Working Papers

The AEI Disgraces Itself Yet Again

Why is it that the right-wing American Enterprise Institute is channelling John Quiggin and Ross Gittins?

The Economist  
Publication Date: June 2, 2005

Sir—You waxed lyrical about Australia’s 15 years of continuous economic growth. However, you gloss over the fact that Australia’s external imbalances have never been larger, even at a time when international commodity prices are booming and China is expanding rapidly. You also failed to note that Australia’s housing bubble and consumer over-indebtedness make the United States look like a paragon of frugality. A more balanced view might have asked what happens to Australia when commodity prices ebb and when China’s investment bubble bursts?

Desmond Lachman is a resident fellow at AEI.

Since the Australian economy powered through the global collapse in commodity prices in 1998 after the Asian crisis with a real annual growth rate of 6%, I think we already know the answer to that question Des!

Maybe Quiggin and Brad DeLong were right after all:

“Back in the late 1970s, the American Enterprise Institute ranked close to the Brookings Institution as a think tank you could trust not to deliberately lie to you. Now it has fallen very deeply into the pit indeed”.

posted on 07 June 2005 by skirchner in Economics

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No one can be wrong all the time, not even AEI, it seems!

I must admit, though, that I’m puzzled as to why the AEI should take this line, which seems to deviate from Republican orthodoxy. There’s even an implied criticism of the US in there.

Posted by quiggin  on  06/07  at  12:03 PM

Lachman has in fact been very critical of the US current account deficit and fiscal policy.  Fair enough on the latter, although I think they are distinct issues.

Posted by skirchner  on  06/07  at  12:19 PM

I thought the twin deficits nonsense had disappeared into the trash can since the US ran surpluses in the 90’s but the US C/a stayed in deficit. It seems to have made a come back.

We were once told if the US got rid of the budget deficit the trade account would also move into balance.

Posted by .(JavaScript must be enabled to view this email address)  on  06/07  at  12:40 PM

Part of the problem is that a lot of US conservatives still have a basically Victorian mindset on these issues, so they have no sympathy for the consenting adults view of current account deficits.

Posted by skirchner  on  06/07  at  12:47 PM

Reading your pieces I get the sense that you don’t feel the C/A deficit really matters.
Apart from having John Quiggin on my side (which would worry the hell out of me as Quiggin doesn’t waste an opportunity to conflate economics with ideology when supporting his biased hard left ideology) there are many of us around who are concerned with the external side of the Australian economy.

A current account deficit running at 7.2% of GDP doesn’t ordinarily mean bad tidings if the capital surplus (the other side of the C/A) is being used to fund the nations capital structure. But it isn’t. I don’t know if the capital inflow is directly financing the housing market, but you can tell from the composition of imports that the trade deficit is arising from consumption goods. This again is not necessarily a bad thing of itself, however the real malaise could be the result of the RBA’s inflationary monetary policies.

No one seems bothered by the fact that M3 or better still bank deposits have gone parabolic over the last 10 years. Most of the lending during this period can be traced directly back to the housing market. Now Quiggin and his buddies don’t have a good explanation for this other than to absurdly suggest that financial deregulation in the 80’s causes people to borrow more (like I am going to buy more bread if it is easily available).

The real issue is that the RBA allowed money growth to expand through loose monetary policy. What happens when the price of something is cheap? Of course people buy more. This is what happens with cheap money. People went out and borrowed to buy real estate. The problem with this is that real estate prices have been bid up very high (Sydney being a great example) with the backing of debt. But debt has a nasty element attached. It has to be paid back and there is a monthly coupon to repay. So no matter whether you or I have a job, the banker is going to foreclose on us if we can’t pay this money back. All is well and good while we have jobs to go to. But what happens in a recession?  In a recession caused by the RBA”S reckless policies we will have Quiggin and the rest of the hard left, anti-market brigade offering “mild mannered” I told you so: that the market process was/is to blame, when if fact the fault lies entirely with the central bank. The joke is that even Quiggin has written how he thinks the RBA has been too loose.

Money is not neutral. The behavior of money cannot really be manipulated without consequences.

My forecast is this. The RBA and it’s minions are momentarily frightened stiff with the direction of the C/A. My guess is that the inversion of the yield curve is telling us a slowdown is coming: probably of some magnitude. The RBA, like a deer caught in headlights takes its time in easing down on rates with the final result that we move in a recession. I wish I could time this.

Posted by .(JavaScript must be enabled to view this email address)  on  06/07  at  06:41 PM

jc, Stephen is of the opinion that “The current account deficit is attributable to an investment boom in which housing has played a relatively small part”.  I don’t know of anyone who agrees with this on the left or right.

Posted by .(JavaScript must be enabled to view this email address)  on  06/08  at  11:00 AM

The difficulty of attributing the trade deficit to the housing boom is that it’s not necessarily lateral. In other words we don’t import houses. But we see evidence of the boom in the component mix of our imports. And this does seem to show up.

A boom in capital goods can also lend support to the idea that the RBA has run loose monetary policy. If one believes boom and busts are caused by inappropriate monetary policy then even a surge in capital goods imports is not contradictory.

Another reason we could have a rise in capital good imports is because of the mineral boom of the last few years, which in itself seems to have been caused by inappropriate monetary polices in the rest of the world. For example China opens up the monetary spigot as it seems to have done and lets the economy rip with the resulting affect that Australia experiences a commodity price boom. Miners interpret the price rises as (sustainable) increased demand for their stuff who then go off and buy equipment to dig more.

Posted by .(JavaScript must be enabled to view this email address)  on  06/08  at  11:33 AM

David, have posted a new chart that will hopefully satisfy you.

Posted by skirchner  on  06/08  at  11:53 AM

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