Treasury’s David Gruen highlights the role of Australia’s macroeconomic policy framework in sustaining the boom:
The Federal Governments of the 1970s were in direct control of all arms of macroeconomic policy, including the value of the exchange rate. When commodity prices were rising strongly, generating boom conditions in parts of the economy, it proved extremely difficult for governments of either political persuasion to impose sufficient restraint on other parts to deliver an appropriate outcome for the economy overall.
By contrast, the current macroeconomic framework has several elements that together represent a crucial improvement on the framework of the 1970s. These elements are: a market-determined exchange rate, a medium-term inflation target implemented by the Reserve Bank, a medium-term fiscal framework implemented by the Federal Government, and largely decentralised wage-setting arrangements.
A consequence of the current framework is that when commodity prices are high, the floating exchange rate is likely to have appreciated sharply, acting as a shock absorber, and reducing the expansionary effects of the terms of trade rise on the overall economy. As a consequence, there is a smaller role for ‘activist’ macroeconomic management - simply because much of the necessary restraint is imposed by the exchange rate.
The exchange rate plays its shock-absorber role primarily by imposing significant restraint on those parts of the traded sector, including parts of the manufacturing sector, which are not experiencing strongly rising prices for their output or are not directly exposed to the booming sectors of the economy…
In the longer term, the increasing numbers of people in the Asian middle classes, with disposable incomes to match, will generate rising demand for a range of Australian goods and services - whether they be a range of foodstuffs, Australian tourist destinations, or educational, financial and other professional services in which Australia has a proven track record. Indeed, this process is well underway.
My review of Paul Cleary’s book ‘Too Much Luck’ is up at The Conversation. The original review included a discussion of the role of the exchange rate which unfortunately hit the cutting room floor, but can be found below the fold. The review draws on a monograph by Robert Carling and I making the case against a sovereign wealth fund for Australia that will be published by CIS in the New Year.
The design of Making Work Pay plays off of mental accounting. One of Thaler’s findings is that people are more likely to spend money that they have filed in their “current income” mental account rather than their “assets” mental account—in other words, they measure their spending against the size of their paycheck instead of the size of their bank account. A lump-sum tax rebate feels like an increase in wealth and is more likely to be saved. A series of slightly bigger paychecks feels like an increase in income and is more likely to be spent.
That’s not what happened in practice, according to Sahm, Slemrod, and Shapiro. In a study of the 2009 stimulus, based on 500 telephone interviews, the authors found that only 13 percent of Making Work Pay recipients reported that the tax credit would lead them to increase spending. This was just half of the 25 percent spend rate the researchers found for the traditional lump-sum tax rebate in President Bush’s 2008 stimulus. Of course, 2009 was a worse economic climate than 2008, and that might have played a role in the change. To control for this, the researchers looked at one-time stimulus payments that went to retirees at the same time that Making Work Pay was going to working households. The retirees, too, reported much higher spending rates than the Making Work Pay households, who got their money in a steady drip.
The authors can only guess at what’s behind their results.
There are plenty of conventional and straightforward explanations for why MWP didn’t work that do not require any resort to behaviouralism. The problem with behavioural economics is that it is really anti-behavioural. Behaviouralists will resort to any ad hoc theory, except the one behavioural theory we already know that actually works: self-interested rational choice.
At the beginning of my first Economics I lecture at ANU in 1986, the lecturer told us that for the next three years we would be studying neo-classical economics. He helpfully suggested if we were interested in other schools of economic thought, we might want to enrol at another university. He went on to point out the significant earnings premium that ANU economics graduates then earned in the labour market. The implication was that these two facts were not unrelated. Not that we needed to be told. This is exactly what many of us had signed-up for. The subject had a 45% failure rate.
If the idea was to indoctrinate students, it failed in my case. I don’t consider myself a neo-classical economist, more a heterodox institutionalist, although I accept many fundamental neo-classical insights. You first have to study neo-classical economics to understand what you reject and why. Too many dismiss neo-classical economics without ever having understood it other than as a caricature.
This would seem to be the case with those students who staged a walk-out from Greg Mankiw’s class at Harvard, judging by their very silly open letter. Having taught from Mankiw’s introductory and intermediate texts, I can vouch for the fact that they are very balanced in their approach, as a good textbook should be. I teach from Cowen and Tabarrok’s principles text, which is more Hayekian than neo-classical, yet still very balanced. For example, it makes a conditional case for activist fiscal policy I would reject, but it is important that students understand the thinking behind such policy.
It is far from clear what Mankiw’s critics want taught instead, but I suspect it is not economics.
Zero Bubble: A Theory of Asset Price Booms and Busts
The Philly Fed’s Business Review has a good article by Satyajit Chatterjee on why asset price booms and busts are a rational response to the uncertain return to innovation.
Stanford University misanthrope Paul Ehrlich will be giving a lecture at UNSW on Monday. You can read about Ehrlich’s humiliation at the hands of Julian Simon here and here.
My recent proposal to auction the right to permanently migrate to Australia was not new. I was treading a path already worn by Gary Becker and Julian Simon in the US, and Mark Harrison, John Logan and Wolfgang Kasper in Australia.
My proposal provoked predictable outrage from those unwilling to think about the idea for more than five seconds. The outrage is partly due to the failure to understand that an auction scheme is designed to facilitate migration, not prevent it. Wolfgang Kasper emailed me this recollection of his experience trying to sell the idea at a conference of economists in San Francisco:
It was a gathering of like-minded friends and some very prominent economists. We had been told that Milton and Rose [Freidman], who lived in their apartment nearby, would come to a morning session, when Milton (now 89) was fresh….Before long, Milton was in the midst of the debate, debunking some idea or elaborating and extending someone else’s. He was in fine form! At morning tea, we expected to say goodbye, but they said they had come for the day! “Rose and I are not a monument,” he said. “This is exciting work, it’s an elixir for Milton to mix with you people,” said Rose…
At one stage of the conference, when I spoke about the idea of selecting immigrants by worldwide auction, I was attacked by R. Rubin, a former Clinton Minister of Labor. He disagreed with me violently… “You just want to sell passports!” I had of course worked on this question in a consultancy report for New Zealand and stood my ground. Our argument became, in my opinion, a distraction to the main topic of our session. Friedman intervened: “I am sure that everyone here has understood Dr. Kasper’s rationale, and I agree with him. Robert, why don’t you think it over overnight. Give me a ring in the morning if you still disagree and I’ll buy you and Wolfgang the best breakfast in town, so we can argue it out some more!” This was vintage Friedman. Alas, Rubin never came back with his counterarguments, and I never was bought breakfast by Friedman.
Steve Jobs versus Bill Gates: The Entrepreneur as Hero and Villain
My appreciation of Steve Jobs, from this week’s Ideas@theCentre:
The passing of Steve Jobs saw a remarkable outpouring of appreciation for the man and the company he founded, and its many innovative products. The quality and user-friendliness of the products, combined with outstanding brand management and marketing, explain Apple’s loyal, even sectarian, following.
It is unusual for an entrepreneur to be appreciated this way. The obvious comparison is with Bill Gates. Gates and the company he founded have also had a profound impact on our everyday lives. Yet if Gates were to die tomorrow, it is hard to imagine people lighting candles outside computer stores. Gates is still seen as the grasping robber-baron of computing, even though his business strategies have been no more anti-competitive than Apple’s iTunes store. Gates’ success earned him prosecution by the US Justice Department and EU competition authorities for supposedly harming consumers.
Microsoft has bestowed benefits on the world rivalling those of Apple, but to the extent that Gates earns plaudits, it is mainly for his philanthropic efforts. Gates’ philanthropy is likely motivated, at least in part, by the desire to win the respect and appreciation he never found as an entrepreneur. Gates is a member of a group of billionaires who have signed up to the notion that they must give away the majority of their wealth. In Australia, Dick Smith threatens to ‘out’ the wealthy who fail to give, treading a fine line between moral suasion and public intimidation. Yet Gates has done more for humanity as an entrepreneur than he is ever likely to achieve as a philanthropist. It is only the entrepreneurship that made the philanthropy possible.
This is something Jobs understood very well. He showed little interest in philanthropy, not because he was uncharitable but because he recognised that it was not his comparative advantage. Jobs was consequently ‘named and shamed’ by the US philanthropic sector. This did not dent his reputation, perhaps because the public also recognised they were better served by his relentless focus on Apple’s product.
Adam Smith famously observed that ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.’ In 1985, Jobs told Playboy magazine ‘we think the Mac will sell zillions, but we didn’t build the Mac for anybody else. We built it for ourselves.’ Like Gates, Jobs was a self-interested and self-serving businessman and yet we are all much richer for their efforts.
Fresh from the longest ever jailing for civil contempt in a federal white-collar case in the US, Martin Armstrong is back. You can read a much longer profile of him and others like him in The New Yorker.
I don’t have much time for cycle theories. When I worked in financial markets I met numerous advocates for various cycle theories among fund managers. Strangely, I always wound-up being the one who paid for lunch. However, his story is an interesting one. I’m always suspicious when someone gets locked-up for an incidental crime that hadn’t taken place before the prosecutors got involved and when everyone in the case seems to have copped a plea bargain. Even if I’m completely wrong in my suspicions, there are plenty of other cases like it pointing to the decline of the rule of law in the US.
The Torygraph is all over Alessio Rastani and who can blame them for wanting to stick it to the pretentious Beeb over their seeming lack of quality control. Turns out that Rastani is a ‘talker not a trader’ with somewhat limited credentials on both counts. While his now famous opinions are highly questionable, this doesn’t exactly set Rastani apart from the vastly more credentialed talking heads routinely used by the Beeb and others to fill air time.
The sad fact is that a PhD from Oxbridge or an Ivy League school and a stellar career at the IMF and/or an investment bank more often than not yields a set of opinions and insights only slightly less dubious than those of Rastani.
Euromoney talks to former finance minister of the year, Paul Keating:
When Euromoney sought comment from the only other Australian ever to have received our award, the famously flinty Keating’s instinctive reaction was to tell us “to just fuck off” and “I couldn’t give a fuck”, while curtly offering what appeared to be travel advice, suggesting we visit some place called “buggery”.
