Cruising for a bruising

John Quiggin19 Comments

Rather inconveniently for the government, it had no sooner dismissed calls for more tax revenue from the usual lefty suspects (including me), when Moody’s came out with a warning that the much-loved AAA credit rating couldn’t be saved with expenditure cuts alone*.

Scott Morrison came back with a line that must have sounded like a good idea at the time. On the one hand “of course there will be revenue measures in the budget”. But, unlike Labor “additional revenue would be applied to reducing the tax burden in other parts of the economy”

That sounds good if you say it quickly enough. But let’s put some specifics in there. It seems clear that “revenue measures” means higher tobacco taxes. and “reducing the tax burden in other parts of the economy” means cuts in the company tax rate and the budget repair levy. So, Morrison’s budget message is

we’re going to tax smokers to fund cuts in company tax and tax relief for top income earners.

Good luck with that.

Of course, Labor is also planning higher tobacco taxes. But they will be able to say that they are using the revenue to fund better health services. And, of course, Labor has been consistent while the tobacco hike will be another backflip for the LNP (unless they get cold feet and do a double backflip, as seems entirely possible).

I’ve given up betting on elections after being unable to collect my winnings when Intrade collapsed a few years back. But for those so inclined, I’d recommend a look at Sportsbet, who are still offering 3.5 to 1 against Labor supplying the next PM (minor aside: most scenarios for so-called “hung” parliaments would lead to this outcome)

* I’m not a believer in ratings agencies, as I’ve said many times, and I don’t think a AAA rating is particularly meaningful. However, the core input to the rating is an estimate of future budget balance, so it’s not all that surprising that Moody’s, looking at the same data, have reached the same conclusion as I did.

The Oz makes the case for higher taxes

John Quiggin13 Comments

A couple of days ago, I was one of fifty signatories to a letter opposing the proposed cut in company tax rate and rejecting the general idea that Australia needs lower taxes. We got excellent coverage from the ABC, Fairfax papers and so on. But by far the most extensive was from The Australian. I counted at least four stories all with a prominent run on the website

* A straight new story, though of course replete with phrases like “the left wing establishment”
* The IPA attacking the signatories as the “fatuous fifty”
* Shorten also attacking the company tax cut as a recipe for “mayhem”
* A front page piece saying a tax increase is a lazy way of solving our problems

Not so long ago, the Oz would have ignored a statement like this (or stuck it in a short story on the inside pages) with the plausible justification that it’s just a bunch of lefties saying what lefties usually say. The fact that they felt the need to reply over and over is revealing, in two ways.

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The awkward squad

John Quiggin65 Comments

Looking back, the G20 meeting in Brisbane marked a historic turning point in global climate policy. Before G20, the big problem had been the unwillingness of any of the big emitters (US, China and India) to make the first move. The joint statement by Obama and Xi Jinping broke the logjam, with the result that India moved away from its longstanding position that poor countries should have the opportunity to repeat the mistakes of the past before dealing with the problems of the future. This shift was reflected in the successful outcome in Paris, and with the arrival of Peak Coal in both the US and China. India is still expanding its use of coal, but renewables are growing much faster, and imports are already declining.

With all the big players on board, the immediate problem in climate change policy is what might be called the awkward squad – a group of second- and third-rank countries that are, for one reason or another, trying to push ahead with fossil fuels. These include Poland, Saudi Arabia, Turkey, Vietnam and, of course, Australia. Until the recent election, the Harper government in Canada was part of the awkward squad and a comfortable ally for Abbott and the LNP denialists. But Harper’s defeat appears to have provoked a broader rethinking with even the Conservatives moving to a pro-planet position.

As the awkward squad shrinks (Vietnam is already showing signs of rethinking) the remaining members are going to find their position in the international community less and less comfortable. That is, of course, unless the Republicans win the US Presidential election. In that case, the whole world will have a lot to worry about.

A class war election

John Quiggin44 Comments

Until quite recently, any discussion of income inequality in Australia was met by howls of “class war” from the political right. Particularly under Abbott, the right wanted to fight on culture war issues, while treating economic policy as a matter of competent management, in which the conservative parties were assumed, by default, to be superior.

Suddenly, however, it appears we are going to have a class war election, largely because of the choices made by the Turnbull government.
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A deliberative Parliament

John Quiggin17 Comments

With the ebbing of Turnbull triumphalism, it’s become evident that the forthcoming election may produce, as in 2010, a House of Represenatives in which neither Labor nor the LNP has an absolute majority. Such an outcome has been common at the state level for some time, and is the norm in upper house elections based on some form of proportional representation. It has proved entirely consistent with stable governments, productive legislation and full-term Parliaments.

Yet commentators persist in calling this a “hung Parliament”, at least when it appears in the lower house. By analogy with a “hung jury” we might suppose a “hung Parliament” is one that proves incapable of reaching a verdict on who should form a government or what legislation should be passed. We have plenty of experience to show that this is not the case.

If we take the jury analogy seriously, it’s worth extending it to the case where the Parliament contains a majority committed to obeying whatever order it receives from the Prime Minister of the day (or, perhaps, the Cabinet). We have plenty of terms for juries and courts that work in this way, none of them complimentary: ‘packed jury’, ‘kangaroo court’, ‘frame up’ and so on.

Those are unduly harsh metaphors when applied to majority governments. But the experience of Queensland, the only Australian jurisdiction without an (invariably ‘hung’) upper house, suggests to me that the cause of good government is greatly enhanced when Premiers cannot rely on a pliant majority to push through whatever laws they like. Admittedly, we’ve had some really good independents, most notably Peter Wellington. But even independents I would never want in government have proved useful as a check on the overweening power of the executives.

So, in the cause of linguistic improvement, I offer the term ‘deliberative Parliament’ for a legislature that actually considers legislation rather than casting votes as ordered by the leader of the day.

Gaps and holes (crosspost from Crooked Timber)

John Quiggin31 Comments

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.

Proof by exhaustion that we need a higher top rate of income tax

John Quiggin79 Comments

Watching the flailing of the Abbott-Hockey-Turnbull-Morrison government on budget policy has been grimly amusing, for those who enjoy politics as theatre. But it has also provided a nice lesson in the policy process, related to an apocryphal[1] story about (IIRC) Thomas Edison. After a thousand or so failed attempts to design a workable filament and design for a lightbulb, Edison was supposedly reproached with discovering nothing, and answered “On the contrary, I’ve discovered 1000 ways that don’t work”.

The AHTM government came to power with the twin slogans “axe the tax” and “fix the debt”, along with a commitment not to cut any public spending that people cared about, and to spend even more on the military than before. That created an obvious problem: how can we bring the budget back into something like balance, given that we have taken on substantial expenditure commitments, and that we can’t rely on bracket creep. To give them credit, they’ve tried just about every answer but one

* First, they tried the standard LNP approach of setting up a Commission of Audit, discovering a budget emergency and breaking promises on spending. That produced the disastrous 2014 Budget, which ended the careers of Abbott and Hockey in due course. Thanks to the backloading of the big cuts, it’s now destroying Turnbull and Morrison. Turnbull has backed off a little way on health, and is still stalling on education. But his disastrous floating of the idea of completely endingFederal funding for state schools means he’ll be in a politically untenable position when he tries to sell smaller cuts, while claiming not to want to kill the sector.

* Second, having killed the carbon and mining taxes, thereby making the deficit even worse, Abbott realised that it would be impossible to claw back the compensating tax cuts given to low income earners.

* Next Abbott called for a tax debate, but ruled out just about everything in advance. Turnbull and Morrison went one better, putting everything on the table, and then killing off each possible option as it ran into trouble. That included the GST, superannuation concessions, the tangle of negative gearing and concessional capital gains taxes, changes to dividend imputation and so on.

* Finally, long after the “all options” discussion was over, Turnbull popped up with the idea of giving income tax back to the states, which lasted all of two days. He is now trying the ludicrous spin that, having rejected his half-baked idea, the states are on their own financially.

So, the government has succeeded in finding lots of approaches that don’t work. The only one left is higher income tax for those who can afford to pay it. The first step would be to maintain the Temporary Budget Repair Levy until the budget is actually repaired. But the real answer is to recognise that the big gainers from the changes in the economy over the past decade or more have been high income earners, and this is the group who need to pay more.

I’m planning to do some proper calculations on this, when I get a little free time.

fn1. Retailing apocryphal stories is anachronistic, now that they can be falsified (or occasionally verified) with a quick Google search. But it’s habitual for old academics, and I regard it as a kind of performance art, like doing a high wire act without a net. In any case, Google is getting less and less useful for anything except selling stuff, so we may have to rely on old skills like memory again.

Adani mirage fading

John Quiggin28 Comments

Adani Mining has just received the final approval from the Queensland government for the Carmichael mine in the Galilee Basin. According to this report from February, citing a “top Adani Group executive”, operations should start in August 2016, which would be a disaster for the global environment.

But wait! Now it seems yet more “secondary approvals” are needed (it appears this refers to a bond for cleaning up the mess afterwards), and “we hope that construction would start any time in 2017”.

There’s more interesting stuff in the report.

He said the price of coal was not the main issue in determining the viability of the project, but rather the cost at which the coal could be mined as the company already had a price agreement with the Indian government.Adani Mining CEO Jeyakumar Janakaraj claims there’s no need to worry about the price of the coal they produce “We are an integrated player. We have sold electricity in India on a long-term price.

‘‘It is not about the price point of coal, it is about the cost point, at what cost can we produce coal so that we will always be able to make a profit with the electricity price that we have already sold,”

The reference to the Indian government is pretty cheeky, given the government policy of eliminating coal imports over the next few years, which looks to be on track to succeed. (it’s currently a little behind its targets for increased production, but that’s because of weak demand).

More importantly, Janakaraj’s claim that “We are an integrated player” suggests he does not know much about his own business. Adani was an integrated enterprise when the project began. But the restructuring of the Adani Group in 2015 separated Adani Power (the electricity producer with a diversified portfolio of coal-fired power and renewables) from Adani Mining, which holds the stranded assets like Carmichael. This analysis from IEEFA spells it all out. Adani Power would be breaching its fiduciary obligations to shareholders if it paid an above market price for coal from Adani Mining.

I found a response from Adani, which illustrates one of my favorite points. When you have no answer to a damning report, say that it is “flawed“. That’s true of just about anything, and saves you the trouble of an actual response.

Good and bad news on climate

John Quiggin32 Comments

Although China has been moving away from coal-fired power for some time, provincial governments didn’t get the memo. They’ve been approving new plants at a cracking pace, with as many as 250 on the books, through a combination of inertia and desire to keep construction going. Now the national government has started pulling them into line, banning new coal plants in 15 provinces.

As this report shows there’s a similar tendency in many developing countries, with a long-standing push for coal running into the reality that it’s economically and environmentally disastrous. The result is a potential trillion dollars in stranded assets.

Still, progress in reducing carbon emissions has been much greater than seemed possible even five years ago. The problem is that the news from the scientists keeps getting worse. I haven’t had time to digest the discussion around the Hansen et al paper on sea level rise, but it’s certainly alarming. Closer to home and undoubted is the disastrous coral bleaching in the Great Barrier Reef.

And of course, while the world is moving to cut emissions, Australia is going backwards under the Abbott government (now notionally led by Malcolm Turnbull). The defeat of this government would be an important step towards saving the planet.