Government refuses a subsidy to Coca-Cola

Yesterday the government decided not to give $25 million to a Coca-Cola subsidiary to help fund restructuring of a factory.

The factory in question is SPC Ardmona, which is Australia's only fruit processing factory (they basically can or package the fruit). The firm claim that they need the money to be able to reorganise and retool their factory so they can compete.

The decision of the government not to support the restructuring with public money has made a lot of people unhappy. This is an important issue and there are arguments on both sides. Amazingly the idiot Abbot has some good points on his side.

Those who want the government to subsidise SPC argue that without it jobs will be lost in the Shepparton area. Not just those who work for SPC, but also farmers who grow fruit locally.

In support of this argument there is the point that those unemployed will claim benefits paid by the very same taxpayers who would have to provide the $25 million investment. In the long-run this could prove to be a higher cost to the taxpayer. Also Shepparton may well decline as a regional centre and the farm land around it fall into disuse.

Another argument, that is sadly used all the time in Australia, is that it is all the fault of cheap imports. The implication being that their cheapness is somehow ‘unfair’.

The government argues that it is not their job to fund private firms, but to create the conditions where firms can operate profitably. (This is a supply-side argument.) They say that if firms can’t operate profitably it is better for them to shut down and the resources will be employed elsewhere where they can.

The argument about cheap imports is spurious. Cheap imports benefit the majority of the population; those who buy the fruit. The only losers are inefficient producers and their employees; a much smaller group.

Overall there is a short-run versus long-run argument here. In the short-run protecting (by subsidy) Australian firms can prevent immediate unemployment. By not protecting Australian firms mean in the long-run the economy will become more efficient as resources are released to new and profitable endeavours.

The Australian reports the story below. Notice how Tony Abbot implies that the working conditions of the workers are contributing to the high operating costs of SPC.

This is a matter we need to debate.

The Australian article is here

Getting the balance right

Governments have a number of macroeconomic policy objectives, they include:

*  Full employment
*  Low and stable inflation
*  Strong and sustainable Economic growth
*  A stable 'balance of payments' (external stability)
*  Equity in the distribution of income

These are all worthwhile and important goals. However it is quite impossible to achieve them all at once. Because often improving one makes another worse!

A classic conflict is between inflation and unemployment. If governments push unemployment down they raise the demand for goods and services through higher Aggregate Demand (AD) and this pushes inflation up. Reducing AD to lower inflation means firms need fewer workers. It's a tough choice.

Typically governments adopt targets for each variable which they hope will mean they achieve a compromise.

In unemployment the ideal situation is seen as achieving the NAIRU. That is the Non-Accelerating Inflation Rate of Unemployment. At this rate the level of AD is consistent with stable (not necessarily zero) inflation.

This is a complex issue and I won't try to explain how the NAIRU is determined. However to use the NAIRU for policy the government must know the level of unemployment it represents.

In the BBC article below the Governor of the Bank of England (a former Canadian Central Bank Governor) makes it clear that the Bank of England has changed its mind about what level the UK NAIRU is, and suggests they don't quite know the correct level.

This illustrates the problem of policy making and also highlights how policy makers look to balance their aims with the correct policy mix rather than rushing headlong to achieve a single goal.

The BBC article is here

Inflation higher

The latest inflation figure was released yesterday. This is another key variable you must follow for VCE.

For those who are new to Economics a few points of clarification.

Inflation is defined as 'a continuous rise in the general price level leading to a decline in the purchasing power of money'.

Australia only reports inflation once every three months (very unusual in world terms where usually monthly figures are reported). When reported the emphasis tends to be on how much prices rose in the three month period, for example in the latest quarter prices rose by 0.8%. But we need to focus on the annual rate - how much prices rose in the last twelve months. In this case it is 2.7%.

The figures show that annual inflation rose from 2.2% to 2.7%. This is a substantial jump, but within the target range for inflation of the Reserve Bank of Australia. However, if this jump in inflation is part of a new trend, such a move would be worrying. The chart below shows Australian headline inflation since 2008.

Looking at the figures it would appear that recently inflation over the period has settled into a stable level of 2 to 3%. We cannot tell yet if this isa new trend to higher inflation (as can be seen in earlier years), the next set of figures in April will help us to decide.

There are, however, good reasons to say we are simply observing a 'one-off' change in prices due to the weakening of the Australian dollar. The Age article below provides excellent information on this and the different measures of inflation (which we will deal with later in the course). 

The falling dollar makes imported goods more expensive and this feeds into inflation really quite quickly. However once the dollar has fallen the price of imports do not rise again, there is no 'continuous rise in the price level' which is what concerns us with inflation.

The Age article is excellent and really needs to be read. The link is here.

The market for foreign students

Australia likes to sell its education services to other countries. The fees they pay help to cover the costs of staff salaries, fund new facilities and research. For Australia the fees represent exports and so help maintain the external balance.

In recent years there has been a sharp drop in the number of foreign students attending Australian Universities and in 2011 this caused Monash to reduce staffing by 400 posts.

Now things are improving with a rise in applications for student visa's. There are a number of factors that have caused this, and The Guardian article gives most of them and backs them up with some useful data.

For Year 12 students this would be a good exercise in applying supply and demand analysis, Year 11 students will need to wait a little but can come back to it in around week 6. Year 12 students can also ponder if there is sufficient information in the article to apply any concepts of elasticity of demand to the situation.

I will say no more for now, but will return to this article in a few weeks to provide some analysis.

The Guardian article is here

Unemployment steady but discouraged workers on the rise

The latest figures for unemployment in Australia were released today. This is one of the sets of data you must follow and understand.

While the most important thing is to recognise trends - see our earlier post - the detail of the figures is also important.

A brief overview.
* Unemployment in Australia remained steady at 5.8%.
* Around 31,600 fewer full time jobs were available.
* This was offset by 9,000 part time jobs.
* Around 8,000 were added to the officially unemployed.

 The graphs show that total employment in the last year has peaked and is declining slowly. There is sufficient data here to suggest that the upward trend in employment changed around May 2013 to broadly static employment. It would be too early to declare a falling trend, but that is what we are looking to confirm or deny in the next six months.

The trend in unemployment is clearly upwards. If this trend continues then it does present a cause for concern and policy makers would be expected to act.

A puzzle

Unemployment up by 8,000, part time work up by 9,000, but jobs lost 31,600. What about the other 14,600? What are they doing?

Of course the people who have recently lost their jobs are looking for another one and are counted as unemployed. But the difference in the figures quoted suggests that some people have given up looking for work.

To be counted as unemployed you must be actively looking for work. When you give up looking, because you think there is no hope of finding a job, you have ceased to participate in the labour market.

This is shown in the participation rate. The percentage of working age adults who are either in work or actively seeking work. This is another statistic you must follow.

The 14,600 figure can be accounted for by a fall in the participation rate from 64.8% to 64.6%. Often when unemployment is high and some people have been unemployed for a long time they become discouraged workers and stop looking for a job. This appears to be happening in Australia.

The ABC reports the figures here

The high cost of manufacturing in Australia

The world started globalising five hundred years ago and the writing has been on the wall for high cost producers ever since.

No firm, and no government either, can subsidise a business indefinitely. The resources employed by a firm, must add more value to the process than they cost. The price that the firm must charge to achieve this must be lower than or equal too its competitors.

Of course there are other factors which can help you, quality, design and service all count for something. If that was not true then Apple wouldn't be in business. However you must in the long run be competitive somehow,

The car industry is a global industry. The same models are sold worldwide and there are plenty of manufacturers able to make them at the required quality. Australia simply can't compete in terms of costs or scale with virtually any of them.

Despite calls for government protection the car industry can't survive in Australia. And protection will cost jobs in the long run, not save them. If good government money is thrown after bad it will mean that resources are diverted from profitable, long run investments that will create the jobs of the mid 21st Century.

GM have explained their decision to pull out of Australia. The Age reports it below.

The Age article is here

MINT - the next BRIC?

I'm putting this post up to save the story at this time rather than write much.

The next set of super-growing economies has been identified as MINT, Mexico, Indonesia, Nigeria and Turkey. It really can't escape notice that Indonesia, a country the Idiot Abbot can't stop himself from upsetting is the I!

The BBC story is here

Trends are everything

As the new year begins we must start watching what is going on in the world. This is vital as any study of economics divorced from the real world is hardly relevant.

For VCE the key variables are inflation, unemployment, the current account and national output. It is necessary to look carefully at these figures and understand them and we will spend some time of this as the year progresses.

An important point to make is that we should look at trends and try to look past short term fluctuations. One or two observations do not make a trend, it takes six months to see a new trend in employment and thirty years to see a new trend in climate change. Often we need to look at data on the right scale.

Further the general principle of watching what is going on in the world means noticing a far wider set of variables. The Age has an article on some economic trends to watch. The interesting thing about this article is that many of the trends are heading in the opposite direction to the one you might expect.

Take the rubbish that was talked about 'Peak Oil' in recent years. The argument was that the supply of oil had got to the point where more oil had been used than was left in the Earth. There were numerous obvious flaws with this argument, not least of which was that the price mechanism would cause the price of oil to rise and this makes new sources of supply profitable.

Since the idea of 'Peak Oil' was first put forward each year has seen more new oil reserves discovered than the world has used up in consumption. People are now realising the flaw in the 'Peak Oil' argument, but the simple application of economic theory and using the right data would have shown this before (see my blog posts in 2010 and 2011 for proof).

The Age article is here. Please look at the various suggestions for what is important in the coming year.