I’m pretty downcast having read Glenn Stevens latest speech. It’s on the usual topic – the economy, its past fortunes and future prospects. I don’t read these kinds of speeches much because I’m not an ‘economy watcher’ trying to predict the next GDP numbers and I have a strong aversion to tea-leaf reading.
Anyway, the fact that I read these kinds of speeches rarely might give me a bit more distance from your usual pundit. I’m really quite taken aback by how one-dimensional the speech is. I guess it’s not surprising that a speech by the RBA Gov is deep in the minutiae of the immediate fortunes of the macro-economy. Anyway if I get time, I’ll blog about the implicit vision of an ‘economy’ that seems to lie at the heart of Stevens’ speech embodied in the five points he makes at the end about what good things we might aspire to for the Australian economy. But for now lets have a look at Stevens’ discussion of consumer confidence.
Now I have to confess to feeling rather ambivalent about consumer confidence. For the duration of the long boom I was hoping for consumer confidence to fall, because I think Australians need to consume a little less and save a little more or to put it another way, they need to import a little less and export a little more (or better still, import more and export a lot more) .* Right now, I agree that consumer confidence and consumer spending are our friends. But only in the short term. In the longer term I’d hope we’d have a plan to rely less on them to maintain demand in the economy and more on investment and net exports.
So Stevens has this to say.
Turning closer to home, Australians cannot do a great deal to make these improved international conditions come to pass. But we can maximise our chances of benefiting from a new international expansion.
The first thing is to maintain some confidence in ourselves and the prospects for our country over time. We cannot achieve effortless prosperity either on the back of everescalating mineral prices or simply by bidding up the prices of our houses. It is as well to realise that. But as I have said on previous occasions, Australias genuine longterm economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.
It is noteworthy that in measures of confidence taken from surveys, household confidence has fallen in Australia relative to the ebullient levels of a year ago, but it remains much more resilient to date than comparable results in major countries (Graph 2). While households expect unemployment to be much higher in a years time, their stated expectations about economic conditions five years from now have barely diminished at all from what we have seen consistently over a number of years (Graph 3). So notwithstanding their evident caution at present, people remain essentially optimistic about the long term.
Now it may be that Stevens is saying no more than I have said in my last paragraph- that it’s important to preserve consumer confidence given our current situation. But it’s quite notable here firstly that the discussion of consumer confidence immediately follows the discussion of a more general kind of confidence. I find it pretty strange to have consumer confidence conflated with “confidence in ourselves”. “Consumer confidence” is constructed from answers to questions like “would you describe the state of the nations economy these days as excellent, good, not so good, or poor?”;”would you describe the state of your own personal finances these days as excellent, good, not so good, or poor?” and what macro-economists tend to be more focused on is answers to the question considering the cost of things today and your own personal finances, would you say now is an excellent time, a good time, a not so good time, or a poor time to buy the things you want and need?”. I think you can see that this is a different thing to ‘our confidence in ourselves’.
More importantly, Stevens seems keen on five year confidence. So he seems to suggest that consumer confidence is a Generally Good Thing and he’s wanting more of it, not just in the immediate term but also in the long term. Perhaps I’m missing something, but can someone tell me after the economy starts growing again, what’s so good about consumer confidence in the medium to long term in an economy in which current account deficits have outrun economic growth year in year out for decades resulting in foreign debt rising with no sign of this trend abating any time soon? Can they tell me what’s so good about a higher propensity for consumers to consume with budget deficits as far as the eye can see? (Of course it’s still possible that more consumer spending remains the only thing that keeps our economy at full employment for a good while, so this short run I’m talking about could last a while – but what’s worrying me is the absence of a longer term framework here – or at least the longer term framework that seems to make sense to me.)
This is quite different to business confidence. Why? Because it’s easy to consume. You get hold of money out of your wallet, purse, bank or credit card, head for your phone, computer or shop and you click on an image or grab an object or you say “I’d like that” and then you pay for it. That’s pretty much it and you’ve mastered the art of consuming. Running a business is more complex and indeed hazardous which makes business confidence a more substantial phenomenon. As Keynes says in The General Theory: “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits–of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities…. Thus if the animal spirits are dimmed and the spontaneous optimism fades, enterprise will fade and die…. It is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.”
Businesses need ‘confidence in themselves’ to be good businesses, to put the thought and effort into investing in the right things at the right time in the right way. Of course business confidence can be too high – as it is sometimes in bubbles leading to what turns out to be exessive invesmement, but generally I’m comfortable with ‘business confidence’ being both a long term economic good and something with some relationship to ‘confidence in ourselves’.
When Stevens says “We cannot achieve effortless prosperity either on the back of everescalating mineral prices or simply by bidding up the prices of our houses” his ‘rhetorical body language’ suggests this is a prelude to the lecture about not living beyond our means. I think the relevance of that lecture is evident. But no such lecture comes. Indeed the speech contains no hint of the perils of living beyond our means as a long run backdrop – even if I would agree that it shouldn’t intrude too strongly into our management of our short term circumstances. Instead, the rhetorical resolution of the futility of building prosperity on escalating mineral and house prices is consumer confidence.
Stevens also seems to relate consumer confidence in Australia to our national characteristics in some way.
Consumer demand in Australia, while weak compared with recent years, is actually at the stronger end of international comparisons among advanced countries. This presumably owes something to the stimulatory effects of fiscal measures and lower interest rates for borrowers (though savers are feeling the pinch). But perhaps it also shows the inherently optimistic view Australians take in the future. Optimism, combined with an awareness of risk, is a fundamental strength. It is to be hoped that this will be matched by a recovery in business confidence over the months ahead. That remains to be seen, though there have been some encouraging signs recently.
I would have thought that the main reason for Australians’ relative consumer confidence has a got a great deal to do with the fact that their houses haven’t plummeted in value as the houses of most other citizens of developed countries have. (And as an aside I get damn sick of all the self congratulation in Australia about the triump of our prudential regulation – our banks have all got government guarantees right now so it’s a strange time to be congratulating ourselves. And of course the banking crises we’ve seen have all been on the back of falling property markets). But fiscal policy has presumably helped a little, and lower interest rates have been part of that story. As for inherent optimism, well, it would be nice to see some evidence of this. Perhaps there is. Confidence in the sense that Stevens is talking about it could be regressed against economic conditions in different countries and we could find out if Australians really are more ‘confident’ as consumers.
In any event, the immediately quoted paragraph shows that Stevens’ fondness for Australians’ five year consumer confidence is not that it provides a good platform for maintaining economic activity in the short term, but that it is an ingredient in a ‘fundamental strength’. And business confidence it is hoped will somehow follow suit. Again, in the current environment that’s a reasonable point, and one that is consistent with basic Keynesian thinking in which increases in business investment are unlikely to lead one out of a slump because businesses won’t invest if there’s a lack of consumer demand. But as a recipe for the long term in an economy with a chronic current account deficit, it seems to me to be a recipe for mediocrity.
It’s an invitation to get back on the treadmill in which our use of others’ savings steadily rises. Why is this a potential problem? Why can’t it be left to ‘consenting adults’? Well it’s a good question, but the answer is that ‘consenting adults’ got us into the mess we’re in and the problem with leaving it all to consenting adults is that some risks are systemic. And external risks are those kind of risks. As a distinguished Australian economist I was talking to the other day whose sympathies are with the ones I am expressing here said to me “foreign debt is never a problem until it’s the only problem”. Indeed, some of the consenting adults suddenly got fitted out with a government guarantee the other day I seem to recall. In the short term, any recovery of expenditure is a good recovery, but for a country with our habits, history and external accounts a recovery driven by consumption will be less sustainable than one driven by investment and net exports. The underpinnings of the first kind of recovery look to have been established already. That’s better than nothing in the short term, but not ‘going forward’ as we like to say these days.
* Economists, please no lectures on the way I’ve put this, I’m trying to keep it simple. In short, in my opinion, we need more saving and I expect we need more investment in tradeables other than in the sector where we’ve probably had overinvestment – mining.