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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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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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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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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When the Guano Runs Out

A RBA research paper obtained through FOI advocates an offshore sovereign wealth fund, although the story seems to contain some editorialising by Paul Cleary, who thinks Australia is just a bigger version of Timor Leste. Liberal MP Paul Fletcher seems to think Australia is just a bigger version of Naru:

More fundamentally, natural resources are finite. When they run out, the money will stop flowing. So we should make sure we put some of the money aside – rather than spending it all now.

In our own region, the micro-state of Nauru offers a sobering example of the folly of assuming that the good times will last forever. It used to have large reserves of guano, used to make fertiliser. With only a few thousand people and a steady flow of mining royalties, it was in a fortunate position.

But the money was largely frittered away. Then the guano ran out – and Nauru had little to show for decades of mining.

Resources are not finite in any economically meaningful sense. The Coalition seems to think that SWFs are a great idea once government debt is paid off (they set up the Future Fund after all). I make the case against further use of SWFs in this op-ed. Governments that are not prepared to commit to binding fiscal responsibility legislation cannot be trusted with SWFs.

posted on 28 March 2011 by skirchner in Economics, Fiscal Policy

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Sovereign Fiscal Responsibility Index

Australia is number one (meaning we hit the wall only after 40 years, as opposed to being broke right now). The United States sits between Italy and Hungary.

These are the variables:

Fiscal Space: An analysis of the additional amount of debt a country could issue before it is likely to face a fiscal crisis. Compares a country’s weighted-average debt level to the estimated maximum debt level a country could carry.

Fiscal Path: A projection of a country’s future levels of debt. The measure uses a projection of a country’s weighted-average debt level every year until 2050, using those figures to then calculate how long it takes a country to meet its maximum debt level.

Fiscal Governance: A rating of a country’s spending rules, transparency about fiscal policy making, and whether those rules are actually enforceable.

posted on 24 March 2011 by skirchner in Economics, Fiscal Policy

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How Big Are Fiscal Multipliers?

For an open economy with a flexible exchange rate, zero to negative. (HT: Scott Sumner).

posted on 17 March 2011 by skirchner in Economics, Fiscal Policy

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An Independent Commission of Budget Integrity

The Business Council of Australia has included a report by Stephen Bartos making the case for an independent Commission of Budget Integrity in its pre-Budget submission to the government. Bartos references a similar proposal by Robert Carling and I on the subject, as well as earlier work by Nic Gruen, which drew on a 1996 proposal by Larry Ball when Larry was visiting the RBNZ.

The report does something we did not do, which is to cost the proposal. Bartos puts a 30-40 member commission with two executives and a board at $10m a year. To put this in perspective, it is less than the extra $15m the ABS wants to increase the frequency of the CPI from a quarterly to monthly release.

posted on 15 February 2011 by skirchner in Economics, Fiscal Policy

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Sell the Gold Stock, Burn the Gold Bugs

Ed Truman makes the case for the US Treasury to follow the IMF and offload its gold stock:

the US Treasury holds 261.5 million fine troy ounces of gold. The government has been sitting on that gold since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340 billion. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

If the United States were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2.25 percent of gross domestic product. Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

This would of course be incredibly lazy public policy, but should nonetheless give gold bugs pause. As I have noted previously, there is a certain irony in people who fear an over-supply of money taking refuge in an asset in which governments hold substantial stocks and for which the price is arguably in a stock rather than a flow equilibrium.

posted on 22 October 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Gold, Monetary Policy

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Peter Reith’s Triumph of Hope Over Experience

Robert Carling and I recently argued that a parliamentary budget office was the wrong model for an improved fiscal responsibility framework in Australia. Former federal minister Peter Reith has an op-ed in today’s Australian arguing for a PBO, but his review of overseas experience does not inspire confidence:

Hopefully, Australia’s PBO will not have the rocky start that the Canadians have had. Only recently, while I was in Canada, former deputy minister of finance Scott Clark wrote that the PBO had been an experiment in transparency and accessibility “that was doomed from the start”. Clark told me it was ironic that the Conservatives established the PBO in 2008, then undermined it from the start. The big problems have been a lack of independence, the failure to properly resource the PBO and the failure of government departments to provide necessary information. Clark says the PBO should be appointed and dismissed by parliament, not by the prime minister. It should be adequately resourced and have access to the same information as the auditor-general.

Carling and I have argued for an independent statutory Fiscal Commission, with Commissioners appointed in consultation with the states in much the same manner as the ACCC Commissioners. This was a theme I pursued at the recent Conference of Economist panel on Monetary and Fiscal Policy Interactions organised by Jan Libich from La Trobe University. The papers from the panel will appear in a future issue of Economic Papers.

posted on 05 October 2010 by skirchner in Economics, Fiscal Policy

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Why the US CBO is the Wrong Model for Australia

Robert Carling and I have an op-ed in today’s Australian arguing that a parliamentary budget office modelled on the US Congressional Budget Office is the wrong model for reforming Australia’s fiscal policy framework.

I will be discussing these issues as part of a panel at this year’s Australian Conference of Economists on the topic of ‘Monetary-Fiscal Interactions: How to Improve Policy Outcomes.’ Other panellists include Don Brash (ex-RBNZ), Jacopo Cimadomo (ECB), Carl Wash (UCSC) and Jan Libich (La Trobe).

posted on 21 September 2010 by skirchner in Economics, Fiscal Policy

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The Broken Windscreen Fallacy

The policies the current caretaker government would like to emulate:

When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy. Other than that, it was a screaming success.

posted on 02 September 2010 by skirchner in Economics, Fiscal Policy

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How Much Stimulus is Too Much?

Richard Epstein wants to know.

posted on 01 September 2010 by skirchner in Economics, Financial Markets, Fiscal Policy

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Fiscal Policy After the Election

Tony Makin argues in The Australian that:

Whichever side forms government, it will have to live with the legacy of the fiscal extravagance since October 2008. Just as present budgetary actions have implications for future economic activity, past actions have economic implications for the present and the near future.

Questions that will most likely arise during the term of the next government include the following: Why are long-term interest rates and the cost of obtaining funds from abroad continuing to rise? Why is private investment not improving as expected? Why is future economic growth now likely to be lower than otherwise? Why are inflationary pressures continuing to build?

The answer to each of these questions is the same. It’s either mostly, or partly, due to the excessive fiscal stimulus of the past two years.

My view is that activist fiscal policy in Australia and abroad will have negative consequences through a rather different channel: a negative wealth effect from increased government debt that will weigh on economic growth and consequently lower rather than raise long-term interest rates globally. I made this argument in a recent op-ed. Recent developments in global long-term interest rates have been consistent with this view.

For those interested, I will be discussing these issues as part of a panel at this year’s Australian Conference of Economists on the topic of ‘Monetary-Fiscal Interactions: How to Improve Policy Outcomes.’ Other panellists include Don Brash (ex-RBNZ), Jacopo Cimadomo (ECB), Carl Wash (UCSC) and Jan Libich (La Trobe).

posted on 30 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy

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