Tuesday, November 18, 2008

How Can Australia Weather the Financial Storm?

Solar water heater on a rooftop in Jerusalem, ...Image via WikipediaAustralia, like the rest of the world, is coming under some battering from the financial crisis. It is worth looking at whether we can take advantage of the situation to make drastic improvements to the overall economy. Let’s begin by looking at where things stand.

Simple version is that the world is heading for recession and demand for Australian goods and services will go down. Various commentators and the Government have talked up China’s growth as keeping Australia from slipping into recession. I don’t think this is going to work. Wall Street Journal has reported a 4% drop in electricity consumption in China in October. Production of goods and services will fall due to the weakening demand in US and Europe, China’s key export markets which will mean China has less need for mineral commodities which has been the engine of Australia for the last few years.

The other idea floating around is that China and India’s middle class will continue to consume. Two problems with that, 1) Chinese and India’s middle class while big is not on the same scale in terms of consumption to replace the demand of the West and 2) much of the middle class in India and China are dependent on jobs that supply goods and services to Western consumers so as demand in the West falls expect to see the number of Chinese and Indian middle class fall. A lot of people don’t understand how the world’s growth has been due to the debt-fuelled consumption of the West. There is nothing to replace that demand.

As to weakening demand in the West a few simple yard sticks indicate that the de-leveraging still has away to go. House prices are still 3 times the average household income and household debt is still much greater than disposable income. In fact we still have yet to feel the effect of unsecured lending and credit card debt.
Unfortunately for Australia, the Government’s hasty and badly contrive deposit guarantee introduce instability into an otherwise stable financial system.

I expect that Australia will fall into recession and while the recession may not last very long the economy will remain flat until the system has de-leveraged itself back to more realistic levels. Golden years are over for now.

But...but this crisis is the single greatest opportunity Australia has to make a rapid shift, a quantum leap if you will, to a low carbon sustainable economy. Taking advantage of the crisis requires short, medium and long term initiatives by the Government, which meld together to shift people into green jobs, reduce per-capita energy consumption and prepare the ground for a low carbon economy by investing in key infrastructure.
Short term, Australia’s already had the fiscal stimulus (by short term I mean right now). That will hopefully keep things from falling off the cliff. Problem with giving money is a lot will go into paying down debt and less into consumption. An additional short term measure is to expand the solar hot water and solar power programs for household. This program already has the management systems in place and has been “closed” due to wild adoption. Simply by adding several hundred million dollars to the program, the number of installations can be increased creating jobs and reducing carbon creation.

Medium term (six months to a year) there are the tax cuts in July 2009. That won’t be enough and although the Government has talked about a 2nd stimulus package, that same money would be better spent focusing on the following initiatives:

  • Paying for low income and pension households to double glaze and insulate the homes, install solar hot water and high-efficiency air-conditioning;
  • Provide up-front income contingent loans to other households to do the same;
  • Fund the installation of solar panels and solar hot water on all government buildings and schools across Australia;
  • Soft loans to small business and commercial real-estate owners to install insulation, double glaze windows, install solar hot water and solar panels and purchase new high-efficiency machinery;
  • Revamp the car bail-out to allow people to trade to the government low millage cars for hybrid and electric cars;
  • Begin construction of a national conduit system across towns and cities starting in regional towns. The single biggest cost of laying fibre broadband is having to dig up the road. By creating a conduit system that anyone can get right of access to will allow new competitors to provide super fast (100+ Mbps symmetrical) to households. Additionally, conduits are standard so the contracts can be tendered to a wide range of construction companies creating short term jobs that are localised.
These initiatives will create green jobs, reduce the per-capita energy carbon energy consumption of Australia while also freeing up household income as utility bills are reduced. Again this income will initially go to paying down loans but then in about one year the income will move into demand replacing the spending of the Government initiatives.

Long term initiatives are everyone’s favourite infrastructure projects. The projects I see as having the best long term pay off are:
  • Fund a High Speed Rail on the East Coast initially connecting Sydney, Canberra and Melbourne with an option to Brisbane using TGV standard;
  • Fund the development of light rail in the major capital cities and regional centres;
  • Fund the development of DC High Voltage transmission lines that connect the centre of regional Australia to the major cities and regional towns.
All three of these initiatives would create a range of jobs over several years. They would also reduce the carbon footprint of the economy. The DC high voltage lines are important as they make large-scale solar more viable by providing an effective, low loss method of getting solar generated power to the cities. HSR can be started quickly by utilising the existing TGV standard and designing to support 500 km/h speeds.

The financial crisis offers the single greatest opportunity to cross the tipping point to a low carbon sustainable economy. A bit of fore thought and planning the Government (or Opposition) can make a huge difference to the country.
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