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Archive for the ‘Economic policy’ Category

Subsidising coal

November 18th, 2014 41 comments

I was going to post on the Newman government’s announcement of subsidies to development of new coal mines in the Galilee Basin, but this piece by Michael West says it all. Key observation

The very day after the G20 concluded, with its recommendations about ending government subsidies to fossil fuels, it appears the Queensland government is poised to ramp up its subsidies for the humungous Galilee Basin coal project.

Read more: http://www.smh.com.au/business/mining-and-resources/wise-investment-or-fossil-fools-queensland-backs-coal-as-g20-moves-the-game-on-20141117-11odkq.html#ixzz3JM8yeHsw

Categories: Economic policy Tags:

The G20: A bonanza for tourism?

October 24th, 2014 26 comments

I was contacted by a journalism student here who would some commentary on the rosy projections being made about how the G20 meetings will put Brisbane on the world tourism map, assisted by such initiatives as a month of cultural celebrations (beginning tomorrow) along with “Team Brisbane” and “Global Cafe”. I offered the following response

G20 will provide a short-lived but substantial boost in demand for accommodation and restaurant services in the Brisbane CBD, associated with the arrival of thousands of delegates and media representatives. This will be offset by a negative effect on all other kinds of tourism, not only because of the difficulty of obtaining accommodation but because of the lockdown and other security measures associated with the event, and perhaps with fears of terrorism.

Longer-term effects on tourism, economic growth, and so on will be negligible. International news coverage of G20 will focus on staged events in the CBD, such as media conferences, held in settings indistinguishable from those of any other CBD. Viewers will scarcely be aware that the event is being held in Brisbane, let alone that there are associated cultural celebrations or that Brisbane is a desirable place to visit. A Google search on “G20 cultural celebrations” reveals zero coverage outside (greater) Brisbane, even though the event is starting today.

As regards “Team Brisbane” and “Global Cafe”, I was entirely unaware of these marketing efforts. I suspect that I am typical of the world’s population in this respect.

Categories: Economic policy Tags:

Black Swans, Financial Crises and more

October 10th, 2014 19 comments

I’ve spent the last couple of days in Sydney at a conference organized by the Paul Woolley Centre for the Study of Capital Market Dysfunctionality. It’s striking that this is the only research group of which I’m aware that takes dysfunctionality, rather than the Efficient Markets Hypothesis as a starting point.

Various people have asked me about the paper and slides, so I’m putting them up for download.

Black Swans and Financial Regulation (presentation

Unawareness and financial innovation presentation and paper)

Categories: Economic policy Tags:

Australian states are losing their AAA ratings. Should we panic?

September 29th, 2014 14 comments

That’s the title of my latest piece in Crikey. Paywalled, but I’ve reposted over the fold

Read more…

Categories: Economic policy, Oz Politics Tags:

From derp to denialism

September 21st, 2014 53 comments

Over the last couple of weeks, I’ve seen four major reports (details over the fold) from very different sources, all making the same point: decarbonizing the world economy will involve economic costs that are
(a) small; and
(b) far outweighed by the benefits
And, the empirical evidence so far is strong. The EU and US have both reduced CO2 emissions significantly, at negligible or even negative economic cost. The measures announced by Obama, including vehicle emissions standards and restrictions on coal-fired power stations appear set to achieve further substantial reductions, again while yielding net economic benefits.

Against the expectations of doubters, wind and solar PV are steadily increasing their share of electricity generation, to the point where they constitute the majority of new installations in many countries. Again, the costs have been trivially small: in Australia’s case, made up almost entirely of the reduction in asset value imposed on existing generators.

There is as far as I am aware, no credible analysis to support the opposite claim (call it the economic armageddon hypothesis) that decarbonization will involve economic costs sufficient to greatly reduce living standards, or, for poor countries, prevent catchup to the developed world. (Again, more detailed argument over the fold.

Nevertheless, past experience suggests that lots of people are sufficiently wedded to the economic armageddon hypothesis that neither this, nor any other evidence will change their minds. I have previously analyzed this unwillingness to respond to evidence in terms of Noah Smith’s Bayesian definition of “derp“: “the constant, repetitive reiteration of strong priors”.

But I no longer think this is sufficient. A central concept of Bayesian decision theory is the separation of preferences from beliefs. That is, your subjective belief about the probability that a proposition is true should be independent of whether (because you have bet on it, or for some other reason) you want it to be true. This is the opposite of what is often called “motivated reasoning” or, less politely, “wishful thinking”.

This, I think, is the central distinction between “derp” and “denial”. Both involve the rejection of factual evidence that would (to a person without strong preconceptions) be overwhelmingly strong. This must involve strong prior beliefs. Denial differs from derp in that these factual beliefs derive from preferences, and are unlikely to undergo any updating. If anything, denial may be strengthened by evidence of the proposition being denied.

This in turn suggests different possible cures. Derp may eventually, if very slowly, be overcome by an accumulation of evidence. By contrast, denial can only be addressed by changing the source of wishful thinking; for example, by convincing rightwingers to stop being rightwingers.

Read more…

Categories: Economic policy, Environment Tags:

Post-School Education in Australia: The Case against Deregulation

September 19th, 2014 8 comments

That’s the title of my submission to the Senate Education and Employment Legislation Committee inquiry into the Higher Education and Research Reform Amendment Bill 2014.

You can read it here

Categories: Economic policy, Oz Politics Tags:

Go8: The empire strikes back

September 15th, 2014 9 comments

Michael Gallagher of the Go8 has put out a press release in reaction to my piece in The Conversation on higher education reform, accusing me of “an attack on a straw man”. It’s a fine example of John Holbo’s two-step of terrific triviality. Gallagher backs away from his previous advocacy of deregulation as a positive benefit to the much weaker position I mentioned in the article that it is “unpalatable but necessary response to cuts in funding”, or, in Gallagher’s words that “the status quo is not an option”.
Read more…

Categories: Economic policy Tags:

Pushing back on productivity

September 3rd, 2014 15 comments

For the last twenty years, I’ve been engaged in a lengthy debate with advocates of microeconomic reform who claim that reforms produced a surge of productivity growth in the 1990s and that more such reforms are urgently needed. I argued that the apparent surge was the result of increased capital utilization and higher work intensity in the aftermath of the 1989-92 recession. Hardly anyone in the economics profession was convinced.

Their views were unchanged after 2000 when (as I had predicted) productivity growth tailed off and then turned negative as the fear of unemployment decelined and the work intensification of the 1990s was reversed. First, this decline was attributed to a range of special factors (drought, Y2K and so on). Then it was said to be a measurement problem associated particularly with mining (true, but why accept measurement error in the 2000s while denying it then 1990s). Finally, after 2008, it was blamed on the end of Workchoices.

As everyone on both sides of the debate understands (though some choose to deny it at times) “productivity” is code for “working harder”. Microeconomic reform is supposed to increase competitive pressure and thereby keep workers on their toes at all times. In addition, they are suppose to “work smarter” which essentially means “find ways of getting more work done with no additional resources”.

Now, at last, it seems that I’m not alone in casting doubt on all this. Ross Gittins, always more sophisticated than the majority of economic commentators, has picked up some remarks by Ric Simes and Mike Keating telling business leaders to stop complaining about their workers’ laziness and start doing what they are supposed to be paid for: promoting innovations that yield genuine improvements in productivity. I’ve quoted at length over the fold, but do go and read the full piece.

Read more…

Categories: Economic policy Tags:

These are our leaders?

August 29th, 2014 66 comments

The website of the Group of Eight long-established universities has a section devoted to “Leaders Statements” supporting the Abbott government’s university reform[1] program. It’s a pretty depressing read. Not only are our leaders going in a direction that almost no-one in the sector wants to follow, but the quality of their arguments is depressingly mediocre. It’s a sad reflection on the university sector if this group is the best we can come up with to lead us.

First, there’s executive director Michael Gallagher (a longtime education bureaucrat rather than a former academic). His boilerplate advocacy of microeconomic reform reads as if he hasn’t had a new idea in 20 years. Most notably, he’s still beating the drum for the discredited for-profit model of the University of Phoenix. After giving the most glancing acknowledgement of the scandals that have exposed Phoenix as a machine for ripping off federal grants, he says

The important policy point is not about individual providers but about the directions of change that pioneering providers indicate for the future through their successes and failures. The thing about the US enterprise culture, unlike Australia’s, is a willingness to accept learning from failure as a step to success.

I thought we’d got over this “succeeding by failing” stuff back at the time of the dotcom bubble.

Then we have Warren Bebbington of the University of Adelaide who asserts

in a competitive environment, some fees will go up and some down. Students will have a range of choice they have never had before

Seriously? If Bebbington really believes this, I have a perpetual motion machine to sell him. His Go8 colleague, Ian Young was much more honest when he said that the Go8 institutions will not only raise fees across the board but will use the resulting financial freedom to cut intakes and offer smaller classes. That is, students will face both higher prices and less choice.

But the prize for embarrassment must surely go to the University of Western Australia whose Vice-Chancellor, Paul Johnson, asserts

“Government does not decide what businesses can charge for a loaf of bread, a litre of milk or any other product or service. Why should universities be any different?”

Apparently Professor Johnson has never heard of the Economic Regulatory Authority of Western Australia which, like its counterparts at state and federal level regulates the prices of a wide range of products and services, for a wide range of very good reasons. This is a level of argument which would be lame even for a random rightwing blogger.

Unfortunately, there is nothing new in this. Back in the 1990s, Alan Gilbert of Melbourne was pushing the Phoenix model and asserting that traditional academics were “handloom weavers” doomed to extinction. Among his many achievements was the $50-100 million or so wasted on U21Global, Melbourne University Private and similar initiatives. Before his unfortunate brush with plagiarism, David Robinson touted Monash as “the world’s first global university”, launching a series of overseas campuses that rapidly turned into money pits. At CQU, Lauchlan Chipman pioneered the use of universities as devices to rort Australia’s immigration system, with expensive central city campuses devoted entirely to overseas students majoring in Permanent Residency, while the domestic students in Rockhampton got nothing. The same advisors who pushed these disasters, along with likeminded successors, are driving education policy today.

fn1. I’ve given up using scare quotes around “reform”. Reform is just change of form, and there’s no reason to expect it will be beneficial.

Privatisation is not a magic pudding

August 22nd, 2014 29 comments

A few days ago, the Courier-Mail ran an editorial supporting privatisation. They were kind enough to run a reply from me, which I’ve reproduced over the fold. The headline picked up the point at the end about the choice between higher taxes and reduced services, which is relevant more general

Read more…

Categories: Economic policy Tags:

Hockey’s amazing discovery: Bigger households use more of everything

August 14th, 2014 203 comments

I’m a bit late joining the pile-on to Joe Hockey for his silly claim that poor people won’t be hit by fuel excise because they don’t drive (or not as much). Obviously, that’s true of just about every tax you can think of: poor people, earn less, spend less and therefore pay less tax. The big question, as the Australia Institute and others have pointed out, is how much people pay as a proportion of income. Food and fuel represent a larger than average share of spending for low-income households, so taxes on these items are more regressive than broad-based consumption taxes like the GST which in turn are regressive compared to income tax.

But there’s a more fundamental problem with the ABS Household Expenditure survey data cited by Hockey to defend his claim. In the tables he used, the ABS sorts households by income, with no adjustment for the number of people in the household (the ABS also provides “equivalised” figures, which adjust for household size). To quote the ABS

This difference in expenditure is partly a consequence of household size: households in the lowest quintile contain on average 1.5 persons, compared to 3.4 persons in households in the highest quintile. Lone person households make up 63% of households in the lowest quintile.

This makes a big difference to the figures quoted by Hockey, that top-quintile households spend $53 a week on fuel, and bottom quintile households only $16.

Comparing expenditure per person, the top quintile spends $16 per person and the bottom quintile $11 – a very small difference. Of course, the income figures need adjusting also, but here the difference remains huge. Income per person in the top quintile is about 5 times that in the bottom. And Hockey’s argument would look even worse if the ABS sorted households by income.

This is the kind of mistake that’s easy enough for an individual politician to make, but Hockey has the entire resources of the Treasury at his disposal. If he’d asked them before making his bizarre claim, I’m sure Treasury officials would have warned him off. As it is, they have had to provide him with the statistics most favorable to his claim and watch him get shot down.

Still, it was good enough to fool Andrew Bolt.

Read more…

Trickling down

August 4th, 2014 58 comments

Among the zombie ideas refuted in my book, Zombie Economics, “trickle down” economics is the one that dare not speak its name. Even those who believe, or are paid to say, that favored treatment for the rich will benefit the poor mostly avoid the term “trickle down”, preferring bromides like “a rising tide lift all boats”.

But that didn’t deter Ian Young, Vice-Chancellor of ANU and head of the Group of 8 Universities (basically, those established first, which have, as elsewhere in the world, gained a permanent high-status position as a result). As I predicted not long ago, he wants to raise fees and reduce the number of students at elite universities, including ANU, allowing them to offer a more personalised education.

Young’s argument is that students excluded from the Go8 will “trickle down” to lower-status universities, giving them a chance to both increase numbers and raise standards. But this suggestion doesn’t stand up to the most cursory examination. Both logic and historical evidence suggests that all or most universities will follow the lead of the Go8. In both the UK and Australia, whenever universities have been given option to increase fees or hold them steady, nearly all have gone for the maximum increase.

Think about this from the position of a university in the tiers immediately below the Go8 in the prestige hierarchy, the 1970-vintage unis like Griffith and Macquarie, and the Universities of Technology. Both groups can fill all the places they have, and both, like all Australian universities are straining at the seams in terms of both physical space and overloaded staff. They could not possibly take in more students with their current finances. It makes perfect sense for them to do the same as the Go8, raise fees a lot, and pass on some of the benefits in the form of smaller classes.

There’s a cumulative effect here. Suppose the Go8 institutions reduce their student intakes by 30 per cent. A few of those will give up on uni altogether, deterred by higher fees, but most will try a second-tier uni, displacing other students who would otherwise have been accepted. On top of that, there will be less places in those uni, say another 30 per cent. So, something like 60 per cent of the students formerly admitted to these unis will be excluded.

At the bottom of the status scale, the hard-pressed regional universities and former CAEs probably won’t be able to raise their fees as much as the Go8. But they will still be in a position to raise fees and entry standards at the same time, and, if they choose, to reduce their numbers as well. This isn’t so much trickle down as a cascade effect.

Of course, if you believe the increasingly silly Business Council of Australia, this is all to the good. Its head, Catherine Livingstone (BA, Macquarie) thinks we need less university students. Her members clearly don’t agree, judging by their hiring patterns. The unemployment rate for university graduates is estimated at 3.3 per cent, about half that for non-graduates. Wages and participation rates are also higher.

Categories: Dead Ideas book, Economic policy Tags:

To help poor people, give them money

August 1st, 2014 87 comments

The Oz (no link) is touting a campaign by Andrew Forrest to introduce an Australian version of the US “food stamps” system, replacing cash payments with a card that can only be used to buy an approved list of items. This is yet another step in the abandonment of economic rationalism by the political right. I’d be surprised if Forrest could get the support of any economist for this (though the recent performances of the IPA crew give me some pause). Free market advocates, following Milton Friedman, have long sought the replacement of in-kind benefits with cash. To those on the left, even where enthusiasm for markets is more qualified, the conclusion is reinforced by the obvious class warfare involved here. At best, someone like Forrest can be seen as a paternalist, hoping to protect the poor from themselves. But it’s obvious that the Murdoch press, and its target audience, want to punish the poor, not protect them.

As it happens, my slowly-progressing book has a section on just this issue, presenting the standard arguments of Friedman and others as part of the case for why markets work so well (when they do)

Read more…

Categories: Books and culture, Economic policy Tags:

Job search, yet again

August 1st, 2014 64 comments

I got lots of very helpful responses to my recent post on the search theory of unemployment, here and at Crooked Timber. But it has occurred to me that I haven’t seen any answer to one crucial question: How many offers do unemployed workers receive and decline before taking a new job, or leaving the labour market? This is crucial, both in simple versions of search theory and in more sophisticated directed search and matching models. If workers don’t get any offers, it doesn’t matter what their reservation wage is, or what their judgement of the state of the market. Casual observation and my very limited experience, combined with my understanding of the unemployment benefit rules, is that very few unemployed workers receive and decline job offers, except perhaps for temporary work where the loss of benefits outweighs potential earnings. Presumably someone must have studied this, but my Google skills aren’t up to finding anything useful.

And, on a morbidly humorous note, it’s a sad day for the LNP when efforts to bash dole bludgers actually cost them support. But that seems to be the case with the latest plans, both expanded work for the dole and the requirement for 40 job applications a month. I’ll leave it to Andrew Leigh to take out the trash on work for the dole (BTW, his new book, The Economics of Almost Everything is out now).

The 40 applications requirement has already been the subject of some amusing calculations. I want to take a slightly different tack. Suppose (to make the math simple) that the average job vacancy lasts a month. There are roughly five unemployed workers for every vacancy, so meeting the target will require an average of 200 applications per vacancy. The government will be checking for spam, so lets suppose that all (or a substantial proportion) of the applicants take some time to talk about how they would be a good fit with the employer and so on. Dealing with all these applications would be a mammoth task. One option would be to pick a short list at random. But, there’s a simpler option. In addition to the 200 required applications from unemployed people, most job vacancies will attract applications from people in jobs. A few of them may be looking for an outside offer to improve their bargaining position with their current employer (this is a big deal for academics), but most can be assumed to be serious about taking the job and in the judgement that they have a reasonable chance of getting it. So, the obvious strategy is to discard all the applications except for those from people who already have jobs. What if there aren’t any of these? Given that formal applications are going to be uninformative, employers may pick interviewees at random or may resort to the informal networks through which many jobs are filled already.

Trying to relate this back to theory, the effect of a requirement like this is to negate the benefits of improved matching that ought to arise from Internet search. By providing strong incentives to provide a convincing appearance of looking for jobs for which workers are actually poorly suited, the policy harms both employers and unemployed workers who would be well suited to a given job.

Update I found the following quote widely reproduced on the web

On average, 1,000 individuals will see a job post, 200 will begin the application process, 100 will complete the application,

75 of those 100 resumes will be screened out by the Applicant Tracking System (ATS) software the company uses,

25 resumes will be seen by the hiring manager, 4 to 6 will be invited for an interview, 1 to 3 of them will be invited back for final interview, 1 will be offered that job and 80 percent of those receiving an offer will accept it.

Data courtesy of Talent Function Group LLC

Visiting the TFG website, I couldn’t find any obvious source. The numbers sound plausible to me, and obviously to those who have cited them. But, if the final number (80 per cent acceptance) is correct, then it seems as if the search theory of unemployment is utterly baseless. Assuming independence, the proportion of searchers who reject even three offers must be minuscule (less than 1 per cent).

The end of economic rationalism …

July 30th, 2014 38 comments

… and the new age of entitlement.

That’s what we are getting under the Abbott government. It’s striking how suddenly the elite consensus in favor of free market policies has collapsed now that we have a tribalist pro-business government. Some examples:

* The Institute of Public Affairs, which once treated irrigation projects like the Ord River scheme as the worst kind of boondoggle now lobbies for them, and for special tax breaks, on behalf of their new owner major sponsor, Gina Rinehart

* The Business Council of Australia wants a strategy of “growing those sectors of our economy that can win on a global scale and make the greatest contribution to lifting our national wealth.” Of course, they deny that this involves “picking winners” or “national champions”, but this is just an example of the euphemism cycle at work

* The Financial Review today runs a piece (paywalled) from Danny Price of Frontier Economics, combining absurd alarmism about the supposed cost of a carbon price (already refuted by experience) with advocacy of the nonsensical and dirigiste “Direct Action” policy

* Finance Minister Matthias Cormann has rejected cost-benefit analysis in favor of a “nation building” approach to infrastructure (the subtitle of Michael Pusey’s book on economic rationalism was “A Nation Building State Changes its Mind”

Economic rationalism had both strengths and weaknesses. The crony capitalism emerging under this government has no redeeming features.

Categories: Economic policy Tags:

Productivity yet again

July 23rd, 2014 24 comments

The ABC has yet another story about economists warning on the need for more productivity. It’s a mixed bag. First up, this from Professor James Giesecke from Victoria University’s Centre for Policy Studies

“We’re going to need a growth rate in multi-factor productivity more like the rates that we saw back in the ’70s and ’80s, about 0.7 per cent per annum, in order to begin increasing per capita living standards going forward

appears to mark an abandonment of the mythical 1990s productivity surge, though he goes on to talk about micro-economic reform. More clearly positively, a bit of attention paid to bloated and lazy management rather than telling the rest of to “work harder and smarter” Many economists are turning their eyes to the business sector to take the productivity baton from the labour market to galvanise growth. Finally, there’s this from Peter Harris of the Productivity Commission who has

nominated energy, health and education and other parts of the non-traded sector as candidates for reform. (emphasis added)

Wow! I would have thought that, 20 years after the Hilmer report, the Australian energy sector has been as thoroughly reformed as it can possibly be, short of going back to oil lamps. We’ve had corporatisation, privatisation, pool markets and full retail competition. And of course, the results are evident for all to see. Apparently, though, we are in need of more.
Read more…

Categories: Economic policy Tags:

La Trobe cuts economics: a bad signal

July 11th, 2014 67 comments

La Trobe University is in serious financial difficulty, which is not surprising given the pressures on universities, and particularly newer universities operating in a “competitive” market that is in fact rigged in favor of the traditional sandstones (like UQ, where I work). Also unsurprising, given past experience, is the decision to make sharp cuts in the economics program. Cutting out economics to focus on business degrees seems to be a routine response of second-tier institutions. But it seems to me to be shortsighted, even in marketing terms. The presence or absence of an economics program is one of the clearest signals of whether or not an institution aspires to be in the top rank.

Categories: Economic policy Tags:

Can any evidence convince the right?

July 7th, 2014 53 comments

Along with nearly 60 other Australian economists, notably including John Hewson, Justin Wolfers and Harry Clarke, I’ve signed my name to a public statement urging agreement on a fair, economically efficient and environmentally effective policy to price and limit carbon emissions.

I’m not naive enough to expect that this will have much of an effect, any more than previous statements of this kind I’ve signed. The problem is not, as you might think, that there is serious disagreement among economists on the issue. Opponents of market-based policies to limit carbon emission have tried in the past to organize counter-statements, and have failed miserably. Outside the set of IPA hacks, most recently seen defending the ludicrous claims of the tobacco lobby, there is essentially no disagreement on this (although there is plenty of dispute about the best design, the optimal price and so on).

The problem is, rather, that there is no evidence, and no clever way of framing the issue that is going to convince the tribal right to go against their shibboleths on this issue. If there were, the actual experience of a carbon price of $24/tonne would have done so. In the leadup to the introduction of the carbon tax/price, Tony Abbott described it as a ‘wrecking ball’ that would destroy the Australian economy. Two years later, the economy is still here and not even the government pretends that removing the carbon tax is going to yield any significant benefit.

And the same is true more generally, notably in the US. This NY Times article by Brendan Nyhan makes the point

Once people’s cultural and political views get tied up in their factual beliefs, it’s very difficult to undo regardless of the messaging that is used.

While this is always true to some extent, it’s far more true, at present, of the right (in English speaking countries) than of the left, and far more true of the right today than in the past.

In the end, there’s no way to persuade those on the political right to accept factual truths about (for example) climate change, without also persuading them to abandon the political right.

Categories: Economic policy, Environment Tags:

Australia’s economic growth secret

July 6th, 2014 11 comments

I argue in this review of John Edwards’ After the Boom that it’s neither mining, nor macro reform. The reason our economy has done so well over the past 20 years is that policymakers have made the right macroeconomic policy calls when it mattered, during the Asian crisis of the 1990s and the GFC.

Categories: Economic policy Tags:

Lifters and leaners

June 19th, 2014 33 comments

I have a piece up at The Guardian looking at Hockey’s adaptation of the “47 per cent” line made famous by Mitt Romney. The focus is not so much on demolishing the claim (Greg Jericho did a more comprehensive job on this) but on the state of delusion that would allow Hockey to think that this kind of claim would be favorably received. After all, even Romney didn’t use the 47 per cent line in public: he was caught on video talking to rightwing donors.

The “job-killing” carbon tax

June 11th, 2014 155 comments

Tony Abbott hasn’t exactly covered himself in glory on his overseas trip. But he has found one ally: Canadian PM (at least until next years election) Stephen Harper, also a climate denialist. They made a joint statement denouncing carbon taxes as “job killing”. I didn’t notice any massive destruction of jobs when the carbon price/tax was introduced in 2012, but rather than do my own analysis, I thought I’d take a look at the government’s own Budget outlook, to see how many jobs they claim to have been destroyed by the carbon tax, and what great benefits we can expect from its removal. Here’s the relevant section of the summary (note that the outlook is premised on the Budget measures being passed)

The Australian economy is in the midst of a major transformation, moving from growth led by investment in resources projects to broader‑based drivers of activity in the non‑resources sectors. This is occurring at a time when the economy has generally been growing below its trend rate and the unemployment rate has been rising. During this transition, the economy is expected to continue to grow slightly below trend and the unemployment rate is expected to rise further to 6¼ per cent by mid‑2015.

In this environment, the Government is focused on implementing measures to support growth and jobs while putting in place lasting structural reforms to restore the nation’s finances to a sustainable footing. The timing and composition of the new policy decisions mean that the faster pace of consolidation in this Budget does not have a material impact on economic growth over the forecast period, relative to the 2013‑14 Mid‑Year Economic and Fiscal Outlook (MYEFO).

Since MYEFO, the near‑term outlook for the household sector has improved. Leading indicators of dwelling investment are consistent with rising activity, while household consumption and retail trade outcomes have improved recently, consistent with gains in household wealth. This is partly offset by weaker business investment intentions, particularly for non‑resources sectors.

The outlook for the resources sector is largely unchanged from MYEFO. Resources investment is still expected to detract significantly from growth through until at least 2015‑16, as reflected in the outlook for investment in engineering construction which is forecast to decline by 13 per cent in 2014‑15 and 20½ per cent in 2015‑16. Rising resources exports are only expected to partially offset the impact on growth. Overall, real GDP is forecast to continue growing below trend at 2½ per cent in 2014‑15, before accelerating to near‑trend growth of 3 per cent in 2015‑16.

The labour market has been subdued since late 2011, characterised by weak employment growth, a falling participation rate and a rising unemployment rate, although outcomes since the beginning of 2014 have been more positive. The unemployment rate is forecast to continue to edge higher, settling around 6¼ per cent, consistent with the outlook for real GDP growth. Consumer price inflation is expected to remain well contained, with moderate wage pressures and the removal of the carbon tax.

The reference to the CPI effects of the carbon price (around 0.4 per cent) is, as far as I can tell, the only mention in the whole of the Economic Outlook statement.

Campus reflection

May 22nd, 2014 54 comments

That’s the mild pun the Chronicle of Higher Education picked for my article (paywalled, but I’ve put my draft version over the fold) making the point that a higher education system is, in important respects, a mirror of the society that created it, and that it helps to recreate. I make the point that, like the US health system and labor market, the US higher education does a great job for the 1 per cent who go to the Ivy League Schools (and whose parents are mostly in or close to the top 1 per cent of the income distribution), does an adequate but expensive job for the next 20 per cent or so, and leaves everyone else in the lurch.

This is important in the context of the Abbott governments proposed removal of caps on fees for higher education, explicitly aimed by Education Minister Pyne at creating a system in which we might have institutions like Harvard and Yale. I plan to write more on this, but the central point will be that, far from creating more places at existing universities, fee deregulation will give them incentives to shrink, pushing students out to the alternatives now being funded under HECS: for-profit institutions and the TAFE system (which has its own funding crisis), corresponding to the bottom tiers of the US education system, where all the recent growth has taken place.

Read more…

Categories: Economic policy Tags:

If it looks like a debt, walks like a debt and quacks like a debt …

May 21st, 2014 11 comments

I’ve finally got around to checking out the big-ticket item (estimated value $28 billion) in the Queensland government’s privatisation program, involving the electricity distribution sector. It’s called a Non-Share Equity Interest, and the Treasury web page explains its appeal to the government.

Under this option the State retains 100 per cent ownership of the ordinary shares in the network businesses and assets. Private sector participation occurs through a hybrid security instrument, a Non–Share Equity Interest (NSEI).

The private sector contribution will equate to the net funding for the capital expenditure requirement and therefore represents new capital injections.

The NSEI security is debt in its legal form, but classified as equity for tax and accounting purposes and these characteristics give the security it’s (sic) “hybrid” form. (emphasis added)

The returns on the NSEI are sculpted to reflect the holders proportionate interest in dividends and tax equivalents paid by the network businesses separately.

In other words, the government is replacing debt raised by the Queensland Treasury Corporation from the private sector with an instrument that’s almost identical, but is classified as equity, and can therefore be presented as a reduction in debt

Read more…

Categories: Economic policy Tags:

The Budget, the bottom billion and the 1 per cent

May 14th, 2014 25 comments

My first Budget commentary is up at the Guardian. Teaser

No progress on tax avoidance, no sign that Australia will responsibly lead the G20, no reform of expensive concessions to the wealthy: this Budget is a massive moral failure

Categories: Economic policy Tags:

Zombie Apocalypse: Commission of Audit edition

May 5th, 2014 20 comments

I’ll be talking on this topic at a hastily-organized workshop at ANU tomorrow. Details here

Categories: Dead Ideas book, Economic policy Tags:

Licenses for cyclists?

May 3rd, 2014 95 comments

NSW Transport Minister Duncan Gay (seemingly one of the few NSW Ministers still in his job) has raised the idea of licenses for cyclists, in response to growing numbers of fatal and near-fatal accidents and (entirely justified) pressure for action against motorists who endanger fellow road users.

He can expect a negative response for a number of reasons. A license scheme is problematic, most obviously because children are (and should remain) free to ride bikes, but can scarcely be expected to pay license fees or sit for an exam. But the policy goal could be achieved without a license. All that is needed is to create a general right to cycle on roads, with no requirement to obtain a license, but with the courts having the power to suspend that right for cyclists who commit traffic offences. There’s no longer any practical requirement for a physical license. If an offender doesn’t have formal ID, a photograph or a phone would be enough to confirm identity in 99 per cent of cases (sad, perhaps, but true).

Then there’s the question of registration. Again, that’s a system that makes much more sense for cars than for bikes. But, if we had a proper system of road pricing, there wouldn’t be much difficulty in including bikes, though I suspect economic analysis would show their contribution to road costs to be very low.

Categories: Economic policy Tags:

Reviewing the Commission of Audit’s opening night

May 2nd, 2014 42 comments

I played my little part in the political theatre that was the Commission of Audit, with about 15 seconds on ABC Lateline. I’m pleased to see that other reviewers agreed with me in dismissing this tired remake of the 1988 and 1996 hits as stale and derivative. Attempts to gin up a bit of excitement by introducing the minimum wage as a new villain wnet nowhere, and reviving the golden oldie (last performed by Malcolm Fraser in the 1970s) of returning income tax powers to the states fell flat. And of course, a supposed audit of the public finances with tax expenditures cut out of the show is like Hamlet without the Prince. About the only thing to be thankful for is that they toned down the Hockey-Abbott melodrama of a debt crisis and budget emergency, preferring instead some dark murmurs about ominous long term trends.

I give it one star.

Categories: Economic policy Tags:

A rose by any other name …

April 30th, 2014 106 comments

Most of the discussion of the Abbott government’s recently announced revenue raising measure has focused on semantics: is there a meaningful difference between a levy and a tax, has the government broken its promises and so on. All of this is boringly predictable. The last government to treat its election promises as binding obligations was Whitlam’s. Perhaps Rudd would have kept his promises if it weren’t for the GFC (I don’t think he broke many before that), but with that exception we’ve got used to the various theatrical devices associated with ditching promises: Black Holes, debt crises, Commissions of Audit and so on. The reaction of Bill Shorten and the Labor Opposition is equally predictable. The job of the Opposition is to oppose, and in particular to excoriate the government for breaking any promise, no matter how ill advised.

On the other hand, I’m disappointed that the Greens have taken the same line. Their job, in my view, is to use their leverage to promote sustainable social democratic policies, and to oppose regressive market liberal and environmentally destructive policies, regardless of source. So, for example, they were sensible to wave through Hockey’s abolition of the debt ceiling, even though it involved breaking a silly promise. They can’t stop the government breaking lots of promises on the expenditure side, so they should try and achieve balance by supporting sensible proposals to raise additional revenue.

The case in favor of an increase in taxes for higher income earners[1] is obvious. The big cuts promised by Howard in the leadup to the 2007 election, and largely matched by Rudd were unaffordable at the time and became even more so when the GFC led to slower growth in real and nominal incomes and therefore to less of the bracket creep that normally pays for such cuts. Along with Costello’s massive handouts to “self-funded” (but publicly subsidised) retirees the previous year, these cuts are the main reason it has been so hard to achieve a return to surplus after the GFC stimulus was wound back under the Labor government.

So, it makes sense to increase the rate, and to keep it high until bracket creep finally works its magic and restores the revenue raising capacity of the income tax to something like its pre-2007 level. I haven’t done the numbers but it seems as if four more years ought to do it. So, a temporary increase that can be called a levy makes sense. And, if everything else is held constant, an increase in revenue translates one-for-one into a reduction in debt.

Summing up, if Abbott wants to increase income tax on high earners, I’ll support him. And, if he wants to call this policy a “debt reduction levy”, I don’t have a problem with that.

fn1. Doubtless, we’ll get objections that taxpayers on $80 000 a year aren’t really high income earners, although the median wage for full time workers is around $60 000. But the extra tax payable by someone on $80 000 is precisely zero: the levy is only payable on income in excess of that level. Even at $180k, the levy is only $2000/year or about $40/week – a small fraction of the discretionary spending of most people earning this kind of income.

Categories: Economic policy Tags:

Stratification in tertiary education

April 28th, 2014 39 comments

When people call for a university system more like that of the US, they commonly have in mind the idea that Australia should have institutions like Harvard and Princeton, and a belief that more competition in tertiary education would bring this about. There are a couple of obvious problems with this.

First, high-status universities like this provide undergraduate education only a tiny proportion of young Americans. Around 1 per cent of the college age cohort attends high-status private institutions like the Ivy League unis, Chicago and Stanford, and this proportion has been declining steadily over time. Most of the Ivies enrol no more undergrads than they did in the 1950s. Adjusting for population, an Australian Ivy League would consist of a single institution enrolling perhaps a thousand students a year.

Second, the US experience shows that the idea of competition between universities is a nonsense. Harvard, Princeton and the rest were the leading universities in North America before the US even existed, and they are still the leaders today. The newest of the really high status universities is probably Stanford, founded in 1885. Competition between universities is pretty much the same as the competition between the Harlem Globetrotters and the Washington General.s

The reality of US education is a highly stratified system. Below the high-status private universities are the “flagship” state universities, which educate around 10 per cent of the college age cohort (again, a proportion that is declining, or at best stable).

After that, there are lower-tier state universities, two-year community colleges and, worst of all, for-profit degree mills like the University of Phoenix which exist largely to lure low-income students into debt and extract Federal grant money, with only a minority ever completing their courses.

Australia has always had a stratified system, but to a much lesser extent. (More on the history when I get a chance). The big question facing policy is whether to increase stratification, by widening the gap between the “Group of 8″ and the rest, or to treat tertiary education like other public services, available to all who can benefit from it, at the best quality we can provide for everyone.

University education systems mirror and recreate the society to which they belong. A highly stratified system, like that in the US and UK, reflects and reinforces a class-bound society in which the best thing you can do in life is to choose the right parents. We should be aiming at less stratification, not more.

Update Just by chance, one of the lead articles in the NY Times advises that, thanks to increased international intakes, the number of places for domestic undergraduates at the Ivies has fallen sharply

Joining a sinking ship

April 26th, 2014 39 comments

According to news reports, Education Minister Christopher Pyne is going to reprise his successful Gonski exercise of last year with an attempt to remodel the Australian university system along US lines, as recommended by former Howard education minister David Kemp and his adviser Andrew Norton. In particular, he hopes to expand the role of the private sector.

Apparently none of these people have read the stream of reports coming out of the US making the points that

* Whereas the US was once the world leader in the proportion of young people getting university education it now trails much of the OECD (including, if I got the numbers right, Australia)
* US university education, even in the state system, is ruinously unaffordable
* The top tiers of the US system are increasingly closed to students from all but the top 5 per cent (or less) of the income distribution
* The US has the most inequality and some of the lowest social mobility in the developed world
* For-profit education in the US is a scam, based on exactly the mechanism promoted by Kemp and Norton, namely access to public funding/

The US tertiary education system is now like the US health system: world-beating for the 1 per cent, high-quality but incredibly expensive for the top 20, unaffordable or non-existent for the middle class and the poor. And this is the model the LNP wants to emulate

Categories: Economic policy, Oz Politics Tags: