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David Murray Wrong on Sovereign Wealth Funds

Outgoing Future Fund Chairman David Murray wrote a defence of sovereign wealth funds for The Weekend Australian. I respond to Murray in today’s Business Spectator.

A curious feature of this debate is the way in which the defenders of sovereign wealth funds have raised the possibility of secular stagnation in defending inter-generational wealth transfers via a SWF (Malcolm Turnbull also suggested this in a tweet). As I note in my Business Spectator piece, a SWF could at best smooth the implications of secular stagnation over time. If secular stagnation really is upon us, then it is even less likely the Future Fund will realise its targeted real rate of return of 5%.

posted on 23 March 2012 by skirchner in Economics, Financial Markets, Fiscal Policy

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A Sovereign Wealth Fund is Not the Same as Fiscal Responsibility

Treasury Secretary Martin Parkinson addressed the issue of a sovereign wealth fund in a speech to the Australia-Israel Chamber of Commerce. Parkinson said that ‘Treasury is often characterised as being opposed to an SWF – yet our comments are neither supportive nor critical.’ In fact, Treasury and the RBA are just as often characterised as supportive of a SWF when they have been studiously equivocal. Whether Australia chooses to make greater use of a SWF is ultimately a decision for politicians. It is appropriate for Treasury and the RBA to discuss the implications of this policy choice, but we should not expect them to come down explicitly in favour of one side of the argument.

Parkinson’s speech makes clear that greater use of a SWF is not the same thing as more responsible fiscal policy:

the creation of an SWF per se does nothing to address either Australia’s net debt position or, more broadly, the level of government or national savings over time.

If the Australian Government had financial liabilities of $10 billion and runs a $1 billion surplus, it can reduce gross liabilities to $9 billion, or it can maintain them at $10 billion and buy $1 billion of financial assets to be held in an SWF – in both cases, net financial liabilities are $9 billion.

The only way the creation of a Sovereign Wealth Fund delivers a faster improvement in net debt is if it is used to justify a tightening of fiscal policy that would not otherwise be achieved.

As such, if we are to have a sensible discussion about the merits of an SWF, the proponents of such Funds, whether at the national or sub-national level, need to be clearer about precisely what they have in mind. Absent tough fiscal decisions, an SWF does not constitute a contribution to future fiscal sustainability.

Robert Carling and I make this point in our CIS Policy Monograph, Future Funds or Future Eaters?  If contributions to a SWF, like the budget surplus itself, are no more than a residual after the government is done spending and taxing, then there is no reason to believe that a SWF changes government behaviour. A SWF, like a budget surplus, is a consequence not a cause of fiscal policy decisions. The IMF found there was little impact on government spending in its study of countries making use of SWFs.

Unless a SWF is embedded in a broader framework of binding and enforceable fiscal policy rules, there is no reason to believe a SWF will induce greater fiscal responsibility. If a politician supports a SWF but does not support fiscal policy rules, you know they cannot be trusted with a SWF.

posted on 08 March 2012 by skirchner in Economics, Financial Markets, Fiscal Policy

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The $1.7 trillion Road Not Taken

It turns out that Christina Romer recommended the Obama Administration implement a $1.7 trillion rather than $800 billion stimulus in late 2008 in order to “eliminate the output gap by 2011-Q1.” In one respect, it’s unfortunate that this was not implemented. While one can have an argument about whether an $800 billion stimulus was large enough, it would have been impossible to rationalise the failure of a $1.7 trillion stimulus. It would have been a definitive, even if disastrous, macroeconomic policy experiment.

posted on 23 February 2012 by skirchner in Economics, Fiscal Policy

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Future Funds or Future Eaters? The Case Against a Sovereign Wealth Fund for Australia

CIS have published a new Policy Monograph by Robert Carling and myself making the case against the use of sovereign wealth funds in the Australian context. We argue that the desirable objectives of a sovereign wealth fund can be better met through greater use of fiscal responsibility legislation.

The Business Council of Australia also argues against a SWF and in favour of fiscal policy rules in its just released 2012 budget submission.

posted on 20 February 2012 by skirchner in Economics, Fiscal Policy

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Quiggin versus Carling and Kirchner

John Quiggin accuses Robert Carling and I of ‘an appalling breach of elementary standards of research’ for not acknowledging that Alberto Alesina’s work on the effectiveness of fiscal stimulus and consolidations is ‘highly controversial.’ In fact, we referenced Alesina’s work precisely because it has featured so prominently in public debate, including in the pages of The Economist magazine. We also referenced Alesina for the comprehensiveness of his research. His papers include balanced summaries of the relevant literature. Alesina has responded to the criticisms of his work.

Even the most casual reader could not be unaware that this is a controversial topic, not least among academic economists. The op-ed was entirely premised on the existence of this controversy. We could have cited other literature on this question on both sides of the debate, but an op-ed is not the place for a literature review (Sinclair Davidson addresses the issue of peer review here). Alesina’s work and the debate around it is simply the most accessible, as John demonstrates.

It should be no surprise that there is conflicting evidence and debate on this question, something Alesina and we are happy to acknowledge even if we come down on one side of the debate. In the absence of some definitive natural experiment or methodological breakthrough, this is a controversy that will be with us for some time yet, despite John’s determination to see this and so many other controversies dead and buried in his favour.

posted on 10 February 2012 by skirchner in Economics, Fiscal Policy

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Give Austerity a Chance

Robert Carling and I have an op-ed in today’s AFR making the case for fiscal austerity. Drawing on the work of Alberto Alesina and his co-authors, we note that austerity may work politically as well as economically:

Interestingly enough, Alesina and his co-authors also show that fiscal consolidations do not generally reduce the popularity of governments or make it more likely they will lose elections.

Indeed, they go so far as to say that “it is impossible to find systematic evidence of predictable political losses following fiscal adjustments”.

This is entirely consistent with their finding that fiscal consolidations need not have adverse implications for economic growth and may even support growth. Electorates seem to recognise this, even if politicians do not.

posted on 08 February 2012 by skirchner in Economics, Fiscal Policy, Monetary Policy

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Did Nudge Kill Keynes? Behavioural Economics and the Stimulus

Business Week reports:

The design of Making Work Pay plays off of mental accounting. One of Thaler’s findings is that people are more likely to spend money that they have filed in their “current income” mental account rather than their “assets” mental account—in other words, they measure their spending against the size of their paycheck instead of the size of their bank account. A lump-sum tax rebate feels like an increase in wealth and is more likely to be saved. A series of slightly bigger paychecks feels like an increase in income and is more likely to be spent.

That’s not what happened in practice, according to Sahm, Slemrod, and Shapiro. In a study of the 2009 stimulus, based on 500 telephone interviews, the authors found that only 13 percent of Making Work Pay recipients reported that the tax credit would lead them to increase spending. This was just half of the 25 percent spend rate the researchers found for the traditional lump-sum tax rebate in President Bush’s 2008 stimulus. Of course, 2009 was a worse economic climate than 2008, and that might have played a role in the change. To control for this, the researchers looked at one-time stimulus payments that went to retirees at the same time that Making Work Pay was going to working households. The retirees, too, reported much higher spending rates than the Making Work Pay households, who got their money in a steady drip.

The authors can only guess at what’s behind their results.

There are plenty of conventional and straightforward explanations for why MWP didn’t work that do not require any resort to behaviouralism. The problem with behavioural economics is that it is really anti-behavioural. Behaviouralists will resort to any ad hoc theory, except the one behavioural theory we already know that actually works: self-interested rational choice.

posted on 13 November 2011 by skirchner in Economics, Fiscal Policy

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Sovereign Wealth Funds as ‘Social Control of Public Wealth’

The Greens are big supporters of making greater use of sovereign wealth funds. This op-ed in The Age helps explain the appeal of sovereign wealth funds to the left:

contemporary Left thinkers have increasingly argued that the ‘‘financialisation’’ of society - the replacement of government-funded retirement with individually-funded savings invested in financial markets, the privatisation of core services, the increasing ownership of society by hedge funds and the explosive use of credit - needs some tempering through social control of public wealth.  That could come through government ownership of vehicles such as sovereign wealth funds.

In other words, the role of SWFs is to disintermediate the private sector from saving and investment decisions. This is perfectly understandable coming from a left-wing perspective. However, it begs the question as to why so many Coalition MPs, such as Malcolm Turnbull and Josh Frydenburg, are also such enthusiastic supporters of SWFs.

The private sector already saves and invests for the future through private capital markets. It is governments that routinely squander future wealth thorough increased public spending and borrowing. Increased public saving via a SWF sounds virtuous, until you recognise that public saving is just deferred government spending. Unless you think future governments are going to make better spending decisions than the governments we have actually had, the argument for increased public saving via a SWF is decidedly weak.

In this op-ed, I argue that some of the objectives behind a sovereign wealth fund could be better achieved through binding fiscal responsibility legislation. If a politician supports a SWF, but opposes fiscal responsibility legislation, then you know they can’t be trusted with a SWF.

posted on 07 September 2011 by skirchner in Economics, Financial Markets, Fiscal Policy

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The PBO is Not the End of Politics

Bloomberg is seemingly the only news organisation to have thought that the introduction of the Parliamentary Budget Office legislation is worthy of note. The Bloomberg report suggests that the federal opposition have unrealistic expectations for the new body:

“We want an independent source,” opposition Finance spokesman Andrew Robb told the Melbourne Age newspaper last month. “I’d expect next time there will be no debate over our costings.”

As I argued in this piece for The Drum, it would certainly be desirable to put an end to pointless partisan bickering over costing assumptions and instead focus on the merits of the policies being proposed apart from their assumed implications for the budget bottom line. Unfortunately, the political process is such that politicians cannot admit to being wrong and they are unlikely to accept contrary opinions from the PBO, no matter how independent. My guess is the PBO will very quickly disappoint the expectations of the opposition and independents and will itself become embroiled in partisan conflict.  This was the Canadian experience, discussed by Peter Reith here. Reith seems to think we can do better, but gives us no real reason to think that we will.

Robert Carling and I have a better idea.

posted on 23 August 2011 by skirchner in Economics, Fiscal Policy

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Why Raising the US Debt Ceiling Was a Mistake

I have an article at The Conversation arguing that failure to raise the US debt ceiling need not have led to sovereign debt default:

It was the failure of US politicians to acknowledge the policy implications of long-run budget sustainability that decided the recent ratings action by Standard & Poor’s. Failing to raise the debt ceiling would not have led to debt default if US politicians had taken the necessary decisions to put the budget on a sustainable footing. Raising the debt ceiling kicks the problem down the road and creates the risk of a far more serious fiscal crisis in future.

A fiscally responsible US president would have joined with responsible members of Congress in refusing to sign a further increase in the debt ceiling. The Obama administration could have used the unthinkable prospect of debt default to force spendthrift members of Congress to reduce government spending and stabilise expectations for the future path of net debt that are currently weighing on economic growth.

Congress and the Administration know that if they lead the US to default on its obligations, the American people will sweep them from office. For politicians, incentives don’t come much stronger than that.

My CIS colleague Adam Creighton has been making similar points in Crikey, although I’m far better disposed towards quantitative easing than he is.

See also Jonah Goldberg, Wake Up and Smell the Tea.

posted on 11 August 2011 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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Politicians’ Relative Pay and Fiscal Performance

I would call this evidence suggestive rather than definitive, but interesting nonetheless:

The chart below compares the pay of legislators in 13 countries with those countries’ fiscal space. The best “deal” for the taxpayer comes at the top left of the chart, where legislators are relatively low paid but the country has a large fiscal space. The worst deal comes at the bottom right of the chart, where pay is high but fiscal space low.

My CIS colleague Adam Creighton has suggested that politicians’ pay should be a fixed multiple of three times the median wage, ensuring that politicians’ incentives are aligned with those of the rest of the population. The linked chart suggests that this multiple is a little high by international standards. I would further modify Adam’s suggestion and tie politicians’ pay to a fixed multiple of the median real wage as an added anti-inflationary incentive.

Robert Carling and I have further argued that politicians suffer pecuniary penalities for breaches of our proposed fiscal responsibility legislation.

posted on 03 August 2011 by skirchner in Economics, Fiscal Policy

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Taxploitation II: Tax Reform for Incentive, Growth and Smaller Government

CIS has released a collection of readings Taxploitation II: Tax Reform for Incentive, Growth and Smaller Government. I have a chapter on capital gains tax, which updates an earlier policy monograph on the subject to reflect the outcome of the Henry tax review.

As I note in my chapter, the Henry review should have been an embarrassment to most Australian journalists writing on the subject of capital gains tax and tax expenditures. George Megalogenis characterised the Henry review as ‘cheeky’, which is as close as he comes to acknowledging that the review’s conclusions and recommendations invalidate most of what George has written on these subjects. Australian journalists have misread (or simply failed to read) the fiscal implications of the Treasury’s tax expenditure statements. They are certainly not alone in doing this, but that is no excuse.

posted on 13 July 2011 by skirchner in Economics, Fiscal Policy

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Unhypothecating the Flood Levy

If your first pay packet of the new financial year is a bit lighter, it is probably due to the flood levy, the first discretionary federal tax increase in over a decade. Robert Carling wrote a paper for CIS in 2007 on the misuse of tax earmarking, of which the flood levy is a good example.

Tax increases should not come as a surprise following the unfunded fiscal stimulus of 2008-09. Announcing an unfunded fiscal stimulus is equivalent to announcing a future tax increase. It is just a matter of when the increased tax burden will have to be paid. The increase in household saving that accompanied the stimulus suggests that households understand this.

Announcing the details of the re-jigged Rudd-Turnbull CPRS at the end of the same week that many taxpayers will experience their first discretionary federal income tax increase in over a decade is a curious political choice to say the least. It can only add to the unpopularity of the new CPRS.

posted on 08 July 2011 by skirchner in Economics, Fiscal Policy

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Budget Office Helps Pollies, Not Punters

I have a piece at the ABC’s Drum Unleashed on the proposed federal Parliamentary Budget Office. Here’s my conclusion:

Policy costings should be a low priority for the PBO or any other independent fiscal authority. Were we really any the wiser for the 128 policy costings released by Treasury and Finance for the 2010 federal election, the work of some 300 public servants? Hands-up if you can recall the conclusion of even one?

The new federal PBO’s focus should instead be on the analysis of overall fiscal strategy and long-term fiscal sustainability. The PBO will not end partisan disputes over competing policies. But it could serve a useful purpose if it injects some realism into debates over costings. To do this, it will need the independence to scrutinise and contradict, rather than just recycle, the work of Treasury and Finance. Whether the PBO is given the necessary freedom to do so remains to be seen.

posted on 20 May 2011 by skirchner in Economics, Fiscal Policy, Politics

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Conservatives and Libertarians for Dumping the Gold Stock

We have previously noted the irony of those who worry about an over-supply of fiat money taking refuge in a commodity in which governments hold stocks that dwarf annual production. We also noted that the pro-free trade social democrats at the Petersen Institute had suggested liquidating the US gold stock to reduce US government debt and interest payments.

Now conservative and libertarian US think-tanks are saying it too. It is consistent with their long-standing support for the privatisation of government assets. Of course, it is a lazy approach to debt reduction, but a lazy debt reduction is better than none.

Dumping the gold stock without tanking the gold price is easier said than done, but the RBA was able to discretely offload 167 tonnes in 1997, yielding a handsome profit on the old Bretton Woods parity price and adding income producing assets to the RBA’s portfolio (contrary to Paul Cleary’s FOI beat-up).

In Australia, sales of public trading enterprises Qantas, Telstra, CBA and the airports yielded $61 billion during the 1990s and 2000s, making a large contribution to the reduction in net debt from $96 billion in 1996-97 to a negative net debt position in 2005-06 before the terms of trade boom really took off. Peter Costello knew a lazy policy option when he saw one. One of the problems facing the current government is that it has to do debt reduction the hard way. And the gold stock’s long gone.

UPDATE: Portugal is under pressure to sell its Nazi gold back to Germany.

posted on 17 May 2011 by skirchner in Commodity Prices, Economics, Financial Markets, Fiscal Policy, Gold

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