We are all aware about the mining boom going on in WA and QLD, and the other states trapped in the slow lane of the 2 speed economy, patiently waiting for the supposed income flows from the mining boom to come. The RBA seems to always be optimistic that the boom will stay strong and the income and prosperity will spread to the other states eventually. The government has attempted to help out with the Minerals Resources Rent Tax. Theoretically economic flows can be felt widespread under normal circumstances however the effect of the Global Financial Crisis plays a major role in why we have a 2 speed economy and how it is constraining the flows from the mining boom to the rest of the economy.
The obvious reason is consumers are spending less of their disposable income. In economic terms our ‘marginal propensity to consume’ has fallen dramatically. There is less income ‘flowing’ from person A to B, and so this has negative implications on overall economic spending due to the smaller multiplier effect. A similar factor to consider is the speed that income flows in the economy, essentially how long it takes for someone to spend their income, once they receive it. Before the GFC, most households and businesses were spending quickly, people lived off weekly wages, and money going into the bank did not stay for long. Money was flowing constantly throughout the economy, and consumer and business confidence was high. Nowadays people are cautious to spend and weekly income stays in their bank accounts for longer periods of time, essentially slowing down the process of income flowing from person A to B. Although it is beneficial for individuals to save it is harmful to aggregate demand when done by everyone in the economy and economists commonly refer to this as the ‘Savings Paradox’.
Secondly our spending patterns are not the same after the GFC. The composition on what both households and companies spend on is much different now. Both households and businesses are in the process of ‘deleveraging’, we are saving more and paying down debt as fast as we can. In a recession or period of uncertainty it is natural for households to cut back on extra spending and live on necessities, things like white goods, discretionary spending, new cars etc, with the surprising exception of spending on cafés and restaurants. The knock on effects are that our spending changes from a diverse spending mix where money flows around the economy more quickly like before the GFC, to one that is much more concentrated towards paying debt, bills, necessities and into savings.
With higher amounts of cash deposits, it is possible for banks to lend the money out for others to spend, to stimulate the economy. However the banks have taken the opportunity to rebalance their funding portfolio’s, relying more on domestic deposits and less on foreign debt and funding. Households and businesses have also been reluctant to borrow money, having learnt the lessons of too much debt in the GFC.
Another important factor is the timing of the latter half of the exports boom that occurred after the GFC. Usually in a business cycle a ‘boom’ occurs after a recovery, where consumers are spending again and consumer/business confidence is restored. However this time it occurred during the recession phase of the cycle, Household and business spending did not recover yet, as they were still in the process of deleveraging, the usual effects of a boom are therefore not fully felt. It is a relief that we are no longer in the downward spiral that we were in during the midst of the crisis, rising unemployment leading to decrease in aggregate demand leading to more unemployment. It’s true that miners are getting paid high salaries from a fly in fly out job; however mining is a capital intensive industry and only employs 2.4% of the workforce. With the subdued spending patterns in mind, it’s certain that the miners too are paying down mortgages and putting large sums into savings, leaving very little income flowing through the economy and eventually into the other states.
It may be the case that the income from the mining boom is working itself slowly through the economy, however it won’t flow in all at once like a huge cheque, it would be slow and gradual and imperceptible.