“Consider a man and a woman each with a productivity of $10 per hour, and suppose, because of discrimination or whatever, that the man is paid $10 per hour and the woman is paid $8 per hour. It is as if the woman had a little sign on her forehead saying, ‘Hire me and earn an extra $2 an hour.’ This makes her a desirable employee even for a sexist boss. But when an equal-pay law stipulates that she must be paid the same as the man, the employer can indulge his discriminatory tendencies and not hire her at all, at no cost to himself.”

This example is applied to a comparison of male labour versus female labour. As was our article yesterday.

But in reality, it’s not even a Male v Female thing.

Because just take the same example and switch in ’skilled worker’ in place of ‘man’ and ‘unskilled worker’ in place of ‘woman’ – not that we’re saying all female employees are unskilled of course! – and the same principle applies.

Or interchange ‘experienced’ in place of ‘man’ and ‘inexperienced’ in place of ‘woman.’ Or any other example where wages are artificially manipulated by government decree.

You can use the same comparison to relate it to the minimum wage. In effect, pay equalisation is just another form of creating a minimum wage. It makes it illegal for an employer to employ someone for a lower wage than someone else.

And like the minimum wage, one consequence is that it creates unemployment.

Anyway, we just thought we’d drop that in. You can still leave comments on this article by going to the Money Morning website.

Back to today. We notice that even the mainstream commentary over at Business Spectator is starting to get a bit antsy with all this ‘economic recovery’ thing.

Two articles yesterday, one from Karen Maley and the other from Robert Gottliebsen clearly warn – as we have – that things aren’t as rosy as they seem.

Right now we’d say, hats off to these two mainstream commentators for saying it. However it’s too late, much too late for it to have any impact.

As the saying goes, the die is cast. The bubble has expanded. It’s like when you blow up a balloon. No-one likes having the thing pop right in their face, but there’s still the temptation to try and make it a little bigger, and that’s what’s happening with the Australian economy now.

The only problem is that in mainstream economics they either don’t believe that bubbles exist, or they believe they are caused by something else, or that even if bubbles do exist then they think they’re smart enough to manage them.

I mean, they’ll look at the last eighteen months and conclude they know the recipe for curing bubbles. So that even if another one is brewing, don’t worry about it, they’ve ‘fixed’ it before, they can do it again.

Look at all the economic data that’s been paraded before your eyes. As you know, we’ve been critical of the way the ANZ Job ad numbers have been reported.

Well, finally you could say the February job ads do look more impressive than some of the previous numbers. In February, ANZ Bank reports a total of 158,611 jobs advertised compared with just 109,177 in January.

You’d expect a pick-up in February, but still, it’s a 45% increase over the previous month. Although, compared to the same time last year, when the economy was on the verge of recession, job ads are still down by 3,723.

And remember, we’re using the original numbers, not the seasonally adjusted or trend numbers.

And then look at the other stats: “Australian economy continues to grow: ABS.”

According to the Australian Bureau of Statistics (ABS):

“Latest ABS figures show that GDP, in seasonally adjusted volume terms, grew 0.9% in the December quarter 2009, after growing 0.3% in the September quarter.”

The Australian economy continues to grow, grow, grow. That provides even more evidence to the mainstream that Australia has figured out how to perfectly direct and manipulate an economy to avoid collapse.

Although, the next paragraph from the ABS statement gave the real game away:

“Growth in the expenditure measure of GDP was driven by a 3.5% increase in private investment , a 10.2% increase in public investment and a 0.7% increase in household expenditure. Offsetting these increases was a fall in net exports. The fall in net exports was due to imports (up 7.7%) growing faster than exports (up 1.7%).”

Actually, we’ll rephrase that. We’re not sure it’s really given the game away as everyone knows public spending – or public ‘investment’ as the public sector drones prefer to call it – is going mental: money spent to ‘create’ jobs, then more money spent to ’save’ jobs, then another bunch of cash to compensate for jobs lost.

The madness never ends.

But that brings us back to the point we made above. While it’s good that some in the mainstream press are starting to whiff a bit of trouble, it’s all rather too late.

The time for warning about the nonsense idea that you can borrow to get yourself out of debt was a subject for twelve months or two years ago.

Yet at the time the mainstream press was too excited about making sure their elected representatives ‘did something.’ At the depths of the market meltdown, it wasn’t the time to ‘play politics’ or get bogged down in ‘economic theory.’ It was the time to ’save jobs’ and help those families who seemed to be constantly ’sat around the kitchen table.’

But the biggest problem right now is the sense of false security – or false sense of security, whichever you prefer.

We’ve noticed quite a bit of excitement about all the increased profits Australia’s robust and excellently run companies have made in 2009. Today’s Australian Financial Review (AFR) trumpets, “Earnings return, are shares next”, “Property turns the corner” and “How banks came out in front.”

According to the AFR, 80% of Australia’s companies reported profits in-line with expectations. It goes on, “Profits for industrial companies rose 3.8 per cent from a year earlier.”

But the AFR does point out, “Cost-cutting was an important driver of profits in the half. Some big companies reported falling revenue but were able to increase profits by reducing their spending on wages, property and technology.”

That’s something we noticed last week. This is what we wrote to Australian Wealth Gameplan subscribers last Friday:

“Last week we conducted a simple exercise. We looked at the company results for that week as reported in the Australian Financial Review (AFR). It printed the earnings results for 131 companies – large and small. As you’ll have read in the mainstream press, a lot of companies produced bumper profit results, such as Flight Centre [ASX: FLT]. What the mainstream press didn’t report was the less than exciting news on the revenue figures. Of the 131 companies detailed, just over half (66 of them) reported lower sales revenues than the previous corresponding half-year or full-year.”

It wasn’t just ’some big companies’ that reported falling revenue, it was half of those companies that reported during that one-week period.

What does that tell you? Well, as the AFR reports, many companies have slashed costs in order to beef up the bottom line. So the first question is whether they can keep doing that?

The other question is whether they can increase sales by as much as the market is now pricing in? Our guess is that will be much harder to achieve. And much of that is down to the sense of false security and the misplaced belief that the bright economists and central bankers have engineered Australia’s escape from the global meltdown.

The economy is growing, companies are hiring again, miners are mining stuff, credit is booming, and everything appears to be ticking along as though nothing has happened.

And as for that old subprime stuff, well surely that’s all fixed up, and no-one will make that mistake again. Trouble is, it’s often forgotten that subprime wasn’t the cause of the problem, it was the effect. The cause of the problem was excess credit and government interference.

Excessive credit simply manifested itself as subprime loans. Subprime borrowers were the means by which politicians could parade themselves as helping the poor, and by which bankers and young gun traders could earn themselves a bucket load of cash.

Therefore, solving the subprime problem will do no more than shift the excesses of credit elsewhere.

We’ve seen that before. Look at Enron. The trading guys at Enron weren’t specialists in electricity trading. They were young kid traders sat in front of six computer screens who just had to click ‘buy’ or ’sell’.

As soon as Enron collapsed they went off looking for other things to ‘buy’ and ’sell’. Many of them probably ended up trading credit default swaps and other such derivatives. Financial instruments that they were just as ignorant of as the electricity market.

Solving the global meltdown by blaming it all on subprime and removing that risk is like taking the keys from a youngster who’s been driving a sports car too fast, and instead handing him the keys to a 3000cc motorbike.

There will still be carnage it’s just that it will look different.

As much as the mainstream commentators may claim that lessons have been learned and that Australia didn’t have a subprime culture, it all misses the point. The old habits of excessive borrowing are still unchanged, and in fact are likely to get worse.

So the message is, if you’re looking for the next big economic meltdown to come from the US subprime housing market, odds are you’re looking in the wrong place. So where will it come from?

We’ll look at that another day. But our guess remains that you need to look north. Because China is brewing up quite nicely right now.

Cheers.
Kris.