the australian economy, may 1966

The Australian Economy, May 1966'

1. Prediction and Policy At the present time, when a number of cross-currents are sweeping

the Australian economy, it is much easier to document the past than to forecast the future. In such circumstances there is a strong temptation to limit the scope of this survey to an account of recent economic events.

A similar temptation must have faced Professor Downing a decade ago when he set out to write the first of these surveys of the Australian economy.1 Then, in March 1956, the economy had recovered from the sharp downturn of 1952-53 and was operating at very high levels of activity. With rising demands pressing on limited labour resources there were real dangers of inflation. These came not from abroad- export prices and farm incomes had been falling-but from rising wage rates and even faster-rising earnings. Current trends, so f a r as they were discernible in March 1956, seemed to point upwards; but the indicators were not unanimous and there was no telling whether some change would develop in the balance of forces to upset the forecast of continuing indationary pressure.

Facing a difficult forecasting task Professor Downing mote : 'It is impossible to predict with any confidence what is going to happen to demand during the current and coming financial years. Yet if we are to have an economic policy a t all, we must a t least appraise current trends of demand, consider whether there are any reasonable grounds for expecting a reversal of those trends and t ry to estimate what government action is necessary to bring aggregate demand nearer to the desired target-that total expenditure should be high enough to maintain full employment but not so high as to provoke an intolerable degree of inflation. It is hopeless to expect perfection. If we can, through policy, do appreciably better than we would have without any

* 1 am grateful to the members of my final year M.B.A. seminar in Managerial Economics for preparing a number of valuable background papers for this article.

1 R. I. Downing, 'The Australian Economy, March 1956', Economic Record, Vol. XXXII, May 1956.

181

182 THE ECONOMIC RECORD JUNE

policy, we should be satis6ed far the present-and try t 3 improve our sources of information so that we may do better in the future. In the last 25 years, o u r economy has at times been subject t o inflation of prices at rates at high as 30 per cent a year; a t others, *30 per cent of our resources have been unemployed. If we could, by pcilicy, keep the economy within the range between full employment with stable prices and a price inflation of, say, 5 per cent a year, we should at least be doing substantially better than we have in the past. T h objective is, I believe, within the range of our economic skill and political courage'?

T-LE I Prices and Wages, 2953-54 to 1964-65

(Percentage change during the year)

YCar

1953-54 .. .. 1954-55 .. .. 1955-56 _ _ .. .. 195tisi I . .. 1958-59 .. .. 1957-58 ,. .. 1959-60 .. . . 196061 _ . .. .. .. 1961-62 .. .. 196243 . . . . 1963-64 .. .. 1964-65 .. ..

2.0 0.6 4.2 5.8 1 .o 1.6 2.5 4.1 0.4 0.2 1 .o 3.7

- 1.9 1.4 2.7 1.8 1.9 0.1 0.9 1.5 0.2 0.5 1.2 1.6

E ! -1.9 -9.2 -7.9 11.7

-13.3 -12.0 - 11.5 -5.1

1 .o 5.2

12.8 -7.9

- Nomind

wasc nta

3.1 2.2 3.8 4.9 2.1 2.0 5.6 3.6 2.9 0.6 2.5 5.2

-

-

5.2 5.6 6.8 4.7 2.7 3.1 7.8 4.8 2.8 2.6 5.0 7.3

Source : Reserve Bank of Australia, Sfafistirol Bulletr'nr.

This statement has many virtues as a text for the present-day forec8ster. Firstly, it was made a t a time when the economy had passed the peak of the boom but was still operating at a high level of a ~ t i v i t y . ~ This is so of the economy now and, as Table I shows, there are also similarities in the behaviour of wages rates and earnings, and internal and overseas prices. In periods like this, cross-currents and conflicting pieces of evidence abound, and uncertainty about the future is at its height. Secondly, the statement is a timely reminder that, despite high levels of uncertainty, forecasts have their uses. These are properly identified as the guidance of short-term policies for the achievement of full employment with price stability. Thirdly, the limitations im- posed by uncertainty are recognized, but put into proper perspective by the specification of a range of error that might be regarded as satis- factory in the light of past history. What economists must do, as

2op. cit., p. 11. 3 With the aid of hindsight and improved statistics, we can miw pinpoint the

peak of the boom as .September 1955. (See J. S. Mallyon, 'Some Leading and Lagging Items in the Australian Business Cycle', paper presented to A.N.Z.A.A.S. Congress, Hobart, August 1965.) A similar analysis puts the turni:ig point of the recent upswing at June 1965.

1966 THE AUSTRdcIhrV ECONOMY 183 Herbert Simon put it of the business man, is to 'satisfice because they have not the wits to maximize'.*

The performance of the Australian economy over the past decade shows that Professor Downing's faith in our economic skill and political courage was largely justified. The average annual rate of increase in consumer prices from June 1956 to June 1965 was 2.2 per cent and, as Table I shows, in every year except 1956-57 the rise was below 5 per cent. More important, the Australian rate of price inflation has not been out of line with the rates recorded by other major trading nations. Very roughly, we have done rather better than the U.K., much better than Japan, about as well as most of continental Europe, but not as well as North America.

Our record of employment, shown in Table 11, is more difficult to mess for, although Professor Downing allowed a 5 per cent upward drift in prices, he allowed no downward deviations a t all from full employment.

TABLE I1 Unemployment, 1955-56 to 1964-65

1955-56 .. .. 195657 .. .. 1957-58 .. .. 1958-59 .. .. 1959-60 .. .. 1960-61 .. .. 196162 .. .. 1962-63 .. .. 1963-64 .. .. 1964-65 .. ..

I I I Registered I Registered

23.4 51.9 28.5 0.6 42.5 25.2 - 17.3 1.1 60.0 21.2 -38.8 1.5 66.5 22. I -44.4 1.7 55.4 32.8 -22.6 1.4 65.1 333 -31.3 1.6

106.3 19.6 -86.7 2.5 87.1 25.7 -61.4 2.0 63.4 36.2 -27.2 1.5 44.1 52.5 8.4 1 .o

Source: Department of Labour and National Service. News Releases.

If we define full employment as a situation where the number of jobs vacant equals or exceeds the number of persons seeking jobs, then we pass the test in only two years: 1955-56 and 196465. If we follow the Vernon Committee and regard full employment as a zone 'com- mencing when registered unemployment as a proportion of the work- force lies between 1.0 and 1.5 per cent, depending on the time of the year',5 then we pass clearly in three years and very nearly in another three. More important, average unemployment throughout the decade, at 1 .5 per cent of the work force, is very close to the full employment zone, and the range of movements around this average has been narrow.

4 Herbert A. Simon, Administrative Behavior (Macmillan, New York, 1960), p. xxiv.

5 Report of the Committee of Economic Enquiry, May 1965, Vol. I, 2.8.


If, however, we follow the Council of Economic Advisers in the United States, and define the zone as beginning at a 4 per cent unemployment rate, then we pass the test in every year.8 So it all depends on what we mean by full employment.

Although the subject has been much debated, I wil l raise it again later because disagreement about the meaning and significance of full employment seems to me to lie at the root of much of the current uncertainty about the state of the Australian economy. I turn now, however, to a brief sketch of recent events.

11. Recent Economic Developments The recent course of the business cycle is suggested b r the employ-

ment index plotted in Figure 1. The index was compiled by deducting the number of persons registered as unemployed from the number of registered job vacancies, both seasonally adjusted by Dr A. R. Hall's factors.'

The level of business activity a t any time is a composite of the behaviour of all the Weren t functioning parts of the economy and, as such, is not directly measurable. Indirect measures such as those designed by the National Bureau of Economic Research c a n , however, be used to mark periods of general expansion and contraction and to indicate upper and lower turning points.'

In a most useful application of these techniques t:, Australian economic statistics for the 1950s and early 1960s, J. S. Mallyon found that: 'In actual fact, if the series registered vacancies less persons registered for unemployment was taken as representative of the business cycle, the results would have been virtually the same as those ob- tained from the larger range of statistics'? We may therefore examine Figure 1 with a reasonable degree of confidence that i t reflecta the swings of the cycle rather well.

I have used ratio scales to give a better picture of' the rate of change in the economic tempo. The cost of this has been some !ass of de- tail about the behaviour of the series Within the area arliitrarily and

6This may be so even with upward adjustments to the Australian figures of registered unemployed so that they approximate the wider coverage of the sample- based US. figures. Census figures for June l%l-uear the trough cif the recession --showed a total of 172,600 persons, or 4.2 per cent of the work force, not at work. Of these, 113,500 or 2 8 per cent of the work force were out of work because they were unable to secure employment The remaining 59,100 or 1.4 per cent were not at work because of sickness or accident, because they had bem temporarily laid off, or because they were resting between jobs or changing jobs. The first component- those unable to secure employment-cmpares well with the 111,700 persons registered with the Commonwealth Employment Service as unemployed at the end of June 1961. The second component suggests that there may be, ai any time, an additional, say, 1 to 2 per cent of unemployment for frictional and seasonal reasons. Even if we were to add 2 per cent to the unemployment rates in Table 11, they would be under 4 per cent in every year except in 196162.

7 As published in the Australion Financial REyim, 17 February 1966. 8 See A. F. Bums and W. C. Mitchell, Measuring Business Cjcles (National

Bureau of Economic Research. New York, 1946). J. S. Mallyon, op. cit., p. 4.

r---- ___- r---7---- I

+40 --- -- +30 - - - -- +----+----t----+-- --

I I +---- m+20 ----- t---- t---t---- C 0 cn L

al a I A

I I I I


in total expenditure in 196465. In a year in which the economy was already fully employed it is little wonder, with an increase of 13 per cent in total spending, that there was considerable pressure on imports as well as on internal prices and wages (see Table I).

677 864

9,461 748

TABLE I11 e o s s N a t i d Expenditure, b y Spen&ng Units

+ 40 + 6 - 38 -11 + 70 + 8 - 2 - + 722 + 8 + 356 + 7 + 132 +18 + 15 + 3

Households Motor vehicles. . .. .. .. Other durable goods . . .. .. Non-durablesandscrvices .. .. Newhousing .. .. .. ..

Total .. .. .. .. Businesses and fums

New buildings .. .. .. Plant and equipment .. .. Non-farm stocks . . .. .. Farmstocks .. .. .. ..

Total . . . . .. .. Financial enterprises . . .. .. Government

Commonwealth: Defence . . . . Other . . . .

State and local. . .. .. .. Total .. .. .. ..

Statistical discrepancy . . .. .. Gross national expenditure . . . .

change over P M C period of previous year

1963-54

11,750 + 964 + 8 + 331 + 5 ---t---l--t 571- + 43 + 8 + 89 +30

1.500 I + 280 I / +19 + 138 I +16 146 + 364 - . 26 I + 124 1 1 I 1:: 1

2,191 + 811 +37 + 63 + 4

7 7 1 - - 1 1

17,641 + 2.3 +13 + 716 + 7

Source : Commonwealth Statistician, Quarterly Estimates of Natio wl Income and Espenditure, December quarter, 1965.

In aggregate dollars, most of this pressure resulted from the de- cisions of householders, who made moderate percentage increases in their outlay on goods and services, and substantial increases in their spending on new house and flat construction. Of almost equal aggregate weight, and representing a much larger percentage increase, was business and farm expenditure on fixed capital and stocks. In retro- spect it would seem that some of this stock accumulation-especially by the vehicle, engineering and .metals industries, which a.ccounted for

1966 THE AUSTRALIAN ECONOMY 187 more than two-thirds of the increase in non-farm stocks-was involun- tary. Stocks were still rising in engineering and metals in the Septem- ber and December quarters of 1965, although very much more slowly than before. Vehicle stocks, however, dropped significantly in the December quarter of 1965 following a sharp cut-back in production rates by about 200 vehicles a day from late last September.

On top of this 37 per cent rise in business investment came a 14 per cent increase in government spending. Although the percentage increase for defence was high, spending for other purposes, especially by the Commonwealth government, rose rapidly too.

Changes in expenditure during the h t half of 1965-66, compared with the same period of the previous year, throw a good deal of light on the reasons for the decline in total activity recorded in Figure 1. Firstly, the rate of growth of total spending dropped by about half to 7 per cent. The effect of this slackening on employment, competitive pressures and business coddence, was magnified, however, by its concentration in the private sector.

Reduced consumer spending on durable goods hit the motor vehicle and electrical goods manufacturers especially hard, and slowed down the rise in manufacturing employment. Although expenditure on non-durable goods and services continued to rise satisfactorily, there was evidence in the profit results and interim reports of many of the large retailers that margins were low and trade intensely competitive over a quite wide range of retail activity. The rise of only 3 per cent in expenditure on new housing construction completes this picture of a very subdued household sector.

The 4 per cent rise in investment expenditure by businesses and farms was similarly low. The 4 per cent figure is misleading, however, as it masks two widely divergent movements: a sharp rise in ibed capital formation and an even sharper decline in the rate of stock accumulation. In some industries, as we have seen, stocks were actually being worked off in the half year to December 1965; in others, including farming, the rate of increase had dropped significantly.

The solid increase of $310 m. or 17 per cent in government expenditure stands in marked contrast to the slower rates of growth recorded by both household and business spending. Defence expenditure, at some slight cost to other Commonwealth activities, leaped ahead, and State and local governments managed to edge up still further their already high rate of advance.

As a result of all these trends, total spending rose by 7 per cent. This was certainly a much more realistic increase, in relation to available resources, than the 13 per cent rise recorded in 196465. It could therefore be claimed that the government had succeeded, through fiscal and monetary constraints, in damping a potentially dangerous boom. Indeed this seemed to be the argument put forward by the Treasury as early as January of this year when it said-without the aid of the national accounts for the December quarter-that ‘growth appears to

188 THE ECONOMIC BECORD JUNE

be proceeding at about the rate our general resources situation makes feasible '.lo

The impact of this changed pattern of expenditure on activity and employment in the private sector was nevertheless severe, and the important question was : had the damping gone too far 7

I sourr?o 1963-64.

Srn.

Gross national product: Non-farm .. .. .. .. 16,446 Farm . . .. .. .. .. 1,466

Total .. .. .. .. 17.912 Imports, etc. . . .. .. .. 2,837 Less Exports, etc. .. .. .. 3,108

Domestic supplies . . .. .. 17,641

IV. Domestic Supplies

Chaags over sbma period of previous year

1964-6s

Sm.

+1,769 - 137 - 9 -22

+ 1,632 + 602 - 110

+2.344

The economy's response to these increases in spending, both in 196465 and in the fmt half of 1965-66, is shown in Table IV. In both periods it was necessary to draw on imports to supplement increases in home-produced goods. In 196465, however, there was a su.bstantial rise of 9 per cent in the value of national production, whereas in the h t half of 1965-66 the growth rate was only 5 per cent. These overall rates of growth arose from changes in employment, productivity and prices, and it is worth trying to disentangle these various influences.

Official estimates of G.N.P. at constant prices suggest that the real rise in Q.N.P. in 196465 was about 6 per cent. Non-farm output rose by a little more than 6 per cent, farm output by about 5 per cent. The decline in farm income, shown in Table IV, was thus entirely attribut- able to falling world prices for our primary products.

The volume of industrial production as measured by the A.N.Z. Bank Index (All groups, excluding power) was 7 per cent higher in 196465 than in the previous year. As Table V shows, this was the result of a very rapid 4.8 per cent increase in manufacturing employment and a small improvement in labour productivity. As total civilian employment in 196465 was up by 4.2 per cent, and G.N.P. a t constant

1OTrearury Information Bulletin, No. 41, January 1966,,p. 5.

1966 THE AUSTRbLIbN ECONOMY 189 prices by 6.0 per cent, the overall rise in national productivity seems to have been about 1.7 per cent.

Although the estimates of productivity in Table V should not be taken too seriously, they do confirm the pattern of productivity change suggested by American experience : that productivity gains are highest in the early stages of recovery, fall off as the business cycle nears the upper turning-point and fall still further in the early stages of contraction.'l

TABLE V Changes in Employment, Production and: Labow Productivity

Percentas change on same period previous ycar

A P P = : ~ ~ producuvity I Civilian employmmt Volume of

Period (monthly average) prod union

% 196162 .. - 2.0 -1.0 +1.2 t l . O +1.2 196263 . . +4.3 t 4 . 6 +2.5 1963-64 . . +3.9 t 6 . 8 +2.0 1964-65 .. $4.8 +1.7 1965-66

1st half . . +2.5 +1.0 +1.0 -2.6 (at.)

Source : Commonwealth Statistician, Monthly Rmkw of Business Statistics, and Quarterly Estimates of National Income and Exjenditure; A.N.Z. Bank, QuarterZy Surveys.

The pattern of supplies changed again in the fist half of 1965-66. By this time the drought was taking its toll, and farm output and income were down sharply. Rising world prices cushioned the blow to some extent and bolstered export receipts. In fact export income, strengthened by substantial sales from stocks of last season's wheat and flour, and by rising overseas sales of minerals, metals and manu- factures, stood up remarkably well.

Progress in the non-farm sector was by this time much slower, especially in manufacturing. As Table V shows, gains in manufacturing employment, production and labour productivity, although positive, were a pale shadow of those recorded in 196465. Taking account of the now faster rise in domestic prices, it seems likely that most of the 5 per cent gain in G.N.P. was illusory. At a rough estimate, G.N.P. at constant prices was possibly only 1 per cent higher than a year earfier, which means that national productivity actually fell by some 2 3 per cent over the period.

11 See R. A. Gordon, Business Fluctuations (Harper International Student Reprint, Tokyo, 1964), p. 290.


V. Balance of Payments This slowdown in the rate of growth of national supplies meant

that me continued to draw quite heavily on imports in the first half of 1965-66. The slower rise in national expenditure eased the strain, however, and a rise in capital idlow resulted in a surprisingly strong balance of payments during a period which could otherwise have proved quite dif€icult.

Recent balance of payments results, together with a forecast for 1965-66, are set out in Table VI. Compared with performance in the

TABLE VI Bdance of Payments, 19G3-64 t o 1965-66

($ million)

-245 .. -45.5

Currentbalance .. .. .. -784 -700 --

Balance of Trade . . Less: Net invisibles . .

Cupiral c~ccuunt Add: F’ublic and private borrowing 433 601 --

- 99

~~ ~ ~~

Current account Exports f.0.b. . . .. .. .. 1 2,739 1 2,586 1 1.953- 1 2.500 Imports f.0.b. . . . . .. .. 2,250 2,755 2,198 2.850

-350 -600

-950

750

-200

Reserves at end of period . . 1.708 1,393 I 1.294 [ 1,193

Source : Commonwealth Treasury, Treasrcry Informution BuUetins.

first three quarters of the year the forecasts imply a slight. weakening in export receipts, a continuation of the decline in impo- that has been evident since October 1965, and some decline in the very high rate of capital i d o w . These trends would result in a deficit on current account of $950 m., but a drain on international reserves of only $200 m. because of the substantial capital inflow. This would leave reserves at the end of June 1966 at nearly $1,200 m.---some $100 m. above the level forecast by Treasury last February.’2

In February the Treasury held the view that 1966-67 mould see the beginnings of a strengthening tendency in the balance of payments and that the loss of reserves was Likely to be less than in the current year.ls In the light of subsequent events-including not only the British restrictions on capital outflow but also the Federal Treasurer’s

12 See ‘The Australian Balance of Payments’, Supplement to Treamry Z n f o m - tion Bulletin, February 1966, p. 43.

13 Op. cit., p. 45.

1966 THE AUSTRALIAN ECONOMY 191

expressed concern about the impact of rising overseas defence expenditure and possibly heavy loan redemptions next year14-this forecast loss of reserves now seems too optimistic. The prospect for achieving balance on trading account nevertheless still seems good, and the drain on reserves from lower capital inflow is unlikely to be damaging.

In 196465 British investors put $165 m. of new funds into companies in Australia and British equity in the retained profits of companies operating here amounted to $66 m. In the current year the i d o w will no doubt be higher ; but part of the increase will be in retained profit, which should not be affected by the restrictions, and some will have been in anticipation of the restrictions. In all, I should imag- ine the Rritish authorities would be very happy with a reduction of $100 m. in capital outflow to Australia next year and that they will work hard to achieve it. In relation to international reserves of around $1,200 m. a t the beginning of 1966-67, and t o total capital inflow of more than $700 m. in 1965-66, this is not an alarming reduction. Nor, given lower imports and fairly stable exports, would an extra $100 m. on overseas defence expenditure be a crushing burden. However, taken together these two possibilities seem to imply that overseas reserves, which have recently steadied, will not remain stable as was earlier hoped, but are likely to run down by another $200 m. by the end of

This outcome assumes a fairly neutral role for government borrowing abroad: heavy net redemptions could exacerbate the position, substantial net borrowings abroad by government conla greatly improve it.

A good case can be made for strenuous government efforts to borrow abroad in 1966-67 fo r reasons other than the balance of payments. If British private capital inflow is cut back, we can expect a heavy demand for Australian funds from British companies already estab- lished here. Government borrowing abroad rather than in Australia would facilitate the BOW of local funds into corporate equity and fixed- interest offerings and help ensure the continued expansion of the business sector.

1966-67.

VI. Monetary Policy One of the features of recent anti-cyclical policy in Australia has

been the much more aggressive use of monetary policy by the Reserve Bank. Thus during the early months of 1964 the Bank made three successive calls to Statutory Reserve Deposits, raising the proportion of the trading bank deposits frozen there from 10.8 per cent at the beginning of the year to 15.5 per cent by early March.

By this time business activity was rising at a very fast rate indeed (see Figure l ) , and the apparently high liquidity of both the banking system and the public threatened to turn a healthy revival into a

14Statement in Parliament by Mr. W. McMahon on 31 March 1966, as re- ported in the Australian Financial Review, 1 April 1966.


speculative boom. By March 1964, for instance, the volume of money in the community (including deposits of the public with cheque-paying banks, and savings banks, as well as notes and coin in the hands of the public) was nearly 12 per cent higher than a year ago ; and ordinary share prices, which had been moving up fairly steadily shce the third quarter of 1961, had risen by 23 per cent over the past year.

In the face of such a situation the Bank decided to operate not only on the availability of credit but also on its price by pushing up the whole structure of interest rates. Maximum bank overdraft rates were lifted from 64 per cent to 7 per cent in April 1964 and to 74 per cent in March 1965, and the yield on long-term bonds was edged up from 4.29 per cent in January 1964 to 4-68 by June, 4.76 by December, and to its peak of 5.15 per cent in April 1965. A variety of short-term rates, including interest payable on fbed deposit with the trading banks and interest payable in the official short-term money market, a h moved up during this period. To curb the housing boom the Reserve Bank also exerted a restrictive influence on the availability of housing finance through the savings banks.

Although these moves were accompanied by slightly restrictive Budgets in 1964 and 1965, it is possible to argue that they played a significant role in curbing the boom. Higher yields on fixed-interest securities seem to have caused a re-assessment of ordinary share prices and yields for, despite improved company profits and dividends, share prices flattened out in the f h t half of 1964 and fell by some 17 per cent over the following eighteen months. At the end of 1965 ordinary share prices were only slightly above levels that had been reached six years ago.

The uncertainty and gloom that have hung over the share market for the past two years seem to be important factors in explaining recent real trends in the economy. Not that this uncertainty, or even the higher cost of capital, have apparently had much direct effect on the corporate sector. In 1964-65 companies succeeded in raising some $391 m. of new money, compared with $361 m. in 1963-64 and $393 m. in 1962-63,15 and they have continued to spend heavily on new buildings, plant and equipment. According to the Commonwealth Statis- tician's survey of private businesses, actual capital expenditure rose by 26 per cent to $1,438 m. in 196465. In the Grst half of 1965-66 expenditure was $910 m., or 31 per cent higher than the same half of the previous year. Plans for the second half of the fhancial year show a slight decline to $886 m., but if these plans are realized total capital spending by business will reach nearly $1,800 m. in 1965-66-a level 25 per cent higher than the previous year. This tapering-off is more likely the result of lower sales forecasts by businessmen than of any shortage or higher cost of capital.

1 5 In each of the last two years half of this new money has come from new share issues for cash, half from fixed-interest borrowings. In 1%2-63 the proportion from share issues was lower, at 38 per cent

1966 THE AUSTRBLIAN ECONOMY 193 It does seem plausible to argue, however, that the prospect of

capital losses on the stock exchange, and the general air of pessimism and caution that sliding share prices have generated, have had a significantly depressing effect on retail sales-especially on purchases of consumer durables. If this is so, then monetary policy, via its effect on the share market, has helped cool off consumer spending, and the decline in consumer spending is now beginning t o affect capital espenditure by business.

In the housing field, where the availability of credit is a much more important determinant of demand, the effects of tighter monetary control have been more obvious : dwelling approvals stabilized in mid- 1964 and then fell fairly steadily until the end of 1965. Commence- ments, seasonally adjusted, were running at a near-peak annual rate of about 127,000 units in the Narch quarter of 1965. This figure can be compared with the later estimate by Mr. Bury, the Minister for Housing,la that resources in the industry are sufficient to build 110,000 units a year-a total which is also a reasonable target for housing in the Iight of long-run demand estimates. In the following quarters of 1965 the annual rate of commencements dropped to 113,000, 107,000 and 103,000.

I n recent months monetary policy has been swiftly reversed with a series of substantial releases from S.R.D.S. A gradual easing of credit began in April and May 1965 when the proportion of trading bank deposits required to be held frozen with the Reserve Bank was lowered in two successive steps from 15.8 per cent to 13.8 per cent. I n Decem- ber 1965 the ratio was dropped a further 1 per cent, and in two moves in April it was lowered to 9.4 per cent.

These moves are important in easing the liquidity pressures on biisinesses and farms which at the moment are acute because of seasonal factors, declining international reserves, and the losses of the drought. They also seem likely to have a major impact on housing, for in the &st quarter of 1966 approvals were running a t an annual rate of 111,000 and commencements had risen to 105,000 a year.

The mere easing of liquidity nevertheless seems unlikely to have much effect on retail sales. If the above analysis is correct, however, a reduction in interest rates might-through its effect on share prices, personal liquidity and confidence-do something to lift sales of consumer durables as well as stimulate new housing and business investment.

None of this is to deny the recent importance of Gcal policy. Higher income taxes have slowed down the rise in personal disposable income, and indirect taxes on 'essentials' have reduced income available for other goods and services. A tax cut, therefore, could be counted on to have similar results, and perhaps more promptly and directly.

If we are to judge by statements from the Reserve Bank and lastatement made in September 1965, quoted in the Australian Finuncial

Rm'ew, 25 January 1966.


Treasury, neither a reduction in interest rates nor a tax cut is likely to be implemented. In March, for instance, Dr. Coombs expressed the xiew that the economy was nicely balanced in a state of uncertainty over which course it should follow, and this, he claimed, was a very healthy state. In his official statement on the economy on 31 March, Mr. McMahon followed a similar theme. He noted the emergence of more encouraging trends in employment, housing and motor vehicles in February, and argued that although the growth of consumer spending had been slackening, total spending in the economy as a whole was growing fast enough to maintain full employment.

VII. Demand and 8upply, 1965-66 I have attempted in Table V I I to check this assessment by draw-

ing together all the threads of the previous discussion in the form of a forecast of aggregate demand and supply for the full year 1965-66. In setting out the forecast I have followed the form used in Tables I11 and Tv in order to make my major assumptions as explicit as possible, and for ease of comparison between trends forecast for the whole year and actual trends for the first half.

The table begins with a forecast of G.N.P. required to maintain the level of emplopent much as it was in 1964-65. Non-farm G.N.P. would need to rise by about 8 per cent : average prices should be about 4 per cent higher this year than last ; employment should be about 3 per cent higher to absorb the growing work force; and productivity could not be expected, at this stage of the cycle, to rise by more than 1 per cent. Farm income may be down by as much as 20 per cent, lower production being offset to some extent by higher prices. Total G.N.P. will thus need to rise by 6 per cent. Imports and exports are consistent with the forecasts shown in Table VI, with services added to merchandise trade in both cases. Domestic supplies will thus be some 7 per cent above their value last year.

With a few modifications suggested by more recent data, trends in expenditure are assumed to continue much as they did in the h t half of the year. The introduction of the new Holden will improve motor vehicle sales a little, but not dramatically. Fixed capital expenditure by business, although easing, will remain high as suggested by the Statis- tician’s survey of anticipated expenditure. This wil l be offset by a slower rise in non-farm stocks and a reduction of farm stocks. Govern- ment spending will continue to rise rapidly.

Taken literally, the forecast suggests that expenditure will fall short of supplies by about $280 m. In the event, they must of course be equal, and the implication of the forecast is that unemployment will rise and G.N.P. fall to fill this deflationary gap. Readers may adjust the gap by varying their assumptions accordingly, and should note especially the scope offered by the statistical discrepancy and by estimates of stock changes !

1966 THE AUSTRALIAN ECONOMY 195 TABLE VII

Forecart Demand and Supplies, 1965-66

Less Exports . . . . . . . . Gross domestic supplies . . . . 1

DEMAND Households

Motor vehicles . . . . Other durable Non-durables and \en+& New housing . . . .

Total . . . .

Newbuildings . . . . Plant and equipment . . Non-fann stocks .. Farmstocks . . . .

Total . . . .

Businesses and forms

Financial enterprises Government Commonweakh-Defence

States, local . . . . Total . . . .

Statistical discrepancy. . . . Gross national expenditure . .

Other

Forccast 1965-66

Sm.

646 916

10,693 880

13,135

764 2,Ooo

410 -102

.. .. .. ..

..

.. ..

.. ..

..

..

.. ..

.. ..

..

Forecast change 1964-65 fo 1965-66

Sm. %

- 71 - 10 - 18 - 2 +510 + 5

+421 + 3

+150 + 24 +220 + 12 -100 -200

- -

SUPPLIES Gross mtional product: Non-farm

Farm .. Total . . . . . .

Imports ' . . . . . . . .

3,072

253 744 941

2,725

+ 70 + 2

+ 12 + 5 +zoo + 37 +130 + 16 +270 + 11

1964-65

Sm.

717 934

10,183 880

4,410 +600

21,088 + 1,103

19,670 + 1,455

- i 1,060 - 269

12,714

+ 16

+ 6

+ 8 - 20

614 1,780

510 98

3,002

24 1 544 811

2,455

3,810 218

19,985

18,215 1,329

19,544 3.439

22,983 2,998

19,985 I + 7 21,370 1 + 1,385

A broader interpretation of the table suggests that the Treasurer may well be right : that even if, as forecast, there is little growth in household and business spending, the likely trend in government spending will be enough to raise total expenditure by 6 per cent-which is near enough to the 7 per cent rise in G.N.P. required to maintain employment. The tactics, therefore, are to wait and see, month by month, how the situation develops.

A factor in favour of waiting is the uncertainty surrounding the future trend of wages until the Arbitration Commission delivers its judgment on the national wage case, probably in July. A moderate rise


in basic wage and margins of about $1.10 a week1? could eventually raise total wages and salaries paid by about $270 m. a year,18 which would be a useful boost t o potential spending. But the rise would not occur at once, may not all be spent, may be too late and may not be enough. A greater increase is of course possible, but this might en- danger longer-term prosperity by raising costs and reducing our ability to compete in export markets.

A factor against waiting and in favour of some prompt stimulation of consumer demand is the rather surprising stability in the consumer price index for March. With a rise of 0.1 per cent in prices since the previous quarter, we can hardly be said to be in t h e grip of inflation !

Weighing all the pros and cons, I would at present do nothing, but stand ready to step up the rate of State and Commonwealth government spending in the coming year. To try to justify this stand I must return t o my argument about the meaning and significance of full employment.

VIII. (;roc& of Policy In favouring a wait-and-see policy, I am taking account of the

level as well as the direction of activity and employment and preferring to risk some further reduction rather than what might la.ter prove to be an over-hasty stimulation. My reasons for this preference are set out in the following Eve assumptions about the goals of economic policy.

(i) The most important issues in Austrdkn economics today are concerned not with the bevel of activity but with the pattern of development. The essential concern of economics is human welf4me or, more measurably, material living standards. Early economists concentrated on the improvements to welfare that would flow from an optimum resource allocation-overlookhg or assuming away the loses incurred through working the system below capacity. Modern Kepesians, however, are in danger of doing the opposite--of focusing so narrowly on the benefits of working to capacity that they forget the costs of not allocating resources effectively.

In the recent past Australian development has shown some clear directions-away from housing and consumer goods towards the pro- vision of more defence and other community services and more public and private investment, especially for the development of minerals. These shifts seem to me desirable.'* Moreover there are other areas,

1' This would represent a 2 per cent increase on average weekly earnings in 1964-65.

18 This assumes that a 2 .7 per cent rise in nominal wage rates would be followed by a 2.7 per cent rise in average earnings. In the light of Table I, this seems a reasonable assumption.

19 They would certainly please Professor Smithies : see 'Australian Economic Strategy', Economic Record, Vol. 39, March 1963, and T h e Vernon Report: An American Economist's View', Economic Record, Vol. 42, March 1966.

1966 THE AUSTRALIAN ECONOMY 197 including education and the improvement of urban and other trans- port facilities, where added investment would yield relatively high marginal returns to welfare and which therefore deserve to attract a greater share of resources.

(ii) The rate of change in the pattern of development is not inde- pendent of the level of activity. If resources are fully employed and if economic activity in virtually all industries and regions is rising, the pattern of supply can change only slowly. This is not only because additions to the work force each year represent such a small fraction of total labour resources but also because it is extremely difficult-for reasons of location, training and individual preference-to channel any significant proportion af new workers into specific industries or areas. If change is to be rapid, what is needed is strong pressure of demand at the growth points combined with some slackness in other areas.

To effect change will of course take time : time for people to change not only their locations but often their attitudes and skills as well. During this period unemployment may rise a little, but it should be recognized as structural, and measures to reduce it should aim at improving mobility rather than increasing aggregate demand.

(iii) The benefits of a more fEexa3le economy are likely to outweigh the costs of temporarily higher levels of structural unemployment. There are reasons for believing that past levels of structural employment in Australia have been low. First there is the matter of geo- graphy : the heavy concentration of manufacturing and tertiary industries in a few major capital cities has enabled labour to shift from declining firms or industries t o growing ones without having to uproot home and family and move to a new location. The shift from rural to secondary and tertiary employment, which is the exception to this general statement, has also been relatively easy to achieve because of the higher level of services and amenities offered in the cities. Secondly, in an economy that has been sheltered from unseemly competition by tarifi, import restrictions and restrictive trade practices, there were few declining industries o r flrms in Australia in the 19509.

The environment of the 19609 has been different. A more open economy has increased competition from abroad and the influx of overseas companies, with their generally more aggressive pursuit of profits and their better developed marketing and management skills, has sharpened competition at home. Some of the results of this more competitive environment include heavy pressures on the T a r 3 Board, and higher rates of company failures and takeovers. A more positive result, however, has been the rapidly growing interest by Australian firms in management education, training and development and in the use of improved methods of organization, planning and control. The growing acceptance of competition and change as facts of business life and the gradual acquisition of skills to cope with them effectively are


likely, I believe, to have a s i g d c a n t long-run effect on productivity. One of the costs of competition and change, however, is likely to be a higher level of structural unemployment.

The future promises even greater changes. The development of iron ore, bauxite, manganese, natural gas and oil, for example, will re- quire greater shifts of resource+industrially and geographicdy- than we have seen in the recent past. Because many of these shifts involve the development of a new frontier under rugged conditions, they will be more difficult to achieve than the shift of manufacturing that occurred in the 1950s.

(iv) Full employmed, 0s conventionaUy defined, is ao Zunger a% adequate goat of short-term policy. This is not to argue that the level of unemployment ought to be generally higher than it has been in the past, or that the 1-14 per cent figure suggested by the Vernon Com- mittee was not a shrewd assessment of what constituted full employment in the 19509. I t is an argument, however, for defining the full employment goal in t e r n other than a percentage of the work force. Thus a 2 per cent level of unemployment would be quite intolerable if there were no vacant jobs available, but could be said to represent full employment if the number of jobs vacant exactly matched the unemployed. Even this idea of equality between job seekers and vacancies needs some qualification, but I would agree with Professor Burns that ‘full employment may be said to mean that the number of vacant jobs at prevailing wages is as large as the number of unemployed, and that the labour market is so organized that everyone who is able, willing and seeking to work already has a job or can obtain one after a brief search or after undergoing some training’.m

Such a definition is conceptually much more useful for formu- lating adequate public policies for full employment. In particular it should help in deciding whether to adopt expansionary measures to raise aggregate demand or whether to focus attention on better organization of the labour market.

It remains a difficult goal to quantify, for although -we have national statistics on job vacancies there is little doubt that they give much less than full coverage. The experience of the 1950s suggests that an exact equality between unemployed and vacancies would be bound to involve inflationary pressures, and that full employment might be defined as the zone where registered unemployed exceed registered vacancies by less than 25,000 persons.

The statistical measure, however, is less important than the change of viewpoint. What must be avoided is an excessively simple view of the economic process which attributes every drop in general economic activity to a deficiency in aggregate demand and urges the government to fill the imagined gap. A more careful diagnosis and the use of

20Arthur F. Burns, ‘Economics and Our Public Policy of Full Employment‘, in E. 0. Edwards (ed.), The Nation’s Economic Objectives-Roots and Prob lms of Achievement (University of Chicago Press, 1964).

1966 THE AUSTRALIAN ECONOMY 199

instruments somewhat smaller and sharper than fiscal measures may be called for in future if we are to achieve not only full employment and stability, but also rapid growth.

(v) Clear national objectives and effective institutions are more important f o r growth than the maintenance of a fine balance between supply and demand. Many of the attitudes I have expressed in this survey seem to me implicit in statements made by the government and by the Department of Treasury. The Treasury, in particular, seems justly proud of our more competitive and open economy.21

Where we differ, however, is that the Treasury seems content to rest the matter here and to leave the allocation of resources largely to the workings of the price mechanism. The alternative, it seems, is ‘planning’ and this is not only dBcul t but dangerous.22 Such a view, in Australia in the mid-l960s, seems to me quite unreal.

The argument that planning is diffkult because the future is uncertain is correct. The problem, however, is not whether or not t o plan, but who should do the planning and how? Using a business analogy, it seems clear that government has a vital role to play here in setting broad national objectives and in spelling out the implications of these, in the form of sub-goals, for various sectors of the economy. These strategic sub-goals-if the business analogy holds good-could be expected not only to clarify the expected role of each sector but also to act as a powerful motivating device for securing co-ordinated action.

Here, admittedly, the analogy breaks down, for the manager would go on to approve detailed plans which would not only co- ordinate action but also form the basis of a control system. In a private enterprise economy no such central control would be undertaken. A point to be stressed, however, is that many business analysts believe that objectives are fa r more effective co-ordinating and motivating devices than are detailed plans and control systems.23

The apparent unwillingness of government in Australia to define its strategy clearly-indeed even to admit that public discussion about strategy is proper-is a serious weakness. It leads to an undue pre- occupation with short-term tactics designed mainly to achieve full employment with price stability and external balance. These tactics, it is hoped, will achieve some growth. But surely it is time we asked, with the Vernon Committee, how much growth, in which directions, and through which institutions?

University of MeUmurne G . T . ~ I L L S

21 ‘The Australian Balance of Payments’, op. cit., p. 46. 22 Commonwealth of Australia, The Australian Economy, 1962, pp. 26-32. 23 See Peter F. Drucker, The Practice of Management (Mercury Books, Lon-

don, 1961).

the australian economy, may 1966

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