Peter Costello and Interest Rates
A remarkable story, if true:
Jon Faine on ABC 774 in Melbourne has revealed yet another extraordinarily ill advised conversation between a leading politician and a journalist.
The Treasurer, Peter Costello, was in Faine’s studios in late September and during a break for the news, Faine said to him: “I can’t believe you haven’t called the election to get it out of the way before the cup day interest rate rise.
“He looked me in the eye. He put his thumb down as he sat there in the chair and he said, ‘There will not be a rate rise in November. Take it from me.’
“I said : ‘You might be right, you might be wrong, but you’re prepared to punt on it.’
“And he said : ‘There will not be a rate rise in November.’…
How is it that the Treasurer of the country could so misread the mood of the Reserve Bank Board when virtually every analyst in the country was predicting the opposite?
posted on 08 November 2007 by skirchner in Economics, Financial Markets, Politics
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Blame Martin Place III
The statement accompanying today’s increase in official interest rates on the part of Reserve Bank confirms what was already effectively implied by the Q3 CPI outcome:
By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.
This forecast presumably includes the anticipated impact of today’s tightening. The RBA will be unable to publish a target-consistent inflation forecast in its November Statement on Monetary Policy. The RBA is effectively admitting to a monetary policy mistake. It is Governor Stevens rather than John Howard who should be in the dock.
The question that has to be asked now is, what path will official interest rates have to follow to bring the inflation forecast back into the 2-3% target range? On this, the RBA was characteristically silent. There is really no excuse for the RBA failing to spell this out in today’s statement or next week’s quarterly Statement on Monetary Policy. The RBA continues to short-change the public with its lack of transparency in relation to its future policy intentions. The Bank is only making its job harder, by robbing itself of the ability to let market-determined interest rates do some of the required tightening work. Interbank futures are still giving less than a 40% chance to a follow-up tightening in December.
posted on 07 November 2007 by skirchner in Economics, Financial Markets, Politics
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Who’s to Blame for Higher Interest Rates?
Andrew Norton notes a Gallaxy poll on interest rates:
‘If interest rates rise again in the near future, which of the following do you believe is mainly to blame?’
The political answer, John Howard, received blame from only 12% of respondents - 17% of Labor voters and 3% of Coalition voters. The other responses were ‘international factors’ (37%), the Australian economy (30%), and the Reserve Bank (14%).
‘International factors’ and the ‘Australian economy’ happen to be the most correct answers. It suggests that the electorate are actually much less parochial than the commentariat and also understand the endogeneity of interest rates to economic conditions. If the electorate can grasp these basics, what’s the commentariat’s excuse?
posted on 06 November 2007 by skirchner in Economics, Financial Markets, Politics
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RBA Reform Under Rudd?
Opposition Treasury spokesman Wayne Swan flags possible changes to the appointment process for the RBA Board under a prospective Labor Government:
“I am very interested in talking to the reserve bank governor about a new method, open and transparent, of appointing the best possible person available.”
Mr Swan said he would seek the advice of current reserve bank governor Glenn Stevens to discuss ways of implementing a more transparent appointment process.
“I would seek the advice of the current reserve bank governor in constructing a process that would do that,” Mr Swan said.
“We have a number of ex-reserve bank governors around the country, maybe we can put a panel together where they could put together a list of names, for example.
“I want an open transparent process that gives the best person for the job, irrespective of their political affiliation or what fundraising they have done for any political party.
Instead of overhauling the appointments process for the Board, a more significant reform would be to bring the RBA into line with the practices of other central banks and separate monetary policymaking from the Board and place it into the hands of an expert committee, made up of the Bank’s senior officers and outside appointees and excluding the Treasury Secretary. The monetary policy committee should then be required to release a summary of proceedings and a record of any votes taken at the conclusion of each meeting. By ensuring a high degree of transparency, there is less of a burden on the appointment process in maintaining the integrity of monetary policy, since the behavior of committee members would be subject to a degree of scrutiny that is entirely absent under current arrangements.
posted on 30 October 2007 by skirchner in Economics, Financial Markets, Politics
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Tax Cuts and Interest Rates - Again
Terry McCrann continues to do battle with the ‘tax cuts lead to higher interest rates’ brigade:
what would have happened if the Government had taken the advice of, in particular, Access Economics and tried to bank them.
Since that 2005 budget which projected a $9 billion 2008-09 surplus—itself after spending $10 billion in the 2008-09 year. That’s to say, the projected 2008-09 deficit even back then could have been $19 billion but for the 2005 tax cut.
Since then the Government has spent a further $50 billion, in the 2008-09 year alone. If not spent, ceteris paribus it would now be projecting a $63 billion surplus for that one year. With similar huge surpluses for this year and the other years in the budget forecasting framework…
Macquarie Bank’s Rory Robertson seems to think he’s rediscovered the fiscal wheel, by arguing that the tax cuts have been fiscally stimulatory. Well, looked at in isolation, of course they are, Rory. Looked at in the totality of revenue change from one year to the next, not having them would have been contractionary. If you think going from a $15 billion surplus in 2005-06 to a $63 billion surplus in 2008-09 would equate to fiscal neutrality, Rory, we will have to agree to disagree.
Interest rates are as high as they are, and heading slightly higher, not fundamentally because of the tax cuts, but because of the seminal upshift in our prosperity of which the surging budget revenues that fund the tax cuts are the manifestation.
McCrann argues that ‘analytically it is beyond absurd to suggest the Government could have in theory sat on a $63 billion surplus.’ Indeed, with Commonwealth debt paid off, the government would have little choice but to recycle these surpluses via the accumulation of assets in the Future Fund. Unless the bulk of these funds were invested offshore, the government would over time effectively nationalise a large share of the domestic stock of equity capital.
posted on 27 October 2007 by skirchner in Economics, Financial Markets, Politics
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Labor’s Tax Policy
Sinclair Davidson and Alex Robson on Labor’s tax policy:
Treasurer Peter Costello is correct when he claims there is a higher tax burden for some taxpayers under the ALP plan: all taxpayers earning between $37,000 and $102,000 will be worse off under Labor.
But the flip side is that some taxpayers will have a lower tax burden and be better off under Labor.
This can be confirmed simply by inspecting the table of figures released by the Treasurer on Sunday. After 2013, for example, those on incomes of $102,000 and above will be better off under Labor because they face lower marginal and average tax rates.
This part of Labor’s plan makes good economic sense. Nobel laureate James Mirrlees, who is leading a comprehensive review of tax policy in Britain, has shown that, even allowing for changes in income inequality, marginal tax rates should fall, not rise, as income increases. This is because the negative supply-side consequences of higher income taxes tend to swamp the inequality effects.
The most recent economic evidence from the US suggests higher income earners - those who will benefit most from Labor’s plan - tend to be the most responsive to changes in their taxable income. By flattening the tax structure, both tax plans move in the right direction.
posted on 26 October 2007 by skirchner in Economics, Financial Markets, Politics
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Blame Martin Place II
I have an article in New Matilda on the implications of this week’s September quarter CPI outcome.
posted on 25 October 2007 by skirchner in Economics, Financial Markets, Politics
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Blame Martin Place
Today’s Q3 CPI outcome cements the case for further RBA tightening at the November Board meeting. The government will inevitably cop a lot of flack as a result of the mid-election campaign tightening. For this, the government largely has itself to blame. Having taken credit for the cyclical downswing in interest rates in 2001, it can hardly avoid taking responsibility for the other side of the cycle. The irony is that the government’s campaign on interest rates in 2004 set it up to be a victim rather than a beneficiary of future prosperity.
This is unfortunate, since it distracts attention from the fact that it is the RBA that is ultimately responsible for interest rates and inflation outcomes. As then Deputy Governor Ian Macfarlane once said, ‘blame Martin Place.’ It is now clear that the RBA has fallen behind the curve in its task of inflation control. The RBA was already forecasting an increase in inflation for 2008 in its August Statement on Monetary Policy, even with the benefit of the August tightening. The baseline for the underlying inflation forecast in the November Statement will be 3.0%, based on the average of the statistical core series published today. Even with the benefit of a November tightening, it will now be difficult for the RBA to publish a target-consistent inflation forecast in the November Statement. The RBA really needs to raise rates by 50 bp in November, although will probably stick with 25 bp, with a follow-up 25 bp in December.
The smartest thing a new Labor Government could do would be to demand that Governor Stevens start giving press conferences after each monthly Board meeting. This would significantly change the media dynamics surrounding interest rate changes and make clear to the public who is really responsible for inflation control and changes in interest rates.
posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics
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Explaining Higher Interest Rates
Terry McCrann explains the real causes of higher interest rates:
It’s the prosperity, stupid.
posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics
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Rudd as ‘Unreconstructed Interventionist’
Sinclair Davidson and Alex Robson argue in a WSJ op-ed that federal opposition leader Kevin Rudd is a thinly disguised economic interventionist:
a closer look at Mr. Rudd’s record reveals that he’s not a reformer, but rather an unreconstructed interventionist masquerading as a free market conservative. Call it “Ruddonomics.”
Take his parliamentary record, for a start. Since coming into the Parliament in 1998, Mr. Rudd has toed the party line and opposed most efforts to further reform the economy. The Australian Labor Party opposed the privatization of Australia’s government-owned telecommunications provider, Telstra; strongly protested industrial relations reform, including Mr. Howard’s recent efforts to reduce union power and abolish unfair dismissal laws; and, most importantly, opposed all significant tax reform over Mr. Howard’s tenure, including cuts in income taxes.
Mr. Rudd’s economic philosophy isn’t a secret. In a speech to the free market Center for Independent Studies in Sydney last year, he openly attacked the free market ideas of Nobel Laureate Friedrich Hayek, branding him a “market fundamentalist.” In Mr. Rudd’s mind, it’s okay to accept “the economic logic of markets but . . . these must be properly regulated and that the social havoc they cause must be addressed by state intervention.” He also argued that public policy should deliver long-term market-friendly reform tempered by “social responsibility.”
posted on 23 October 2007 by skirchner in Economics, Politics
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Arbitraging Federal Electoral Division Betting Odds
Simon Jackman identifies daily spot arbitrage opportunities in bookmakers’ odds for various divisional races in this year’s federal election.
posted on 23 October 2007 by skirchner in Economics, Financial Markets, Politics
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Kevin Rudd’s Anti-Market Ideology
‘Traditional Labor voter’ Paul Kerin exposes the ignorance and intellectual laziness underlying Kevin Rudd’s anti-market ideology:
The best glimpses of Rudd’s philosophy are contained in a couple of articles he wrote in The Monthly last year before becoming Opposition Leader. His social aspirations - and genuine passion about them - are admirable, although not ambitious enough. But his economic philosophy, or lack thereof, is worrying. The ideologically driven uni-dimensional view of the world outlined in the essays prevents him from entertaining the thought that freer markets could help him better achieve his social aspirations. Rudd depicts the “real battle of ideas in Australian politics” as the “battle between free market fundamentalism and the social-democratic belief that individual reward can be balanced with social responsibility”.
This depiction - replete with false mutual exclusivities (free market v social responsibility) and put-down labels (free market fundamentalism) - implies that anyone who supports free markets must be a selfish bastard who doesn’t care about social goals. Nothing could be further from the truth…
Rudd attacks “market fundamentalists”, a label he liberally attaches to Hayek and modern economic liberals, for believing that humans are “almost exclusively self-regarding” and for holding self-regarding values themselves. He contrasts this with “other-regarding values of equity, solidarity and sustainability” of social democrats such as him.
Ironically, he claims fundamentalists “distort Smith, adopting his Wealth of Nations while ignoring ... his The Theory of Moral Sentiments”. I can’t believe that an intelligent, reflective man such as Rudd has read either book. If he had, he would not have drawn this conclusion. It is a gross distortion. Smith’s views on human behaviour in both works are perfectly consistent…
Rudd clearly hasn’t read Hayek either. His only evidence on Hayek’s values are quotes from former communist and non-economist David McKnight.
posted on 20 October 2007 by skirchner in Economics, Politics
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Supply-Side Implications of Lower Taxes
The ‘tax cuts lead to higher interest rates’ brigade have been relatively quiet in response to the government’s tax cuts announced yesterday. This is in no small part due to the government continuing to highlight in the Budget papers the positive supply-side implications of its tax cuts. According to yesterday’s Mid-Year Economic and Fiscal Outlook:
The 2007-08 MYEFO tax cuts and the Government’s goal for the personal income tax system will continue the focus on encouraging workforce participation that has been a feature of the tax cuts delivered by the Government since the introduction of The New Tax System. The estimated impact of the 2007-08 MYEFO tax cuts is to encourage around 65,000 new entrants into the workforce. The cumulative effect of the tax cuts delivered by the Government since The New Tax System is estimated to encourage around 300,000 new entrants to the workforce.
Far from leading to higher interest rates, the government’s tax cuts may play an important role in preventing the labour market from becoming a source of inflationary pressure and a constraint on economic growth.
posted on 16 October 2007 by skirchner in Economics, Financial Markets, Politics
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Promises, Promises…Good Policy, Bad Strategy
The government announces $34 billion in tax cuts, the day after calling the federal election for November 24:
Treasurer Peter Costello has announced five years of progressive reductions of income tax that will see the current tax system eventually reduced to four tax brackets—15, 30, 35 and 40 cents in the dollar.
The plan would see the tax-free threshold raised to $14,000 next year, while the lowest tax rate would kick in on earnings over $34,000.
In following years, the top tax rates would be lowered while the tax-free threshold would be lifted again.
Mr Costello has said the goal of the restructure was to arrive at a tax-free threshold of $20,000 and for there to be only four marginal tax rates, with the top rate set at 40 cents in the dollar.
The changes, to be introduced gradually, will see the tax threshholds for lower income earners increased and the reduction of the percentage of tax paid in the top two tax categories—currently 40 and 45 percent.
This is good policy, but bad political strategy. These initiatives would have been much more credible had they been announced in the May Budget and legislated ahead of the election. As things stand, they are just another campaign promise that the public is likely to treat with scepticism. The electorate may even be resentful that it takes a federal election to induce good fiscal policy from the government.
Moreover, should the government lose the election, the proposed tax cuts will give way to the as yet unannounced tax policy of the federal opposition. The government runs the risk of bequeathing to the Labor Party the surpluses it has accumulated in the Future Fund and the other artificial lock-boxes it has used to warehouse revenue it doesn’t need to meet current expenditure commitments.
At least the government is ignoring the advice of the ‘tax cuts equals higher interest rates’ brigade. No prizes for guessing what Chris ‘Rainy Day’ Richardson will have to say about it.
posted on 15 October 2007 by skirchner in Economics, Financial Markets, Politics
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Lunch with Kevin Rudd
Federal opposition leader Kevin Rudd addressed an Australian Business Economists’ lunch last week. John Edwards’ observations on the event go a long way to explaining why a booming economy is providing the government with little or no political traction:
Rudd ranged widely over Australia’s recent economic record and what he planned to do if elected to government. He then took questions. There were just three, none of them memorable. Given that the polls show Mr. Rudd will highly likely be Prime Minister within eight weeks or so and that Labor has been out of office for over a decade, this was a remarkably small number of questions from what might be expected to be a well informed, concerned and not particularly sympathetic audience…Mr. Rudd wasn’t asked many questions, because there isn’t much worth asking.
Edwards’ goes on to note the near complete bipartisanship between the government and opposition on economic policy and says:
for all its vaunted political brilliance [the government has] an amazing inability to shape the economic debate.
posted on 10 October 2007 by skirchner in Economics, Financial Markets, Politics
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