How Keating Trashed Regional Economies!

And how Oakeshott, Windsor and Gillard will make it worse.
 
There is no doubt that former Prime Minister Paul Keating regards himself as a ‘sophisticated metrocentric’ with an eye for the ‘big picture’ and possessed of a ‘reformist vision’. And he regards the implementation of the national statutory superannuation scheme as a major economic reform and one of his proudest achievements. But like so many policies conceived and implemented by metrocentrics, this big picture vision seems to only extend to the city limits. There has been a total absence of analysis of  the impact of this policy on regional economies. Yet again, we have that ignorant assumption that what is good for the city is good for the bush.
    In reality, the concept of universal retirement savings is laudable and desireable. The theory is that any drop in consumption due to increased savings will not have an adverse economic impact because savings always equal investment and the investment outlays maintain the original volume of money in circulation. But the manner of the universal superannuation  implementation has proven to be a major and enduring disaster for many parts of regional Australia. A higher and higher portion of regional consumption expenditure has been converted to metropolitan savings and metropolitan investment. The economic truism that savings equals investment no longer applies in regional economies. The general economic theory is broken because there is no mechanism to ensure that anywhere near the regional level of savings are reinvested in those regions.
    Indeed, the very nature of the consolidation of numerous small savings into very large pools by public fund managers ensures that most smaller regional businesses have no access to those investment funds. The funds simply do not bother with investments of the smaller scale that regional businesses require.  So the only regional economies that experience any where near a balance of savings and investment are those with large listed mining or agri-business sectors.  The parts in between, and surrounding, these sectors experience a substantial reverse multiplier effect where the removal of savings produces a reduction in consumption, a reduction in profits and a further reduction in consumption each time the funds circulate within the regional economy. And the more the regional economy contracts the less favoured the region becomes in the competition for investment funds.
    And let there be no mistake as to how significant this leakage of funds really is. Wages and salaries generally make up about 50% of GDP. So when statutory super contributions were raised to 9% of salaries it resulted in a diversion of 4.5% of regional GDP to the metropolitan funds managers.  And not only did they fail to reinvest an equivalent proportion back in the regions, they proceeded to send 40% of all funds collected overseas to create jobs and stimulate economic activity there.
    The industry argument to justify this was that these funds would bring the profits back into the country and we would all be better off. But this is overly simplistic and only part of the truth. The export of these funds needed an offsetting importation of debt to avoid a reverse multiplier effect. The removal of these funds produced a shortage of funds in Australia which led to a structural increase in interest rates and a corresponding increase in foreign debt. That increased cost of capital was not as severe in metropolitan Australia because they still had access to the large pool of remaining superannuation funds. But in the regional economies that increase in cost of funds was exacerbated by the reverse multiplier effect of the diverted savings. And of course, the increased interest rates on borrowings produced a further diversion from local consumption to the metropolitan lenders.  
     This leakage of funds from regional economies also has a major impact on the quality and equity of government services to the regions. Of the average $10,000 that each state government spends on each of its citizens, about 75%, or $7500, is in the form of wages and salaries. And that means that 8.25% (9/109) of the total regional public servant wages bill never even makes it into the regional economy. On a per capita basis this 8.25% comes to $618 of the $7500 worth of wages spent on each regional resident. In the New North Wales region, with 900,000 population, this amounts to a $556 million leakage from the regional circular flow. There is a similar loss from the Cental/Southern part of NSW. The loss from North Queensland is about $463 million a year with another $309 million lost from the Hunter Valley. But the relevant state accounts continue to count this money as part of the region’s share of the revenue pie so it looks like the city is subsidising the bush. And this is only the state level public sector leakage. Add the stat super for Telstra, Australia Post and all the Bank staff, etc and we have a major structural problem.
   Extrapolations from national GDP figures to regional GDP are not entirely accurate, due in no small part, to the kind of economic leakages mentioned above. But in the absence of detailed GDP data for the regions such an extrapolation can provide a useful indicator of the scale of the problem in particular regions. If national GDP/Capita is about $55,000 then the GDP of New North Wales with population of 900,000 is a bit less than $49 billion. And if wages and salaries are 50% of this then the region’s wages amount to $24.5 billion, and 8.25% of this is statutory super contributions of $2.02 billion. There may be additional contributions from the owners of regional businesses but most of these would be into self managed funds that are less likely to be diverted outside the region.
    This $2.02 billion is leaking from the Northern NSW regional economy each year and averages out at $2,270 per person. It is safe to assume that the same per capita rate is also leaking from all other non-mining, non-treechange, regions as well. And included in those regions would be Tasmania and South Australia who do not have a proportionate funds management sector and, to date, have taken no preventative measures. 
     It is also abundantly clear that the only state government with both the means and a strong self interest in reducing this leakage would be a fully autonomous new state government representing that region.
    Any other government structure has competing metropolitan interests that currently derive considerable benefit from the current situation. There are a number of measures that could be taken to reduce the level of this leakage and retain a much larger portion of regional savings. But as they can also be seriously compromised by a reluctant metropolitan state government, these must remain unstated.
 
So how will Oakeshott, Windsor and Gillard make it worse?
    Well, unlike the LNP, both Labor, the Greens and these so-called “Regional Independents” have undertaken to increase the statutory superannuation contribution to 12% during this term. This would exacerbate the leakages and reverse multiplier effects on regional economies by a factor of 33%.  It would turn the $2,270 per capita leakage into a $3,025 per capita leakage. And in an average Federal electorate with a population of 146,000 people like Oakeshott’s and Windsor’s, this will amount to a permanent loss of $440 million each year from their local economies. So if Swan and Gillard are not talking about $4.4 billion each in compensation over the next decade then Oakeshott and Windsor will have sold their electorate’s soul for nothing but trinkets and badges.
Update 29/09/10
An indication of where super funds are actually invested can be seen at http://www.statesuper.nsw.gov.au/investments_assetallocation.htm#growth 
The Growth Strategy was applied to 98.4% of the NSW public service’s $28 Billion fund in 2008/9. The $26 Billion Qld fund can be seen at
Funds that were clearly not invested in regional Australia  as at 30/06/2010 included,
International Shares, NSW = 26.86%, Qld = 26%
International Fixed Interest, NSW = 4.26%,
Australian Fixed Interest, NSW = 6.06%, Qld = 12% (combined Aus & O’seas)
Cash holdings, NSW = 9.57%, Qld = 12% 
A total of, NSW = 46.75%, Qld = 50%, excluded from regional Australian investment.
 
The remaining NSW = 53.25%, Qld = 50%, of funds were invested in,
Australian Shares, NSW = 31.00%, Qld = 30%, (large listed companies, not small regional ones)
Property, NSW = 9.54%, Qld = 9%, (some rural holdings but mostly CBD buildings)
Alternate Assets, NSW = 12.71%, Qld = 11%, (urban infrastructure, toll roads, tunnels,power stations).
Clearly, the regional 33% of Australians get minimal on-going economic stimulus from their share of the superannuation pie.
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A site for informed discussion on the strengths, weaknesses, risks and opportunities to be gained for regional Australians through the formation of new states within the commonwealth.
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15 Responses to How Keating Trashed Regional Economies!

  1. Tom Richards says:

    This is a pretty eye opening set of numbers here and it all ties in when we look at it like this. The timing of the rate of decline in a lot of country towns is also about right. Oakeshott and Windsor will do some serious damage to the very places they claim to represent if they pass Gillards 12% levy.

  2. Graham says:

    I’d have to say I don’t like your thesis about superannuation though. Deposits always got mediated through the banking and stockbroking industries. I think the bigger problem with it is these ideologically driven funds run by ex-Union hacks who burn their members’ contributions on ideologically pure investments. Why don’t you have a look at that?

  3. Ian Mott says:

    I agree, Graham, that deposits always got mediated through the banking and broking industries. But the statutory super was a managed process whereby pay rises were diverted to compulsory savings over a few years. And in that process a large portion of regional consumption expenditure was taken out of the regional circular flow to become metropolitan savings. The equivalent impact on the national economy would be if we ran up a continuous, structural, balance of payments deficit of 9% of GDP ($117 billion a year). I don’t think even Weimar Germany faced that sort of fiscal drain with reparations payments. A Greek style debt to GDP ratio of 1.0 would only produce a 5% drain of GDP on 5% interest payments. But they would also have the benefit of the additional capital that was borrowed (assuming most of the borrowing was invested rather than consumed). Regional economies have no such benefit and, consequently, experience a marked reverse multiplier effect.

    So I will have to graciously decline your suggestion to investigate what urban ex-labor hacks are doing with the savings of urban Labor voters. I am an unrepentent regional seperatist and God clearly has a sense of humour.

  4. Graham says:

    We don’t publish just any opinion (on our site). Some opinions get in because they are part of the mainstream debate, even though they are mad. A lot of the AGW stuff fits that criteria. But most of what we publish is arguable.

    I’m afraid that your argument about superannuation and the regions is not arguable and is not part of the mainstream debate. We publish more broadly than most, and I’d be surprised if any mainstream publication would carry it. If you want to argue about neglect of the regions there are plenty of other things to talk about.

  5. Ian Mott says:

    Thats fine, Graham. By the way, what is the extent of your economics education?

  6. Graham says:

    About 30 years now. To see how that is relevant.

  7. Ian Mott says:

    Ah, then you can speak in detail about the influence of variations in MPC and MPS in economic models?

  8. Ian Mott says:

    Graham,
    Due to your reluctance to go to specific detail about your exposure to economic modelling, I took the liberty of googling up your profile. And I was surprised to discover that I am being fed lines like “your argument about superannuation and the regions is not arguable and is not part of the mainstream debate”, by an English Lit. Major who, on balance of probability, hasn’t the faintest idea of the workings of the kind of economic modelling that has informed my article.

    If you have been busy googling up the meaning of the acronym MPC over the past few minutes you would now be approaching where I was on the learning curve in week four of my Level 1 Economics unit back in 1972. And that was before I even started my B.Bus Degree and the additional economics units that it included.

    To suggest that you have been talking through your backside on a topic on which you are totally out of your depth is putting it rather politely. I don’t know which is more shocking. The arrogance of your own presumption of competence or the ignorance that seems to come with it. That discussion on a detailed, specific and measurable aspect of regional economics could be impaired by such ill-informed prejudice is breathtaking, absolutely breathtaking.

    But thank you, at least, for giving me a better understanding of the operational terrain (particularly in respect of the difficulty I have had getting published on your site).

  9. Graham says:

    Not interested in having an argument with you. And no, I’m not an economic modeler, which is a good thing because they tend to get it wrong, just like climate modelers do.

  10. Ian Mott says:

    Pathetic. They are chalk and cheese. And the sum of the models run by merchant banks and fund managers all over the country (and planet for that matter) on a quarterly, if not monthly basis, reflect error margins, against actual measured outcomes, of less than 0.5% of GDP.
    You have already said quite enough.

  11. Graham says:

    You need to get out more. These will be the same models that predicted the GFC? And I have enough experience of reading BIS Shrapnel, Access, Melbourne Institute and all the rest to know they get it wrong by much more than 5% even when things are running along reasonably evenly.

    Your basic hypothesis is wrong so no matter what you model you will get garbage out. I’d be betting that the regions are the net beneficiaries of the increase in national savings, as well as the increase in the share of the economy going to profit via the resources boom. But you’d certainly be flat out justifiying that they were worse off than the metropolitan areas, none of which are homogenous anyway. You could apply your differential argument equally well to Queensland versus New South Wales or Victoria, and you’d be equally wrong.

  12. Graham says:

    Ian,
    You are indulging in the sort of crap that the climate science lobby indulges in. As is your arrogant assumption that somehow I do not have the ability to understand your arguments. Your qualifications mean diddly squat in front of the facts. No wonder you can’t get published anywhere. Not only is your economic supposition crap but you have no idea how to treat other people.

    I read your argument and it doesn’t accurately represent how investment and spending occurs in the real world so any model you may have built is not going to give you any worthwhile information. Go back to basics and argue facts and concepts rather than qualifications. All yours prove is that you can spend a lot of time at university and still know nothing.

  13. Ian Mott says:

    Keep digging that hole, Graham.
    For the record I wasn’t submitting this article for publication on (your site). You were part of a broadcast email on an information basis only. Nor did I seek your opinion as to the merits of it. You chose to give me your advice and I have responded.

    And it is understandable that you would seek to connect points of similarity with this issue and your habitual narratives. The problem is that you almost string together a plausible response and then add something else that blows your credibility out of the water. You see, Graham, stock market and economic analysts were a major part of my bread and butter as a head-hunter in Sydney in the late 1980s. I know what a good one looks, sounds and writes like and I also know their job specs in detail. And I can inform you that most use of economic models is not as long term predictive tools, as you seem to imagine, but rather, as short/medium term tools to tell us what is actually taking place as we speak. Unlike climate models, wise economists understand that the situation is constantly changing, with frosts, crop failures, floods and drought all having an impact on entire value chains to retail level. And it is those external events that produce variances on earlier model output. It is the job of the models to feed those changes into corporate strategies so that appropriate and timely action can be taken. They are very accurate and they are a world away from your rudimentary grasp of what you think is going on.

    Now if this simple explanation of the variation between your understanding of economic analysis and mine causes offence then I can only conclude that it might actually be long overdue. And if you choose to respond with some sort of tabloid behavioural analysis then that is always your call. But the more you continue in the belief that I have constructed a model to suit my biases only confirms your ignorance of the fact that I am referring to a set of core economic interrelationships that you clearly do not understand.

    Good day to you sir, and I wish you luck in your endeavours.

  14. Graham says:

    Yeah, I responded to be polite. I didn’t expect an ignorant rant from you, which you now defend on the basis of your experience as a head hunter. Bit like a voter suggesting they understand what their MP does because they elected one once. If your model doesn’t work in the long term it is unlikely to be working very well in the short term. They are just scenarios as to what you think are happening. And the exogenous factors are always likely to blow them out of the water. On top of that you have some severe conceptual problems underlying yours, including the idea that somehow there is a metropolitan market and a rural one and they are somehow discrete, and that money from superannuation funds doesn’t get put back into regional areas.

  15. Ian Mott says:

    Tell you what, Graham. You obviously have some strong and fixed ideas about economic models and the circular flow of funds so how about we let the public in on the discussion? There are quite a few respected business people who might be quite interested in learning about your perspective. You could always make a comment on my blog. But if that would be too tedious for you I could copy your emails into the thread (in your name, of course) so others can see the full context and provide their own thoughts.

    I have no proplem with my understanding of economics being on full display. So how about you, eh?

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