Just before Christmas, I published a piece in The Interpreter (Lowy Institute) arguing that most of the claims made by the contending parties in the South China Sea are myths designed to promote the interests of nationalists and militarists in a variety of countries, including Australia. Final paras

The mutual sabre-rattling associated with South China Sea mythology is beneficial to a variety of actors in the United States, China and elsewhere. The military-industrial complex, against which President Eisenhower warned 60 years ago, is powerful in every country, and always seeks to promote preparation for large-scale war as well as the routine use of military power for political and commercial ends. Nationalist politicians promote territorial claims of all kinds, and exaggerate their importance. And both Chinese and Taiwanese governments have good reasons to keep the idea of an invasion of Taiwan alive.

Unfortunately, these myths are not harmless. The possibility that the United States and China will somehow blunder into war is ever-present. And if such a war broke out, Australia would have a choice of bad options: either a disastrous war with its biggest trading partner or a breach with its most important ally. Rather than joining the alarmist chorus, the government should be seeking to reduce tensions.

The week before Christmas is traditionally a time to publish for those who want to avoid attention, so my timing wasn’t ideal. But in the New Year there has been a bit more interest. I was interviewed by CNBC Asia and Radio Free Asia, and there have been a few republications/

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.