Cultural Protectionism
Louise Adler of Melbourne University Press provides a self-parody of the arguments against liberalisation of parallel book imports:
To borrow from John Howard, surely we should decide what books come to this country, and the manner in which they come.
Tim Wilson makes the case for scrapping parallel import restrictions here.
posted on 20 July 2009 by skirchner in Economics
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A Carling-Kirchner Ticket?
Robert Carling and I have an op-ed in today’s Australian on our proposals to reform Australia’s federal fiscal responsibility legislation.
‘Henry Thornton’ responds:
Pardon my cynicism, but I see Australia as a long way from establishing another “self-binding” system, one that enforces long-term economic rationality on the government of the day.
Carling and Kirchner might consider offering themselves for election at the next federal election, and see how enthusiastically this plan is embraced by the voters.
Thornton underestimates voters. There is a reason Kevin Rudd claimed to be a fiscal and economic conservative when running for office. The federal opposition now campaigns on debt and deficits because it thinks it will play well with voters.
Our proposal offers a framework through which politicians could make a credible commitment to fiscal responsibility, so that voters would no longer need to rely on politicians promises in relation to fiscal policy.
The idea of linking politicians pay to fiscal performance is also likely to be popular, not least because politicians have long argued that private sector pay should be tied to performance. As Mark Latham demonstrated in relation to parliamentary superannuation, if a major party were to run with our proposal, it would be very hard for the other side of politics to argue against it.
posted on 15 July 2009 by skirchner in Economics, Fiscal Policy
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Monetary versus Fiscal Stimulus
Tony Makin, on the relative effectiveness of monetary and fiscal stimulus:
dramatically easier monetary policy has probably done more for the Australian economy than fiscal policy. A less modest, or perhaps more independent, Reserve Bank would take more credit for this.
Tony makes an important point. The RBA’s very low public profile relative to the very noisy fiscal stimulus efforts of politicians is skewing perceptions of the relative importance of these two arms of macro policy.
It was not that long ago that many economic commentators were talking of a direct trade-off between fiscal and monetary policy. Tax cuts and smaller budget surpluses, we were told, would lead to higher inflation and interest rates. This argument never had much merit, not least because the actual (as opposed to the forecast) fiscal impulse was simply too small to matter very much for the economy. The former government put in place some of the tightest fiscal policy settings since the early 1970s.
By contrast, the current government has put in place an unprecedented fiscal easing of 4.4% of GDP in a single financial year. The RBA’s statements on monetary policy suggest that it believes that fiscal stimulus is supporting economic activity (in sharp contrast to previous years, in which fiscal policy was rarely even mentioned). This would argue against reductions in interest rates at the margin, even if it is based on an exaggerated view of the effectiveness of fiscal policy. The proponents of discretionary fiscal policy can’t have it both ways. If activist fiscal policy is thought to be effective, there is less work for monetary policy to do in supporting activity and official interest rates will be higher than in the absence of a discretionary fiscal easing.
posted on 14 July 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Kevin Rudd’s China Crisis
Greg Sheridan and John Garnaut both have good analyses of the issues arising from China’s detention of Australian Rio Tinto executives for alleged espionage. Both emphasise that this is a critical test of Kevin Rudd’s leadership and China credentials, although Garnaut maintains that Rudd’s leadership has already failed:
With the exception of his famous “Zhengyou” speech at Peking University last year, he ducked the responsibility to lead on China. His Government’s policy ambivalence towards Chinese investment encouraged those in Australia who believed that Chinese money was something to be feared. His advisers played up the China military threat, or encouraged journalists to believe that his Defence White Paper had played up that threat.
The leadership vacuum on China was quickly filled by the shrill and ill-informed.
Australia’s business and political leaders needed to be assisting those in China who saw the world as an economic opportunity rather than a security threat. The risk of doing otherwise, of playing up the threat of “China Inc”, was that it would become self-fulfilling.
While there is an element of truth to this, China still bears primary responsibility for these developments.
Greg Sheridan was an opponent of the proposed Rio-Chinalco tie-up (a position he uncharacteristically shared with arch-enemy Peter Costello), which explains why he perhaps did not appreciate the irony of these comments:
The Chinese have made it clear they can regard any commercial matter as a matter of their national interest...
Under this system, they can intervene legally in any business deal they do not like…
the Chinese authorities have explicitly said that commercial matters are matters of national security
Exactly the same could be said in relation to Australia’s regulation of FDI. The Australian government has routinely made use of bogus national security and national interest arguments to rationalise political interventions in the market for foreign ownership and control of Australian equity capital. This is not to say that we are as bad as the Chinese, but the differences are ones of degree rather than kind.
Sheridan says that:
The implications for Chinese conduct of investments in Australia is clear.
The Foreign Investment Review Board, perhaps at the direction of the Rudd government, needs to factor this information in to all future decisions about proposed Chinese strategic investments in Australia.
China’s actions will cost it dearly. But it would not be in Australia’s interest to make the same mistake by becoming even more like China in its regulation of FDI.
posted on 13 July 2009 by skirchner in Economics, Foreign Investment
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Productivity and House Prices
In Bubble Poppers, I followed Peter Garber in arguing that claims about ‘bubbles’ in asset prices are a substitute for fundamental analysis, a non-explanation for events that people are otherwise unable or too lazy to explain. In contrast to the dominant non-explanation for innovations in house prices in the United States, James Kahn argues that there is a strong relationship between house prices and productivity growth that explains the recent US housing boom and bust:
The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.
posted on 10 July 2009 by skirchner in Economics, Financial Markets, House Prices
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New CIS Policy Monograph: Fiscal Rules for Limited Government
Robert Carling and I have released a new CIS Policy Monograph, Fiscal Rules for Limited Government: Reforming Australia’s Fiscal Responsibility Legislation. The paper makes the case for a rules-based framework for fiscal policy to replace the Charter of Budget Honesty, as well as the establishment of a new Fiscal Commission to increase the independence, transparency and accountability of the federal budget process.
There is a write-up in the SMH. Julie Novak makes a similar case in The Canberra Times.
posted on 09 July 2009 by skirchner in Economics, Fiscal Policy
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Market, Regulatory or Business Model Failure?
Yet another open letter from the usual suspects, this time calling for a new financial system inquiry. However, their call proceeds from a mistaken premise:
SINCE the severe market failures in Australia’s securitisation industry were identified in 2008, we have been concerned that these problems were partly attributable to more fundamental flaws in Australia’s ageing regulatory architecture and the inadequately defined role of government in dealing with such crises.
The authors cannot seem to make up their mind about the relative importance of market failure and regulatory failure, but a more basic issue is business model failure. The mortgage securitisation industry was overly dependent on a particular financial technology. When that technology was new and working well, the industry was able to capture market share from the banks. The industry was not complaining about either market or regulatory failure then. From a consumer standpoint, the success or failure of particular business models is irrelevant, not least because the RBA’s setting of the official cash rate explicitly discounts the impact of shocks to financial technology on overall credit conditions. I discuss these issues in more detail in this paper.
posted on 08 July 2009 by skirchner in Economics, Financial Markets
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Too Much Hand Wringing, Not Enough Hand Raising
The Australian’s FoI desk has another stab at the decision-making processes of the RBA Board, this time seeking voting records, but comes up empty-handed:
“There are no records as the board seeks to achieve a consensus without the need for formal voting,” the board’s secretary, David Emanuel, wrote in response to The Australian’s request.
“The board now seeks to make decisions by consensus and only the consensus decisions are recorded.”
This remarkable unanimity implies that the RBA Board is little more than a rubber stamp for decisions made by the RBA’s senior officers. Now that the RBA and Treasury effectively control the appointments process to the Board, there is little chance that this bureaucratic monopoly over monetary policy decision-making will ever be effectively challenged. I make the case for an alternative model of RBA governance in this article.
posted on 07 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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The Slow and Secretive FIRB
Don’t hold your breath waiting for the Foreign Investment Review Board’s annual report:
THE Foreign Investment Review Board is reinforcing its reputation as one of Canberra’s most secretive bodies. More than a year after the 2007-08 year there is no sign of its annual report.
In contrast, the companies whose fate depends significantly on the board’s deliberations must deliver their annual reports within four months of the end of the financial year…
Although the board carries out confidential consultations with government departments and takes submissions from interested parties in cases that are already in the public domain, its decision-making remains secretive even to those with a close interest in outcomes. Its recommendations are passed directly to the Treasurer and are rarely made public…
Even when the Treasury-controlled board’s 2007-08 report is eventually made public, it is unlikely to reveal little about its deliberations.
The 2006-07 report reveals the number of applications for foreign investment and the decisions made, but does not identify the companies subject to applications.
I make recommendations for reform of the FIRB in my CIS Policy Monograph, Capital Xenophobia II.
posted on 06 July 2009 by skirchner in Economics, Foreign Investment
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When Interventions Collide
Christopher Joye notes how the government’s bank guarantees have undermined its $8 billion intervention in the market for residential mortgage-backed securities:
while the $8 billion has directly helped out the lenders who have benefited from the capital, it has had no effect at all on the overall cost of RMBS funding (or the so-called ‘spreads’) because it is being undermined by the government guarantees of bank debt, which have massively increased the supply of AAA-rated securities and created two-tiers of investment – those AAA assets with and without a government guarantee (RMBS and CMBS obviously fall into the latter category). Indeed, as the RBA (in its Statement of Monetary Policy) and the Treasury’s David Gruen have recently observed with some bewilderment, RMBS spreads have actually increased markedly to more than 200 basis points over the swap rate since the AOFM started investing its money notwithstanding their incredibly low default rates (again because of the dysfunction indirectly introduced by the government guarantees of bank debt). In the ten years prior to the advent of the GFC, Aussie RMBS spreads averaged 20-30 basis points over. And today, the 90 day mortgage default rate sits at about 15 per cent and 25 per cent of US and UK levels, respectively, or roughly 0.6 per cent.
As I argue in this paper, the idea that government intervention in the RMBS market can engineer an exogenous easing in credit conditions is mistaken, because the RBA fully discounts these conditions in its conduct of monetary policy. Even if such an easing were possible, it would be capitalised into house prices, with no benefit to home borrowers.
posted on 02 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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Hockey’s Hindsight Heroes
Opposition Treasurer Joe Hockey has problems staying on message:
Mr Hockey’s most controversial remarks were suggesting that the Rudd government would have been justified in cancelling this year’s tax cuts.
“The honest answer is there would have been a legitimate justification for the government to say our debt, our recovery, our economic recovery will be slower if we are running a big deficit and I think it should’ve been considered as part of the mix.”
Mr Hockey noted that it would have been hard for the Liberal Party to support the removal of the tax cuts. Earlier this year, Mr Hockey had argued for the government to bring forward tax cuts.
There is, of course, a case for not proceeding with the tax cuts. Because they are unfunded, the tax cuts are equivalent to a future tax increase and subject to the same Ricardian equivalence critique as discretionary government spending. However, one suspects that this is not the case Hockey has in mind. Instead, Hockey is an unreconstructed, Costello-style revenue-hoarder:
Mr Hockey said that, if he had his time again, he would have better explained the Future Fund, which Mr Costello regarded as one of his crowning achievements. “I would have set up the other funds earlier: the higher education funds for infrastructure and the health and hospitals fund,” he said.
Like Costello, Hockey does not seem to understand that these funds are simply deferred government spending.
posted on 01 July 2009 by skirchner in Economics, Fiscal Policy
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Ricardian Equivalence, with a Vengeance
Dave Rosenberg, on the effectiveness of US fiscal stimulus efforts:
In April, total stimulus from the federal government to the personal sector, in the form of tax reduction and increased benefits, came to $121 billion at an annual rate. But that month, in nominal terms, consumer spending rose the grand total of $1 billion. Then we found out on Friday that in May, the total stimulus from the Obama economics team came to $163 billion at an annual rate, and consumer spending increased by a measly $25 billion (again at an annual rate). The big story is that the personal savings rate surged again to a new 16-year high of 6.9% from 5.6% in April and 4.3% in March. This is a repeat of the fiscal impact from the tax relief a year ago when the savings rate jumped from 0.2% in March 2008 to 4.8% in May 2008. This is what economists refer to as “Ricardian equivalence” — the money from Uncle Sam goes into the coffee can instead of being used to buy more coffee.
So let’s get this straight, the future taxpayer is being asked to contribute to a policy today that is aimed at perpetuating a consumer cycle — and yet for every dollar that is coming out of Washington to support a 70% consumption/GDP ratio, it is getting barely more than 8 cents worth of new spending activity. In real terms, as was the case with the tax rebates of just over a year ago, the real impact is on the savings rate, and it is very clear that not even the most aggressive monetary and fiscal policy since the 1930s is going to stop consumer spending in volume terms from rolling over in the second quarter.
posted on 30 June 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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When Behaviouralists Attack
Scientific American notes the penetration of the Obama Administration by behavioural economics:
The arrival of the Obama administration marks a growing acceptance of the discipline. A group of leading behavioural scientists provided guidance on ways to motivate voters and campaign contributors during the presidential campaign. Cass Sunstein, a constitutional scholar who wrote the well-regarded book Nudge, which President Barack Obama has reportedly read, was appointed head of the Office of Information and Regulatory Affairs, which reviews federal regulations. Other officials who are either behavioral economists or aficionados of the discipline are now populating the White House.
Alan Wolfe comments on the reactionary and anti-Enlightenment foundations of behaviouralism in this podcast with Russ Roberts.
Meanwhile, Chris Dillow uncovers a ‘heartbreaking work of staggering genius, a brilliant illumination of class relations, post-modernism and the crisis of the left.’
posted on 29 June 2009 by skirchner in Economics, Financial Markets
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Greenspan on the Political Allocation of Capital
Alan Greenspan, on the quantitative channel for crowding-out:
Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of “creative destruction” – the private sector market competition that is essential to rising standards of living. This paradigm’s reputation has been badly tarnished by recent events. Improvements in financial regulation and supervision, especially in areas of capital adequacy, are necessary. However, for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.
posted on 26 June 2009 by skirchner in Economics, Fiscal Policy, Monetary Policy
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Are Americans All Keynesians Now?
While policymakers around the world may be sold on the effectiveness of discretionary fiscal stimulus, the public remain more skeptical. The disconnect between official and public sentiment is important, because confidence is meant to be one of the channels through which stimulus spending works to support economic activity. We have previously pointed to US survey data on consumers’ evaluation of macroeconomic policy, which calls into question the effectiveness of fiscal stimulus efforts.
A WaPo-ABC News poll directly asks whether economic stimulus has or will help the economy. A net 52% see stimulus as helpful to the economy, while 46% view stimulus as not helping, either currently or prospectively. At the same time, 87% of respondents were ‘very’ or ‘somewhat concerned’ about the federal budget deficit. A majority (54%) also favour ‘smaller government, fewer services’ to ‘larger government, more services.’ The majority view expressed in these polls is consistent with a Ricardian interpretation of the effectiveness of fiscal policy. The poll also sheds light on why President Obama remains popular. Most respondents still see Obama as ‘a new-style Democrat who will be careful with the public’s money’ rather than ‘an old-style, tax-and-spend Democrat.’
posted on 25 June 2009 by skirchner in Economics, Fiscal Policy
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