Other economics
Post-Coalition economic reconstruction
In 1996, before the Howard government took office, Australia occupied position 58 on Harvard’s ranking of economic complexity. It was a poor showing in comparison with other prosperous countries. Australia earned the epithet of a third world country temporarily enjoying a first world living standard.
Over the next 25 years our ranking has gotten far worse: it is now 93 out of the 133 countries surveyed. We’re just ahead of Pakistan and just behind Uganda. The top 5 positions are occupied by Japan, Switzerland, South Korea, Germany and Singapore – all countries with high incomes and well-educated populations.[1] The following high ranks are occupied mainly by high and medium-income European and Asian countries.
The simple explanation for our poor ranking is that the index is based on the complexity of a country’s exports, where complexity is defined as “the diversity and sophistication of the productive know-how required to produce a product”. Coal, iron ore, gas and basic agricultural commodities don’t score very highly on Harvard’s index. Therefore mathematically, if prices of these commodities were to fall, our ranking would improve. Also the way the index’s authors link complexity to particular products is a bit tough on us, because our farm sector is more technologically advanced than it is in other countries, but it classifies all farming at an average level of complexity.
It’s harder, however, to explain away the fact that Saudi Arabia ranks at 38, and Norway, another commodity exporter, is at position 44. And it’s even harder to explain away New Zealand’s ranking at position 52.
It’s not possible to establish one cause for our pathetic and falling ranking, but the fact that the Coalition was in office for 19 of those 25 years must go some way to explaining it. The Coalition confined economic policy to fiscal book-keeping rather than to economic structure, was openly hostile to industry policy, under-invested in education and physical infrastructure, pursued a low-wage structure, and changed taxation provisions to privilege financial and property speculation over productive long-term investment.
An improvement in our ranking on that index is important to Martijn Wilder, inaugural Chair of the National Reconstruction Fund. On Saturday Extra last weekend he explained how the fund will operate, with an objective of re-invigorating manufacturing in Australia, particularly in industries that add value to natural resources and industries that de-carbonize the economy. In fact, as outlined on the NRF’s website, its brief is not confined to “manufacturing”. Rather it’s about high-value export-oriented activities, and unlike industry policies of old, which operated through tariff and related protection, the NRF will operate through loans, equity and guarantees. Some projects may flop, but over its portfolio the fund should broadly achieve a commercial return on investment: that’s how venture capital works, using diversification to spread risk.
1. Taiwan is not included in the Harvard survey. If it were it would probably occupy one of the top ranks. ↩
What is an acceptable rate of unemployment?
Douglas Adams may have nominated 4.2 percent. Or is the answer 3.75 percent – a neat estimate to two decimal places?
That’s an average of an Economic Society poll of 51 leading economists, reported in a Conversationcontribution by Peter Martin: We can and should keep unemployment below 4%, says our survey of top economists.
One economist, Uwe Dulleck, said “I am not sure whether this question makes a lot of sense”, and others expressed similar sentiments, essentially questioning the premise that there is some determined “non-accelerating inflation rate of unemployment” (known by its acronym NAIRU). The world of employment is more complicated than can be captured in macroeconomic models that relate unemployment to inflation in simple equations.
Even so, economists were asked to select three measures that would reduce NAIRU. They were asked to choose from a list of structural reforms that would allow unemployment to fall without adding to inflation.
Improving primary and secondary education got top ranking, followed by two measures to reduce friction in the labour market – improving employment services and reducing the out-of-pocket costs of childcare. Reducing the level of Jobseeker and cutting immigration, ideas that come from diverging ideological directions, got very little support.
Remember when auditors were auditors?
When we examine the balance sheet and the profit-and-loss statement of a public company we expect the figures to have been prepared with diligence and to have been properly audited. Surely we learned the importance of independent auditing from the global financial crisis, when financial institutions’ balance sheets carried loans that would never be repaid and investments in high-risk highly-levered derivatives, but which were presented as rock-solid assets.
As Allan Fels reminds us on the 730 Report – Risky Business – we can attribute the global financial crisis largely to a failure by auditors to do their job.
Those auditors are mainly the Big Four accounting giants that have recently come to our attention because of their dealings with government. We should also be concerned with the way they deal with public companies.
Because those firms provide both audit and consultancy services to the same companies, they are conflicted, however. Auditors are supposed to serve the interests of stakeholders who are one step removed from the company – shareholders, creditors, taxation authorities. But consultants are engaged in helping firms make investment decisions and to shape the way they report their operations to stakeholders. The conflict of interest is obvious, and as was demonstrated in the global financial crisis, it is equally obvious whose interests will be served when there are such conflicts.
But as Senator Deborah O’Neill points out on the same program, conflict of interest has become these firms’ business model.
Senator O’Neill and others, including Allan Fels and accounting professor John Dumay, say that auditing and consulting should be done by completely different entities. O’Neill summarizes the situation:
Auditors are no longer auditors. They try to be everything to everybody, with a profoundly profit-driven culture, and they’ve lost what they had to sell – which was integrity, skepticism, and dedicated truth-telling in service to the market. We need to recover that. That is the vital product for every Australian and for everyone who needs the market to properly function.
The unbearable stupidity of toll roads
Toll roads compete with the National Electricity Market and private health insurance for classification as the dumbest example of privatization. It makes no sense to set charges for certain roads in a system where all other roads are free. In order to avoid tolls, drivers use non-tolled roads, causing unnecessary congestion and pollution, while the high-quality toll roads are relatively underutilized. Economists know such a situation as “deadweight loss”. It’s “deadweight” because no-one benefits – not even the toll road owners who sit on expensive but underutilized infrastructure.
We have toll roads because governments are afraid to raise taxes, such as gasoline and diesel taxes, or to implement road user charging, to pay for roads. All in the name of “small government”.
Even first-year economics students could have seen putting toll roads into an otherwise free system wasn’t going to work, it hasn’t.
As the Grattan Institute’s Marion Terrill points out – Learning the lessons of Sydney’s toll-roads mess – the New South Wales government has had to bail out toll-road operators at great public expense. There has been no saving to taxpayers, and there has been a huge and wasteful distortion in the way Sydney people (and by extension Melbourne and Brisbane people) use the road network. Her suggestion is to set road charges in line with basic economic principles:
The aim should be a road system that enables as many people as possible to share in the best that Sydney has to offer on any given day. This means all urban motorways would have peak-period charges that vary depending on where you are and how big your vehicle is, but at rates that aren’t brutal, and off-peak prices at zero or close to it.
To extend those principles, an enhancement would be to set penalty road user charges on people who choose not to use the urban expressways – a “rat runner’s penalty”. That would allow for lower speed limits and traffic calming on those clogged urban roads presently used by toll avoiders. Without trucks spreading their dangerous particulates, and with lower traffic generally, those roads could become part of suburban neighbourhoods, rather than Berlin-Wall type barriers, unfriendly to pedestrians, terrifying for cyclists, and unattractive to businesses.