In today’s Fin (subscription required), Sinclair Davidson tries to resuscitate the claim that Australian taxpayers are suffering from severe bracket creep, a claim I refuted in my piece last week (over the fold). The case is so thin that he spends half of his article restating a version of the claim I’d already refuted, before admitting that it is spurious (this is the claim that the abolition of the old 66 per cent rate, by making 47 per cent the new top rate, put more people into the top tax bracket. While this is trivially true, it’s also clear that this change was the opposite of bracket creep).

Davidson’s second argument, involves an interesting redefinition of the terms of debate. The standard approach has been to look at either the real income level or the proportion of average weekly earnings at which the top rate is payable. The real income level has risen over time and the proportion of average weekly earnings has been roughly stable. Davidson instead looks at the proportion of taxpayers paying the top rate. Obviously, if pretax incomes become more unequal, as they did over the 1990s, this proportion will rise, and this is what he finds.
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I was watching Costello discussing the likely increase in interest rates on the news last night and he said something “Whenever you have a single digit in front of your interest rate, it’s low”. I couldn’t see a reference to this in the papers today, and I wonder if any readers can locate a transcript or similar.

This is all relative of course. My first home loan was at 9.5 per cent and that was considered outrageously high. For those who experienced the economic management of Howard and Keating in the 1980s, such a rate came to seem amazingly low. But with the levels of indebtedness prevailing now, I’d have thought 9.5 per cent would be ruinous for many.

In an interesting tribute to the impact of blogs, the latest issue Centre for Independent Studies magazine Policy includes a lengthy article by Sinclair Davidson, entitled Taxation with Misrepresentation (PDF), which appears to be a response to this blog post, criticising an earlier article in the same journal. If only all the posts here attracted a similar response.

At this stage, it doesn’t appear that the article adds much to the discussion that took place at the time. For example, Davidson has a lengthy defence of the morality of tax avoidance and of Garfield Barwick’s excellence as a judge, but doesn’t respond at all to the substantive point that his figures on taxable incomes are distorted by the effects of tax avoidance/minimisation/effective planning. Call it what you will, the game is about making your taxable income less than your actual income.

One interesting claim is that 60 per cent of households get more in welfare benefits (including family payments) than they pay in tax. Davidson refers to his own unpublished calculations as the basis for this claim. I’ll wait until I’ve seen a bit more detail before responding.

Anyway, as I say, it’s good to see that blogs are having an impact, at least to the point of provoking a reaction.

It looks as if the WA election may turn on a PPP scheme: Liberal leader Colin Barnett’s proposal for a canal bringing water from the Kimberleys to Perth. This seems to me like complete lunacy. The estimated construction cost is $2 billion, but given a 10-year staged construction process, accumulated capital costs will be closer to $3 billion by the time the first water flows. The private owner will want a nominal return of at least 10 per cent, and depreciation of 4 per cent[1]. That’s more than $400 million a year in capital costs alone, or something like $800 a household. I think a saw an estimated water flow of 200 GL, which suggests $2/kl in capital costs.

But that’s just the start of it. Water is heavy. Every kilolitre of water is a tonne of matter that has to be transported nearly 3000km with no assistance from gravity. I have no idea how much this would cost, but I’d be amazed if it could be done for $1/kl. And all of this is before treatment and reticulation, and without even thinking about evaporation and seepage, environmental issues, native title, compensation for non-indigenous freeholders and so on. Desalination is considered expensive at $1-2/kl but it looks like a marvellous bargaing compared to this.

The proposed contract is take or pay, so if demand falls short (this scheme will supply around 400kl/household, more than total consumption for many) the loss will be borne by existing public water suppliers.

Barnett has apparently committed himself to the scheme without any sort of feasibility studies, and, according to the Fin, scored a big win with the TV audience in his debate with Geoff Gallop by doing so. But, on the evidence of this scheme, he’s unfit to be trusted with a footy club raffle, let alone running a state government.

One interesting feature of this kind of scheme is that I’m in agreement with the Institute of Public Affairs. We have very different views on infrastructure policy in general, but we can both recognise a boondoggle when we see one.

Update 5/04 The Fin quotes a Treasury report that estimates the cost at $6.50/kl which includes higher construction costs. That sounds about right to me, and confirms my conclusions about Barnett. The story says the $2 billion promise was based on a proposal from Tenix (the planned private partner) that was exceptionally sketchy – apparently they didn’t even know the route of a major gas pipeline in the area.

Further update Rob Corr is all over this story. For what it’s worth, I’d judge that Barnett has a few days left to back off the idea and claim he’s been misunderstood. Any longer than that and he’s better off brazening it out all the way to the election. But three weeks is a long time in politics.

fn1. It’s supposed to be a BOOT apparently, so the capital will have to be amortised over 25 years or so, making 4 per cent a lower bound.

The news that the number of university students is declining is far from surprising. The number of Australian students commencing degrees has been roughly static since the Howard government was elected and, contrary to election commitments, imposed broad-ranging cuts on the sector. Writing in the Oz, and also at Catallaxy, Andrew Norton argues that this isn’t a problem.

Norton makes a reasonable case that the decline is due more to a reduction in HECS-funded places than to increases in fees, but since both are policies of the same government, this is a distinction without a difference.

Norton continues with the general line that a contraction in the supply of university graduates isn’t a problem for Australia. His only evidence, though, is that some graduates are in jobs that don’t use their skills. As he concedes, this has always been the case, and the proportion hasn’t changed significantly. The BA driving a taxi was a stock figure in the 1970 (I knew several, so it wasn’t entirely an urban myth). It may well be that some relative expansion of TAFE would be a good thing, but we need expansion in postsecondary education across the board. In any case, TAFE has plenty of problems

Underinvestment in human capital is a big problem for Australia, and we will all pay the price in future.

My article The Unsustainability of U.S. Trade Deficits has just been published in The Economists’ Voice along with a piece on government deficits by Ronald McKinnon. Although relatively new and oriented to a general audience, EV looks like being a high-powered journal, having already published Stiglitz, Posner and Akerlof among others, so I’m pretty pleased to have made it into volume 1. Thanks to everyone here and on Crooked Timber who helped me to sharpen my arguments on this topic.

My post on Keith Windschuttle’s statements defending the White Australia policy drew an interesting response. No-one, as far I can see, was prepared to defend Windschuttle outright, but there was a sudden and startling outbreak of caution. Maybe Windschuttle had been misquoted. Maybe the interview gave a misleading picture of his book and we should all wait to read it. Maybe the term “White Australia policy” was never used officially. Maybe the dictation test was administered so as to admit educated Indians. Maybe my links were inaccurate.

All of this is very uncharacteristic of the blogosphere. The nature of blogging lends itself to summary judgements based on limited evidence, not waiting for years until all the evidence is in. You read the papers, make a judgement and (at least among the better class of bloggers) if you turn out to be wrong, you admit it with good grace. Why has the response in this case been so different ?

I think it’s because of the R-word racism. There is only one real instance of political correctness in Australia today and that is that you are never, ever allowed to call anyone a racist. It’s OK to say that Adolf Hitler was a racist, and that apartheid was racist, but the idea that any actual Australian could be a racist is utterly taboo. Even I can’t resist the Zeitgeist on this one. In my post, I called Windschuttle “a consistent apologist for racism, happy to use racist arguments in support of his cause”.

It’s obvious why this taboo has emerged. Racism is an evil, bloodstained ideology and no one wants to admit association with it. Hence, almost no-one is silly enough to come out with a clear-cut statement like “white people are inherently superior to black people, and should be able to use them as they see fit”.

In this respect, racism is very similar to Communism. But while few people were willing to endorse Soviet Communism openly, particularly after the purges and the exposures of Kruschchev’s secret speech, there were plenty who were always willing to make excuses for the communists along the lines of “you can’t make an omelette without breaking eggs” and so on. With his characteristic turn of phrase, Lenin called people of this type “fellow travellers” to their faces and “useful idiots” behind their backs.

Since his (still unexplained) swing from far left to far right about a decade ago, Windschuttle has consistently sought to excuse racist actions by whites (or, more precisely, British whites) by the usual range of strategies including denial of the facts, quibbling about irrelevant details, denunciation of witnesses and attacks on the victims as subhumans responsible for their own demise[1]. But, in politically correct Australia, that’s not enough reason to call him a racist. So, I’ll just call him a fellow-traveller.

fn1. There’s an obvious model for this kind of thing in the recent historical literature, but I’ll leave the identification as an exercise for readers.
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I’ve read lots of pieces on proposals to reform the US Social Security system, both positive and critical. Unfortunately, most of them include claims that are at best half-true and most of the rest assume a high level of knowledge of the issues. Over the fold, I’ve added a lengthy piece trying to explain the issues. Although I’m actively involved in debate on some of them, I’ve done my best to give a neutral presentation, at least until the final assessment of the proposals currently being discussed by the Administration and Congressional Republicans. This is primarily a matter of political judgement and can be summed up fairly quickly.

The Republican proposals involve accounting transfers amounting to trillions of dollars between different government accounts and newly created individual accounts. These transfers will almost certainly be packaged up with substantive changes to the Social Security system. Whether you support them depends on which you think is more likely:

* The transfers will be used to facilitate tough but necessary increases in contributions relative to benefits, eliminating the funding deficit. In doing this, the President and Congress will demonstrate their commitment to promoting the long term interests of the American people, even at the expense of short-term political pain

* The transfers will provide an ideal opportunity for all manner of pork-barrelling, from handouts to existing retirees to cosy deals for Wall Street investment banks, with accounting tricks being used to provide cover for a claim that the system has been restored to solvency

You may be able to guess which of these I think more likely, but you’ll have to read (or scroll) to the end to find out.
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Linking a couple of recent posts, it ought to be obvious that Australia is in pretty dire need of improved trading access to the kinds of countries with which we run trade surpluses, that is with ASEAN members rather than the US. So it might be a good idea to promise not to invade those countries. But since Howard thinks that playing the regional hyperpower will play well in the western suburbs and with GWB, we won’t do it.

Meanwhile, rather contrarily, we’re pressuring them to ban landmines, an issue on which they can point to the US as a model.