Write about your hopes, fears, predictions for the coming year.

Usual comment rules apply. I’m going to be cracking down hard on snark this year, so if you’re in any doubt about your response to another commenter, don’t post it.

That’s the headline for a story based on an email interview I did with Yahoo News. Over the fold, the full Q and A.

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As I indicated in my previous post about self-driving vehicles, I’m trying to think more about where I’ve gone wrong in my analysis of current issues and trends, hoping to improve. I got some useful comments on that issue, though nothing directly applicable to my bigger predictive failures

The most important such failure has concerned the future of democracy, where my views were characterized by clearly unjustifiable optimism (see here and here). I’ve now shifted to extreme pessimism, but I would love to be convinced I’ve overcorrected, as I have done in the past.

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I’ve written a couple of posts about Labor’s social housing fund, showing that it’s smaller than it appears, and that hypothecation (linking housing expenditure to the fluctuating proceeds of an investment fund) is bad policy. But is the underlying idea sound? This is a complicated question, and the answer takes us back to the mixed economy of the mid-20th century

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In my first post on Labor’s $10 billion housing fund, I pointed out that the $10 billion number is misleading.  The key idea is to borrow $10 billion at the low rate of interest payable on government debt, invest it in higher-yielding assets and use the profits (maybe $400 million a year, based on historical average returns) to finance social housing. The same model has been used by the LNP government to set up funds for a variety of purposes. There’s a total of $50 billion across five funds, the biggest of which is the Medical Research Future Fund of $22 billion, twice the size of Labor’s housing fund.  

All of these off-budget funds are managed by the Future Fund, which was established to offset the government’s unfunded superannation liabilities, and is currently just below the target level ($200 billion in the fund vs target of $215 billion).  The Future Fund can be seen as matching off-budget assets and liabilities

I’ll look at the general idea of sovereign wealth funds in a later post.  A separate question is whether it makes sense to allocate the proceeds of a particular source of revenue (the fund) to a particular policy objective (social housing). In the jargon, this is called hypothecation.

Economists generally dislike hypothecation, but it’s often a harmless way of making the link between revenue and expenditure clear. For example, some road projects in Queensland are funded by the revenue from speed and red light cameras. That encourages law-abiding motorists to think positively about the idea, and weakens the position of dangerous drivers complaining about ‘revenue raising’.

But the housing fund has no such merit. To the extent that the hypothecation is genuine, it means that the money available for social housing depends on the performance of the share market. And this dependence is the wrong way around. The case for public spending on social housing is strongest, both in terms of need and the availability of resources, when the economy and the share market are doing badly.

The Housing Fund is, quite simply, a poor substitute for direct public expenditure.

Following my cri de coeur about the limited scope for progressive analysis now that Labor has adopted almost the whole of the LNP economic program, I got a number of useful suggestions, one of which was a detailed analysis of Labor’s most prominent spending initiative, the $10 billion social housing fund. This idea raises a lot of issues, so I’m going to tackle it a bit at a time

First up, is $10 billion a lot, or a little? There was a time when programs like this were typically described in terms of the annual expenditure they entailed. If that were still the case, the program would be a really big deal. With cheap publicly-owned land and scale economies, $10 billion a year would probably enough for 40 000 homes at $250k apiece. Compared to around 200 000 a year being built privately, that would make a big difference.

But it’s been a long time since the conventions of annual budgeting were observed. The standard procedure now is to quote spending over 4 years (the arbitrarily chosen period of forward estimates in the budget) and the LNP government has occasionally extended this to 10 years, which is absurd given the rate at which things change..

Even $10 billion over four years would still be a big deal however, enough to reinstate social housing as a major part of public policy.

Sadly, the crucial word here is “fund”. Labor isn’t planning to spend $10 billion. The idea is to borrow $10 billion, invest it in high-yielding assets and use the profit (the difference between the market rate of return and the government bond rate) to finance social housing. I’ll have lots more to say about this, but for the moment what matters is the amount that can be raised in this way.

The standard estimate of the “equity premium” is around 4 percentage points, meaning that the government could borrow at 2 per cent and plan to earn a 6 per cent return on average. That yields net earnings of $400 million a year, enough, on the calculations above, to pay for 1600 homes. That would be nice for the people who got off the waiting list, but not really a big deal.

Back in the day, the frill-necked lizard, which can make itself look a lot bigger than it really is, was briefly a popular meme, particularly in Japanese anime circles. Labor’s $10 billion fund is the frill-necked lizard of public expenditure policy.