Working Papers

2009 07

The Trans-Tasman Battle for FDI

I have an op-ed in today’s Age contrasting the New Zealand government’s liberalisation of its regulatory regime for foreign direct investment with the Australian government’s growing use of FDI regulation as an extension of domestic industry policy (note that there is a minor sub-editorial error: the third para should read ‘by 40%’ not ‘to 40%’).  I predict that this will add to Australia’s underpeformance in attracting its share of global FDI.

Bryan Frith wrote-up my proposals to reform Australia’s regulatory regime for FDI in The Australian, concluding that ‘While the Rudd government is in reformist mode, it should take a serious look at Kirchner’s suggestions.’  However, as my Age op-ed notes, the Rudd government is moving in the opposite direction to the one I set out in Capital Xenophobia II.

posted on 31 July 2009 by skirchner in Economics, Foreign Investment

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Open Australia

Open Australia is providing a useful service making information about federal parliament available on-line.  This volunteer effort often provides better information than parliament itself, as this story notes. 

Most notably, the volunteers have scanned the 1500-odd pages of the Register of Members’ Interests and made them available on-line.  Previously, this information was available only in hard copy in binders kept in Parliament House, Canberra, making it a costly exercise for members of the public to examine the Register.  It says a lot about the willingness of politicians to subject themselves to the same levels of disclosure and transparency they routinely demand of the private sector.

Unfortunately, the Register does not contain enough information to perform a study like this, showing how US Senators’ shareholdings significantly outperform the market. 

posted on 30 July 2009 by skirchner in Economics, Financial Markets, Politics

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Where Your Taxes Go

Read and weap.

posted on 30 July 2009 by skirchner in Economics, Fiscal Policy

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It’s Not Easy Being a Supply-Sider

From RBA Governor Glenn Stevens’ speech yesterday:

A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over leverage and asset price deflation down the track.

Much of the commentary on Stevens’ speech suggested that he was warning of a housing ‘bubble’, but the text makes clear that his real concern was the supply-side rigidities that amplify asset price cycles.  Stevens’ speech is the lead story in much of today’s media, but Google News finds only three stories that directly quoted ‘serious supply-side impediments’.  It is indicative of how difficult it is to interest the media in structural as opposed to cyclical stories.

posted on 29 July 2009 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy

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Central Bank Transparency and Accountability in Action

Federal Reserve Chairman Ben Bernanke’s appearance at a town hall meeting at the Federal Reserve Bank of Kansas City can be seen here (transcript here). 

As I lamented in an AFR op-ed last week, this kind of public scrutiny is notably absent in Australia.

posted on 28 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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No Time for a Media-Shy Central Banker

I have an op-ed in today’s Australian Financial Review, comparing the level of media scrutiny applied to central bankers in Australia and the rest of the world.  Full text below the fold (may differ slightly from edited AFR text).

continue reading

posted on 24 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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Cultural Protectionism

Louise Adler of Melbourne University Press provides a self-parody of the arguments against liberalisation of parallel book imports:

To borrow from John Howard, surely we should decide what books come to this country, and the manner in which they come.

Tim Wilson makes the case for scrapping parallel import restrictions here.

posted on 20 July 2009 by skirchner in Economics

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A Carling-Kirchner Ticket?

Robert Carling and I have an op-ed in today’s Australian on our proposals to reform Australia’s federal fiscal responsibility legislation.

Henry Thornton’ responds:

Pardon my cynicism, but I see Australia as a long way from establishing another “self-binding” system, one that enforces long-term economic rationality on the government of the day.

Carling and Kirchner might consider offering themselves for election at the next federal election, and see how enthusiastically this plan is embraced by the voters.

Thornton underestimates voters.  There is a reason Kevin Rudd claimed to be a fiscal and economic conservative when running for office.  The federal opposition now campaigns on debt and deficits because it thinks it will play well with voters. 

Our proposal offers a framework through which politicians could make a credible commitment to fiscal responsibility, so that voters would no longer need to rely on politicians promises in relation to fiscal policy. 

The idea of linking politicians pay to fiscal performance is also likely to be popular, not least because politicians have long argued that private sector pay should be tied to performance.  As Mark Latham demonstrated in relation to parliamentary superannuation, if a major party were to run with our proposal, it would be very hard for the other side of politics to argue against it.

posted on 15 July 2009 by skirchner in Economics, Fiscal Policy

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Monetary versus Fiscal Stimulus

Tony Makin, on the relative effectiveness of monetary and fiscal stimulus:

dramatically easier monetary policy has probably done more for the Australian economy than fiscal policy. A less modest, or perhaps more independent, Reserve Bank would take more credit for this.

Tony makes an important point.  The RBA’s very low public profile relative to the very noisy fiscal stimulus efforts of politicians is skewing perceptions of the relative importance of these two arms of macro policy.

It was not that long ago that many economic commentators were talking of a direct trade-off between fiscal and monetary policy.  Tax cuts and smaller budget surpluses, we were told, would lead to higher inflation and interest rates.  This argument never had much merit, not least because the actual (as opposed to the forecast) fiscal impulse was simply too small to matter very much for the economy.  The former government put in place some of the tightest fiscal policy settings since the early 1970s. 

By contrast, the current government has put in place an unprecedented fiscal easing of 4.4% of GDP in a single financial year.  The RBA’s statements on monetary policy suggest that it believes that fiscal stimulus is supporting economic activity (in sharp contrast to previous years, in which fiscal policy was rarely even mentioned).  This would argue against reductions in interest rates at the margin, even if it is based on an exaggerated view of the effectiveness of fiscal policy.  The proponents of discretionary fiscal policy can’t have it both ways.  If activist fiscal policy is thought to be effective, there is less work for monetary policy to do in supporting activity and official interest rates will be higher than in the absence of a discretionary fiscal easing.

posted on 14 July 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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Kevin Rudd’s China Crisis

Greg Sheridan and John Garnaut both have good analyses of the issues arising from China’s detention of Australian Rio Tinto executives for alleged espionage.  Both emphasise that this is a critical test of Kevin Rudd’s leadership and China credentials, although Garnaut maintains that Rudd’s leadership has already failed:

With the exception of his famous “Zhengyou” speech at Peking University last year, he ducked the responsibility to lead on China. His Government’s policy ambivalence towards Chinese investment encouraged those in Australia who believed that Chinese money was something to be feared. His advisers played up the China military threat, or encouraged journalists to believe that his Defence White Paper had played up that threat.

The leadership vacuum on China was quickly filled by the shrill and ill-informed.

Australia’s business and political leaders needed to be assisting those in China who saw the world as an economic opportunity rather than a security threat. The risk of doing otherwise, of playing up the threat of “China Inc”, was that it would become self-fulfilling.

While there is an element of truth to this, China still bears primary responsibility for these developments.

Greg Sheridan was an opponent of the proposed Rio-Chinalco tie-up (a position he uncharacteristically shared with arch-enemy Peter Costello), which explains why he perhaps did not appreciate the irony of these comments:

The Chinese have made it clear they can regard any commercial matter as a matter of their national interest...

Under this system, they can intervene legally in any business deal they do not like…

the Chinese authorities have explicitly said that commercial matters are matters of national security

Exactly the same could be said in relation to Australia’s regulation of FDI.  The Australian government has routinely made use of bogus national security and national interest arguments to rationalise political interventions in the market for foreign ownership and control of Australian equity capital. This is not to say that we are as bad as the Chinese, but the differences are ones of degree rather than kind.

Sheridan says that:

The implications for Chinese conduct of investments in Australia is clear.

The Foreign Investment Review Board, perhaps at the direction of the Rudd government, needs to factor this information in to all future decisions about proposed Chinese strategic investments in Australia.

China’s actions will cost it dearly.  But it would not be in Australia’s interest to make the same mistake by becoming even more like China in its regulation of FDI.

posted on 13 July 2009 by skirchner in Economics, Foreign Investment

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Productivity and House Prices

In Bubble Poppers, I followed Peter Garber in arguing that claims about ‘bubbles’ in asset prices are a substitute for fundamental analysis, a non-explanation for events that people are otherwise unable or too lazy to explain.  In contrast to the dominant non-explanation for innovations in house prices in the United States, James Kahn argues that there is a strong relationship between house prices and productivity growth that explains the recent US housing boom and bust:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

posted on 10 July 2009 by skirchner in Economics, Financial Markets, House Prices

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New CIS Policy Monograph: Fiscal Rules for Limited Government

Robert Carling and I have released a new CIS Policy Monograph, Fiscal Rules for Limited Government: Reforming Australia’s Fiscal Responsibility Legislation.  The paper makes the case for a rules-based framework for fiscal policy to replace the Charter of Budget Honesty, as well as the establishment of a new Fiscal Commission to increase the independence, transparency and accountability of the federal budget process.

There is a write-up in the SMHJulie Novak makes a similar case in The Canberra Times.

posted on 09 July 2009 by skirchner in Economics, Fiscal Policy

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Market, Regulatory or Business Model Failure?

Yet another open letter from the usual suspects, this time calling for a new financial system inquiry.  However, their call proceeds from a mistaken premise:

SINCE the severe market failures in Australia’s securitisation industry were identified in 2008, we have been concerned that these problems were partly attributable to more fundamental flaws in Australia’s ageing regulatory architecture and the inadequately defined role of government in dealing with such crises.

The authors cannot seem to make up their mind about the relative importance of market failure and regulatory failure, but a more basic issue is business model failure.  The mortgage securitisation industry was overly dependent on a particular financial technology.  When that technology was new and working well, the industry was able to capture market share from the banks.  The industry was not complaining about either market or regulatory failure then.  From a consumer standpoint, the success or failure of particular business models is irrelevant, not least because the RBA’s setting of the official cash rate explicitly discounts the impact of shocks to financial technology on overall credit conditions.  I discuss these issues in more detail in this paper.

posted on 08 July 2009 by skirchner in Economics, Financial Markets

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Too Much Hand Wringing, Not Enough Hand Raising

The Australian’s FoI desk has another stab at the decision-making processes of the RBA Board, this time seeking voting records, but comes up empty-handed:

“There are no records as the board seeks to achieve a consensus without the need for formal voting,” the board’s secretary, David Emanuel, wrote in response to The Australian’s request.

“The board now seeks to make decisions by consensus and only the consensus decisions are recorded.”

This remarkable unanimity implies that the RBA Board is little more than a rubber stamp for decisions made by the RBA’s senior officers.  Now that the RBA and Treasury effectively control the appointments process to the Board, there is little chance that this bureaucratic monopoly over monetary policy decision-making will ever be effectively challenged.  I make the case for an alternative model of RBA governance in this article.


posted on 07 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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The Slow and Secretive FIRB

Don’t hold your breath waiting for the Foreign Investment Review Board’s annual report:

THE Foreign Investment Review Board is reinforcing its reputation as one of Canberra’s most secretive bodies. More than a year after the 2007-08 year there is no sign of its annual report.

In contrast, the companies whose fate depends significantly on the board’s deliberations must deliver their annual reports within four months of the end of the financial year…

Although the board carries out confidential consultations with government departments and takes submissions from interested parties in cases that are already in the public domain, its decision-making remains secretive even to those with a close interest in outcomes. Its recommendations are passed directly to the Treasurer and are rarely made public…

Even when the Treasury-controlled board’s 2007-08 report is eventually made public, it is unlikely to reveal little about its deliberations.

The 2006-07 report reveals the number of applications for foreign investment and the decisions made, but does not identify the companies subject to applications.

I make recommendations for reform of the FIRB in my CIS Policy Monograph, Capital Xenophobia II.

posted on 06 July 2009 by skirchner in Economics, Foreign Investment

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When Interventions Collide

Christopher Joye notes how the government’s bank guarantees have undermined its $8 billion intervention in the market for residential mortgage-backed securities:

while the $8 billion has directly helped out the lenders who have benefited from the capital, it has had no effect at all on the overall cost of RMBS funding (or the so-called ‘spreads’) because it is being undermined by the government guarantees of bank debt, which have massively increased the supply of AAA-rated securities and created two-tiers of investment – those AAA assets with and without a government guarantee (RMBS and CMBS obviously fall into the latter category). Indeed, as the RBA (in its Statement of Monetary Policy) and the Treasury’s David Gruen have recently observed with some bewilderment, RMBS spreads have actually increased markedly to more than 200 basis points over the swap rate since the AOFM started investing its money notwithstanding their incredibly low default rates (again because of the dysfunction indirectly introduced by the government guarantees of bank debt). In the ten years prior to the advent of the GFC, Aussie RMBS spreads averaged 20-30 basis points over. And today, the 90 day mortgage default rate sits at about 15 per cent and 25 per cent of US and UK levels, respectively, or roughly 0.6 per cent.

As I argue in this paper, the idea that government intervention in the RMBS market can engineer an exogenous easing in credit conditions is mistaken, because the RBA fully discounts these conditions in its conduct of monetary policy.  Even if such an easing were possible, it would be capitalised into house prices, with no benefit to home borrowers.

posted on 02 July 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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Hockey’s Hindsight Heroes

Opposition Treasurer Joe Hockey has problems staying on message:

Mr Hockey’s most controversial remarks were suggesting that the Rudd government would have been justified in cancelling this year’s tax cuts.

“The honest answer is there would have been a legitimate justification for the government to say our debt, our recovery, our economic recovery will be slower if we are running a big deficit and I think it should’ve been considered as part of the mix.”

Mr Hockey noted that it would have been hard for the Liberal Party to support the removal of the tax cuts. Earlier this year, Mr Hockey had argued for the government to bring forward tax cuts.

There is, of course, a case for not proceeding with the tax cuts.  Because they are unfunded, the tax cuts are equivalent to a future tax increase and subject to the same Ricardian equivalence critique as discretionary government spending.  However, one suspects that this is not the case Hockey has in mind.  Instead, Hockey is an unreconstructed, Costello-style revenue-hoarder:

Mr Hockey said that, if he had his time again, he would have better explained the Future Fund, which Mr Costello regarded as one of his crowning achievements. “I would have set up the other funds earlier: the higher education funds for infrastructure and the health and hospitals fund,” he said.

Like Costello, Hockey does not seem to understand that these funds are simply deferred government spending.

posted on 01 July 2009 by skirchner in Economics, Fiscal Policy

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