Category Archives: Economic theory and policy

A textbook answer to Japan’s economic problems

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Look, Malcolm might not be the worst economic manager in the world: Japanese Prime Minister Shinzo Abe to unzip $33bn on welfare. The Japanese economy has never recovered from its stimulus program of the 1990s, and despite its twenty years of failure, the addiction to public spending just keeps getting worse.

Japanese Prime Minister Shinzo Abe will increase spending on ­social programs and raise the minimum wage as he tries to jump-start the flagging economy ahead of an election next year.

Mr Abe said on Thursday the government would give cash handouts to the elderly poor, and build childcare and aged-care ­facilities to help people enter and stay in the workforce, as part of a stimulus package expected to cost at least ¥3 trillion ($33 billion).

He hopes to revive an economy that has slipped into recession for the second time in two years, heightening scepticism about whether Abenomics will succeed in generating sustainable growth.

Why should anyone be sceptical? They’re just stimulating demand, just like the textbooks say they need to do.

The puzzle of low real interest rates and low investment is not really a puzzle

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Arnold Kling raised an interesting question: The Puzzle of Low Real Interest Rates and Low Investment. He summarises the various possibilities into Keynesian and non-Keynesian:

The puzzle in macroeconomic data is that the real interest rate is low and investment is low. There are a number of stories, none of them fully convincing.

In the Keynesian category, we have:

1. Low “animal spirits.” As far as I know, no one has actually propounded this.

2. Accelerator model. That is, when other forms of spending are high, investment is high. So when spending by households goes down, investment goes down. I put Furman (and most Keynesians) in this camp.

In the non-Keynesian category, we have:

3. Real interest rates are actually high, because prices are falling. This is perhaps more plausible if you think about sectoral price movements. If the price indexes go up because of college tuition and health insurance, then prices elsewhere may be falling.

4. Real interest rates are actually high for risky investment. Interest rates on government debt and on high-grade private bonds are a misleading indicator of the marginal cost of capital.

5. Crowding-out can occur at low interest rates. That is, if financial intermediaries are gorging on government debt, they may not seek out private-sector borrowers.

The puzzle in my view is a result of thinking entirely in money and not looking at the real side of the story at the same time. See Chapters 16 and 17 of my Free Market Economics, but essentially the reason for low money rates creating a fall in the real level of investment is because the supply of savings diminishes, and then, because the price of these savings to those who can get the money is so low, many really low productivity and no productivity activities ended up being funded. The analysis may be faulty somehow, but the conclusions it reaches is what you see in the world around us today.

Malcolm and the economy

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The way to achieve growth is to encourage the private sector: lower taxes, less regulation and a cut to spending. Three stories, each highlighting how bizarre economic policy now is. First this: Budget cash to back innovation push.

Malcolm Turnbull’s sweeping innov­ation strategy will hit the budget bottom line as the package of more than 30 reforms, including new spending measures, will not be matched with savings.

The Prime Minister, who has told Industry Minister Christopher Pyne to “release his inner revolutionary” in setting the new innovation agenda, is understood to have ordered Treasury officials to prepare “second-round effects” modelling to demonstrate the long-term benefits of the reform package, despite the anticipated short-term hit to the budget.

And then on the matter of savings, we have this: Cutbacks eyed for superannuation tax breaks.

Tax breaks on superannuation could be scaled back to help fund income tax cuts for workers, under ideas Scott Morrison will air today in a bid to ignite a debate over the best way to use concessions worth billions of dollars.

The Treasurer will also raise the prospect of easing some of the rules that prevent people from building up their nest eggs, acknowledging that caps on their contributions can make it impossible to save all they need for a comfortable old age.

But Mr Morrison will use a major speech today to warn that super must not be turned into ­“estate-planning vehicles” for the wealthy to exploit the tax-free ­nature of the funds in retirement.

The suggestions widen the tax reform debate, as the government examines options that range from an increase in the GST to a “progressive” scale of super tax rates that could recoup as much as $6 billion a year in revenue.

And we should not neglect this either: Turnbull’s NBN deficiencies exposed by $800 million Optus debacle.

Leaked documents, which show that the company building the government’s national broadband network could be up for $375 million in repairs and upgrades of a key part of its multi-technology-mix (MTM) pose serious questions about the wisdom of the government in tearing up Labor’s fibre to the premise plans.

The stories are each part of Malcolm’s visionless approach to policy. He thinks government spending is good, private investment irrelevant, and national saving not central to his plans. We are dealing with a Labor government that is only being constrained by the conservatives in its ranks, the ones Malcolm is trying to rid the party of.

Everyone is perfectly aware that Albanese will lead the ALP at the next election. If Malcolm loses the unloseable, he will have to emigrate with the other millions heading to Europe.

Where pictures replace words

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matilda reading quadrant

I have an article in this month’s Quadrant which is now posted at Quadrant on Line: Drawing the Wrong Conclusions. Three separate issues are brought together – the use of visuals in the place of words in modern academic discourse which not only helps bamboozle others but even helps bamboozle themselves; a review of Mark Steyn’s brilliant book on the hockey stick, A Disgrace to the Profession, which looks at the diagram that has featured in both IPCC Reports and Al Gore’s An Inconvenient Truth; and a final section explaining my own disdain for Keynesian economics which was entrenched by another diagram known as the Keynesian cross, that has done much to implant aggregate demand among economists since it was published in the first edition of Paul Samuelson’s Economics in 1948.

Since a large proportion of what I read was written a century or more ago, I am very aware how few graphs and diagrams there once were. It may only have been the limitations of print technology, but to understand something once required paying attention where one needed to follow the logic. Today, a picture is provided in place of the thousand words of text. The result is that such diagrams have replaced the need to follow close reasoning in understanding the point someone else is making. With diagrams and pictures of all sorts, there is less apparent need to bother with detail and complexity. And it is no small problem as we can see with the hold that global warming and Keynesian macro continue to have, even though the evidence that either is valid remains thin on the ground.

My grand-daughter, bless her, will be part of the mid-century generation who will come after the millennials. These post-millennials will be starting at the more difficult end by going back to thought and reason, as the photo above clearly shows.

A fat man resting on a thin man’s back

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Tax reform is pretty easy, if you see what you need to do. For governments, tax reform typically means finding some way to get more money to spend. But not everyone thinks so, not even every government. In the midst of everything else, Israel is in the middle of an economic boom, and part of it has been driven by cuts to taxation, but also by cuts to spending. The article begins with these words, “since I’m a big fan of the Laffer Curve, I’m always interested in real-world examples showing good results when governments reduce marginal tax rates on productive activity.” But in the body of the story, we find this image.

“Netanyahu explained that the public sector had become a fat man resting on a thin man’s back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. …Government spending was capped for three years.”

This story, on the other hand, comes from the United States with a focus on Elizabeth Warren, the Democrat Senator from Massachusetts. She’s looking to raise taxes on the largest American businesses because she thinks their rate of taxation is too low. The article is titled, Head in the Clouds from which we find:

Elizabeth Warren must believe that somehow you can disconnect reality and put it into a bubble. Like most Progressives she can’t seem to understand that corporations do not pay taxes, they act as tax collectors by adding taxes to all the other costs that they pay when selling products. Which means we all pay more. The problem is that we the people are running out of “more.” We can’t afford their avarice anymore.

And on it will continue because that is the nature of the beast.

Raising the GST to 15% is not a 5% increase it is a 50% increase

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Why is a rise in GST even on the table, never mind one so large? This is why the left is backing Malcolm to the hilt. The ALP could never get away with such a heist, but the Liberals can, since there is no doubt whatsoever that an increase in the GST to 15% will be supported by Labor. And it’s not just a 50% increase since they also wish to broaden the tax to include some of the current exclusions.

The meme that Tony was uninterested in economics never goes away, but he at least knew where he was trying to get to. He was let down by an incompetent Treasurer but there is no reason to think Abbott was uninterested in getting the budget to balance through lower spending.

Malcolm supposedly has a greater interest in economics, but what’s the point of having such an interest if you are so off the mark in understanding what needs to be done to get the economy to grow. Turnbull is a Keynesian. He wants to increase the level of public spending, and wants to rake in the cash so he can do it.

Making money in business is common. Understanding economics is a very different talent and skill, and it is one Turnbull most definitely does not have. If he manages to get the GST up to 15%, he will lead Australia into a recession the likes of which we have not experienced for many many years.

The dumbest story on economic management I have read this year

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This is the headline at The Oz: Wages growth risks sinking budget hopes. Over how many years did I see such headlines, and how many years did I spend trying to deal with the problem of wages growth? So I read through it all expecting to find an old story repeated, but found this instead:

Private sector wages are growing at the slowest rate in at least two decades, threatening both the ­Reserve Bank’s hopes consumers will power economic growth next year and the government’s budget that counts on rising personal ­income tax to narrow the deficit.

The average wage rise across the private sector over the past 12 months was only 2.1 per cent, just matching the underlying inflation rate, while public sector workers gained a 2.7 per cent rise.

The pace of private sector wage growth has fallen in the past year despite strong employment growth. Barclays chief economist Kieran Davies said that in the past wage increases of about 3 per cent had been associated with unemployment at the current level.

You do have to wonder some times. Employment growth has been good because of lower wages growth, not in spite of. But even that’s beside the point so far as all of this goes. The RBA now sees low wages growth as a problem because tax revenues will be lower than projected and higher wages are needed to increase demand. It’s even stupider than this because we then find this:

The public sector traditionally has had faster wage growth than the private sector. The wage price index, compiled by the Australian Bureau of Statistics, suggests some of the restraint shown early this year is being lost. In the 12 months to March, public sector wage increases were only 2.4 per cent.

The figures would not yet reflect the early decision of Malcolm Turnbull’s new Employment Minister Michaelia Cash to abandon the 1.5 per cent cap on wage increases that had been pushed by her predecessor Eric Abetz. The government has said it will allow agencies to negotiate enterprise agreements with increases of up to 2 per cent.

If I get the point, our new Employment Minister, so worried is she about falling tax revenues, has decided to lift the cap on public service wage increases! But it is these tax revenues that are used to pay our public servants. If you pay them more, you will have to raise even more taxes.

Am I missing something, or are they really this stupid?

As a footnote, I might mention that I discovered Say’s Law for myself when I had to formulate an argument on why higher wages would not stimulate demand. Now, apparently, an idea as economically illiterate as it is possible to be, is part of the thinking at the RBA. No punishment would be harsh enough for anyone with such beliefs.

What is the best simple intro to market-based economics?

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I have been asked by John A what I think of Freakonomics to which I have given this reply:

Dear John

Thank you for your note which has caused me to go into quite a bit of thought. Freakonomics is as others have said, a storybook of interesting observations on this and that which never comes to anything much at all. It is not what I think you are looking for, which is an easy-to-read set of tales which would allow you to absorb economics by osmosis while also being entertained. The book that is supposed to do that is Henry Hazlitt’s Economics in One Lesson which I have read a couple of times but which has never done the trick for me. And when you ask it just like that, I don’t really know of anything like it, which is either because it can’t be done – which is possible – or because no one has done it – which strangely is also possible – or because it has been done but I am unaware of the book. I would say that I have done it, sort of, but my version comes in at 400+ pages so that’s not what you mean either. And I am possibly not a very good judge of this anyway, since I bring a lot of background knowledge so what I am looking for is different from what you are looking for.

An interesting and useful question. I would be interested in any thoughts on any brief, easy-to-follow intro to economics that goes over the basics, but would really like to know of one that takes a non-Keynesian, non-interventionist approach to how a market economy really works.

Conscious capitalism and central banks

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I made it into the media twice during the weekend. Here I am in Alan Kohler’s column from the Business Section of The Oz: Central banks risk becoming economic wreckers. You can find my quote if you’d like to look, but Alan’s point is the one that matters:

After Thursday’s stunning employment figures for October, the chances of another rate cut in December have disappeared. Or at least they should have.

That there remains the chance of a further rate cut in Australia, despite clear evidence that the economy doesn’t need it, is a reflection of the modern paradox and problem of central banking: low and falling inflation.

Central banks everywhere have switched from fighting inflation to ardently desiring it. In the process, they are in danger of becoming economic wreckers.

Central bankers are no better than the theory they apply, and at heart they are all Keynesians. I met Janet Yellen years ago at some OECD meeting I was attending on behalf of Australian employers, and it was an experience I have not forgotten, even though she was years from becoming the Chairperson of the Fed. Her rabid Keynesian views astonished me since by then it was clear enough that no approach to economics was less enlightening than starting from the premises found in just about every introductory text. That Keynesian thought has poured into central banking practice was inevitable. She didn’t cause it, but is a symptom of it. Our own central bank is the most resistant to it, but no bank can withstand the ignorant pressures to lower rates to stimulate growth. That such reductions in rates have never worked ever is just so much data as far as economic practice is concerned.

I also showed up on the ABC’s Sunday Extra where I was in a debate with Denis Kilroy over an intellectual entity described as “conscious capitalism”. It would not be easy for me to say in respect of our economic system that we are on the same side of the fence. Nevertheless, he is in favour of a modified capitalist system, one in which business decisions are guided at every turn by our conscious wish to serve the whole of humanity. From their website:

Conscious Capitalism differs from Corporate Social Responsibility (CSR) by virtue of its origins from within the company as an expression of an overall perspective on how to conceive and build a business, rather than as a response to external notions of what counts as “socially responsible” or external pressure. Conscious Capitalists are unapologetic advocates for free markets, entrepreneurship, competition, freedom to trade, property rights, and the rule of law. They recognise that these are essential elements of a healthy, functioning economy, as are trust, compassion, collaboration, and value-creation. Conscious Capitalism is the system-level effect of a substantial number of companies practicing the four tenets of a Conscious Business as defined below.

So far so good. I am with them on all that. And, in fact, I would say that for the most part, capitalist enterprises are ethical organisations. Aside from personal values, a market system automatically punishes dishonest behaviours, although there is no doubt there is plenty of dishonesty about. But can any economic system embrace all of this:

1. HIGHER PURPOSE

Conscious Businesses adopt a higher purpose that transcends profit maximisation. A compelling sense of purpose can create an extraordinary degree of engagement for stakeholders and catalyse tremendous organisational energy.

2. STAKEHOLDER ORIENTATION

Conscious businesses are managed for the simultaneous benefit of all of their interdependent stakeholders, including customers, employees, investors, suppliers, the environment and the larger community in which the business participates. By creating value for each stakeholder in various and often differing ways the whole system advances.

3. CONSCIOUS LEADERSHIP

Conscious Leaders adopt a holistic worldview that moves beyond the limitations of traditional machine metaphors for business. Conscious Leaders see that profit is one of the important outcomes of the business, but not the sole purpose. Most importantly, they reject a zero-sum, trade-off oriented view of business and look for creative synergistic win-win approaches that offer multiple kinds of value simultaneously to all stakeholders.

4. CONSCIOUS CULTURE

The culture is a conscious business is captured in the acronym TACTILE: Trust, Authenticity, Caring, Transparency, Integrity, Learning and Empowerment. The culture of a conscious business can be felt immediately upon walking in its doors.

I met John Mackie, who started this movement in the US, at Freedomfest so he and his movement are definitely considered within the tent. I won’t even say I am cynical and that it is hopelessly naive. What I do think is that it is unnecessary since the owners of our businesses need a sympathetic understanding from within the community of both their role and the pressures entrepreneurs are under. What they do not need in my view is this kind of approach which seems to side with those who are anti-capitalist and who incessantly rattle on about the immorality of business. If there is immorality about, it is embedded within the anti-capitalist mentality that is the home territory of the left.

Joe Hockey – contemptible buffoon

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Running true to form, the article exposing the treachery of Joe Hockey in betraying his Prime Minister is displayed by von Onselen as somehow Tony Abbott’s fault. The headline writer gets it sort of right, but there is more to the story than this: How Joe Hockey added an $80bn insult to Abbott’s injuries. Let him van Onselen tell the story:

[Hockey] insisted on the $80 billion of cuts to health and education funding beyond the forward estimates being included in the budget, in those terms. They didn’t need to be; in fact, standard practice would mean such long-term forward projections (well out beyond 2020) never would be ­included.

Abbott, showing political common sense, a commodity utterly absent in his Treasurer, was adamant that these projected cuts not be included. “The PMO insisted,” writes van Onselen, “the $80bn in cuts come out of the document”. Why invite trouble when dealing with the Senate was already likely to be difficult.

But team Hockey reinserted it without PMO approval or even awareness, [which] shows Abbott and his office were aware of the political challenge such sizeable cuts would represent, all the more so in the context of Abbott’s promise that there would be no cuts to health and education in the SBS interview — the areas targeted for an $80bn haircut.

Yes, they were aware of the political challenge, due to the likes of columnists like van Onselen who under no circumstances would have said a positive word on Abbott’s behalf when it might have been some use in getting a budget passed. Who knows where Joe took advice at that stage, from whichever treacherous scum there might also have been among Liberals in cabinet. But at least, if it could be said that Joe’s judgement was vindicated then at least there would be that. Back to van Onselen:

Hockey’s standing in the electorate sank after the first budget, ending his hopes of one day leading the Liberal Party. Talk of Hockey as a future leader was quickly replaced by calls for him to be sacked as treasurer. The mutual self-interest of survival helped Hockey and Abbott overcome the colossal mistake [!!!] in that first budget. But distrust between the off­ices never went away, and Credlin in particular never trusted Hockey or his staff again.

She never trusted Hockey again! What a terrible woman no longer to trust such a duplicitous lying deceiving rat ever again. You may be sure that no one ever trusted Hockey again. Meanwhile, van Onselen cannot bring himself to state that obvious, that Abbott had been dudded in such a way at such a time by someone he had put into a position of trust. It is one of the most disgusting stories I have ever come across, and the fact that Hockey allowed this story to reach the light of day shows what a political imbecile he is and obviously always had been.