Working Papers

2007 10


Australia and New Zealand are among the few developed countries not to publish a monthly CPI, producing a quarterly series instead.  In Australia, the ABS have always argued that a higher frequency CPI does not stack-up on a cost-benefit basis.  Yet it would seem most unlikely that the cost-benefit calculus in Australia and New Zealand would be substantially different from the many comparable countries that somehow manage to produce a monthly CPI. 

In Australia, TD Securities and the Melbourne Institute have teamed-up to produce a monthly CPI, that has a low tracking error with the official series.

The National Bank in New Zealand are now looking to do something similar and are calling for help from fellow kiwis:

There seems little appetite across policy circles for producing a monthly CPI. So we are going to take it upon ourselves to fill the void. To do this we need your help. For simplicity we’re going to limit ourselves to a domestic or non-tradable inflation measure. The technological age means it is possible to capture many areas of domestic inflation via the internet, which we’ve already started doing. Alas we have gaps, and need your help. So if you’re engaged as a medical practitioner, dentist, mechanic, plumber, electrician, builder, vet, lawyer, accountant, real estate agent, property maintenance, gymnasium, early childhood centre, physiotherapist, or hairdresser (yes we know this is a long-shot), we’d love to have your input. Full confidentiality conditions would apply and we’ll use technology to make responding easy just like the Business Outlook. Just email cameron.bagrie at nbnz.co.nz if you are prepared to help the nation out!


posted on 31 October 2007 by skirchner in Economics, Financial Markets

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RBA Reform Under Rudd?

Opposition Treasury spokesman Wayne Swan flags possible changes to the appointment process for the RBA Board under a prospective Labor Government:

“I am very interested in talking to the reserve bank governor about a new method, open and transparent, of appointing the best possible person available.”

Mr Swan said he would seek the advice of current reserve bank governor Glenn Stevens to discuss ways of implementing a more transparent appointment process.

“I would seek the advice of the current reserve bank governor in constructing a process that would do that,” Mr Swan said.

“We have a number of ex-reserve bank governors around the country, maybe we can put a panel together where they could put together a list of names, for example.

“I want an open transparent process that gives the best person for the job, irrespective of their political affiliation or what fundraising they have done for any political party.

Instead of overhauling the appointments process for the Board, a more significant reform would be to bring the RBA into line with the practices of other central banks and separate monetary policymaking from the Board and place it into the hands of an expert committee, made up of the Bank’s senior officers and outside appointees and excluding the Treasury Secretary.  The monetary policy committee should then be required to release a summary of proceedings and a record of any votes taken at the conclusion of each meeting.  By ensuring a high degree of transparency, there is less of a burden on the appointment process in maintaining the integrity of monetary policy, since the behavior of committee members would be subject to a degree of scrutiny that is entirely absent under current arrangements.

posted on 30 October 2007 by skirchner in Economics, Financial Markets, Politics

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The Business Spectator

The Business Spectator has finally launched and promises to provide a welcome alternative to the unreadable Australian Financial Review:

Now you’ll never have to wait (or pay) for the news (or analysis) that counts. Business Spectator has filled the gap, providing Australians with real-time business news and commentary 24 hours a day, seven days a week.

The Business Spectator also includes a moderated, blog-style section called The Conversation:

The Conversation will combine the best elements of a letters-to-the-editor page, a blog, an online forum and a roundtable discussion. We want to create a place where Australia’s business community can exchange views, react to the news or set the agenda.


posted on 30 October 2007 by skirchner in Culture & Society, Economics, Financial Markets

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Tax Cuts and Interest Rates - Again

Terry McCrann continues to do battle with the ‘tax cuts lead to higher interest rates’ brigade:

what would have happened if the Government had taken the advice of, in particular, Access Economics and tried to bank them.

Since that 2005 budget which projected a $9 billion 2008-09 surplus—itself after spending $10 billion in the 2008-09 year. That’s to say, the projected 2008-09 deficit even back then could have been $19 billion but for the 2005 tax cut.

Since then the Government has spent a further $50 billion, in the 2008-09 year alone. If not spent, ceteris paribus it would now be projecting a $63 billion surplus for that one year. With similar huge surpluses for this year and the other years in the budget forecasting framework…

Macquarie Bank’s Rory Robertson seems to think he’s rediscovered the fiscal wheel, by arguing that the tax cuts have been fiscally stimulatory.  Well, looked at in isolation, of course they are, Rory. Looked at in the totality of revenue change from one year to the next, not having them would have been contractionary.  If you think going from a $15 billion surplus in 2005-06 to a $63 billion surplus in 2008-09 would equate to fiscal neutrality, Rory, we will have to agree to disagree.

Interest rates are as high as they are, and heading slightly higher, not fundamentally because of the tax cuts, but because of the seminal upshift in our prosperity of which the surging budget revenues that fund the tax cuts are the manifestation.

McCrann argues that ‘analytically it is beyond absurd to suggest the Government could have in theory sat on a $63 billion surplus.’  Indeed, with Commonwealth debt paid off, the government would have little choice but to recycle these surpluses via the accumulation of assets in the Future Fund.  Unless the bulk of these funds were invested offshore, the government would over time effectively nationalise a large share of the domestic stock of equity capital. 


posted on 27 October 2007 by skirchner in Economics, Financial Markets, Politics

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The Conflicted RBA Board

Brad Norrington notes the conflicts of interest sitting around the RBA Boardroom table:

ROGER Corbett faces a potentially excruciating choice when he enters the board room of the Reserve Bank in Sydney’s Martin Place on Melbourne Cup Day, less than two weeks away…

two sides of Mr Corbett’s brain will be talking to him: the independent banker and the hard-headed businessman.

Mr Corbett may no longer head Woolworths, but he still serves as a consultant to the giant retailer.

And Michael Luscombe, Mr Corbett’s successor at Woolworths, has made his view plain: there is no case for a rate rise because the inflation rate at Woolies stores does not justify it…

That courage could only make life more difficult for Mr Corbett and others in his position on the board whose business interests could be affected by the decisions they make. The three permanent members of the Reserve Bank are Mr Stevens, his deputy Ric Battelino, and Ken Henry, the Secretary to the Treasury.

The six others, including Mr Corbett, are external board members and most have links to big corporations that do not want an interest rate hike.

Unlike the US Federal Reserve, which hands out statements every time it holds a meeting and releases deliberations of its minutes every six weeks, deliberations of its Australian equivalent remain secret. When the Reserve successfully tried to block The Australian from seeing its minutes in 2004, former board member Dick Warburton said the release of such information would expose external directors to “undue criticism and pressure from the sectorial groups they nominally represent”.

What transpires in the boardroom may never be known, but the pressure from retail business interests on Mr Corbett and his corporate colleagues inside the room is undeniable.

What makes the RBA exceptional among central banks is not so much the lack of minutes, but the failure to separate monetary policy decision-making from the other governance functions of the Bank Board.

In the US, the Federal Reserve Board and the Federal Open Market Committee have distinct functions, with the latter determining interest rates (indeed, there is no formal requirement that the Fed Chair also Chair the Open Market Committee).  The RBA’s actions before the AAT in seeking to block access to the Board minutes highlighted the incompatibility of the current governance arrangements with the increased transparency and accountability now routinely demanded of other central banks.

posted on 26 October 2007 by skirchner in Economics, Financial Markets

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Labor’s Tax Policy

Sinclair Davidson and Alex Robson on Labor’s tax policy:

Treasurer Peter Costello is correct when he claims there is a higher tax burden for some taxpayers under the ALP plan: all taxpayers earning between $37,000 and $102,000 will be worse off under Labor.

But the flip side is that some taxpayers will have a lower tax burden and be better off under Labor.

This can be confirmed simply by inspecting the table of figures released by the Treasurer on Sunday. After 2013, for example, those on incomes of $102,000 and above will be better off under Labor because they face lower marginal and average tax rates.

This part of Labor’s plan makes good economic sense. Nobel laureate James Mirrlees, who is leading a comprehensive review of tax policy in Britain, has shown that, even allowing for changes in income inequality, marginal tax rates should fall, not rise, as income increases. This is because the negative supply-side consequences of higher income taxes tend to swamp the inequality effects.

The most recent economic evidence from the US suggests higher income earners - those who will benefit most from Labor’s plan - tend to be the most responsive to changes in their taxable income. By flattening the tax structure, both tax plans move in the right direction.

posted on 26 October 2007 by skirchner in Economics, Financial Markets, Politics

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The Fed Moves Towards an Inflation Target

Ben Bernanke seems to be getting his way, with the Fed moving towards increased transparency, but the new measures will stop short of an explicit inflation target, according to the WSJ:

Federal Reserve officials are nearing consensus on several steps to make their deliberations more transparent to the public, but are likely to defer one of Chairman Ben Bernanke’s longstanding goals: an explicit inflation target.

The centerpiece of their new communications steps would be the release of economic forecasts of policy makers four times a year, instead of the current two times, with additional detail and background, according to people familiar with the matter. Moreover, the horizon for those forecasts would be extended to three years from two…

While the idea of setting an inflation target hasn’t been shelved, officials say it needs more discussion. Meanwhile, they see the longer forecast horizon as an interim step with many of the benefits of an inflation target. The public could assume the Fed expects to achieve its desired inflation rate in three years and thus a third-year forecast amounts to a target. The forecast approach sidesteps the biggest problems with an official number: the misgivings some officials still have with a target, potential political fallout and the difficulty of agreeing on the right number.

posted on 25 October 2007 by skirchner in Economics, Financial Markets

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Blame Martin Place II

I have an article in New Matilda on the implications of this week’s September quarter CPI outcome.

posted on 25 October 2007 by skirchner in Economics, Financial Markets, Politics

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Greenhouse Gas Abatement and Monetary Policy

The RBNZ is quite possibly the world’s first central bank to reference greenhouse gas abatement in explaining the current stance of monetary policy.  According to today’s RBNZ intra-quarter policy review:

There are a number of other upside risks to inflation, including the direct effects of the proposed greenhouse emissions trading scheme and rising global food prices.

Greenhouse gas abatement is analogous to a negative short-run supply shock in its implications for monetary policy, except that it is self-imposed restriction on supply and therefore not strictly a shock.  Couple this with the existing global demand shock emanating from the emerging market economies and monetary policymakers are increasingly going to have their work cut out for them.

posted on 25 October 2007 by skirchner in Economics, Financial Markets

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Blame Martin Place

Today’s Q3 CPI outcome cements the case for further RBA tightening at the November Board meeting.  The government will inevitably cop a lot of flack as a result of the mid-election campaign tightening.  For this, the government largely has itself to blame.  Having taken credit for the cyclical downswing in interest rates in 2001, it can hardly avoid taking responsibility for the other side of the cycle.  The irony is that the government’s campaign on interest rates in 2004 set it up to be a victim rather than a beneficiary of future prosperity.

This is unfortunate, since it distracts attention from the fact that it is the RBA that is ultimately responsible for interest rates and inflation outcomes.  As then Deputy Governor Ian Macfarlane once said, ‘blame Martin Place.’  It is now clear that the RBA has fallen behind the curve in its task of inflation control.  The RBA was already forecasting an increase in inflation for 2008 in its August Statement on Monetary Policy, even with the benefit of the August tightening.  The baseline for the underlying inflation forecast in the November Statement will be 3.0%, based on the average of the statistical core series published today.  Even with the benefit of a November tightening, it will now be difficult for the RBA to publish a target-consistent inflation forecast in the November Statement.  The RBA really needs to raise rates by 50 bp in November, although will probably stick with 25 bp, with a follow-up 25 bp in December.

The smartest thing a new Labor Government could do would be to demand that Governor Stevens start giving press conferences after each monthly Board meeting.  This would significantly change the media dynamics surrounding interest rate changes and make clear to the public who is really responsible for inflation control and changes in interest rates.

posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics

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Explaining Higher Interest Rates

Terry McCrann explains the real causes of higher interest rates:

It’s the prosperity, stupid.

posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics

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Rudd as ‘Unreconstructed Interventionist’

Sinclair Davidson and Alex Robson argue in a WSJ op-ed that federal opposition leader Kevin Rudd is a thinly disguised economic interventionist:

a closer look at Mr. Rudd’s record reveals that he’s not a reformer, but rather an unreconstructed interventionist masquerading as a free market conservative. Call it “Ruddonomics.”

Take his parliamentary record, for a start. Since coming into the Parliament in 1998, Mr. Rudd has toed the party line and opposed most efforts to further reform the economy. The Australian Labor Party opposed the privatization of Australia’s government-owned telecommunications provider, Telstra; strongly protested industrial relations reform, including Mr. Howard’s recent efforts to reduce union power and abolish unfair dismissal laws; and, most importantly, opposed all significant tax reform over Mr. Howard’s tenure, including cuts in income taxes.

Mr. Rudd’s economic philosophy isn’t a secret. In a speech to the free market Center for Independent Studies in Sydney last year, he openly attacked the free market ideas of Nobel Laureate Friedrich Hayek, branding him a “market fundamentalist.” In Mr. Rudd’s mind, it’s okay to accept “the economic logic of markets but . . . these must be properly regulated and that the social havoc they cause must be addressed by state intervention.” He also argued that public policy should deliver long-term market-friendly reform tempered by “social responsibility.”

posted on 23 October 2007 by skirchner in Economics, Politics

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Arbitraging Federal Electoral Division Betting Odds

Simon Jackman identifies daily spot arbitrage opportunities in bookmakers’ odds for various divisional races in this year’s federal election.

posted on 23 October 2007 by skirchner in Economics, Financial Markets, Politics

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The Baltic Dry Index versus Kevin Rudd

Capacity constraints are one of the issues in this year’s federal election in Australia, with the opposition Labor Party suggesting that the federal government has failed to ‘invest’ in capacity across a broad range of areas. 

A less parochial perspective on the issue shows that governments and the private sector everywhere have been caught out by the strength in global demand.  As the WSJ notes, the Baltic Dry Index rose to a new record high last week and Australia is hardly alone in experiencing congested ports:

The Baltic Exchange Dry Index, the most important and widely used indicator of world-wide ocean freight rates for bulk commodities, hit a record Friday after rising 169% over the past year. And shippers, brokers and commodity merchants are braced for higher rates next year and possibly through 2009. By then enough new bulk freighters are expected to come on line to ease the shortage.

“All of the ship owners are making a lot of money because these are numbers that the market has never seen,” said John P. Dragnis, commercial director of Athens-based Goldenport Inc., one of the largest providers of ships to commodity sellers.

Even when ships are available to carry the cargo, inadequate port facilities can cause delays, driving up the cost of shipments. At Brazilian ports, ships often wait offshore for as long as two weeks for their turn to load or unload, like airplanes sitting on a runway waiting for a gate.

posted on 22 October 2007 by skirchner in Economics, Financial Markets

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The Future Fund versus the Republic of Azerbaijan

Which of the following sovereign wealth funds would you expect to score more highly in terms of transparency and accountability: the State Oil Fund of the Republic of Azerbaijan; Timor’s Petroleum Fund; Singapore’s Temasek Holdings or Australia’s Future Fund?

The answer is that Australia’s Future Fund lags behind all of them according to a scoreboard of sovereign wealth funds compiled by Ted Truman of the Peterson Institute.  The Future Fund scores seven out of a possible 12 for transparency and accountability compared to 9.5 for the State Oil Fund of the Republic of Azerbaijan.  Indeed, the Future Fund scores only half a point better than the National Oil Fund of Kazakhstan (jagshemash!)

In terms of the overall scoreboard, which takes into account additional factors such as structure and governance, Australia’s Future Fund ranks sixth with a score of 17 out of 25, behind New Zealand’s Superannuation Fund, Norway’s Government Pension Fund, Timor’s Petroleum Fund, Canada’s Alberta Heritage Savings Trust Fund and the Alaska Permanent Fund.

Having recently attended a presentation on the NZ Super Fund by its head, Adrian Orr, I think New Zealand’s number one ranking is well deserved.  The NZ Fund is in many ways of a model of public sector accountability and transparency.  Yet for all that, the Fund is also designed to support bad public policy, namely a universal pension system.  You would rather have Australia’s retirement income system than New Zealand’s.  But that is no excuse for the Future Fund to be falling short of world’s best practice in terms of transparency and accountability.

posted on 20 October 2007 by skirchner in Economics, Financial Markets

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Kevin Rudd’s Anti-Market Ideology

‘Traditional Labor voter’ Paul Kerin exposes the ignorance and intellectual laziness underlying Kevin Rudd’s anti-market ideology:

The best glimpses of Rudd’s philosophy are contained in a couple of articles he wrote in The Monthly last year before becoming Opposition Leader. His social aspirations - and genuine passion about them - are admirable, although not ambitious enough. But his economic philosophy, or lack thereof, is worrying. The ideologically driven uni-dimensional view of the world outlined in the essays prevents him from entertaining the thought that freer markets could help him better achieve his social aspirations. Rudd depicts the “real battle of ideas in Australian politics” as the “battle between free market fundamentalism and the social-democratic belief that individual reward can be balanced with social responsibility”.

This depiction - replete with false mutual exclusivities (free market v social responsibility) and put-down labels (free market fundamentalism) - implies that anyone who supports free markets must be a selfish bastard who doesn’t care about social goals. Nothing could be further from the truth…

Rudd attacks “market fundamentalists”, a label he liberally attaches to Hayek and modern economic liberals, for believing that humans are “almost exclusively self-regarding” and for holding self-regarding values themselves. He contrasts this with “other-regarding values of equity, solidarity and sustainability” of social democrats such as him.

Ironically, he claims fundamentalists “distort Smith, adopting his Wealth of Nations while ignoring ... his The Theory of Moral Sentiments”. I can’t believe that an intelligent, reflective man such as Rudd has read either book. If he had, he would not have drawn this conclusion. It is a gross distortion. Smith’s views on human behaviour in both works are perfectly consistent…

Rudd clearly hasn’t read Hayek either. His only evidence on Hayek’s values are quotes from former communist and non-economist David McKnight.

posted on 20 October 2007 by skirchner in Economics, Politics

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The World Bank as Rogue Institution

Ahead of this weekend’s meeting of the World Bank in Washington, Adam Lerrick argues that it is a rogue institution that needs to be brought under control by its members:

While presidents come and go, a bureaucracy, hostile to change and clever at manipulating an unwieldy multinational board, is flouting the bank’s founding articles, distorting the facts, concealing losses, lowering standards and now planning to take on new risks. The bank is desperate to “remain relevant” to middle-income countries that no longer need its money and do not want its advice.

The bank does not, as it claims, lend where the poor live. More than half of loans since 2000 flowed to six upper-middle-income nations which tally less than 5% of the developing world’s hard-core needy. For the creditworthy countries the bank courts, the private sector will underwrite any pro-poor project the bank would consider. Far from generating a surplus for the poorest, fees and interest on middle-income lending now fall $500 million a year short of the bank’s cost of doing business. The $2 billion return on the bank’s $40 billion of zero-cost capital masks the loss.

Australia contributed AUD 176m to the activities of the World Bank in 2004-05.


posted on 19 October 2007 by skirchner in Economics, Financial Markets

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Laissez Faire Books Going Out of Business Sale

Laissez Faire Books is going out of business:

We are sad to announce that Laissez Faire Books is going out of business. The book market has changed tremendously over the past 30+ years, and it has gotten harder and harder for a small niche bookseller to cover expenses. I suppose the market has spoken.

I want our loyal customers, supporters, and friends to know how much that support has meant to everyone at LFB over the years. You helped us stay around as long as we did and made our efforts worthwhile.

In the days before Amazon, LFB was one of the few means by which those of us in the Antipodes could access classical liberal literature.  Grab a bargain while you still can.

posted on 19 October 2007 by skirchner in Economics

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Can Greenspan Write?

Michael Kinsley reviews Alan Greenspan’s The Age of Turbulence and pronounces:

So the suspense is over: Alan Greenspan is able to express himself in clear English prose.

That is just the first of many things wrong with Kinsley’s ridiculously partisan review of Greenspan’s memoirs.

I’m about half-way through Greenspan’s book and my first reaction was that Greenspan did not write it.  Greenspan himself acknowledges the assistance of a collaborator in the writing and it is clear that whatever Greenspan contributed has been heavily re-written.  Greenspan’s distinctive voice is evident in his many speeches as Fed Chairman, but it is not to be found in this book.  With the publisher having paid a USD 8.5 million advance, it is hardly surprising they would want the book professionally written. 

As for the substance of the book, more later…


posted on 16 October 2007 by skirchner in Economics, Financial Markets

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Supply-Side Implications of Lower Taxes

The ‘tax cuts lead to higher interest rates’ brigade have been relatively quiet in response to the government’s tax cuts announced yesterday.  This is in no small part due to the government continuing to highlight in the Budget papers the positive supply-side implications of its tax cuts.  According to yesterday’s Mid-Year Economic and Fiscal Outlook:

The 2007-08 MYEFO tax cuts and the Government’s goal for the personal income tax system will continue the focus on encouraging workforce participation that has been a feature of the tax cuts delivered by the Government since the introduction of The New Tax System. The estimated impact of the 2007-08 MYEFO tax cuts is to encourage around 65,000 new entrants into the workforce. The cumulative effect of the tax cuts delivered by the Government since The New Tax System is estimated to encourage around 300,000 new entrants to the workforce.

Far from leading to higher interest rates, the government’s tax cuts may play an important role in preventing the labour market from becoming a source of inflationary pressure and a constraint on economic growth.


posted on 16 October 2007 by skirchner in Economics, Financial Markets, Politics

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Promises, Promises…Good Policy, Bad Strategy

The government announces $34 billion in tax cuts, the day after calling the federal election for November 24:

Treasurer Peter Costello has announced five years of progressive reductions of income tax that will see the current tax system eventually reduced to four tax brackets—15, 30, 35 and 40 cents in the dollar.

The plan would see the tax-free threshold raised to $14,000 next year, while the lowest tax rate would kick in on earnings over $34,000.

In following years, the top tax rates would be lowered while the tax-free threshold would be lifted again.

Mr Costello has said the goal of the restructure was to arrive at a tax-free threshold of $20,000 and for there to be only four marginal tax rates, with the top rate set at 40 cents in the dollar.

The changes, to be introduced gradually, will see the tax threshholds for lower income earners increased and the reduction of the percentage of tax paid in the top two tax categories—currently 40 and 45 percent.

This is good policy, but bad political strategy.  These initiatives would have been much more credible had they been announced in the May Budget and legislated ahead of the election.  As things stand, they are just another campaign promise that the public is likely to treat with scepticism.  The electorate may even be resentful that it takes a federal election to induce good fiscal policy from the government. 

Moreover, should the government lose the election, the proposed tax cuts will give way to the as yet unannounced tax policy of the federal opposition.  The government runs the risk of bequeathing to the Labor Party the surpluses it has accumulated in the Future Fund and the other artificial lock-boxes it has used to warehouse revenue it doesn’t need to meet current expenditure commitments.

At least the government is ignoring the advice of the ‘tax cuts equals higher interest rates’ brigade.  No prizes for guessing what Chris ‘Rainy Day’ Richardson will have to say about it.

posted on 15 October 2007 by skirchner in Economics, Financial Markets, Politics

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Fiscal Policy and Interest Rates in Australia

Alan Wood mentions my Policy article on fiscal policy and interest rates in his column in today’s Australian:

The very large (potential) budget surpluses of recent years tells us Australia has a structure of tax rates that is excessively high and major tax reform is needed.

It just has to be done in a way that doesn’t add to inflationary pressure—that is, it needs to be offset by spending cuts or spread over future budgets.

Yet it is quite clear from the run of huge budget surpluses the Howard Government has enjoyed that structurally, Australia’s tax rates are excessive.

This is no time to take serious tax reform off the economic agenda.


posted on 13 October 2007 by skirchner in Economics, Financial Markets

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Two RBA Tightenings Before Christmas?

Terry McCrann speculates on a December RBA tightening, in addition to a November tightening:

so hot is the economy, it is even possible—but, I hasten to add, nowhere yet likely—that he could raise the rate again in December.

I’ve previously suggested that a November rate rise was only certain with a ‘bad’ inflation number in the September quarter. If ‘baddish’, Stevens and the RBA brains trust would have to weigh all the other evidence.

Consider it ‘weighed’. Now even a ‘baddish’ inflation number will deliver a rate rise. Only a clearly ‘good’ number will avoid one. Or postpone it.

Malcolm Maiden also notes the high probability of an election eve rate rise:

the bank itself was perceived to be maintaining what could be called an interest rate demilitarised zone around elections.

The dimensions of the interest rate DMZ were never precisely outlined. But the markets believed that the Reserve would not change rates during an election campaign, and was less likely to do so when one was approaching.

The Reserve’s action and inaction tended to bear that out. It began announcing interest rate hikes and explaining them at the start of the ‘90s, when Macfarlane’s predecessor, Bernie Fraser, was in charge. But until August this year there were no examples of a rate rise in an election year, let alone a rate rise in the middle of an election campaign. So the August move set a precedent, and it did so as new governor Stevens was reshaping the view of the bank’s independence.

As I argue here, the August move set a precedent only in that it is the first time that the electoral and interest rate cycles have coincided in this way.  The current conjunction of political and economic events has made it necessary for Stevens to spell out the implications of RBA independence in a way that has simply not arisen in the past.


posted on 12 October 2007 by skirchner

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Not a Minsky Moment

If you read only one paper on recent developments in credit markets, this should be it:

the correct application of the Minsky model to the current data indicates that the financial system may be able to absorb the subprime mortgage and securitization technology shocks in an orderly fashion, without a large “financial accelerator” effect. The financial system has suffered a significant liquidity shock, and it is not over yet. But the worrying turmoil does not necessarily mean that the turmoil resulting from this shock should be viewed, as some have labeled it, as a “Minsky moment” – that is, the beginning of a severe economic decline produced by a collapse of credit, which would magnify adverse aggregate demand shocks. Such collapses of credit, in the Minsky framework, tend to occur in reaction to asset price collapses, which are themselves partly a result of the widespread overleveraging of consumers and firms. At the moment, however, it is not obvious that housing or other asset prices are collapsing, or that leverage is unsustainably large for most firms or consumers. That is not to say that the economy will avoid a slowdown, or possibly even a recession.

posted on 11 October 2007 by skirchner in Economics, Financial Markets

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Lunch with Kevin Rudd

Federal opposition leader Kevin Rudd addressed an Australian Business Economists’ lunch last week.  John Edwards’ observations on the event go a long way to explaining why a booming economy is providing the government with little or no political traction:

Rudd ranged widely over Australia’s recent economic record and what he planned to do if elected to government.  He then took questions.  There were just three, none of them memorable.  Given that the polls show Mr. Rudd will highly likely be Prime Minister within eight weeks or so and that Labor has been out of office for over a decade, this was a remarkably small number of questions from what might be expected to be a well informed, concerned and not particularly sympathetic audience…Mr. Rudd wasn’t asked many questions, because there isn’t much worth asking.

Edwards’ goes on to note the near complete bipartisanship between the government and opposition on economic policy and says:

for all its vaunted political brilliance [the government has] an amazing inability to shape the economic debate.


posted on 10 October 2007 by skirchner in Economics, Financial Markets, Politics

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The Credit Crunch that Wasn’t II

We previously noted that there was little sign of a credit crunch in Australia’s financial aggregates for the month of August.  My associates at Action Economics reach similar conclusions in relation to the US:

What if Wall Street throws a panic, and nobody shows up? Some players became so caught-up in the pass-through scenario of credit market disruption to reduced economic growth that it seemed a fait accompli. Yet, the events of August were better described as market turmoil than a credit crunch, and the difference is important for the economy, inflation, and the Fed…

In total, the use of the term “credit crunch” to describe the events of August may prove a misnomer with real implications for risk assessments as we enter Q4. Though turmoil for financial market participants was substantial, there is widespread evidence that the large majority of the borrowing public both ignored the events and experienced little effect. To most U.S. borrowers, the period has only been associated with declining interest rates, a falling dollar, surging stock and commodity prices, and rapid loan, money, and reserve growth. Such patterns usually define a period of easy money and rising inflation rather than a “credit crunch.” Even if some borrowers on the margin are now unable to obtain credit, and there is no doubt that credit conditions have tightened for some borrowers, expanded borrowing by everyone else may more than offset the difference.

posted on 10 October 2007 by skirchner in Economics, Financial Markets

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Bryan Caplan’s The Myth of the Rational Voter

Bryan Caplan’s The Myth of the Rational Voter turns on the distinction he draws between the familiar rational choice theory concept of rational ignorance and what he calls rational irrationality: the idea that there are weak or no incentives to behave rationally in the political arena.  This runs counter to standard public choice theory, but Caplan argues that this explains the failure of political behavior to parallel market behaviour. 

I’m not sure that Caplan’s attempt to distinguish between rational ignorance and rational irrationality succeeds in the end.  It mostly just relocates the standard cost-benefit analysis of rational choice theory from the costs and benefits of acquiring information to the costs and benefits of holding and indulging irrational beliefs in the political arena.  Caplan notes that to the extent that standard rational choice theory wrongly emphasises the former, ‘this is a failure of economists rather than a failure of economics.’ 

Caplan suggests that one way of raising the economic literacy of the median voter is plural voting for the well-educated and eliminating efforts to increase voter turnout.  Caplan’s view implies that political-economic outcomes should be decidedly worse in a country with compulsory voting like Australia than in a country like the US, where voting is voluntary and electoral participation is correlated with education.  Australian and US economic literacy levels are likely to be very similar, but the economic literacy of the median Australian voter should be lower than that for the median US voter.  Yet as a generalization, the two political systems produce qualitatively similar public policy outcomes.  Indeed, in some policy areas, such as regulation of the financial system and retirement incomes policy, the Australian political system has produced decidedly better outcomes than in the US.  For a book that aims to explain ‘Why Democracies Choose Bad Policies,’ I think this is a significant problem.

Caplan’s book includes a nice dig at the fever swamp Austrians of the Mises Institute.  Caplan argues against the caricature of economists as market fundamentalists, noting that only the Mises Institute crew comes close to giving substance to the caricature:

Both Mises and Rothbard have passed away, but their outlook – including Ph.D.s who subscribe to it – lives on in the Ludwig von Mises Institute.  But groups like these have basically given up on mainstream economics; members mostly talk to each other and publish in their own journals.  The closest thing to market fundamentalists are not merely outside the mainstream of the economics profession.  They are way outside.


posted on 06 October 2007 by skirchner in Economics, Politics

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The Fall in Employment that Wasn’t

The James Hamilton emoticon indicator turns from frowny face to neutral.

posted on 06 October 2007 by skirchner in Economics, Financial Markets

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A November RBA Tightening

Terry McCrann continues to highlight the risk of an increase in the RBA’s official cash rate in November:

The only thing that could stay the RBA’s hand on the rate lever on Cup Day is a mild September quarter CPI inflation figure.

And it would now have to be milder than a tobacco-free cigarette. And/or some sort of utter disaster in the US.

But even if so, almost nothing can save the governor . . . from hiking early next year.

posted on 04 October 2007 by skirchner in Economics, Financial Markets

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Fiscal Policy and Interest Rates in Australia

The latest issue of Policy includes my article on Fiscal Policy and Interest Rates in Australia.

posted on 04 October 2007 by skirchner in Economics, Financial Markets

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The ALP, Interest Rates and Truth in Advertising

The Labor Party has pulled the on-line advertisement we highlighted late last week:

LABOR has had to withdraw an online advertisement which said a Kevin Rudd government would cut interest rates.

The ad was a tougher version of ALP policy, which is to keep “downward pressure” on interest rates.

A party spokesman said the ad was not properly authorised.

Labor’s Google advertisement headed “Interest Rates in 2007” read: “Families today are carrying record debt. Labor will force rates down.”


posted on 03 October 2007 by skirchner in Economics, Financial Markets, Politics

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Another Redundant International Financial Institution

Bill Easterly on the Asian Development Bank:

Given all the economic success stories in today’s Asia, you’d think the ADB could pat itself on the back for a job well done and then pack up and go home. But not so fast, says the ADB, which is desperately trying to find new things to do with its 2,000 employees and $6 billion of annual lending.

To that end, the ADB is working on a Long Term Strategic Framework 2020, a project best read as bureaucratic jargon for the ADB’s promise to keep producing bureaucratic jargon through the year 2020. For help with the framework, the ADB commissioned an Eminent Persons Group to tell it what to do with itself. The learned committee was chaired by Supachai Panitchpakdi, Secretary-General of the United Nations Conference on Trade and Development, a body that has long distinguished itself by promoting all the bad ideas that stifle both trade and development. The end result was a report called “Toward a New Asian Development Bank in a New Asia.” The eminences have pointed out to the ADB what should be obvious to anyone who reads this newspaper: The ADB’s original raison d’etre of providing capital is obsolete in a capital-surplus region with a large excess of saving over investment.

Australia is the fifth largest shareholder in the ADB.

posted on 02 October 2007 by skirchner in Economics, Financial Markets

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Running the CPI-Interest Rate Gauntlet

The failure of the Prime Minister to visit Yarralumla over the weekend means that he chosen to run the gauntlet of the Q3 CPI at the end of October and the November meeting of the RBA Board.  Terry McCrann has been highlighting the implications:

JOHN Howard has ignored the ‘message’ from Reserve Bank governor Glenn Stevens, first ‘revealed’ in these columns on August 14.

That he should consider, seriously consider, holding the election on October 20.

After ‘sitting out’ a trip to Government House in Canberra on Sunday, literally at Telstra stadium in Sydney, the earliest practically the election can now be held is November 10.

Why should he have considered that Saturday in October? Because it came before the next official inflation figures, released on Wednesday October 24.

And Stevens had made it absolutely crystal clear in the RBA’s quarterly monetary statement in mid-August that if it was a bad inflation number, the RBA would lift rates again in November.

Here is what Glenn Stevens said on the subject at his last appearance before the House Economics Committee:

If it’s clear that something needs to be done, I don’t know what explanation we can offer to the Australian public for not doing it.  I don’t think there’s any case for the Reserve Bank board to cease doing its work in the month the election is going to be.  I doubt that members of the public would see that as appropriate.

Of course, it is by no means obvious that having interest rates front and centre in an election campaign is a negative for the government.  But having decided to run the gauntlet, the risk of an interest rate rise argues for an election at the end rather than the beginning of November.


posted on 02 October 2007 by skirchner in Economics, Financial Markets, Politics

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Household Sector Debt and Wealth Accumulation

Steve Burrell highlights the extent to which household sector borrowings underpin the accumulation of financial and other assets:

we are taking on more debt to accumulate wealth and this leveraging has paid off handsomely. Figures earlier this year showed Australians on average had debts of just over $25,000. Not only is that dwarfed by the value of assets they hold, but the ratio of wealth to debt was the highest in nine years.

Last Friday’s figures showed that, overall, net household financial wealth in the June quarter was up by 23.3 per cent on a year ago to $1208 billion.

That means that, after allowing for borrowings, every Australian has a record $57,400 in net financial assets - up more than 21 per cent in a year and by 48.6 per cent in the last two years, the largest jump on record.

And that’s before we take into account the wealth tied up in homes. Other recent figures show the value of Australian dwellings rose by almost 10 per cent over the past year to stand at $3.3 trillion at the end of June. The latest figures on overall wealth show the average Australian worth nearly $400,000 at the end of March, a record high and a doubling in the past five years.

posted on 02 October 2007 by skirchner in Economics, Financial Markets

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A Blogger’s Credo

Chris Dillow’s wisdom to blog by:

I don’t blog so I can be judged by any middle-class moron who thinks his opinion matters - that’s what I go to work for.

posted on 01 October 2007 by skirchner in Culture & Society

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