The economy bubbling along?

Issue 
Joe Hockey sweats on the economy.

When neoliberal economics was being established as a hegemonic position in Australia in the late 1980s, 1.2 million workers were employed in the manufacturing industry — 15% of the workforce.

The Australian Bureau of Statistics’ (ABS) latest employment analysis shows that 25,000 jobs were lost in manufacturing last year, bringing the total employed down to 920,000 — 7.8% of the workforce.

It is a trend that will only continue with the winding-down of the vehicle production industry and its related vehicle components sector.

In the mining industry, which more than doubled its workforce between 2004 and 2012, close to 50,000 jobs were lost last year — 18% of the industry workforce.

The only industries which showed significant employment growth in 2014 were professional services, construction and the low-paying hospitality and recreational industries.

The building industry added 46,000 jobs in 2014, fuelled largely by investment in the Sydney and Melbourne property markets.

With the overall economy sluggish at best, the Reserve Bank is considering a further cut to record-low interest rates of 2.25% to stimulate the economy by encouraging more debt. Household debt in Australia is at 130% of GDP, the highest level of any country in the world.

This is another “victory” for the neoliberal project. In 1988, household debt averaged 32% of income. By 2008, before the onset of the global financial crisis, it had climbed to 160% and has remained around this level since.
In the financial year 2012-13, total federal and state government debt combined was 34% of GDP; household debt was 114% of GDP.

In the rich economies, consumption typically accounts for two-thirds of GDP. Unemployment, underemployment and falling living standards leads to a crisis of consumption that feeds back into unemployment.

The obvious solution is increased wages, but the received wisdom of neoliberalism is to emasculate unions who are capable of achieving these for their members. Where this hasn’t occurred due to avoidable structural changes in the economy, such as the decline in well-paid manufacturing jobs, legislative coercion of the type embraced by the attack on construction unions is the preferred solution of the state.

So the only remedy left in neoliberal economics is the expansion of credit. But this brings with it the creation of debt-fuelled bubbles that must eventually burst leaving increased unemployment and flattened economies in their wake.

The economies of Spain, Ireland and the United States are the most recent examples of the damage that housing bubbles can cause when they go pear shaped. And this is what is shaping up in Australia.

The regulatory authority charged with overseeing the Australian finance sector is the Australian Prudential Regulation Authority (APRA). Last year it put a limit of 10% per year on the credit growth it deemed to be acceptable in the current economic climate.

The chairperson of APRA, Wayne Byres, recently appeared before an Economics Committee of the House of Representatives where he said that it was difficult to determine whether a bubble was occurring in a market before it was too late. He is reported as saying: “Bubbles are actually very hard to define. It’s always hard to spot.”

But he did offer some advice: “If you look at the conditions we are in at present, where we have very low interest rates, very high household debt, subdued income growth, rising unemployment, very high house prices and a very competitive financial market in terms of housing lending, there is a lot of potential risk, and risk is higher than it might otherwise be.”

With banks selling a high level of loans on interest-only terms, almost half of all new loans issued by banks are to property investors who can take advantage of negative gearing.
This is why APRA issued guidelines in December last year warning banks that they could be hit with higher capital requirements if they continued with risky lending. To date, the banks have been prepared to call APRA’s bluff.
Another emerging bubble that is not too hard to spot is occurring in the sharemarket. Despite a 4.4% decrease in overall company profits in 2014, the S&P/ASX 200 index is at a seven year high.
In neoliberal theory, markets are never wrong. While they can make mistakes, they apparently have this inherent capacity to self-correct. Minor corrections take place every day.

Large corrections also happen, but most people know the results of these major corrections by another name. It’s called recession.

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