Archive for the ‘Economics’ Category

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Those terrible “d” words

Wednesday, November 26th, 2008

There is no denying that the rhetoric that the Prime Minister has employed to describe the current global economic situation is strong, and the Rudd Government’s actions so far have been tailored accordingly. Over a month ago, when announcing his government’s $10 billion package of stimulus handouts, Rudd described the current crisis as “the greatest global financial crisis since the Great Depression”. This assertion is not entirely unjustified when one considers the extraordinary ramifications we have observed so far, but on the other hand, the Prime Minister was walking on shaky ground by linking the current financial crisis to the word “depression”. It’s something like rhetorical guilt by association. Depression? Did he really say depression? As in, the Great Depression? And, so on.

In short, Kevin Rudd’s personal approach to the economic situation as Prime Minister seems to revolve around straight talking, with a cautiously pessimistic bent. If things could get worse, then the Prime Minister seems to want to make it clear to everyone that they should be prepared for things getting worse. Rather than trying to create an oasis of blissfully ignorant confidence at the head of government – something the Howard Government probably would have done in the same position – the Rudd Government seems hellbent on highlighting the uncertainty that does exist. Nobody really knows just how events are going to play out. Just like other governments and indeed commentators, Federal Labor does not really know if the current crisis is going to take several months or several years to peter out.

It is in this sort of environment that the Prime Minister has elected to finally entertain that great Australian shibboleth for economic “incompetents” – the dreaded budget deficit. Samantha Maiden has the details in The Australian, and the full statement delivered by Rudd to parliament is here:

Kevin Rudd has conceded for the first time that Australia’s budget may have to go into “temporary deficit” if the global financial crisis worsens.

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“If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that Australian revenues will reduce further,” Mr Rudd said.

“Under those circumstances, it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.”

…

“In fact, failing to do so would irresponsible – and would sacrifice growth and jobs. But any such action would need to be consistent with the discipline of maintaining a surplus across the economic cycle.”

It is probably well past time for one of the most misguided economic conventions of the modern era to be buried. Anybody who owns a home or invests in property will be able to tell you that it often makes sense to borrow money in order to invest for the future. Anybody who runs a business can tell you that it sometimes make sense to borrow in order to grow the business, even if the current bottom line is not healthy enough to support such a step. The doctrine that suggests that budgets deficits are always “bad” effectively is also suggesting that investment for the future should be mercilessly limited, and that important projects too big to be funded by governments should be dumped.

As long as the Rudd Government takes care to ensure that any funds borrowed are spent wisely and on measures that are effectively certain to benefit the national economic situation, I personally see no problem with the government going into deficit. It would obviously amount to poor governance to consistently deliver budget deficits, but the odd one, if put to proper use, can definitely work to the greater benefit of the nation.

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Posted in "Economic Conservatism", Economics, Rudd Labor Government | 11 Comments »

Should Federal Labor consider cutting GST?

Monday, November 24th, 2008

In the current global economic environment, governments across the world are looking for ways to stimulate spending in their domestic economies. Consequently, the beleaguered British Government is set to temporarily cut the rate of their VAT (value-added tax) for a one to two year period, in the hope that it will stimulate spending in the immediate term. Toby Helm and Heather Stewart have the details that are at hand for the moment in The Guardian:

Alistair Darling will make a high-risk bid to lead Britain out of recession tomorrow, when he is expected to cut VAT and entice the British people to go on a pre-Christmas spending spree.

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Last night, as Darling put the finishing touches to the most important financial statement of Labour’s 11 years in government, there was speculation that he might slash the rate to 15 per cent [from 17.5 per cent], a move that would cost the government about £12.5bn a year.

This is an interesting development because it raises a few questions about the Australian Labor Party’s stance on the local GST. Historically, of course, Labor opposed the introduction of the GST at the 1998 election and fought a second unsuccessful election campaign in 2001 on a policy of GST “rollback”. Now that the GST has been in place for practically a decade and is firmly part of the architecture of federal-state funding, it would appear unlikely that the Rudd Government would seek to manipulate it at this juncture. Cutting the rate of GST in Australia would have considerable implications for state funding, given that all revenue generated by the tax flows through to the state governments. In short, for the rate of GST to be reduced, one would have to think that the existing federal-state funding framework would need to in the least be padded by some non-GST contingency funding from the Federal Government – or perhaps reframed altogether.

The other part of the puzzle worth considering is whether lowering the rate of GST would realistically have any effect on consumer spending at all. Let’s say that the rate of GST was cut by the Federal Government tomorrow from 10% to 5% – an astronomical 50% cut. Consumers presumably would have more money in their pockets every week as a result of their reduced weekly spending – money that may or may not then be reinvested in more goods and services, stimulating the economy. Given present consumer confidence and the vast uncertainty that still exists with respect to the global economic situation, it is questionable as to whether cutting GST would actually result in a positive outcome, a fact that Peter Mandelson points out in the Guardian article with respect to the proposed British VAT cut.

In any case, it would appear that the Rudd Labor Government could not realistically afford a rate cut of anything like that magnitude without going into deficit. The revenue generated for the states from the GST in 2008-09 was projected at $45.5 billion, meaning effectively that funding such a 50% GST rate cut would cost in the ballpark of $22.75 billion; a figure already exceeding the now optimistic total budget surplus of $21.7 billion projected back in the May Budget. Without some credible evidence suggesting that cutting the rate of GST even by a small amount is definitely going to deliver results, it would be a highly risky endeavour for the government to pursue it.

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Posted in Economics, Labor Party, Rudd Labor Government | 2 Comments »

Mister fast money schmicko no longer quite so schmicko

Wednesday, November 19th, 2008

In a political sense, it is increasingly looking like the global financial crisis has been just what the doctor ordered for British Labour and in particular Prime Minister Gordon Brown. As The Guardian reports today, a Mori poll has Labour trailing the Tories by only three points now, an amazing seventeen point improvement on what polls were suggesting a few months back before the worst of the crisis hit. For someone like myself, who lived through an extended period whereby it seemed that David Cameron and the Tories were interminably ahead of the Prime Minister by ten points or more, it’s really all quite astonishing.

So why the shift? There is surely a multitude of reasons, but I am going to offer some observations about the comparative public images of Gordon Brown and David Cameron. Brown comes across in the media as a dour, boring, wonkish man. I dare say that a majority of Britons descend into a microsleep the very moment that he appears in front of them on the television, the very second that his voice starts droning across the airwaves in earshot. While the going was good economically, twelve months or so ago, it is probably fair to say that Brown was not really in tune with the entrepreneurial energy of the times. The British people wanted boldness; they wanted action. They were not adverse to a little risk taking by their government. This is of course where the poll success of David Cameron comes in; a young business type actually willing to embrace new age concerns like global warming. He represented a fresh change and a clean break from the past. Sure, he was probably a little wet behind the ears compared to his rival, but he promised to deliver the energy that the Prime Minister seemed to lack.

Now, the tables have turned. We have entered troubling economic times, when suddenly ordinary people are interested in what dour, boring wonks have to say. They are concerned for their future. They are worried about their employment prospects. They are no longer in the mood to take financial risks, or to take a punt on an unknown quantity like David Cameron. They want surety and certainty, and someone who has a lot of experience behind them and the intellectualism required to fortify the nation against the chaos of the global financial situation.

It would be an interesting exercise to plot the poll ratings of Gordon Brown against the FTSE over the last twelve months. And it will be interesting to see if Gordon Brown manages to surge to a lead in the polls over the next six months, on the back of his superior credentials with respect to the financial crisis that seems to currently have observers the world over in a bit of a tizz.

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Posted in Economics, UK Politics | No Comments »

Talking the financial crisis up and down

Saturday, November 15th, 2008

There can be no denying that Prime Minister Kevin Rudd and Treasurer Wayne Swan, in particular, have brought a concerted air of solemnity to their communications regarding the global financial crisis. It has become almost cliched for our leaders and media commentators to assert that these are “tough times that we are living in”, or to compare the recent machinations in our financial markets to Black Monday, the oil shocks of the 1970’s, or even the mother of them all, the Great Depression. The national mood is a heady brew of overstated pessimism and introspection, and few have the confidence to predict exactly how events will unfold in the future.

The importance of confidence for consumers and the world’s remarkably flaky financial markets can’t really be overestimated at this stage. This creates a bit of a conundrum for government; on the one hand, the situation should probably be talked up, in order to send positive signals out there to those willing to listen. On the other hand, the government needs to keep its mood in touch with that of the Australian people. The last thing the Rudd Government wants to do is engage in rank triumphalism over Australia’s position in relation to the financial crisis when a lot of people out there are hurting as a result of it.

It would seem that the Liberal Party is happy to send positive signals with respect to the financial crisis, and to wear on its sleeve any criticisms arising from it being out of touch (some would suggest this is its natural disposition). Shadow Treasurer Julie Bishop appeared on Channel Nine this morning suggesting that Rudd needs to be more positive in relation to the crisis, offering this hyperbolic vignette to support her case:

Ms Bishop said shopkeepers in an Adelaide shopping centre had sent her a clear message.

“A number of shopkeepers … said to me that every time the Prime Minister goes on the nightly news and says ‘it’s going to be tough and ugly and hard’, they know that sales will be flat the next day.”

Former Prime Minister John Howard sent the Rudd Government a similar message on Fox News yesterday, urging the government to steer clear of comparisons of today’s crisis with the Great Depression. He is not without a point, but clearly the line upon which the government needs to walk here is fraught. Federal Labor is getting hit by the Opposition and some punters for talking the crisis up. If it talks the crisis down while the problems related with the crisis remain, it will also get hit by Opposition and the punters.

Rudd and Swan, knowing that this truly is a global financial crisis and that for the most part it is beyond Australia’s control, are erring to the negative side at the moment. Although we could perhaps do without some of the “Great Depression” hyperbole, I am not sure this is necessarily a bad thing given the reality of the situation that Australia faces. When the United States sneezes, we need to do what we can and hope for the best, because we simply don’t have the economic equivalent of an influenza vaccine on hand.

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Posted in Economics, Rudd Labor Government, Turnbull Opposition | 6 Comments »

A great big blob of ego speaks

Wednesday, October 15th, 2008

That’s all I could see when in the middle of A Current Affair this evening, the head of Malcolm Turnbull appeared suddenly to deliver this somewhat nebulous message to the nation. It’s fascinating that Turnbull seems to already think himself the Prime Minister elect after less than a month in the job; as well as the right person to be lecturing the nation on the causes of the financial crisis the world finds itself in. Of course, true to form, he could not resist the opportunity to have a half-hearted jab at the government during his address:

Regrettably, Mr Rudd’s Government missed the warning signs at the beginning of the year and talked up inflation, and consequently interest rates, at precisely the wrong time.

Eh? Regrettably, it seems the Turnbull Opposition didn’t really have anything to say to the nation in this instance that necessitated a public address, apart perhaps from satisfying the Opposition Leader’s ego. Rudd’s address to the nation explained the stimulus package his government was introducing, and neglected to make any petty digs at his political opponents. Nor did the Prime Minister take the opportunity during his address to attack the Liberal Party for the inflationary snake’s nest it left behind when it left office last year. That’s called statesmanship, see. Someone should inform the Member for Wentworth that getting your mug on television in primetime does not in itself constitute statesmanship.

The Turnbull Opposition have already agreed to support the government’s stimulus package without amendment or suggesting any alternative measures. In other words, as is apparent if one reads the transcript of Turnbull’s address, this stance doesn’t really leave much for the Opposition to say to the nation. This leaves me thinking… has there ever been a televised address to the nation by an Australian politician with less substance or purpose than this one from Malcolm Bligh Turnbull?

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Posted in Economics, Rudd Labor Government, Turnbull Opposition | 2 Comments »

The Rudd Government’s bribe program… I mean stimulus package

Tuesday, October 14th, 2008

I must admit to having some mixed feelings about the Rudd Labor Government’s $10.4 billion stimulus package, announced today. On the one hand, there is certainly quite a bit to like about the package from a Labor point of view. It specifically targets those who are likely to be hardest hit during the trying economic times we find us in; namely low income earners, pensioners, and people trying in vain to buy their first home. It is courageous and decisive, and in effect has forged a bipartisan approach to the financial crisis. Politically speaking, it will no doubt be a big winner, particularly with Christmas fast approaching.

I also have some concerns about the package. Firstly, it must be noted that the stimulus package is being delivered for the most part in the form of lump sum payments to the electorate. In the past I have been highly critical of the Howard Government when it has delivered “taxation relief” through the bundling out of ad hoc lump sum payments, and thus it is only fair for me to call Federal Labor out accordingly on this occasion. Lump sum payments to targeted interest groups raise some serious questions about political expediency, and also whether or not the government is actively encouraging the electorate to spend the stimulus payments frivolously by delivering them in such a throwaway form. For a lot of people, handouts like these from the government feel like a free, one-off bonus payment, that it is okay to completely splurge away. These sorts of payments do not feel like “earned money” to such people. They feel like obligation free gifts, and effectively serve to distort the normal consumption cycle for taxpayers.

I suppose one rebuttal to this line of argument would note that the world is experiencing a financial crisis right now, and that therefore a program of lump sum payments now is justified. If the stimulus package was spread out as a form of weekly or fortnightly additional allowance payments to pensioners and low income earners, it would likely not produce the desired effect, which is to stimulate the economy now. This rebuttal leads us to a second possible criticism of the stimulus package; is it really necessary now? The Reserve Bank has just cut the cash rate by one percent. The stock market has been a bit up and down over the past couple of weeks, but there are signs just over the last couple of days that the situation is stabilising. Are we really in such a dire situation at the moment that blowing half the budget surplus on a series of handouts is justifiable? I can’t say I am too sure either way, but in the very least, it is questionable.

The third potential negative point that I think is worth considering with the stimulus package relates to our old friend, interest rates. It is fascinating to me how quickly the nation has apparently moved from a mode of economic operation where the government is actively trying to reduce inflation, to one where the government is frantically trying to stimulate growth through arguably inflationary policy measures. It is a point that has been alluded to by Opposition Leader Malcolm Turnbull, who seems to want to have a bob each way by pledging his support for the package but foreshadowing possible repercussions for inflation:

Opposition Leader Malcolm Turnbull backed the strategy and said it would help cash-strapped pensioners but noted it was fiscal concerns, not compassion, that had prompted the government to act.

He also questioned whether existing homeowners might end up bearing the brunt of the bonus for low-income Australians.

“We trust that the government has taken into account advice from Treasury and considered the impact that this stimulus may have on the Reserve Bank’s ability to continue reducing interest rates,” Mr Turnbull said.

So overall, it’s great that these payments look like they are going to go to the right people (for a change!), but it is almost impossible to deny that these lump sum payments have been inspired by a prominent chapter in the Howard/Costello book of economic management. Not to mention a prominent chapter in the Howard/Costello book of election-winning pork barrelling measures. That aspect of this stimulus package, even if it is somewhat unintentional, absolutely galls me.

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Posted in Economics, Rudd Labor Government, Tax | 12 Comments »

Paul Krugman wins Nobel Prize

Monday, October 13th, 2008

It has been announced this evening that Economics Professor and New York Times journalist (but is that the right order?) Paul Krugman has won the Nobel Prize in Economics. There is some good background information on Krugman and the specific aspects of his work that won the prize at the Nobel Foundation site here.

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The Nobel Museum in Stockholm


Of particular interest is this succinct scientific background paper [PDF], which gives a great overview of Krugman’s contributions to trade theory for all of us lay-economists. The introductory paragraphs excerpted below paint a good high-level picture of trade theory prior to the contributions of Krugman and his likeminded colleagues in the field: 

As of the mid-1970s, trade theory was based on the notion of comparative advantage. Countries were assumed to trade with each other because of differences in some respect – either in terms of technology, as assumed by David Ricardo in the early 19th century, or in terms of factor endowments, according to the Heckscher-Ohlin theory developed in the 1920s. The latter was exposited by Bertil Ohlin in his 1933 monograph Interregional and International Trade; Ohlin was awarded the 1977 Economics Prize for his contributions to trade theory.

These theories provided good explanations of the trade patterns in the first half of the 20th century. But as many researchers began to observe, comparative advantage seemed less relevant in the modern world. Today, most trade takes place between countries with similar technologies and similar factor proportions; quite similar goods are often both exported and imported by the same country. At least among the richer countries, intra-industry trade – whereby, for instance, a country both exports and imports textiles – came to dominate relative to inter-industry trade – whereby, for instance, a country exports textiles and imports agricultural products.

I recommend having a full read of the PDF – interesting stuff. Lord knows in today’s sport and entertainment-obsessed world, we do not honour the people who achieve great academic success nearly enough.

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Stockholm by night.
   

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Posted in Economics | 3 Comments »

The OECD gives Nathan Rees a nudge

Friday, October 10th, 2008

With respect to the incredibly destructive electricity privatisation debate in New South Wales, I remain a fence-sitter, at least to some degree. I was not convinced by the arguments that were put forward by the former Premier and former Treasurer Michael Costa in support of the sell-off, nor the arguments of those opposing it. In an ideological sense I do not believe there to be a simple answer to the questions raised by the associated issues in this case. The old left/right dictums of “state ownership” and “private ownership” can not simply be applied glibly to complex situations such as this one, no matter what the nation’s rigid ideological warriors might continue to believe.

It’s probably worth considering the politics of this for just a moment. The Rees Labor Government is in a spot of bother, given that its former leadership team was determined to push the privatisation through, with or without the support of the NSW Labor Party. With Nathan Rees enjoying only a tenuous command of the party organisation, he lacks the political capital to defy the rump of the party on this issue, as Iemma and Costa bravely (and stupidly) tried to do. This leaves NSW Labor looking like a bit of a shambles, with the whole issue shelved once again for now. Of course, unless the government can turn things around rapidly over the next year or two, the smart money in 2011 will definitely be on the Liberal Party returning to power in New South Wales, as unsavoury as that is for Labor supporters like myself. If and when that happens, it is likely that electricity privatisation will be back on the agenda anyway, and this is something that the Rees Government needs to consider carefully.

On balance, from what I have read, I do believe that a partial sell-off of the state’s electricity assets probably makes sense for the people of New South Wales. On the other hand, I don’t think any person within the Labor Party has yet cogently argued their case to the people of this state or indeed the party’s rank and file. It’s interesting therefore to note this excerpt from the OECD’s policy brief [PDF] associated with its Economic Survey of Australia 2008 report (pp. 8-9):

The implementation of a competitive domestic energy market needs to be accelerated, with companies still under government control privatised and the ceiling on electricity retail prices removed. Public control over electricity companies is neither necessary for securing power supply nor a guarantee of efficiency. Electricity prices have risen faster in New South Wales, where there is still a public monopoly, than in other states in eastern and south-eastern Australia since the creation of the National Electricity Market, whereas productivity gains have been smaller.

So where to now on the electricity industry Premier Rees? If anywhere at all?

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Posted in Economics, Iemma Labor Government, Rees Labor Government | 5 Comments »

More interest rates gubbish in the media

Monday, October 6th, 2008

With an interest rate cut all but announced for tomorrow, I have been bemused to observe the public debate on interest rates once again focus on a red herring. Treasurer Wayne Swan has taken the brave and perhaps politically unusual step of declining to demand that Australia’s banks pass on the hypothetical interest rate cut to consumers. Shadow Treasurer Julie Bishop has taken precisely the opposite tack, criticising the government for not demanding that the banks pass on the cuts:

Reserve Bank governor Glenn Stevens has reportedly told Prime Minister Kevin Rudd that squeezing the banks too hard could make it unprofitable for them to lend and push the Australian economy into recession.However, opposition treasury spokeswoman Julie Bishop said passing on the full RBA cut would help keep people in jobs and the Australian banking sector stay strong.

“One of the most important ways to keep our financial sector strong is to ensure that Australians keep their jobs so that they can pay off their mortgages … their bank loans,” she told reporters in Perth.”

And that is why if there is an interest rate cut tomorrow it should be passed on in full so that people can keep their jobs and keep paying off their financial obligations.”

This debate raises some interesting questions about what Commonwealth Treasurers should and shouldn’t do, or perhaps more interestingly, what they realistically have the influence to do. Should Wayne Swan really be getting on the blower, as Julie Bishop seems to be suggesting, to the chiefs of the big five tomorrow and demanding that they immediately pass on the hypothetical cut to consumers? Does Julie Bishop, a so-called economic rationalist, have so little faith in the market that she feels the Treasurer needs to instruct individual private organisations on how they run their business? Put simply, it is an absurdity.

There are three points worth making here in rebuttal to Bishop’s foolishly populist demands:

1) It is not the Commonwealth Treasurer’s role to attempt to run the business of Australia’s big five banks by demanding that certain monetary policy actions be taken;

2) The Treasurer’s views are probably the least of the concerns of Australia’s big five. They are businesses answering to their customers and shareholders, not the fiefdoms of the Treasurer. here Any views that Treasurer Swan attempted to impose upon them would almost certainly be ignored;

3) It is almost a certainty that one of the big five will elect (if not immediately, than in the relatively short-term) to cut rates and seek to make their offerings more attractive to consumers. When this happens, there is a pretty good likelihood that the others will follow suit in due course.

This is not a good start from Bishop. One wonders whether the Turnbull Opposition is going to suffer for not having someone who can reliably score the odd point (e.g. the Opposition Leader!) against Swan opposing him in the Shadow Treasury.

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Posted in Economics, Interest Rates, Rees Labor Government | 4 Comments »

The oft-maligned Bill Gates on “creative capitalism”

Tuesday, September 30th, 2008

The August 11 edition of TIME Magazine featured philanthropist and Microsoft founder Bill Gates on the cover, and included a somewhat interesting article by the man himself on the topic of “creative capitalism”. As arguably one of the greatest individual beneficiaries of the capitalist system in the twentieth century, I suppose that we should not be surprised to hear that Gates believes that capitalism does have the potential to lift the third world out of poverty and into the marketplace. On the other hand, it may be surprising to some to hear that one of the most successful in-practice exponents of market domination ever believes that capitalism should be bent to meet the needs of the less unfortunate.

This passage from the article sums up Gates’ philosophy quite succinctly (p.28):

As I see it, there are two great forces of human nature: self-interest and caring for others. Capitalism harnesses self-interest in a helpful and sustainable way but only on behalf of those who can pay. Government aid and philanthropy channel our caring for those who can’t pay. And the world will make lasting progress on the big inequities that remain – problems like AIDS, poverty and education – only if governments and non-profits do their part by giving more aid and more effective aid. But the improvements will happen faster and last longer if we can channel market forces, including innovation that’s tailored to the needs of the poorest, to complement what governments and nonprofits do. We need a system that draws in innovators and businesses in a far better way than we do today.

In short, he is something of a modern-day socialist. Gates cites C.K. Prahalad’s work The Fortune at the Bottom of the Pyramid (which sounds like an intriguing read!) in formulating his thoughts in the article, which revolve around the fact that there are many markets all over the world that the free market system has essentially looked over. Effective markets have not arrived in some impoverished developed countries, and the blame for this can clearly not just be laid at the feet of the despots who lead some or perhaps many of these places. Free-ish markets have failed to deliver wealth to the world’s poor over the last few decades, and clearly need more of a push from the public and non-government sectors.

It is deeply ironic that despite the fact that Gates is almost universally maligned today as the former leader of the world’s least cool software company, the work he has done in his industry and is now involving himself in is quite frankly invaluable to the world at large.

ELSEWHERE: There’s a video featuring Gates’ thoughts on the topic here.

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Posted in Economics | 4 Comments »

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