Refuted economic doctrines #4: individual retirement accounts

The news that, on average, superannuation investments lost nearly 20 per cent of their value last year Johnny Got His Gun movie download comes as no surprise, and its likely that there are plenty of unrealised losses still on the books. Still, while the losses on the stockmarket have been as bad here as anywhere, we can take some comfort in the fact that Australian superannuation funds, like Australian banks, don’t seem to be in the same trouble as some of their overseas counterparts. As the government scrambles to keep the financial system operational, it’s natural to ask what, if anything can be done about this.

In the short term, the answer appears to be, nothing, or very little. Fortunately, for most people the losses are, in a sense, notional, wiping out the spurious gains of previous years. It’s only for those at or near retirement that the crash presents an immediate economic problem. Given that the demand for labour is plummeting, the government could perhaps consider an ex gratia payment to people who choose to retire now. There are all sorts of problems with this, and in normal times, such a proposal would never pass muster, but plainly, these aren’t normal times.

Looking to the longer view, this is more than a bad year for superannuation funds. The crash and the way it came about undermines the fundamental premise that has driven Australian retirement income policy for the past decade: that allowing individuals, with good financial advice, to make their own investment decisions on the basis of defined contributions from employers to personal accounts, is the best way of financing retirement. The old age pension, in this view, serves as a residual for those who don’t manage to save enough.

This privatised approach (also represented in Bush’s failed attempt to reform Social Security in the US) is has been largely discredited by the crash. Financial advisers, even the honest ones, have proved to be useless. Lots of investments that were marketed as low-risk have turned out to be little more than junk. Morover, the idea that stocks will always perform better than bonds over the medium term (say a decade) has been proved false. This is a central premise of long-term investment advice.

We need to look again at the alternatives: either a return to employer-based defined benefit schemes, with portability of service, or some kind of national superannation schemes. In the short term, the call for an increase in the aged pension will also gain strength.

Update 27/1/09 The New York Times agrees. And today’s Fin has a piece from Robert Shiller denouncing the efficient markets hypothesis. I’d better get cracking with more refutations, while there are still plenty of doctrines left to refute.

108 thoughts on “Refuted economic doctrines #4: individual retirement accounts

  1. The article I referred to above was the editorial “Australia’s neoliberal path” in the Autumn/Winter edition of Dissent. On page 3 Kenneth Davidson writes:

    A major ‘reform’ imposed on Chile on the advice of the ‘Chicago boys’ was the privatisation of public pensions which was replaced by privatised superannuation (adopted in Australia in 1986, proposed by President George W. Bush in 2004 and rejected by a Republican-controlled congress).

    So, even the US Republicans during Bush’s first term seemed to have had more nous than the Hawke/Keating ‘Labour’ government and the bulk of the Australian Trade Union movement in the 1980’s.

    I note that Andrew apparently believes that everything would have been alright if only more of us had spent more of our time studying the various alternative superannnuation investment strategies or had received better advice.

    Whilst I am sure that Andrew would love nothing better than to spend all his spare time wading though the mountains of literature that the various superannuation companies have been thrusting through the letterboxes in these past years, I think most of us would have preferred to spend our time differently.

  2. There are so so many super funds, investment funds, this funds, that funds….and some folded even before the crash….who could be bothered to analyse each one (MC > MB of analysis) and e rely on others opinions, but given the ability of the written word to conceal the fact that the fund is a lemon waiting to fall off a tree, and praises its golden lemon colour on the way down, what hope have we got?

    Somewhere in the dark recesses of my mind I recall JK Galbraith noting and documenting the sheer growth the actual number of funds in the years leading up to 1929 (the term was slighly different but it meant the same thing – “Investment trusts” I think was it). Does anyone know what the growth in the number of these funds has been in Australia over the past ten years say?

    Apart from losing this little gem of a book (The Great Crash) and not being able to find a replacement, another interesting recollection from it, is that bits of Florida alligator infested swamp with no infrastructure were turning over so fast (I think before 1925 as the 29 crash was also presaged by a real estate boom) that people were trading options in the bits of swamp.

  3. Gosh Alanna @50, you’re experiences appear to have left you somewhat distraught, frazzled even. What is proposed here is absolutely no different from a housing market perspective to what happens normally. If a person can afford a house with their in hand income (superannuation not included) under the borrowing rules of a bank then they buy it. However, when it comes to making payments on the mortgage they can include their employer contribution superannuation payment. In many cases this will reduce their mortgage term to perhaps 12 years saving them interest on that purchase which might amount to $120,000. This is reduced interest layout is taken into account when calculating the return on their superannuation investment. Ownership of the property is entirely theirs, but under the same rules as any superannuation holding. ie they cannot spend it until they retire unless other circumstances or special arrangements prevail ie they are free to use it, they can transfer it (value) to another house, they can divide its value in the case of a divorce, but they cannot spend its value until retirement. The superannuitant would continue to make payments at the same rate as the mortgage payments beyond the end of housing payment period for a ratioed term. This becomes their retirement income later and is the difference between this and the Singaporean experience (link below).

    This proposal is based entirely on the statutory employer contribution part of every Australian’s income and is entirely independent to whatever other retirement savings that a person may make. Do the numbers, I think that you will be impressed.

    http://www.emeraldinsight.com/Insight/ViewContentServlet;jsessionid=B08C3CFB0E1FC0B1518C0CCCAED49DF4?ContentType=Article&Filename=Published/EmeraldFullTextArticle/Articles/0060340303.html

    http://www.diypensionschemesuperannuation.com/superannuation-australia.html

  4. A little story – I once worked as a consultant to a very wealthy individual who had worked for the infamous ‘Tiny Lonhro’ and other similar fraudsters. This individual was completely unscrupulous and had absolutely no regard for legal obligations or the financial regulatory institutions, basically ignored them if they came knocking,which they did frequently, then would bury them in litigation. This individual was positively over the moon at the opportunities that the superannuation changes introduced by the Keating Government represented, for easy cash access and looked upon the whole process as a Christmas Gift that would keeping giving. I quit shortly afterwards in disgust.

    Nothing since then has changed my mind about the crass and corrupt mindset of the major financiers and merchant banking sector. The lesson for me was that as a taxpayer or wage earner I had little effective control over my financial future with this form of compulsory system and it taught me how financially unsophisticated and naive the Labour party was and they remain true to form. They have never understood the big end of town and cling to a misplaced class view of the very wealthy.

    To my mind compulsory superannuation levies of wage earners should have always been paid into a government owned and managed fund like the Future Fund and the money used for investment and other forms of infrastructure development that had some social and economic good attached to it. The money could have been invested in cash and bonds and you could have accessed the account like a pension or in cash when you retired. That opportunity for all in the current workforce is now gone but it is not to late to consider such a system for those under the age of 35, if your over 35 your goose is cooked.

  5. Oh, dear. TerjeP suggests half of that policy recommendation of mine further up, “Each year we should be increasing the eligibility age by a few months”, but unfortunately he leaves out the crucial other half: an income tax break for people above a cut off age, with that age also declining in a way that is actuarially matched to the rise in eligibility age. Without that people don’t get the chance to provide for themselves, and it just turns into a windfall for the government.

    MH, the difficulty with your suggestion that “compulsory superannuation levies of wage earners should have always been paid into a government owned and managed fund like the Future Fund and the money used for investment and other forms of infrastructure development that had some social and economic good attached to it” was brought out by Andrew Reynolds further up, beginning after “many of the problems with the idea are easy to list”.

    I’m surprised nobody has mentioned front end loading of fees as part of the problem in providing correct incentives, not in that form anyway.

  6. Donald Oats @ 41 wrote:

    Carbonsink: I agree that the portfolio mix for my super money can be changed by me – in the same fund – but I don’t have a choice in who does the managing of that portfolio.

    Are you able to choose your own super fund? If so, change to one of the big industry funds. The fees are minimal, and you can choose your own asset allocation mix, even individual shares. If your super tanks, at least you didn’t fork out huge fees as well, and you only have yourself to blame.

    We all have to take control of our destiny now. The gazillions in mining company taxes that funded everything from public sector super, to generous family tax benefits, to Professor Quiggin’s salary, have all but evaporated. Regardless of whether you believe government should fund people’s retirement, the new reality is they can’t afford to.

  7. Carbonsink is correct.

    The Australian superannuation system is very flexible.

    Trouble is, account holders failed to take advantage of that flexibility.

    Both the Keating and the Howard governments offered wage earners a huge and growing bribe in the shape of major tax breaks to max up their superannuation.

    Unfortunately, many account owners made some bad choices and non-choices with that bribe money. Don’t forget that pension money of baby boomers worldwide was one of the major components inflating the biggest asset bubble in history.

    Willy-nilly many of these folks will be thrown back on to the pension system, which may have been more efficiently and conservatively funded by a refusal to pay bribes to superannuants.

    Will the next generation of superannuants be wiser? I doubt it.

    The good news is that, after being dubbed the “boomerang generation” for refusing to leave home, this next cohort of superannuants will have the enormous pleasure of playing host/nursemaid to their decrepit and impoverished boomer parents.

  8. Katz##55

    The reality is the “boomerang generation” even after the crash is still likely to be poorer than the “boomers.” Many many of them cant get a toehold in realestate as it stands now and many more will find themselves unable to get jobs or keep their jobs. (and what do we would do – load the poor kids up with hecs debts…stupidity – a younger generation already weighed down by debt big enough for a deposit before they go into the increasingly unkind labour market).

  9. Quite so Alanna. The Howard years property greed have passed. The fact that there very large numbers of property deprived young people will be the force to create the solution as they start to form families. Public housing will see a resurgence, and there are many variations of housing solutions. The biggest danger is one that is seen in Europe is that of generation specific law making such as grey dominance of councils that make life difficult for younger families. Don’t make noise, don’t throw balls, don’t use scate boards, etc. A classic example of generational indifference came from Trigiboff (I think that it was Trigiboff) who said that Centenial park and Hyde park should be handed over for development. If people want to see trees he said they should go west to the Blue Mountains to see them. The real problem is the predominance of inappropriate rental accommodation on the one hand, and a confused employment environment on the other.

  10. Triguboff- what would he care about a public park in the city ?? – developers have been leaning on public planning processes and getting clean away with all sorts of rorts. If this sort of thing isnt an indicator of letting the private sector have way too much control I dont know what is? I question whether we already have much of an effective public regulatory or government system -and how much worse damage will it do the economy before it improves? Taken to the nth degree this unustainable economic policy direction of de-regulated free markets will lead us into a huge mess..if it hasnt already and many think it has. What is at the end of this extreme sort of direction – I heard it once expressed as “gated communities of the rich” (presumably with their private mercenaries) “surrounded by deserts of the poor”.

  11. Once I read something that suggested the economy proceeds more or less as ‘an eternal battle between capital and labour’ – when unemployment is high capital gains ground and when it is low capital loses ground – but if it swings too far one way or the other we are swinging to the extremes of communism and fascism, respectively (danger). I also read a comment about the great depression that suggested “there was no fundamental disagreement between capital and labour; labour wanted to work and capital wanted to produce; what was missing was the wherewithall to buy the goods (income).” (Ive been quoting it for too many years to remember where it came from!) Maybe someone else knows?
    John Ralston Saul also wrote an interesting little book called “On Equilibrium” that really gives a bigger picture of the essence of equilibrium.

  12. Hi Alanna, Carbonsink:

    The problem, with super funds, is that we are now in a world with systemic risk. Funds will be imploding over the course of this year and we are not privvy to which funds – until the explanatory letter in the mail. My point is that *even* if I move my money into a cash account option with a super fund manager, I have no control or knowledge as to whether the fund manager/trust is able to remain solvent. Upon bankruptcy or the equivalent, is there *really* a separation of capital invested in cash units from the more risky capital growth units, shares units, etc? I don’t personally know how the law works for claims under this scenario.

    Transferring from one fund to another doesn’t assist me either, unless I can evaluate the relative risk in doing so. Of course, systemic risk is still present where ever I transfer it.

    Because of the lack of super choice several years back – I mean choice of fund, not portfolio selection – I had several accounts in quick succession, which I rolled over into a large industry fund in 1999. Since then I’ve ended up with two funds again due to the peripatetic nature of the world of work. I kept the big industry fund, only to watch supposedly well balanced portfolio (I did choose a mix of risk classes via the fund’s options) lose in 2003, finally gain ground and then lose again. Sure, I could remix or move the money again, but to where?

    A couple of other thoughts on unexploded landmines in the super field.

    1) Let’s say I have done everything right in getting a sensible risk profile set up for my super. How do I know that my (about to go to the wall) employer has *actually* been making regular transfers from my salary to the super fund? Remember Stan Howard’s company (National Textiles?) and the super problem it had? Lucky John Howard was his brother and could use the power of government to intervene. In general though, there is nothing to prevent a business from shirking on the super contributions and using that money to help along its cashflow. Until the music stops.

    2) Again, let’s say I am in big Al’s super scheme, and big Al has provided the following “asset classes”: C: cash, A: Aussie shares, D: Dodgy Brother’s fund-of-Mortgage-backed Security instruments. Well I don’t like the sound of Dodgy Brother MBSI, and I’m pretty conservative, so I have C: $20, A: $80, D: $0.

    But, a short while later we have some new asset classes spring up (can’t get too much choice, can we?): A.C: Aussie shares – High Capital growth, A.Y: Aussie shares – high Yield (growth + div), A.D: Aussie shares – high Dividend, and A.A: Aussie shares – Aussie shares (ie the original asset class).

    Here is the thing: how can I realistically determine the risk profiles of each of these new options? And what if, behind the scenes, the fund manager “tweaks” the original A.A portfolio so that the higher yield companies are less represented, for example? Perhaps to make the new A.Y look relatively better. Any chance of my knowing?

    Say the original A –> A.A is now effectively eliminated by selecting a weighted portfolio of A.C + A.Y + A.D? The weighting is chosen so that the risk profile of A.A and the weighted portfolio agree at the chosen date of replacement of A.A by A.A.CYD. Us monkeys who originally bought plain old A have through a set of supposedly risk equivalent changes ended up with A.A.CYD. One year later our A.A.CYD is performing quite differently to what our original A would have, which is different to what A.A would have as well. Is this possible? If so, I don’t see how a straight forward bloke like myself could keep track.

  13. Exactly Don. I had the great misfortune to get hooked up with National mutual (became merged into AXA) when they hired legions of hotshots to hardsell personal super in the 80s. After 3 years it didnt do anything so I stopped giving them monthly money but it did have a lump sum to start with. After another 10 years through the boom it still managed to do absolutely next to nothing, because everytime it made a return the fees got substantially larger. You could not reconcile their statements from one year to the next but when I took it out I lost 50% and ended up with just about what I put in the first place (and it took me a year of letters, threatening to sue, yelling down phone lines, refusing to give them my “original policy documents” which they wanted me to mail so they could claim they got lost in the mail (and then they required people to advertise “lost policy documents in the newspaper for 6 months before they paid up) I finally retrieved the crumbs! They were the singularly the greatest corporate thieves I ever came across. The process of retrieval was so arduous many would have just given up.

  14. Yes, the industry has its share of crooks and shonks. Like every industry.

    Donald’s point about losing control over the nature of his portfolio is an important one.

    Reassurances about the perspicacity of fund managers just doesn’t cut it in the era of lemming-like behaviour of fund managers.

    On the other hand, fund managers are restricted by the preferences of their clients. They cannot withdraw funds from a broad asset class unless their clients require that withdrawal to occur.

    Imagine the counterfactual. A fund manager persuades herself that a certain asset class is about to tank and withdraws funds. Subsequently, that asset class booms. The fund managers’ clients would have an action for malpractice.

  15. Chris @ 36 says “If welfare is funded by taxing surplus, and welfare is used to purchase consumption goods (without credit), and the receipts of welfare reduces crime, then society benefits. There is no disruption of the circular flow.”

    Chris, the argument that higher welfare expenditures reduce crime is a total canard. In most countries there has actually been a significant correlation between the growth of the welfare state and increased crime and other social problems.

    In the US between the 1960s and 1990s government spending on welfare and other programs to help the poor increased dramatically, while crime rates also rose dramatically. During the 1990s governments started cutting the welfare rolls heavily in much of America, yet crime rates also fell heavily. In New York City, Rudy Giuliani managed to both slash the welfare rolls and slash the crime rates. During the 1990s a lot of critics of welfare reform in the US claimed that it would trigger a new crime wave. Yet this never materialised.

    There are a number of reasons why more welfare does not reduce crime, and indeed probably increases it. One is that higher taxes and government expenditures have the effect of making crime a more attractive option than legitimate work or business. Another is that higher welfare expenditures tend to create the wrong incentives, like encouraging less capable parents to have more children etc.

  16. As for demands that the aged pension should be increased, there is an obvious objection. Why should today’s retirees or those close to retirement receive far more benefits than what it cost them to fund during their working lives? And why should people remaining in the workforce have to pay higher taxes to fund more benefits that they are less likely to receive when they reach retirement age?

    Because of the aging population and increased benefits to pensioners (like various one-off government payments including utilities allowance and the recent stimulus package), the cost to taxpayers of supporting an aging population has increased dramatically. So today’s pensioners are already largely drawing far more benefits than what it would have cost them to fund these programs during their working lives.

    Meanwhile, younger workers are being forced to pay twice. They are being made to fund their own retirement through compulsory superannuation, plus pay more taxes to fund benefits for retirees or those nearing retirement who haven’t funded their own retirement.

    Increasing the pension significantly would exacerbate what is already a major problem of intergenerational equity. The demand for higher pensions among existing retirees is nothing more than an ambit claim, a selfish demand for greater material rewards that they never funded at the expense of placing unsustainable burdens on future generations.

    I find it somewhat odd that when it comes to issues like global warming we are constantly told that there is a moral obligation to preserve the planet’s resources intact for future generations. Yet at the same time it is perfectly okay to encourage today’s retirees to just help themselves to more of society’s resources and stuff the consequences for those that will still be around in the future to pick up the bills.

    [Monkey’s Uncle is the new username of Nick K]

  17. What advice should be given to everyone paying into super today?
    For the next 24 months there are unrealized losses that will be crawling out of every nook and craney. We haven’t even seen how low the commercial property trusts will go as they have stopped withdrawls for 12 months!
    These losses will be offset by new contributions going in, because the new contributions will lose their value.
    Everyone for the next 24 months should be getting their employers to lodge their contributions into fresh cash/bond funds – let the old funds sink if they are to sink, keep the new funds safe!

  18. Nick K believes that “…the argument that higher welfare expenditures reduce crime is a total canard. In most countries there has actually been a significant correlation between the growth of the welfare state and increased crime and other social problems.”

    There is a misunderstanding here, just as there is on the other side of the question. Higher welfare expenditures do reduce crime – if you are starting from a very low base, and only up to a certain point. That is, they remove the incentives for crimes of necessity. Once that has been done, crime from other causes is left – and further expenditure has little or no effect on that. People on the other side of the question are making a faulty extrapolation, but they are not believing something completely baseless.

  19. P.M. Lawrence, I can see the argument you are making here and I have previously considered that possibility myself.

    The only thing I would add is that in most developed countries general prosperity, the welfare state, and other forms of voluntary aid have usually expanded well beyond the point where simply being able to eat is the main concern. So the necessity argument seems somewhat redundant.

    [Monkey’s Uncle is the new username of Nick K]

  20. P.M. Lawrence, the other reservation I would add is that just because an argument may hold for a given number of individual cases does not necessarily prove that it holds in aggregate.

    In other words, even if very limited welfare may reduce crimes of necessity it doesn’t necessarily follow that the other perverse incentives I previously mentioned don’t also start impacting at these low rates. So the question of whether there is a net increase or fall in crime rates would still be debatable.

    The other point is that there is always more than one way to skin a cat. In the absence of a welfare state, it is more likely that people would put more resources into voluntary aid.

  21. 68# PM says
    Higher welfare expenditures do reduce crime – if you are starting from a very low base, and only up to a certain point. That is, they remove the incentives for crimes of necessity. Once that has been done, crime from other causes is left – and further expenditure has little or no effect on that.

    I agree PM you need to consider both sides of that argument and we do also need to consider this now that many more able and productive workers will be facing unemployment possibly for the first time in their lives and with families to support. Welfare in this case, with so many firms shedding labour due the GFC is necessary and appropriate. Two types of crime – crime arising from tax avoidance incentives and crimes arising from a neccessity to survive. There isnt a great big quarry out there that the unemployed can be tipped into to avoid payments of welfare (although I am sure some of the more extreme amongst us, who see welfare recipients as a drain on their tax, wouldnt mind the idea at all). The point is to also manage the economy and to use fiscal stimulus to ensure that the number of unemployed from this crisis remains as low as practically possible. Monetary policy initiatives are pretty unlikely to appeal to recently retrenched people.

  22. I would suggest also that necessity in terms of positive welfare initiatives does not just mean the ability to merely feed a person – it also means shelter and the ability to keep getting on the bus to look for work.

  23. There are a number of threads here:
    We cannot afford higher age pensions as it is a burden on taxpayers,
    Financial Advisers are not to be trusted because their advice is flawed,
    People should have control over their savings,
    People don’t have the time, energy or knowledge to have control over their savings.

    In other words the arguments are confused and confusing. The legislation around retirement incomes is the same.

    There is the individual aspect as to how each person can best provide for a future which relies as little as possible on welfare payments as there will be fewer taxpayers once the baby boomers retire in great numbers. This was the aspect that led to the creation of the mass superannuation industry and where wage increases were traded off for better superannuation investment. The worry for the government looking to the future was that when given an option to save or spend people are more likely to spend. The build up of personal credit debt in recent years supports this view. Individual solutions can act in a way that is unsustainable for society.

    People can currently set up their own superannuation schemes as outlined by BilB although most people lack the time, skills and inclination to do so. It is an area where the red tape is a definite disincentive. However it is still a choice which some choose.

    People are also free to change Superannuation schemes. This law was introduced to help out the for profit sector of the market and this is the area that financial advisors have preferred because it helped them make a living. However it is a case of buyer beware and the better deal available through Industry funds has been promoted widely through advertising on television. This carries an element of risk as investors have to rely on the judgement and honesty of those who manage their money. Something in short supply juging by this thread.

    Defined Benefit Schemes are an attractive option for the individual retiree as these schemes do assure that the whole of the savings cannot disappear. The practical difficulties in changing employers are one downside but this would not be insuperable.

    Government has already engaged in building capital through the Future Fund. We are yet to see if this is a good thing overall. However this appears to provide a model and/or a base for a national scheme which could be run along the lines of Medibank Private ie not compulsory but providing a benchmark and a non profit government controlled alternative to the for profit, industry and self managed funds.

  24. The Commonwealth did set up the AIDC (Australian Industry Development Corporation in 1970) for the purposes of enabling Australians to invest in Australian industry and it was considered safe and as I understand it ordinary citizens could invest you could select a capital guaranteed option. I know people who invested in this entity quite happily for many years. AIDC’s borrowings were guaranteed by the Commonwealth government.
    Alas, it was privatised in the push to the privatisation agenda as Labor sold off 20% of AIDCs shares in 1989

    After that? It gets even more foolish (and this is a cut and paste from the following link).
    http://www.aph.gov.au/library/pubs/BD/1996-97/97bd115.htm

    “A separate problem arose after the initial partial sale in 1989 and came to a head in 1994.The issue was whether the Commonwealth as majority shareholder could (via the Department of Finance) seek privileged financial information from the board of AIDC Ltd.Two government-nominated directors were common directors on the boards of the AIDC and its subsidiary AIDC Ltd.These two directors were also senior government officials.Understandably, they appeared to be in a difficult position.They believed that they were precluded by the Corporations Law from disclosing, as directors, information confidential to the board of AIDC Ltd, back to the AIDC for the benefit of the Department of Finance.They resigned from AIDC Ltd to enable legal clarification of the impasse.(4)

    In much the same period, the board of AIDC Ltd also voted to give massive pay rises to its executives.In an answer to a Question Without Notice by the Hon Tim Fischer to Hon Kim Beazley MP on 18 October 1995, Mr Beazley noted with concern the salary increases but advised that it had been suggested to the Government by AIDC Ltd that it would be necessary to offer such incentives to retain quality staff in the competitive merchant banking sector.Mr Beazley said that he had been advised that the salary structures resulted from consultations that the board of AIDC Ltd had with a number of private advisers elsewhere in the private sector who were on equivalent salaries.(5)

    In the absence of well run government investment vehicles such as AIDC was originally and then failed – due to foolish notions of mixing private interests with public initiatives for the common good – I now think individuals should be given the choice to directly manage our own retirement savings in the form of having our wages placed directly into our own hands. I do not believe it necessarily the case that most people would spend it and not save and the rise in household debt may not necessarily related to a spendthrift mentality. I would suggest most understand the dangers in not putting money away for your own retirement and private interests alone operating in the area of the pool of mandatory superannuation savings since it was introduced have now created risk, uncertainty and lack of confidence as people have expressed here. I am most unwilling to give funds anything but what is required by law and if it wasnt, I wouldnt add to it. There are other ways to save, more prudent ways and in the absence of a well run Commonwealth industry development fund I dont seee much that is attractive. Even if there were one – look what happened to AIDC.

  25. Finally as a requiem to the disaster of AIDC the Howard Government clearly didnt see the problems of AIDC as stemming from partial privatisation (and the interface of the the Corporations legislation with the Commonwealth’s interest as a majority shareholder notwithstanding government officials being on the board) and decided that they may as well privatise all of it…

    “On 18 December 1996, in a joint press release, Ministers Hon John Fahey and Hon John Moore announced a call for expressions of interest in the acquisition of AIDC Ltd.The final date for the lodgment of indicative proposals was 27 January 1997.Media reports indicate that most of the interest in acquiring AIDC Ltd is from foreign investors but there is speculation that the Australian private investment bank, Macquarie Bank, is one of the interested parties.(8)Another media report indicates that AIDC Ltd believes that it is on track to earn a record profit (estimated at $60 million) this financial year.The same report speculated on an unconfirmed asset sale value of $200 million to a high of $400 million for AIDC Ltd.(9)”

    I suppose its now buried in Macquarie Group somewhere investing in CDOs.

  26. Nick K

    Please note – I do not distribute canards.

    Chris, the argument that higher welfare expenditures reduce crime is a total canard. In most countries there has actually been a significant correlation between the growth of the welfare state and increased crime and other social problems.

    My point was about the circular flow not welfare (which I introduced to illustrate my point about the circular flow).

    The issue of taxing surplus (for any public purpose including welfare) should be discussed separately to ideological bantering over “Giuliani” and the so-called “welfare state”.

    However as you have raised this hoary issue, and it may be seen as tangential, I will respond in another post.

    In short – Giuliani created a rightwing horror state where citizens were simply piled-up in prisons, and then the fool of a fellow pointed to some cut in welfare rolls and crime rates after 1990.

    Theoretically, you can cut welfare to zero and crime to zero if you transport or gaol 100% of criminals.

    So, unless you include the increase in gaol numbers, it is fallacious to simply correlate low welfare to low crime – particularly in the context of Rudi Giuliani 1990.

  27. Grumpy Donald Oats @ 62 wrote:

    My point is that *even* if I move my money into a cash account option with a super fund manager, I have no control or knowledge as to whether the fund manager/trust is able to remain solvent.

    That’s true don’t. To minimise risk, go with a big industry fund. If a big industry fund manages to lose your money when its in cash, you’ll be in the same boat with tens of thousands and govt action is likely.

    How do I know that my (about to go to the wall) employer has *actually* been making regular transfers from my salary to the super fund

    Log into your super fund’s website, and look at recent transactions. If your super fund does not provide this facility, change your super fund.

  28. Here’s a pretty succinct graph of the investment adviser’s environment and overall problem- http://www.econbrowser.com/archives/2008/11/investment_advi.html
    The $64000 question is how low will that graph go from one helluva record breaking spike? If demographics created that record upward spike then it’s likely to produce a record breaking downward plunge and a sustained one. Note the sustained fall from the mid60s to the early 80s and then that spectacular increase before the equally spectacular fall to who knows where?

    If baby boomers have paid off their homes and don’t know where to put any excess savings now, the best riskless retirement investment for their offspring is in their own homes and that’s where their compulsory super should be channelled with a couple of provisos. Firstly some reasonable averaged benefit limit which is quarantined upon sale until it is used again for purchase of a principal residence. Secondly that highly distorting incentives to borrow and negatively gear are removed from the system totally (abandoning income tax altogether for carbon and resource taxing as I outline on WR would certainly do that) In that sense our current taxation system and investment decisions probably served us OK while leverage and negative gearing was the preserve of a select wealthy few, but once whole swathes of middle income earners hopped on the bandwagon, the results are now catastrophic. The constitutional marketplace of the inherited tax system is clearly in tatters defying any bandaid solutions.

  29. Re. Nick K’s low welfare, low crime hypothesis

    I was wrong. I said “Theoretically, you can cut welfare to zero and crime to zero if you transport or gaol 100% of criminals.”

    But I forgot that Giuliani was a mad death penalty advocate. So I should have said that in New York, under Giuliani’s preferred regime, you can cut welfare to zero and crime to zero if you transport or gaol, or kill, 100% of criminals.

    Luckily New York’s 1995 reinstatement of the dealth penalty was overturned on appeal.

    Removing people from the welfare rolls, does not mean they do not need welfare. Guiliani simply inserted barriers between the needy and normal civilized rights to welfare.

    The Giuliani reduction in welfare ‘rolls’ has little to do with reduction in welfare needs. In any case this just filled New York gaols – see

    http://tinyurl.com/ddzyml

    America generally executes and gaols it citizens in a made endeavour to reduce crime and welfare rolls. We can do this Australia but it would mean more than quadrupling the prison population.

    America cuts crime and welfare by gaoling and executing its citizens on a mass scale.


    http://tinyurl.com/dyt7pd

    So it is not reasonable to simply state “During the 1990s a lot of critics of welfare reform in the US claimed that it would trigger a new crime wave. Yet this never materialised.”

    Just let your citizens out of gaol.

  30. Chris, you raised the claim that higher welfare expenditures reduce crime (even if it was only a small point in a broader argument). Yet you object to me picking up on this point.

    As for your claims about the number of people in jails in America, I will add a few points:
    – it seems from your reasoning that actually punishing crimes instead of doling out more welfare is more effective in reducing crime. If that’s your point, you will get no argument there

    – it’s true that in America there are more people in jail than in Australia. I think in Aus there are about 0.1 or 0.2% of the adult population in jail. In the US there is closer to 1% of the adult population in jail (if anyone else has more accurate figures, feel free to supply them). Even if those in jail were far more likely to be on welfare or unemployed if they weren’t in jail than the population at large, the best that can be said is that America’s greater propensity to jail people might make a difference of maybe a fraction of 1 percentage point to things like the unemployment rate or the rate of welfare dependence.

    In other words, this alone would only account for a small percentage of the fall in welfare rolls.

  31. I do know that I looked up some research on the fall in welfare and the US and there were strong welfare to work initiatives aimed at single mothers and others. When the mothers or parents couldnt find work essential payments were merely shifted to the childrens names thus apparently reducing eg the number of single mothers on welfare or others (even though parents still received the payments) so as usual you need to be careful in analysing so called falls in welfare stats.

  32. Alanna, I appreciate that when there is an economic downturn there is increased need for welfare assistance.

    But the flipside of that argument is that when the economy is growing strongly there should be less need for welfare assistance. Yet few supporters of more government spending were prepared to accept reductions when the economy was growing strongly.

    It’s also the case that higher welfare expenditures have to be paid for by higher taxes, which has a negative impact on the number of jobs in the economy. So there is a danger that citing a lack of jobs as a justification for higher expenditures can become a circular, self-reinforcing argument.

  33. Alanna, re the welfare reform in the US, I know that there were complex shifts in policy in various parts of the country that sometimes defy simple explanations.

    In parts of the country welfare cuts were accompanied by things like higher child care funding and other policies to help low-income workers like tax credits.

    Still, there is little evidence to support the notion that less welfare leads to more crime.

  34. Monkey’s Uncle wrote “…few supporters of more government spending were prepared to accept reductions when the economy was growing strongly”.

    Of course not, not in the benefits offered per person. Someone who has the bad luck to be unemployed still needs assistance even when unemployment is low.

    He continues “It’s also the case that higher welfare expenditures have to be paid for by higher taxes, which has a negative impact on the number of jobs in the economy”.

    No, not necessarily. It depends how everything is structured. Higher welfare could be paid from an endowment fund rather than taxes, although that is not a short term option. And even if taxes were to fund it, that could help the number of jobs in the economy if it used Professor Kim Swales’s scheme of providing GST tax breaks per employee – and that is a fast acting option (see also here).

  35. Monkeys Uncle#80
    I think we have had this discussion in some other thread. The proportion of government expenditure on welfare iniatives, and health and education (social welfare) as a percentage of GDP has in fact been declining over the past twenty years so its not correct to say that these things have not been declining as GDP grows (as the proportion of this spendiung has declined) – that is what we expect from cyclical upswings per theory – however Im not convinced the recent boom has spread itself evenly at all – there is a lot of people underemployed and likely not far in income above welfare entitlement levels. Just out of the net so to speak but not ideal in terms of carrying the majority with us through the recent boom, and this category are most likely to be affected in the coming recession / depression being low paid part timr or casuals (first to go).

  36. Monkeys Uncle#
    The US welfare stats are a minefield of complexity (given all those different state initatives) whereby the same numbers with different constraints could be quoted as an increase / decrease / sideways shift / or static!!

  37. John, if I may reply to Monkey’s Uncle by saying you might want to take into account the following before you rave on about welfare. Illiteracy Statistics show 42 million American adults can’t read at all; 50 million are unable to read at a higher level that is expected of a fourth or fifth grader. The number of adults that are classified as functionally illiterate increases by about 2.25 million each year. 20 percent of high school seniors can be classified as being functionally illiterate at the time they graduate. In otherwords illiteracy leads to 70 percent of prisoners in state and federal systems can be classified as illiterate, 85 percent of all juvenile offenders rate as functionally or marginally illiterate, 43 percent of those whose literacy skills are lowest live in poverty.

    Source: National Institute for Literacy

  38. I am not too concerned about welfare. Provided we do not base our understanding on paradigms from a prison and execution based society such as America then welfare should be pretty mundane.

    Surely, folks in Sydney including investors in CBD office buildings, benefited from the construction of the harbour bridge.

    Surely it is only right that some of the wealth from this construction should assist secure decent retirements for workers who built the harbour bridge.

    Similarly many contemporary businesses benefited from the construction of Mascot airport. So surely some of this ongoing benefit can be used to ensure a decent retirement for workers who built the airport.

    Every generation benefits from economic activity of earlier generations, and I am not concerned if some of my taxes go to fund welfare.

    As I understand it – most welfare payments stay in Australia and always reappear when pensioners buy things in shops and purchase services.

    Compared to the losses to the economy when capitalists purchase planes, boats, trucks, machinery overseas, I think that welfare is the least of our problems.

    Economically I would like to see welfare subsidised by a Tobin-like tax.

    We must not end up like America.

  39. Chris Warren wrote “Surely, folks in Sydney including investors in CBD office buildings, benefited from the construction of the harbour bridge. Surely it is only right that some of the wealth from this construction should assist secure decent retirements for workers who built the harbour bridge.”

    They already had that, since those workers have already moved through. The outstanding moral obligation would be to repay the shortfall on the inadequate returns to the (mostly British) investors achieved by inflating away the interest and principal of the bonds that financed the bridge’s construction.

  40. Monkey’s Uncle wrote “…few supporters of more government spending were prepared to accept reductions when the economy was growing strongly”.

    PM replied: Of course not, not in the benefits offered per person. Someone who has the bad luck to be unemployed still needs assistance even when unemployment is low.

    Monkey’s Uncle replies: But the issue is not just cuts to the real value of welfare benefits. The issue is also to what extent people should be made to move from welfare to work. Even though we had seventeen years of consistent growth and job creation, there was much opposition to even modest measures like making single parents work part-time once their children were at school.

    To now use the economic downturn to justify more welfare looks a bit selective.

    I also note your claim that “bad luck” is the main cause of unemployment. So individuals have little control over their destiny? In that case, we had better tell kids sitting their exams or starting a job not to try too hard because their efforts count for nought and their fate is solely determined by luck or machinations beyond their control.

    I appreciate that sometimes people lose jobs through risks beyond their control. And I appreciate that everyone makes mistakes in life, and sometimes people need some help to get back on their feet and have another chance. But the notion that individuals have no control over their own destiny is not only wrong but deeply destructive and disempowering and a big part of the problem.

  41. Michael @ 85, the statistics you cite here are good evidence of the failings of the US public school system.

  42. Monkey’s Uncle misunderstands the issues and, possibly inadvertently, misrepresents me:-

    – “The issue is also to what extent people should be made to move from welfare to work. Even though we had seventeen years of consistent growth and job creation, there was much opposition to even modest measures like making single parents work part-time once their children were at school.” Notice that “made” and “making”. All those measures could ever do is apply pressure to people to work whether or not there were any work. As, when, and if there were, it would work out that way – but see below.

    – ‘I also note your claim that “bad luck” is the main cause of unemployment’. [My apologies for the following, JQ, but I see no other alternatives, and I must be blunt or let something I was offended by go unchallenged.] That’s the misrepresentation. He is either making it deliberately or is so caught up in his own views that he cannot understand the plain meaning of what I wrote but can only recast it as the nearest thing that it reminds him of that fits in with his thinking. Let me restate what I wrote, with emphasis as appropriate: “Someone who has the bad luck to be unemployed still needs assistance even when unemployment is low”. Where in that is a claim that bad luck is a cause, let alone the main cause, of unemployment? It is merely an assertion that someone who finds himself in that situation when so many others do not can fairly be said to be unlucky. One thing that implies is, people like that may (not necessarily must) have something making it hard for them to find work. For people in such a situation, applying pressure to them to find work is hardly going to achieve any results along that line. I suppose Monkey’s Uncle is liable to read that as saying that all people without work in good times are of that sort. No, I am just saying that the set of such people is like that, a tautology that doesn’t even imply that there are any such people at all. It’s just that I prefer to keep an open mind on the subject rather than supposing that all unemployment in good times is ipso facto voluntary and should be addressed by pressuring the unemployed.

  43. Yes

    It is often the case that people rephrase someones statement and then criticise the revised version.

    Sometimes they manufacture an implication – and then criticise the implication.

    Usually this is out of enthusiasm, but it just leads to a very confused conversation.

  44. PM, so I misrepresented you by claiming that you believe ‘bad luck’ is the main cause of unemployment? And you are offended by this.

    You said “Of course not, not in the benefits offered per person. Someone who has the bad luck to be unemployed still needs assistance even when unemployment is low.”

    I took that to mean that ‘bad luck’ is the main cause of unemployment. And I thought that a reasonable interpretation.

    And you used the ‘bad luck’ argument as a justification for maintaining welfare benefits. So I took this to mean that most welfare recipients are mainly in their position due to bad luck, and have no control over their destiny.

    If I misrepresented your position, I don’t think you have really clarified it that well.

    Moreover, you completely misrepresent my position as being that no-one is ever out of work due to circumstances beyond their control. If you look back at what I wrote @ 90, this is obviously a complete misrepresentation of my position.

    I wrote “I appreciate that sometimes people lose jobs through risks beyond their control.”

    You have gone to great lengths to misrepresent my position and set up a straw man argument here.

  45. PM, if your position is not that ‘bad luck’ is the main cause of unemployment (my interpretation of your claim), then what is your position?

  46. Monkeys uncle# 90 says on welfare

    “But the notion that individuals have no control over their own destiny is not only wrong but deeply destructive and disempowering and a big part of the problem.”

    Your comment is a bit sort of inappropriate at the moment when firms are cutting employment by the vast amounts around the globe. Its a given that people have control – and its a given that sometimes they dont – you cant deny people welfare to “make them work” – that was Tony Abbots catchphrase – “””they are on welfare because they are “on drugs or lazy”””. And Tony calls himself a christian (so damn heavenly he was no earthly good).

    The GFC wasnt the fault of many (probably the vast majority had nothing to do with it) of these off laid workers. As well the Commonwealth Governments, in Australia, over the past decade or more have stripped jobs from the public sector in the long ideological march to embrace privatisation and this involved the bullying of the public sector in Australia.

    I suspect the public sector is barely capable of giving independent advice to government any more – there has been so much political interference in the public sector its been truly a national disgrace.(stacking of political allies into publicn positions and employing outside sympathetic consultants and advsisers)

    Howard also showed little concern for sacking thousands from the old Commonwealth Employment Service for a start.

    In view of what we are facing now this sort of thing will prove to be a mistake of monumental proportions and as well it was purely and solely ideologically driven.

    There was not a single thought given by that myopic and control driven Government for the consequences of loss of public sector jobs (rising casualisation, rising underemployment). What went on in the public sector under his leadership will take ten or possibly 20 years to fix. Jobs is the word on everyone lips now yet first the public sector stripped labour and now the private sector stripping labour as well.

    Hardly sustainable is it?

    I hope Australian businesses get used to having lower prices and less profits – because that will come. A lot of our entrepreneurs and business people will also be on the street along with those “who need to take control their lives”.

    Poor economic policy.

  47. Alanna, in regards to public sector employment it is state governments that employ more people than the federal government. As for reductions in public sector jobs, it is often the case that governments tend to cut public sector jobs mainly when they are forced to do so through financial difficulties or large amounts of debt.

    That was the case for many state governments (South Australia, Victoria, Western Australia) during the 1990s.

    Yet a lot of state governments have tended to start expanding their payrolls as soon as their financial position has been restored and their revenues have improved (especially from things like the windfall stamp duty from rising property values over the last several years).

    I think it’s true that since about the early 1990s, there has been some decline in public sector employment as a share of overall employment. But in the decades prior to then, there were steep increases in public sector employment. So those reductions came off a historically high base.

  48. Monkey’s Uncle misrepresented me, then asserts “I took that to mean that ‘bad luck’ is the main cause of unemployment. And I thought that a reasonable interpretation.”

    Does this mean that he thinks I am annoyed because he got it wrong? No, that’s not what’s offensive. The offence is that he started telling people the things he got wrong and made out that I believed those things, putting words in my mouth. Now he seeks to excuse that on the grounds that he sincerely believed it. So what? The offence lies in the personal intrusion, not in the content of the untruths he purveyed.

    It gets worse. Now he writes “And you used the ‘bad luck’ argument as a justification for maintaining welfare benefits”.

    Not only is that not what I did, by now he knows that I only used the expression “bad luck” to describe the situation of people in a certain predicament and not as an argument at all. So the plea of inadvertence is not open to him unless he is singularly impervious to being told, and he is almost certainly a liar telling a deliberate untruth. Either way he is compounding his original offence.

    For what it’s worth, readers, I recommend maintaining welfare benefits for the unemployed because while they remain such they need them and because, without the benefits, there would be harmful spillovers – but I don’t recall stating my thinking in this area on this thread (though some of my links might show it), so Monkey’s Uncle was just putting words in my mouth, offensive at the best of times. I would consider that a reason to do it rather than a justification, though (because it’s a pragmatic and not an ethical position). His “If I misrepresented your position, I don’t think you have really clarified it that well” is an attempt to excuse putting words in my mouth on certain points on the grounds that I didn’t clarify them, when in fact I never touched on those points at all! It’s no excuse.

    “Moreover, you completely misrepresent my position as being that no-one is ever out of work due to circumstances beyond their control… You have gone to great lengths to misrepresent my position and set up a straw man argument here”.

    Now that is a downright lie. I never made any statements about his position whatsoever, apart from direct quotation of comments he made as Nick K or as Monkey’s Uncle (I did anticipate a possible objection he might make, at one point, but I made it clear that I was not responding but anticipating). Readers, go and look.

    Since it finally occurs to him actually to ask “if your position is not that ‘bad luck’ is the main cause of unemployment (my interpretation of your claim), then what is your position?”, and it occurs to me that readers may be interested, I will state for their benefit that I feel that there is a market imperfection promoting unemployment over and above what there would otherwise be (from the lack of connection between the hire and fire decisions and the spread costs of unemployment), that the general level of economic activity determines much or all of the undistorted level of unemployment that we would have without the market imperfection, that individual circumstances play a part, that those circumstances are both internal and external to the individuals and affect which remain unemployed as well as the numbers unemployed, that there may well be other factors some of which I am unaware of, and that there are deeper causes underlying many of those things which I have neither the time nor the space to go into.

  49. PM, I try not to spend too much time nitpicking over the smaller details of other people’s posts, but it seems you are contradicting yourself.

    At 92 you say “Let me restate what I wrote, with emphasis as appropriate: “Someone who has the bad luck to be unemployed still needs assistance even when unemployment is low”. Where in that is a claim that bad luck is a cause, let alone the main cause, of unemployment?”

    Yet in the next sentence you say “It is merely an assertion that someone who finds himself in that situation when so many others do not can fairly be said to be unlucky.”

    So in one sentence you deny that you are claiming that luck is the main cause of unemployment. Yet in the very next sentence you say that an unemployed person can “fairly be said to be unlucky.”

    I understand the context of what you are saying. That is, when the economy is strong and unemployment is low the risk of unemployment is lower. So therefore, someone who finds themselves unemployed may be said to be unlucky.

    But this doesn’t change the underlying argument about whether luck is the main cause of unemployment. By defintion, someone can only ever be said to be unlucky if you believe luck is the main determinant.

    If luck is not the main cause of unemployment, then it could well be said that someone who finds themselves unemployed during a strong economy and jobs growth is probably more inept than someone who finds themselves unemployed during an economic downturn.

  50. PM says “Now that is a downright lie. I never made any statements about his position whatsoever, apart from direct quotation of comments he made as Nick K or as Monkey’s Uncle (I did anticipate a possible objection he might make, at one point, but I made it clear that I was not responding but anticipating). Readers, go and look.”

    So let me get this straight. It’s okay because you weren’t actually claiming that I had said anything different? You were merely projecting an assumption about what I believe, even though that had nothing to do with what I actually wrote.

    You said “I suppose Monkey’s Uncle is liable to read that as saying that all people without work in good times are of that sort.”
    Given that I had already said “I appreciate that sometimes people lose jobs through risks beyond their control.”, it seems clear that you were trying to project a view onto me that was clearly out of step with what I said. What is the point of that?

    As I said, you erected a straw man and knocked it down.

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