I’ve written a couple of posts about Labor’s social housing fund, showing that it’s smaller than it appears, and that hypothecation (linking housing expenditure to the fluctuating proceeds of an investment fund) is bad policy. But is the underlying idea sound? This is a complicated question, and the answer takes us back to the mixed economy of the mid-20th century

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In my first post on Labor’s $10 billion housing fund, I pointed out that the $10 billion number is misleading.  The key idea is to borrow $10 billion at the low rate of interest payable on government debt, invest it in higher-yielding assets and use the profits (maybe $400 million a year, based on historical average returns) to finance social housing. The same model has been used by the LNP government to set up funds for a variety of purposes. There’s a total of $50 billion across five funds, the biggest of which is the Medical Research Future Fund of $22 billion, twice the size of Labor’s housing fund.  

All of these off-budget funds are managed by the Future Fund, which was established to offset the government’s unfunded superannation liabilities, and is currently just below the target level ($200 billion in the fund vs target of $215 billion).  The Future Fund can be seen as matching off-budget assets and liabilities

I’ll look at the general idea of sovereign wealth funds in a later post.  A separate question is whether it makes sense to allocate the proceeds of a particular source of revenue (the fund) to a particular policy objective (social housing). In the jargon, this is called hypothecation.

Economists generally dislike hypothecation, but it’s often a harmless way of making the link between revenue and expenditure clear. For example, some road projects in Queensland are funded by the revenue from speed and red light cameras. That encourages law-abiding motorists to think positively about the idea, and weakens the position of dangerous drivers complaining about ‘revenue raising’.

But the housing fund has no such merit. To the extent that the hypothecation is genuine, it means that the money available for social housing depends on the performance of the share market. And this dependence is the wrong way around. The case for public spending on social housing is strongest, both in terms of need and the availability of resources, when the economy and the share market are doing badly.

The Housing Fund is, quite simply, a poor substitute for direct public expenditure.

Following my cri de coeur about the limited scope for progressive analysis now that Labor has adopted almost the whole of the LNP economic program, I got a number of useful suggestions, one of which was a detailed analysis of Labor’s most prominent spending initiative, the $10 billion social housing fund. This idea raises a lot of issues, so I’m going to tackle it a bit at a time

First up, is $10 billion a lot, or a little? There was a time when programs like this were typically described in terms of the annual expenditure they entailed. If that were still the case, the program would be a really big deal. With cheap publicly-owned land and scale economies, $10 billion a year would probably enough for 40 000 homes at $250k apiece. Compared to around 200 000 a year being built privately, that would make a big difference.

But it’s been a long time since the conventions of annual budgeting were observed. The standard procedure now is to quote spending over 4 years (the arbitrarily chosen period of forward estimates in the budget) and the LNP government has occasionally extended this to 10 years, which is absurd given the rate at which things change..

Even $10 billion over four years would still be a big deal however, enough to reinstate social housing as a major part of public policy.

Sadly, the crucial word here is “fund”. Labor isn’t planning to spend $10 billion. The idea is to borrow $10 billion, invest it in high-yielding assets and use the profit (the difference between the market rate of return and the government bond rate) to finance social housing. I’ll have lots more to say about this, but for the moment what matters is the amount that can be raised in this way.

The standard estimate of the “equity premium” is around 4 percentage points, meaning that the government could borrow at 2 per cent and plan to earn a 6 per cent return on average. That yields net earnings of $400 million a year, enough, on the calculations above, to pay for 1600 homes. That would be nice for the people who got off the waiting list, but not really a big deal.

Back in the day, the frill-necked lizard, which can make itself look a lot bigger than it really is, was briefly a popular meme, particularly in Japanese anime circles. Labor’s $10 billion fund is the frill-necked lizard of public expenditure policy.

A few years ago, I got enthusiastic about the prospects for self-driving vehicles, and wrote a couple of posts on the topic. It’s now clear that this was massively premature, as many of the commenters on my post argued. So, I thought it would be good to consider where and why I went wrong on this relatively unimportant issue, in the hopes of improving my thinking more generally.

The first thing I got wrong was overcorrecting on an argument I’d made for a long time, about the difference between radical progress in information and communications technology and stagnation in transport technology. The initial successful trials of self-driving vehicles in desert locations led me to think that ICT had finally come to transport, when in fact only the easiest part of the problem was solved.

There was also an element of wishful thinking. As commenter Hidari observed, the most obvious use of self-driving vehicles is to provide mobility for 75+ Baby Boomers. As someone approaching that category, and having never liked driving much, this is an appealing prospect for me. And I liked the idea of taking other bad drivers’ hands off the steering wheel.

That framing of the issue is very different from the way a lot of commenters saw it. Should self-driving cars be seen as automated taxis, and if so is automation desirable or not? Is any improvement in car technology a distraction from the need to shift away from cars altogether? I don’t have good answers to these questions, but they indicate that resistance to self-driving cars won’t be purely a matter of technological judgement.

Finally, having put forward a position, I am usually tenacious in defending it. Within limits, that’s a good thing, particularly in the context of a blog where the discussion doesn’t have any direct implications for what happens in the world. It’s good to put up the strongest case, and test it against all counter-arguments. But that approach carries the risk of being obstinately wrong.

I’m hoping discussion here will help me deal with more consequential errors of judgement I’ve made. So feel free either to discuss the original question of self-driving vehicles or the broader issue of how to think about mistakes, and particularly mistakes I’ve made.

While I reconsider what I should write about, I’m also thinking about when to get a Covid booster shot. I had planned to do so in February, six months after my second AZ shot. But now, I’m thinking I should wait until the vaccines have been updated for Omicron, maybe in March.

The question I need to assess is how rapidly, if at all, case numbers will grow in Queensland once borders are reopened. So far, it seems clear that Queensland has R < 1, though not so clear why. A string of local outbreaks have been detected, then fizzled out. With vax rates rising, and a combination of vax passports and employment mandates coming into force, that should continue even with regular arrivals of new cases, suggesting that waiting is not a bad idea.

Omicron could change all that, but if it does, it seems even more sensible to get an updated vax. It’s going to be a nervous few months.

My latest newsletter is here

Opening para

Labor has finally released its climate policy, which is just ambitious enough to differentiate it from Morrison’s do-nothingism. Apart from that, and process issues like the introduction of a federal version of ICAC, it seems unlikely that there will be any significant policy differences between the parties at the forthcoming election. Labor’s support for high-income tax cuts and budget “repair” means any spending initiatives will be small, and possible (as in the case of the social housing fund) shunted off-budget. And of course there is no guarantee Labor will win.

So, I’ve decided to shift my attention away from economic policy for the moment. 

I finished this article just as the Morrison government announced it was abandoning its proposal for voter ID laws. So, it ran with some hasty rewriting. Might be useful if the issue resurfaces.

Labor’s commitment to a 2030 target of reducing emissions by 43 per cent is a pleasant surprise. I expected 35 per cent and was confident it wouldn’t be more than 40.

In essence, the 43 per cent target a restatement of the goal taken to the 2019 election. The difference is within the margin of measurement error and appears to reflect the need not to reannounce a policy that had previously been abandoned.

The commitment is a surprise because it follows a series of announcements which ruled out most of the obvious policy options to reduce emissions, including a carbon price, a moratorium on new coal, oil and gas projects. Recent reports also said that Labor would reject the idea of a vehicle fuel efficiency target.

The announcement of the target reduction gave no indication of how Labor plans to reach it. Action already taken by state governments, business and the general public seems likely to achieve a 30-35 per cent reduction, primarily from the decarbonization of electricity generation. Where will the rest of the reductions come from.

There’s room to speed up the electricity transition, for example through a new Renewable Energy Target. Labor has also foreshadowed an expansion of the “safeguards” mechanism for industrial emissions introduced by the current government, covering more firms and lowering the current cap. There may also be some room to move on land use, although that is the kind of politically contentious policy Labor has been at pains to avoid in recent times.

Finally, there’s transport. Unless we move rapidly to an electrification of the vehicle fleet, transport emissions will continue to grow. It’s hard to see how this can be achieved without a vehicle fuel efficiency target. In 2019, Labor promised to consult with industry about such a target, but recent reports have suggested that the coming policy statement will rule this out. This would be big mistake.