required stimulus. That logicis correct so far as it goes. But even the fiscal stimulus usedin 2008-09 did not put Australia anywhere near the dangerzone of a runaway deficit or public debt.

It is clear that the deficits and debt generated in the GFCyears were clearly within bounds that allowed them overtime to be reduced as proportions of GDP without therequirement of fiscal contraction sufficient to slow theeconomy.

Even that bastion of conventional economic thinking, theIMF, is apparently unconvinced by such an argument,having been reported (ABC News, October 2011) as arguinglate last year that the Australian government had the “fiscalspace” to delay bringing the budget back to surplus.

As for the need to bring the budget back to surplus becausethe economic activity is returning to trend, economicsprovides no hard and fast rule here, unless one thinks thateconomics provides some justification for balancing thebudget on average over the cycle.

But the latter is not much more than an article of faith forthis writer, and one still looking for a coherent economicargument to justify it.

More importantly, the economic and particularly the socialimplications of a significant fiscal withdrawal from theeconomy, cannot and should not be made to serve thequest for a particular budget balance in circumstanceswhere there is no foreseeable danger of unsustainable andburgeoning deficits or public debt.

Graham White is a senior lecturer at the University ofSydney's school of economics.

WEEKEND ECONOMIST: RATES PRECIPICEBill EvansPublished 8:02 PM, 4 May 2012 The Business Spectator

In its May statement on monetary policy the Reserve Bankhas substantially reduced its inflation and growth forecasts.The overall tone of the statement has changed significantlywith deflation and growth risks being emphasised. Theimplied case for further rate cuts is strong and it nowappears likely that the board will be seriously consideringfurther rate cuts at every board meeting for at least most ofthe course of 2012.In the February SoMP, the bank forecast underlying inflationin the year to December 2012 at 2.5 per cent. That has nowbeen reduced to two per cent. Forecasts to December 2013appear to be broadly unchanged with 2.5 per cent beingreplaced by two to three per cent. The forecast for June2014 has been reduced from 2.5–3.0 per cent to two tothree per cent.

We find these forecast revisions significant since it is veryrare that a central bank would forecast inflation at thebottom of the band over the course of the current year. Onour figuring the bank is assuming a print for underlyinginflation in the second quarter of 0.7 per cent falling to anaverage of 0.5 per cent in the third and fourth quarters.The other significant development is that there is no longerconcern that inflation will necessarily reach the top half ofthe two to three per cent band in the year to June 2014.In February the bank predicted that GDP growth in the yearto December 2011 would be 2.75 per cent. The numbersubsequently printed at 2.3 per cent. That implies that the0.4 per cent print for Q4 was being anticipated by the bankto be around one per cent, a large miss and the realcatalyst for the bank's more dovish rhetoric over the lastfew months. Growth in 2012 is now forecast to be three percent, down from the 3.0–3.5 per cent we saw in February.Growth in 2013 is now forecast at 2.5–3.5 per cent, downfrom the upbeat three to four per cent in February.These substantial revisions to inflation and growth aredespite the bank having cut the cash rate by 50 basis pointssince February. In the February SoMP the assumptionaround interest rates was "no change", and despite marketscurrently expecting a further series of rate cuts totalling75bps, the bank's forecasts assume no change in the cashrate.It is Westpac's view that growth through 2012 will be threeper cent, consistent with the RBA's forecast, but ourforecast relies upon a further series of rate cuts totalling atleast 50bps.The bank's decision to forecast underlying inflation(excluding the carbon price) to remain at the bottom of thetwo to three per cent band over the course of 2012 is avery strong signal that it retains an easing bias.Since 2005, when the bank began publishing inflation andgrowth forecasts, there have only been two SoMP's when ithas forecast inflation to be at the bottom or below the bandover the next year or so. That was in May and August 2009in the aftermath of the global financial crisis. Admittedly,the cash rate had bottomed out by then, but cuts totalling425bps had been rapidly delivered as the economy lostmomentum. In this current episode the bank's growthforecasts are more upbeat, but in recognising that inflationwill remain at the bottom of the band (despite trend

growth) the signal is clear that there is ample scope forfurther monetary easing.The tone of the discussion around the economy is nowconsistent with the key themes that Westpac has beensignalling over the last year.Our themes have been around the impact of the highexchange rate on job prospects in industries such asmanufacturing, retail and tourism, compounded by thedeleveraging by the household sector with falling houseprices and resulting concerns for job prospects and financialsecurity for households. These forces have conspired togenerate weak confidence, soft spending and fallingconstruction activity. This in turn has pressured jobs andgenerated deflationary pressures. Furthermore, we haveconsistently questioned the strength of the so-called 'miningmultiplier' and this SoMP seems to be consistent withreduced enthusiasm for the short- term stimulatory effectsof the mining boom.There is specific recognition of subdued housing activity,which partly stems from poor sentiment regarding jobsecurity, softness in existing housing markets and relativelytight credit conditions for developers. While it is recognisedthat the mining sector has been responsible for adding asubstantial number of jobs, weakness in other sectors isnow being recognised. The bank notes caution about hiringand that many firms are indicating they will need to reducestaffing levels to improve productivity and competitiveness.It is recognised that outside of the mining industry, growthin labour demand remains subdued. Indeed employmentgrowth is now expected to remain subdued in the nearterm.Furthermore, the assumed high level of the exchange rateand a weak short-term outlook for building construction areexpected to result in subdued growth outside of the miningsector in the near-term. There is some attention given topublic demand, which is now expected to decline over theyear ahead consistent with the fiscal consolidation plansbeing signalled by both federal and state authorities.The bank continues to expect a strong boost to labourdemand from the mining sector although this is nowdescribed as "over the medium-term" as mining projectsprogress towards the labour intensive phase ofconstruction.Concerns around the European impact on the internationaleconomy are further emphasised and the global economy isstill expected to grow at a below trend pace in 2012.The governor's explanation of the decision to cut rates by50bps on May 1 is repeated in this statement. The need forfinancial conditions to be easier than those which prevailedin December is emphasised. Recall that in February–Marchbanks raised their variable mortgage rates by nine to 12bps.The implication is that the Reserve Bank would not beconfident that a 25bp rate cut would lead to a reduction inprivate borrowing rates of more than nine to 12bps. Wehave now seen three major banks reduce their mortgagerates by an average of 36bps, suggesting that this responsewas greater than the bank may have expected from twoconsecutive 25bp movements.This development may be a factor when the board meetson June 6. With a larger impact on loan rates than mayhave been expected, the decision may be to await the

impact of the May move before moving again. As usual,predicting month to month moves by the bank is fraughtwith danger. It is better to assess the general sentiment ofthe bank and set a three to six month target. In that regardwe confirm our call that there will be two more 25 bpmoves, but recognise that the statement implies the risksare such that moves will be sooner than earlier expected.The bank's inflation forecast and the general rhetoric in thisSoMP leave the door open for rate cuts at any time. We hadexpected that the 50 bp cut would be in two tranches in

August and November. This statement now indicates to usthat these cuts can be expected earlier, by the end of theSeptember quarter being concentrated in that July–September "window".However, the evidence from this SoMP makes it quite clearthat the case for another rate cut has already been madeand every board meeting through the course of this yearmust be seen to be very much alive.Bill Evans is Westpac’s chief economist

WEBSITEWWW.GAPMINDER.ORG This is a great site for up-to-date world statistics. The For Teachers section is very relevant toEconomics teachers.

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