An excellent op-ed by Doug Irwin on why US monetary policy is too tight:
The Divisia M3 and M4 figures for the US money supply, calculated by the Center for Financial Stability, show that the money supply is no higher today than in early 2008. For all the fretting about the Fed’s accommodative policy, the money supply has barely increased and is way off its previous trend. This represents a very tight policy compared to Friedman’s rule that growth in the money supply should be limited to a constant percentage. The lack of growth in the money supply is an important reason why US inflation and inflationary expectations remain under control. The Federal Reserve Bank of Cleveland’s latest market-based estimate of the 10-year expected inflation rate is 1.32 per cent.
Restructuring Prudential Bank Regulation in the Light of the GFC
‘Restructuring Prudential Bank Regulation in the Light of the GFC’ is the topic of this year’s free Warren Hogan Memorial Lecture to be given by Professor Charles W. Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia Business School, a Professor at Columbia’s School of International and Public Affairs, and a Research Associate of the National Bureau of Economic Research.
Charles is one of the most interesting economists working in this important area of public policy. You can register to attend the lecture by following the above link.
Does Glenn Stevens know something Ben Bernanke does not? Matt Yglesias seems to think so:
if it’s true that Australia has recession-proofed itself through sound monetary policy, there are lessons that larger countries could be learning here. Heck, we could even be hiring some Australian central bankers to ply their trade in England, Japan, the United States, or wherever.
It is of course very implausible that being Australian in itself makes one a better central banker or the RBA has hit upon a secret formula for conducting monetary policy unknown to the rest of the world (not least because Australian central bankers mostly trained in North America). It is equally implausible that foreign central banks are incapable of observing and learning from the Australian experience.
Nor is that experience as good as Matt suggests. Australia went into the financial crisis with an inflation rate of 5%. In the absence of a severe global economic downturn, the RBA would have been forced to engineer a local one to have much hope of bringing inflation back down to the 2-3% target range. I argued back in August 2008 that monetary policy had been too easy in previous years. The subsequent financial crisis does not change that judgement in any way if you accept that it was an event that could not be forecast.
Glenn Stevens and Ben Bernanke both assumed their respective roles in 2006. Had they swapped roles, would monetary policy and macroeconomic outcomes have been any different in Australia or the US? I think not.
Jessica Irvine has rounded-up another Shadow RBA Board, including yours truly. Like the overlapping ANU Shadow Board, the News Ltd version makes normative rather than positive predictions, ie, what the RBA ‘should’ do rather than what it ‘will’ do.
This distinction probably isn’t very meaningful if the starting point for each month’s normative forecast is the existing cash rate. If the starting point re-sets every month, the Shadow rate track cannot deviate far enough or long enough from the actual rate to be economically significant. A Shadow Board needs to take its previous decisions as the starting point and develop an independent interest rate path. Even then, the difference between the Shadow and actual rate tracks may not amount to very much.
The US Shadow Open Market Committee and the UK’s Shadow Monetary Policy Committee were established specifically to critique current policy from a monetarist perspective, as well as advocating reform of existing monetary institutions. This has not prevented significant differences of opinion on these bodies. For example, the Shadow MPC includes supporters and opponents of QE for the UK. As I have argued here previously, QE is an entirely orthodox monetarist policy prescription. It represents no more than a change in operating instrument and QE in itself does not indicate whether policy is easy or tight. Monetary conditions could still be too tight even in the presence of large scale outright bond purchases by the central bank if money demand is strong enough.
We were also asked where we would like to see the official cash rate in 12 months time. My expectation is 100 bp lower than the current rate, but I do not think this will be a particularly easy monetary policy stance. There is a good case to be made that that the world equilibrium real interest rate and potential output have declined as a result of the bad public policy decisions taken globally during and after the financial crisis and now reflected in record low bond yields. How much of this is cyclical and how much becomes permanent depends on where public policy goes from here.
Monetary policy will need to reflect this, but will not do much to address what are ultimately supply-side problems.
Ashby Monk on how SWFs failed to prevent fiscal disaster in the EU:
The pension reserve funds were set up to try to use the ‘power of finance and compounding’ to take some short-term surpluses to meet long-term unfunded pension obligations. It’s a neat idea, which hasn’t played out as hoped. For example, Ireland used its fund to bailout Irish banks, Portugal has tapped its Fund to the tune of €6 billion to meet its fiscal obligations, and Spain has used its Reserve Fund to prop up its bond market. You get the idea.
The Reserve Bank of Australia has used powers given to it by Treasurer Peter Costello to issue a “conclusive certificate” to prevent publication of the RBA board’s minutes, saying their release is not in the public interest.
The Reserve Bank’s action on Thursday 25 November came just three days before the start of a hearing in the Administrative Appeals Tribunal in which The Weekend Australian newspaper was set to challenge the RBA’s decision under the Freedom of Information Act not to release the minutes of its meetings and voting records for 2003/04.
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).
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.
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.
“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.”
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.
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.