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I have an op-ed in today’s AFR on the occasion of the 30th anniversary of the decision to float the Australian dollar. This year also marks the 20th anniversary of the adoption of implicit inflation targeting by the Reserve Bank, although a formal inflation target was not adopted until August 1996. As I note in the op-ed, the combination of these two macroeconomic institutions fundamentally changed the role of fiscal policy in the economy. Yet much of our macroeconomic policy debate remains stuck in the pre-float era. Full text below the fold (may differ somewhat from edited AFR text).
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posted on 09 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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I participated in a roundtable discussion on the Financial System Inquiry’s draft terms of reference organised by federal Treasury. Item 7 of the draft terms of reference states that:
In reaching its conclusions, the Inquiry will take account of, but not make recommendations on the objectives and procedures of the Reserve Bank in its conduct of monetary policy.
This can be read a number of ways. I think the intent is to take RBA independence and inflation targeting off the table, but it can also be read as shutting down any consideration of RBA governance. The RBA is internationally anomalous in failing to separate monetary policy decision-making from the overall governance of the bank. This puts the board in the position of oversighting itself in the conduct of monetary policy, the bank’s most important function.
As I argue in this paper, external board members are also conflicted in being notionally appointed to represent particular interests and perspectives, but their role as monetary policy decision-makers requires them to put aside these interests in favour of the public interest. This results in the contributions of individual board members to monetary policy deliberations being suppressed, reducing transparency and accountability in the conduct of monetary policy. The RBA is also exceptional in affording a government representative voting rights (as opposed to non-voting representation) in setting monetary policy.
I also argued at the roundtable, consistent with my article in yesterday’s AFR, that the role of both the Foreign Acquisitions and Takeovers Act and the Foreign Investment Review Board needed to be explicitly included in the terms of reference because of their implications for the cost of capital and the financial system’s international integration with global capital markets. I briefly canvass reform options for the regulation of foreign direct investment in this article in the December issue of Infinance.
My concern is that unless RBA governance, the role of FATA and the FIRB are explicitly raised in the final terms of reference, these issues will not be adequately examined by the Inquiry.
Submissions on the draft terms of reference close Thursday 5 December. If you think these are important issues, it is not too late to put in a submission.
posted on 04 December 2013 by skirchner in Economics, Financial Markets
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The Fraser Institute has released a collection of essays on Federalism and Fiscal Transfers, including my essay on Australia’s experience with horizontal fiscal equalisation. The efficiency and equity implications of horizontal fiscal equalisation in Australia are theoretically and empirically ambiguous, arguing against overly ambitious attempts at equalisation. The 2002 Garnaut-FitzGerald Review of Commonwealth-State Funding still remains the best reform proposal.
posted on 22 October 2013 by skirchner in Economics, Fiscal Policy
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I have an op-ed in the AFR making the case against macro-prudential regulation in relation to lending for housing. Text below the fold (may differ slightly from published version).
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posted on 03 October 2013 by skirchner in Economics, House Prices, Monetary Policy
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I have an op-ed in the Business Spectator discussing a recent CPA Australia report and its claim that “nothing has been saved during the 20 years of compulsory superannuation contributions”:
The CPA report argues that households anticipate the tax-free benefit they will receive from their superannuation account balance on retirement by increasing their current levels of borrowing and consumption. This increased borrowing is claimed to have fully offset the increased saving via compulsory superannuation contributions. Hence the report’s conclusion that “superannuation savings minus household debt effectively equals zero”.
This surprising result reflects a questionable feature of the report’s methodology. The report counts borrowing for housing on the liabilities side of household balance sheets, but does not count housing equity on the assets side. The report defines household saving as household financial wealth less debt, including housing debt.
The report defends this approach on the basis that few retirees access housing equity to fund their retirement, whether through reverse mortgages, downsizing or relocating the family home. As the report notes, the means test for the age pension encourages the movement of financial assets into the home rather than taking equity out of the home. Stamp duty on property transactions is another factor discouraging the realisation of housing equity. Whereas mortgage debt in retirement needs to be serviced, the value of the family home does not directly affect the cost of living in retirement.
In fact, it is always possible to change the incentives that currently discourage households from realising housing equity for the purposes of funding retirement. In principle at least, housing equity is available to fund retirement, even if this is not a popular choice. We should not completely discount the role of housing equity as a source of retirement saving when it is such an important part of household net worth.
posted on 25 September 2013 by skirchner in Economics, Financial Markets
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Scott Sumner has a new paper published by the Mercatus Centre, Why the Fiscal Multiplier is Roughly Zero. The argument will be familiar to regular readers of his blog, but the paper serves as a nice summary of what has become known as the Sumner critique. As Scott would be the first to concede, this is not a new or unconventional idea, but somehow the economics profession lost sight of this basic insight into monetary-fiscal interactions during the global financial crisis.
The Sumner critique is particularly relevant to a small open economy like Australia, where the entire institutional framework for macroeconomic policy is arguably built around this insight. With a floating exchange rate and an inflation targeting monetary policy, the change in the budget balance as a share of GDP from one year to the next is a macroeconomic irrelevance by design. This allows fiscal policy to focus on microeconomic and supply-side issues.
In testimony before various parliamentary committees, former Treasury Secretary Ken Henry and RBA Governor Glenn Stevens explicitly acknowledged monetary offset in the context of the 2008-09 fiscal ‘stimulus’, but resorted to the argument that it was better to rely on a mix of macroeconomic instruments rather than monetary policy alone, citing alleged adverse side-effects from very low interest rates. In the US context, Sumner notes the real reason for such arguments: politically, the monetary authority cannot be seen to be explicitly undermining the efforts of the fiscal authority.
In Australia, it is often argued that the government should not cut government spending or return the budget to surplus because it would supposedly be contractionary for the economy. This not only ignores the role of fiscal policy within Australia’s macroeconomic policy framework. As Scott notes, the assumed underlying ‘estimates of fiscal multipliers become little more than forecasts of central bank incompetence.’
posted on 13 September 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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The Lowy Institute weighs up the prospects for the G20 Summit in St Petersburg:
Expectations of big outcomes on the economic agenda are low. Domenico Lombardi from the Center for International Governance Innovation said ‘The forthcoming G20 summit in Russia may, unlike previous summits, be an event with no immediate, significant deliverables’. It is a bleak assessment, particularly when it is so hard to point to many ‘immediate, significant deliverables’ from the last few summits…
Hopefully the situation will be different at the Brisbane G20 summit in 2014.
When it comes to Brisbane, I’m betting on experience rather than hope.
posted on 30 August 2013 by skirchner in Economics
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Scott Sumner enjoyed his time in Australia, presenting at the Centre for Independent Studies’ Consilium conference on the Gold Coast and the Economic Society of Australia (New South Wales) in Sydney. You can read Scott’s account here.
Scott’s presentation covered similar ground to his article in the Winter issue of our journal Policy. I did a video interview with Scott that should be available soon. Watch this space.
Scott says some nice things about the Centre for Independent Studies in the post linked above. Many potential overseas speakers are reluctant to make what is admittedly a long trip to Australia. But take it from Scott, if you come to Australia, we will show you a good time!
One thing I learned as a result of my presentation at Consilium was that then Treasurer Jim Cairns offered the RBA Governorship to Charles Goodhart in the early 1970s (who wisely turned it down). This was quite possibly the only good idea Jim Cairns ever had. So there is at least some historical precedent for my long-standing suggestion for an internationally competitive process for filling senior positions at the RBA.
posted on 29 August 2013 by skirchner in Economics, Monetary Policy
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Scott Sumner will be in Australia next month as a guest of the Centre for Independent Studies. He will be attending our Consilium conference on the Gold Coast, but will also be doing a seminar with the Economic Society of Australia (NSW) in Sydney.
Scott has written an article in the latest issue of our journal Policy, ‘A New View of the Great Recession.’ It is an excellent introduction to some of the ideas informing what Lars Christensen has dubbed ‘the new market monetarism.’
I’m also pleased to read that Scott will be attending next year’s Mont Pelerin Society meeting, where he will be on a panel on The Coming Threat of Inflation. As Scott notes on his blog:
The 500 classical liberals in the audience will be surprised to learn that the threat is that inflation will be too low over the next 5 years.
In fact, MPS includes quite a few market monetarists, especially among the younger members (I’m young by MPS standards!) This should not be surprising since the new market monetarism is firmly in the orthodox monetarist tradition of Milton Friedman, one of the Society’s founding members. Unfortunately, many of the older MPS members are still wedded to fighting the inflation battles of the 1970s. They need to move on!
posted on 22 July 2013 by skirchner in Classical Liberalism, Economics, Monetary Policy
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I have an op-ed in the Business Spectator noting that the Australia-China free trade deal sought by Prime Minister Kevin Rudd would be best facilitated by Australia giving up its micro-management of Chinese FDI. As noted in the op-ed, this is not something that comes naturally to the Prime Minister. While an agreement could be struck that excludes investment, this would be a wasted opportunity. It would also stand in contrast to the growing likelihood of a US-China investment agreement.
Under current arrangements, very little Chinese FDI in Australia escapes scrutiny because of Canberra’s policy of screening all investment by foreign government-related entities, regardless of transaction size.
Canberra maintains that this policy is applied in a non-discriminatory fashion to all foreign government-related investors. But the rules for these entities were only publicly articulated subsequent to the surge in Chinese investment from 2008 onwards. The Chinese can thank the US Embassy in Canberra and Wikileaks for confirming their suspicions that the policy is unofficially directed at them.
The marked deterioration in Australia-China relations during Kevin Rudd’s previous occupancy of the Lodge was in no small part due to the inability of his government to articulate a coherent policy on FDI from China.
Most Chinese FDI proposals are ultimately approved, which in itself is strong evidence that the current level of regulatory scrutiny at the border is costly and unnecessary.
Chinese direct investment in Australia is subject to the same competition, tax, industrial relations, planning, development and environmental laws that apply to other investors.
The additional layer of regulatory scrutiny Australia imposes at the border adds little to these robust regulatory frameworks behind the border. It serves mainly as a vehicle for political interference in commercial transactions the government does not like.
The rejection or modification of foreign investment proposals has often been explicitly protectionist in intent.
Former Treasurer Wayne Swan rejected Singapore Exchange’s bid for the Australian Securities Exchange in part because it would “risk us losing many of our financial sector jobs”.
Minmetals’ acquisition of OZ Minerals was made subject to conditions that were, to quote the former treasurer again, “designed to protect around 2000 Australian jobs”.
The Australian government has even sought to use the FDI screening process to regulate the level of output and employment in local mining operations.
Such micro-management of FDI trivialises the concept of the ‘national interest’ that is meant to inform the application of the treasurer’s discretion under the Foreign Acquisitions and Takeovers Act.
posted on 16 July 2013 by skirchner in Economics, Foreign Investment
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I have an op-ed in the Business Spectator arguing that Australian retailers are mistaken in arguing for a lowering of the low value exemption threshold for GST and duty on imports. Instead, retailers need to focus on their own business models and lobby for policies that lower the tax and regulatory burden on business.
posted on 24 June 2013 by skirchner in Economics, Free Trade & Protectionism
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The national accounts were out yesterday, so time to update our graph of the (log) level of nominal GDP relative to its low inflation period trend. The Australian economy still sits 4% below the NGDP level stabilisation benchmark suggested by the new market monetarists, implying that monetary policy has been too tight:
The new market monetarists argue Australia was a poster child for NGDP stabilisation during the financial crisis, but I interpret things differently. Prior to the onset of the financial crisis, inflation was out of control (CPI inflation running at 5%) and nominal GDP growth was running in the double-digits. The financial crisis saved the RBA from having to induce a domestic recession to bring inflation under control. The RBA was most successful when international conditions were doing the work for them.
Lest this look like the luxury of hindsight, I was arguing much the same thing in August 2008.
posted on 06 June 2013 by skirchner in Economics, Financial Markets, Monetary Policy
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The Centre for Independent Studies has released my new paper Time to Dump Australia’s Anti-Dumping System. The paper notes the multi-decade failure to have public interest considerations incorporated in the administration of anti-dumping in Australia:
The Productivity Commission argued that ‘the highest priority for reform of Australia’s anti-dumping system is to introduce consideration of the broader public interest.’ The commission (under its previous names) has been arguing for this position since at least 1985. This multi-decade failure to incorporate public interest considerations into Australian anti-dumping and countervailing law suggests the system is unlikely ever to serve the public rather than private producer interests. The government’s rejection of the commission’s proposal for even a bounded public interest test ensures that Australia’s anti-dumping system will continue to serve the interests of a small number of Australian producers at the expense of other Australian businesses and consumers. The ‘reforms’ implemented by the federal government and supported by the federal opposition set the stage for creeping protectionism via anti-dumping actions that will impose growing costs on the Australian economy. This is part of a broader trend on the part of the federal government to extend assistance to Australian industry at the expense of consumers and taxpayers, and to stand in the way of a structural adjustment in the Australian economy.
The public interest will be best served by repealing the anti-dumping and countervailing provisions of Australian law and dismantling the associated bureaucracy within Customs. This was a recommendation of the 1989 Garnaut review that remains un-implemented nearly a quarter of a century later. Doing so would send a powerful signal to Australian industry that it must adapt to the structural changes in the world and domestic economies rather than going cap-in-hand to the federal government for assistance at the expense of consumers and taxpayers.
Australia can also set a powerful example on the world stage as a country that prospers because it has abandoned recourse to these protectionist measures.
posted on 05 June 2013 by skirchner in Economics, Free Trade & Protectionism
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The Future Fund’s creator, former Treasurer Peter Costello, does not have much faith in the ability of sovereign wealth funds to promote fiscal responsibility:
Now I put aside $60 billion in the Future Fund. People say “oh well you could have put aside 70 or $80 billion or something like that.” But I make this point. If we’d put aside more they’d probably just have borrowed more.
posted on 01 May 2013 by skirchner in Economics, Financial Markets, Fiscal Policy
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I have an op-ed in the Business Spectator arguing that foreign exchange market intervention is a risk to taxpayers who would be better served if the RBA matched its foreign currency assets and liabilities. I also debunk the notion that Australia is a victim of a ‘currency war’:
It has been argued that Australia is somehow a victim of a ‘currency war’ being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.
Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).
In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.
The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.
In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.
posted on 18 April 2013 by skirchner in Economics, Financial Markets, Foreign Investment, Monetary Policy
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