CIS Policy Point Lecture: Stern Hu and Stern China
CIS Policy Point Lecture: Stern Hu and Stern China - Why Beijing did it and what it means for Australia-China Relations.
Since the arrest of Rio Tinto executive Stern Hu in mid July, Beijing has stood firm by reiterating several times that evidence against Mr. Hu for commercial espionage causing massive losses to the Chinese state is serious and irrefutable. What has Stern Hu actually done, why has China chosen to charge Mr. Hu and others for espionage, rather than commercial theft, and what will the consequences of this action be for diplomatic and political relations between Australia and China? Join research fellow at CIS and visiting fellow at the Hudson Institute in Washington, Dr John Lee and Paul Kelly, Editor-at-Large of The Australian, as they discuss this issue.
Venue: The Library, The Centre for Independent Studies, Level 4, 38 Oxley Street, St Leonards.
Parking is available across the road at the Hume Street Car Park.
Date: Tuesday, 25 August 2009
Time: 6:00pm – 7:15pm followed by drinks.
Cost: Members – free, Non Members $10 payable in advance by credit card.
Booking: Places are limited and reservations essential. To book please email CIS Events Assistant, Alanna Elliott, at aelliott AT cis.org.au or call (02) 9438 4377.
posted on 24 August 2009 by skirchner in Economics, Foreign Affairs & Defence
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Stimulus Skeptics
I’m quoted in a story in The Australian today on the effectiveness of fiscal stimulus. As I noted in this post, if we are to accept the proposition that fiscal stimulus has been effective in supporting demand, then this implies that monetary policy has had less work to do and that interest rates have been higher than they otherwise would have been. To be clear, that is not my view, but it is where the logic of the pro-stimulus camp must lead. In that case, all fiscal stimulus has done is trade-off monetary for fiscal easing.
Kevin Hassett has noted the same inconsistencies in the discussion of fiscal policy in the US:
Democrats opposed the Bush tax cuts from the beginning not because lower marginal tax rates are bad, but rather, because they believed they would lift deficits and interest rates.
The interest-rate effect is so large, goes this line of reasoning propounded by disciples of the “Rubin school,” that the net effect of tax cuts would be harmful.
But now we hear that we can adopt the Obama health-care plan, increase an already massive deficit, and it will be no problem. But if raising taxes can reduce deficits and spur the economy, then cutting spending should do that too. So why are we increasing spending yet again? Democrats have no answer…
The fact is, deficits are a problem precisely because politicians can get away with running them with near impunity. If interest rates did soar in the face of deficits, it would provide a constraint on the growth of big government.
Sadly, there will be no such constraint.
posted on 19 August 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Australia: Developed Country Institutions, Emerging Market Growth Rates
Treasury Secretary Ken Henry suggests that Australia remains an attractive proposition to foreign investors:
it seems quite likely — to me at least — that the Australian economy might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate.
This fifth observation might surprise you. My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities — of governance and flexibility — of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.
It follows from what I have just said that I do not think it likely that, relative to earlier growth periods, the future expansion of the Australian economy will be constrained by a reduced capacity to attract foreign capital.
Henry failed to mention that the main constraints on Australia attracting foreign capital are imposed internally, not externally: relatively high rates of tax on capital and a Whitlam-era, Chinese-style regulatory regime for foreign direct investment. We will find out at the end of the year what Henry proposes to do about the former. The government’s modest tinkering with the latter suggests that Australia will continue to underperform its potential in attracting FDI.
posted on 18 August 2009 by skirchner in Economics, Foreign Investment
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Demand is Not Supply
Asked about the effectiveness of discretionary fiscal stimulus measures, RBA Governor Stevens told the House Economics Committee on Friday that:
we believe that the fiscal measures have supported demand and, therefore, at least to some extent, output.
The distinction was probably lost on members of the Committee, but is nonetheless an important one. Demand can be met out of imports and inventories, without boosting domestic production. This is why indicators like retail sales are entirely inappropriate as a measure of the effectiveness of fiscal policy.
Some remarkably good questioning from Liberal MHR Scott Morrison also flushed out some more of the Governor’s position on using monetary policy to target asset prices:
One view, the Alan Greenspan view, is you cannot know it is a bubble until it has burst, so you should not do anything much, and then you should clean up the mess once it has burst… I personally would not want to commit to saying, ‘We’re definitely never going to pay attention to asset prices and totally ignore them.’ That has been shown to be a mistake, basically. But nor do I think it is our brief to aggressively chase down asset things that pop up here and there that we might personally find hard to accept or agree with, at the expense of other things that we have as our objectives. So I think that, into the future, it is going to be a matter of judicious, careful use of our instrument in trying to meet all these worthy goals—keeping in mind as well that there is a whole separate debate about other tools that might be applied to booms and busts and asset prices. That is a whole separate section of this debate—what tools could be used by the supervisory authority to rein in the lending.
In fact, no one has ever suggested that asset prices should be completely ignored. Greenspan explicitly rejected this proposition in his 1996 ‘irrational exuberance’ speech. The issue is whether asset prices should have a weighting in the central bank’s reaction function that is independent of the inflation forecast.
Stevens can at least be thankful he does not have to appear before the US Congress:
Far from deference, Mr. Bernanke’s recent testimonies have been treated with all the delicacy usually reserved for a mob boss.
posted on 17 August 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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The Market Can Only Know What is Knowable
Eugene Fama explains why recent asset price volatility is entirely consistent with the efficient markets hypothesis.
posted on 12 August 2009 by skirchner in Economics, Financial Markets
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The End of America
If people are most bearish near the bottom of the cycle, it is probably a good sign that Slate has been running an interactive feature on The End of America: How It Will Happen. It is even more encouraging that of the top five apocalyptic scenarios most favoured by Slate readers, two are economic crankery deserving little serious consideration: ‘peak oil’ and ‘China Unloads U.S. Treasurys’ [sic].
There are more prosaic reasons for considering the ‘end of America’, at least as we once knew it, as suggested in David Goldman’s Top Ten Reasons Why the Recession Will Last Forever:
1. Barack Obama. Bill Clinton, the last Democratic president, thought in effect, “Let’s get economic growth so I can tax it and pay for all my toys and games.” That was the “New Democrat” approach. Obama knows that if the economy crumbles and he’s the only one left with a checkbook, then everyone has to come to him. Where is the independent base of entrepreneurial business to which the Republicans might turn to raise money against Obama? The banks, the hedge funds, the manufacturers, the municipalities, in fact everyone who is left standing in the economy is beholden to Obama. This is Chicago city politics writ large. Leave aside all of the individual things that Obama is doing that harm economic growth: Obama is the first American president (with the possible exception of FDR) to actually benefit from economic weakness.
posted on 11 August 2009 by skirchner in Economics, Financial Markets
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The Efficient Markets Hypothesis as Meta Predictor
Bill Easterly answers Her Majesty’s questions on the role of economists in the financial crisis:
We correctly predicted that we would not be able to predict it.
Robert Lucas spells out the obvious implications:
The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.
posted on 11 August 2009 by skirchner in Economics, Financial Markets
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The Wizards of Oz: Behind the Curtain
The always interesting Scott Sumner (who is right on most things) falls into the grass-is-always-greener trap that seems to afflict many Americans when it comes to monetary policy:
Earlier I said Australia is very similar to the US. The main difference is that the wizards who run monetary policy in Australia don’t listen to Puritans who insist we must suffer high unemployment for our sins.
Scott is impressed with Australia’s high rates of nominal GDP growth, which he attributes to superior monetary policy. But as Scott himself notes, Australia has had a high average growth rate for nearly 20 years. Real growth has also averaged at or near the top of the OECD. In other words, this outperformance is structural rather than cyclical and has little to do with short-run demand management. The fact that Australia has continued to outperform in the context of a global economic downturn lends further weight to the view that this outperformance has been structural rather than cyclical.
Scott fails to consider the downside of this high rate of nominal GDP growth: a high rate of inflation. While Australia’s headline inflation rate has moderated recently, the statistical core series that capture the persistent component of inflation are still running well above the upper bound of the RBA’s 2-3% target range, even after a nearly two percentage point increase in the unemployment rate. Australia consequently also has some of the highest nominal interest rates of any developed country. As Friedman noted, high nominal rates are often indicative of monetary policy that is too loose due to a high inflation premium.
The RBA’s inflation target range has a mid-point above the 2% widely considered to be consistent with price stability in the rest of the world. Australia has thus institutionalised a relatively high rate inflation. If the central bank’s primary responsibility is long-run inflation and price stability rather than nominal income growth, then Australia’s monetary policy performance does not compare favourably to the US. What is considered to be an acceptable inflation rate in Australia would be considered a policy failure in the US.
posted on 10 August 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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FDI Liberalisation Falls Short
Following hot on the heels of the New Zealand government’s announcement of reforms to its regulation of foreign direct investment, the Australian Treasurer has also announced changes to the thresholds for screening FDI applications. My take on the changes can be found in an op-ed in The Canberra Times today (text below the fold). I’m also quoted on the subject in a story on page three of the AFR today.
continue reading
posted on 05 August 2009 by skirchner in Economics, Foreign Investment
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The Trans-Tasman Battle for FDI
I have an op-ed in today’s Age contrasting the New Zealand government’s liberalisation of its regulatory regime for foreign direct investment with the Australian government’s growing use of FDI regulation as an extension of domestic industry policy (note that there is a minor sub-editorial error: the third para should read ‘by 40%’ not ‘to 40%’). I predict that this will add to Australia’s underpeformance in attracting its share of global FDI.
Bryan Frith wrote-up my proposals to reform Australia’s regulatory regime for FDI in The Australian, concluding that ‘While the Rudd government is in reformist mode, it should take a serious look at Kirchner’s suggestions.’ However, as my Age op-ed notes, the Rudd government is moving in the opposite direction to the one I set out in Capital Xenophobia II.
posted on 31 July 2009 by skirchner in Economics, Foreign Investment
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Open Australia
Open Australia is providing a useful service making information about federal parliament available on-line. This volunteer effort often provides better information than parliament itself, as this story notes.
Most notably, the volunteers have scanned the 1500-odd pages of the Register of Members’ Interests and made them available on-line. Previously, this information was available only in hard copy in binders kept in Parliament House, Canberra, making it a costly exercise for members of the public to examine the Register. It says a lot about the willingness of politicians to subject themselves to the same levels of disclosure and transparency they routinely demand of the private sector.
Unfortunately, the Register does not contain enough information to perform a study like this, showing how US Senators’ shareholdings significantly outperform the market.
posted on 30 July 2009 by skirchner in Economics, Financial Markets, Politics
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Where Your Taxes Go
Read and weap.
posted on 30 July 2009 by skirchner in Economics, Fiscal Policy
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It’s Not Easy Being a Supply-Sider
From RBA Governor Glenn Stevens’ speech yesterday:
A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over leverage and asset price deflation down the track.
Much of the commentary on Stevens’ speech suggested that he was warning of a housing ‘bubble’, but the text makes clear that his real concern was the supply-side rigidities that amplify asset price cycles. Stevens’ speech is the lead story in much of today’s media, but Google News finds only three stories that directly quoted ‘serious supply-side impediments’. It is indicative of how difficult it is to interest the media in structural as opposed to cyclical stories.
posted on 29 July 2009 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Central Bank Transparency and Accountability in Action
Federal Reserve Chairman Ben Bernanke’s appearance at a town hall meeting at the Federal Reserve Bank of Kansas City can be seen here (transcript here).
As I lamented in an AFR op-ed last week, this kind of public scrutiny is notably absent in Australia.
posted on 28 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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No Time for a Media-Shy Central Banker
I have an op-ed in today’s Australian Financial Review, comparing the level of media scrutiny applied to central bankers in Australia and the rest of the world. Full text below the fold (may differ slightly from edited AFR text).
continue reading
posted on 24 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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