Guaranteed to Fail
My review of Guaranteed to Fail is available at The Conversation. Oddly enough, the book also gets an endorsement on its jacket from our old enemy Nouriel Roubini. Since the authors are colleagues of Roubini at Stern, this may just be a collegial courtesy. Roubini’s endorsement is ironic because the book demonstrates that the crisis looked nothing like any of Nouriel’s many and varied pre-crisis narratives. Nouriel managed to forecast every crisis except the one that actually occurred.
posted on 18 May 2011 by skirchner in Economics, Financial Markets
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Conservatives and Libertarians for Dumping the Gold Stock
We have previously noted the irony of those who worry about an over-supply of fiat money taking refuge in a commodity in which governments hold stocks that dwarf annual production. We also noted that the pro-free trade social democrats at the Petersen Institute had suggested liquidating the US gold stock to reduce US government debt and interest payments.
Now conservative and libertarian US think-tanks are saying it too. It is consistent with their long-standing support for the privatisation of government assets. Of course, it is a lazy approach to debt reduction, but a lazy debt reduction is better than none.
Dumping the gold stock without tanking the gold price is easier said than done, but the RBA was able to discretely offload 167 tonnes in 1997, yielding a handsome profit on the old Bretton Woods parity price and adding income producing assets to the RBA’s portfolio (contrary to Paul Cleary’s FOI beat-up).
In Australia, sales of public trading enterprises Qantas, Telstra, CBA and the airports yielded $61 billion during the 1990s and 2000s, making a large contribution to the reduction in net debt from $96 billion in 1996-97 to a negative net debt position in 2005-06 before the terms of trade boom really took off. Peter Costello knew a lazy policy option when he saw one. One of the problems facing the current government is that it has to do debt reduction the hard way. And the gold stock’s long gone.
UPDATE: Portugal is under pressure to sell its Nazi gold back to Germany.
posted on 17 May 2011 by skirchner in Commodity Prices, Economics, Financial Markets, Fiscal Policy, Gold
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Turnout Matters: Evidence from Compulsory Voting in Australia
A paper suggesting that compulsory voting in Australia has increased Labor’s vote share and spending on pensions (although the latter result is heavily qualified):
Despite extensive research on voting behavior, there is little evidence connecting turnout to tangible outcomes. Would election results and public policy be different if everyone voted? The adoption of compulsory voting in Australia provides a rare opportunity to address this question. The Commonwealth enacted compulsory voting for federal elections in 1924 and each state enacted similar policies at different times between 1914 and 1941. Within each state, the timing of compulsory voting was exogenous to other political events. Exploiting this variation, I estimate that compulsory voting increased voter turnout by 24% which in turn increased the vote shares and seat shares of the Labor Party by 7-9%. Then, employing synthetic control methods, I find that pension spending in Australia increased significantly after the adoption of compulsory voting. Results suggest that increased voter turnout can dramatically influence election outcomes and the resulting public policies.
Needless to say, we should not make a case for or against compulsory voting based simply on whether we like or dislike the political and distributional outcomes it supposedly produces, not least because these outcomes are unpredictable and could well change over time. The conservative politicians who originally backed the introduction of compulsory voting in Australia did so in part because they thought the labour movement was better at mobilising voters. Now the labour movement has the coercive power of the state to do it for them.
posted on 10 May 2011 by skirchner in Economics, Politics
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The Finite Resource Assumption: Tripling or Quadrupling Down with Jeremy Grantham
Malcolm Turnbull is not the only person to be led astray by the assumption that resources are finite. According to GMO’s Jeremy Grantham:
Scavenging refuse pits will no doubt be a feature of the next century if we are lucky enough to still be in one piece.
Here is Grantham’s strategy for trading commodities:
Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus. If prices continue to run away, then my small position will be a solace and I would then try to focus on the more reasonably priced – “left behind” – commodities. If on the other hand, more likely, they come down a lot, perhaps a lot lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever.
Sounds like a good formula for losing ‘a lot lot’. Apparently, this is what passes for macro strategy at GMO.
posted on 06 May 2011 by skirchner in Commodity Prices, Economics, Financial Markets
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MNI-Deutsche Börse Economic Forecasting Competition
I came third in the first round of the MNI-Deutsche Börse economic forecasting competition:
NEW YORK, NY, May 5, 2011 – Market News International has announced the April winners of the MNI Forecast Competition, a free online contest in predicting US economic indicators.
April’s highest forecasters in descending order are:
• Omair Sharif, RBS
• Fernando Melro dos Santos, Private
• Dr. Stephen Kirchner, UTS Business School
Until June 30, contestants are competing for the title of Best Overall Forecaster and a prize of $1,500 by forecasting ten economic data releases: Non-farm Payrolls, Retail Sales, CPI, PPI, Industrial Production, ISM Manufacturing Index, Housing Starts, Durable Goods Orders, International Trade Balance, and New Home Sales.
posted on 06 May 2011 by skirchner in Economics, Financial Markets
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20 Million Future Funds
I think it was my colleague Peter Saunders who first coined the phrase 20 million Future Funds in arguing that the Howard government should make one off contributions to individuals’ superannuation accounts rather than hoard revenue in the Future Fund.
The government has adopted the same tag line in arguing for an increase in the rate of compulsory superannuation contributions, although these contributions necessarily come at the expense of the supposed beneficiaries through lower take-home wages, fewer hours worked and reduced employment. Compulsory super promotes dissaving through other saving vehicles and only succeeds in raising net household wealth to the extent that some households are liquidity constrained and cannot dissave through other mechanisms to offset the compulsory contributions.
Bill Shorten is suggesting there is some kind of trade-off between an increase in the compulsory super contribution rate and a sovereign wealth fund. While this is absurd, it does provide Shorten with an opportunity to highlight the philosophical weakness of the federal opposition:
Turnbull’s sovereign wealth fund advocacy is inconsistent with his free market philosophy. A sovereign wealth fund would see the state play a role that Labor now sees being performed by the private sector. The importance of our superannuation savings during the GFC was evidence of how it acts as a bulwark. Since the last election, however, we have seen the Liberals move further away from their free-market credentials. It was evident in Joe Hockey’s overly regulatory approach to mortgage lending rates. And it’s evident in Tony Abbott’s Soviet style centrally controlled $10bn direct action policy on climate change. The philosophical contractions colliding within the Liberals may seem soft now, but watch it grow in the months ahead. Meanwhile, I’d rather trust thousands of trustees across thousands of super funds to invest and manage billions of dollars rather than government insiders in Canberra picking winners.
In this context, it is worth noting that the Future Fund has divested itself of two of its three biggest defence holdings, Lockheed Martin Corp. (LMT) and General Dynamics Corp. (GD) because they are supposedly engaged in mines and cluster munitions, even though Australia has yet to ratify the relevant convention and the Fund is notionally free from political direction from Canberra. Clearly the Fund is looking over its shoulder at what politicians are doing in making investment decisions.
posted on 04 May 2011 by skirchner in Economics, Financial Markets, Fiscal Policy, Politics
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Fed Glasnost: Australia’s Media Shouldn’t Settle for Less
If it’s good enough for Ben Bernanke, it’s good enough for Glenn Stevens:
Next Wednesday, Federal Reserve Chairman Ben Bernanke will do something no Fed chief has done before: Stand before a room full of journalists after officials conclude a policy meeting and answer questions about the central bank’s decisions…
Fed officials have been preparing carefully, according to people familiar with the process. Mr. Bernanke spent a recent weekend watching videos of European Central Bank President Jean-Claude Trichet and Bank of England chief Mervyn King, parrying reporters’ questions at their regular press conferences.
In February, on the sidelines of a meeting of financial officials in Paris, Mr. Bernanke quizzed Mr. Trichet and other European central bankers on how they manage their press conferences. He’ll do dress rehearsals, with staffers peppering him with questions, as the briefing nears.
Mr. Bernanke’s staff, meanwhile, has spent weeks scripting the mechanics of how the press conference will work.
He will hold his briefing in a big top-floor conference room at the Fed’s Martin building, opposite the central bank’s main cafeteria, where Mr. Bernanke can sometimes be found wandering, tray in hand, to chat with staffers…
In the past month alone, 16 different Fed policy makers have given more than 40 formal addresses, in addition to television, newspaper and newswire interviews. They espouse different views, not only on when to reverse the Fed’s easy-money policies, but how.
As I noted in this op-ed, post-Board meeting and post-CPI press conferences by the RBA Governor would change for the better the media dynamics around inflation and interest rates in Australia.
posted on 21 April 2011 by skirchner in Economics, Monetary Policy
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Italian-French Food Fight: How to Regulate FDI
A couple of US lawyers note the global trend towards invoking bogus strategic and national interest considerations to support political intervention in cross-border acquisitions. They suggest the following principles for regulating politically-sensitive transactions:
First, the review process should encourage investment and be tailored to apply to transactions implicating true national security interests. Screening for other reasons, such as a “national interest” standard should require an exceptionally high standard for intervention. To support this principle, reviews should be led by a responsible agency able to assign appropriate weight to the interests of open investment while also fully protecting against national security risks. The review process should be protected from political interference…
Also, the review mechanism should provide as much certainty as possible to investors…
Third, the government agencies conducting the review should be accountable.
Australia’s regime for regulating FDI fails on all three counts.
posted on 21 April 2011 by skirchner in Economics, Foreign Investment
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Symposium on Fiscal Stimulus
Agenda has published a symposium on fiscal stimulus, including papers by Sinclair Davidson, Tony Makin and Ross Guest, Creina Day and Nigel Stapledon. The papers can be downloaded for free.
posted on 19 April 2011 by skirchner in Economics, Fiscal Policy
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Wayne Swan at Home and Abroad
Wayne Swan before the G20 summit in South Korea:
“As we go forward we have to ensure that we don’t see a return to protectionism in new guises,” Mr. Swan said, citing the G-20’s success in staving off protectionist measures in the past two years as one of the global gathering’s “great achievements.”
Wayne Swan before federal cabinet:
Sources confirmed yesterday that Trade Minister Craig Emerson won approval for the shift with the backing of Ms Gillard, but only after her deputy, Wayne Swan, attacked the policy as lacking a political constituency. The sources said that, although the Treasurer, who has a long record of advocacy for trade liberalisation, did not attack the principles of the policy, he questioned the political wisdom of proceeding with the change at a time when the government was already fighting for reform on a range of other fronts, including the carbon tax.
posted on 15 April 2011 by skirchner in Economics, Free Trade & Protectionism
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What Caused the Housing Boom of the 2000s?
Not monetary policy.
posted on 14 April 2011 by skirchner in Economics, House Prices, Monetary Policy
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Budget Needs Micro Not Macro Focus
I have an op-ed in The Australian arguing that federal budget debates need a stronger micro rather than macro focus:
A good indicator of the macroeconomic importance of the budget is the reaction of financial markets on budget night. More often than not, the market reaction is minimal, highlighting the irrelevance of the change in the budget balance to economic growth and macro variables such as interest rates.
The real economic significance of the budget is its microeconomic implications: how tax and expenditure policies influence incentives to work, save and invest. Tax and spending policies should be evaluated based on the incentives they create, for better or worse.
As if to prove my point, Shadow Treasurer Joe Hockey has an op-ed on the same page arguing that the budget should be judged solely on the basis of the surplus.
The Centre for Independent Studies has also released my Policy Monograph Why Does Government Grow?
Economic Papers has published the papers from the symposium on Monetary and Fiscal Policy Interactions: How to Improve Policy Outcomes held at the 2010 Conference of Economists. My contribution can be found here.
posted on 13 April 2011 by skirchner in Economics, Financial Markets, Fiscal Policy
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A Failure of Political Leadership
I have an op-ed in the Straits Times that discusses Australia’s regulation of foreign direct investment in light of the Treasurer’s rejection of the SGX-ASX merger:
the Treasurer’s sweeping powers and the open-ended nature of Australia’s ‘national interest’ test are a standing invitation for politicians to pre-empt and second-guess commercial outcomes. The Foreign Acquisitions and Takeovers Act is a lightning rod for political intervention in the market for ownership and control of Australian equity capital.
The Act adds nothing useful to the regulation of business investment in Australia. It allows government to infringe the property rights of the owners of Australian equity capital, who are denied the opportunity to sell to the highest bidder and thereby realise the full value of their equity. That in turns reduces the amount of capital available for re-investment in Australia by the sellers of these assets. The Treasurer’s opposition to this and other deals devalues Australia’s stock of equity capital.
posted on 12 April 2011 by skirchner in Economics, Foreign Investment, Politics
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Peter Ruehl, RIP
A great loss. Possibly the only reason many people read the AFR. A favourite Ruehl line (from the early 1990s):
Telecom is communism without the tanks.
Thanks for all the laughs Pete.
posted on 12 April 2011 by skirchner in Media
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ASX-SGX RIP: Wayne Swan’s ‘No-Brainer’
Treasurer Wayne Swan’s rejection of the SGX-ASX merger is given an explicitly protectionist rationale:
“Becoming a junior partner to smaller regional exchange through this deal would risk us losing many of our financial sector jobs,” he told media.
Former Treasurer Peter Costello resorted to similar protectionist arguments in boasting about his role in frustrating the globalisation of Australian business:
The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.
The regulation of foreign direct investment in Australia is now effectively an arm of domestic industry and employment policy. Swan has received advice on the matter from the RBA and ASIC, but it remains to be seen how much of this advice is publicly released and how much stays a state secret. No doubt The Australian will try and FoI all of it. The journalists at The Australian are the only ones who understand that this is principally a rule of law issue. The commercial merits and implications of the proposed transaction are a secondary consideration.
posted on 08 April 2011 by skirchner in Economics, Foreign Investment, Rule of Law
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