Working Papers

2009 10

Tax Competition and the Future Fund

Australia’s sovereign wealth fund, the Future Fund, does not pay tax, which would be pointless, but it is not too keen on paying foreign taxes either.  The Fund’s 2008-09 Annual Report shows five Cayman Islands subsidiaries.  As the report notes ‘the Fund seeks to maximise after tax returns and, where it is legitimate to use a structure which protects the claim to sovereign immunity, this path has been taken.’  The Australian government has been an enthusiastic participant in international efforts to crack-down on so-called ‘harmful’ tax competition, but is not averse to having its own proprietary trading operation take advantage of these opportunities.  To be clear, this is meant as a criticism of the government’s participation in such efforts and not the Future Fund.

The Fund saw a real rate of return of -5.7% (ex-Telstra), which is pretty poor compensation for the tax cuts forgone as a result of the Fund’s creation.  The Fund remains 41.1% invested in cash (ex-Telstra), down from 62.1% at the end of the previous financial year.  The government could have achieved a better return with less risk and at lower cost simply leaving the funds on deposit with the Reserve Bank.

posted on 30 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy

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Why the Financial Crisis Proves the Efficient Market Hypothesis

Jeremy Siegel on why the financial crisis proves rather than disproves the efficient market hypothesis:

is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.


posted on 28 October 2009 by skirchner in Economics, Financial Markets

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Complete Confusion

You know it’s Friday whenever the government slips out another late afternoon FDI approval.  The government continues to micro-manage FDI in Australia, with another long list of conditions attached to Yanzhou Coal Mining Company Limited’s acquisition of Felix Resources, while creating even more uncertainty about government policy:

One adviser to Chinese companies trying to invest in Australian resources, who has had potential takeovers of Australian public companies quashed by FIRB before they were made public, expressed frustration at the lack of consistency.

“It creates complete confusion as to what the policy is,” he said.

“All we can see is that there is no policy.”

Senator Sherry’s office would not comment on what could be gleaned from the decision in terms of policy.

Because there is none.


posted on 24 October 2009 by skirchner in Economics, Foreign Investment

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Never Mind the Prices, Check the Volumes

As Australia records the biggest annual percentage decline in Australian dollar export prices since comparable data began in 1974, Stephen Green predicts ‘enormous’ Chinese demand for Australian iron ore next year.

I discuss the relationship between Australian export prices and volumes in this article.

posted on 23 October 2009 by skirchner in Economics, Financial Markets

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Steve Keen, They Hardly Knew You

The latest 12-month consumer house price expectations from Westpac-Melbourne Institute:

Some 73% of respondents expect prices to increase over the next 12 months with 15.9% expecting no change and 9.9% expecting a decline. The proportion expecting an increase compares with 53% in July and 32% – a minority – in May.

posted on 21 October 2009 by skirchner in Economics, House Prices

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What If You Got Pink Bats and a School Hall for Christmas?

Scroogenomics author Joel Waldfogel, on the welfare costs of poorly chosen Christmas gifts:

My favorite way to do it is to compare what would you be willing pay for stuff that you receive as a gift per dollar spent versus what would you be willing to pay for stuff you bought for yourself per dollar spent. The surveys converge on the idea that it is about 20% less. U.S. holiday spending per year is conservatively about $65 billion. So about 20% of that, something like $13 billion a year, is what’s destroyed through gift giving in the U.S. But it turns out it is by no means limited to the U.S.

You see the same pattern of spending in almost every major western economy, with a big bump in spending in December. You don’t see it in China and you don’t see it in Israel. But you see it in every country that is predominantly Christian, and some that aren’t. Japan also has it in a big way. If you add up that spending in the other major OECD economies you get, instead of $65 billion alone for the U.S., $130 billion (in holiday spending). There’s every reason to believe the dead weight loss is as big elsewhere. That would get you to $25 billion a year around the world in value destroyed through gift giving.

An almost perfectly analogous argument can be made against fiscal stimulus of the non-cash variety, except that the government has even less knowledge about your preferences, has even less of an incentive to satisfy them and you get sent a tax bill for the gifts you didn’t want.  The rush to push stimulus dollars out the door is similar to the mad rush to buy presents before Christmas, resulting in poor quality spending decisions.  The political Santa Claus also has a rather more selective view of who has been ‘naughty’ and who has been ‘nice’. 

Fiscal stimulus spending is often viewed as valuable in its own right, as if it doesn’t matter what the government spends money on.  When asked whether his proposal for less Christmas gift-giving would be bad for the economy, Waldfogel notes:

I’m not against spending, I’m just against spending done ignorantly by others… Although George Bush said go out and spend and other folks have exhorted us to spend at times, spending is not really a measure of success or satisfaction… When we say it is good for the economy, we can’t just look at the amount of spending, we want to think about the amount of satisfaction that we’re getting from the spending.

While Waldfogel’s argument is less applicable to so-called ‘cash splashes’, last year’s cash hand-outs were strategically timed just before Christmas.  We will never know just how much of last year’s pre-Christmas cash splash ended-up in the great national stockpile of unwearable socks and ties.

posted on 19 October 2009 by skirchner in Economics, Fiscal Policy

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The Integrity of Postal Voting

Peter van Onselen on Australia’s internationally anomalous system of postal voting and why you should never use the postal voting forms sent out by politicians:

Political parties operate sophisticated databases that track voters, recording their voting intentions and issues of interest. They are a central element of the professionalisation of politics in this country.

The Labor database carries the sinister-sounding name Electrac. The Liberal database is called Feedback.

When postal vote forms come in - and in complete violation of the principle of the secret ballot - the name of the voter is checked into the database and if they have had their voting intention previously identified (through doorknocking or telephone canvassing), the party knows how diligently it may be in looking to forward the form to the AEC.

Kelly writes in his paper: “It is conceivable that a party might delay forwarding a completed postal voting application to the AEC if the elector is identified as a non-supporter.” He casts his concerns more broadly: “While political parties continue to be allowed to be involved in the postal voting process, the integrity of Australia’s ‘independent’ electoral administration is undermined.” …

At the very least the privacy of voters is under siege when party operatives are using databases to cross-check voting intentions of postal voting electors. If political parties had not exempted themselves from the Privacy Act (our legislators in action) they would not be allowed to operate the postal voting system as they do.

posted on 18 October 2009 by skirchner in Politics

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Absolute Greed

The rhetoric of class hatred from Prime Minister Kevin Rudd:

If you want a definition of social injustice this was it in brutal colour - millions of innocent workers losing their jobs because a few thousand financial executives around the world surrendered any pretence of social responsibility in their blind pursuit of absolute greed.

The facts from the AEI’s Peter Wallison:

Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?

The answer, of course, is that it was government policy for these poor quality loans to be made.

posted on 16 October 2009 by skirchner in Economics, Financial Markets

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Fiscal Stimulus and Monetary Policy

RBA Governor Glenn Stevens, making the case for tightening monetary policy yesterday:

If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.

The same argument can be made in relation to fiscal policy, but not because it will make the RBA’s job any easier.  The main argument for winding back the fiscal stimulus at a faster pace is to avoid the long-run costs from crowding-out and resource misallocation rather to contribute to short-run demand management.  There is no necessary contradiction in arguing that fiscal stimulus has been ineffective and that it should now be wound back, as some have suggested. 

Standard New Keynesian models would predict that fiscal stimulus in a small open economy will induce capital inflows, put upward pressure on the exchange rate and crowd-out net exports, rendering discretionary fiscal policy wholly ineffective in stimulating aggregate demand.  Treasury have argued that this does not apply in the context of a concerted global fiscal expansion.  The problem with the Treasury’s argument is that Australia’s fiscal stimulus is one of the world’s largest as a share of GDP and we now have the exchange rate appreciation to show for it. 

Despite the downturn, underlying inflation as measured by the RBA’s statistical core series remains above the upper-bound of the RBA’s 2-3% medium-term target range.  The Bank’s forecast that underlying inflation will return to the middle of the target range by June 2010 is based on economic forecasts that look overly pessimistic.  Little wonder that the inter-bank futures market is pricing an aggressive tightening cycle, with a further 50 basis points of tightening more than fully priced before the end of the year.

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

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When FDI Regulation Turns to Crap

John Garnaut continues to expose the chaos in the regulation of foreign direct investment in Australia:

a whole industry of lawyers, lobbyists and retired politicians is springing up to earn fees by promising China that they can divine the mysteries of Australia’s foreign investment laws. Many contacted by BusinessDay are critical of the review board and others are critical of the Australian media. But they are all fearful of speaking publicly, lest they offend the agency they are paid to deal with.

Garnaut quotes my former colleague Stephen Joske on the government’s failure to construct a coherent framework for dealing with China:

“There wasn’t strong public resistance to Chinese investment in Australia a few years ago,” he said.

“But indecision from the Government and negative signals created a vacuum in which concerns grew. As soon as FIRB started to define what the national interest is they bound their hands without really resolving the issue; now FIRB is being used to fan public opinion and concerns about state-owned enterprises.”..

He said he was “shocked” at Treasury’s failure to brief its boss, Swan, on the usual pros and cons of foreign investment…

Joske said the investment policy setting was getting worse because of a lack of leadership.

“There is no strategic framework with China,” he said. “I don’t know what caused it but it’s a fact. Because of this vacuum you get crap policy.”

And the result, he said, is that the review board ‘‘has been allowed to depart from the spirit of the open economy and to effectively dominate the entire economic relationship”…

“The thing that’s inexplicable is this is the overall approach to China: you’re setting foundations for Australia’s economic future,” he said. “The business lobbyists have dropped the ball, the bureaucracy is under-resourced, BHP is doing what it always does and the Opposition is making things worse.”


posted on 15 October 2009 by skirchner in Economics, Foreign Investment

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Policymakers Sold Australia Short

I have an op-ed in today’s AFR arguing that the budget economic forecasts are the wrong benchmark to use in evaluating the effectiveness of fiscal stimulus.  Full text below the fold (may differ slightly from edited AFR text).

Alan Mitchell’s column on the facing page is worth reading for its discussion of the relationship between the Rudd government and the Treasury Secretary.  Mitchell argues that ambiguity about the nature of this relationship is undermining accountability for government policy.

continue reading

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

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Does the RBA Still Feed the Media Chooks?

Speculation about RBA media backgrounding in relation to future interest rate decisions is back again.  Even if no such backgrounding has taken place, the perception that this still occurs is very damaging, not only for the integrity of financial markets, but also for the supposed beneficiaries of the backgrounding.  It is well understood that politicians engage in selective leaks in order to control journalists.  There is nothing more damaging to the credibility of a press gallery journalist than to be seen as the mouthpiece for a politician.  The relationship between the RBA and journalists should not be viewed any differently.

The RBA could put a stop to the speculation by denying that the practice takes place or at least foreswearing its use in future.  Not only would this benefit the integrity of financial markets, it would also give us more confidence that the rather generous treatment the RBA receives from many in the media was actually deserved.

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

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CIS on Facebook

The Centre for Independent Studies has a Facebook page that can be used to follow CIS media, publications and events.  The latest issue of Policy magazine is also available, including my review essay on behavioural economics.

posted on 07 October 2009 by skirchner in Centre for Independent Studies

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The Feral FIRB

John Garnaut has a story in the SMH highlighting the arbitrary and capricious nature of Australia’s regulation of foreign direct investment and the damage it is doing to Australia’s international reputation as an investment destination.  If Garnaut is to be believed, the FIRB is a bureaucracy turned feral, which would help explain the Patrick Colmer speech debacle.  Extract over the fold, but read the whole thing.

continue reading

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

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The Colmer Doctrine?

Matthew Stevens coins the phrase ‘the Colmer Doctrine’, but as his own analysis suggests, the real problem is the complete absence of anything that could be called a doctrine:

There are two quite different conclusion[s] to draw from Colmer’s contribution to last week’s Australian China Business Council conference. Either he is a very new kind of beast in FIRB, in that he has seized the opportunity offered by government uncertainty to help shape foreign investment policy.

Or, as is far more likely, the commentary he offered was vetted and approved by a government still unwilling to formally define its preferences on Chinese investment…

That we are 18 months into our national reflection on China’s investment intentions and we are still so unsure about the FIRB process says only that the government had failed to plainly explain its policy.

That failure would seem to reflect either policy uncertainty or a failure of will. Either way, it is time to sort it out.

posted on 02 October 2009 by skirchner in Economics, Foreign Investment

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The Great Pat Colmer Speech Hunt

Glenda Korporaal weighs in on the Pat Colmer speech:

A week later the FIRB says there is no transcript of the speech, and the Australia China Business Council, which is to be commended for organising a conference with a wide range of Australia-Chinese experts, has been deluged with requests for a copy from every lawyer advising on foreign investment.

As of yesterday afternoon none was available…

The fact that the speech is not yet available—and may not be made available—to people who would genuinely like guidance on foreign investment applications can only add to the potential for criticism that Australia’s foreign investment policy is less than clear…

That said, there is still a real hunger for more information and more clarity about both the official policy and the administration of that policy.

This is an issue that should be acknowledged and addressed at higher levels than the FIRB director, but making the speech generally available would be a start.

The Executive Director of the FIRB is the designated Australian National Contact Point (ANCP) under the OECD Guidelines for Multilateral Enterprises.  According to the government, ‘the ANCP is committed to carrying out these responsibilities in accordance with the Guidelines requirement for NCPs to be visible, accessible, transparent, and accountable.’

All rhetoric, no substance.

posted on 02 October 2009 by skirchner in Economics, Foreign Investment

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Single-Issue Forecasting Tragics

Don Harding has a great piece on economic forecasting in today’s Australian:

In the future there will continue to be financial crises and recessions, all of which economists, bankers, finance gurus, bureaucrats, politicians and the public will fail to predict.

To be sure there will be some who claim predictive success… Most will be single-issue tragics who predict the next calamity in the same way that I, an Essendon tragic, successfully predicted their win over St Kilda in round 20 by predicting that Essendon would win every match. The only information in such predictions is about the tragics who make them.

Harding also notes the appalling state of the debate over fiscal stimulus in Australia:

Public policy standards are so low in Australia that my expectation is that we won’t get well-researched, evidence-based answers to these questions from either the bureaucrats or the politicians.  Instead we will get spin, vitriol and blame shifting.

Here’s a suggestion for the FOI desk at The Australian: request all the materials that form the basis for the Treasury’s estimates of the impact of fiscal stimulus on economic growth and employment.

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

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Yes, We Have No Patrick Colmer Speeches

I really shouldn’t complain about FIRB secrecy.  Variations on ‘Patrick Colmer speech’ are now the number one search term delivering traffic to this site.  Alan Jury’s Chanticleer column in the AFR yesterday (gated, so no link) deserves considerable credit for highlighting the issue of making pseudo-policy announcements via speeches that are not in the public domain.  As Jury noted, it makes a complete mockery of the government’s posturing on transparency and accountability in international fora like the G20, not to mention the ‘Government 2.0 Taskforce’ (I would settle for some Government 1.0).

posted on 01 October 2009 by skirchner in Economics, Foreign Investment

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