Working Papers

2009 09

Xenophobic, Not Racist

I have an op-ed in today’s Wall Street Journal on the confusion being created by the government’s discretionary approach to the regulation of foreign direct investment.

This morning I read in one of the US equity analyst reports I receive that ‘we hear out of Australia that its foreign investment regulator wants to impose 15% caps for global purchases of the country’s large companies.’  This is over-stating the situation, but is indicative of the perceptions now being created among offshore investors.

Australian mining magnate Clive Palmer is not taking Patrick Colmer’s advice to leave the lawyers and media out of it and quietly cut deals in Canberra.  He is threatening to take an FDI case to the High Court.  Palmer is also calling Australia’s regulatory regime for FDI racist.  I think ‘xenophobic’ is a better characterisation (hence the title of my monograph on the subject).  Colmer effectively conceded as much when he said that part of FIRB’s role was to maintain public support for foreign direct investment by managing an ‘orderly’ flow of FDI transactions.

posted on 30 September 2009 by skirchner in Economics, Foreign Investment

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Steve Keen’s Long Walk

A Steve Keen forecast that might actually come true:

2010 should be an interesting year for property. I will probably have to walk to Kosciouscko [sic] at its beginning…

posted on 30 September 2009 by skirchner in Economics, House Prices

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The Mother of All House Price Booms?

Recently, I have been drawing attention to the implications of Australia’s population growth, the strongest since the echo of the baby boom in the early 1970s.  Paul Sheehan quotes me on the issue here.

In the latest Rismark Monthly (gated), I’m quoted on the fact that Australia is now building fewer dwelling units per addition to the resident population since the early 1980s, based on one measure of dwelling commencements.  On another measure, we are producing fewer dwelling units per person than at any time since the late 1960s. 

The RBA’s head of economic analysis, Tony Richards, follows Governor Glenn Stevens in highlighting the implications of this dire supply situation for housing affordability.  The RBA is performing a valuable service in putting this issue on the agenda for public debate.  This is perhaps one of the few public policy issues the RBA can safely touch, because it straddles all three levels of government and so is less likely to be seen as criticism of a particular government’s policies.

posted on 29 September 2009 by skirchner in Economics, House Prices

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The FIRB and the Rule of Law

If you need further evidence that the rule of law is largely non-existent with respect to foreign direct investment in Australia, you need look no further than a speech FIRB director Patrick Colmer gave to the Australia-China Business Council last week, as reported in The Australian:

Mr Colmer said many of the foreign investment decisions were matters of “policy” rather than black-letter law.

He said the government had to balance the need for an orderly flow of foreign investment into Australia with the need to ensure continued public support for foreign investment proposals.

“One of the problems we have also seen is where lawyers get involved and try to turn a policy argument into a legal debate,” Mr Colmer said. “It is not effective. The lawyers don’t like us telling them that, but we do try to steer people through the policy issues rather than the legal issues ... Don’t turn it into a legal stoush, and deal with us the way we like to deal with you - in confidence.”

The last thing FIRB wants is a review of decisions on common law grounds (other forms of administrative and judicial review being effectively precluded).  As the ACCC would no doubt tell their FIRB colleagues, legal process and case law are the enemies of bureaucratic discretion. 

Perhaps the most tragic aspect of Colmer’s speech is that it was actually welcomed by some commentators as a clarification of the regulatory regime for FDI.  This interpretation would be somewhat less ludicrous if Colmer’s speech were actually a publicly available document, accessible by foreign investors.  FIRB is evidently too busy micro-managing FDI on behalf of the Treasurer to put the speech on its web site.  I have emailed FIRB requesting a copy, but have no expectation of receiving a reply.

posted on 28 September 2009 by skirchner in Economics, Foreign Investment

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‘You Will Not Ask Me Any Questions’

Academics speaking truth to Doug Cameron at the Senate Economics References Committee:

Senator CAMERON—Who would want an academic running the economy? I said that this morning and the more I hear from academic economists the more I believe that it would be a fatal mistake.

Prof. Makin—Ben Bernanke is an ex-academic economist and he seems to be getting a lot of credit for what he has done.

* * *

Senator CAMERON—Do you believe the government has made any positive economic decisions since it has come to power?

Prof. Davidson—Yes. The government delivered on the tax cuts that were promised by the Howard government.

Senator CAMERON—Is there anything else?

Prof. Davidson—The government scrapped the Fuelwatch scheme.

Senator CAMERON—Is there anything else?

Prof. Davidson—The government scrapped the GroceryWatch scheme.

* * *

Senator CAMERON—Are you seriously putting to this inquiry that the federal government should play no role in investing in the nation’s road infrastructure?

Prof. Davidson—I am putting it to you that if you wanted to build roads that you would give the money to the states and allow the state governments to make decisions as to what roads they wish to build.

Senator CAMERON—That is an interesting point of view!

Prof. Davidson—We have a constitution that actually has states that make decisions about these things. You do represent the states, don’t you?

Senator CAMERON—I am here to ask the questions, not you.

Prof. Davidson—Actually, I am a taxpayer. I will ask questions too.

Senator CAMERON—You will not ask me any questions.

posted on 25 September 2009 by skirchner in Economics, Fiscal Policy, Politics

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Vernon Smith Prize for the Advancement of Austrian Economics

The European Center of Austrian Economics Foundation is calling for submissions for its 2nd International Vernon Smith Prize for the Advancement of Austrian Economics.  The essay topic is based on Schumpeter’s statement that ‘This process of Creative Destruction is the essential fact about capitalism.  It is what capitalism consists in and what every capitalist concern has got to live in.’

Strangely, the ECAEF have overlooked the fact that a member of the prize jury is actually dead!

posted on 24 September 2009 by skirchner in Austrian School

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Oil is Found in the Minds of Men

And ‘peak oil’ is founded on ignorance, argues Peter Foster:

Peak Oil theory represents a combination of economic ignorance and moral rejection of markets as greed-driven and short-sighted. These all-too common attitudes usually go with a profound faith in effective government policy, despite the monumental weight of evidence to the contrary.


posted on 19 September 2009 by skirchner in Commodity Prices, Economics, Financial Markets, Oil

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The Tax Cut that Could Have Been

How much of a tax cut could you get for $97 billion in federal fiscal stimulus spending?  Alex Robson does the sums.  Of course, from a Ricardian standpoint, a temporary and unfunded tax cut should be no more effective in stimulating activity than a temporary and unfunded increase in government spending.  However, it does have the advantage that whatever spending does occur out of the tax cut is on things people actually want, rather than projects the government thinks we need, while the private sector also gets to allocate any increase in saving. 

posted on 18 September 2009 by skirchner in Economics, Fiscal Policy

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Gold as an Option on the End of the US

Spengler (aka David Goldman) makes the case for gold as a hedge against the Obama Administration:

The scurrilous fringe of financial journalism likes to speculate as to when China will dump the dollar, without asking the obvious question: what would China do in the absence of the dollar? The billion people who inhabit China’s interior are no substitute for the 300 million in the American market. They have a fraction of the purchasing power, they have little access to financial services, they have no credit bureaus to calculate their capacity to carry debt, and they have no means to make liquid their limited assets through mortgage markets. Perhaps over a dozen years of Herculean efforts, the situation might be changed - but that is then, and this is now.

The world not only is stuck with the United States for the time being, but wants to be stuck with the United States. But the Barack Obama administration’s attempt to substitute government spending for collapsing consumer spending makes US assets less attractive, while its attempt to diminish America power on dubious ideological grounds forces other countries to act as rivals, unsuited and unwilling as they might be to do so.

That is why options on the end of the US are trading well in the form of the gold price. Gold will have no official role unless America’s international role really does collapse, and the world is reduced from a system of trust (or imperial dictates, which amounts to the same thing) to a kind of barter at the international level. That would be a situation much to be abhorred, but it is not to be excluded. The world may need an alternative to the dollar if Obama persists in his present course.

posted on 17 September 2009 by skirchner in Economics, Financial Markets, Gold

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Prophet der Pleite

Oliver Hartwich and I have an article in Juedische Allgemeine profiling Nouriel Roubini.  Linked text is in German, but an English language version can be found here.

posted on 17 September 2009 by skirchner in Economics, Financial Markets

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Minsky Remembered

Eric Falkenstein recalls Hyman Minsky:

I was Minsky’s TA while a senior at Washington University in St.Louis in 1987, and took a couple of his advanced classes, which regardless of the official name, were all just classes in Minskyism. He was a maverick, but perhaps a bit too much, being a little too dismissive of others, as he hated the traditional Samuelson/Solow Keynesians as much as the Friedmanite Monetarists. He always thought a market collapse was just around the corner…

Most articles celebrating Minsky have a strong subtext, kind of like Krugman’s wistful remembrance of his undergraduate macro based on the General Theory, that if we only go back to the days when Nixon famously said ‘we are all Keynesians now’, we would have more faith in government top-down solutions. That was when Federal spending was 30% of GDP. Now it’s 40%. Economists did not abandon Keynesianism because they are capitalist dupes, rather, it was inconsistent, generated poor models of economic growth, and it neglected the micro economic factors that make all the difference between a North Korea and South Korea: free markets, property rights, decentralized incentives. A Keynesian thought he could steer the economy via two controls, the budget deficit and the Fed Funds rate, and indeed in the short run these are very powerful tools, but in the longer run, rather unimportant.

It is reassuring that the critics of mainstream macro have nothing better than Minsky to turn to, but still no less excusable.

posted on 16 September 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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A Policy-Induced Financial Crisis

John Cochrane and Luigi Zingales, on how policymakers induced a financial crisis a year ago today:

the main risk indicators only took off after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke’s TARP speeches to Congress on Sept. 23 and 24—not after the Lehman failure.

The risk of Citibank failure (the Citi-CDS spread) and the cost of interbank lending (the Libor-OIS spread) rose dramatically after Ben Bernanke and Hank Paulson spoke to Congress.  On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman’s collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony.

Why? In effect, these speeches amounted to “The financial system is about to collapse. We can’t tell you why. We need $700 billion. We can’t tell you what we’re going to do with it.” That’s a pretty good way to start a financial crisis.

See also Cochrane on Krugman:

Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.

posted on 15 September 2009 by skirchner in Economics, Financial Markets

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Vindicating Fightback

I join the history wars with an op-ed in today’s Australian taking issue with Paul Kelly’s claim that ‘the defeat of Dr Hewson’s policy [of Reserve Bank reform] laid the basis for the successful monetary policy of the Keating-Howard era.’  I make the case that:

Far from being a repudiation of Fightback, as Kelly suggests, subsequent developments have largely vindicated its vision for monetary policy reform.


continue reading

posted on 15 September 2009 by skirchner in Economics, Financial Markets, Monetary Policy, Politics

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The Merchants of Doom

Juedische Allgemeine, Germany’s leading Jewish newspaper, recently asked Oliver Hartwich and I to write a profile of Nouriel Roubini as a counter to the numerous puff pieces in the Anglo-American press.  The German language version has yet to appear online, but there is an English language version in today’s Age:

For years, he argued that the US current account deficit would lead to a US dollar crisis and higher interest rates, pushing the US economy into recession. But that was not how the financial crisis unfolded.

One of Professor Roubini’s few specific predictions was that the US would experience zero GDP growth in the fourth quarter of 2006. This was far off the mark: the actual result was 3 per cent. After this embarrassment, he backed away from his recession prediction, writing in January 2007 that ‘it is not clear whether the bust of the housing bubble in the US will lead to a soft landing as the consensus view goes or a hard landing that could take the form of a growth recession or, less likely now, an outright recession’. The professor was hedging his bets in early 2007, clearly uncertain about the direction for the US economy.

The Age also runs a self-refuting profile of Steve Keen headed ‘This Keen professor overlooked by MSM [mainstream media].’  If only!

While on the subject of Keen, Christopher Joye has prepared a handy route map for Keen’s house price forecast death march from Canberra to Mt. Kosciusko.


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

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The Political Psychology of Activist Fiscal Policy

David Hirshleifer ponders the loaded character of the language behind activist fiscal policy:

Regardless of who’s right on the economics, clearly the ‘stimulus’ language captures the pro side perfectly, and the con side not at all. Indeed, the term immunizes the mind to opposing evidence…

So, here’s a political psychology question. Why did opponents gullibly swallow the stimulus terminology, and thereby defeat?

The antidote to the loaded language of activist fiscal policy is to draw attention to the government’s inter-temporal budget constraint.  Few people would regard the announcement of a $42 billion future tax increase as ‘stimulatory’, but that is exactly what the federal government’s unfunded fiscal stimulus package amounts to in the absence of an explicit commitment to future cuts in government spending.

(HT: Don Boudreaux)

posted on 08 September 2009 by skirchner in Economics, Fiscal Policy

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Lehman Brothers’ Failure Was Not Pivotal

Even Steven Pearlstein recognises that the failure to rescue Lehman Brothers was not the pivotal event of last year’s financial crisis:

subsequent events have only confirmed that, if Lehman had somehow been rescued, things would not have turned out a whole lot better for Citigroup, or Washington Mutual or Wachovia or Bank of America, or any of the institutions that eventually needed cash injections from the Treasury. And it certainly would have done nothing to save AIG or Merrill, whose rescues were set in motion during the same Lehman weekend. For the reality is that, underlying the liquidity crisis of last fall was a massive credit crisis—too many risky loans made on loose terms and based on overly optimistic assumptions. Lehman’s failure may have sped up the process by which all this lousy lending was revealed and the losses acknowledged, but the financial reckoning was inevitable.

The final point is a political one. A year ago, in the wake of the Bear Stearns rescue, the public—left, right and center—was hopping mad about government bailouts of Wall Street. Paulson isn’t just kidding when he says that if he had used taxpayer money to save Lehman, impeachment proceedings would have begun against him the following day.


posted on 06 September 2009 by skirchner in Economics, Financial Markets

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The Children of Julian Simon


posted on 03 September 2009 by skirchner in Economics

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The Welfare Costs of Federal Infrastructure Spending

Henry Ergas and Alex Robson highlight the welfare costs of federal infrastructure spending:

Australian Government spending on infrastructure projects has increased rapidly in recent years, and especially so over the course of 2009. In this paper, we examine the processes for project evaluation, in the light of the Government’s commitment, in the 2008-09 Budget, to “(infrastructure) decision making based on rigorous cost-benefit analysis to ensure the highest economic and social benefits to the nation over the long term .. (and to) transparency at all stages of the decision making process.” We find that contrary to this commitment, significant projects have been approved either with no cost-benefit analysis or with cost-benefit analysis that is clearly of poor quality. Moreover, despite the commitment to transparency, very little information has been disclosed as to how most projects were evaluated.

To better assess the quality of project evaluation, we examine the largest single project the Commonwealth Government has committed to – the construction of a new National Broadband Network – and find that in present value terms, its costs exceed its benefits by somewhere between $14 billion and $20 billion dollars, depending on the discount rate used. We also find that it is inefficient to proceed with the project if its costs exceed $17 billion, even if the alternative is a world in which the representative consumer cannot obtain service in excess of 20 Mbps and even if demand for high speed service is rising relatively quickly. This amount of $17 billion is well below current estimates of the costs the NBN will involve, especially if (as the Government has pledged) the NBN is to serve non-metropolitan areas.

posted on 02 September 2009 by skirchner in Economics, Fiscal Policy

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Resolving Equity and Bond Market Divergence

Richard Cookson suggests two scenarios for the resolution of the current episode of equity and bond market divergence:

The benign argument for bond yields (and equities) revolves around supply.  Many pundits and investors have been in a lather about the vast quantities of debt that governments have to issue. But if an unexpected mountain of supply raises the risk premium that investors demand for holding longer dated paper, the opposite is also true: supply that becomes less Everest-like than feared would reduce it.

So the benign explanation for why bond yields have been falling even as equity markets have been rallying is that worries about the surge in government bond issuance are lessening as signs of recovery mount.

That in turn should lead to a fall in government issuance and thus long-term yields, especially since inflationary pressures (apart perhaps from the UK) are so muted and yield curves so steep by historical standards.

And if that’s right, lower government bond yields would increase the appeal of riskier assets, equities included.

Effectively, the ex ante equity-risk premium would be driven higher because the long-term risk-free rate, but not the growth rate, would be lower.

Sadly, there’s also an altogether more malign explanation. Much as was the case in Japan in the 1990s, it could be that low government bond yields are telling you that this recovery is unsustainable once the monetary and fiscal medicine wears off.

It could be saying that, thanks to the required private sector deleveraging, especially in the US and UK, the long-term potential growth rate of the developed world is much lower than it was. That would lead to a sharply lower ex ante equity risk premium and thus  potentially dreadful returns from equities.

Unfortunately, another lesson from Japan in the 1990s is that the world’s lowest bond yields can co-exist with the world’s worst fiscal policy outcomes.  This makes the first of Cookson’s scenarios less plausible.  We are more likely to end up with whatever is behind door number two.

posted on 01 September 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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