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The Treasury’s incoming government briefs partly support my criticisms of Australia’s regulatory regime for foreign direct investment, noting the current framework’s ‘reliance on policy unsupported by legislation’ and calls for ‘further changes’ to the regime. The ‘next steps’ section is redacted, however.
posted on 25 September 2010 by skirchner in Economics, Foreign Investment
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The Reserve Bank of Australia has released a research discussion paper that is aimed at ‘describing the Australian experience of a cycle in house prices and credit from 2002 to 2004 and discussing the role played by various policies during this episode.’ This period is widely misunderstood and the RBA seeks to set the record straight by noting that:
During the period, monetary policy continued to be set on the basis of medium-term prospects for inflation and output and the Bank was not targeting housing prices or credit growth.
Not that this will stop numerous observers, particularly from offshore, from continuing to maintain the contrary. The RBA’s approach during this episode is often used as a foil to support Fed-bashing of one kind or another. The fact is that the RBA’s approach was textbook inflation targeting, but one augmented by open mouth operations aimed at moderating growth in housing and credit markets, which the RBA then deemed to be experiencing speculative excess.
Of course, the RBA has been understandably reluctant to offer too much by way of objection to the suggestion that Australia’s economic outperformance in recent years has been due to the deft handling of monetary and other policy instruments. The authors of the paper no doubt see the Australian experience as a successful episode of managing an asset price cycle and at least one of the authors, Chris Kent, has been a long-standing advocate of a more activist approach to managing innovations in asset prices.
However, the paper’s review of the RBA’s past statements on housing and credit growth undermines the case for a more activist approach to asset prices. Any prospective home buyer or investor with a time horizon of more than a few years who actually heeded the RBA’s warnings would have almost certainly been left worse off in view of subsequent developments in the housing market. The RBA’s warnings about ‘overheating’ in the housing market during 2002-04 now look quaint in view of the chronic undersupply that has emerged in recent years. Indeed, it is frightening to contemplate what the current supply situation would look like in the absence of the boom in housing investment during this period. To the extent that the RBA successfully deterred housing investment during 2002-2004, it may have even contributed to the subsequent supply problems that have put upward pressure on rents, CPI inflation and house prices. The RBA can’t have it both ways. To complain about ‘overheating’ in 2002-2004 and then ‘serious supply-side constraints’ in 2009 suggests that the RBA’s jaw-boning efforts may well have been pro-cyclical.
Milton Friedman showed the disastrous consequences of a central bank becoming an ‘arbiter of security speculation and value’. The RBA’s review of its own record suggests that it is no better at calling future developments in the housing market than anyone else. Statements such as ‘the very prominent role of investors in the housing market also suggested a strong speculative element’ (p. 24 of the RDP) belong in the mouths of politicians and taxi drivers and not central bankers.
posted on 24 September 2010 by skirchner in Economics, House Prices, Monetary Policy
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Robert Carling and I have an op-ed in today’s Australian arguing that a parliamentary budget office modelled on the US Congressional Budget Office is the wrong model for reforming Australia’s fiscal policy framework.
I will be discussing these issues as part of a panel at this year’s Australian Conference of Economists on the topic of ‘Monetary-Fiscal Interactions: How to Improve Policy Outcomes.’ Other panellists include Don Brash (ex-RBNZ), Jacopo Cimadomo (ECB), Carl Wash (UCSC) and Jan Libich (La Trobe).
posted on 21 September 2010 by skirchner in Economics, Fiscal Policy
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...is currently available for free on (US) Kindle. I disagree with at least one aspect of Ridley’s work, which I may blog about at a later date, but there is plenty in the book to like.
Ridley incorrectly identifies my CIS colleague Peter Saunders as an ‘Australian economist’ when he is in fact a British sociologist (although Saunders probably understands economics better than the average Australian economist).
posted on 17 September 2010 by skirchner in Economics
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An important reason for opposing FDI protectionism at home is that Australia is also a significant exporter of direct investment capital. Australian firms are potentially vulnerable to FDI protectionism abroad. Terry Corcoran discusses the protectionist and nationalist backlash in Canada over BHP Billiton’s takeover of Potash Corp. The arguments made against foreign investment in Canada almost perfectly echo those made in Australia, but somehow sound even less convincing when an Australian listed company is on the receiving end:
Jeffrey Simpson at the Globe, David Crane at the Toronto Star, Maude Barlow of the Council of Canadians, investment guru Stephen Jarislowsky, and now former Calgary resource executive Dick Haskayne — together they have become the ersatz Paul Reveres of the Canadian economy, riding through the pages of newspapers to alert the population to the looming menace of foreign ownership of our vital natural resources. In this case, the threatened sacred trust is potash. Collectively, our midnight riders of economic nationalism have assembled a wrong-headed and misguided series of arguments against BHP Billiton’s $40-billion takeover of Potash Corp. of Saskatchewan. If ever Canada sought to become a backwater in the global mining economy, moving to block the Potash deal would be a good place to begin.
posted on 16 September 2010 by skirchner in Economics, Foreign Investment
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Steven Hayward on why nobody notices political scientists:
Ask yourself this question: Among policy makers in Washington, are you more likely to find academic economic journals in their offices, or academic political science journals? Why do economists not face the same kind of worry about their “relevance,” even though their mathematical approaches to the subject matter can be even more esoteric and forbidding?...
As my late friend Tom Silver once wrote: “Imagine yourself marooned on a desert island with only ten books to read, but in this case ten books not of your choosing. Suppose them all to be books written by behavior political scientists during the past twenty years. Question: Do you think that you would die first of boredom, or of self-inflicted wounds?”
posted on 15 September 2010 by skirchner in Economics, Politics
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Alex Pollock revisits 2004.
posted on 14 September 2010 by skirchner in Economics
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Peter Cox exposes some of the myths that have grown up around the government’s latest industry policy cargo cult, the national broadband network.
posted on 11 September 2010 by skirchner in Economics
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Chris Joye explains.
posted on 09 September 2010 by skirchner in Economics, House Prices
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Vaclav Smil has a new book out, Energy Myths and Realities Bringing Science to the Energy Policy Debate. Here is a taste:
There is a finite amount of liquid oil in the Earth’s crust, but estimates of the grand total remain uncertain. Until we explore the entire planet as carefully as we did Oklahoma and Texas, our assessment of global oil reserves will have plenty of room for surprises. Improvements in production also mean that we are now recovering more oil than ever before. And, in addition to our supply of conventional liquid oil, there are vast, untapped reserves of unconventional hydrocarbon fuels, some of which are already being refined for use. A combination of new discoveries, higher recovery rates, and increased use of unconventional resources means that the near-term future of global oil production will not drop off precipitously, as alarmists claim, but will more likely resemble an undulating plateau. Appraisals of the oil future tend to focus on dwindling supply and assume that demand will inexorably grow. But this is not the case. Rising oil prices and economic downturns exert clear downward pressure on demand, and we can reinforce this pressure through more efficient fuel conversions, by promoting sensible alternatives, and, above all, by turning to natural gas. This abundant fuel can do everything oil can, and is already the most important fuel for heating houses and the second most important fuel for generating electricity. The United States already has natural gas reserves sufficient for nearly a century at the current rate of consumption.
posted on 08 September 2010 by skirchner in Economics, Oil
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I have an op-ed in today’s SMH arguing that a ‘small Australia’ will not only limit economic progress, but also scientific and cultural creativity:
Like the US, Australia provides an environment in which people and their ideas can flourish. But while the tyranny of distance has receded with advances in communications technology, Australia’s small scale remains an obstacle to economic and other forms of progress. How often do Australian innovators complain about a lack of local commercialisation opportunities and local markets? How often do customers complain of an apparent lack of competition in industries dominated by a small number of companies?
Entrepreneurs, scientists, writers, artists, actors and filmmakers often find Australia too small for their talents. They move to other countries, even if it is with reluctance. While their talents are not lost to the world, Australia is the poorer for them leaving.
Similarly, New Zealanders move to Australia because it provides opportunities that are either non-existent or in insufficient supply in a country with a population no greater than Sydney. Australia’s relatively large and crowded cities are beacons to New Zealanders. While New Zealand enjoys the same institutions and a similar culture to Australia, few Australians would choose to make a new life there. The reluctance is hard to explain with reference to anything other than the limiting effects of scale on life and opportunities in New Zealand.
posted on 07 September 2010 by skirchner in Economics, Population & Migration
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16.8%, according to iPredict.
posted on 03 September 2010 by skirchner in Financial Markets, Politics
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There is a lot of ill-informed offshore commentary about Australian house price inflation, with anecdotal reports suggesting that some hedge funds are putting on trades designed to capitalise on what they see as an inevitable Australian house price bust.
We have heard all this before from a local debate about house prices that goes back to at least 2003 and substantially predates international interest in this issue since 2007. In 2005, Robert Shiller declared that Australia had suffered a burst housing bubble the previous year, a proposition that has become even more laughable with the passage of time.
Chris Joye reviews the latest data in his presentation for offshore investors.
posted on 02 September 2010 by skirchner in Economics, Financial Markets, House Prices
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The policies the current caretaker government would like to emulate:
When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy. Other than that, it was a screaming success.
posted on 02 September 2010 by skirchner in Economics, Fiscal Policy
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Richard Epstein wants to know.
posted on 01 September 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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