More reform threatened

John Quiggin56 Comments

The Turnbull government is apparently keen to undertake more reform, in this case applying to the welfare system. This weekend I saw a couple of media reports, unsourced but apparently based on material supplied by Social Services Minister Christian Porter, based on the “alarming” projection that welfare payments will rise from $154 billion to $270 billion in a decade, more than can be accounted for by inflation and population growth.

A huge dollar figure makes for a scary headline but not for sensible analysis. The prosaic facts underlying this projection are
(a) Welfare payments are dominated by the old age pension
(b) The value age pension increases in real terms over time, since it is linked to earnings
(c) Even allowing for an increased age of eligibility, and more reliance superannuation, the proportion of the population eligible for the old age pension is unlikely to fall

Put these facts together, and it’s virtually certain that the welfare bill will grow broadly in line with national income (usually measured by GDP), and therefore will outstrip growth in population and inflation. Indeed, a quick check suggests a compound rate of growth of about 6 per cent*, almost exactly in line with nominal GDP (assuming 3.5 per cent real growth and 2.5 per cent inflation).

The government’s proposed reforms appear to involve attacks on recipients of welfare in the popular media sense of the term (Jobstart, disability benefits and so on). But the only ways in which the growth rate of the welfare bill can be held much below that of GDP are
(i) Freeze the real value of age pensions, as has been done to Jobstart since the 1990s; or
(ii) Reduce access to the age pension, either by further raising the access age or by tigntening means and assets tests.

* Porter’s briefing apparently suggested 7 per cent, which I can’t replicate. Feel free to check.

Directional politics

John Quiggin21 Comments

A few Prime Ministers back, Australian politics seemed to be all about Western Sydney. On the conservative side of politics, unremarkable politicians who managed to win and hold former Labor electorates were lionised, while similar wins in other parts of the country were seen as part of the normal ebb and flow of electoral politics. On the Labor side, the region was invoked by the NSW Right (many of whom preferred not to live there) as the basis for its “aspirational” politics. This was all nonsense. The two million or so people who live in Western Sydney vary far more among themselves than they differ from the Australian population as a whole. To the extent that they have any sort of collective identity it hasn’t stopped large numbers of them for voting for (or, for that matter, against) governments led by silvertails from the North Shore, Northern Beaches and Eastern Suburbs.

But since the brief return of Kevin Rudd, the focus has shifted back to an area of more traditional concern: Northern Australia and its supposed need for development. I had hoped to see the end of this when Turnbull became PM, especially given the government’s fiscal woes. But sadly, this is not to be. Not only is the $5 billion development fund still alive, but we are getting stories about Turnbull’s plans to “unlock the North“.

As it happens, I’m in North Queensland right now, and I lived in Townsville for most of the 1990s. Like everyone else in the region I received a special “zone allowance” under the tax system to compensate me for living in a pleasant (if rather warm) coastal city with all the amenities that would be expected by a resident of, say, Newcastle or Wollongong. I understand that this allowance is still available. Nothing of the sort is on offer to people in poor suburbs or declining country towns in the rest of the country.

Like every other place in Australia, the North has plenty of unmet needs for services and, though to a much lesser extent than people seem to think, physical infrastructure. But it is in no sense “locked up”. There are road, rail and air transport links that meet the needs of the region with the same adequacy or lack of it as most other places in the country. Internet access is taken for granted in all but the remotest parts of the region. Ports, and transport links to them, are well developed to carry agricultural and mineral exports wherever they need to be sent. And so on.

Moreover, as with Western Sydney, the region has much the same diversity as the rest of the country, with a corresponding diversity of needs and wants. The cities of Rockhampton, Townsville, Cairns and Darwin differ as greatly from each other and from the rural areas they serve as they do from cities and regions in the rest of Australia.

We don’t need a Northern Australia policy any more than we need a Western Sydney policy. Public infrastructure projects should be assessed on the basis of their merits, and not their location. Private investment should be left to the commercial judgement of those involved. The $5 billion development fund should be rolled back into general revenue and used wherever it is most needed.

What the unions really need

John Quiggin54 Comments

As I observed here, the Trade Union Royal Commission has spent tens of millions of public money to show that the corrupt behavior of a number of Health Services Union officials is the exception rather than the rule. The payments made to a dozen or more TURC lawyers, after a ‘limited tender‘ process of very dubious propriety, far exceed the amounts involved in any of the handful of offences alleged in the Commission’s report.

But that’s not to say all is well with the Australian movement. The steady decline in union membership is mostly the result of external causes (the increased power of employers, a stream of anti-union laws, and so on), but the unions haven’t always helped their own cause.

Here are some changes I think are needed:

* Term limits for union officials. To take just two examples, Bill Ludwig has been Secretary of the Queensland AWU since 1988 while Joe DeBruyn was National Secretary of the SDA from 1978 to 2014. Both men used their entrenched position to exert political power within the Labor Party, in ways entirely unrelated to the interests and concerns of their members. Which brings me to:

* Ending affiliation with the Labor Party (or any political party). Bob Hawke recently pushed this idea as a way of freeing the ALP from the corrupting influence of the CFMEU. But the real problem is the other way around. The ALP, like most Australian political parties is a shell, controlled by factional chiefs, notably including union officials who control important blocks of votes. Obviously, someone whose main role is as a party apparatchik can hardly do a good job of representing workers

* Actual workplace experience for officials. Bill Ludwig was, at least for a few years, a pastoral worker before he was a union official. By contrast, Joe De Bruyn was one of the first representatives of a modern type – the career union official. He went to work in the SDA straight out of uni , getting the job on the basis of DLP political connections, and stayed there until he retired 40 years later.

Feel free to comment or offer your own suggestions.

Update A colleague tells me that, before devoting himself to the concerns of retail workers, Joe de Bruyn had a brief stint as an agricultural economist at the University of Sydney, where I also worked early in my career. Agricultural economics was a formative influence for quite a few Australian politicians, notably including John Dawkins and John Kerin, as well as many who became prominent in the public service and the broader economics profession.

What about the iceberg ?

John Quiggin40 Comments

The Trade Unions Royal Commission report, released in the dead news time between Christmas and New Year has had an extraordinarily soft reception from the media. After spending tens of millions of dollars of public money (not to mention the amount witnesses would have had to spend on legal representation) Dyson Heydon has come up with about a dozen allegations of criminal corruption. By far the largest is one involving his own former star witness, Kathy Jackson. Most of the others are for small amounts, some as minor as using the union credit card to get a tattoo.

Of course, it’s deplorable that the funds of union members should be misused for private purposes, and if the allegations turn out to be true, those involved should face the appropriate penalties. But compare these allegations to the routine behavior of members of Parliament. Under the “Minchin rule”, they can charge almost anything they like, with no penalty greater than being required to repay expenditures found to be unjustified. Even while Heydon’s inquiry was running, we saw revelations of misuse of public funds on both sides of politics, notably including senior figures in the government that launched this inquiry. And the situation in the business sector is no different.

Heydon’s other allegations are directed against union officials for the way they do their job. In this respect, the unions can’t win: the AWU gets hit for sweetheart deals, and the CFMEU for going too far in the opposite direction, with allegations of intimidation and blackmail. It’s important to remember these are only allegations. On past experience, most will fall over in court, if they make it that far.

Heydon claims that his findings represent “the tip of the iceberg”, but surely, after all this expenditure and long running hearings, we are entitled to expect the whole iceberg. The Auditor-General should be called upon to investigate this appalling waste of public money.

Do we need a global tax to stop rising inequality (crosspost from Crooked Timber seminar on Piketty)

John Quiggin33 Comments

One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.

What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.

So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?

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Christmas repost

John Quiggin22 Comments

Here’s a Christmas post from my blog in 2004. The theme is that nothing about Christmas ever changes, so it’s a repost of the same post from 2003. Looking back from 2015, the only change I can see is that the complaints about inclusive language to which I referred as “old stuff by now” have now become codified, as the “War on Christmas”.

I’ll add one new thought that the use of “War on Christmas” rhetoric reflects a larger problem for Christianists: should they be asserting their privileges as a majority (as in the demand that their particular holiday be recognised as primary) or demanding their rights as a minority (as in their unwillingness to accept equal marriage). The two strategies undermine each other.

In anticipation of at least a short break, let me wish a merry Christmas to all who celebrate it, and a happy New Year to everyone (at least everyone who uses the Gregorian calendar).

Read on for my unchanged Christmas message

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What do you do with a problem like Adani ?

John Quiggin22 Comments

Having jumped a number of legal hurdles, Adani is now seeking approvals from the Queensland state government, necessary for the Carmichael coalmine/rail/port project to proceed. This presents the government with a nasty dilemma.

On the one hand, refusing approval would be a PR disaster. Adani, and the government’s opponents, would blame obstructive regulation for the failure of the massive bonanza that has been promised. Adani continues to claim that project will give Queensland $22 billion in royalties and taxes, and up to 10 000 jobs, even though its own expert refuted these claims in court.

On the other hand, everyone (even the International Energy Agency, notably until recently for its stubborn faith in the coal of the future) knows that this project is uneconomic, and unlikely to proceed before 2020, if ever. And while the government has said it won’t subsidise the mine, it appears that it may be forced to spend some money on the Abbot Point upgrade.

So, |irony alert on| I have a simple suggestion to resolve the government’s problem. Just ask for a downpayment of, say, 5 per cent of the promised benefits ($1.1 billion). In the unlikely event that Adani pays up, this will be money for jam. If, as is virtually certain, the money isn’t forthcoming, the government can rightly claim to have protected the interests of the Queensland public.|irony alert off|

Taking the question more seriously, the government should seek evidence from Adani that the project has sufficient finance to proceed before issuing any approval. That will be enough to ensure an indefinite delay.

Bracket creep: How to get the answer you want

John Quiggin18 Comments

NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?

We chose 2013 as the starting year because this is when the last change to tax thresholds occurred

Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes

This shows the importance of the starting year.

There’s no need to check the CIS numbers: given the setup, only one answer is possible.

Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.

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Public funding for phlogiston ?

John Quiggin106 Comments

According to the Oz, Queensland LNP Senator Matt Canavan has called for public funding for research promoting his belief that scientists since Arrhenius have been wrong about climate change. He makes this claim on the basis that the overwhelming body of evidence amassed by mainstream science means that “only one side of the debate is heard” (there’s also something about witches). Oddly enough, Canavan goes on to cite some (presumably publicly funded) research on aerosols from the Max Planck Institute which he thinks supports his arguments. The fact that such research gets undertaken and published suggests that there is no problem with the scientific process as regards climate change.

Still, there’s an interesting question here. To what extent should research funding seek to promote research approaches that are regarded by most experts in the relevant field as wrong or discredited?

In fields like economics, the ebb and flow of opinion is such that any temporary appearance of consensus is illusory. When I started studying economics, the dominant Keynesian/market failure school regarded classical economics as a collection of exploded fallacies. Within a decade or so, the position had reversed. Free market microeconomics and New Classical microeconomics became dominant and remained so until the Global Financial Crisis. The position now is best described as confused. Something similar could be said of fields like psychology (another example where plenty of non-specialists have strongly held views)

In the natural sciences, there are a lot more firmly established conclusions, which nonetheless run against the prejudices of many (obviously including Senator Canavan). I don’t see any merit in funding the pet theories and tribal prejudices of politicians. But at the frontiers, there are lots of instances where some particular approach (such as string theory in particle physics) seem to be dominant, at least in part, for sociological reasons. Here it would be desirable to ensure that alternative approaches get a hearing.

Any thoughts?