Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please. If you would like to receive my (hopefully) regular email news, please sign up using the following link
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John Quiggin 
Svante,
Thank you for the links.
John’s point about opportunity cost and Modern Monetary Theory is apt coming as it did just after the G20 summit. The loose talk about free trade by politicians always amuses me because most of them have no idea it is also based on opportunity cost. The Principle of Comparative Advantage first explained by David Ricardo made the case for free trade. But shortly after that Ricardo saw his own mistake. It was a lot more complex that he had imagined.
Free trade is not something that politicians should be blindly supporting. For example a proposed free trade deal between the USA and China may see China buy less of Australia’s agricultural exports. The old Offer Curve Theory can help here show how complex trade negotiations can become. Edgeworth and Marshall used indifference curve analysis and production possibility functions to explain the complex exchange mechanism of price relativities for tradable goods. This is the reality of trade negotiations. That is why international competitiveness is so important. It may also explain to the economic novice why countries are so keen (excepting the Europeans) to get their exchange rate DOWN against other tradable currencies.
I have a very naive question about how to understand opportunity cost. The textbook definition is that it is the value of the next best alternative. That’s easy to understand in my own case, but harder to understand when I’m assessing the opportunity costs of other people’s choices, and those people value their options differently from me.
Imagine e.g. a government led by a purely hypothetical political party; let’s call it The Nasty Party. The Nasty Party has 3 platforms: (1) give rich people more money (2) beat up foreigners and (3) pander to a religious minority. When I think of a TNP policy that I disagree with — say, their Schmool Schmaplaincy program — I might think of its opportunity cost as being, say, hospital beds they might have provided at the same cost, or public school funding, etc. But those are not in fact what TNP would spend that money on; what they’d actually spend the money on is, let’s say, giving even more money to rich people.
So in this case, I’d say the opportunity cost of Schmool Schmaplaincy is e.g. $x for school funding; but TNP would say the opportunity cost is y% less tax relief for those struggling on a mere $200,000 p.a. Which of us is right? Or, since that question seems to me not to have an answer, how is the concept of “opportunity cost” applied in such cases (which, presumably, abound)?
(I apologise that this is the economic equivalent of posting hey how does multiplication work can someone explain times tables to me. Feel free to direct me to whatever rudimentary source explains this)
Jones I have the similar problemyet my cognitive dissonance rises when confronted with lives lost.
“easy to understand in my own case, but harder to understand when I’m assessing the opportunity costs of other people’s choices, and those people value their options differently from me.”
See:
https://johnquiggin.com/2019/06/26/gleebooks-tomorrow/#comment-211928
http://www.thepaincomics.com/weekly110713.htm
And my reply re moon vs war – and the lives lost revealed ro me I have a very hard time keeping ‘cost’ vs “opportunity cost” in mind when confronted with 3,000 ish dead real people.
“””JD – opportunity cost of: 2579 – 3 = 2576 lives AND $’s:
Is the opportunity cost the full $432Bn or the difference between afganistan minus moon. $432 – $145 = $287Bn?
I understand ‘opportunity’ but now I need a definition of ‘cost’ as cost is not taken as also ‘lives lost/saved’.
Maybe a new rule; cost to life then notional cost of opportunity.””
Easy if binary choice. Hard with 3,000+ human grief dimensions and vectors. For me.
Hat tip to Ernestine.
I was searching for something on Laffer recently and Ernestine’s comment ( below ) appeared. (JQ may we have a “best quote of the op / month / explanation” please?).
Re current tax package and brackets;
“By 2024-25, the 37 per cent and 32.5 per cent tax brackets will be eliminated altogether – leaving all incomes between $45,000 and $200,000 taxed at a rate of 30¢ in the dollar.”
https://www.smh.com.au/politics/federal/labor-prepares-to-back-coalition-s-158b-tax-cut-package-20190701-p5232l.html
“”Ernestine Gross says:
“I considered it after I wrote the post @16. The clue is the term ‘bracket’. The convention is that [ ] denotes a closed set and ( ) denotes an open set. The so-called progressive tax system in Australia (and probably in most countries) looks like this: [ ], [ ], [ ], [ . Ah, there is a bracket missing! What if we write [ ], [ ], [ ], [ ], and [ )? No cap on income is specified. But whatever is in the last bracket is taxed at 100%. I suspect a lot of people would like to have many more tax brackets than what we have now (approximating a continuous function).” “”
https://johnquiggin.com/2015/05/16/the-laffer-hypothesis-in-australia/comment-page-2/#comment-169869
Ernestine, Labor needs you.
And I never understood why we do not have continuous function – smooth – tax rates. Instead of almost culture war / minimising causing / “30%” “47%” sawtooth / cliff brackets.
And I never understood why we do not have continuous function – smooth – tax rates.
Germany has a continuous (quadratic) function function income tax rate schedule.
A recent cartoonist’s comment on the ‘generation’ game:
https://xkcd.com/2165/
Solar energy update:
Several recent announcements of utility PV projects have come out at under US 2 cents per kwh for long-term PPAs. In Brazil, the latest auction led to awards of 200MW at at an average price of 17.5 US cents per kwh (I think the prices are set in dollars) for 20 years (****pv-tech.org/news/brazil-auction-sets-record-low-solar-price-of-us17.5-mwh). The City of Los Angeles is about to sign a 400 MW PPA for 25 years at 1.997 cents per kwh. (****cleantechnica.com/2019/06/30/los-angeles-8minute-solar-announce-25-year-ppa-at-under-2-cents-per-kwh/).
It’s only recently that contracts under 3 cents were news. Important caveat: in both cases, the delivery deadline is in 2023. Since PV farms can be put up in 6 months, the developers are pricing in three years of future declines in module costs. Still, these are contracts not forecasts.
The LA project also includes an initial 100 MW/200 MWh of storage batteries, at an additional 1.3 cents per kWh. That’s for half an hour of firming. Scaling up to a more realistic 6 hours for grid balancing (typical of big CSP plants with hot salt storage), it would cost a hefty 15.6 cents/kwh. This confirms my impression that batteries are fine for short-term voltage regulation but a very expensive way of load shifting at grid scale. I follow Andrew Blakers’ simulations for Australia that firming with HVDC transmission and off-river pumped storage would add only about 50% to the raw solar and wind cost. But you ned to plan ahead for these and invest political capital in ovrcoming NIMBY opposition.
China coal speculation
Chinese coal consumption, which bounced back in the last two years without reaching its 2023 peak is set to stay flat in 2019. Useful chart here (****chinadialogue.net/article/show/single/en/11107-China-s-coal-consumption-on-the-rise). Reuters (***af.reuters.com/article/energyOilNews/idAFB9N20600M):
“China’s coal consumption is set to rise slightly to 3.89 billion tonnes in 2019 from 3.87 billion tonnes last year, the president of the China National Coal Association [Wang Xianzheng] said on Monday.”
An increase of 0.05% is well within Mr. Wang’s measurement error, and he’s a professional coal lobbyist with an institutional bias towards coal optimism, so flat it is.
Now combine this with the import substitution policies of both China and India, and the prospects for Australian coal export prices do not look good. Chart here ***indexmundi.com/commodities/?commodity=coal-australian&months=60 . Gautam Adani may be waiting for a clearer picture, as China is the swing coal importer. The previous DHS forecast has been for good Newcastle coal prices to stay under $75/tonne as far out as 2023 (****reneweconomy.com.au/adanis-vain-hope-global-coal-market-will-save-carmichael-mine-35641/)
Damn, 2013 peak.
James, I assume your reference to the price of the Brazilian solar project was meant to be US 1.75c/kwh, rather than US17.5c.
Tim: quite right, mea culpa (made eternal by the absence of an edit function in comments). Sloppy conversion from the prices in Mwh.
KT2, so you liked this little exercise from 4 years ago. Yes, sometimes taking words seriously, as an exercise, is entertaining and on rare occasions even a little enlightening.
Anyway, wrt the income tax package before the Senate now, it would require getting rid of GST and to increase the tax free threshold on income tax a lot to make the tax system less regressive. I suspect everybody knows that but how would I know this.
There is a glaring unequal treatment of income earned from wages and income earned as profit that goes beyond negative gearing and other subsidies to ‘investors’.
In the case of profit, tax is levied on revenue – expenses that are considered necessary to earn the revenue. In the case of wages expenses such as food, housing, clothes, transport, soap, ….., which are necessary to earn the wages are not counted as tax deductible expenses. Setting aside a few allowances, income tax for wage earners is akin to income tax on revenue. I know this is not an original idea because I mentioned it once to a professor of economics, who brushed it aside as an old hat.
RE China Coal Consumption: China has filled its natural gas storage capacity to avoid a repeat of what happened in their winter when cold weather result in natural gas shortages and higher than expected coal use. Natural gas is now at a 10 year low in price so I would expect China’s coal use to resume its decline. While there is definitely no guarantee natural gas prices will remain low, the general trend is downwards thanks to the falling cost of renewables and their increasing capacity.
Smith9, I just looked at the German income tax rate schedule and it doesn’t look like a quadratic function to me.
And I never understood why we do not have continuous function – smooth – tax rates.
That is an interesting questions. For example when calculating mortality rates (human population), one assumes that these change ‘continuously’ (increase) with age (a resonable assumption) to fit a curve to the available data. So in theory at least, there is a unique number (mortality rate) corresponding to each age (age as a real number over say [0,100]). Yet ‘interpolation’ is used subsequently to determine a constant mortality rate over each bracket [x,x+1], where $x $ is a positive integer.
Having a constant number over some interval, to work with, in various other calculations is I guess easier (existing models are likely based on this).
I expect tax calculations are a little more straightforward, so more brackets should not be a problem.
Choosing the rate curve/function though and explaining the details to people would probably not be easy. If people are unhappy with the brackets, they may be even unhappier with the slope (and so on) of the curve .
“There is a glaring unequal treatment of income earned from wages and income earned as profit that goes beyond negative gearing and other subsidies to ‘investors’… (namely treatment of) expenses…” – Ernestine Gross.
Correct, Ernestine. I know a young man has decided to become an investor. It has certainly been an eye-opener to me to see how he can use the extant laws completely legally to extract all sorts of advantages for his investing portfolio. At the same time, it’s quite hard for him to minimize tax on his professional income. Understandably, he has come to the rational decision that soon he will not practice his profession, he will simply invest. If all our smartest young people decide it’s not worth working and it’s only worth gaming the system via investing, then I fear for the system itself.
My personal assessment? I don’t think people run this system any more. I think the system runs the people. The system now follows its own emergent trajectory beyond the steering capacity of humans individually or collectively. We control units in the system (households, firms, institutions etc.) but we don’t control the emergent behavior of the ensemble. It is obeying its own laws and we don’t fully understand what they are.
“At the same time, it’s quite hard for him to minimize tax on his professional income”
Then he should change his profession to lawyer or accountant. Enter a partnership with a corporate structure where he’s a shareholder; hold his shares in his family trust or super fund; take the minimal salary allowed by the ATO guidelines; take the rest as dividends paid to the family trust or super fund; and Bob’s your uncle, taxes are minimised.
Smith9,
That seems quite hard to me. Let’s see;
(a) ditch current profession;
(b) go back to uni (another 5 years and more student debt);
(c) get early experience (another 5 years);
(d) enter law firm as junior (another 5 years);
(e) progress up the ladder and get made a senior partner (another 5 years).
Our hero is now 45. Playing the stock market at the current rate he will likely be rich by 30 (though ruin is a possibility too). Even then, he still has time for another dash at speculation and being rich by 40. Lawyer or accountant sounds like the slow way.
Iko
it’s very hard to make a quick fortune playing the stock market, unless you buy a penny dreadful stock that goes to the sky, The odds against that are Lotto-like.
Anybody contemplating making a fortune from the stock market should consider this.
https://en.m.wikipedia.org/wiki/Benoit_Mandelbrot
“I think the system runs the people. The system now follows its own emergent trajectory beyond the steering capacity of humans individually or collectively. ”
I don’t think that it is the system that runs the people. It is the people who are doing things in a way to preserve, and keep the system going.
Mostly because the system is kind to those who have power to keep it going. Also because many would not even be able to concieve an alternative and there are always risks that change brings.
Which group of people, or which `class’ of australian people could/would call for a change, or run the system? This group would have to be organised, have some power, have good leaders, have the support of a majority of australian people. Have confidence.
There is unfortunately no such group, other than that of the `masters’.
The idea of a `master’ and his authority seems still well and alive in this country, without people even realising it (or what the `master’ has been doing).
So things are exactly as they have always been, with the `master’ now becoming a little stronger again, and the servant a little weaker.
I am not a believer in CO2-warming but I think people of goodwill should look to things they can agree on. I see it that a civilisation is only as good as its soil. And that good soil comes out of the backside of herbivores to a very great degree. Grasslands with cell-grazing would therefore be a great way to build soil but grasslands on their own are too fragile. Plus phosphates come out of the backside of birds and most birds need a lot of trees.
You want trees. You want trees in order to have an extensive myceleal (fungal) network such that you have a gigantic system for mining sub-surface rocks for minerals. I will get behind anything that will promote silvopasture, polyculture and permaculture …. As opposed to industrial agriculture croplands. Monoculture croplands eat up soil and do not produce new soil. Straight mono-cultures of corn, wheat and soy are destroyers of soil, rather than creators.
I have common cause with the global warming crowd when it comes to high-rise wooden buildings. Other than having 3 metres of deep rich soil everywhere, putting carbon into high-rise is the “you-beaut” everyones-a-winner sort of CARBON INTERNMENT So I hope everyone gets behind this concept. I also like the idea of higher royalties for our coal sold overseas. Got no problem with that. On my side of the fence I simply could not live with an international carbon trading regime. I would see this as very hostile.
There has been a lot of talk about nano-technology. Probably too much talk about nano-technology. But we know what the lowest maintenance cost form of nano-technology is. We call this “the seed.” To me permaculture is all nano-technology. To me the greatest Australian is the teller of tall stories: Bill Mollison. So lets get this wood-based hi-rise happening. Put all the carbon in the soil, and up in many buildings.
Smith9,
“It’s very hard to make a quick fortune playing the stock market, unless you buy a penny dreadful stock that goes to the sky, The odds against that are Lotto-like.” – Smith9
It’s hard to make a fortune on the stock market but the odds are not Lotto-like. The terms of your statement need some modifying. It’s not a quick fortune unless you term 5 to 10 years “quick”. The speed of the fortune also depends on the initial stake and whether it is augmented with earnings from another source like a standard wage. In addition, most people waste a lot of money on socializing, holidaying, drinking, buying a good car and buying a house with a mortgage. Some serious young investors I know double their money about every two years. They drive old cars, hardly drink at all, live and socialize very frugally and have avoided real estate and mortgages like the plague. Instead of socializing and having “fun” as often as most people they research and crunch numbers.
They are maths and science majors, very tech and finance savvy with a good idea of which tech and which financial innovation will take off next. They don’t buy penny dreadfuls, they buy potential 10-baggers etc. (a 10-bagger being a stock that realises a ten times gain while you hold it.) They have a series of analytical and mathematical methods for picking these stocks. They utilize probability theory and inter-temporal portfolio choice strategies like the Kelly strategy and other techniques. “We wouldn’t bother explaining it to you because you don’t have the maths to understand it.” By the way, I don’t invest with these guys and they don’t ask me to. I would reply, “You said it. I don’t understand the maths and I don’t invest in anything I don’t understand.
The common perception is that people can only make fortunes on the stock market if they are very lucky and take a lot of risks. This self-comforting, folk-wisdom neglects the fact there is a small subset of people who are lot smarter and lot more disciplined than the majority of people. They can and do make “fortunes” playing the stock market. Yes, they do take risks and they can come unstuck but their astute choices and handling of risk can mean 40% – 50% returns per annum at risk levels little higher than a standard, “safe” portfolio. Most dabblers on the stock market are suckers compared to these guys. Large funds and institutional investors cannot make the plays these guys make. These guys target small stuff with a high research quotient per investment. Big institutional funds don’t bother with this (to them) small, speculative stuff.
I have also seen how these investors can legally minimise tax and get other investment benefits. Our system is heavily weighted towards speculative investment and heavily weighted against honest wage work. I’m socialist at heart, albeit the arm-chair variety I guess. But I can see how this system has made it proximally rational to speculate and be a capitalist (if you are smart and disciplined enough). I also think the whole system is leading us to disaster but that’s another story. It’s rational to play the game for self-interest but the game itself is irrational. Short-sighted local self-interest rationality leads to global irrationality. This is the fact that market fundamentalism does not understand. Meanwhile my young acquaintances keep making money (so far) while I waste time philosophizing.
Iko, I’ve known many people like that. They all have one thing in common. They only tell you about their wins, never their losses.
There is a site called “hotcopper” which is a forum for stock investors to talk about the various stocks they’re investing in. If you ever want to know how dumb and stupid some people can get, go there and visit one of the more speculative stock discussions. Seriously, it’s like going to a football game – any contribution that is deemed as not positive to the stock, no matter how objective it is or how much analysis went into the info, is seen as “down ramping” the price and is jumped upon. There’s an emotional attachment which is completely irrational.
The problem, of course, is that some contributors provide excellent analysis, which keeps you tuned in… well, up until a point before it gets too intolerable (which isn’t long)
Gdp to tax% ‘naive framing less culture war’ comment.
Ernestine said: “There is a glaring unequal treatment of income earned from wages and income earned as profit that goes beyond negative gearing and other subsidies to ‘investors’.”
Yes.
“the culture war is just a useful distraction to ensure that those they are exploiting never combine against them. The big issue for them is taxation,”
johnquiggin.com/2012/11/10/the-end-of-the-tax-revolt/
Nothing new I assume, so how about we change the cultute war tax debate from unequal treatment / invest / cgt / gst / super etc, to;
23% tax to gdp ratio rising to 28% provides for all.
And set tax to gdp on a rolling basis – independently of politics. Or NNI with different parameters?
…”In a recent book, Fair Share: Competing Claims and Australia’s Economic Future, Mr Keating and co-author Stephen Bell argue the ratio of tax to gross domestic product, or GDP, should be lifted by 1 percentage point per decade over the next 30 years to avoid a budget blowout linked to the ageing population.”. This suggests we will be forced to remove the artificial cap of 23.9%.
But … “the Coalition, in the 2014 budget, announced it would cap the tax to GDP ratio at 23.9 per cent of GDP, promising to cut taxes to prevent any breaches of this ceiling.”
https://abc.net.au/news/2018-05-02/fact-check-is-tax-to-gdp-lower-now-than-howard-years/9705324
If we were able to debate “24% gets this type of society” vs say ” 26- 28% relieves many of societies ills “, then the debate would have a frame of 2-4% difference will produce superior society without effecting employment / production / investment / non rentier profits. And collapses all debating points to a simple metric. And shows us ” the degree to which the government controls the economy’s resources” (*1). We like control in our hands. And a potential political wedger’s wedge. And makes the top 1% seem unfair as “we are only talking about 1% over ten years”. (And a tobin tax to achieve this?)
“From its pre-crisis level in 2007-08, the tax-to-GDP ratio fell 3.7 percentage points (around 16 per cent) to 20.0 per cent in 2010-11, the biggest decline in the ratio since the mid-1950s.”
https://treasury.gov.au/publication/economic-roundup-issue-2-2013-2/economic-roundup-issue-2-2013/tax-to-gdp-ratio-past-and-prospective-developments
See all oecd tax to gdp rates via the editable oecd tax to gdp tool. Able to isolate years / country / avg etc. A great interactive visual graphing tool.
*1. “It can be regarded as one measure of the degree to which the government controls the economy’s resources.”
https://data.oecd.org/tax/tax-revenue.htm
I note in presented oecd graph above at top right quadrant a peak outlier – Iceland raised its tax to gdp ratio from 36% to 51% and back to 32% 2015 – 2017. ???
Framing affordability of an equitable society around 2- 4% difference or 1% over ten, of tax to gdp, would seem to me a sensible framing.
***
And I discovered JQ’s suggestion: “something a little different in blog terms. This post will be updated whenever I get a chance, both with new material and in terms of publication date so that each new version will appear at the top of the homepage, hopefully with the comments being carried with it.”
https://johnquiggin.com/2015/04/24/rethinking-tax-policy-for-australia/
Updated blog in tax sounds like a great idea to me. And supporters to prompt JQ? JQ?
Thanks for the reminder, KT. I should get on to this.
Who knew?! Awaiting study now of News Corp vs populist effect here and UK & Fox vs populist voting trends.
“The Political Legacy of Entertainment TV
…”we find that individuals exposed to entertainment TV as children were less cognitively sophisticated and civic-minded as adults, and ultimately more vulnerable to Berlusconi’s populist rhetoric. ”
https://www.aeaweb.org/articles?id=10.1257/aer.20150958
Latest report from IEEFA’s Tim Buckley on Japan’s slow but steady move away from imported coal: ****/ieefa.org/wp-content/uploads/2019/07/Japan_Coal_July-2019.pdf
The paper also covers the other Asian markets briefly. It’s all bad news for existing Australian coal exporters, and worse for Adani. When your hopes for a miracle rescue hinge on Pakistan and Vietnam, you are in bad trouble.
Nugget: a spokesman fot Tata says that the price uplift in the expected bailout of its Mundra coal megaplant will only cut the losses in half. It’s not politically likely that Adani has secured a much better deal. Modi is rescuing his cronies from bankruptcy, but not making them whole.
ALP is becoming more and more to the Right after the election. At this rate, by the next election voter will think ALP stands for the Australian Liberal Party. Its not easy to know if this shift is due to ALP lost the election on progressive policies, or if Anthony Albanese’s political stance is similar to that of moderate Liberal as Professor Quiggin pointed out in the past. I think its a mix of both. Either way, progressive policies are dead for the coming decades because of the last election.
Tom,
I agree. The Labor Party has completely caved in and acquiesced to the right wing victory. This capitulation is not limited to Albanese and his faction in the Federal wing. Annastacia Palaszczuk, here in Qld, also completely caved in and back flipped after the federal election. She almost fell over herself in her haste to approve the Adani Carmicheal coal mine. People see these sort of things, understand them and realize that the ALP stands for nothing except winning and caving in to big money. This makes all of the ALP’s protestations about caring for the environment and the climate (and the reef, the mangroves, the mulga, the bilby, the black-throated finch etc. etc.) appear completely hollow as indeed they are.
Progressive politics is dead in this country for at least a decade (and the whole world since the election of Trump). By that time (2030) it will be too late to save anything ecologically or civilizationally. Eventually people will realize what they have done and become enlightened and… I jest. Eventually people will realize what they have done and what they face. Then they will descend into war, cruelty and barbarism as they fight over the last remaining scraps of the environment and economic production.
What? Me bitter? Disillusioned? Nah, just realistic about homo insipiens, avarus, rapax, cupidus, vorax.
Investors are avoiding coal mines – it seems nobody wants to be last one to own a hole in the ground.
https://www.mining.com/web/australian-thermal-coal-leaves-investors-cold/
That article mainly points out that some big coal players have, are, or might, be selling coal mines. Bottom line is, if someone is selling coal mines then someone else is still buying them. The key break point will be when coal mines are unsaleable, when they become stranded assets.
Meanwhile, world coal production has risen by 1.9% for the second year in a row. Admittedly this is after a decline from a peak of about 8,000 Mt in 2013. It bottomed out in 2016 and has risen back towards but not reached that previous peak.
Overall, the phase out of fossil fuels is still far too slow to save us from dangerous global warming. A physics dot org article in 2016 suggested that fossil fuels could be phased out in ten years. That is the sort of time-frame we need to save the planet’s biosphere.
“How long will it take? Conceptualizing the temporal dynamics of energy transitions” – Benjamin K.Sovacool
https://www.sciencedirect.com/science/article/pii/S2214629615300827
However, as that physics dot org article notes, there is a absolute requirement for “strong government intervention coupled with shifts in consumer behaviour, often driven by incentives and pressure from stakeholders.” We have to cease being capitalistic and cease over-consuming.
It’s clear we haven’t done nearly enough, given that it is 2019 and according to Fatih Birol “Despite major growth in renewables, global emissions are still rising, demonstrating once again that more urgent action is needed on all fronts — developing all clean energy solutions, curbing emissions, improving efficiency, and spurring investments and innovation…”
The consistent picture of late stage capitalism is its failure to act in time. I expect this to continue and the biosphere to collapse; the world population of humans collapsing along with it. Other animal and plant populations are already collapsing as shown by the current 6th mass extinction event (including collapses of insects, birds, fish and mammals). Eventuially, the biological kingdoms of Plantae and Animalia will collapse severely and even possibly entirely. The biological kingdoms of Archaebacteria, Eubacteria, Protista and Fungi will survive. A new round of evolution will then begin, without humans of course.