Archive for the ‘Economic policy’ Category

Would a significant increase in the top (US) marginal income tax rate substantially alter income inequality?

October 5th, 2015 5 comments


This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

Some post-school education bodies we could do without

October 1st, 2015 37 comments

First, there’s the Australian Skills Quality Authority, which is supposed to regulate the quality of vocational education. AQSA’s performance makes the Greyhound Racing Queensland Board look good

In 2012, when I wrote a report on vocational education, it was common knowledge that the for-profit education sector was comprehensively rotten, particularly in Victoria where the push to privatisation began. This ABC report suggests that ASQA was on the case. But three years later, the only thing that has changed is that the rot has spread nationwide. All the big names in the industry – Evocca, Aspire and so on – are engaged in practices like using laptops as inducement to recruit low-income students who have no chance of either completing their courses or repaying their HECS-HELP debts. There’s no surprise here – it’s exactly the business model of US for-profits like the University of Phoenix.

The right solution is to stop giving any public money to for-profit education businesses. But, in the current market liberal environment that would probably fall afoul of competition policy. So, my suggestion is to cap the amount any publicly funded institution can spend on marketing to Australian students. Ideally the cap would be well below the amount currently being wasted by universities and other public providers competing against each other with our money. That in turn would be far below the rake-off being taken by the recruiters on whom the for-profits depend.

In the meantime, AQSA is a proven failure. It needs to be scrapped and its functions turned over to a body with some real teeth and a willingness to defend the interests of students and the public purse, rather than being a captive of the industry it is supposed to regulate. A joint investigation by the ACCC and the Auditor-General would be a good start.

Next, Universities Australia, the Go8 and the other Vice-Chancellors’ clubs. Fresh from the fee deregulation debacle, they’ve turned their attention to the question of how we should allocate research training places (such as PhD programs).

In the case of fee deregulation, the VC groups were uniformly wrong, not to mention tin-eared. This time, we have the odd spectacle of the Go8 directly opposing UA, even though one is a subset of the other. The Go8 want to stop departments with poor research records, based on the “Excellence in Research Assessment” from getting funding for research training places. UA is opposed, making the point that ERA is not “fit for purpose”.

In the abstract, I have some sympathy for both sides of this argument but in practice it just looks like special pleading on both sides – UA wanting to keep something for all its members, and the Go8 lobbying for special treatment.

But the real problem is the one I identified in the deregulation debacle. The VC groups claim to speak for universities, but exclude all but 40-odd of the people who work and study in them. In the present case, wouldn’t the perspectives of research students and the academics who supervise them be more useful than those of VCs and administrators? To repeat, we need to replace UA with a body that represents students and staff as well as top management.

And, while we’re at it, how about dropping the linguistic abomination of names like Universities Australia[1]? Even knowing nothing else about the group, a name like this reeks of the worst kind of 1990s managerialism.

[^1] Are there any grammar experts who can give a name to the part of speech represented by “Australia” in this title? It’s not known to Standard English, I’m pretty sure.

Categories: Economic policy Tags:

A CHAFTA election? (updated)

September 17th, 2015 47 comments

Malcolm Turnbull’s coup against Abbott has been the subject of much commentary, and I didn’t have anything to add. But now it’s time to look beyond the juggling of Cabinet positions and to consider some of the long term implications. Turnbull’s rise takes off the table, or radically changes the politics of, a number of issues that would have been central to an Abbott election campaign. Most obviously, there are the issues (climate change, equal marriage, republicanism) where Turnbull is known to agree with Labor but has said he will stick with Abbott’s policies. Obviously, Turnbull can’t run hard on these. It remains to be seen whether Labor can make political mileage out of the contradictions involved.

The ground Turnbull wants to fight on is that of economic liberalism, primarily as represented by the so-called Free Trade Agreements with Korea, Japan and, most importantly, China.

Turnbull has the near-unanimous support of the elites on these deals, even though it’s hard to find even a single economist who would support them with any enthusiasm. Anyone who has looked seriously at the issue understands that the trade aspect of these agreements is trivial. What matters are the side clauses on issues like Investor-State Dispute Settlement procedures, intellectual property, environmental protection and so forth. Unfortunately, political journalists, as a class, don’t do much thinking.

Here, for example, is Laurie Oakes, asserting that

>Labor needs to end up supporting this trade deal. That is the bottom line

but not providing a single argument in favour. In typical “Insider” style, Oakes says

The government charge that Labor is sabotaging jobs would not be a difficult one to sustain.

without worrying about whether this charge is actually true (it isn’t).

In the case of CHAFTA (the unlovely acronym for the China deal), the big problem is not in the agreement itself, but in a “Memorandum of Understanding”, which provides for circumstances under which a Chinese company can import its own workforce, without labour market testing (that is, even if there are Australians willing and able to fill the jobs) and without matching existing conditions.
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Categories: Economic policy, Oz Politics Tags:

When did “Free Trade Agreements” become “reform” ?

September 8th, 2015 15 comments

The Oz is pushing hard for the China-Australia Free Trade Agreement. Support for the deal was (AFAICT) the only significant output from the “National Reform Summit” held by the Oz and AFR a week or so ago. This raises a few points of interest.

* Until very recently, bilateral trade deals of any kind were seen as the antithesis of free-market reform. Reformers favored either unilateral removal of trade barriers or global deals through the World Trade Organization. Admittedly, the latter is clearly a forlorn hope, but what happened to unilateral free trade

* Second, it ought to be clear by now that “reform” means “whatever the Oz and IPA wants”. For example, tax reform doesn’t mean taxing mineral rents or carbon externalities or tax-dodging trusts and shell companies. In essence, it means taxing food and giving the proceeds to the rich. Anyone concerned with good policy should stop using this word in a positive sense

* Most importantly, “Free Trade Agreements” are nothing of the kind. The key to the China deal is the expansion of the 457 system to allow for 100 per cent overseas workforces. Even if you think that’s a good idea, it should be addressed in the context of immigration policy. There’s a startling contradiction between this stuff and Joe Hockey’s high profile persecution of Chinese buyers who are allegedly pushing up the price of Sydney houses.

* The same is true of the other FTA’s this government has signed, and even more so of the proposed TPP. At most, the trade component of these deals consists of Australia selling its domestic policy sovereignty to foreign governments in return for the removal of their trade barriers.

Three word slogans

August 22nd, 2015 18 comments

I have a piece up at the Drum, looking at how the three-word slogan approach of the Abbott government helps to explain their budget problems. Text is over the fold

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Green jobs

August 17th, 2015 13 comments

The question of “green jobs” has arisen in a lot of different contexts. At present, the most relevant is the problem of how to deal with the employment effects of the necessary and inevitable decline of industries based on fossil fuels. Part of this question is whether expanding sectors of the economy will create a number of new jobs comparable to those that disappear , and whether those jobs will be appropriate for the kinds of workers who worked, or would have, in the declining sector (that is, predominantly, male manual and trades workers). There are a lot of conceptual problems here, which I’m not going to address in detail. Rather, I’ll just look at some raw numbers and throw in some comments.

I was struck recently to read that, in the United States, the solar power industry now employs 174 000 people. That’s twice as many as coal mining. And, while these aren’t direct substitutes, they are, it would appear, broadly similar kinds of industries in the sense that the core workforce is dominated by male manual and trades workers.

Looking quickly at similar stats for Australia, I found that the numbers were reversed. According to the ABS, there were just under 40 000 Australians employed in the coal mining industry in May 2015, down from a peak of 60 000 in 2012, but well above the 20 000 or so employed in the early 2000s.

The Clean Energy Council estimates around 20 000 jobs in the renewables sector in 2014 – that’s up from virtually zero before 2010. So, broadly speaking growth in renewables has offset the decline in coal mining.

One specific issue in the US, that’s less of a problem here, at least in Queensland, is that of declining communities in places like Appalachia. Thanks to the practice of Fly-in Fly-Out, there are many fewer Australian communities focused on coal mining.

Finally, some related statistics I found in the process of researching this. The forestry and logging industries currently employ 3900 people (this number bounces about a lot, so I’m not sure how reliable it is). That’s about the same as the combined total for the NSW and Victorian National Parks systems. I expect if you added in various kinds of manual/trades jobs in adventure tourism and similar, you would find a net gain over the past 25 years or so.

Categories: Economic policy, Environment Tags:

How our Senate (and not the US Senate) blocked the TPP

August 4th, 2015 17 comments

Following the breakdown of talks on the Trans Pacific Partnership last week, I did a quick reaction piece for Inside Story, making the point that our much-maligned Senate was the most important source of resistance to the demands for yet more protection for US pharmaceuticals, demands that make a mockery of both the claim that the TPP is a “free trade agreement” and the “diffusion of knowledge” rationale for the patent system.

Is an emissions trading scheme a carbon tax?

August 4th, 2015 23 comments

I was recently asked this question by ABC Fact Check. Here’s my answer:

The core idea of an ETS is to limit the volume of emissions (of carbon dioxide) by creating a set of permits that must be used by emitters. The permits may initially be auctioned or given away. Since the permits are tradeable a market price will be determined by the demand for permits and the willingness of permit holders to sell their permits. By contrast, a carbon tax sets a price on carbon emissions and allows the market to determine the volume of emissions.

There are a large variety of schemes that resemble the ETS in general structure. Within the environmental area, both the Renewable Energy Target and the government’s Emissions Reduction Fund (if augmented with a baseline allocation and penalty structure) fall into this class. Other examples include taxi licenses, electronic spectrum auctions, and tradeable catch quotas in fisheries. None of these policies is normally described as a tax.

Back to the Deutschmark

July 28th, 2015 86 comments

The debt crisis has upended lots of my assumptions about European politics, so it’s perhaps not surprising that I find myself agreeing with just about everything in this piece from The Telegraph by Mehreen Khan, advocating a German exit from the euro. Less surprisingly, I also agree in general with this NY Times article by Shahin Vallee, who also concludes that the (virtually inevitable) breakup of the euro would be better achieved by an orderly German departure.
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Categories: Economic policy Tags:

Sea change

July 27th, 2015 25 comments

Maybe it’s my chronic over-optimism, but it seems to me as if there has been a sudden change in the long-sputtering debate about taxation in Australia. Until a few weeks ago, “tax reform” was, as it had long been, code a “tax mix switch” which in turn was code for “tax food and use the proceeds to cut the company tax rate or the top marginal rate of taxation”. Joe Hockey was still pushing the second part of this package only a week ago.

But the reports coming out of the recent COAG summit seemed to convey a general acceptance that more tax revenue is needed to fund health expenditure in particular. The two top options were an increase in the rate of GST or an increase in the Medicare levy, with little mention of “base broadening” (more code for taxing food).

Meanwhile, Labor has been talking about a Buffett tax, that is, a minimum rate of tax levied on gross incomes, regardless of deductions. And, while the LNP still assumes that it can win by running against a “carbon tax”, that belief seems to have come unmoored from any general theoretical viewpoint. How can Abbott run against a “great big new tax on everything”, if he is happy to discuss a 50 per cent increase in our existing “great big tax on everything”, the GST?

I’m not clear what has happened to bring this about, or whether I’m misreading the signals. But it certainly looks to me as if the great political taboo against even mentioning higher taxes has been broken.

How I learned to stop worrying and love the RET

July 26th, 2015 21 comments

That’s the title of a paper I wrote a while back about the Renewable Energy Target scheme. I was reminded of it when Labor announced its proposal to raise the RET to 50 per cent by 2030.

First, it’s striking to observe that no one has popped up to claim that the target is unachievable or that an electricity supply system with 50 per cent renewables will be unworkable. The strongest claim I could find in this article describing coal lobby responses is someone from the Minerals Council of Australia saying that the target is “technically questionable” which could mean anything. By contrast, until very recently, sites like Brave New Climate were full of amateur experts claiming to demonstrate the impossibility of such a goal.

Second, it’s clear that the economic impact will be minuscule. Owners of coal-fired power stations (if they are not compensated, as they should not be) will bear most of the costs. Electricity prices may rise a little compared to the current RET, but will probably be no higher than if we had stayed with a coal-based system. Perhaps this will help to convince those who think that decarbonization of the economy as a whole must have a massive cost impact, but, based on past experience, I can’t see this happening.

Third, as argued in the paper mentioned in the title, an expanded RET may not be the best way to achieve climate goals, but, if the carbon price is below the appropriate level ($50/tonne or more), a RET for the electricity sector is an appropriate policy. The main problem is that the RET doesn’t discriminate between different fossil fuels. A RET, combined with incentives to close down brown coal power stations, would have much the same effects as an adequate carbon price, and is politically much easier to do.

Categories: Economic policy, Environment Tags:

Balancing the books

July 10th, 2015 43 comments

I’ve been at the Australian Conference of Economists for the last few days. Today we had presentations from the Queensland Treasurer, Curtis Pitt, who is about to bring down his first budget, and from Commonwealth Treasury Secretary, John Fraser.

Curtis Pitt’s big announcement was a rearrangement of debt and equity in Government Owned Corporations, increasing their borrowing and transferring the resulting equity to the general government balance sheet. The result is a $4 billion reduction in general government debt, part of a program to bring the debt/revenue ratio down to around 70 per cent.

A transfer like this doesn’t make any difference to the state’s net financial position. Bu it makes the point that publicly owned assets are assets, not liabilities, and the fact that we own them makes the state’s position stronger. As long as the higher gearing ratio is commercially sensible and the debt can be serviced out of GOC earnings, there’s no reason not to use this to improve measures of general government debt.

Privatisation also makes no difference to the net position, assuming assets are sold at their value in continued public ownership, and the proceeds are used to pay down debt. However, the StrongChoices plan put by the LNP at the last election, would have dissipated around half of the sale proceeds on pork-barrel projects (to be delivered only if the LNP won the seat in question). So, compared to the alternative, Labor’s management is fiscally responsible.

The only measure that is unaffected by balance sheet reshuffles (at least if it is correctly measured) is net worth, and the only way to increase net worth is for income (revenue and asset earnings) to exceed expenditure.

John Fraser’s performance was as expected, which is to say, deeply disappointing. As a colleague sitting at our table remarked, he came across as a politician not a Treasury secretary. Fraser repeated the Henry Review’s criticism of stamp duties and the case for not taxing mobile capital. But when I asked if that meant he supported land taxes, he squibbed the question, waffling on about what a great group of officials he was working with in the states.

Categories: Tax and public expenditure Tags:

The IMF: An inexcusable, incorrigible failure

July 4th, 2015 55 comments

Chris Berrtram at Crooked Timber has already pointed out the failure of the core European institutions in their response to the global financial crisis. One excuse that can be made for these institutions is that they are still in the process of development, and were ill-prepared, intellectually and institutionally, for an event so far outside their experience. The ECB and EC developed in a period when controlling inflation and stabilizing government debt were the key imperatives, and they responded to the crisis accordingly.

No such excuse can be made for the third member of the Troika, the International Monetary Fund. The IMF has understood from the start that the austerity policies it has imposed are economically unsound and a repetition of past failures. And yet it has been unwilling and unable to do anything else.

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A progressive alternative economic agenda

June 26th, 2015 194 comments

This is a statement released yesterday and endorsed by a group of unions and individuals, including me. It calls for a progressive alternative economic policy. It’s a statement of principles rather than a program, and essentially a restatement of the social democratic position that represents the best of the Australian labor movement, free of both dogmatic leftism and the capitulation to market liberalism we’ve seen over the past thirty years or so.

A program developed on these principles would, I believe, be electorally popular if only we could get it before the public. But the policy elite, including journalists and the press, remain under the spell of market liberalism, despite its evident failures. So, our public debate will continue to be dominated by silly pointscoring about debt, deficits and the need for “reform”.

The full text is over the fold (the link goes to a properly formatted version)

Read more…

Categories: Economic policy Tags:

The Laffer hypothesis in Australia

May 16th, 2015 34 comments

I didn’t have time to respond, but the IPA brought Arthur Laffer out to Australia a month or two ago. For those interested, over the fold is a relevant extract from Zombie Economics.

Of rather more concern is the evidence that both the Secretary of the Treasury, John Fraser, and his Deputy for Revenue, Rob Heferen are adherents of the Laffer hypothesis or something very close to it. Fraser gave evidence to the Senate endorsing the Reagan tax cuts (based on Laffer’s hypothesis), while Heferen has claimed that something like 50 per cent of the revenue lost through a company tax cut will be returned through dynamic effects.

Although no issues are ever truly resolved in economics, this informal survey published by Ezra Klein is revealing. Klein asked various people about the tax rate at which revenue would be maximized. His respondents fell into three groups: left/liberal economists, who mostly gave answers around 70 per cent, rightwing pundits with zero credibility who gave answers around 20 per cent, and serious right/centre-right economists, who declined to give a direct answer to the question.

This suggests to me that the debate over the Laffer hypothesis has been won fairly conclusively by the left, and that those on the right would prefer to frame the question in the more defensible (though still, in my opinion, incorrect) claim that we face a long-run trade-off between equality and growth.

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Economic policy for the 21st Century

May 13th, 2015 18 comments

That was the title for the John Freebairn lecture on public policy I gave in Melbourne on Monday (Sorry for not giving any advance notice, I’ve been a bit swamped). Having offered that ambitious title, I decided to confine myself to the subset of policy issues surrounding the knowledge economy, and how it renders the reform agenda of the 1980s obsolete or irrelevant.

I believe there will be a vodcast, but in the meantime here are Mac Keynote and PDF versions of the slides.

Categories: Economic policy Tags:

Rethinking tax policy for Australia

April 24th, 2015 96 comments

The title of this post is taken from that of the recent Treasury Discussions Paper on Tax, entitled Re:Think. Sadly, as I point out in this Guardian piece, there’s very little evidence of rethinking from Treasury. Most of the paper could have been lifted straight from the Asprey Review of 1975, and the sensitivities of the current government have ensured a step backwards from the Henry Review, with carbon taxes and resource rent taxes now off limits.

Undeterred, I’m going to start on my own review. I’m going to try something a little different in blog terms. This post will be updated whenever I get a chance, both with new material and in terms of publication date so that each new version will appear at the top of the homepage, hopefully with the comments being carried with it. I’m putting in some headings, and starting off with an idea I mentioned recently, that of a tax on bank profits

Aggregates: Revenue, expenditure, budget balance, debt and net worth

Revenue options

* A tax on the super-profits of banks, reflecting their privileged position. Tax base $29 billion. Possible revenue $5-10 billion, or 0.3-0.6 per cent of national income/GDP.

* Reforming the treatment of negative gearing “Quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains. Revenue estimate: rising over time to $5 billion a year, or 0.3 per cent of national income/GDP.

Expenditure requirements

Categories: Tax and public expenditure Tags:

Negative gearing

April 24th, 2015 17 comments

As I mentioned a while back, I’m planning a series of posts on tax policy. Since debate about “negative gearing” has been spurred by the suggestion that Labor might restrict it, this seems like a good time to cover the topic.

I’ll give my summary upfront, then go on. The problem is not negative gearing in itself but its interaction with the concessional treatment of capital gains. There are a variety of solutions, but the best is probably to “quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains.

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Categories: Tax and public expenditure Tags:

Waiting for the fallout: Australia and return of the patrimonial society

April 21st, 2015 26 comments
Categories: Economic policy Tags:

Goodbye to CPD

April 17th, 2015 30 comments

Like Mark Bahnisch, Eva Cox and a number of others, I’ve resigned as a Fellow of the Centre for Policy Development. It’s a sad day, since CPD has done a lot of great work, and I’ve enjoyed being involved in it. But the leadership of the Centre has taken a decision to move to the right in the hope of being more relevant to the policy process. The most recent outcome has been a paper on tax policy that broadly accepts the Treasury view of the issue, and pushes for a broadening of the GST base, which means taxation of fresh food. This isn’t a new or innovative idea. Rather, it has been part of rightwing orthodoxy for decades. CPDs endorsement allows its advocates to claim some “left” support. That claim obviously gained credibility from having Fellows like Mark, Eva and me. So, we had no alternative but to resign.

I should clarify that, apart from a nice title and a publishing outlet, I wasn’t getting any direct benefit from being part of CPD. So, I’m making a statement rather than a sacrifice.

Stop subsidising for-profit education

April 12th, 2015 94 comments

Among the many failures in the education ‘reform’ movement, the attempt to promote for-profit education has been the most complete. The Swedish experiment, for quite a few years seen as the exemplar of success, has turned out very badly.

In the US, the for-profit schools company Edison failed completely. Far worse for-profit universities like Phoenix, which have prospered by recruiting poor students, eligible for Federal Pell Grants, and enrolling them in degree programs they never finish. Phoenix collects the US government cash, while the students are lumbered with debts they can never repay and can’t even discharge in bankruptcy.

Several years ago, there was a major scandal in Victoria (which led the way in privatising vocational education) about similar practices.

This did not, of course, lead to any change for the better. Instead, governments across Australia followed the Victorian model. For-profit providers responded by emulating the University of Phoenix, with recruiters offering free laptops to anyone will to sign up for a course and the associated debts: the targeted groups were low-income earners who would not have to repay the income contingent loan except in the unlikely event that the course propelled them into the middle class.

This isn’t just a matter of fringe players: a report on A Current Affair[1] identified some of the biggest for-profit firms, such as Evocca, Careers Australia and Aspire. The Australian Skills Quality Authority is supposedly investigating. However, as with the authorities that are supposed to regulate greyhound racing, the obvious question is why, when these rorts have been common knowledge for years, a current affairs show can find the evidence ASQA has apparently missed.

It’s clear enough that privatisating VET-TAFE has been a failure, as would be expected based on international experience. But the answer isn’t to go back to the past. Rather, we need a national framework for post-school education, with funding both for TAFE and universities on an integrated basis.

There’s still the problem of how to wind down the for-profit system. I’d suggest that we could start by converting the better ones into contract providers of TAFE courses, and then gradually absorbing them into a unified system.

Those who don’t like that deal could compete like good capitalists in the open market, charging upfront fees and serving whatever market they could find, subject to ordinary consumer protection laws.

fn1. Presumably reflecting a change in the audience, A Current Affair has started targeting large-scale corporate wrongdoing rather than going solely after the easy target of dodgy tradespeople and low-grade con artists. Unfortunately, the story was spoiled by an apparently irrelevant attempt to drag in the Mormon affiliations of some of those involved in the basis, but you can’t have everything.

Categories: Economic policy Tags:

How should we tax banks?

March 29th, 2015 43 comments

The first real Budget leak of the season has sprung, with indications that the government will introduce a tax on bank deposits, aimed at financing a deposit insurance fund. This was proposed by Labor in 2013, and attacked by Tony Abbott at the time. Judging by Andrew Leigh’s comments that “I don’t think we’re going to take any lessons on bipartisanship from Joe Hockey”, they haven’t forgotten.

The best course for Labor would be to support the measure, but to impose ACCC supervision to stop the banks passing the charge onto consumers. That should be the wedge for permanent ACCC oversight of fees and charges.

None of this, however, gets to the real issue. Banks are immensely profitable, and their profitability rests on the fact that they can never really fail. It’s nearly always cheaper for the regulators to bail a bank out (for example, via a takeover) than to actually shut it down and pay out the depositors.

The appropriate tax base for a profit-enhancing subsidy is profits, currently running at $29 billion per year. Bank profits should be subject to a special tax, reflecting their special status. This would raise substantially more revenue than a deposit insurance levy.

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Categories: Economic policy Tags:

Plan B

March 19th, 2015 62 comments

Now that the Senate has rejected Pyne’s university deregulation plan, the obvious question is, what is Plan B? The first, negative answer: there is no acceptable plan that will deliver what the advocates of deregulation wanted, namely a highly stratified system, catering to a smaller minority of the population than at present, and topped by high-status institutions comparable to Yale and Harvard. That’s the US model and, as a system for educating young people, as opposed to generating research and reproducing a tiny elite, it’s been a miserable failure.

The correct way to think about this is to begin with the core objective of the process: to provide young Australians with post-school education that fits them for work in a modern economy and life in a modern society. That leads to two main principles

* A single system encompassing both universities and post-school technical education with easy flow between the two
* Uncapped access with an objective of (near) universal participation in some form of post-school education
* As with school education, the aim should not be stratification by quality, but the provision of a high-quality education for all, with resource allocation based on educational needs, not institutional history or individual wealth

I’ll leave aside, for the moment, the problems of the TAFE sector, though these are, I think, more urgent and difficult than those of the universities.

The big problem with what I’m proposing is that it will require more money for undergraduate education. That’s because the existing system relies on a mixture of student payments (through HECS), government funding and a cross-subsidy from fee-paying overseas students. There’s no substantial scope to get more money from overseas students, so the more domestic students the more thinly that cross-subsidy is spread. Similarly, although more government funding is merited, maintaining existing funding on a per-student basis while expanding numbers is probably too much to hope for. However, a clear focus on the core goal of universal post-school education would help a lot, though it necessarily poses some tough choices.

Broadly speaking, the goal I’m thinking about is to maintain existing teaching resources per student, while expanding access to cover a steadily increasing proportion of the population.

Some ideas are listed below (over the fold)

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The TPP: an attack on our freedoms

March 16th, 2015 53 comments

I have a piece in Inside Story looking at the Trans-Pacific Partnership.

Summary: It’s bad, and our only hope is that the US Congress will block it.

Categories: Economic policy Tags:

Neither up nor down

March 16th, 2015 30 comments

I’ve had the unusual experience of being cited as an authoritative expert* by both the Oz and AFR this week. Unfortunately, the Oz got the story wrong, and the AFR report, while correct on a careful reading, is misleading. The issue is the impact of electricity privatisation on power prices.

Direct comparisons suggest that consumer prices don’t differ much between NSW and Queensland (with public ownership) and SA and Vic (with privatisation), though SA is highest.

The advocates of privatisation have focused on distribution charges, showing in the process that they don’t understand the National Electricity Market reforms they and their ideological allies pushed through in the 1990s. Under the system of regulation, distributors are allowed to charge a price sufficient to cover their “efficient costs”, which are determined in large measure by benchmarking against other distributors. So, if private firms are more efficient than public firms, that should have no effect on regulated distribution charges, only on relative profitability. **

As the AFR and Oz both gleefully pointed out, that analysis contradicts what they called Luke Foley’s “great lie”, that prices will rise if privatisation takes place. Unfortunately, it also contradicts the equal and opposite lie, that prices will fall if privatisation takes place. The AFR gives a misleading headline, but is correct in the body of its report, saying “The prices charged by the government-owned NSW network companies will go down – not up – whether or not they are leased out to private operators.” That contradicts Foley’s claims, but also the opposite claims made by the Liberals.

I look forward to the AFR and Oz correcting this error and presenting the correct analysis (only joking!).

More seriously, I’m hoping to do a proper analysis of electricity prices and why they have risen so much under the NEM, contrary to the predictions of the micro reform lobby of which both the Oz and the Fin are part.

* Of course, I was cited in an “even the liberal New Republic …” way. The AFR noted, reasonably enough, that I was opposed to privatisation. The Oz went full-on as only the Oz can do, reprinting some of Michael Stutchbury’s hit piece, written for them before he jumped ship to the Fin. Since this piece earned me a very nice write up in the New York Times, I guess I can’t complain.

** Disclosure: I was for some years, a member of the Queensland Competition Authority, which regulated distribution charges. I’ll write more about this, if I get time.

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The US government didn’t lose the War on Poverty: it changed sides

March 14th, 2015 72 comments

I made this observation in comments on a Crooked Timber post, and got some pushback, so I thought I’d take a look back at the data

US Households in Poverty, 1959-2013

US Households in Poverty, 1959-2013

Both the number and the percentage of families in poverty dropped sharply during the 1960s when the “War on Poverty” was being waged actively, and remained near their all-time lows through the Nixon and Carter years until 1979, when the Volcker recession hit, followed by the election of Ronald Reagan. These events can reasonably be said to mark the point at which the government unequivocally changed sides.

The number of households in poverty has risen steadily since then and is now higher than in 1959, the year for which the poverty level was first defined by Mollie Orshansky. The poverty rate has remained consistently higher than in the 1970s, except for a brief deep at the peak of the late-1990s boom.
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NSW Privatisation

March 11th, 2015 62 comments
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A life expectancy of 95 by 2050? This does not mean what you think it means

March 7th, 2015 31 comments

Among the scary numbers in the Intergenerational Report was the estimate that, by 2050, life expectancy would have risen to 95/96 years, which would seem to imply a huge increase in the number of years spent in retirement. I checked and found that the report gave current life expectancy as 92/93 years, far higher than the 80 or so that is usually quoted. The reason, it turns out is that the standard estimate is done on a “period” basis, using the age-specific mortality rates of the present. The higher estimate is done on a “cohort” basis, taking account of expected future reductions in mortality. More on this here.

A few observations on this point.

* An increase of four years is neither surprising nor alarming. This is doubtless why this comparison ins not made in the IGR.

* In my last post, I noted the use of the obsolete 15-64 category to estimate the working-age population. One possible defence was that this was done in consistency with past practice. But clearly this can’t apply to the (unannounced) shift from the standard period basis to a cohort basis

* More importantly, the 95-year figure is an estimate of the likely life expectancy of children born in 2050, who would reach retiring age some time after 2115. Even the current birth cohort won’t be of pensionable age until near the end of this century.

A cohort measure of life expectancy is more relevant to projections of future pension expenditure than a period measure, though it requires the use of estimates of future mortality. But the relevant cohorts for the purpose of the IGR are those born before 1983 who will be 67 and over in 2050 and will then (assuming no policy change) be eligible for the age pension.

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My take on the latest round in the Greek crisis

February 28th, 2015 36 comments
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Who blinked ?

February 25th, 2015 31 comments

So, the latest round of the Greek debt crisis has ended in a typical European combination of delay and compromise, much as Yanis Varoufakis predicted a week ago. But in view of the obvious incompatibility of the positions put forward, someone must have given a fair bit of ground. The Greeks wanted continued EU support, and an end to the Troika’s austerity program. The Troika (at least as represented by German Finance Minister Schauble) wanted Syriza to abandon its election program and continue with the existing ND/Pasok policy of capitulation to the Troika.

Put that way, I think it’s clear that the Troika blinked. The new agreement allows Syriza to replace the Troika’s austerity program with a set of reforms of its choice, focusing on things like tax evasion. Most of Syriza’s election platform remains intact. Of course, it’s only for four months, and none of the big issues has been resolved. But four months takes us most of the way to the next Spanish election campaign, hardly an opportune time to contemplate expelling a debtor country from the eurozone with utterly unpredictable consequences.

If the negotations were a win for Greece (feel free to disagree!) how did it happen?

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