Cum/ex

Looking for a different story in the business pages of The Guardian, I happened across a headline stating The men who plundered Europe’: bankers on trial for defrauding €447m. That attracted my attention, but the standfirst, in smaller print, was even more startling

Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal worth €60bn that exposes City’s pursuit of profit

For those without a calculator handy, that’s about $A100 billion.

I think of myself as someone who pays attention to the news, but I had missed this entirely. Google reveals essentially no coverage in the main English language media. There’s a short but helpful Wikipedia article and that’s about it. The scandal has been described as the ‘crime of the century’, but it’s just one of many multi-billion dollar heists, with the GFC towering abover them all.

It remains to be seen how the trial will turn out, but it’s already clear that, as usual, the banks have got away with it. The bank most closely involved in the scam, HypoVereinsBank in German has set aside €200 million euros to cover its potential liability. That’s less than 1 per cent of the tax avoided or evaded (the lawyers will be fighting out which, for some time, but the effect on ordinary citizens is the same).

The crucial point here isn’t the failure of the law to punish wrongdoing.

What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.

The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains. The rational route to achieve this would start with the kinds of reforms being proposed by Elizabeth Warren. But we may be stuck with a messier path, in which courts tire of giving slaps on the wrist to recidivist banks and start shutting them down.

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A nuclear grand bargain ?

I wasn’t expecting much of a reaction to my submission to two Parliamentary inquiries into nuclear power, in which I advocated imposing a carbon price (set to rise to $50/tonne over time) and, conditional on this, repealing the existing legislative ban on nuclear power.

Over the weekend, though, I heard that Aaron Patrick of the Fin was asking a few people about it. Given my past history with Patrick, I was expecting a gotcha hatchet job, or worse.

When today’s Fin came out, I was surprised to learn (via Twitter and email, as I don’t subscribe), that the Fin had run not one, but two articles about my submission, both by Patrick. The first that came to my attention was the expected gotcha, focusing on the recommendation to repeal the ban, while softpedalling the carbon price to the point of near-invisibility (just enough of a mention that he could deny having ignored it altogether).

The second, though, was a reasonably accurate and supportive summary of the proposal (a few digs at me, but I have a thick skin). Money quote:

A carbon price would delight the left, and would be unlikely to upset most of the business community. Small-scale nuclear reactors could be framed as a nascent technology that might not ever happen – giving its opponents a short-term political victory in the long-term national interest.
A confident and pragmatic centre-right government could seize the opportunity to alter the path of Australian economic and environmental history – from one of the worst emitters of carbon, based on population, to among the lowest.

As I’ve said previously, anyone who seriously believes that nuclear power should be adopted as a response to climate change ought to endorse this proposal. I find it hard to imagine that the nuclear boosters in the LNP are in this category, but if they are, here’s their chance to put their hands up.

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Opportunity cost, MMT and public spending (crosspost from Crooked Timber)

I’ve been busy for the last week doing events for Economics in Two Lessons, so I didn’t have time to take part in the discussion arising from Harry’s post on alternatives to Sanders’ proposal to wipe out college debt.

In one way, that’s a pity because the key point of the book is the idea of opportunity cost – the true cost of anything, for us as individuals, and for society as a whole, is what you must give up to get it. More precisely, it’s the best alternative available to us.

Harry’s post was all about opportunity cost – what would be the best use of $1.6 trillion in public funds. However, the discussion was inevitably enmeshed in the complexities and inequities of US education, while comments making broader arguments about opportunity cost reasoning weren’t discussed in detail.

One of those broader arguments is the idea that, thanks to Modern Monetary Theory, there’s no need to worry about such questions. In the “chartalist” reasoning underlyng MMT, the fact that governments can issue their own sovereign currency means that there is no need to “finance” public spending by taxation; rather taxation is a tool used to manage aggregate demand so as to keep the economy fully employed but not at a point where excess demand creates inflation. That (essentially correct) position can easily slide into the (only subtly different, but radically mistaken) view that governments can spend money on anything they like with no need for any increases in taxes or cuts in other spending.

As I will argue over the fold, a correct version of MMT makes no such claim. Unfortunately, while avoiding the error themselves, a lot of MMT theorists have not shown much willingness to set their more naive followers straight.

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Coming events

I’ve got quite a few events coming up in the next couple of weeks.

* On 13 and 14 May, I’m running a workshop at the University of Queensland on Epistemic & Personal Transformation:
Dealing with the Unknowable and Unimaginable
. Details here.

* On Thursday 16 May, I’ll be at ANU for the official Australian launch of Economics in Two Lessons.  Details are here. If campaigning permits, Andrew Leigh will say a few words about the book. There will be a launch at Avid Reader in Brisbane in late June (date tbd), and in Sydney and Melbourne a bit later

* On Wednesday 22 May, I’ll be delivering the Keith Hancock lecture for the Academy of the Social Sciences in Australia, at the University of Queensland. Topic is The Future of Work. Details here.

* I’m doing a number of radio interviews related to Economics in Two Lessons. I talked to Radio SER in Sydney yesterday. On Saturday 18 May, at 7:45 am, I’ll talk to Geraldine Doogue on Saturday extra, then on Wednesday 15 May to Steve Austin on ABC Radio Brisbane Drive.

How much will it cost to deal with climate change? Not much at all

That’s the headline for my latest piece in Inside Story, along with the short version of my answer. The long answer is that, even with dubious modelling choices and extreme parameter assumptions, Brian Fisher of BAEcon* comes up with estimates of about 2 per cent of GDP, trivial compared to the potential cost.

So, he uses the same presentational trick he’s been using since the first ABARE modelling exercise back in 1996, turning an annual flow into a present value over ten years to make it look bigger.

The truth is that the economic impact of reducing emissions by 45 per cent relative to 2005 levels by 2030 will be so small as to be lost in the noise of statistical revisions and exchange rate effects. By contrast, the costs of doing nothing about climate change are already visible and are only going to get bigger.

Considered in terms of opportunity cost, action to mitigate climate change is a no-brainer, which is why so much intellectual and rhetorical energy has to be used to mount any kind of case against such action.

  • BAEcon is a play on the title of the Bureau of Agricultural Economics, precursor of the Australian Bureau of Agricultural Resource Economics (ABARE) where Brian was Director and I was Chief Research Economist in the 1980s and 1990s. It’s now ABARES having absorbed the Bureau of Rural Sciences.

The average (median) worker does not earn the (arithmetic) average wage

Eryk Bagshaw, recently[1] appointed economics correspondent for Fairfax, is certainly aware of that. In fact, mentions it right near the end of this scare story about the effects of Labor’s rejection of the second-stage of the Morrison government’s legislated tax cuts. But that didn’t stop the Fairfax subeditor running his article under the headline “Average full-time workers to be $1000 a year worse off under Labor”

To spell it out, the trick here is that Bagshaw is looking at workers who earn between $90,000 [the arithmetic mean of wages for full time workers} and $120,000. He estimates that there are about 1.6 million such workers. That’s a bit over 10 per cent of the workforce (about 13 million people). As he admits, the median full time wage is well below this, and the median wage for all workers lower again. Once pensioners and welfare recipients are taken into account, it’s evident that Bagshaw’s “average workers” are well towards the top end of the income distribution.

This is amusing since I had a previous run-in with Bagshaw over this very issue of headlines. On that occasion, Bagshaw was scathing about a sloppily written ACTU press release, which ended up with a totally inaccurate headline. I don’t think a defence of innocent error is available here. Bagshaw’s story is written in a way that would lead any casual reader to make the same inference as the subeditor. Moreover, there’s no obvious reason why workers receiving between $90K and $120K should be of more interest than any decile of the workforce. Certainly they aren’t average in any meaningful sense. So, without the misleading phrasing, the story would probably have been spiked.


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