Phillips curve “flattening:” Should we worry?

Economists do live in their own little world.

But an occasional glimpse into it can be rewarding.

So, even if you don’t know the difference between a Phillips Curve and a Laffer curve, you might find a moment or two spent reading some recent Reserve Bank research, to be well spent.

There is a link to it, on the front page of the Reserve Bank’s website, at rba.gov.au.

We must admit that its title is not immediately inviting.

“Understanding the flattening Phillips Curve” is, perhaps, a little short of grabby.

But it deals with some issues that will have a direct impact, one way or another, on your future.

First things first, though.

The Phillips curve tracks the relationship between the rate of inflation and unemployment .

The trouble, according to Reserve Bank Economists Kenn Kuttner and Tim Robinson, is that “in recent years, inflation appears to have become less responsible to fluctuation in output and unemployment.

“That is, the Phillips curve has become flatter.”

This matters, because it affects the calculations the Reserve Bank makes, when reviewing interest rates.

The paper goes well beyond Economics I. Its calculations and reasoning are, at times, quite dense.

But there are glimpses of reality in it too, which are worth a little thought and reflection.

One is that the rise of China, as an industrial power, has fundamentally changed the way prices are set, in the wider world.

“In recent years, the greater role of China in the world economy has undoubtedly held down the price of imported manufactured goods,” the two economists say.

And they say this “may have encouraged domestic firms to be more productive.”

What do we take from that?

Perhaps that interest rate hikes might not be quite as necessary, in future, as they have been thought to be in the past.

Related stories:

1. Australian farmers worry about climate change
2. Wall Street traders worry

Stability first:PM

The Prime Minister has finally come out and said it.

“The first responsibility that we have as a government is to ensure the strength of the Australian economy and the strength and stability of the Australian financial system,” he said after meeting State premiers in Perth last night.

Well, perhaps not quite the first.

Defending the realm usually takes that position.

But let’s not quibble.

Mr Rudd probably put it better, when he had a second go at the reporter’s question.

“This is fundamental,” he said.

“It is fundamental to everything.”

He is, of course, absolutely right about that.

Mr Rudd  explaining why his government has softened its earlier position on Australia’s banks.

Even a week ago, the government was pressuring the banks to pass on any cut in Australia’s official interest rates, in full.

It isn’t, any longer.

That’s because the global financial meltdown is a whole lot worse now, than it might have appeared to be then.

And the dangers are that much greater.

Australia’s banks are, indeed, well governed and well capitalised, as the government keeps telling us.

But that does not mean that they could not be touched, to some extent, by the world’s financial crisis.

The government is right to take one step back, and allow Australia’s banks to protect their position, at this delicate stage, by passing on only part of the interest rate cut that the Reserve Bank is expected to announce next Tuesday.

Related stories:

1. ANZ ‘fesses – but what about the others?

Advisers battle over defence spending

The Federal government’s advisers are deeply divided over the future course of defence spending in Australia.

Lieutentant General Peter Leahy, who retired as head of the army last week, is far from alone, in the services, in pressing for the acquistiion of more high tech, high cost  e quipment.

He sees that as nessary, in view of Australia’s heavy defence commitments overseas, both now and in the future.

However, Treasury economists are warning that Australia’s ability to pay for that equipment still “underpins” future acquisition programs.

Leahy warned, in a weekend interview, that further unrest lies ahead in what he called  these “fractured and troubled” times.

He said that if unrest continued, Australia might well need a bigger – and better equipped – army.

At present, Australian forces in Afghanistan, regularly used Dutch helicopters and Dutch artillery, Leahy said.

Australia would have to think very seriously about providing its own fire support, if those facilities should be withdrawn.

The Treasury economists published their conclusions, in the latest issue of their publication Economic Roundup, which was released yesterday.

Their paper proposed alternative methods of projecting likely defence spending, into the future.

It said these approaches “provide some different ways of thinking about future defence spending trends.”

The economists admitted that defence spending has, actually, been declining, when measured as a proportion of Australia’s growth national product.

But they also said that had only happened because Australia’s economic growth rates had been higher than growth in defence spending.

They warned, too, that defence spending must always be balanced against “fiscal constraints.”

Related stories:

1. Australia’s miners go on a spending spree
2. Spending cuts “will hurt”:Prime Minister

Climate change:the new test

The Rudd Labor government will face its toughest test tomorrow.

That’s when Professor Ross Garnaut will present his draft report on climate change.

The government will follow that with a discussion paper, setting out the options.

That is, in bureaucratic talk, a green paper.

Professor Garnaut is to produce his final report in September.

That, in turn, will be followed by a white paper, in which the government will spell out its climate change policies.

Although the debate is still at an early stage, Professor Garnaut has already made central points clear.

The most basic is that while tackling climate change seriously now will be expensive, it will still be much cheaper than taking the apparently easier path, and doing little or nothing.

Rudd built, cleverly, on the early euphoria, with which accompanied his government’s early days.

His apology to Australia’s Aborigines, for their treatment at the hands of white Australians – and the 2020 Summit – were both brilliant moves.

Policies that tackle climate change, though, will -necessarily – involve all the expense and the discomfort, that can come with adopting new, tighter ways of living.

Rudd will have just one chance to make those changes.

That will be this year.

A combination of soaring fuel prices, higher food bills, steep falls in share prices and high interest rates will, certainly, erode public confidence, after that. This is happening already.

A strong , efficient carbon trading scheme will be central to the Rudd government’s climate change policies.

And they must include private cars, if those policies are to have a serious chance of success.

Brendan Nelson has already signalled, though, that the opposition will be looking for all the votes it can get, as all this proceeds.

He has already said that it is “not yet certain” that the opposition will support the government, in this area.

That would be a tragedy, of the first order, for future generations.

Related stories:

1. Climate change:the realities
2. Brendan Nelson’s big test

Climate change:the realities

Australia will start to get an idea of where it is going on climate change, later this week.

That will happen when Professor Ross Garnaut’s draft report on the nation’s options is published.

It will be published on Friday.

Professor Garnaut’s final report won’t be released until September.

Garnaut is making no secret of the fact that climate change science is still far from mature.

But he is  also saying that the costs of waiting until it is will, almost certainly, be higher than those of starting to act now.

He compares the state of public knowledge now with that which existed, when Columbus sailed west, several centuries ago, searching for China.

Garnaut admitted, too, that even the best climate change scientists we have now differ, even with each other, on important points.

He concedes, too, that Galileo’s case shows that one person can be right, when many others are wrong.

But he says uncertainty is no excuse for inaction.

And Garnaut warns that, in current circumstances, the “business as usual” option must be rated as “high risk.”

“This has no close precedent,” he said.

The professor’s draft report, though, is expected to provide the first real guide to the approach to climate change, that the Rudd government is likely to take.

This will be a rough – and expensive – ride.

Related stories:

1. The enviroment – balancing the costs of investing, and not investing
2. Mitsubishi:the hard realities

New report urges vigilance on Jemaah Islamiyah

Present gaps in our knowledge of the terrorist organisation, Jemaah Islamiyah must be systematically plugged if Australia is country is to be safe, according to a new report.

The Australian Strategic Policy lnstitute which produced the report, says this is essential.

“The nature and the evolution of the regional terrorist threat remains high on the list of Australia’s national priorities,” the report said.

It said JI continues to represent a significant threat to both Australian and regional security.

JI was responsible for the Bali bombings in 2002 and 2005 and the bombing of the Australian embassy in Jakarta in 2004.

The report recalled that Australia or Australian interests had been subjected to planned, conducted, or aborted terrorist attacks each year from 1999 to 2005.

“It is essential, therefore, that Australian and South East Asian governments remain vigilant, ” the report adds.

The report said that although much research had already been carried out, the “precise nature” of the islamist militancy in South East Asia had “still to be mapped out.”

“It is important that any gaps in understanding are addressed,” the report said.

“A thorough grasp of the current organisational and operational dynamics of local terrorist groups and the extent to which they are (or are not) gravitating towards pan regional designs will allow for a more informed and nuanced debate on how best to mitigate the challenge from Muslim extremists based in South East Asia,” the report said.