Monday, April 2, 2018

What would Jesus do about tax and government spending?

It’s Easter, so let me ask you an odd question: have you noticed how arguments about governments’ intervention in the economy – should they, or shouldn’t they – often rely on an appeal to Christ’s parable of the Good Samaritan?

No, me neither. Until I read a little book called, The Political Samaritan: How Power Hijacked a Parable, by Nick Spencer, of the British religion-and-society think tank, Theos.

This is my take on what I read.

Polling in 2015 by the British Bible Society found that 70 per cent of respondents claimed to have read or heard the parable, but in case you missed that day at Sunday school, I’ll summarise.

One day a lawyer trying to trap Jesus quoted the Old Testament law to “love your neighbour as yourself”, but asked, who is my neighbour?

Jesus replied with a story. A man was travelling down a road when he was attacked by robbers and left half-dead. A priest came down the road and saw the man, but passed by on the other side. So did a religious functionary.

But next came a Samaritan who took pity on the man, bound his wounds and took him to an inn, where he looked after him. Next day the Samaritan paid the innkeeper to look after the man until he was well.

Then Jesus asked the lawyer which of the three was a neighbour to the man who’d been robbed. “The one who had mercy on him,” the lawyer replied. Jesus told him, “Go and do likewise”.

Politicians have been using this parable to support their arguments at least since British evangelicals were campaigning for the abolition of slavery in the early 1800s. Martin Luther King spoke about the parable at length in his last sermon before he was assassinated in 1968.

George W Bush spoke about it, as did Hillary Clinton. But it’s been a particular favourite of the British Labour Party.

Early in his establishment of New Labour, Tony Blair said: “I am worth no more than anyone else, I am my brother’s keeper [an allusion to Cain and Abel in the Book of Genesis], I will not walk by on the other side. We are not simply people set in isolation from one another . . . but members of the same family, same community, same human race. This is my socialism.”

Blair’s successor as British prime minister, Gordon Brown, son of a Presbyterian minister, said “we are prepared to spend money to help the unemployed; we are not going to walk by on the other side, we are going to help them.’’

In the aftermath of the global financial crisis, Brown said: “In a crisis what the British people want to know is that their government will not pass by on the other side, but will be on their side.”

So, to politicians on the left, the Good Samaritan is the all-purpose justification for state intervention to help anyone anywhere with a problem. It’s about collective responsibility and collective action.

To a politician like Margaret Thatcher, however, it’s about precisely the opposite. The Good Samaritan was an individual; he saw someone with a problem and he acted to help them. He didn’t tell the government to do something about it.

People shouldn’t hand over to the state all their personal responsibility. Point one.

Point two: the Samaritan needed money to be able to help the half-dead man, and he had it. But the more we’re taxed, the less we have to discharge our personal responsibility to others.

So what was Jesus really saying? First, according to Spencer, he was reacting against the lawyer’s legalism.

Jesus was concerned with following the spirit of the law, not exploiting its letter. And he was saying the law of neighbourly love is the key commandment which, in cases of conflict, overrides other commandments.

The Samaritan was from an ethnic group the other people in the story despised. So neighbours aren’t just the people in our street, our friends, our fellow Australians, they’re everyone, including those we don’t know or don’t like. The parable is relevant to our treatment of other races and asylum seekers.

The world has changed a lot in the 2000 years since the parable was spoken, so I think we should be wary of assuming it speaks definitively about every modern practice. It doesn’t explicitly authorise compulsory state redistribution of income from rich to poor, nor is it condemned. It doesn’t even give the tick to organised charities.

Conservatives are right to emphasise that our personal responsibility for others is fundamental. But I think supporters of collective action may claim that it’s consistent with the spirit of the parable.
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Saturday, March 31, 2018

Competition isn't always as good as we're told

The banking royal commission has many sub-plots. Did you notice the one where a couple of the banks blamed their decisions to keep doing things they knew were dodgy on the pressure of competition?

A chap from Westpac didn’t argue when one of the inquiry’s barristers criticised it for paying “flex commissions” to car dealers arranging loans for people buying cars. The higher the interest rate the dealers could get their customers to accept, the higher the (undisclosed) commission Westpac paid them.

The Australian Securities and Investments Commission has decided to prohibit this practice from November. So why was Westpac persisting with it until then? Because, if it simply stopped doing it off its own bat, it would lose most of its business to competitors.

Another chap, from the Commonwealth Bank, gave a similar explanation for it continuing to base its commissions to mortgage brokers on the size of the loans they organised. If it stopped doing the wrong thing, he said, its brokers would switch to dealing with other banks.

But since it’s a relaxing long weekend, let’s not persist with such a blood-pressure raising subject as the behaviour of our lovely banks. No, let’s just have a calming philosophical discussion about the complications of competition in markets.

Economists like to give us the impression competition is a fabulous thing in any market, all upside and no downside. Competition is something you can never have enough of, they imply.

Don’t believe it. It’s certainly true that a market with no competition – a monopoly – isn’t a great place. Prices are high, service is bad, and when you complain to the company, no one gives a rat’s.

But it doesn’t follow that all competition is wonderful, nor that more is always better. Far from it.

The simple “neo-classical” model of markets assumes a large number of small sellers. The competition between them is so fierce that none of them dares charge a price that’s a cent more than the minimum needed to cover their costs (including the cost of the capital invested in the business, aka profit).

All sellers charge the same price, and if you try selling for a bit more, you sell nothing and go bankrupt.

In the real world, it ain’t so simple. There are various reasons for this, but a big one is the presence of economies of scale – the more you produce, the lower the average cost of what you’re producing.

This allows you to lower your price – which is good for buyers – but, as a consequence, sell a lot more, which is also good for you.

It’s scale economies that explain why so many of our real-world markets are the opposite of what textbooks assume: a small number of large sellers – known as oligopoly. The big four banks are a good example.

When you look at the behaviour of oligopolies you see competition isn’t as wonderful as it’s cracked up to be. Oligopolists compete fiercely against each other, but they compete mainly for market share, and try to avoid competing on price.

According to the economists’ basic model, however, low prices are the key benefit competition brings us. In reality, oligopolists prefer to keep prices and profit margins high by competing via marketing and advertising, including by “differentiating” their products.

Occasionally a firm tries to steal a march on its competitors by innovation – coming up with a product that’s clearly better than the others. Mainly, however, product differentiation involves superficial differences.

Economists preach the virtues of competition because they assume it gives consumers a wider range of products to choose from, which must be a good thing.

But with only a few sellers, competition tends to do the reverse, limiting the choice available. Each firm will have a product range remarkably similar to the others.

This is because the few big firms focus on each other, not the customers. Their goal is not so much to find the magic product the punters will love, as to make sure their competitors don’t get ahead of them. So product ranges tend to be the same.

But how do we explain those two bankers claiming competition prevented them from ceasing dodgy practices? Why wouldn’t a bank want to get itself a reputation for being square with its customers?

Because of another weakness in the economists’ basic model: its assumption that both buyers and sellers know all they need to know about market conditions - an implicit assumption that gaining the knowledge you need to make good choices is easy and costless.

In reality, it costs time and money to be well-informed, which gives sellers (who tend always to be in the market) an inbuilt advantage over buyers, who tend to buy a new car, or change houses, only occasionally.

The first economists to starting thinking such thoughts just a few decades ago ended up winning Nobel prizes for realising that information is “asymmetric”, with sellers usually knowing a lot more than buyers.

In the two cases from the royal commission, the banks and their car dealers and mortgage brokers know about the conflicts of interest caused by their commission arrangements, but customers don’t.

Should one bank decide to stop playing that game, many of its dealers or brokers would have taken their business elsewhere long before the nation’s customers realised it was more trustworthy than its competitors.

Up-to-date economists see this as a class of “market failure” called a “collective action problem”: all the firms in a market realise they’re doing something wrong, or even profit-reducing, but no one’s game to be the first to stop.

The obvious solution is for the government to intervene and ban the practice, letting everyone off the hook at the same time - just as ASIC has decided to do in the case of flex commissions for car dealers. Sometimes competition needs help from a visible hand.
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Tuesday, March 27, 2018

Cheating cricketers symptomatic of our declining standards

I can’t see why people are so shocked to discover our cricketers have been cheating. Surely that’s only to be expected in a nation that’s drifted so far from our earlier commitment to decency, mateship and the fair go.

Such behaviour is unAustralian? We do, or condone, many things that used to be thought of as unAustralian.

There was a time when it would have been unthinkable for Australians to stand by while an elected government physically and psychologically mistreated people whose only crime was to arrive by boat without an invite.

Many of them are fleeing persecution in their own country, but that makes no difference. We even mistreat their children, causing them to have mental illnesses and then refusing them medical treatment.

Last week a government led by Mr Harbourside Mansion dished out another round of punishment to fellow Australians whose crime was to be unemployed or to have split with their partner while having dependent children, making it hard for them to do paid work.

The money to be saved will go just the tiniest way towards paying for tax cuts for big business. Did the rest of us care? Not really.

But let’s not kid ourselves. If governments thought mistreating asylum seekers and being unreasonable to welfare recipients would lose them votes, they wouldn’t do it.

They do it because they believe most voters want them to punish boat people and supposed dole bludgers. Which also explains why both sides of politics are guilty of it.

Lovely people, Australians. (And don’t imagine the rest of the world isn’t realising how unlovely we are.)

But stoop to tampering with a cricket ball? We’d never do something so utterly despicable. A player could have been injured.

Don’t forget that cricketers have money at stake when they decide whether to ease the path to victory with the help of a little sticky tape.

Nor should we imagine they’re the only Aussies yielding to the temptation to bend the rules in pursuit of a bigger bonus. What do you think the royal commission into banking misconduct is about?

I fear we hear about only a fraction of the national franchises that screw their franchisees, who then screw the kids working for them; the many employers paying less than award wages, including those ripping off people on temporary work visas who’re afraid to complain.

They do so because they’ve lost any sense of fairness towards their workers – and because they’re (rightly) confident their chances of being caught are low.

Governments – Coalition and Labor - have been cutting the number of inspectors and auditors in the name of greater public service efficiency.

We’ve become less Godfearing, more individualistic, more materialistic and more self-centred. We’ve become less community-minded, less committed to “solidarity” – where the strong go easy so as to help the weak do better – and less sympathetic to the battling of the battlers (except when we kid ourselves that we are battlers).

We’ve changed the meaning of “professional” to being highly competent in your occupation, whereas it used to mean putting your clients’ interests ahead of your own.

Politics has degenerated into an unending battle between interest groups, in which each seeks advantage at the expense of the rest. Much of the fighting is conducted by a thriving industry of lobbyists.

Even the churches fight like Kilkenny cats for a bigger share of the government handouts to private schools – just so they can afford to teach their children Christian values, of course.

But don’t imagine the greed is limited to businesses and institutions. Almost all of us have a mercenary attitude towards the government, paying as little tax as possible while demanding free public hospitals, subsidised pharmaceuticals, bulk-billed GP visits and much else.

How does all that add up? Not my problem. My problem is paying an investment adviser to tell me the somersaults I have to turn to get the pension and avoid paying tax on my investments.

What I’ve found most surprising in recent days is not money-hungry cricketers but the views of a leading businessman, Harold Mitchell, expressed in this very organ: “I’m an Australian and I pay tax for the good of the country.”

Mitchell tells of being visited by representatives of the Singapore government, who invited him to move his head office there. Their advertised company tax rate was 15 per cent, but he’d get a special offer of 7 per cent.

He declined. “I believe in the Australian system that creates the sort of society that enabled me to build a successful business. Avoiding tax, even if it seems legal, is a very shortsighted ambition,” he wrote.

What’s wrong with the man? What a corporate dinosaur. He claims to have found at least one other rich person who thinks similarly – the Scottish children’s author, JK Rowling.

“I pay a lot of tax, and I feel one of the reasons I stay and pay and why I’m not based in Monaco ... is I think my country helped me,” she's said.

Mitchell even quoted the American jurist Oliver Wendell Holmes’ dictum that “taxes are what we pay for a civilised society”.

Perhaps the problem is it also works the other way: more money-grubbing, rule-bending and tax avoiding are part of a society that’s becoming less civilised.
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Monday, March 26, 2018

We have a bad case of misdirected compassion

Why do so many of us – and the media, which so often merely reflect back the opinions of their audience – feel sorrier for those who profess to be poor than for those who really are?

Last week, on the day after the single dole was increased by 50¢ to a luxurious $273 a week ($14,190 a year), Malcolm Turnbull’s henchmen succeeded in persuading Pauline Hanson’s One Nation to let him give the down-and-out part of our one nation another kicking. (Sorry, my Salvo upbringing is showing again.)

You’ve heard the news that homelessness is much more prevalent than we thought. According to the Australian Council of Social Service, the Senate’s passing of the Orwellian Welfare "Reform" Bill will, in its first year, add to homelessness by cutting off payments to more than 80,000 people.

The bill contains 17 measures that will adversely affect the lives of thousands of the unemployed, single parents and women and children escaping violence.

You’ve never seen such a list of pettifogging nastiness, yielding tiny savings to the budget.

The unemployed will no longer be back-paid to the day they lodged their claim, meaning the longer Centrelink takes to process that claim, the longer the jobless go without (or have to go cap-in-hand to outfits like the Salvos) and the more pennies the government saves.

Let’s hope it doesn’t make lengthening processing times a KPI.

Until now, the legislation has protected people who can’t complete and lodge their claim because they’re in hospital, are homeless, are escaping domestic violence, or are victims of natural disaster or fire. Sorry, such pathetic excuses will no longer be accepted.

Fortunately, Hanson was shamed into reneging on a commitment to remove a small, one-off “bereavement allowance”.

So, were the media up in arms over this gratuitous attack on people who are already below the poverty line – this “cash grab”?

No, they hardly seemed to notice. Perhaps they were distracted by the bitter tears they were shedding over the plight of all those poor self-funded retirees whose unused dividend imputation refunds the evil Labor Party is threatening to steal.

I’m sure there must be a few retireds with genuine cause for complaint, but I didn’t see any among those whose cries of pain were taken up by a righteously outraged media.

Perhaps the problem is that most political reporters are too young to know how retirement income works. Let’s look at Australia’s most self-pitying and grasping group, the self-proclaimed “self-funded retirees”.

What they mean by this term is that they don’t get the age pension. What they fail to mention to naive reporters is that they don’t get it because they’re too well-off to meet the means test – notwithstanding the best efforts of their investment advisers to rearrange their affairs so they do.

What’s the main reason they’re too well-off to get the age pension? Too much superannuation savings. That’s why I see red every time I hear them claiming to be “self-funded”.

They’ve convinced themselves they’re fiscal heroes who are saving the government a fortune by not getting the pension. Rather, they’ve scrimped and sacrificed for decades to amass the super savings they have.

But they’re deluding themselves on both counts. They conveniently forget that their contributions to super were taxed at 15 per cent rather than their much higher marginal tax rate, as were the annual earnings on those tax-concession-enhanced contributions.

And, since 2007, thanks to Peter Costello (who spent his time as treasurer planting time-bombs in the budget), they’ve paid no tax on their super withdrawals.

As a result, a proportion of their super balance is attributable not to their frugality, but to decades of annual tax concessions, plus compound interest on those concessions.

The higher the payout, the higher the proportion of it attributable to tax breaks rather than actual saving. For most of those with super balances high enough to exclude them from the pension, those accumulated tax breaks would greatly exceed the budgetary cost of that pension, sometimes several times over (as in my case).

That’s being “self-funded”?

Another thing the media’s bleeding hearts (middle-class division) don’t know is that since withdrawals from super are tax-exempt, the money that allegedly self-funded retirees have to live on far exceeds the modest “taxable income” they tell you about.

When they cry poor, these comfortably-off people with their hand out don’t tell you their goal is to get sufficient assistance from the taxpayer to allow them to avoid dipping into the capital value of the shares and property they want to hand on intact to their offspring – who are, no doubt, just as deserving as they are.
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Saturday, March 24, 2018

Economic case for cutting company tax rate is weak

Most people don't realise it, but we're on the verge of letting foreign multinationals pay less tax on the profits they earn in Australia because we locals don't mind paying higher tax to make up the difference.

Our almost unique system of "imputing" to Australian shareholders the company tax already paid on their dividends means they have little to gain from Malcolm Turnbull's pressure on the Senate to phase the rate of company tax down from 30 per cent to 25 per cent, over about 10 years, at a cumulative cost to the budget of $65 billion.

So what can we hope to obtain in return for our generosity to foreign businesses? Economic theory (which may or may not prove realistic) assumes it would induce them to increase their investment in Australia which, in turn, would increase the demand for Australian workers relative to their supply, thus bidding up their price (otherwise known as wages).

Note that, contrary to all Turnbull's said about his "plan for jobs and growth", the theory does not promise a significant increase in employment – mainly because the theory assumes the economy is already at full employment before the company tax rate is cut.

As my colleague Peter Martin has written, Treasury's updating of its modelling of the theory finds that, after 10 to 20 years, consumer welfare (arising mainly from higher wages) would be $150 per person higher than it otherwise would be.

Doesn't seem a lot.

Apart from the initial benefits of the company tax cut going pretty much only to foreigners, another reason Treasury's modelling has always shown the ultimate benefits to us as being surprisingly small is Treasury's further assumption that the budgetary cost of the cut would have to be covered by some means.

Treasury's consultant modelled several possibilities: by cutting government spending (don't hold your breath), imposing a lump-sum tax (a textbook fav), increasing the goods and services tax, or by letting bracket creep quietly increase income tax (the most likely).

Trouble is, the model's assumption that increased taxes would harm the economy's performance diminishes the good the lower company tax is assumed to do. As Milton Friedman liked to say, there are no free lunches (you'll end up having to pay, one way or another).

So the impression the government and big business are trying to give us (and naive crossbench senators), that only an economic wrecker would oppose a lower company tax rate, is just spin.

As always, every possible economic policy change has costs as well as benefits, which should be debated. I think the case for cutting company tax is weak.

With the government taking such a propagandist line, the most dispassionate advice we've received has come from evidence Reserve Bank governor Dr Philip Lowe, and an assistant governor, Dr Luci Ellis, gave to a parliamentary committee last year.

Lowe pointed out something no other official has mentioned: the main countries are engaged in a bidding war, in which each moves to a lower company tax rate than the others, hoping to pick up a bigger share of the world's foreign investment - before some other country cuts to an even lower rate.

You can imagine how much the world's chief executives love this game and are urging their own government to put in the lowest, supposedly winning, bid.

But the longer everyone keeps playing, the closer we'll come to the point where no country has any company tax to speak of – and no country has any competitive advantage over the others. All we'll be left with is a distorted tax system.

Lowe's point was that we should think twice before we join this mutually destructive game. Why would a tax war be good, whereas a trade war would be terrible?

The proponents' latest argument is that, now the US is cutting its company tax rate to 21 per cent, we'll get little foreign investment if we don't cut our rate from 30 per cent.

What no one seems to have noticed is that the case for a company tax cut has now turned from positive to negative. It's not that we'll gain anything by cutting, but just that we'll avoid losing if we don't.

But you don't have to accept that argument if you don't want to. Behavioural economics reminds us that the proponents have "framed" our choices in a way that favours their case.

They want us to accept without thinking that foreign companies make their decisions about whether or not to invest in Oz solely by comparing the rate of our company tax with other countries' rates.

That is, foreigners take no account of how our special tax breaks compare with other countries' tax breaks, nor any non-tax factors that make investing in Oz attractive (say, we've got better iron ore than everyone else) nor even that they don't have to worry about our taxes because their lawyers know how to avoid paying them.

As Lowe and Ellis explained to the parliamentary committee, the notion that multinationals focus solely on the rate of our tax is highly implausible.

I think all those other factors mean we're unlikely to attract insufficient foreign investment, even though the US has cut to 21 per cent.

But Treasury's been a great worrier about us attracting enough foreign investment for as long as I've been in the game, without there ever being much sign of a problem.

So, what's eating Treasury? My theory is that it hasn't adjusted its thinking since we moved from a fixed to a floating exchange rate in 1983.

What the proponents of a lower company tax rate don't tell you is that, with a floating dollar (and all else remaining equal), the more successful we are in attracting foreign investment – as we were in the resources boom - the higher our exchange rate will be. Is that what we want?
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Wednesday, March 21, 2018

How Labor is taking on the greedy elderly

Talk about missing the point. The media spent all last week working themselves into a lather over Labor's newly announced policy to abolish cash refunds for unused dividend imputation credits. (If you have no idea what that means, it probably wouldn't affect you.)

This promise would be terribly unfair to dirt-poor self-funded retirees, we were told. And it was utter stupidity for Bill Shorten to drop such a monumentally unpopular proposal in the last week of the Batman byelection, which he was now safe to lose.

Except, of course, that Labor won comfortably, with little sign the policy had much effect.

The media smarties' greater failure was their inability to see the bigger picture: the next federal election is shaping as a battle between the generations, with Labor championing the put-upon young and the Coalition defending the privileged old.

According to Canberra conventional wisdom, this too is crazy-brave territory for Labor. The ageing of the population means Grey Power is our fastest growing political force.

Those of retirement age (which includes me) have little more pressing to do than to worry incessantly about their finances, and have developed an unshakable sense of entitlement ("I've paid taxes all my life ..."). Any concession they've been granted, no matter how unjustified or unaffordable, can't be taken back, we're assured.

Well, I'm not so sure.

As a political force, Grey Power has one huge weakness: of all the age groups, the over-65s are those least likely to change their vote. The great majority vote for the Coalition, so Labor doesn't have a lot to lose.

It's among the non-aged (sorry) that most swinging voters are found, and it's by picking up enough swingers that a party wins.

Haven't you noticed how, since 2013, the Coalition has been reacting to Labor's pro-younger policies by flying to the defence of the better-off old? The conservatives are allowing themselves to be "wedged" – separated from the majority of voters.

The Canberra smarties also used to believe negative gearing was politically untouchable. But Labor went to the 2016 election promising to curtail it – while the Libs predicted it would send house prices crashing – and came within a whisker of winning. Labor's persisting with the policy.

Labor went to that election with another pro-younger policy: cutting the tax breaks going to exceptionally well-off superannuants (including me). This time, Malcolm Turnbull, needing help to pay for his company tax cuts, produced his own, Treasury-crafted version of Labor's idea.

The issue didn't feature greatly in the election campaign, but after the Coalition had won, the exceptionally well-off superannuants in the Liberal heartland turned on Turnbull. This advantaged Labor by adding to the disunity in the Coalition's ranks. Turnbull modified his super changes, but not greatly.

And now Labor is planning to remove another super tax concession that goes overwhelmingly, but not exclusively, to superannuants with large share portfolios. The Coalition hasn't resisted the temptation to side with its well-off elderly heartland, nor have the media resisted the temptation to promote its (and the super industry's) misrepresentation of the policy as an attack on struggling retirees (who just happen to own a lot of shares).

How is this another of Labor's pro-younger policies? That will be easier seen if, as seems likely, Labor uses the saving to pay for a promise of income tax cuts for people earning less than $87,000 a year – few of which would go to the retired rather than to the workers who pay for the retired's largely income tax-free status.

If you think an election campaign based on conflict between the generations is not a good thing, I agree. Unless what you mean by that is that the better-off aged should be allowed to retain their relatively recently conferred tax advantages, and the taxpaying non-old should continue to lump it.

It's a pity John Howard and Peter Costello (the chap who kept issuing reports warning that population ageing would play merry hell with the budget) didn't worry more about future generational conflict when they spent most of their 11 years in office slipping new benefits for the aged, particularly self-funded retirees, into the budget.

They started with the private health insurance tax rebate (the biggest users of private health insurance services are 60 to 79-year olds) and moved on to giving the alleged self-funded retirees the "seniors and pensioners tax offset", also making it easier for them to get health cards and pay the pensioners' rate for pharmaceuticals.

In 1999, they gave negative gearing a huge boost by introducing a 50 per cent discount on capital gains tax. And they decided that anyone who paid so little income tax they couldn't take full advantage of their dividend imputation credits should be sent a refund for the balance.

On the younger side of the ledger, while they didn't invent HECS debts for university students, they greatly increased them.

Then, in 2007, Costello introduced sweeping super changes, making super payouts completely tax-free for people over 60. He also made a lot of supposedly self-funded people eligible for a part pension.

Since this largesse was quite unaffordable, Labor and Coalition governments have been chipping it back ever since.

Even so, we retain an income tax system where how much you pay sometimes depends on the size of your income, but other times on how old you are. And that's not going to lead to intergenerational conflict?
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Monday, March 19, 2018

Immigration the cheap and nasty way to grow the economy

The ABC's temerity in hosting a debate about the merits of high population growth has drawn predictable repostes from the economic establishment. Shades of the legendary note in the margin of a politician's speech: "shout here - argument weak".

There are at least four counts against the advocates of high immigration. First, their refusal to engage with the academic environmentalists arguing that we've exceeded the "carrying capacity" of our old and fragile land. Scientists? What would they know?

Second, they keep asserting high immigration's great economic benefits, blithely ignoring the lack of evidence. Whenever the Productivity Commission has examined the issue carefully it's found only small net effects, one way or the other. Its latest modelling found only a "negligible" overall impact.

Third, the advocates not only decline to admit the high social and economic costs that go with high rates of immigration, they decline to accept their share of the tab, doing all they can to shift it to the young, the poor and those on the geographic outer, including many of the migrants.

You rarely hear pro-immigration economists acknowledging the clearest message economic theory gives us on the topic: more population requires more spending on additional public and private infrastructure if material living conditions aren't to deteriorate.

The more we invest in such "capital widening" to stop the ratio of capital to labour declining, the less scope for investment in "capital deepening" to keep the ratio increasing, and so improving the productivity of our labour.

When we fail to invest sufficiently in capital widening – which we have – the decline in living conditions is manifest in overcrowding, traffic congestion and long commuting times.

Why have we failed to invest sufficiently? Partly because a high proportion of the promoters of high immigration are also promoters of Smaller Government, never acknowledging the two are incompatible.

A bigger population requires a bigger government, with more debt, not less. When you persist with high population growth, but put the clamps on government, you end up with overcrowding, congestion and the rest.

Another truth the high immigration advocates refuse to acknowledge is that a much bigger population must lead to much bigger cities and higher-density living in those cities.

The Reserve Bank's estimates of the huge addition to Melbourne and Sydney house prices caused by state governments' acquiescence to resistance to higher density in inner and middle-ring suburbs, are partly a consequence of successful attempts to shift the spatial cost of high immigration onto the less well-placed.

The fourth criticism of high immigration is that it's the cheapest and nastiest way to pursue economic growth. You get a bigger economy, but not the promised benefits. The studies repeatedly fail to show high immigration leads to a significant increase in real income per person.

Of course, the business lobby has no reason to care whether high immigration yields economy-wide benefits. All they're after is a bigger domestic market, allowing them to sell more widgets, make a higher profit and justify a bigger salary package.

Few economists can see this is a cop-out. An escape hatch. As a way of achieving corporate growth, it's even easier than taking over your competitors. And it sure beats the hard graft of trying to increase profits by being more efficient and contributing to national productivity improvement.

As we've seen, high immigration probably comes at the expense of productivity-enhancing (capital-deepening) business investment and public infrastructure. To the extent that inadequate capital-widening leads to overcrowding and congestion, it worsens productivity.

In principle, one productivity-enhancing effect of high immigration is that you get greater human capital on the cheap by pinching it from other (mainly poor) countries.

After foreign students have come here and paid full freight for Australian qualifications, you let them stay and work. You select permanent immigrants on the basis of their skills, or you let skilled workers on temporary visas stay on.

But as Dr Bob Birrell, of the Australian Population Research Institute, has shown, there's a big gap between the claims made for our skilled migration program and the reality. We let in people whose skills aren't in high demand, and plenty of them end up driving taxis because the local professions' gatekeepers refuse to recognise their qualifications.

So it's not clear the benefits of our skill-pinching program exceed the cost of discouraging businesses from incurring bother and cost training enough of our own young people, when you can always get the government to let you bring in someone ready-trained.

High immigration may suit our rent-seeking business people, but it's a hell of a way to pursue the professed benefits of economic growth.
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Saturday, March 17, 2018

Why protection from imports isn't smart

With The Donald now busy playing poker with Little Rocket Man, the threat of a trade war has receded. Good. Gives us time to get our thinking straight before the threat returns.

Everyone knows a trade war would be a terrible thing, but most people's reason for thinking so is wrong. This misunderstanding means such a war could happen, even though everyone knows it would be bad.

It seems common sense for a country to want to protect its industry by imposing a tax – known as a tariff or import duty – on imports competing with locally-produced goods. After all, we win and foreigners lose.

The problem arises only if the foreigners retaliate and slap a tariff on our exporters. That's bad for us because it may lead to job losses among those of our workers who earn their living making goods for export.

Is that the way you figure it? Sorry, it may be common sense, but it's wrong. You need to have learnt a bit of economics to see why, because the case against protection is "counterintuitive" – it doesn't seem right, but it is.

The reason people can't see what's wrong with protection is that every baby is born with a disease called mercantilism.

Mercantilism is the belief that exports are good, but imports are bad. Why? Because we – Australia – make money selling exports to foreigners, whereas it costs us money to buy imports, the foreigners' exports.

So mercantilists see Australia as like a company, and our balance of trade as like a company's profit and loss statement. The more you can export and the less you can import – the higher your trade surplus - the richer you become.

What's wrong with that way of thinking? Plenty. For a start, it's the mentality of a miser – someone who loves money for its own sake, not for what it will buy.

Money is just a means to an end, not an end in itself. The economic game is about producing goods and services so we can consume them. Production is the means; consumption is the end. Focus on one at the expense of the other and you've actually done badly in the game.

Similarly, jobs are just a means to an end. Why do people want jobs? So they can earn money and then spend it.

Exports are production, imports are consumption (although much of our imports are of machines we use in the production process). Production without consumption makes sense only to a miser.

Get this: 80 per cent of the way Australia makes its living is by all the workers and businesses and governments producing goods and services and selling them to other Australian workers, businesses and governments, so they can be consumed.

In principle, we could raise the 80 per cent to 100 per cent by only selling to and buying from ourselves. So why do we sell about 20 per cent of the things we produce to foreigners?

Not because it makes us richer, nor because it creates more jobs. It's solely so we can afford to buy some of the goods and services produced by businesses and workers in other countries, when we judge them to be better or cheaper than the stuff made locally.

Exports are good solely because we can use the proceeds to pay for imports – and imports are also good because they raise our material standard of living by giving all of us (workers, would-be workers and dependents) access to goods and services that are better or cheaper than those made in Australia.

If we weren't willing to use the proceeds from our exports to pay for imports from other countries, those countries would refuse to buy our exports.

Refusing to buy our exports would leave those countries worse off (because they'd lose their ability to buy the things we can produce better or cheaper than they can), as well as leaving us worse off because we lost our ability to use our export income to buy their exports.

This, BTW, is why trade wars are mutually self-harming. A group exercise in cutting off your nose to spite your face.

Why wouldn't it be better to be 100 per cent self-sufficient? Because this would limit the benefits to us from "specialisation and exchange". Our domestic economy is organised on the basis that we're all better off if each of us specialises in producing what we're good at, then uses money to exchange what we've produced with what other specialists have produced.

Opening our economy to trade with other countries merely extends this principle, on which we've always run our domestic economy, beyond our borders.

This is why the mercantilists' assumption that trade is a zero-sum game – if you win, I lose – is wrong. Both sides win because both benefit from the "mutual gains from trade".

It follows that the mercantilist notion that foreigners are the only people who lose when we decide to protect some of our industries is wrong. The biggest losers are every other industry and every Australian who loses their access to cheaper or better imported goods and has to pay more for the local version.

That is, tariffs are a tax, not on foreigners, but on Australian producers and consumers. A way of favouring some Australian industries at the expense of all the others. A redistribution of income to favoured industries from those that aren't favoured, and from Australian consumers generally. A form of rent-seeking.

And thus, an attempt to protect some jobs at the expense of all other jobs. Great idea.

Trade wars are destructive not primarily because it's crazy for other countries to retaliate – which it is – but because the country that provokes the retaliation by protecting some favoured industries is damaging itself.

Better to let it stew in its own juice than punish it by harming yourself.
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Wednesday, March 14, 2018

What's making homes hard to afford and what we could do

There aren't many material aspirations Australians hold dearer than owning their own home - but dear is the word. There are few greater areas of policy failure.

The rate of home ownership, of which we were once so proud, has been falling slowly for decades. And as the last high home-owning generations start popping off, it will fall much faster.

We've been debating this issue for years, while it's just got worse. Yet we have a better handle on the causes of the problem, and what needs to be done, than ever.

Let me see if I can pull a lot of the elements together and give you the big picture.

Don't let anyone tell you the younger generation would be happy to stay renting forever. Nuh.

And while the hurdle of owning a home and a mortgage seems almost insurmountable to the young, jumping it is just the start of our property ambition. Most people want to keep moving up to a bigger and better home. Every promotion we get makes us wonder whether we can afford a better place.

This preoccupation with the quality of our housing is the first part of the reason house prices have risen so high: ever growing demand.

Don't forget that our newly built houses are much grander than they were even 10 years ago. And most older houses have been renovated and extended to make them better.

When two-income families became common people thought "great, now we can afford a bigger mortgage on a better place".

When we got on top of inflation in the early 1990s and interest rates fell so far, people could have paid off their mortgage faster, or bought a boat, but more people said "great, now we can afford a bigger mortgage on a better place".

Trouble is, you can't satisfy increased demand for better houses – particularly better-located houses - by building more places on the outskirts of the city. And when a lot of people decide to move to a better place at the same time, the main thing they do is bid up the prices of existing houses.

One change in recent decades is the growth of the services sector and the knowledge economy (more workers knowing how to do things; fewer workers making things), which means many of the jobs have gravitated to the CBD and nearby suburbs.

So the meaning of "position" has changed from good views to "proximity" to the centre. In theory, the amount of land within 10 kilometres of the GPO is fixed. In practice, factories and warehouses can be moved further out, while detached houses can be replaced by townhouses and low-rise or high-rise units.

Even so, in every city, property prices have risen more the closer homes are to the centre.

Another source of increased demand for housing is our high population growth, caused by our policy of high immigration.

Then there's foreigners' investment in our housing, though this isn't as big a cause of higher prices as many imagine because – in principle but not always practice - foreigners are only supposed to buy newly built or "off-the-plan" homes. That is, create their own supply.

Another source of greater demand is Paul Keating's introduction of capital gains tax in 1985 and John Howard's introduction of a 50 per cent discount on the tax in 1999. This has made owner-occupied homes (which are exempt from the tax) and, thanks to negative gearing, rented-out homes, more attractive as a form of investment, relative to shares.

So house prices are higher partly because we've acquired a second motive for home-ownership: not just the security and freedom of owning the home you live in, but also the prospect of homes becoming much more valuable over time.

Of course, increased demand leads to higher prices only if supply fails to keep up. And that's where our governments – state and federal – have failed us.

It's better now, but for ages state governments failed to do enough to permit the building of more homes on the edge of cities. We got more immigrant families, but not more homes to put them in.

Worse, state governments have allowed people in inner and middle-ring suburbs and their councils to resist the pressure for more medium-density housing – more units – from people wanting to live closer to where the jobs and facilities are.

Just last week the Reserve Bank published estimates that this resistance to higher density had added more than $300,000 to the average Melbourne house price and almost $500,000 to the Sydney price, over the past two decades.

So, who pushed housing prices so high? We did. Who failed to do what was needed to counter the increase? Our governments.

The feds failed to limit the growth in demand (by limiting immigration and fixing the tax system), while the states did too little to increase supply (by discouraging the building of new homes on the outskirts and by permitting a first-in-best-dressed mentality by people in inner and middle-ring suburbs).

Why are they allowing the proportion of home owners to decline? Because most things they could do to genuinely help first home buyers would come at the expense of existing home owners, who have more votes than the youngsters.

If young people and their parents don't like that, the answer's more pressure at the ballot box. Wheels that squeak more.
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Monday, March 12, 2018

How we could gang up against a Trump trade war

A possible trade war looms and, as always, an adverse overseas development has caught poor little Oz utterly unprepared. Well, actually, not this time.

Just as Treasury had been war-gaming the next big world recession well before the global financial crisis of late 2008, so the Productivity Commission began thinking about our best response to a trade war soon after the election of Donald Trump.

In July last year it published a research paper, Rising protectionism: challenges, threats and opportunities for Australia, to which Dr Shiro Armstrong, co-director of the Australia-Japan Research Centre, at the Australian National University, made a major contribution. (During a visit to ANU last week I also benefited from discussion with Professor Jenny Corbett.)

Trump's tariffs (import duties) on steel and aluminium were never a great threat to our economy. It'll be only when he decides to take a crack at the Chinese that there'll be a lot to worry about.

But the chest-thumping by our pollies (on both sides) over steel is a demonstration of the way populism can crowd out clear-headed self-interest where protectionism is involved.

Trade wars happen by accident. They start out in a small way, the perceived victims feel their manhood demands they stand up to a bully by retaliating, the bully hits back and pretty soon everyone in the bar is throwing chairs and punches.

As the research paper puts it, "significant worldwide increases in protection would cause a global recession."

Economic modelling by Armstrong estimates that, for every extra dollar by which our revenue from import duties rose, economic activity in Australia would fall by 64¢.

In total, the level of real gross domestic product would be 1 per cent lower each year. This would equate to a loss of about 100,000 jobs. (As with all modelling, take these figures as, at best, roughly indicative.)

A full-blown global trade war would take many months, even years to build up, so how should we respond to the provocative actions of others? What could we do to minimise the damage we'd suffer?

The research paper proposes what economists call a "first-best" response (here I'd call it the What-would-Jesus-do? cheek-turning response): not only should we resist the temptation to retaliate in any way, we should also cut what few remaining protective barriers we have.

If you think that would be plum crazy, you don't know as much about protection as you should. But you've demonstrated why any politician would find such advice almost impossible.

That's why I'm attracted by the paper's second-best suggestion: "working with a coalition of countries to keep their markets open is a strategy that would make it easier for Australia to resist protectionist pressures".

Good thinking. Our leaders want to be seen to be acting to defend our economy, and this response – "let's form our own gang and fight back" - is active rather than passive, and harder to portray as appeasing the bullies.

Oh yeah, what gang? What coalition of countries? That's obvious. We're already a member of a gang that, depending on how you measure it, is bigger than Trump's, or the Europeans'. And our gang's by far the fastest growing.

We do almost three-quarters of our two-way trade (exports plus imports) with Asia – in descending order, China, ASEAN, Japan, South Korea, New Zealand, India, Hong Kong and Taiwan. Europe accounts for only about 15 per cent and Trumpland​ for little more than 10 per cent.

Although it's true Asia needs to trade with North America and Europe, it's also true there's huge trade within our region. Just imagine the damage we'd suffer if we Asians started jacking up tariffs against each other. Or all of us against the rest of the world.

Australia and New Zealand are already members of various Asian trading clubs. And what greater incentive for Asians to pack down more closely than a threat from Trumpland, or from a Europe trying to repel boarders?

Nor is it presumptuous for Oz to take a (quiet) leadership role. Despite all their trade, there's a lot of mistrust between China, Korea, Japan and other countries. China and Japan, for instance, find it easier to work with us than with each other.

After all, we played significant roles in the formation of the Asia-Pacific Economic Co-operation group and in improving the governance arrangements for China's new Asian Infrastructure Investment Bank. We worked behind the scenes with Japan to keep the Trans-Pacific Partnership alive despite Trump's dummy-spit.

And guess what? Malcolm Turnbull will host a summit of the 10 leaders of the Association of Southeast Asian Nations in Sydney next weekend.
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