Other economics
A new age of multilateralism?
Even though Australia has escaped the worst of Trump’s tariffs, we would do well to seek trade deals elsewhere.
The final round of Trump’s tariffs will see America imposing a 10 percent tariff on Australia, the rate applied to those few countries with which America has a trade deficit, explains Laura Tingle: Trump's new tariffs reveal somewhat vindictive and irrational strategy. There will still be extra tariffs on specific commodities, such as copper products.
As Tingle writes:
The outcome somewhat took the wind out of the sails of those who have been criticising the prime minister for not getting to the White House, or into any meeting with Trump, and instead boosted the argument that there was little to be lost from staying out of his uniquely coiffed hair.
Those who believe that trade and other relations are initiated at meetings between heads of state have little understanding of how diplomacy works. Those meetings are usually the final outcome of a long process involving public servants in both countries, who would consider it a failure if they had to amend the draft communique and press release that they had prepared well in advance of the meeting. The meeting itself is theatre – often important for its demonstration effect, but it’s not where the work gets done.
In the case of dealing with Trump the wisest strategy for Australia may be to hope that Trump doesn’t realize we exist, lest he sees that we don’t go along with his Middle East policies, and learns that we have a social-democratic government that lies to the left of the Democrats on important issues.
Similarly, it may be in Australia’s interests if we behave as if America doesn’t exist. In 1944, when the world economic order was hammered out at Bretton Woods in the final year of the 1937-45 war, the USA was the world’s only large and reasonably intact economy. By 1960 it still accounted for 40 percent of the world GDP, but its share has steadily declined since then, to 24 percent in 2019, and is bound to go on declining. Also, in comparison with smaller countries that are more open to the world, the USA is already comparatively self-efficient.
That’s why Bill Reinsch of Washington’s Center for Strategic and International Studies, interviewed on Saturday Extra last weekend – Has Trump successfully upended global trade? – suggests that Trump has simply cut his country out of the world trading system. Reinsch doesn’t think the world system is upended, “but it is for us [the US]” he comments, reflecting Robert Reich’s assessment that the US economy is tanking.
Prompted by Trump’s tariff moves countries are putting renewed effort into developing bilateral deals, and there is no reason bilateral deals cannot develop into multilateral deals over time.
In the same context of American isolationism, Martyn Goddard has a set of three essays – Australia alone: the future without America – on his Policy Post. The first is about America’s long history of isolationism. Its involvement in the two so-called “world wars” and the “cold wars”, and its lead in establishing the Bretton Woods order, were out of keeping with its long-term behaviour, Goddard argues.
Essential has polled Australians about their attitudes to dealing with Trump. Because respondents were surveyed before the 10 percent tariff announcement, it was framed in terms of the possibility that we would be pressed to change the Pharmaceutical Benefits Scheme, a kids’ social media ban and so on, to get tariff concessions. But the message is clear: we should stand up against Trump’s bullying. That defiant attitude is strongest among older Australians.
Reinsch comments that so far tariffs are bringing in a flow of money to the US government and Trump is boasting about it. This raises a question about the purpose of those tariffs. If they are to protect industry – bringing back manufacturing to America – the plan should be to see tariff revenue diminish over time. If they are revenue-raising, then they will be ineffective, except as the dumbest and most regressive form of sales tax one could imagine.
Or maybe they have neither purpose: they are just part of Trump’s childish petulance, a vindictive way of sending costly messages to people with whom he is pissed off. Albanese would be well-advised to keep Washington off his diplomatic bucket list.
Cash without banknotes
One thing people liked about cash was its anonymity. Can there be a digital equivalent?
The roundup two weeks ago had a post The demise of cash, in which I put forward arguments that public policy should be directed to discouraging cash transactions, because of its use by tax evaders, money launderers, terrorists and other criminals. And for legitimate businesses, handling cash is an unnecessarily expensive way of operating when there are much safer and cheaper electronic systems.
Fred Schilling has responded with a defence of cash – not so much a defence of banknotes and coins, as a defence of one essential property of cash, its privacy. When you make a transaction in cash or coin it can be a private transaction, inaccessible to companies who want to harvest your market transactions, and to governments who collect taxes and may want to keep an eye on you.
Seventeenth century bitcoin
He draws attention to a podcast on community radio involving a discussion with Rohan Grey, an (Australian) law professor at Willamette University, who describes how people are creatively adjusting to the digital world by developing new forms of private transactions. (60 minutes) As part of this description he explains almost everything we need to know about money – as a store of wealth, as a unit of account, and as a means of payment. Along the way he presents a convincing argument that Bitcoin does not qualify as “money”.
Grey describes attempts to develop a digital currency that has the assurances of fiat (government-backed) money, but which provides the same level of anonymity as cash. He and others ask if the government could run such a service as a public utility. This is not just theoretical: a group of Democrat Congresspeople have drafted a bill, the E-Cash bill, which if legislated would direct the Treasury to:
It’s only paper and plastic
develop and pilot digital dollar technologies that replicate the privacy-respecting features of physical cash, in order to promote greater financial inclusion, maximize consumer protection and data privacy, and advance U.S. efforts to develop and regulate digital assets.
Crucially, such cash would not be “reliant on a common ledger or any third-party payments processing intermediary.” (The bill’s explanatory document has an informative table summarizing the properties of different forms of digital money.)
On a related matter Schilling has provided a link to another podcast to which Grey contributed, describing how Trump, in his DOGE, is radically changing the whole process of government spending. Most media attention to DOGE has been about the savagery of Elon Musk’s cuts, but the more important aspect 0f DOGE is that Trump is assuming for the presidency the power to appropriate and spend money, taking it away from Congress. This is essentially a reversal of hard-won reforms that took the power of raising revenue and spending from kings to parliaments – a principle established in almost all parliamentary democracies, that the Americans thought they had achieved in 1776 when they asserted that there should be no taxation without representation.
Closing the gap
A few positive indicators do not override the hard reality that the gap between the conditions of indigenous and other Australians is disgracefully wide.
An insipid interpretation of the Productivity Commission’s most recent Closing the Gap Report, released on July 31, is to say that it presents a mixed set of indicators, some improving, some going backwards. The Commission summarises its assessment in neutral tones:
Of the 15 socio-economic targets with data available to report progress, four targets are on track, six targets show improvement but are not on track, progress for four targets is worsening and one has shown no change from the baseline.
Perhaps that’s all an official government agency, or a detached social scientist, could say, because there is no moral accounting system that could balance improvements in the number of children completing Year 12 against worsening outcomes in adult imprisonment, to take two examples.
In an 18-minute interview with David Speers – Why can’t Australian governments close the gap? – Thomas Mayo expresses his clear assessment: “it’s a sad set of results”, he says. He does not identify one general problem offering a clear and simple solution, but he comes back to the layers of decision-making in indigenous programs, and the way expert advice is ignored or overridden by those who claim to know better. Noting the poor performance in the Northern Territory, he is particularly critical of the hard Trumpist line taken by the territory’s CLP government, most notably its rough populist approach to youth crime. The session ends with a discussion of the ways the voices of indigenous Australians can be brought to bear on policy and program development.
There was an opportunity for Prime Minister Albanese to use his appearance at the Garma Festival to announce some new directions from the Commonwealth. His Address to the Garma Festival is more uplifting than statements we have heard from his Coalition predecessors, and has an emphasis on economic development. It includes an announcement of $70 million to help get First Nations clean energy projects up and running and $75 million to support native title holders get better deals “to drive faster approvals and deliver a real and lasting economic legacy for communities”.
On Radio National Darren Godwell of Indigenous Business Australia comments positively on the government’s emphasis on economic development. It’s not just about government funding: it’s also about a change in legislation that will allow IBA to tap into capital markets to fund enterprises. He also makes an insightful comment about the demographics of indigenous Australians.
The ABC’s Bridget Brennan writes that Albanese spoke of economic empowerment at Garma, but what he didn't address dominated the mood. In particular:
He did not outline a clear plan on what the government intends to do with disastrous policy failures in the Closing the Gap agreement, where the most heartbreaking targets to reduce suicide, incarceration, and child removals are getting worse.
Nor has he responded to “mounting pressure to make some bold calls to influence the direction in the Northern Territory”, even though it is heavily dependent on Commonwealth funding (and is still constitutionally a territory, not a fully self-governing state).
One aspect of closing the gap not assessed in this round is the dimension called “culture and language”. At Australian Fashion Week First National designers displayed their creations.
The use and abuse of models
Be wary of economic models: they are often no more than replications of the pub test, using mathematics to make them look respectable.
Last week’s roundup referred to the Productivity Commission’s paper – Growth mindset: how to boost Australia’s productivity – outlining its general approach to the government’s productivity inquiry.
That paper makes a broad claim about the benefits of improved productivity:
Australian full-time workers would be $14,000 a year better off within a decade if the country adopted a “growth mindset” and focused on ways to lift living standards and make the economy more efficient.
A reader, Henry Haszler has drawn attention to a post by Ross Gittins which explained the way such projections are made. Government economic agencies, such as Treasury and the Productivity Commission, generally use economic models that necessarily incorporate certain assumptions that are not always disclosed. Roundtable warning: When they say “modelling” grab your bulldust detector, he writes.
Gittins’ post is not a specific critique of the Productivity Commission’s paper. Rather it is a summary of an Australia Institute research paper, published in January this year, which explains the way bodies such as the Treasury, the Productivity Commission and think tanks use what are known as computable general equilibrium models (CGE models) to predict the effects of policy changes.
The name is impressive, but they are standard models, based on long-established mathematical techniques. The Australia Institute paper, which explains their limitations in clear language, can be summarized as two bits of advice for those who are inclined to put too much faith in them.
The first piece of advice is that models are often used as a means to give an impression of objectivity in support of a particular policy agenda. The Productivity Commission, as its name implies, can be seen as an advocacy body, although few would see anything controversial in advocating for higher productivity.
The second piece of advice for users is that the equations in these models – usually a very big matrix of simple equations – rely on many assumptions, which may or not be made explicit.
In relation to models that make claims about promised economic gains, Gittins points out the main assumptions on which the equations are based:
The models usually assume that inflation has no effect on the real economy, most assume that the profits in each industry are minimal because competition competes them down, and capital equipment can be repurposed at no cost.
The Australia Institute paper goes into more specific points about the way models are used.
In relation to the Commission’s $14 000 claim, it sounds almost too good to be true, but it passes the simple test of what it implies about productivity growth. The present (November 2024) full-time average adult wage is $103 000. Applying the basic compound interest formula, a rise to $117 000 over ten years implies a 1.3 percent annual wage growth. That’s in line with the long-term growth in labour productivity, as the Commission points out. If we can get back on that long-term trend, it’s achievable.
But Gittins’ and the Australia Institute’s warnings are relevant, because this $14 000 gain assumes that gains in productivity will be shared proportionally between employers and employees. That has not been the case over the long term: as has often been pointed out in these roundups, over the last fifty years a greater share of the improvement in income (factor income) has gone to profits rather than to wages. Only if that trend can be reversed will those wage rises come about.
These qualifications are about that $14 000. In the roundtable there will be other claims made by bodies with less professional objectivity than the Productivity Commission. We can expect to hear the usual claims about the supposed benefits of tax cuts, particularly at the top end of the scale.
The Australia Institute paper anticipates these claims about tax cuts, with a warning about assumptions relating to the effects of after-tax wages on labour supply. The economic assumption, used in the 2010 tax review (the “Henry Review”), is that higher wages result in people devoting more of their time to work. But this isn’t necessarily so, particularly at high-income levels. Indicative of the importance of the underlying assumptions of CGE models, according to the Australia Institute, is this unorthodox assumption that underpins the Henry Review’s recommendation to cut taxes.
In fact the Australia Institute paper, and Gittins’ summary, are relevant to all aspects of government economic policy, because they refer to the assumptions in economic modelling generally, and not just in the big CGE models. Debates about fiscal and macroeconomic policy – the size of the fiscal deficit, the effect of changes in interest rates and so on – implicitly assume that the so-called “factors of production” (capital, labour and natural resources) are homogenous, fungible and undifferentiated commodities. A foundry worker can become a waiter in a tourist establishment, or as the Australia Institute puts it, “coal mines can be converted into hospitals, with even less effort than was required by a blacksmith to repurpose a sword.”
They treat resources as if they are all interchangeable
Advocates for so-called “modern monetary theory” are pushing back against these simplifying assumptions, using basic economics to point out that public policy should be concerned with the allocation of real resources, rather than monetary and fiscal abstractions. In fact the “modern” of MMT is a misnomer, because they are really saying that the clever mathematicians in Treasury and the Reserve Bank should get out into the real world to see how things are made and how services are delivered.
If they did get away from their desks we might more easily dismiss silly ideas: that giving grants to first home owners will result in more affordable housing, or that spending another one percent of GDP on defence is going to make us safer.
And as for CGE models – be sceptical when you hear economists talking about “equilibrium”. An economy in equilibrium, if it ever exists apart from the fantasy world of lecturers’ whiteboards, would be a rather boring place to live, work and invest.