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.

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

Nearly a month ago, I noticed that betting markets were giving long odds (3.5 to 1) against a Labor win in the (presumably) forthcoming election. That would be a good bet if you thought Labor had a better than 22 per cent (1/(1+3.5)) chance of winning. Given that the polls were pretty much tied, I thought those were good odds.

Since then, the polls have moved steadily in Labor’s favor to the point where their lead is just about statistically significant in a meta-analysis (add lots of independent samples and the margin of error declines). At the same time, the government has barely had a good news day. Their one big hit, the kerfuffle about 10-year projections of tobacco tax revenue (a bipartisan policy) blew up in their faces a few days later when Turnbull and Morrison couldn’t/wouldn’t state the cost of their company tax plan. It seems that they had the $50 billion number ready, but had hit on the clever plan of having the Treasury announce it today, just before Parliament is dissolved so that Labor couldn’t … I’m not sure what (cue underpants gnomes). As a result of all this, the pundits, who dismissed the idea of a Labor win as implausible until very recently, are now coming around to the idea

Yet despite all this, the odds are barely unchanged at 3.3 to 1. That’s good for anyone who gives Labor a 23 per cent chance. There are a few possible explanations of this

(a) The idea that betting markets are highly rational aggregators of information is wrong
(b) Those betting in these markets have inside information or else insights unavailable to the rest of us.
(c) The markets don’t really exist in any substantial form and are just a publicity stunt for the bookmakers. That’s the argument of this 2013 article by Michael West, whom I’ve usually found to be sensible and reliable.

The stream of leaks about Tuesday’s budget suggest that the process was still in turmoil until the last minute. If the last round of leaks are broadly accurate, it looks like a budget that will fit fairly neatly into a class war frame. On the tax side, the government has long been floating a cut in company tax rates and the removal of the budget emergency levy on incomes above $180k. At the last minute, they have apparently decided on an increase in the threshold (currently $80 000) for the 37 per cent marginal tax rate.

Presumably, Morrison and Turnbull think that this will be a vote-winner for people concerned about being pushed into higher tax brackets, or already in the higher brackets. How may such people are there, and who are they? Let’s suppose that the budget measures compensate for the bracket creep since Labor left office. The income tax statistics for 2012-13 showed that, at that time, 18.6 per cent of tax returns reported income of $80 000 per year.

Assuming a 10 per cent increase in nominal incomes since then, I estimate that around 5 per cent of taxpayers would have entered the 37 per cent bracket since then. Of course, most of these would be paying 37 per cent on only a tiny fraction of their income, but people don’t always judge these things sensibly. Still, a budget measure targeted at 5 per cent of taxpayers (a good deal less than 5 per cent of the electorate, even taking account of the fact that many are in couple families) doesn’t seem like an election winner.

The real punch of the measure is that everyone on incomes currently over $80 000 will benefit. Assuming a 10 per cent increase, the full benefit of $360 per year (the 4.5 cent difference in marginal rates, applied to $8000) would go to everyone with a taxable income above $88000. That’s about 25 per cent of the 12 million who file income tax returns or 3 million people.

Those above $180 000 will also benefit from the removal of the 2 per cent emergency levy, which is a much bigger deal for the beneficiaries. Anyone earning over $200k will gain at least $400 from this measure, more than from the tax cut

The threshold change I’ve calculated would cost around $1 billion a year to benefit a relatively small group of voters, most of whom are already Liberals and the rest of whom (including me, for example) are unlikely to be all that responsive to tax cuts.

As a political strategy, this doesn’t make obvious sense. I suspect, however, that most politicians and political commentators (particularly, though not only, on the conservative side) make their political estimates on the basis of people they know, many of whom are exercised about bracket creep, and very few of whom make less than $80 000 a year. I recall studies where members of the political class were asked to estimate the median Australian income, and got the number drastically wrong. The social bubble is reinforced by the intellectual bubble created by an increasingly fact-free rightwing world view.

Bubble thinking isn’t exclusively a problem of the political right. But it’s more prevalent there than at any time in the recent past. It may well prove the Turnbull government’s undoing.

* Peter Martin makes the same point about median incomes. After seeing a lower number in his article, I’ve corrected my original estimate of the budget cost, which was too high.

Over the fold, an extract from my book-in-very slow-progress, Economics in Two Lessons. I’m getting closer to a complete draft, and I plan, Real Soon Now, to post the material so far in a more accessible form. But for the moment, I’ll toss up an extract which is, I hope, largely self-sufficient. Encouragement is welcome, constructive criticism even more so.

The book is aimed at a US audience (if it goes well, an Australian edition will follow, as with Zombie Economics). So, there are US-specific institutional points, but the general argument is applicable more broadly.

Read More »

Something went wrong with the “I, for one” post, so I’m attempting to open a comments thread for it here.

Test

Press coverage massive leak of papers from hitherto unheard of (by me, at any rate) Panama law firm Mossack Fonseca has, unsurprisingly, focused on the world leaders, celebrities and fixers whose financial affairs have been revealed in an unflattering light. As regards the financial system as a whole, the New York Times draws a fairly typical conclusion

Above all, the Panama Papers reveal an industry that flourishes in the gaps and holes of international finance.

Really? This description suggests that those involved are obscure minor players in the system, of the sort who might be expected to deal with dodgy law firms in tax havens. The real business of global finance is undertaking by upstanding financial institutions with transparent practices.

But writing this down is enough to see that it is silly. As usual in such cases, we find familiar names: HSBC, UBS, Credit Suisse,and RBS and so on. And of course this is just one firm in one tax haven. The absence of major American banks reflects, in large measure, the fact that they prefer tax havens other than Panama, where there is a high degree of US state countrol.

Again as usual, the line is that this is all in the past, and that the banks have cleaned up their act. But the criminal charges keep on coming. This is scarcely surprising when no major bank has been shut down, even for the most egregious wrongdoing, and where only a handful of bank employees have faced jail time over frauds that total well into the hundreds of billions.

As I’ve argued in the past, activities like tax avoidance/evasion and regulatory arbitrage aren’t peripheral flaws in a financial system primarily concerned with the efficient global allocation of capital. They are the core business, without which the profits of the global financial sector would be a tiny fraction of the $1 trillion or so now reaped annually. The burden of supporting this financial sector is a major factor in the secular stagnation now evident in most developed economies.[^1]

The financial globalization that began in the 1970s has not produced an efficient global financial market with a few gaps and holes. The gaps and holes are the market.

[^1]:Since it’s bound to be raised, the costs of financial globalisation to the developed world can’t be offset by considering rapid growth in China and India. These countries have, until recently, maintained tightly regulated financial systems, and have had plenty of criticism for it. Of course, that has resulted in plenty of corruption and misallocation of capital, but the sector simply hasn’t been enough to produce a large drag on growth. That’s clearly changed, in China at least, so it will be interesting to watch the consequences.