Bring back core and non-core promises

The election is no longer “on the horizon.” It’s close enough to smell the sausages. Everyone involved in politics is working hard, trying to get us to listen, trying to get us to believe, trying to get us to vote.

Most of what they are saying is lies. Or to be a little kinder, false predictions about what they will do in the future.

Screen Shot 2016-06-23 at 9.56.44 PM.png
Labor’s policy list

Labor has set out 100 positive policies on its website.They’re really quite interesting and I recommend having a look.

But will it do them all? No way.

Take its plan to cut capital gains tax and negative gearing. These are very bold reforms any party would struggle to get  through the Senate.

And – despite recent reforms – the coming Senate is going to be a particularly mixed one.

Psephologist Anthony Green predicts eight Greens, three Nick Xenophon Teamers, either Glenn Lazarus or Pauline Hanson, Jacqui Lambie and an associated senator, plus probably one other odd-bod from Tasmania.

It’s a volatile mix that would wreak havoc on the most carefully-planned legislative agenda and laugh heartily at the very idea of a mandate.

And there is no guarantee of a mandate, for anyone. A hung parliament is quite possible, with independents and Greens set to make good runs in a range of lower-house seats. Nick Xenophon Team is a huge factor because it is competitive in some classic Coalition seats in SA. One expert tips six cross-benchers.

The odds of a hung parliament are 4:1 against and the closer the two major parties get, the better the chance a couple of independents (Yes Tony Windsor, I’m thinking about you) could have the parliament in the palm of their hands.

What all this means is that words spoken before the election – however earnestly meant  – cannot all come true.

Why don’t politicians admit that?

Instead of having broken promises littering the field of battle, creating the impression  “they’re all liars”, why not explicitly admit some outcomes are state-contingent?

They could make promises contingent on election outcomes:

“If we win a Senate majority we will pass all our policies. If not we will make health and education our top priorities.”

Promises contingent on Budget outcomes.

“If company tax revenue rises above $100 billion, we will fund a new hospital in Launceston.”

Or promises contingent on other promises.

“If we can get our negative gearing reform bill through, we will fund the building of submarines in South Australia.”

Politicians demur on hypotheticals for a reason – adherents of the more cynical schools of political communication will insist the complexity is too high for voters. And I’m sure the first few weeks after adopting this approach would be full of mocking.

The Leader of the Opposition is a maybe man, a possibly politician, an if-then individual,” the PM would jeer. “He’s built an escape route into every promise!”

Perhaps most politicians would wilt immediately under such ripostes – and the bad press that would follow. Gallery journalists – whose expertise in reading the tea leaves might be slightly less valuable in such a scenario – might be unwilling to give the approach a decent chance.

But maybe, just maybe, a  contrast would eventually become apparent between one side explaining their priorities and the risks and contingencies while the other side baldly claims things that can’t all come true will all come true. It just takes one politician floundering when asked, “But what will you do if you don’t control the Senate?” for that to become the favourite question of press-packs everywhere.

If so, the pressure for truth-telling would ultimately fall on the party that over-simplifies their plan. If that party won an election and then failed to keep their promises the consequences would likely be harsher, given the good example set in advance.

There would still be plenty of opportunity for broken promises. Sometimes politicians simply do the opposite of what they say they will, as Tony Abbott demonstrated after the last election.

But without the cover of all those things promised that were only really deliverable under very particular circumstances, the flat-out lies would be much easier to see.

 

Class war and cognitive dissonance: do the rich pay enough tax?

In the SMH, Jess Irvine has written a post accusing the rich of not paying enough tax. Strong piece. Very clickable, quite memorable, and in places, very reasonable:

“It is right to think that rich people should pay more tax than the poor. Happiness studies show an extra dollar means a lot more to a poor person than a wealthy person. So, we maximise society’s wellbeing when we raise taxes from the rich, rather than the poor.”

In the AFR, an equally strong reply:

Screen Shot 2016-02-15 at 1.50.33 PMThis was written by the gossip columnist though, which suggests The Fin is passing up the opportunity to really take the bait.

All this has me thinking. Do the rich really pay enough tax?

Instinct says “No!”

There is, however, a bit of cognitive dissonance the average policy wonk faces in answering such a question.

Let’s face it. Most of us consider that question by imagining those richer than us paying more. Few readers interpret it as “should I pay more tax?” even though plenty of you find yourselves in a household making over $100,000 a year.

Secondly, the average policy wonk already knows the facts.  (The graphs that follow come from a terrific Productivity Commission report that is just a few months old.)

Those on higher incomes do pay the most tax in Australia.  The few families making $175,000+ a year contribute more total tax than the (far greater) numbers of households making under $100k.

Screen Shot 2016-02-15 at 2.48.55 PMThe tax burden is squarely aimed at the top of the income distribution curve.Screen Shot 2016-02-15 at 2.36.43 PMWhen you look by assets things get a bit more complicated, but the overall trend is still richer people tend to pay more.

Screen Shot 2016-02-15 at 3.29.19 PM Screen Shot 2016-02-15 at 3.27.41 PMn.b. for whatever reason the data above is by group not decile, and the groups aren’t evenly sized. Sorry. Here’s the distribution of actual households across those groups:

Screen Shot 2016-02-15 at 3.26.42 PMOne technique Jess Irvine uses to support her call for more tax on the rich is raising the spectre of widespread income tax rorting.

I wrote about rorting in Crikey last year after we learned 55 people who earned over a million dollars paid no tax in 2012-13. That fact went viral. But it represents just 0.6 per cent of millionaires.

Most income millionaires seem to pay a lot in tax – 93  per cent of them are in a group with an average tax rate of 42 per cent. Another 6 per cent pay an average rate of 35 per cent.

I reckon tax evasion is far more common in corporate tax than income tax. But Irvine’s article says we can’t do anything about that.

She goes on to argue we should institute a land tax. It’s a good conclusion to what has been a fairly odd argument. I support a land tax. I’ve been pleased recently to see it getting a fair bit of attention.

But it doesn’t really follow from her argument.

It seems to me the rich already pay a lot of tax, are fairly honest about it, and don’t actually complain that much. Is that the end of the argument?

I say no.

This “do the rich pay enough tax?” question is just a proxy – an emotive, perhaps even fun-to-think-about proxy – for a question about whether our society is fair.

So, is Australia fair?

That’s a better question, because it allows that bubbling pot of cognitive dissonance to simmer down for a moment.

The answer is probably a qualified yes. It could be fairer still, if we focus on eliminating disadvantage.

We can hold onto the fact the rich pay most tax, and permit the idea society could still be fairer.

There are many ways to eliminate disadvantage, and make society fairer. Minimum wages and strong public health systems are a big part of it.

When we look at America, we see what can happen without them. That is an economy much less fair than the one we experience.

Transfers are another major way to make a nation fairer. A basic income, or minimum income policy would go a long way to making Australia fairer. But I don’t see arguments for hiking taxes on the rich helping create the sort of consensus necessary for that change.

Screen Shot 2016-02-15 at 2.37.21 PMAmong the many charms of minimum wages, public health and transfers is they don’t discriminate. Everyone has access to them. It’s far harder for a Tory gossip columnist to mock the idea of Medicare than the idea of soaking the rich.

So thinking about areas of disadvantage that are important to eliminate seems to be a better way of looking at fairness in the Australian context. If higher taxes are required for such policies to be afforded, precedent suggests they will fall on those with capacity to pay.

Meanwhile thinking about ways to raise the same amount of tax more efficiently is probably the best argument for land tax.

For these reasons, I’d suggest dialing back instinctively appealing arguments the rich should pay more tax, in favour of more targeted arguments about avoiding corporate tax fraud or eliminating disadvantage.

Why people think tax reform is a knife, and why that’s a problem for Australia.

EDITED on Tuesday September 29 to make it better, fairer, more accurate.

My hypothesis is this: A large part of the Australian public does not understand the tax reform “debate” at all. a substantial part of the tax reform debate.

I hypothesise these people are smart, capable and have Australia’s interests extremely close to their heart. But they have no training in tax theory and therefore lack mental models to understand why, for example, Labor’s Chris Bowen, Shadow Treasurer, would be willing to consider cutting corporate tax to 25 per cent.

They just don’t see how tax affects growth.

The most mentally available model of tax is not one where tax is an ingredient in making the cake, but a knife to cut it up with at the end. This matches lived experience. As a worker and consumer, tax happens at the end of transactions. You get paid, then you pay tax. You buy something then you pay GST at the checkout.

So my hypothesis is the concept of tax as an input to the rate of economic growth is not one that is available to most people.

I’ve been thinking about this hypothesis for a while. Today I decided to test it. I chose the following four tax-related articles and read the comments in all of them.

The Age: Malcolm Turnbull halts tax white paper in major reset (163 comments)

Herald Sun: Imbalanced Tax system stunting growth, says Business Council of Australia (7 Comments)

The New Daily: Scott Morrison wants to give us tax cuts (22 comments)

SMH: Scott Morrison: Work Save Invest the Mantra for the new Treasurer (90 Comments).

If people understood that the tax reform was about boosting growth, I expected to see comments engaging on that topic – supporting the link or refuting it, talking about high-tax high-growth countries like Scandinavia, and low-tax low-growth countries too.

If people did not bring this frame of reference, I expected to see the comments focus on other topics, especially distribution.

I read about 280 internet comments. (Which – as you can imagine – meant deciphering a great number of garbled sentences and enjoying an even greater number of insults.)

I coded them according to whether they mentioned growth or output; distributional outcomes; loopholes; or ‘other’.  ‘Other’ accounted for over 200. The remaining results were crystal clear.

tax commentsDiscussion of growth was present in just over two per cent of total responses and was outweighed by discussion of distributional issues about 9:1.

I tried to be generous with the comments I coded as addressing issues of growth. Here’s one:

“The most important thing to do to fix the economy is to get the taxation right! Fact is the economy under Abbott and Hockey was a blatant disaster getting worse!”

Here’s another:

“Penalty levels of taxation combined with high levels of social welfare payments result in deficites, high borrowing costs and a downward spiral of he economy. That is exactly what is happening in Australia. Our economy is headed the same way as the Greek economy. To reverse this Australia needs to increase the incentive to work and invest and reduce the reward for not working.”

In the 61 comments about “loopholes” there were very many along these lines:

“No change in the policies, give the big end of town a tax cut, and spread the burden over everyone with an increase in the GST. Lower income people are worse off as a result.”

Please note that I am not criticising this last comment. Distributional issues are a crucial part of tax policy and that kind of comment is an important input to a well-grounded tax debate.

The point is we do not have a well-grounded tax debate until everyone is on the same page.

The broader tax debate does not address the impact of tax settings on the output capacity of the economy. It is far more focused on fairness.

The “elites” must work to understand the grip matters distributional have on the public imagination. If they still want to press on with tax reforms – and I think they probably should – they need to take two courses of action.

  1. Prioritise matters of distribution in their own thinking. No tax reform will be possible so long as it obsesses on output to the exclusion of fairness. Multinational enterprise tax reform was a very common thread in comments about fairness.
  2. Work to give people the mental models to understand how tax affects output. Without this very little tax reform will be possible at all.

Elites, building a case for reform does not mean repeating the phrase “We need reform!” It’s truistic to the people who understand it, while confusing and annoying to everyone else. It sounds like you’re talking in code, and that implies you’re plotting something.

Instead, talk about “changing tax law so businesses want to do more work in Australia and hire more people.”

If you hector people about tax by saying “it affects investment decisions!” you’re unlikely to cut through. “Investment decisions” sounds like it has something to do with Macquarie Bank.

The comments on the article about Scott Morrison’s “Work Save Invest” slogan showed “investment” was uniformly interpreted as being about buying shares. Many commenters pointed out they couldn’t afford to do that. “Foreign investment decisions” is probably even worse language. It conjures Chase Manhattan and Bank of China conspiring to rip us off.

Talk about economic growth in language people can understand. Use this language even among yourselves, so when it comes time to talk to “real people” it comes naturally.

One way to build capacity in the community is through using metaphors:

  • Tax is not just a knife, but also the yeast that grows the cake.
  • The economy is like a party and tax is adding water to the beer.
  • The economy is like a football match and tax is like adding more umpires ready to blow the whistle at any moment. They disrupt the natural flow of the game.
  • The economy is like a road and tax is traffic lights. If we put in too many in the road won’t be useful any more.

But that can’t be all. The explanation needs stories about business owners who expand their business once their returns meet a benchmark, and how returns are affected by tax. I can imagine an animation. A business owner making a business plan. Every time she does the maths she comes out in the red, until the tax percentage becomes lower. Then she opens her shop and hires some staff.

Understanding a concept requires knowing several mutually-reinforcing stories that illustrate the same point. The Australian people have not heard enough of these stories. And that is why Tax reform is going nowhere.
NB: In todays’ Fin Review, Laura Tingle talks about this exact issue:

Just as the tax reform debate threatened to choke itself on too many conflicting agendas – increasing the GST, lowering company tax, fixing bracket creep, doing something about superannuation tax concessions – our new treasurer has injected a rather important ingredient: the need to define a reason to do it all.Some of the contributors to the AFR Tax Reform Summit this week have made the observation that an organising principle for the tax reform debate has only rarely been seen amid the worthy, but perhaps too often repeated, calls for individual tax measures to be addressed.

The organising principle needs to be a political argument to voters about why you actually need to mess around with tax in the first place. An argument about corporate competitiveness isn’t really going to cut it out in the ‘burbs.

Yes, we all heard Tony Abbott and Joe Hockey talk ad nauseum about “lower, simpler, fairer” taxes. But they were never able to cut through to voters about why this was such a good idea: that it would – or should – help boost and transform the economy. Instead, it just sounded like a bit of conservative government ideology.”

So if Morrison wants to prosecute that case for tax reform he needs to formulate a story that’s as clear as “Stop the Boats” but for a much more complex concept. Good luck Scott.

Here’s a late-breaking caveat I decided to add.

Among the people who appear to not understand the nature of tax reform are a group who understand it perfectly well but oppose it. They fan the flames of the distributional arguments.

They’re not the only self-interested sorts in the debate.

The fact company tax cuts are now widely accepted  as the most growth-crucial tax cuts in our whole economy is very interesting. Of course cutting it would help growth. But at what revenue cost? And why is it #1? Self interest lurks in any issue where facts are complex.

Ross Gittins swings at reform, misses, falls flat.

Ross Gittins has just published an article making a case against the reform obsession that grips the current political class.

I like Gittins and I’m always interested in a smack-down of a new religion, so I started reading eagerly.

But Gittins was unable to deliver a smackdown. Unable to deliver much at all.

See if you can spot the fallacy here:

“Simple statistical theory should be telling economists that a protracted period of below-average growth is most likely to be followed by a period of above-average growth.”

Whew, that’s embarrassing.

The nicest thing I can think of to say about it is there are economic models suggesting poorer countries grow faster than richer ones. They imply a degree of catch-up – perhaps those were the theories Mr Gittins was fumbling for?

But the problems with the article go beyond just one dodgy paragraph. His whole case against “reform” depends on the idea that the economy will grow just fine without it.

That’s certainly possible. I actually think the economy might well be about to bounce back a bit. But that doesn’t make a case against reform.

Economists know you get growth from adding more people and machines, and then you get extra growth for free via productivity gains. Productivity gains are the really good gains because they come without real trade-offs. You don’t need more ingredients, just a better recipe.

Productivity gains can come from two main sources.

  1. Better ways of doing business (innovative ways of combining inputs inside the firm), and
  2. Better-functioning markets (innovative ways of combining inputs outside the firm).

Why do we obsess over the latter one? It’s where we have our hands on the lever. Governments can’t really control innovation at the firm level. Not in the short-term at least. They do control market regulation.

So “reform,” that buzzword that’s as popular as a buzzard, refers to this latter issue. Making markets work better.

Sometimes they work better with less regulation (economists arguing against the taxi cartel, for example) sometimes they need more regulation (economists arguing for a carbon tax or higher capital requirements for banks.)

Whether or not you get the first kind of productivity improvement, there’s a chance you can bring growth into existence by focusing on the latter.

Growth matters.

The desire for growth is not about the hope of self-enrichment. The sad fact is growth remains the only way we know to ensure full employment. Unemployment is horrible. It hurts people and ruins lives long-term. Meanwhile higher growth can bring better standards of medical care, lower infant mortality, safer foods, more opportunities to work in satisfying jobs. So the hunt for growth is a humanist pursuit. Obsessing over it is a risk-averse social scientist’s way of trying to maximise human happiness.

Gittins seems to think gambling on future growth is a great idea.

When you convince yourself, as many economists have, that the only way we’ll see faster growth and further productivity improvement is for governments to engage in extensive reform, you’ve convinced yourself our economy is deeply dysfunctional.

Optimism is an endearing quality in a friend, not an economic policy-maker.

The great thing about market reform is it should work whether or not we’re getting the other kind of productivity inside firms. It’s additive. If Mr Gittins’ optimism is rewarded and we see a great surge of firm-level productivity unleashed, it won’t be a mistake to have unleashed market-level reform too.

There are strong arguments against reform. Arguments about the extent of economic encroachment into our lives. About materialism and reification. About market power. About whether we can shape economic growth in ways that brings us more of the good and less of the bad. These are good arguments we should all be engaging in.

It’s a shame those column inches didn’t attempt such an engagement.

Want a glimmer of hope? Look at this.

Things look bad.

Today, economic growth figures are coming out (at 11.30am) and for the first time in ages, people are predicting negatives.

Recession talk is in the air. I have my doubts about that. But the talk alone is very suggestive, and there are lots of reasons for it.

Chinese markets are falling, our own stock-market is in a sustained slide, and with all that bubble talk our housing construction sector looks weaker.

Screen Shot 2015-09-02 at 8.36.13 amIs Australia about to get a surge of growth, or a slump?

One way to answer that is to look at what business is up to. In May, we checked in with business spending plans and they gave me intestinal cramps. Things have changed, sort of…

Capital expenditure is what makes your business bigger, lets you employ more people, etc. It’s one of the big signals of future economic growth. And it’s going backwards.

The mining sector is in such a funk that it won’t bring us any growth. This next graph shows the plans the mining industry has for capital expenditure.

The grey bars show actual expenditure. The last one for 2014-15 is the lowest in four years. The white ones are plans for next year. The latest white bar (3rd estimate for 2015-16) is the lowest 3rd estimate in five years.Screen Shot 2015-09-02 at 8.25.14 amThat is having a seriously negative effect on Australia’s total capital expenditure. Check out the increasing steepness of that slope at the end.Screen Shot 2015-09-02 at 8.26.15 am  Manufacturing won’t save us.Screen Shot 2015-09-02 at 8.25.06 am But there’s other parts to the economy. Other selected industries are investing more than ever.

Other selected industries sounds like a miscellaneous grab-bag. But check out the labels on the vertical axes. This is a massive part of our economy. Not only that, it just invested more than it expected, which is more than ever. Plans for 2105-16 are more modest, but increasing fast.Screen Shot 2015-09-02 at 8.24.55 amOther selected industries* includes:

Electricity, Gas, Water and Waste Services
Construction
Wholesale Trade
Retail Trade
Transport, Postal and Warehousing
Information Media and Telecommunications
Finance and Insurance
Rental, Hiring and Real Estate Services
Professional, Scientific and Technical Services
Accommodation and Food Services
Administrative and Support Services
Arts and Recreation Services

In other words, a whole lot of important parts of our economy that we can actually believe in.

And there’s one simple reason why they might grow. Our falling dollar.

Screen Shot 2015-09-02 at 8.57.45 amThe fall in our currency is a bit like being a lobster in a boiling pot of water. Unlike stock market fluctuations it happens slowly and we don’t pay it so much mind. But it matters a lot.

The slow growth of non-mining industries in the last few years can be attributed to our high dollar. America’s incredible recovery from its recession in the same time period can be explained by its low currency.

A falling dollar could flip slow growth on its head. And we’d be too busy worrying about mining to notice.

The current mood of widespread gloom may prove to have been peak fear.

*This whole private capital expenditure data-set excludes healthcare and social assistance, which as we know, is one of the fastest growing sectors of the economy. In Melbourne, a billion dollar new cancer hospital is being built, for example. That’s not in the stats. Further reason to hope.

The puzzle of where men outnumber women, and vice-versa.

The concentration of men and women in various parts of Victoria is stronger than you’d expect according to random variation.

There’s some real trends in place that seem like a genuine puzzle. (These charts are made from fascinating data released by the ABS this week.)

Screen Shot 2015-08-20 at 11.51.11 am Fully a third of postcodes have a gender ratio that’s skewed more than 5 per cent one way or the other. There are slightly more postcodes where women outnumber men by 5 per cent (79) than those where men outnumber women by 5 per cent (62.)

That’s to be expected because there are 99 men per 100 women in Australia.

But where men outnumber women they do so by a lot more.

The top result is Port Melbourne Industrial, which is a place I’m surprised anyone calls home. And indeed there are just 9 males to 4 females (ratio 2.25). Security guards who sleep among the containers? Who knows.

The next one is Braeside. A similar story with a ratio of 12 men to 6 women.  Then Alps East with 18 and 9. I’d like to imagine those 18 men have swags and wake each day to see their horse breathing steam under an old ghost gum.

Anyway, we can discount those three because the samples are tiny.

Screen Shot 2015-08-20 at 11.50.54 am
Female dominated suburbs include Chelsea and Rosebud. More men live in Seymour. Is this another case of nominative determinism?

Rosedale is the real thing. 2645 men to 1863 women (ratio 1.42). A little hamlet out in the Latrobe Valley, it is probably full of people working in the coal-fired electricity industry. A hard place for a fella to get a date, no doubt. Although the photos on the Rosedale Tavern’s facebook page suggest that’s where the local ladies go. (and it’s not as bad as East Pilbara where men outnumber women 350 per 100.)

It’s easy to explain some locations of high concentrations of men by reference to workforce pressures. They are found around heavy industries and agriculture.

Some are more tricky. Why is Footscray so full of testosterone? Why Docklands?

And why do women crowd into the expensive eastern suburbs? We see Burwood, Camberwell and Armadale in the top 10 with less than 90 men per 100 women.

Toorak, the suburb most emblematic of wealth, has a ratio of 91 men to every 100 women. Are there many young single women there perhaps? Or families whose daughters live with them for a long time?

The CBD , meanwhile, has a ratio of 107 men to every 100 women.

Perhaps we are seeing women self-select into suburbs they deem are very safe, while men are more willing to live in supposedly rough areas?

Do you have another explanation? Please feel free to share it in a comment below!

EDIT

Commenter Matt points out that women live longer, which is a very good point (that I wish I thought of). This is definitely part of the explanation as we can see in the graph for the most skewed suburb, Burwood:

Screen Shot 2015-08-20 at 1.21.51 pmBut it’s not the whole explanation. If it were, Footscray would look similar up til the mid-40s, when men start dropping off. Instead Footscray has more men at every age.

Screen Shot 2015-08-20 at 1.33.30 pmI think the puzzle has had a lot of pieces added, but there’s still some blank spots… Any further ideas?

The curious case of poll-driven political reporting.

The Guardian published a report yesterday about Bill Shorten. The author set out to repent for calling  Bill Shorten a “tired accountant”. The impetus for the story was the turn around in the polls.

“Shorten is still leading the Labor party in the wake of this latest credibility disaster for the Coalition, after last week’s credibility disaster (blocking a free vote on marriage equality) and the preceding week’s credibility disaster (chopper-friendly Bronwyn Bishop). He’s now sitting atop polls from both Ipsos and Morgan that have the Coalition facing a loss of between 36 and 44 seats.

Is it time for a rethink?”

I’ve seen this kind of thing before, and I don’t like it.

Interpreting what a political leader does through the polls is intellectually vacuous. It’s easy to write. There is no need to have a view on tough questions about policy effectiveness or priorities, the merits of intriguing questions about whether the head of the AWU should be matey with big business, or the management and composition of their front bench.

The author of yesterday’s piece is not especially guilty. She has written about policy more than polls. But overall, allowing poll numbers to drive judgment of politicians’ merits is now commonplace. [1, 2, 3, 4, 5, 6, 7, 8, 9].

The rise of this sort of reporting means a swing in the polls does double business.

Not only does a poll bump get the leader kudos in their party, but it changes the tone of reporting about them. The new, glowing stories therefore amplify swings in popularity. That may be responsible for the increasingly binary popularity positions we see among our political leaders (They’re often wildly popular like Baird or old Abbott, or wildly unpopular, like Gillard and new Abbott).

This kind of reporting validates the paradigm that political hacks of the most cynical kind push inside their parties: We can do good once we’re in power. For now let’s focus on winning. It sidelines those inside a political party who think they should focus on making the country better, not just making the polls better.

Here’s a choice example of the kind of reporting I’m talking about.

The Sydney Morning Herald's Peter Hartcher thinks parties should use poll numbers not policy ideas to choose their leader. Is he right?
The Sydney Morning Herald’s Peter Hartcher thinks parties should use poll numbers to choose their leader. Is he right?

I can only imagine the cognitive dissonance some reporters must experience when they write articles demanding more policy substance and less poll-driven rubbish.

Of course, we do need some political reporting. It’s helpful to peek behind the curtain from time to time and see the way the magician performs his tricks. You feel like an insider.

But it can’t be all we have, most of what we have, or even a substantial minority of it. It’s a sometimes food.

Our meat and veg must be stories about policy.

Rising house prices: not a wealth fountain. A money-go-round.

RBA deputy governor Phillip Lowe gave a great speech last night. Lowe is the guy most likely to replace Glenn Stevens when Stevens quits as Governor and it is worth paying attention to what he says.

Last night’s speech was pretty radical. In the guise of a dry discussion of Australia’s balance sheet, Lowe single-handedly deflated arguments for rising house prices.

That puts him in direct opposition to noone other than Prime Minister Tony Abbott. Abbott, of course, said in June “I do hope our house prices are increasing.”

The argument Lowe makes is so smart and so obvious it’s amazing we don’t hear it more often. He starts out by showing that the rise in “house prices” is really a rise in land prices.

Screen Shot 2015-08-13 at 10.33.46 am“[T]he figures that I have presented invite the conclusion that our national wealth has risen largely because of higher land prices. But is such a conclusion really warranted? Have we really become wealthier as a nation simply because the value of our land has increased?

“The answer would clearly be yes if this increase was because we had discovered more land. To my knowledge, though, this has not happened.[7]”

Lowe argues that the rise in house prices is not a nice neat story about the returns to city life increasing. He says prices rose because of financial deregulation and supply constraints.

This creates not a wealth fountain but a money-go-round, he explains.

“from the perspective of society as a whole, much of what is gained on the one hand is lost on the other: there are windfall gains from higher land prices but then everyone pays more for housing services.”

Lowe also reveals that the “baby boomers are ripping off the kids” narrative has some credibility even in that palest of economic ivory towers, the RBA.

“For an older person who owns their own home and has no children, the capital gain from the higher land prices more than offsets the expected higher future housing costs. Such a household is better off. The same is true for owners of investment properties, since they own multiple dwellings on which they earn a capital gain. In contrast, for young homeowners with multiple children, the calculation can look quite different. If they care about the future housing costs of their children, then, in some circumstances, it is possible that the higher future expected housing costs could exceed the capital gain on their dwelling. In a welfare sense, the increase in land prices could make them worse off, even though they own land. The same is obviously true for renters as they do not have any capital gain to offset the higher future housing costs.”

“I think many Australians have an innate understanding of the concept and share the concern. Many parents around the country look at the high housing (really land) prices and worry that their children will not be able to afford the type of property that they themselves have been able to live in, even if their children were to have the same life-time income profile as they have had.”

“So it is arguable that the main impact of higher land prices is not really to increase our national wealth, but to change the distribution of that wealth.”

He goes on to argue that if parents help their kids buy houses, high house prices are perpetuated. But their wealth effect is diminished because the people that have expensive assets are using them as collateral for buying more expensive assets. That is to say the high prices bring no benefit.

If, however, parents don’t help their kids buy houses, and instead spend up big (say on trips overseas) then house prices are more likely to moderate.

This latter scenario, as unpleasant as it may seem to some, is actually the better one for social stability. Because with Australia’s strong immigration profile, not everyone has parents who own property in Australia. The divide between new migrants and established citizens will only grow larger if property wealth is transmitted across generations.

Who is to blame for the state of the labour market?

Last week unemployment was up. This week wages growth was down.

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chart
Worst annual growth on record (since 1978)

These two series measure the most important and relevant determinants of Australia’s economic well-being. Both are deteriorating.

Forget interest rates. Forget house prices. Forget the dollar. Forget petrol prices and forget the share market.

How much money people make is the single biggest determinant of how well off they are. And we’re not doing well at all on that score.

This is a failure of economic policy. No government should be complacent in the face of a weak labour market.

The Government is silent on this and to its credit the opposition is squawking at them.

But it is to no avail. No decent policy is evident.

There’s a Productivity Commission report on our workplace relations policies, but nobody really thinks that will make a lick of difference, even if the government had the political capital to implement it.

These days it seems like some on the left actually relish a bit of weak wages growth. They use that to bash the government for hypocrisy over a wages breakout and guard against workplace reform.

I wouldn’t mind seeing a wages break-out. Isn’t that what good economic policy would produce? Wealth shared widely?

The failure of our labour market to do very much in the last few years probably comes down to macroeconomic factors. The high dollar crimped output and hiring. So did weak federal spending.

Screen Shot 2015-08-06 at 12.08.47 pmThe high dollar was a result of US quantitative easing and there was little more we could do beyond slashing official interest rates. That policy front was maxed out. But fiscally, we pulled puches.

Esteemed labour market economist Jeff Borland argues our failure to remedy unemployment is due to a shortage of aggregate demand.

“•The rate of unemployment in Australia has increased from 4.0 to 6.4 percent since the GFC. Over that period it has shown little tendency to decline. The rate of unemployment in the US is now lower than in Australia.
• This increase in the rate of unemployment in Australia appears to be explained entirely by the cyclical downturn in aggregate demand.

How could the government have increased aggregate demand? Spending more would have been one answer.

The Swan Budgets in 2012 and 2013 and Hockey’s efforts in 2014 and 2015 were all deficit-obsessed. All were focused on “return to surplus.” None of them achieved it. Instead unemployment has risen from 5.2 per cent to 6.3 per cent.

That deficit obsession hurts us all.