Capital Gains Tax Myths and Realities
The CIS have released my Policy Monograph on Reforming Capital Gains Tax: The Myths and Realities Behind Australia’s Most Misunderstood Tax. There is an op-ed version in today’s Australian.
The 2004 Productivity Commission inquiry into first home ownership noted that ‘changes to the capital gains tax regime coupled with longstanding negative-gearing arrangements were seen to have contributed to higher prices through encouraging greater investment in housing’, but the commission did not model the effects of the tax changes. If increased investment is putting upward pressure on prices, this is an argument for easing supply-side constraints, not for discouraging investment with a CGT. CGT is a tax on transactions that would reduce turnover in owner-occupied housing and lead to a less efficient allocation of that stock.
Some mistakenly see a CGT on the family home as a way of soaking the rich. Yet a CGT on owner-occupied housing would most likely be accompanied by tax deductibility for mortgage interest payments, as in the US, offsetting any increase in revenue from a CGT.
In conjunction with negative gearing, the Ralph reforms were blamed for the housing boom in Australia in the early part of this decade. In reality, the boom was caused by the inability of housing supply to respond flexibly to the increased debt-servicing capacity of households in a low inflation, low interest rate environment.
The boom in house prices also occurred in the context of a bear market in equities between 2001 and 2003. It is not surprising demand for housing increased when prices of a competing asset class were declining. House price inflation was a global phenomenon, arguing against country-specific factors as the main cause.
Rather than increasing the tax burden on housing, policymakers need to tackle the impediments to new housing supply to improve affordability.
posted on 12 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, House Prices
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Nouriel Roubini versus the Dow
An illustrated history of Nouriel’s money-losing calls of 2009.
posted on 11 November 2009 by skirchner in Economics, Financial Markets
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Tens of Billions Lost
RBA Board member Warwick McKibbin, on the resource cost of fiscal stimulus:
RESERVE Bank director Warwick McKibbin has publicly questioned whether the Rudd government dumped him from the Prime Minister’s science council as payback for saying its fiscal stimulus package was “too big”.
Speaking yesterday after Wayne Swan said the RBA was “entirely comfortable with our fiscal policy”, Professor McKibbin said he had no doubt history would show that the Rudd government had overdone the stimulus.
Professor McKibbin also revealed that part of the motivation behind establishing a new council of eminent economists to debate policy issues was to encourage academics to speak out.
“I think when people look through the entrails of this, they will find billions, if not tens of billions, that was just lost,” he told The Australian.
A few weeks after he suggested that the second part of the stimulus package was too large while giving evidence at a Senate inquiry in May, he was dumped from a government advisory role on the Prime Minister’s Science and Innovation Council, Professor McKibbin said.
posted on 09 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Politics
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‘I Have Been Corrupted, A Little’: How Spin-Resistant Are Economics Bloggers?
The US Treasury has been running high level briefing sessions for economic bloggers. Officialdom has obviously recognised that bloggers are an influential voice and need to be managed like old media. Fortunately, economics bloggers are proving a little more spin-resistant than Treasury perhaps expected. Here is what Naked Capitalism thought about the briefing:
It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken).
And Steve Waldman:
The second thing I’d like to discuss is corruption. Not, I hasten to add, the corruption of senior Treasury officials, but my own. As a slime mold with a cable modem, it was very flattering to be invited to a meeting at the US Treasury. A tour guide came through with two visitors before the meeting began, and chattily announced that the table I was sitting at had belonged to FDR. It very clearly was not the purpose of the meeting for policymakers to pick our brains. The e-mail invitation we received came from the Treasury’s department of Public Affairs. Treasury’s goal in meeting with us was to inform the public discussion of their past and continuing policies. (Note that I use the word “inform” in the sense outlined in a previous post. It is not about true or false, but about shaping behavior.)
Nevertheless, vanity outshines reason, and I could not help but hope that someone in the bowels of power had read my effluent and decided I should be part of the brain trust. The mere invitation made me more favorably disposed to policymakers. Further, sitting across a table transforms a television talking head into a human being, and cordial conversation with a human being creates a relationship. Most corrupt acts don’t take the form of clearly immoral choices. People fight those. Corruption thrives where there is a tension between institutional and interpersonal ethics. There is “the right thing” in abstract, but there are also very human impulses towards empathy, kindness, and reciprocity that result from relationships with flesh and blood people. That, aside from “cognitive capture”, is why we should be wary of senior Treasury officials spending too much time with Jamie Dimon. It is also why bloggers might think twice about sharing a conference table with masters of the universe, public or private. Although the format of our meeting did not lend itself to forging deep relationships, I was flattered and grateful for the meeting and left with more sympathy for the people I spoke to than I came in with. In other words, I have been corrupted, a little.
In Australia, it is worth noting that most of the running on the issue of RBA media backgrounding has been from new media like Business Spectator and bloggers, although old media have since picked-up the story too. Spin control becomes a lot more difficult when dealing with a proliferation of unregulated media with no stake in the status quo.
posted on 06 November 2009 by skirchner in Economics, Financial Markets, Politics
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The Future of the US Dollar
I have an op-ed in the business section of today’s Australian on the future of the US dollar (no link, but full text below the fold). Many commentators mistakenly view the market-clearing price of the US dollar on foreign exchange markets as a reflection on the US dollar’s future role in the international financial system. As I argue in my op-ed, the US dollar’s role is entirely a function of the role of US capital markets in the international financial system. It makes the often neglected point that a declining US dollar actually improves the net international investment position of the United States.
I would also highly recommend Richard Cooper’s PIIE Policy Brief on The Future of the Dollar. Cooper is particularly good in explaining why it is China that is financially dependent on the US, not the other way around.
continue reading
posted on 05 November 2009 by skirchner in
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The Efficient Market Fantasy of Justin Fox
Eugene Fama reviews The Myth of the Rational Market, by Justin Fox:
The book is fun reading, but its main premise is fantasy. Most investing is done by active managers who don’t believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems. Finally, MBA students who aspire to high paying positions in the financial industry have a tough time finding a job if they accept the EMH.
I continue to believe the EMH is a solid view of the world for almost all practical purposes. But it’s pretty clear I’m in the minority. If the EMH took over the investment world, I missed it.
The Fox book is an example of a general phenomenon. Finance, financial markets, and financial institutions are in disrepute. The popular story is that together, they caused the current recession. I think one can take an entirely different position: financial markets and financial institutions were casualties rather than the cause of the recession.
posted on 05 November 2009 by skirchner in Economics, Financial Markets
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The Revenge of the Three Amigos
An insight into how Australia is perceived abroad, care of Holman Jenkins in the WSJ:
What most infuriated their hosts, though, was Telstra’s abandonment of its traditional deference to policy makers. The company took regulators to court over mandates requiring it to lease its network to competitors at knockdown rates. Mr. Burgess bashed civil servants and politicians by name, in a fashion apparently deemed unbecoming a corporate citizen in Australia…
Australia lacks America’s bottomless think-tank and K Street resources for publicizing policy differences. Its parliamentary government puts all the policy levers, including a ready resort to secrecy, in the ruling party’s hands. Australia is a small nation, with a small elite that tends to place limits on burn-the-bridges debate.
posted on 04 November 2009 by skirchner in Economics, Politics
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Steve Keen’s Accidental Demonstration of the Efficient Market Hypothesis
Following the release of the ABS house price data for the September quarter, Steve Keen concedes defeat in his bet with Rory Robertson and will be hiking from Canberra to the top of Australia’s highest mountain wearing a teeshirt that reads ‘I was hopelessly wrong on house prices, ask me how.’ Keen’s answer is to blame the gub’nent:
“I didn’t know the government was going to be stupid enough to bring in the first home buyer’s boost”.
While I would agree that the increased first home-owners grant has inflated house prices, transferring wealth from taxpayers to incumbent property owners, it would be an exaggeration to say that this prevented a decline in house prices of the magnitude Keen has been predicting. Moreover, any forecast needs to discount the likely actions of policymakers.
Steve Keen has inadvertently supplied yet another observation in favour of the efficient market hypothesis, much like Robert Shiller’s suggestion in 1996 that investors should stay out of the stock market for the following decade. The EMH maintains only that we cannot predict future innovations in asset prices. It is ironic that both Keen and Shiller have demonstrated the truth of this proposition in the course of trying to refute it.
Perhaps the teeshirt should read, ‘The EMH was right on asset prices, just don’t ask me how’.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, House Prices
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The RBA and the Media Revisited
I featured in a Lateline Business story last night on Reserve Bank media backgrounding in relation to monetary policy. Lateline Business supervising producer Richard Lindell deserves considerable credit for pursuing this story in the face of both official and unofficial stonewalling. Credit is also due to Alan Kohler, Adam Carr and Christopher Joye, who have all spoken out on this issue. Some of the people who originally agreed to appear on camera for the story were prevented from doing so by their employers. As I said to Richard Lindell, ‘now you know why market economists don’t criticise fiscal stimulus.’
A 2001 AFR Magazine profile of then RBA Governor Ian Macfarlane by Peter Hartcher quoted a former RBA official as saying:
The Bank uses newspapers to manage expectations. It’s a game the Bank manages very well. Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.
The quote was re-produced in Stephen Bell’s 2004 book on the Reserve Bank, Australia’s Money Mandarins (see my review). Journalists and academics should be the standard-bearers for due process, procedural fairness and public accountability. Yet many commentators view the RBA’s manipulation of the media as simply a clever use of power.
The practice is a legacy of a less transparent era at the Reserve Bank. With so many open channels of communication now available to the Bank, there is no longer any excuse for it to continue.
There is more on Reserve Bank governance here.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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Tax Competition and the Future Fund
Australia’s sovereign wealth fund, the Future Fund, does not pay tax, which would be pointless, but it is not too keen on paying foreign taxes either. The Fund’s 2008-09 Annual Report shows five Cayman Islands subsidiaries. As the report notes ‘the Fund seeks to maximise after tax returns and, where it is legitimate to use a structure which protects the claim to sovereign immunity, this path has been taken.’ The Australian government has been an enthusiastic participant in international efforts to crack-down on so-called ‘harmful’ tax competition, but is not averse to having its own proprietary trading operation take advantage of these opportunities. To be clear, this is meant as a criticism of the government’s participation in such efforts and not the Future Fund.
The Fund saw a real rate of return of -5.7% (ex-Telstra), which is pretty poor compensation for the tax cuts forgone as a result of the Fund’s creation. The Fund remains 41.1% invested in cash (ex-Telstra), down from 62.1% at the end of the previous financial year. The government could have achieved a better return with less risk and at lower cost simply leaving the funds on deposit with the Reserve Bank.
posted on 30 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Why the Financial Crisis Proves the Efficient Market Hypothesis
Jeremy Siegel on why the financial crisis proves rather than disproves the efficient market hypothesis:
is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.
posted on 28 October 2009 by skirchner in Economics, Financial Markets
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Complete Confusion
You know it’s Friday whenever the government slips out another late afternoon FDI approval. The government continues to micro-manage FDI in Australia, with another long list of conditions attached to Yanzhou Coal Mining Company Limited’s acquisition of Felix Resources, while creating even more uncertainty about government policy:
One adviser to Chinese companies trying to invest in Australian resources, who has had potential takeovers of Australian public companies quashed by FIRB before they were made public, expressed frustration at the lack of consistency.
“It creates complete confusion as to what the policy is,” he said.
“All we can see is that there is no policy.”
Senator Sherry’s office would not comment on what could be gleaned from the decision in terms of policy.
Because there is none.
posted on 24 October 2009 by skirchner in Economics, Foreign Investment
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Never Mind the Prices, Check the Volumes
As Australia records the biggest annual percentage decline in Australian dollar export prices since comparable data began in 1974, Stephen Green predicts ‘enormous’ Chinese demand for Australian iron ore next year.
I discuss the relationship between Australian export prices and volumes in this article.
posted on 23 October 2009 by skirchner in Economics, Financial Markets
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Steve Keen, They Hardly Knew You
The latest 12-month consumer house price expectations from Westpac-Melbourne Institute:
Some 73% of respondents expect prices to increase over the next 12 months with 15.9% expecting no change and 9.9% expecting a decline. The proportion expecting an increase compares with 53% in July and 32% – a minority – in May.
posted on 21 October 2009 by skirchner in Economics, House Prices
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What If You Got Pink Bats and a School Hall for Christmas?
Scroogenomics author Joel Waldfogel, on the welfare costs of poorly chosen Christmas gifts:
My favorite way to do it is to compare what would you be willing pay for stuff that you receive as a gift per dollar spent versus what would you be willing to pay for stuff you bought for yourself per dollar spent. The surveys converge on the idea that it is about 20% less. U.S. holiday spending per year is conservatively about $65 billion. So about 20% of that, something like $13 billion a year, is what’s destroyed through gift giving in the U.S. But it turns out it is by no means limited to the U.S.
You see the same pattern of spending in almost every major western economy, with a big bump in spending in December. You don’t see it in China and you don’t see it in Israel. But you see it in every country that is predominantly Christian, and some that aren’t. Japan also has it in a big way. If you add up that spending in the other major OECD economies you get, instead of $65 billion alone for the U.S., $130 billion (in holiday spending). There’s every reason to believe the dead weight loss is as big elsewhere. That would get you to $25 billion a year around the world in value destroyed through gift giving.
An almost perfectly analogous argument can be made against fiscal stimulus of the non-cash variety, except that the government has even less knowledge about your preferences, has even less of an incentive to satisfy them and you get sent a tax bill for the gifts you didn’t want. The rush to push stimulus dollars out the door is similar to the mad rush to buy presents before Christmas, resulting in poor quality spending decisions. The political Santa Claus also has a rather more selective view of who has been ‘naughty’ and who has been ‘nice’.
Fiscal stimulus spending is often viewed as valuable in its own right, as if it doesn’t matter what the government spends money on. When asked whether his proposal for less Christmas gift-giving would be bad for the economy, Waldfogel notes:
I’m not against spending, I’m just against spending done ignorantly by others… Although George Bush said go out and spend and other folks have exhorted us to spend at times, spending is not really a measure of success or satisfaction… When we say it is good for the economy, we can’t just look at the amount of spending, we want to think about the amount of satisfaction that we’re getting from the spending.
While Waldfogel’s argument is less applicable to so-called ‘cash splashes’, last year’s cash hand-outs were strategically timed just before Christmas. We will never know just how much of last year’s pre-Christmas cash splash ended-up in the great national stockpile of unwearable socks and ties.
posted on 19 October 2009 by skirchner in Economics, Fiscal Policy
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