Category: Economic policy

Worse than the Bourbons

John Quiggin35 Comments

I have a couple of pieces in The Guardian. The first, which came out a few days ago, points out the consistent failure of market competition and for-profit firms to deliver human services effectively and equitably. The second gives the mainstream economic analysis of the problem, in terms of market failure and the mixed economy, developed 40 to 50 years ago, and ignored by the policy class of today, which takes the assumptions of market liberalism (aka neoliberalism) for granted. My summary:

The problem is that the political class, along with much of the economics profession, have done worse than the Bourbons, of whom Talleyrand observed “they have learned nothing, and forgotten nothing”. … Our leaders, and the economists who advise them, have not only shown themselves incapable of learning from experience, they have forgotten much that we once knew.

Edison in reverse

John Quiggin53 Comments

The takeaway from my latest piece in The Guardian on the failure of for-profit provision of services like health and Education

Blair, and like-minded reformers throughout the English-speaking world, have delivered an Edison in reverse. Edison experimented with many things that didn’t work, but ended up with a light bulb. Market-oriented reforms, particularly in the provision of human services like health, education and public safety, have begun with a working system and replaced it with a string of failed experiments.

Same old, same old on university places

John Quiggin62 Comments

Another day, another article complaining that we have too many young people going to university. I’ll pick this one by Nicholas Stuart, not because it’s particularly good or bad, but because it covers all the main points. Then I’ll ask, the following question:

If you substitute the word “Menzies” for “Dawkins”, is there anything in the article that wasn’t being said 50 years ago, when the proportion of young people going to university was about a quarter of what it is now (that’s a guess, which I’ll try to correct when I get time)?

I’m reaching back to my childhood here,so I can’t remember when I first heard these points being raised. But the way in which they were discussed made it clear they were cliches even them. Those points include massification, dropout rates (higher then than now, I think) the large numbers of graduates doing jobs that didn’t require a degree (Arts graduates driving taxis was the standard example back then), the merits of getting a trade instead of a degree, the role of the university as part of the capitalist system and the corrupting effects of Commonwealth money.

Abandon inflation targeting while we still have time

John Quiggin49 Comments

Back in 2012, I wrote a piece arguing that Australia should abandon the policy of inflation rate targeting, and switch to one in which the target was the level of nominal GDP. As I argued then, inflation targeting is part of a package deal involving a number of propositions, most particularly
* Macroeconomic management should be left to an independent central bank
* Successful inflation targeting will also stabilize real GDP, and therefore fulfil the dual mandate of price stability and full (or as full as possible) employment
* The best policy approach for central banks involves modest regular adjustments of a key interest rate. In Australia this is the cash rate, which is the overnight money market interest rate.

The idea of nominal income targeting has recently been put forward by .Nick Xenophon and economist Danny Price, in relation to the contract with the new Governor of the Reserve Bank, Phil Lowe. The article mentions my support, and I commented on an earlier draft.

Writing in Crikey, Bernard Keane and Glenn Dyer criticise the idea, making three points
(a) Unlike other countries, we are not yet at the zero lower bound, so we can continue using interest rate policy
(b) Macroeconomic outcomes in Australia have been pretty good under inflation targeting
(c) A nominal GDP target can’t be achieved using monetary policy alone, we need fiscal policy as well.

My response to point (c) is “Yes, that’s the point of the shift. When we dump inflation targeting, we dump the entire package, including exclusive reliance on monetary policy”. On (a) and (b), it seems to me more sensible to make the change when we can, rather than be in the position of most countries, where inflation targeting remains notionally in force, but in practice the only instrument available is open market security purchases (aka quantitative easing). And in all those countries, macro outcomes in the inflation targeting era have ranged from poor to disastrous.

Although Australia is doing well right now, interest rates are heading down, and would certainly hit zero fast in the event of a crisis. So why not fix our policy now, while we still have time.

Identity crisis (repost from 2014)

John Quiggin17 Comments

When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war.[1] Not for the first time, I was wrong. So, here’s a reprint.

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[2], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.

fn2. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

A data point on minimum wages

John Quiggin23 Comments

I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents

The standard minimum wage for workers aged 21 and over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.

More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:

* “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
* For workers employed on a regular basis, protection against unfair dismissal.

The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.

Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.

* Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.

What do Australian economists think about policy?

John Quiggin10 Comments

Jan Libich of La Trobe University has a new book out called Real-World Economic Policy: Insights from Leading Australian Economists. Each chapter has a fairly accessible introduction to an economic policy issue, along with an interview with an Australian economist: examples include Bob Gregory, Andrew Leigh and Warwick McKibbin. It’s useful both as an intro text and to get a bit of insight into how some of our leading economists think about the issues facing Australia.

The Smart State saves Queensland

John Quiggin31 Comments

I’ll be talking tomorrow (Tuesday) at the Queensland Jobs Growth Summit organized by the University of Queensland School of Economics and The Australia Institute.

The core point of my presentation is that the resilience of the Queensland economy, despite the end of the coal boom reflects the transition to a knowledge based economy, symbolized by the Beattie government’s “Smart State” strategy and the opposite of the nostalgic and reactionary Four Pillars (agriculture, mining, construction and tourism) strategy pushed by the LNP.

A Royal Commission to end all (or most) Royal Commissions

John Quiggin28 Comments

In political terms, it’s hard to fault Labor’s call for a Royal Commission into the banking system. It’s a neat riposte to the government’s Double Dissolution trigger, the ABCC bill derived from the Royal Commission into trade union corruption, which spent $100 million to announce that it had discovered a handful of cases of petty corruption*, claimed to be “the tip of the iceberg”. (That was one of a string of Royal Commissions set up as political vendettas by the Abbott government, none of which found anything useful.) The hypocrisy of this effort, when we are daily bombarded with evidence of corruption in business, finance and the LNP itself is obvious, and the proposed Commission provides a convenient political hook. And doubtless there will be plenty of evidence of individual wrongdoing, real or alleged.

However, I don’t think this proposed Commission will be any more useful, in practice, than Abbott’s. The problem with the banks is not so much breaches of the rules but the rules themselves. What we need is another inquiry which, unlike the Campbell, Wallis and Murray inquiries is not run by advocates of financial deregulation.

The Royal Commission we should really have is one into Abbott’s Royal Commissions, taking the same nakedly political approach as those Commissions did. The Commissioners, the counsel assisting and the government ministers who called the Commissions should be questioned on the political understandings with which they approached the job, the waste of public money involved. With luck, that would deter any future use of Royal Commissions as partisan vendettas, and leave them to inquire into real issues of public concern, where the powers of Royal Commissions really are necessary.

Finally an observation and a question: Having been critical of the TU Royal Commission, I’ve tried to be consistent in the prediction that this one will be similarly ineffectual. Did any of those now arguing that we don’t need a Royal Commission into banking make the same observation about TURC?

* As far as I know, no union offical has yet been convicted of a corruption offence as a result of the Commission’s work, while at least four prosecutions have failed or been dropped. My guess is that the total number of convictions will end up below 10, and the total amount of money involved not much more than a million dollars. That’s a pretty appalling return for $100 million of public funds that could have been used to protect the community against armed robbers and burglars, not to mention white collar criminals.