A Bad Government Gets the Media it Deserves
An unnamed federal cabinet minister, quoted in The Monthly’s profile of Australian editor-in-chief Chris Mitchell:
“The Oz doesn’t report the policy issues. It just reports that big business is shitting on the government, and Abbott is shitting on the government, it reports politics in any way that shits on the government, day after day.” Whether it’s climate change, asylum seekers, industrial relations, the schools building program or the National Broadband Network: “It’s just ‘let’s shit on the government’, every single fucking day.”
Words to live by.
posted on 11 August 2011 by skirchner in Politics
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Why Raising the US Debt Ceiling Was a Mistake
I have an article at The Conversation arguing that failure to raise the US debt ceiling need not have led to sovereign debt default:
It was the failure of US politicians to acknowledge the policy implications of long-run budget sustainability that decided the recent ratings action by Standard & Poor’s. Failing to raise the debt ceiling would not have led to debt default if US politicians had taken the necessary decisions to put the budget on a sustainable footing. Raising the debt ceiling kicks the problem down the road and creates the risk of a far more serious fiscal crisis in future.
A fiscally responsible US president would have joined with responsible members of Congress in refusing to sign a further increase in the debt ceiling. The Obama administration could have used the unthinkable prospect of debt default to force spendthrift members of Congress to reduce government spending and stabilise expectations for the future path of net debt that are currently weighing on economic growth.
Congress and the Administration know that if they lead the US to default on its obligations, the American people will sweep them from office. For politicians, incentives don’t come much stronger than that.
My CIS colleague Adam Creighton has been making similar points in Crikey, although I’m far better disposed towards quantitative easing than he is.
See also Jonah Goldberg, Wake Up and Smell the Tea.
posted on 11 August 2011 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Does Murdoch Own the Journal of Economic Literature Too?
Stephen Williamson reviews John Quiggin’s Zombie Economics:
I knew absolutely nothing about John Quiggin, until someone asked me to write a short review of Zombie Economics for the Journal of Economic Literature. The timing was good, as I was about to leave for Australia to give a plenary talk at the Australian Conference of Economists in Canberra in July. I could read the book on the plane (though a trip from St. Louis to Chicago would actually be sufficient) and might actually come across the man himself, or news of him, at the conference.
By the time I got to Canberra, I had read Zombie Economics, and had written a draft of my review which panned the damn thing.
The review we commissioned for the CIS journal Policy was a little more friendly.
posted on 04 August 2011 by skirchner in Economics
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Politicians’ Relative Pay and Fiscal Performance
I would call this evidence suggestive rather than definitive, but interesting nonetheless:
The chart below compares the pay of legislators in 13 countries with those countries’ fiscal space. The best “deal” for the taxpayer comes at the top left of the chart, where legislators are relatively low paid but the country has a large fiscal space. The worst deal comes at the bottom right of the chart, where pay is high but fiscal space low.
My CIS colleague Adam Creighton has suggested that politicians’ pay should be a fixed multiple of three times the median wage, ensuring that politicians’ incentives are aligned with those of the rest of the population. The linked chart suggests that this multiple is a little high by international standards. I would further modify Adam’s suggestion and tie politicians’ pay to a fixed multiple of the median real wage as an added anti-inflationary incentive.
Robert Carling and I have further argued that politicians suffer pecuniary penalities for breaches of our proposed fiscal responsibility legislation.
posted on 03 August 2011 by skirchner in Economics, Fiscal Policy
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The Real Cost of the CPRS Mk II
Ricardian Ambivalence highlights the real cost of the CPRS Mark II in the presence of political capital constraints:
The fact is the government can’t open a new tax battle while the carbon tax is taking all the oxygen. This is the hidden cost of the carbon tax. Not only will it do nothing to change the climate it is also crowding out a discussion of controversial but important policy debates.
The government’s apparent determination to die in a ditch over the CPRS Mark II is puzzling from a public choice perspective. There is nothing wrong with dying in a ditch for something worthwhile, but this is not typical behavior for politicians and begs the question why they don’t do it for something more worthwhile if they really are putting principle ahead of political expediency. Implementing the entirety of the Henry review would surely come at lower political cost and could even gain bipartisan political support.
Rudd and Turnbull realised they had to form a policy cartel on the CPRS to avoid it consuming them both. Neither wanted to fight an election on the issue. It was a bipartisan political conspiracy that nearly paid-off. A policy cartel is consistent with the median voter model. The CPRS Mk I would be operating today were it not for the coalition revolt against Turnbull’s leadership. Turnbull’s judgment that this would be electorally fatal to the Coalition was spectacularly wrong. Breaking the Rudd-Turnbull CPRS policy cartel destroyed Rudd and nearly won the Coalition the 2010 election.
posted on 01 August 2011 by skirchner in Economics, Politics
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Monetising the US Gold Stock
Monetising the US gold stock is a tried and true method of keeping the bond bailiffs at bay:
the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress.
Plenty of irony there for gold bugs.
posted on 30 July 2011 by skirchner in Economics, Financial Markets, Gold
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Are Australian Economists a Bevy of Camp-Following Whores?
I have an article at The Conversation on the results of a survey of the policy views of members of the Economic Society of Australia. Along with poorly worded questions, the survey suffers from a selection bias problem. The survey is arguably more representative of those ESA members interested in public policy than of economists more generally.
Judy Sloan beat me to the punch in commenting on the response to the minimum wage question. As Sloan quotes Jim Buchanan:
no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimum scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.
Except for the majority of ESA members, it seems.
UPDATE: John Tierney considers selection bias in the US academy.
posted on 26 July 2011 by skirchner in Economics, Politics
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Be Careful What Jim Grant Wishes For
A gold standard won’t do what Jim Grant says it will:
Supporters of the gold standard like to point out that since creation of the Fed in 1913 the dollar has lost 95% of its value. Well in 1913, the dollar was convertible into an ounce of gold at $20.86 an ounce. So while the dollar has lost 95 percent of its value, gold has appreciated even more rapidly than the dollar has depreciated. If gold had kept its value in 1913, its value today would be somewhere between $400 and $500 an ounce. Accept for argument’s sake the claim of supporters of the gold standard that the recent run up in the value of gold was caused by a loss of confidence in the dollar. Would it not be reasonable to conclude from that assumption that if the dollar were made convertible into gold, people would then start selling off their gold, the threat of dollar depreciation having been eliminated?
But wait. If people started selling off their gold, the value of gold would decline. If the real value of the gold fell from its current value back to its value in 1913 when the dollar was convertible into gold at $20.86, the value of would lose two-thirds to three-quarters of its value. We are talking about two or three hundred percent inflation. Does that make feel more confident about the value of your savings?
posted on 19 July 2011 by skirchner in Economics, Financial Markets, Gold
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Friedman Was a Hedgehog
John Cochrane: ‘economic events should be unforecastable, and their unforecastability is a sign that the markets and our theories about them are working well.’
posted on 16 July 2011 by skirchner in Economics, Financial Markets
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How the Financial Crisis Inquiry Commission Suppressed Dissent
Peter Wallison responds to the Report of the Democratic Staff of the House Oversight and Government Reform Committee:
The report of the Democratic staff of the House Committee on Oversight and Government Reform—although it attempts to call my conduct into question as a member of the Financial Crisis Inquiry Commission—actually indicts the Commission. The facts are these. From the outset of its “investigation” the Commission’s chair, Phil Angelides, was intent on reporting that the financial crisis was caused by greed, misconduct and lack of regulation of the private sector, exculpating government housing policy from any significant responsibility. Evidence of this can be seen in the fact that in December 2009—before any investigation had been done—Angelides handed the commission members a list of hearings that the Commission would hold over the succeeding 8 months. Those hearings focused on the private sector’s role in the financial crisis, and paid scant attention to the government’s role. This was fully in accord with the interests of the House and Senate Democrats, who were intent on establishing this narrative as a basis for enacting the Dodd-Frank Act, which sought to impose substantial new regulation on the U.S. financial system.
posted on 16 July 2011 by skirchner in Economics, Financial Markets
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Federal Election Betting Market Odds and Carbon Sunday
Simon Jackman updates federal election betting market implied probs. See if you can spot carbon Sunday!
Sadly, Malcolm Turnbull still doesn’t get it.
posted on 14 July 2011 by skirchner in Economics, Financial Markets, Politics
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GSE Debt: ‘Treasuries with Higher Yield’
Why worry about US Treasuries when they’re buried in agency debt:
The expansion of agency debt not only imposes risk and realized losses on taxpayers—we recall the $160 billion that the U.S. Treasury has been forced to put into Fannie and Freddie to prevent their financial collapse—it also increases the cost of Treasury’s direct financing by creating a huge pool of alternate government-backed securities to compete with Treasury securities, and thus increases the interest cost to taxpayers.
So although agencies are not “officially government debt,” they undoubtedly increase the required interest rates on Treasury securities, in my judgment, and thus increase the federal deficit. The greater the amount of agency securities available as potential substitutes for Treasuries, the greater this effect must be. As a manager of a major institutional investor told me recently, “We view Fannie and Freddie MBS as Treasuries with a higher yield—so now we own very few Treasuries.”
posted on 14 July 2011 by skirchner in Economics, Financial Markets
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Taxploitation II: Tax Reform for Incentive, Growth and Smaller Government
CIS has released a collection of readings Taxploitation II: Tax Reform for Incentive, Growth and Smaller Government. I have a chapter on capital gains tax, which updates an earlier policy monograph on the subject to reflect the outcome of the Henry tax review.
As I note in my chapter, the Henry review should have been an embarrassment to most Australian journalists writing on the subject of capital gains tax and tax expenditures. George Megalogenis characterised the Henry review as ‘cheeky’, which is as close as he comes to acknowledging that the review’s conclusions and recommendations invalidate most of what George has written on these subjects. Australian journalists have misread (or simply failed to read) the fiscal implications of the Treasury’s tax expenditure statements. They are certainly not alone in doing this, but that is no excuse.
posted on 13 July 2011 by skirchner in Economics, Fiscal Policy
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MNI-Deutsche Börse Economic Forecasting Competition – Final Round
Congratulations to Jos Theelen of the University of Amsterdam, who took out first prize in the MNI-Deutsche Börse Economic Forecasting Competition. Along with Daiwa Capital’s Mike Moran and myself, Jos was the only other person to place in two of the three forecasting rounds.
This was my first foray back into forecasting since the financial crisis and it was interesting to see that many of the pre-crisis forecasting relationships still hold. The final June round was particularly brutal, however, given the bearish turn in the US data.
Hopefully, MNI-DB will turn this into a regular event. There are too few independent, public tests of economic forecasting ability.
posted on 13 July 2011 by skirchner in Economics, Financial Markets
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Unhypothecating the Flood Levy
If your first pay packet of the new financial year is a bit lighter, it is probably due to the flood levy, the first discretionary federal tax increase in over a decade. Robert Carling wrote a paper for CIS in 2007 on the misuse of tax earmarking, of which the flood levy is a good example.
Tax increases should not come as a surprise following the unfunded fiscal stimulus of 2008-09. Announcing an unfunded fiscal stimulus is equivalent to announcing a future tax increase. It is just a matter of when the increased tax burden will have to be paid. The increase in household saving that accompanied the stimulus suggests that households understand this.
Announcing the details of the re-jigged Rudd-Turnbull CPRS at the end of the same week that many taxpayers will experience their first discretionary federal income tax increase in over a decade is a curious political choice to say the least. It can only add to the unpopularity of the new CPRS.
posted on 08 July 2011 by skirchner in Economics, Fiscal Policy
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