Elliott Wave International

posted on 16 January 2012 by skirchner in Other Links

(0) Comments | Permalink | Main

Why We Should Welcome the Relative Decline of Manufacturing

I have a piece in The Conversation arguing that the relative decline of manufacturing is a sign of economic progress:

The manufacturing share of developed economies has been in decline for decades. But that does not mean that manufacturing output has been declining in an absolute sense. Far from it. In the United States and the United Kingdom, manufacturing output was at record levels prior to the onset of the financial crisis. Manufacturing employment has fared less well, but this is symptomatic of substantial long-term productivity gains in this sector, not declining absolute levels of output.

Manufacturing has also been declining steadily as a share of world GDP. This should not be surprising. It is driven by much the same process that saw a decline in the agricultural share of GDP during the 19th and 20th centuries with the onset of industrialisation. As incomes grew, the share of food and other agricultural goods in consumption and production declined. The same is now happening with manufactured goods, as a greater of share of rising incomes is allocated to services.

posted on 16 January 2012 by skirchner in Economics, Free Trade & Protectionism

(0) Comments | Permalink | Main

Partisan Grading

Republican academics are associated with less egalitarian grading outcomes.

posted on 10 January 2012 by skirchner in Higher Education

(1) Comments | Permalink | Main

Labour Supply of Politicians

From a new NBER Working Paper:

Doubling an MEP’s salary increases the probability of running for reelection by 23 percentage points and increases the logarithm of the number of parties that field a candidate by 29 percent of a standard deviation. A salary increase has no discernible impact on absenteeism or shirking from legislative sessions; in contrast, non-pecuniary motives, proxied by home-country corruption, substantially impact the intensive margin of labor supply. Finally, an increase in salary lowers the quality of elected MEPs, measured by the selectivity of their undergraduate institutions.

posted on 10 January 2012 by skirchner in Economics, Politics

(0) Comments | Permalink | Main

EMU and International Conflict

Martin Feldstein writing in Foreign Affairs in 1997, demonstrating that the euro crisis was entirely foreseeable:

If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States.

The immediate effects of EMU would be to replace the individual national currencies of the participating countries in 2002 with a single currency, the euro, and to shift responsibility for monetary policy from the national central banks to a new European Central Bank (ECB). But the more fundamental long-term effect of adopting a single currency would be the creation of a political union, a European federal state with responsibility for a Europe-wide foreign and security policy as well as for what are now domestic economic and social policies. While the individual governments and key political figures differ in their reasons for wanting a political union, there is no doubt that the real rationale for EMU is political and not economic. Indeed, the adverse economic effects of a single currency on unemployment and inflation would outweigh any gains from facilitating trade and capital flows among the EMU members.

posted on 13 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy

(0) Comments | Permalink | Main

The Irrefutable Logic of Quantitative Easing

A useful thought experiment from Robert Hetzel:

The institutional fact that makes a liquidity trap an irrelevant academic construct is the unlimited ability of the central bank to create money. One can make this point in an irrefutable manner by noting that the logical conclusion to unlimited open-market purchases is that the central bank would end up with all the assets in the economy including interest-bearing government debt, and the public would hold nothing but non-interest-bearing money. Because that situation is untenable, individuals would work backward from that endpoint and begin to run down their money balances and stimulate expenditure in the current period.

posted on 13 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy

(1) Comments | Permalink | Main

The Long March of Fightback

I have an op-ed in Online Opinion marking the 20th anniversary of Fightback:

Twenty years ago this November, the Liberal-National Party coalition released Fightback, the most comprehensive and market-oriented policy platform ever taken to a federal election. Conventional wisdom holds that Fightback was a political folly that saw the opposition lose an un-losable election. Yet in the last twenty years, much of Fightback has been implemented and even enjoys bipartisan political support. Fightback was a failure only when viewed through the lens of short-term electoral politics rather than public policy.

The1993 federal election is still considered Paul Keating’s greatest political triumph and John Hewson’s spectacular failure. But this is to elevate personal political fortunes above public policy outcomes. Fightback’s centerpiece, the goods and services tax, was supported by Paul Keating in 1985. It would be surprising if he now called for its repeal. Keating beat Hewson in 1993 but within seven years the GST prevailed and now serves to diminish Keating and his legacy.

Even with the advantages of incumbency, the Howard government’s 1998 tax reform package was as politically risky as Fightback. It nearly cost John Howard both the 1998 and 2001 elections. Yet it made Howard’s reputation as a reformer and few would argue with the economic legacy of the tax reforms introduced in 2000. As Paul Kelly has noted, if the Labor Party had implemented the 1998 tax reform package, the ABC would have been making documentaries about it for the next 50 years.

posted on 12 December 2011 by skirchner in Economics, Politics

(0) Comments | Permalink | Main

FIRB Should Not be a Model for South Africa

South Africa looks to Australia’s Foreign Investment Review Board as a model:

THE establishment in SA of a body similar to the Australian Foreign Investment Review Board will be vital in regulating the government’s rules on foreign direct investment and removing uncertainty of the kind around this year’s controversial Walmart-Massmart merger.

However, competition experts warn that for the body to function properly, it will have to be independent from the government, will have to be governed by rules that clearly define its role and jurisdiction, and will have to have absolute transparency.

Australia’s FIRB has none of those characteristics.

posted on 07 December 2011 by skirchner in Economics, Foreign Investment

(0) Comments | Permalink | Main

Not that 70s Show: Why This Boom is Different

Treasury’s David Gruen highlights the role of Australia’s macroeconomic policy framework in sustaining the boom:

The Federal Governments of the 1970s were in direct control of all arms of macroeconomic policy, including the value of the exchange rate. When commodity prices were rising strongly, generating boom conditions in parts of the economy, it proved extremely difficult for governments of either political persuasion to impose sufficient restraint on other parts to deliver an appropriate outcome for the economy overall.

By contrast, the current macroeconomic framework has several elements that together represent a crucial improvement on the framework of the 1970s. These elements are: a market-determined exchange rate, a medium-term inflation target implemented by the Reserve Bank, a medium-term fiscal framework implemented by the Federal Government, and largely decentralised wage-setting arrangements.

A consequence of the current framework is that when commodity prices are high, the floating exchange rate is likely to have appreciated sharply, acting as a shock absorber, and reducing the expansionary effects of the terms of trade rise on the overall economy. As a consequence, there is a smaller role for ‘activist’ macroeconomic management - simply because much of the necessary restraint is imposed by the exchange rate.

The exchange rate plays its shock-absorber role primarily by imposing significant restraint on those parts of the traded sector, including parts of the manufacturing sector, which are not experiencing strongly rising prices for their output or are not directly exposed to the booming sectors of the economy…

In the longer term, the increasing numbers of people in the Asian middle classes, with disposable incomes to match, will generate rising demand for a range of Australian goods and services - whether they be a range of foodstuffs, Australian tourist destinations, or educational, financial and other professional services in which Australia has a proven track record. Indeed, this process is well underway.

posted on 29 November 2011 by skirchner in Commodity Prices, Economics, Monetary Policy

(0) Comments | Permalink | Main

My Review of Paul Cleary’s ‘Too Much Luck’

My review of Paul Cleary’s book ‘Too Much Luck’ is up at The Conversation. The original review included a discussion of the role of the exchange rate which unfortunately hit the cutting room floor, but can be found below the fold. The review draws on a monograph by Robert Carling and I making the case against a sovereign wealth fund for Australia that will be published by CIS in the New Year.

Paul has been offered the opportunity to respond.

Correction requested by Paul Cleary: “Stephen Kirchner’s review of Paul Cleary’s book Too Much Luck said he “wants the Foreign Investment Review Board to use its powers to force foreign companies to buy local”, and that he has advocated policies, including industry intervention, which appeal to “Australia’s parochial, insular and protectionist past”. Dr Kirchner now accepts that Mr Cleary’s book advocates no such policies. His policy recommendations only involve measures to save windfall resource revenue in a sovereign wealth fund, and to tax and regulate the resources industry more effectively.”

I welcome the fact that Paul says he does not support such policies and I am sorry for the misunderstanding.

Too Much Luck is Never Enough

If Paul Cleary is to be believed (Too Much Luck: The Mining Boom and Australia’s Future, Melbourne, Black Inc, 2011), the mining boom is the worst thing that ever happened to Australia. He maintains that the mining industry is under-taxed and under-regulated and in need of ‘stronger and more effective government control’ (ix). Yet at the same, he argues that recent governments have also squandered the revenue windfall from the mining boom. These positions are difficult to reconcile. Cleary’s proposals for greater taxation and regulation of the mining sector and increased use of a sovereign wealth fund (SWF) would only enhance the capacity of governments to squander the boom.

Cleary’s book is based in part on Freedom of Information requests made to Treasury, the Reserve Bank and other agencies on some of the public policy issues raised by the mining boom. Ironically, these FOI documents are far less revealing than what Treasury and other official sources have put on the public record.  Cleary tries hard to find support for a sovereign wealth fund among the documents even though they mostly relate to experience in overseas economies that have little in common with Australia. He is forced to concede the Treasury’s ‘curious bias against sovereign wealth funds’ (71). Cleary neglects to mention comments in a speech by then Treasury Secretary Ken Henry to Australian Business Economists on 18 May 2010 arguing against a SWF. These comments are far more compelling than the Treasury working papers Cleary cites. Cleary also seeks to enlist Reserve Bank Governor Glenn Stevens to his cause, but Stevens’ comments on SWFs have been equivocal and have called for no more than the issue to be considered.  Much of Cleary’s argument is ultimately an appeal to the authority of economists, but the few reputable ones he relies on for support would also reject many of the arguments in his book.

Cleary’s support for a sovereign wealth fund reflects his view that Australia’s resources are finite and that future generations will be left worse-off because the current generation will have exhausted these resources and spent the proceeds.  The idea that resources are finite in any economically meaningful sense is fallacious because of productivity growth and long-run substitutability on both the demand and supply sides of commodity markets. The Australian economy is well diversified and not dependent on a single resource, unlike the economies of Norway or Timor-Leste that Cleary views as models for Australia. The so-called ‘resource curse’ is not a function of resources, but of weak institutional frameworks in some resource-rich developing countries. Australia, by contrast, scores very highly on comparative measures of institutional quality.

The idea that future generations need to be ‘compensated’ for resource depletion by the current generation through a SWF is absurd. Future generations will be much wealthier than the current generation due to the ongoing technical progress that drives productivity and long-run growth in real GDP per capita. This will occur regardless of the contribution of the resources sector. Proven reserves are a poor guide to future resource availability. But even based on these estimates, Australia’s resources are not in danger of being exhausted. Cleary’s case for ‘compensation’ is the equivalent of saying that people in the late 19th century should forgo current consumption and living standards for the benefit of people in the late 20th century.

Cleary’s view that resources are finite leads to the absurd suggestion that they should be left in the ground because future resource scarcity will render them more valuable later. For example, he thinks that LNG should be left in the ground ‘for another decade or two at least’ (15). He also argues Australia should not compete with other countries that are also exploiting their resources aggressively because this will lead to over-supplied markets and falling commodity prices. Australia is a price-taker in global commodity markets. It should focus its efforts on increasing real output and exports rather than a fruitless attempt at manipulating world prices through cartel-like behaviour.

It is a gross contradiction to say that resources are in danger of being exhausted and that their prices will also fall. Cleary can’t have both sides of the argument. In fact, real commodity prices almost certainly will fall in the long-run because they become less scarce over time, a stylised fact well established by economists like Julian Simon, Harold Barnett and Chandler Morse. But this is no threat to Australia’s future prosperity, because Australia will share in the process of increasing global supply through greater output and export volumes, employment and productivity growth. Cleary’s suggestion that Australia will in future become ‘like Nauru today, but on a continental scale’ is ridiculous hyperbole.

Cleary accuses the mining industry of a multitude of sins. The mining industry uses imported equipment, adding to the current account deficit. It is capital intensive and does not create jobs. He is hostile to foreign investment and foreign ownership and wants the Foreign Investment Review Board to use its powers to force foreign companies to buy local (92). Yet the policies implied by these views are at odds with his complaint that the mining industry draws resources away from other sectors of the economy. The solution to these capacity constraints is to increase Australia’s openness to foreign goods, capital and labour so that the mining industry can expand without increasing pressure on other sectors of the economy. But Cleary does not argue for a single measure that would increase the openness and flexibility of the Australian economy.

Cleary complains that the mining industry puts upward pressure on the exchange rate, but fails to mention that this has the effect of reducing the Australian dollar incomes of the mining industry. The reason the current mining boom has not triggered the boom-bust cycle that characterised the Australian economy historically is precisely because this is the first boom Australia has experienced with the benefit of a flexible exchange rate. Just as a falling exchange rate insulates the Australian economy against adverse foreign shocks, a rising exchange rate serves to moderate the macroeconomic consequences of the terms of trade boom. Exchange rate appreciation is the solution not the problem.

Instead of allowing the price signals from the exchange rate and commodity prices to guide resource allocation, Cleary wants the government to warehouse the revenue from the mining boom in foreign currency denominated assets, effectively taking a massive punt on the future direction of the exchange rate (the foreign currency assets would rise in value if the exchange rate fell). This proposal is little different from massive intervention in the foreign exchange market and would mark a return to a managed exchange rate regime. However, it would be entirely ineffective in alleviating upward pressure on the exchange rate. Average daily turnover in the Australian dollar against foreign currencies is around $A100 billion. Any foreign currency assets held by an Australian SWF would be a drop in the ocean of this enormously deep and liquid market, which is why official intervention in foreign exchange markets is rarely effective in moving exchange rates other than in the very short-term. 

In addition to a sovereign wealth fund, Cleary would like to see a debate about the creation of a state-owned resource company. But both these proposals sit uneasily with his concern about the role of governments in squandering the mining boom. Cleary is critical of the National Broadband Network, seeing it as symptomatic of the bad public policy that results when governments are awash with revenue, yet at the same time, he is in favour of industry policy and laments the demise of government boondoggles like the Green Car Innovation Fund (29). Cleary would have Australia retreat behind a wall of strategic industry and trade policy and state-run commodity cartels.

Cleary thinks that a sovereign wealth fund can be ‘pollie proofed’ through legislative provisions. The problem with public saving through a SWF is that it is just deferred government spending. There is no reason to believe that future governments will spend the saving accumulated in a SWF any more wisely than the governments we have actually had. In reality, the proceeds of the mining boom are being saved and invested by the private sector. It is only governments that have been dissaving and spending poorly, as Cleary is the first to admit.

If Cleary doesn’t like multinationals making money off Australia’s resources, he’s not too keen on workers profiting either. For Cleary, tax cuts and welfare payments are just ‘pissed up against the wall’ (ix). Miners spend their wages on ‘grog, gambling and women’ or go into debt to buy houses, boats and four wheel drives (47).  Apparently, future generations of Australians will be more saintly and frugal and therefore more deserving of this largess.

Cleary goes so far as to suggest that the mining industry has ‘subverted a well functioning democracy’ (77) through its opposition to additional taxes. Yet no one would suggest that the trade union movement was ‘subverting democracy’ by defending its interests in the public sphere in response to the Howard government’s industrial relations reforms. Defending one’s interests in the public sphere is the very definition of democracy, not its subversion. Yet the extra taxation and regulation Cleary proposes would only increase the incentives for the mining industry to become involved in politics.

Cleary’s views on the mining boom and his public policy recommendations are confused and contradictory. Cleary’s book is an appeal to Australia’s parochial, insular and protectionist past, when mining booms really did cause boom-bust cycles because the Australian economy lacked its current openness and flexibility. We can be thankful those days are behind us, but it is mystery why a journalist of Cleary’s standing would want to turn back the clock to the failed policies of the past.

posted on 21 November 2011 by skirchner in Commodity Prices, Economics, Foreign Investment, Media

(0) Comments | Permalink | Main

Did Nudge Kill Keynes? Behavioural Economics and the Stimulus

Business Week reports:

The design of Making Work Pay plays off of mental accounting. One of Thaler’s findings is that people are more likely to spend money that they have filed in their “current income” mental account rather than their “assets” mental account—in other words, they measure their spending against the size of their paycheck instead of the size of their bank account. A lump-sum tax rebate feels like an increase in wealth and is more likely to be saved. A series of slightly bigger paychecks feels like an increase in income and is more likely to be spent.

That’s not what happened in practice, according to Sahm, Slemrod, and Shapiro. In a study of the 2009 stimulus, based on 500 telephone interviews, the authors found that only 13 percent of Making Work Pay recipients reported that the tax credit would lead them to increase spending. This was just half of the 25 percent spend rate the researchers found for the traditional lump-sum tax rebate in President Bush’s 2008 stimulus. Of course, 2009 was a worse economic climate than 2008, and that might have played a role in the change. To control for this, the researchers looked at one-time stimulus payments that went to retirees at the same time that Making Work Pay was going to working households. The retirees, too, reported much higher spending rates than the Making Work Pay households, who got their money in a steady drip.

The authors can only guess at what’s behind their results.

There are plenty of conventional and straightforward explanations for why MWP didn’t work that do not require any resort to behaviouralism. The problem with behavioural economics is that it is really anti-behavioural. Behaviouralists will resort to any ad hoc theory, except the one behavioural theory we already know that actually works: self-interested rational choice.

posted on 13 November 2011 by skirchner in Economics, Fiscal Policy

(0) Comments | Permalink | Main

De-Occupying Greg Mankiw

At the beginning of my first Economics I lecture at ANU in 1986, the lecturer told us that for the next three years we would be studying neo-classical economics. He helpfully suggested if we were interested in other schools of economic thought, we might want to enrol at another university. He went on to point out the significant earnings premium that ANU economics graduates then earned in the labour market. The implication was that these two facts were not unrelated. Not that we needed to be told. This is exactly what many of us had signed-up for. The subject had a 45% failure rate.

If the idea was to indoctrinate students, it failed in my case. I don’t consider myself a neo-classical economist, more a heterodox institutionalist, although I accept many fundamental neo-classical insights. You first have to study neo-classical economics to understand what you reject and why. Too many dismiss neo-classical economics without ever having understood it other than as a caricature.

This would seem to be the case with those students who staged a walk-out from Greg Mankiw’s class at Harvard, judging by their very silly open letter. Having taught from Mankiw’s introductory and intermediate texts, I can vouch for the fact that they are very balanced in their approach, as a good textbook should be. I teach from Cowen and Tabarrok’s principles text, which is more Hayekian than neo-classical, yet still very balanced. For example, it makes a conditional case for activist fiscal policy I would reject, but it is important that students understand the thinking behind such policy.

It is far from clear what Mankiw’s critics want taught instead, but I suspect it is not economics.

posted on 04 November 2011 by skirchner in Economics

(0) Comments | Permalink | Main

Zero Bubble: A Theory of Asset Price Booms and Busts

The Philly Fed’s Business Review has a good article by Satyajit Chatterjee on why asset price booms and busts are a rational response to the uncertain return to innovation.

posted on 01 November 2011 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

Ehrlich versus The Doomslayer

Stanford University misanthrope Paul Ehrlich will be giving a lecture at UNSW on Monday. You can read about Ehrlich’s humiliation at the hands of Julian Simon here and here.

posted on 29 October 2011 by skirchner in Commodity Prices, Economics

(0) Comments | Permalink | Main

Auctioning Permanent Migration Rights: Friedman Agreed

My recent proposal to auction the right to permanently migrate to Australia was not new. I was treading a path already worn by Gary Becker and Julian Simon in the US, and Mark Harrison, John Logan and Wolfgang Kasper in Australia.

My proposal provoked predictable outrage from those unwilling to think about the idea for more than five seconds. The outrage is partly due to the failure to understand that an auction scheme is designed to facilitate migration, not prevent it. Wolfgang Kasper emailed me this recollection of his experience trying to sell the idea at a conference of economists in San Francisco:

It was a gathering of like-minded friends and some very prominent economists. We had been told that Milton and Rose [Freidman], who lived in their apartment nearby, would come to a morning session, when Milton (now 89) was fresh….Before long, Milton was in the midst of the debate, debunking some idea or elaborating and extending someone else’s. He was in fine form! At morning tea, we expected to say goodbye, but they said they had come for the day! “Rose and I are not a monument,” he said. “This is exciting work, it’s an elixir for Milton to mix with you people,” said Rose…

At one stage of the conference, when I spoke about the idea of selecting immigrants by worldwide auction, I was attacked by R. Rubin, a former Clinton Minister of Labor. He disagreed with me violently… “You just want to sell passports!” I had of course worked on this question in a consultancy report for New Zealand and stood my ground. Our argument became, in my opinion, a distraction to the main topic of our session. Friedman intervened: “I am sure that everyone here has understood Dr. Kasper’s rationale, and I agree with him. Robert, why don’t you think it over overnight. Give me a ring in the morning if you still disagree and I’ll buy you and Wolfgang the best breakfast in town, so we can argue it out some more!” This was vintage Friedman. Alas, Rubin never came back with his counterarguments, and I never was bought breakfast by Friedman.

posted on 27 October 2011 by skirchner in Economics, Population & Migration

(0) Comments | Permalink | Main

Steve Jobs versus Bill Gates: The Entrepreneur as Hero and Villain

My appreciation of Steve Jobs, from this week’s Ideas@theCentre:

The passing of Steve Jobs saw a remarkable outpouring of appreciation for the man and the company he founded, and its many innovative products. The quality and user-friendliness of the products, combined with outstanding brand management and marketing, explain Apple’s loyal, even sectarian, following.

It is unusual for an entrepreneur to be appreciated this way. The obvious comparison is with Bill Gates. Gates and the company he founded have also had a profound impact on our everyday lives. Yet if Gates were to die tomorrow, it is hard to imagine people lighting candles outside computer stores. Gates is still seen as the grasping robber-baron of computing, even though his business strategies have been no more anti-competitive than Apple’s iTunes store. Gates’ success earned him prosecution by the US Justice Department and EU competition authorities for supposedly harming consumers.

Microsoft has bestowed benefits on the world rivalling those of Apple, but to the extent that Gates earns plaudits, it is mainly for his philanthropic efforts. Gates’ philanthropy is likely motivated, at least in part, by the desire to win the respect and appreciation he never found as an entrepreneur. Gates is a member of a group of billionaires who have signed up to the notion that they must give away the majority of their wealth. In Australia, Dick Smith threatens to ‘out’ the wealthy who fail to give, treading a fine line between moral suasion and public intimidation. Yet Gates has done more for humanity as an entrepreneur than he is ever likely to achieve as a philanthropist. It is only the entrepreneurship that made the philanthropy possible.

This is something Jobs understood very well. He showed little interest in philanthropy, not because he was uncharitable but because he recognised that it was not his comparative advantage. Jobs was consequently ‘named and shamed’ by the US philanthropic sector. This did not dent his reputation, perhaps because the public also recognised they were better served by his relentless focus on Apple’s product.

Adam Smith famously observed that ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.’ In 1985, Jobs told Playboy magazine ‘we think the Mac will sell zillions, but we didn’t build the Mac for anybody else. We built it for ourselves.’ Like Gates, Jobs was a self-interested and self-serving businessman and yet we are all much richer for their efforts.

posted on 14 October 2011 by skirchner in Economics

(0) Comments | Permalink | Main

SIPP Pension

posted on 13 October 2011 by skirchner in Other Links

(0) Comments | Permalink | Main

SIPP Pension

posted on 13 October 2011 by skirchner

(0) Comments | Permalink | Main

Roubini Global Economics ‘Not Yet Profitable’, May Be for Sale

Nouriel Roubini’s RGE is ‘not yet profitable’ and may be up for sale according to Institutional Investor. This made me laugh:

For RGE’s senior analysts, getting it right requires gaining a deep understanding of Roubini’s distinctive approach to macroeconomic research.

Good luck with that!

posted on 12 October 2011 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

Was there Anything Ian Macfarlane Couldn’t Do?

A strange line from Paul Kelly’s The March of the Patriots:

Macfarlane’s skill at smoothing the growth curve helped to transform Sydney’s skyline…

Move over Harry Seidler! Then there is this:

Bank independence was Costello’s triumph over Hewson.

In this op-ed, I argue that it was Hewson’s triumph over the Bank.

posted on 09 October 2011 by skirchner in Economics, Monetary Policy

(0) Comments | Permalink | Main