Economics
Isn’t it time we had a fast rail?
In the 1880s the Australian colonies went through a huge investment in railroads, but that was our last rail-building spurt. Over the last 40 years there have been many inquiries about an east coast fast rail line connecting Brisbane, Newcastle, Sydney, Canberra and Melbourne, a corridor with at least 15 million people and with high population growth. Governments have baulked at the upfront cost, however. A dominant ideology of “small government”, a short-term economic perspective that applies high discount rates to infrastructure investment, a failure in public budgeting to distinguish between recurrent and investment outlays, and a general belief that however we live now is good enough – the culture of mediocrity ushered in by the Howard Government in 1986 – have conspired against nation-building.
ABC News has a 7-minute video of our hopes and dashed expectations for an east coast rail link – Why doesn’t Australia have high speed rail?. The amounts of money sound daunting, but they should be seen in the context of our total expenditure on transport, and the fact that such investments pay off in many ways. Unfortunately it seems possible that Australia will have a number of short fast rail tracks within state borders that don’t connect up, and that for the foreseeable future we will have to endure the indignation and discomfort of unreliable and high-carbon air transport or long road trips.
A poor national report card
According to the Institute for Management Development (IMD) world competitiveness ranking published in its 2021 World Competitiveness Yearbook, Australia has slid further down the scale to position #22 out of 64 countries surveyed. Even Europe’s poor outcast, the UK, is now ranked ahead of us. CEDA has links to the report on its website, along with a short interpretation, but it’s worthwhile reading the IMD country profile for Australia, because while CEDA makes the corporate sector’s perennial complaints about taxation, the actual profile is reasonably positive about our tax policies: on tax the only poor mark we score is worsening tax evasion. Our worst ranking (#58) is in “management practices”, and our most significant declines have been in “basic “infrastructure”, “technological infrastructure”, business “attitudes and values” and “societal framework” – the last being a composite index based on indicators of income distribution, gender equality, press freedom, social cohesion and access to justice.
The dead hand of fiscal austerity
Carved into stone above the doorway of the Internal Revenue Service building in Washington is a quote from Justice Oliver Wendell Holmes: “Taxes are what we pay for a civilized society.”
It’s a reminder to taxation authorities and treasury departments around the world that their task is to collect the revenue needed to ensure the prosperity of their people. It’s hardly a radical idea, and the same reminder is provided in an article by Martin Wolf, associate editor of the Financial Times, who warns that the UK Treasury is not collecting enough tax: It’s time to lop off the dead hand of Treasury.
In one way that’s a criticism of an institution that’s failed to understand that even Johnson’s Conservative government has abandoned fiscal austerity. But Wolf goes further to point out that the UK Treasury uses its power over other departments to block almost all public expenditure other than social security and health care. In the UK, as in many other countries, social welfare and health care are inviolable. But Treasury has been tough on all other public spending, and is particularly sceptical about spending on programs for economic development. Wolf’s article includes a neat scatter diagram showing the relationship between taxation and prosperity.
He’s not the first person to point out that the prosperous countries of the EU all collect more taxes and are better-off than the UK, but it’s always a point worth making, particularly to the generally conservative readers of the Financial Times. (As a side point his scatter diagram illustrates, once again, that Australia collects even less tax than the UK.)
Wolf’s article is a short version of a phenomenon Miriam Lyons and I describe in our book Governomics: can we afford small government?, which we took from Harvard’s Dani Rodrik. Rodrik would put the proposition to students that conservative governments, such as those of Reagan and Thatcher, spent more on transfer payments such as social security than social-democratic governments spent – true or false? Most students say “false” – of course these right-wing governments would be tough on welfare. Rodrik would then bring out the data. Put simply, the austerity programs of conservative governments deprive the economy of government-funded programs that contribute to long-term prosperity, including education, environmental protection, infrastructure, public health and research. As a result economic growth falters, unemployment rises, wages fall, income disparities widen, and governments have to spend on social security transfers to keep an increasing number of people out of dire poverty.
(Note that the Financial Times does a better job at sustaining its revenue base than the UK Treasury. You can click on the link once and get the article, but if you go to the link again you are confronted by a paywall. Either read it on the screen or print it.)
The pandemic as an opportunity?
On last week’s Saturday Extra Geraldine Doogue interviewed Ian Goldin, Professor of Globalisation at Oxford University. He sees the emergence from the pandemic as an opportunity similar to the opportunity presented in the 1940s, when governments realised that to establish enduring peace and prosperity the postwar order was going to have to be different from the order that preceded the hostilities. The ways we have coped with the pandemic are giving us an opportunity to re-shape the way we work, and the way we live together. How will our “work-life” balance change, he asks: in fact does the idea of separating “life” and “work” make sense?
If you go to the segment’s link – The pandemic as an opportunity? – you will see the note “This audio is not available”. You will need to go to the full program – always worthwhile if you have one and half hours – and find this segment starting at 30:40 and ending at 48:00.
Is the Reserve Bank changing its message about interest rates?
Until recently we have heard that the Reserve Bank will make no move on interest rates until 2024.
Its monthly statement on monetary policy – its justification for keeping interest rates low – gives the impression that all is well. The economy is back on track to recovery and there is nothing to worry about in the housing market. (We might wonder if that’s the way younger staff, working in the RBA’s head office in Sydney, see it.) The statement concludes with a carefully-worded paragraph:
[The Board] will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
That’s a little less categorical than saying rates are on hold until 2024.
And while the Reserve Bank may be indifferent to housing debt, the Australian Prudential Regulation Authority (APRA) is concerned, because on Wednesday it increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications from 2.5 to 3.0 percentage points. That means, for example, that if a borrower is taking a mortgage at a rate of 3.0 per cent interest, the lender must be satisfied that the borrower can service that mortgage if the interest rate rises to 6.0 per cent.
APRA’s concern is mainly about the stability of our financial system, rather than housing affordability. But if it is concerned about the risk faced by banks, which have diversified portfolios of financial assets, then the situation for highly-indebted households must be several times worse. As Warren Hogan of the University of Sydney explains, APRA’s move won’t change the situation for existing borrowers, but it should prevent some future first home buyers and “investors” from become over-leveraged: Thanks to APRA, it’s about to become harder to get a mortgage in The Conversation.
On the subject of unaffordable housing, it’s worth a look at Monday night’s Four Corners – The Pandora Papers. It is mainly about the mechanisms the super-rich use to hide their financial wealth from view, and the Coalition’s reluctance to develop a register of beneficial ownership of real-estate and other assets in Australia. (Whoever’s interests the Coalition is serving, it’s certainly not the Australian taxpayers.) Although the program is mainly about commercial property, when an overseas buyer, through a series of trusts, buys a hotel or apartment or office block, that money comes into the whole real-estate sector, pushing up demand and prices.
Labour force figures explained
Had most of us not been subject to lockdowns, we should have been dancing in the streets last month to celebrate the unemployment rate having fallen from 4.6 per cent to 4.5 per cent.
But we didn’t feel inclined to celebrate this joyous news, and in a 2-minute video, Alan Kohler takes us through an explanation of labour force data. Drawing on official figures, and making only one conservatively defensible assumption, he demonstrates that the real level of unemployment is around 15 per cent: Lies, damn lies, & unemployment.
Ross Gittins on positive feedback
One misuse of language that upsets engineers, system analysts and other nerds is the term “positive feedback”. It’s not about the supportive feedback a boss may give a recruit, or a teacher to a student. Rather, it’s a technical term referring to phenomena that may have minor origins and that usually lead to great damage.
When, as a result of warming, the polar ice cap melts more quickly than it is replenished, less ultraviolet radiation is reflected off the ice, oceans heat up, more ice melts, less radiation is reflected, and so on. When the prices of shares, houses or tulips start to rise, investors, driven by fear-of-missing-out, pile into the market, encouraging more FOMO investors into the market, until the whole market collapses. They are examples of positive feedback in action.
Covid-19 has brought its own loops of positive feedback. As soon as contact-tracers start to get overwhelmed, their effectiveness in tracking cases diminishes, more cases break out, and their effectiveness is further diminished, leading to more cases breaking out. In arguments about Covid-19 modelling it is clear that many politicians didn’t understand this dynamic.
Ross Gittins has a neat article The economy can self-correct, but only up to a point, describing the difference between positive and negative feedback. In general we benefit from negative feedback – it brings systems back into equilibrium. Positive feedback is destabilising, and unless we arrest it the consequences can be costly.
Just occasionally positive feedback has positive consequences. The more electric cars we buy the more charging stations will be installed, leading us to buy more electric cars, and so on. That’s a positive feedback loop (described by a logistic equation), which is often seen in the establishment of networks. So far sceptics look at the slow uptake of electric cars and predict, confidently, that it will be decades before they take a significant market share. But at some stage the processes of positive feedback will take over.
Marx, the Ten Commandments and Arthur Brooks, on objectification
When Marx wrote about the way capitalism reduces people to mere “objects” in the production process he was writing about objectification. Another example is that pornography represents people, almost always women, as objects to provide sexual satisfaction.
Harvard professor and writer for The Atlantic Arthur Brooks writes about a more extreme form of objectification, “self objectification”, where people define themselves by their jobs: A profession is not a personality. It’s a condition that damages our closest relationships. The objectified individual, whether they have simply slipped into that role or have been pushed by a dominating employer, is devasted by retirement, or compulsory furlough during a pandemic lockdown. The more successful we are in our work, and the more we immerse ourselves in our work, the more we are at risk of self-objectification.
“Get some space” is his first piece of advice: there’s wisdom in the tradition of the sabbath. And “make friends who don’t see you as a professional object” is his second piece of advice. Perhaps these could be taken as solemn commitments by people who work at Parliament House.