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The Case Against RBA Exchange Rate Intervention

I have an op-ed in today’s Business Spectator making the case against RBA intervention in the foreign exchange market. Text below the fold for those who are not registered.

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posted on 12 August 2012 by skirchner in Economics, Financial Markets

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We Welcome Foreign Investment, Except When We Don’t

I have an op-ed in today’s Australian arguing the federal coalition had the right policy on foreign direct investment 24 years ago when it was committed to abolishing the Foreign Investment Review Board. The recent debate on this issue within the coalition almost perfectly mirrors a similar debate in the late 1980s, only this time, the National Party seems to be getting its way. Full text below the fold (may differ slightly from published version).

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posted on 05 August 2012 by skirchner in Economics, Foreign Investment

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Richard Kovacevich: ‘This is America Today’

posted on 15 July 2012 by skirchner in Economics, Financial Markets, Rule of Law

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Warwick McKibbin on Australia’s Carbon Tax

posted on 04 July 2012 by skirchner in Economics

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Welcome to Australia. That’ll be $25,000

Brian Toohey in the Weekend AFR suggests charging for permanent migration rights:

The time may be ripe to adopt a market-based solution to the political obstacles to obtaining more workers from overseas.

Charging immigrants a fee to help fund new infrastructure could help ease worries about overcrowding as more people become permanent residents. For refugees, paying the Australian government to come here would be a lot more attractive than paying a people smuggler. Combined with an increased refugee intake, it should help undermine the smugglers’ “business model”.

In theory, politicians who accept the free movement of capital, and goods and services, across international borders, should also accept the free movement of labour. In practice, both sides of Australian politics squabble over who can best control the inflow of new workers and their families, especially those who have fled political violence…

The migration program for 2012-13 of 190,000, including a humanitarian component of 13,750 refugees, is likely to stay around that level for several years. It is doubtful if a deferred fee of $20,000 to $25,000 per adult, with a discount for upfront payments and couples, would deter suitable applicants. If 190,000 permanent new settlers paid an average of only $17,500 each year, this would raise more than $3.3 billion annually when the scheme matured.

In my CIS Policy Monograph, Hands, Mouths, and Minds I suggested an auction scheme rather than a flat fee for permanent migration rights, including the humanitarian quota. However, an auction scheme should not be viewed primarily as a revenue-raising measure, but rather as a selection device. Prospective migrants have much more knowledge about their potential for success in Australia than bureaucrats in Canberra attempting to centrally plan the labour market. An auction scheme allows potential migrants to act on their superior knowledge while enabling the Australian government to economise on migrant selection processes by focusing only on security assessments.

posted on 01 July 2012 by skirchner in Economics, Population & Migration

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FDI Restrictions for Thee But Not for Me

Qantas is lobbying politicians for FDI restrictions to prevent Etihad from acquiring Virgin or to ease the foreign ownership restrictions in the Qantas Sale Act. Australia’s Hansonite political class will likely choose the former over the latter, at least in the short-run. In the long-run, however, the government will probably have to choose between a majority foreign-owned Qantas or taking Qantas back into public ownership as a loss-making ward of the state.

posted on 22 June 2012 by skirchner in Economics, Foreign Investment

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Wayne Swan at Home and Abroad II

Wayne Swan in front of a Euromoney forum in Sydney:

“In a pattern now all too familiar, European politicians are still well behind the curve, having failed to take advantage of the months of relative calm,” Swan said in the text of a speech to be delivered at a Euromoney forum in Sydney today. “Put simply, what is required is some basic political courage.”

Wayne Swan in federal cabinet:

Sources confirmed yesterday that Trade Minister Craig Emerson won approval for the shift with the backing of Ms Gillard, but only after her deputy, Wayne Swan, attacked the policy as lacking a political constituency. The sources said that, although the Treasurer, who has a long record of advocacy for trade liberalisation, did not attack the principles of the policy, he questioned the political wisdom of proceeding with the change at a time when the government was already fighting for reform on a range of other fronts, including the carbon tax.

posted on 14 June 2012 by skirchner in Economics, Politics

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Taxing US Human Capital Flight

From this week’s Ideas@TheCentre:

US embassies around the world are accustomed to queues of people seeking to migrate to America. More recently, a new type of queue has been developing: American ex-pats lining up for the 10-minute and $450 ceremony in which they renounce their US citizenship. According to the Federal Register, the number of Americans renouncing their US citizenship or residency increased from 231 in 2008 to 1,781 in 2011. The US embassy in Bern, Switzerland, was recently reorganised to clear a growing backlog of citizenship renouncers.

This human capital flight gained prominence with the decision of Brazilian-born Facebook co-founder Eduardo Saverin to renounce his US citizenship and take up residency in Singapore. This led to accusations of tax avoidance, ingratitude and disloyalty levelled at the former immigrant to the US.

The accusation of tax avoidance is wrong. Under US tax law, expatriation is a deemed disposal for capital gains tax purposes. Saverin will pay taxes on his accrued Facebook capital gains while he was a US citizen. Only subsequent gains, if any, will benefit from the absence of capital gains taxes in Singapore.

The Saverin case nonetheless prompted senators Charles Schumer and Bob Casey to propose a new law, the Ex-Patriot Act, which would ban expatriates from ever re-entering America and tax an ex-citizen’s capital gains at a punitive 30% for 10 years. The Ex-Patriot Act has obvious similarities with the laws imposed by some of history’s worst regimes.

The US government has long made life difficult for its expats, taxing them on their global income, but the growing human capital flight from America has little to do with tax minimisation. The compliance burden resulting from the Foreign Account Tax Compliance Act and other new laws have made it increasingly costly to be an American abroad. Foreign firms are becoming reluctant to hire Americans, and foreign financial institutions increasingly refuse to deal with them because of the US government’s growing administrative overreach.

Rather than persecuting human capital flight, US senators would do well to consider why American citizenship is increasingly seen as a burden and not an asset.

posted on 02 June 2012 by skirchner in Economics, Population & Migration

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Euro Crisis Vindicates Friedman’s Big Idea

I have an op-ed in today’s Business Spectator arguing that the euro crisis should be viewed primarily as a vindication of Milton Friedman’s pioneering 1953 essay, ‘The Case for Flexible Exchange Rates.’

Not mentioned in the op-ed, but Friedman’s essay had its origins in a 1950 memo he wrote as a consultant to the Office of Special Representative for Europe, United States Economic Cooperation Administration. The essay references many of the problems with exchange rate regimes in Europe at that time.

posted on 21 May 2012 by skirchner in Economics, Financial Markets, Monetary Policy

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The Western Australian Future Fund: A Solution in Search of a Problem

I have an op-ed in today’s West Australian making the case against the proposed Western Australian Future Fund. As I note in the article, the WA Future Fund nonetheless improves on the federal model by avoiding the establishment of an expensive new funds management operation that duplicates existing capabilities. The federal Future Fund incurred expenses of $444m in 2010-11.

posted on 21 May 2012 by skirchner in Commodity Prices, Economics, Fiscal Policy

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Intergenerational Conflict: Pagan versus Gruen

I have an article at The Conversation referencing the Pagan-Gruen exchange at the Melbourne Institute’s Intergen+10 Workshop (you can listen to the exchange here). As I note in the article, whether the 2010 IGR growth assumptions were really the outcome of a political process is less important that the perception on the part of serious observers that they could be. This is something that needs to be addressed.

It is interesting to compare how the last IGR compiled under the Howard government in 2007 characterised Australia’s long-term debt position compared to the 2010 IGR. The 2007 IGR said that:

Demographic and other factors are projected to place significant pressure on government finances over the longer term and result in an unsustainable path for net debt towards the end of the projection period.

If Adobe Acrobat’s search function is right, the word ‘unsustainable’ never appears in the 2010 IGR. The 2007 IGR was a much more candid document in relation to the long-run fiscal outlook.

posted on 20 May 2012 by skirchner in Economics, Fiscal Policy

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A New Broom at the FIRB?

New FIRB chairman Brian Wilson promises greater openness in an interview with Glenda Korporaal:

The former investment banker, who has been on the board of FIRB since 2009 and took over as chairman last month, says FIRB is making a greater effort to communicate the government’s foreign investment policies through its website and in briefing sessions for advisers. “It is important for all our constituencies—the Australian public, Australian business, foreign investors and their governments—to understand that the processes FIRB goes through are sensible and rigorous, and open and consistent,” he says. “Being a little more forthcoming, and having a little more transparency, will actually reduce, for some, the suspicion that we hear or read about from time to time.”

Wilson says FIRB is now putting up a lot more on its website about Australia’s foreign investment policies.

The FIRB has some catching up to do when it comes to posting things on their web site. The fundamental problem with the legislation the FIRB administers remains:

“There is only one test—is the proposal contrary to the national interest? What that may be varies over time depending on economic circumstances, community attitudes, geopolitics, a whole gamut of things.”

Then there is this:

“So, I wouldn’t have thought talking to FIRB about a concept or a possible transaction would tip you over the ASX disclosure threshhold.”

Probably not quite the level of certainty investors are looking for, but perhaps a good quote for the M&A lawyers to file away for future reference.

posted on 12 May 2012 by skirchner in Economics, Foreign Investment

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Good and Bad Reasons for a Budget Surplus

The government’s stated motivation for returning the budget to surplus next financial year is to give the Reserve Bank ‘maximum room to move’ on interest rates. Yet a fiscal contraction is no more effective in restraining the economy than a fiscal expansion is effective in stimulating it. In an open economy with a floating exchange rate and an inflation-targeting central bank, changes in fiscal policy do not have significant macroeconomic implications. That is why the reaction of financial markets to budget statements is so negligible. The Reserve Bank’s statements also make clear that fiscal policy is a very minor consideration in its decision-making.

During the financial crisis, the government tried to have it both ways, arguing that its fiscal stimulus saved us from recession, but had no implications for interest rates. The second part of the argument was correct, but not the first. If the first part had any truth, then monetary policy must have been much tighter during the financial crisis as a result of the government’s stimulus spending.

The government should have no concern over the macroeconomic implications of changes in the budget balance, so long as it is balancing its budget over time and conducting fiscal policy in a sustainable manner. This should free the government to focus on what fiscal policy can do effectively, namely, changing microeconomic incentives to work, save and invest.

The government and opposition’s mistaken belief in a trade-off between fiscal and monetary policy is dangerous, because it leads to fiscal policy decisions that are more about window-dressing the budget balance and claiming credit for reductions in official interest rates that would have happened anyway, rather than improving incentives. For example, the mistaken belief that tax cuts stimulate demand and lead to higher interest rates can prevent sensible tax reform that has positive implications for the supply-side of the economy. Similarly, the fiscal stimulus of 2008-09 was bad primarily because it misallocated resources. Take away the macroeconomic rationale and the stimulus measures look indefensible on microeconomic grounds, even if the spending had been administered perfectly (which it was not).

A budget surplus target can be defended as a fiscal rule designed to impose additional discipline on government decision-making that might otherwise be absent. But there is no reason to subordinate fiscal policy to monetary policy and fiscal targets should not be pursued at the expense of the microeconomic incentives that are the ultimate source of both economic growth and long-term fiscal sustainability.

posted on 09 May 2012 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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Mining Booms and Government Budgets

John Freebairn makes the case against a sovereign wealth fund for Australia in the Australian Journal of Agricultural and Resource Economics (no paywall for the moment!) From the conclusion:

The applicability of arguments used in other countries, including Norway and the smaller Middle East oil producers, to quarantine the revenue windfalls of a mining boom in a sovereign wealth fund for use by future generations are questioned for Australia. Relative to these countries, in Australia mining revenues represent a smaller share of the economy and budget, and Australia has a much more diverse portfolio of different minerals and energy, and many with proven reserves exceeding 50 years at current extraction rates. There are other sources of volatility of government revenues and outlays with low correlations with mining government revenues. Future generations are expected to have higher per capita incomes than the current generation. Including mining revenues and outlays within the normal budget processes provides greater flexibility for using the mining boom revenue windfalls for a wider range of investment, tax reform and debt reduction strategies to support higher future incomes than a sovereign wealth fund.

posted on 04 May 2012 by skirchner in Commodity Prices, Economics, Fiscal Policy

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Give Bernie 50 and He Will Want 100

Some of us have long memories:

‘No Risk In 1% Rate Cut, Says Fraser’,  PAUL CHAMBERLIN, 4 December 1996, The Age:

The former governor of the Reserve Bank, Mr Bernie Fraser, said last night he believed November’s cut in official interest rates should have been doubled. As an overheated dollar retreated in markets yesterday, amid concern about its effect on exports, Mr Fraser said he thought the 0.5 per cent reduction announced last month by the central bank could have been 1 per cent.

“I thought at the time with inflation pretty well under control, very much under control really, and the economy being a bit sluggish in some sectors, that we could have accommodated a 1 per cent cut without any risks,” he said on the ABC’s The 7.30 Report.

Bernie’s comments in December 1996 tanked AUD so hard, the RBA did not cut at that month’s regularly scheduled Board meeting. The RBA waited until 14 December while markets recovered from Bernie’s open mouth operations. So monetary policy ended-up being marginally tighter for longer thanks to Bernie. During his time as Governor, Bernie gave us an average cash rate of 8.7% and an average inflation rate of 3.6%.

posted on 01 May 2012 by skirchner in Economics, Financial Markets, Monetary Policy

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