Children are the future*

May 14, 2004 John Quiggin19 Comments

Turning from the short-term politics of the budget, what does it do for Australia’s long-run future? At least one commentator has raised this question, and I’ve been asked in other contexts, so it’s probably time to organise my thoughts.

Most of the discussion of long-term issues has been framed by the Treasury Reports on Intergenerational Equity, which have not been very satisfactory. They’ve done their analysis primarily in terms of the “aging of the population”, which leads to a focus on retirement incomes and nursing homes. The retirement income problem is much overblown, as many analysts have pointed out. Health care is an issue but, as I’ll argue in a later post, thinking about it in terms of an aging population is highly misleading.

More importantly, this way of looking at the problem leads Treasury to ignore education almost entirely[1]. After all, if you’re thinking in terms of an aging population, it’s natural to ignore kids. But in reality the demographic change we’re looking at includes not only an increase in the length of lifetime but an extension of the initial period in which education is the main activity. Statistics on “working-age population” typically look at people aged 15-65. But in the current economy, the age at which people typically begin their first “real” job (as opposed to part-time jobs in conjunction with school or uni) is now in the early 20s. A substantial increase in education, along with a need for steadily higher standards, is going to cost a lot of money.
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Too clever by half ?

May 13, 2004 John Quiggin15 Comments

That’s my view of Costello in general[1]. And I think it may be true of the election budget he brought down on Tuesday night. The tight targeting of large lumps of cash was fairly transparent, and made it easy for Labor to get coverage for the converse observation, that lots of people, and crucial government services got nothing. The Courier-Mail is about as negative as I’ve ever seen in the immediate wake of a budget, running photo stories on a low-income student who gets nothing, and a mother-of-two who says the whole thing is a “vote-buying exercise”. The Oz has a series of negative stories.

Howard actually gets a better run in the Fairfax press, with both the SMH and the Fin running on a blunder made by Latham, who mistakenly said he wouldn’t benefit from the Budget (as a high-income earner he gets a tax cut). But this is the kind of story, beloved by journalists, that leaves the general public cold. The only time this kind of thing has any impact is when the person concerned is already on the ropes.

It’s now up to Latham to make a convincing response. He doesn’t need to present an alternative Budget but he does not some concrete alternatives. A good starting point would be promising to wind back the tax cuts for the top 20 per cent of income-earners, in order to fund an across-the-board reduction. I’m pleased to see that this is still on the table.

Update

Latham’s reply seems to me to have hit most of the right points.

More significantly, perhaps the Channel 9 news ran a story on Labor’s promise to fund pneumococcal vaccine, which had the government playing catch-up. This news story isn’t nearly as damaging as the version I saw on TV. but the government is faced with a nasty choice here. I can’t recall an instance where a Budget decision has been changed, during Budget week and in response to Opposition pressure, but that’s what looks like happening. The fact that Costello rolled Abbott (who lobbied for the vaccine funding) in the Budget process only makes the whole thing more piquant.

fn1. I’m sure quite a few people would have the same view of me. But if it takes one to know one, this only strengthens my assessment of Costello.

The budget and democracy

May 12, 2004 John Quiggin19 Comments

Is Costello’s budget good or bad for Australian democracy? I’ve been critical of the exceptional reliance on lumpsum payments, which certainly looks like bribery. But this is a presentational trick Australians ought to be able to see through (if not, the adage about getting the government you deserve applies). Leaving this trick aside the Budget is clearly based on the premises that:

* what people need is money in their pockets rather than better publicly-funded health and education

* we need to redistribute income towards households with children and away from those without

* at least for households without children, tax cuts for ‘middle-income earners’ (that is, everyone with incomes over $50 000) are more important than for those with incomes less than $50 000[1].

Labor will presumably accept the second of these premises, and merely argue that it could do a better job of implementation. But that leaves plenty of room for disagreement on the first and third points. So, if Labor takes up the challenge, we might for once be faced with a real choice, something we haven’t really had for many years[2]. I’ll post on what some elements of that strategy should be in the near future.

fn1. As the scare quotes around ‘middle-income earners’ indicate, only around 20 per cent of all income-earners make this much money. And to get the full benefit of the tax cuts, you’ll need an income of at least 70 000 in 2005.

fn2. Neither Beazley in 1998 and 2001, nor Howard in 1996 nor Peacock in 1990 offered positive alternative to the government. Hewson certainly put up a radical strategy in 1993, but his radicalism consisted largely in being more Keatingesque than Keating.

The ticking bomb problem

May 12, 2004 John Quiggin26 Comments

In response to the exposure of widespread torture of Coalition prisoners in Iraq and elsewhere, it’s inevitable that the “ticking bomb” problem should be raised. As Harry Clarke asks in the comments to this thread

‘You hold a terrorist who knows the location of a defusable bomb which, if exploded, will kill x million people. Do you have the right to torture him/her to find the bomb?’

Instead of offering an answer to this question, I’m going to look at a question that follows immediately, but doesn’t seem to have been asked. Suppose that you have used torture to extract information from a prisoner in the belief (correct or not) that doing so was justified by a “ticking bomb” situation. What should you do next?

My answer is that you should turn yourself in, and plead guilty to the relevant criminal charges. I think this answer can be defended from a wide variety of perspectives, but I’ll take an intuitive one first. If the situation is grave enough to warrant resort to torture, it’s certainly grave enough to justify losing your job and going to jail.

In consequentialist terms, it’s desirable in general that laws against torture should be obeyed. Since few people will want to follow your example (particularly if they can’t plead a ticking bomb in mitigation) your action in such a case will undermine the law less than if you committed torture and got away with it. Other theories will, I think, give the same answer.

Turning from individual ethics to law and public policy what this means is that laws against torture should be enforced in all cases. A plea in mitigation might be considered in cases like the one described above – an urgent and immediate danger, followed by a voluntary confession. In any case where a confession is not made, no claims about mitigating circumstances should be admitted.

Since, to my knowledge, no torturer has ever made an immediate and voluntary confession, the practical impact is that the ticking bomb scenario should be disregarded in any consideration of the legal and political response to torture.

The Budget Part II

May 11, 2004 John Quiggin5 Comments

I’ve now had a chance to look at Budget Paper 2, and I think it might be more accurate to replace the observation “Nothing much for education, and nothing at all for health” with “Nothing or less than nothing for most areas of education and health”.

The Budget Papers have literally dozens of descriptions of “measures” in which the expenditure item is either a row of dashes (the government has left the program alone) or a row of negatives (the program hasn’t been abolished, but expenditure has been cut).

Now, there may well be areas of spending which ought to be cut. But a search of the Budget speech reveals only seven occurrences of the word “cut”. Five refer to tax cuts, one to income cut-offs for eligibility for Family Tax Benefit and one to not “cutting and running” in Iraq. There’s no hint of any cuts on the expenditure side.

Tax fallacies from Peter Saunders

May 11, 2004 John Quiggin22 Comments

While I’m on the topic of tax and public expenditure, this is a good opportunity to refute some spurious claims made by Peter Saunders of the CIS in a piece in the Oz recently. This isn’t too hard, since the claims have been made quite a few times before, and I’ve refuted them quite a few times previously, a task that becomes a bit frustrating after a while.

First, Saunders says

The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today.

As I pointed out in my 1998 book Taxing Times

The tax reforms of the 1980s abolished the old top tax bracket, for which a marginal tax rate of 60 per cent was applied. An inevitable effect was that the former second-highest rate now became the top rate, even though it was lowered from 49 per cent to 47 per cent. Hence, even though taxes on high and middle incomes have been cut, the top marginal rate is now reached at a lower income, expressed as a proportion of average weekly earnings.
Even sillier comparisons are made with the tax system applicable in the 1950s. For example the Treasurer, Mr. Costello argues for reform on the basis that, in the 1950s, only people with incomes equal to 19 times average earnings paid the top marginal rate of taxation, whereas today people with incomes equal to one and half times average earnings pay the top rate. The ratio of tax revenue to GDP has, of course, risen since the 1950s, in Australia as in every other developed country. But the dominant effect arises from reductions in the progressivity of the income tax system. The current income tax system contrasts dramatically with that of the 1950s which had 29 brackets and a top rate of 67 per cent. Obviously in a system with so many brackets, very few people will have in incomes in the highest bracket.

The Parliamentary Library has a useful article on this topic, which shows how the increase in proportions paying the top rate was mainly driven by the reduction in the number of brackets. More detailed info is available from NATSEM (PDF file). Combining this with AWE data, I estimate that the 47 per cent rate applied at around 1.2 times Average Weekly Earnings in 1974 and about 1.4 times average weekly earnings in 1984, scarcely any different from today.

The main difference was in the very high rates applying to high incomes (the real target of Saunders’ concern, I suspect). The top rate in 1974 was 67 per cent, and it did not apply until income reached 40 000 per year, 5 times the threshold for the 48 per cent rate. Upper-income earners were taxed much more heavily in the past than they are today (though of course it’s necessary to take account of avoidance and evasion when considering actual rates of tax).

Second Saunders compares rates between countries saying

Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down).

But this ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security[1]. By contrast, in most of the other countries mentioned by Saunders, these taxes are large. In Germany, for example The employer and employee each make a contribution of 21% (2004)This point has been made so often it’s hard to believe that Saunders is unaware of it.

fn1. It’s also necessary to take account of compulsory superannuation contributions in Australia. But unlike social security schemes in other countries, this is pure forced saving – there is no pooling of contributions in the accumulation schemes that are now standard (except for politicians). So although there’s compulsion used here, it should not be regarded as taxation.

The Budget: The good, the bad and the ugly

May 11, 2004 John Quiggin3 Comments

I’ve just watched the Budget speech, and seen the immediate wrapups, but haven’t yet had time to read the Budget Papers (late night ahead, as I have to go on Life Matters tomorrow to discuss it). Here’s my instant reaction in three categories

h5. The Good

* Howard’s attempt to reinstate the cultural dominance of the single-income family has been dumped, with lots of assistance for families following the model preferred by most Australian households with dependent children, that if one full-time and one part-time job.

* The baby bonus has been dumped, and Labor’s idea for a replacement stolen.

h5. The Bad

* Nothing much for education, and nothing at all for health. Costello spent the entire health section of the speech on two initiatives that would barely get coverage if they were issued as a press release by the Minister for Health, one on equipment costs for people managing diabetes and the other on a cochlear implant for which there are currently 130 people on the waiting list. Of course, if you’re one of the people affected, this will be welcome use, but for the other 19.9 million of us, there’s nothing here. In particular, the obviously unsatisfactory measures taken so far to arrest the decline of Medicare were touted as if they were the answer to the problem

* Regressive changes to the tax scales, with significant benefits for those on high incomes and nothing for anyone below $50 000. The large segment of the population on below-average incomes, but without dependent children or ineligible for family tax benefit gets nothing at all from the Budget except another round of bracket creep.

h5. The Ugly

* Resort to vote-buying lump-sum handouts on a scale I can’t previously recall. Obviously this is a reaction to last year’s “sandwich and milkshake”, but it’s very dangerous stuff. The Fistful of Dollars rides again.

* The announcement in the 2004-05 Budget of a raid on the 2003-04 Budget, to finance the first instalment of the handouts mentioned above. As far as I know, this is absolutely unprecedented. Since the amount raided is almost exactly equal to the projected surplus for 2004-05, it would be more accurate to describe the Budget as being in balance rather than in surplus.

Interesting?

May 11, 2004 John Quiggin2 Comments

I’ve been meaning for a long time to collect my thoughts about US interest rates, and where they are and should be going. As is often the case, I’m largely in agreement with Paul Krugman, at least as far as long-term rates are concerned. On the other hand, I’m a bit more hawkish in relation to short-term rates than Brad DeLong, with whom I agree on a lot of things.

I’m planning on reworking this piece as I have new thoughts, and in response to comments. so please treat it as a work in progress.

Warning: long and boring (but maybe scary) post over the fold.
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Time to repeal Godwin’s Law ?

May 10, 2004 John Quiggin6 Comments

What kind of America-hating lefty would seize on an isolated incident like this

Three weeks ago in Highland Park, Texas, Mrs Dolly Kelton was arrested and handcuffed for failing to pay a traffic ticket after her car was stopped for having an expired registration. I doubt that Mrs Kelton was a threat to the safety of the arresting officer. She is 97 years old.

then follow up with this

We handcuff her… because some Western societies, and America in particular, use these procedures as a way of softening up the accused by humiliation and to underline the power of the authorities.

What kind of slippery-slope argument do you think is going to follow?
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Time to repeal Godwin's Law ?