Supply is important for the long term

Whilst supply side economics has taken a temporary back seat at present it will need to return in importance for Australia to shake off the underlying issues that existed prior to the recession. That is the recession we didn't have, although we are still in it. The issues of competition, low savings, underlying inflation due to skills shortage, infrastructure and a appreciation in the $A all will serve to lower our international competitiveness.
Sidenote why is the $A about to appreciate? Well the financial markets are already predicting that by the end of the year our interest rates will have risen by 0.5 and a further 1.0 next year to slow inflation. If you compare our interest rates to the rest of the world there is already a major differential. This means that if our cash rate moves first it will attract investors and speculators, leading to lower returns for our exporters.

So as Gittins has pointed out recently in PM won't be a great leader the Rudd government needs to make some hard decisions and why not now? Politically there is no serious competition and secondly the time is ripe when the economy is in the need of injections. The article points out 5 areas that Rudd has already considered; competition, innovation, skills, infrastructure and tax reform. There is debate whether all of these involve micro reform however there is a need for change.
In light of this as Henderson (Rudd will need reform for recovery) points out that flexibility is key to future growth. It is of particular interest to compare this article to Gittins' No such thing as a free market. to see a contrasting view regarding the direction of labour and financial regulation.
Which one do you believe is the direction Australia should take? It would be great to see some responses to hear your thoughts???

p.s if you are after some more reading on micro policy and another viewpoint check out Mr. Woods (VCE link to your right) in Topic 4- micro and Topic 3- Allocation of resources.

Are we out of the recession?

Well for a political junkie like myself a week when the great smirker Peter Costello retires after all the time he has spent coveting the leadership of the Australian Liberal Party, is a week to comment upon.
Costello despite the efforts by Howard to downplay his efforts deserves credit for the position that the Australian economy now finds itself. As Peter Hartcher stated in his article this week,

"Keating imposed the structural reforms that woke Australia from its economic coma and created the beginnings of a modern, competitive economy. And Costello imposed the discipline to prevent the political system from bogging the country down in a mire of government debt"

There is no doubt that without Costello the Howard government would have blown a considerably higher proportion of the commodities boom. The result is that Australia has been able to cope with the recession better than any other developed country due to the subsequent budget surpluses and negative public debt. The following graphs from the Federal Treasury show Australia's Economic growth to be higher than all of the top 20 economies and to have lower net public debt than all of the top 5 economies.








However the question that needs to be answered is - Is Australia out of the recession?? (give the poll a go). After reading Gittins from the 13/06/09 a number of points are raised. Our recent trade performance has been exceptional- why? Well the Australian dollar feel sharply which meant that exports received an advantage and imports were higher. Combined with lower demand for imports by Australians in a downturn has meant that our trade performance has been very good. In addition during a recession manufactured good demand falls- now we our economies structure is weighted towards services and commodities. The demand for these has been steady.

However with the dollar heading back to 80c/US, business confidence picking up and thus higher imports combined with the prices gained for our exports sliding the future for Australia is not rosy yet.