Sunday, November 16, 2008

Tough times call for tough measures

This time last year, the Reserve Bank was forecasting growth a tad lower than the previous year's 4 per cent.  It now sees growth in June 2009 at only 1 per cent.

Even this looks optimistic.  Worldwide, reductions of 20 per cent are now being built into many companies' production schedules.

For Australia, the world financial collapse has shown we were over-reliant on foreign capital that was indirectly financing consumer spending.  We now need to save more.

But the Government's knee-jerk reaction to the economic downturn has been to give consumers money to increase their spending.

This won't work.  In fact, it is exactly the wrong response, since it dissipates savings that comprise the government budget surpluses.

Other measures being undertaken are similarly doomed to failure.

A host of infrastructure projects are queueing up for federal support.

Some of these may be useful.  But you can bet your government-guaranteed bank savings that those getting the tick will include lots of wasteful investment into public transport, desalination plants and other uneconomical projects.

Last week, the Government gave $22 million to ABC Learning, which had gone bankrupt.  But ABC Learning's failure was not due to lack of demand.  ABC Learning was actually underpricing its services, and had been accused of pricing low to force out competitors.

The overwhelming number of ABC Learning's 1040 centres clearly generate sufficient cash to stay open.  But Deputy Prime Minister Julia Gillard preferred $22 million of taxpayers' insurance rather than watching any centre close down amid heart-wrenching appeals by parents.

ABC Learning getting $22 million of taxpayers' funds was chicken feed compared to Canberra gifting $6.4 billion to the car industry, which the Government sees as strategic for all industry.

But granting companies blood transfusions of taxpayer money will only defer their collapse or, at best, their downsizing.

The coming recession will mean a string of businesses looking for similar government support and marshalling a case that they are "strategic".

Part of the car industry subsidy was to pursue the mirage of the Australian green car.  Linking the environment and job support is becoming increasingly fashionable.

Incoming US President Barack Obama has said he will create five million green jobs in alternative power resources based on wind, and solar.

Maybe instead we could replace conventional power stations with people generating electricity by pushbike!  This would create jobs but, like those created producing alternative energy, the accompanying subsidies and high costs would destroy far more jobs.

When emerging from communism, Eastern Europe faced far worse dilemmas than those currently confronting the Australian Government.

In 1992, Hanna Gronkiewicz-Waltz found herself chairman of the dominant Polish bank.  Her frequent response was to reject claims for bail-outs and financial infusions, telling the applicants:  "You say these are valued assets but all I see is debts and losses."

In post-communist Poland, as in present-day Australia, those businesses that can show an ability to profitably supply goods and services that people want will always find backers.

If we are to avoid a lengthy and costly recession, Australian governments need to absorb these lessons.


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