Jun

30

Too many central bankers

by Mark Crosby | Filed Under Economics | 3 Comments

Front page of the Budapest Times this week has an article about the Hungarian central bank governor’s salary being cut. He currently earns more than twice Ben Bernanke’s salary. Maybe he’s twice as efficient as Bernanke, but I doubt it, and the Hungarian government is clearly having some doubts. So how many central bankers does a country need? I recall a conversation with a senior central bank official from a small central bank to our right who argued that central banks should only need a handful of staff – they just had to say up or down on interest rates and that was about it. The Economist Magazine in December last year published a list of the number of central bankers by country. It would be interesting to correlate this measure with average inflation. By all measures Russia has the biggest central bank with 71,200 employees, but they are hardly a paragon of central bank virtue – prices have increased 1500 hundred fold since 1992. Australia, by comparison has 1000 employees, and here prices have increased by about 50 percent since 1992 (that year is only chosen because that’s the longest data series for inflation in Russia that I have).

Jun

30

Farmville and addiction

by Joshua Gans | Filed Under Economics | 2 Comments

I have a confession. For the last month or so I have been playing ngmoco’s GodFinger. It is an addictive iPad game that has you build a world and move up in levels. Other than that it is boring as all hell with no cognitive processes required. But it did have a social element. A good friend of mine was also playing it and you could exchange gifts and see how you were going. The game pretty much required it. But we kept asking ourselves: “why are we playing this? It is so stupid.”

I’m happy to report that I am now off (on?) the wagon. I reached the maximum level in GodFinger (level 50) and then committed to stop by killing and destroying everything I built. The picture to the side shows the Armageddon. My friend continues on in the hope that ngmoco will add more levels.

GodFinger is of course, small potatoes. The big game is Farmville. Farmville has 26 million daily users — more than any other game. I joke that the daily harvested crop take on Farmville exceeds the daily agricultural output on the United States. It is the biggest shift back to the agrarian society ever. The new iPhone version makes harvesting even easier so I suspect the measured ‘productivity’ of the world is about to increase significantly.

Farmville is on its level an insanely pointless game. Here is a description. Read more

Jun

29

Expansionary fiscal contractions

by Mark Crosby | Filed Under Economics | 33 Comments

We can hope that fiscal consolidations in Europe might have an upside – here is my piece on this published in today’s Age newspaper.

The big debate at the just concluded G20 meetings was about the appropriate direction to take fiscal policy in the coming year or so. On the one side the US argues that to withdraw stimulus now risks a slide back into recession. During the meeting final US GDP data were released, and weakness in a number of areas supports the view that that economy is still some way away from a robust recovery. On the other side sits the Europeans, supported by Japan and Canada who argue that sovereign debt problems are so dire that it is not possible to continue stimulus, rather deficits and debt need to be addressed now. The Americans worry that if the rest of the G7 and other major economies do not continue to “go for growth” then there is little chance of strong global economic growth in the coming year or so.

 One might think that the withdrawal of stimulus in Europe and elsewhere would be a significant drag on global growth, but there is some powerful evidence that fiscal consolidations can support rather than hinder economic growth. A number of European countries have in the past engaged in significant fiscal consolidations that led to strong, rather than weak economic growth. The key is to make sure that the fiscal consolidation goes hand in hand with economic reforms that encourage private sector investment so that the overall level of demand in the economy does not fall as the government cuts spending.

 Two countries that successfully consolidated their public finances and at the same time enjoyed strong economic growth were Denmark and Ireland in the 1980s. In Denmark the recession at the beginning of the 1980s saw public debt jump dramatically to 65% of GDP at the end of 1982. A newly elected conservative government then cut the budget deficit dramatically, both through expenditure cuts and tax increases, and also stabilised inflation. Stable inflation reduced borrowing costs, both for business and government. Rather than suffering contraction, the Danish economy grew at 3.6% for the next four years, on the back of strong investment and private consumption growth.

 In Ireland an initial attempt to reduce public debt from more than 80% of GDP beginning in 1982 met with limited success. Increases in taxes at that time led to weak economic growth and private investment, and public debt failed to fall. But in 1987 the new government again tried to reign in debt, this time by dramatically cutting public spending. This time the policy was successful in reducing public debt, and economic growth for the subsequent three years was 3.7 percent, compared with no growth after the earlier stabilisation attempt.

 The Irish and Danish episodes, as well as a number of other successful stabilisations such as in Canada post 1995 and Sweden in the early 1990s present a number of interesting lessons for policymakers today. Firstly, cuts in government spending seem to be more effective than increasing tax rates, both in reducing government deficits and debt levels and in stimulating economic growth. The logic behind this argument is that tax increases tend to reduce private activity, while spending cuts can support stronger consumption and investment. It is also important that economic reform accompanies budget consolidation. In many European countries there are many opportunities to improve business confidence. In Greece for example measure of global competitiveness and the business environment place Greece well behind Australia or the US. More pro-business reforms can support private investment, jobs and the economy at the same time as the government reduces spending.

 One worry about such reforms is that Europe’s social support system would need to be abolished. But this is not the case. Denmark and Sweden for example have shown that it is possible to have strong social support, low public debt and a well functioning economy. But the key is to properly target and pay for social programs and to ensure that business is supported rather than constrained by government.

 The European experience might not be as relevant for Australia given our low level of public debt, but the finding that fiscal consolidation can support economic growth should be noted. The key is to ensure that government spending increases are carefully considered, and other reforms continue to support business and private investment.

Jun

29

Blogging and researching

by Joshua Gans | Filed Under Academia | 6 Comments

In what seems at least uncharacteristic of a research economist in a Central Bank, Kartik Athreya [Updated link] as written an opinion piece (or if it were on a blog, a post) criticising economics opinion writers and bloggers. The one thing that is certain is this creates a big target for economics bloggers to re-criticise.

In reading this, Athreya is clearly frustrated. Economists are supposed to lay out assumptions, draw logical conclusion and debate the evidence before commenting on policy. The blogosphere doesn’t do that. In Athreya’s opinion, it is because (a) they can’t or (b) are scientifically dishonest. Apparently, this is not meant to offend but really. Read more

Jun

27

IMF says we’re doomed?

by Mark Crosby | Filed Under Economics | 6 Comments

Some of you might like me have been puzzled by a big bold graph in Glenn Mumford’s piece in the weekend Australian Financial Review. The graph showed fiscal tightening required between 2010 and 2020  in order to achieve a public debt ratio of 60% of GDP by 2030. And next to Iceland and not far above Italy sits Australia? Huh? How can that be? The data comes from the IMF’s Fiscal Monitor, published about a month ago. Appendix 2, Table 1 shows the data, but the notes state that the fiscal tightening  shows what countries need to do in order to stabilise debt at 2012 levels by 2030, or to reduce debt to 60% by 2030 if public debt levels are above that level. With Australia having a large fiscal deficit in 2010 the required tightening of policy is significant, but whatever we do we will not be near Iceland or Italy in public debt outcomes in my lifetime. For us to achieve a 60% debt to GDP ratio by 2030 we could pretty much go crazy – or elect a Hungarian, Greek, or Italian government and get there in half the time.

Jun

27

Information disclosure as regulation

by Stephen King | Filed Under Economics | 3 Comments

A couple of recent stories highlight the importance of getting information out to consumers and other interested parties. The first, reported here, relates to airbrushing photos. The relevant bit is that the fashion industry will:

Disclose when images have been retouched and refrain from enhancing photographs in a way that changes a person’s body shape, for example, lengthening their legs or trimming their waist, or removing freckles, lines and other distinguishing marks.

This strikes me as a good thing. By all means, magazines should be allowed to digitally alter images – but tell the consumers when you do it.

One that hit me closer to home relates to grades given by Universities. Law schools in the US are looking at ‘elevating’ marks to improve their graduates’ employment chances. Similar pressures exist in Australia – although I am always pleased that academics try to strongly avoid this pressure. However, grade inflation is a risk for Universities tempted to try and push the worth of their graduates. But an easy solution – require public universities in Australia to publish their grade distributions.

Maybe the Australian government could make this simple reform rather than the costly intrusive extra regulation that it is currently considering. Give employers and students information – and them let them decide.

Jun

25

Cupertino, we have a problem

by Joshua Gans | Filed Under Economics | 2 Comments

So there are reports today of a problem with the iPhone 4′s antenna. If you hold the phone with your left hand (as I do when talking on it), the ‘bars’ drop from 5 to 3 or 2. I tried it and much as it pains me to say it, it’s happening and is easy to replicate. It seems that the issue is covering the bottom left side of the iPhone’s edge. You hold it for about 5 seconds and watch the apparent reception quality drop off. I haven’t experienced an actual call issue so who knows what it means but this doesn’t look good. You would think that all the Apple engineers in bars might have noticed it.

[Update: tested it with a 'bumper' case and there is no issue. Me thinks Apple may have to provide them as part of the deal.]

Jun

25

Interview on BNet

by Joshua Gans | Filed Under Economics | Comments Off

I did a quick interview this morning on BNet on the role of academics in policy-making. Caution: may be a little rambling.

Jun

24

Missing Markets in the iPhone Line

by Joshua Gans | Filed Under Economics | 1 Comment

As I stand here in the iPhone line it is clear that entrepreneurship is dead. There are many missed clear market opportunities. First, where is the coffee cart? Second, where is the arbitrage between those with a preordered phone and those without? True on average that shouldn’t exist but given the size of the line there should be some trades to be made.

Finally, everyone here has an iPhone. Surely there is a big opportunity to buy old phones as people exit and arbitrage on eBay or something?

But none of this is happening. Just lots of waiting.

OK two hours later and we are out of the line. Basically, the iPhone 4 is all about the display. I can’t describe it in words. You will just have to see it for yourselves.

Jun

24

The new leadership

by Joshua Gans | Filed Under Economics | 5 Comments

Over 30 hours ago, a 1st round Wimbledon tennis match began. At that time, there was speculation that there may be some discontent in the Labor party over whether Kevin Rudd would remain as leader. The tennis match is still going — the longest in history at 59 all in the fifth set. But the leadership battle was begun, fought and resolved in less time. It must be said that there is something civilised about this all happening without the endless speculation, the failed bids and the years of turmoil. It seems to me that Kevin Rudd deserves an enormous amount of praise for that happening in that way.

Despite the shocking pace of movement, the change in leadership is an exciting one. The Government had shown plenty of signs of falling away at the seams and there can be no doubt that Julia Gillard has been a stellar performer and policy-maker over the past three years. I had the occasion to meet her 6 or so years ago for a lengthy discussion of health policy and reform. While I can’t say that it led directly to anything concrete — the ALP were in Opposition at the time and was to remain there for some time after — I came away with the impression that she was an informed, critical thinker with a genuine desire for evidence that might support what she considered (rightfully) theoretical propositions. There are few politicians that I have met that have left such a positive impression. If the person I met then is the person now becoming the Prime Minister, it bodes well for us all. And if her rise can serve as the inspiration that I already observe from people around me and on social networks, then mores the better.

Jun

23

Hungary and Australia

by Mark Crosby | Filed Under Economics | 1 Comment

 The following is my piece on Hungary published in the Age today. …

Earlier this month comments by Hungarian officials led to speculation that Hungary would have to default on its public debts, though within 24 hours of the offending comments the Hungarian State Secretary tried to hose down such speculation. 

In 1995 Hungary’s net public debt level was 24.2% of GDP, below the 25.6% of GDP for Australia in the same year. But that year was the peak for Australia’s debt, while in Hungary persistent budget deficits saw government debt rise to 46.0% by 2005 – the same year that Australia’s public debt was reduced to zero. In 2005 Hungary’s GDP grew at 4.1%, but despite this solid growth performance the budget deficit was 7.8% of GDP. A government that spends so much more than it earns in a good year is headed for big problems when the economy faces a downturn.

In 2006 despite still strong economic growth the budget deficit blew out to 9.25 percent of GDP, before being cut to 5.5 percent in 2007. The plan at that stage was to stabilise Hungary’s public finances, with the ultimate aim being to join the Euro system during 2010. To support plans to adopt the Euro a Fiscal Responsibility Law was drafted in 2008, with the Law requiring transparency in public finances and forcing the government to spend no more than it raised in taxes, excepting for interest payments.

Late in 2008 the global financial crisis hit Hungary very hard. With net public debt over 50 percent of GDP, and with heavy private sector borrowings as well, the shutting down of international capital markets forced Hungary to go to the IMF for emergency loan assistance. The issue was not that Hungary could not repay, but rather that loans simply could not be rolled over. Loans totaling €20 billion from the IMF, the EU and the World Bank were arranged for a period of 17 months. Weak economic growth in 2009 and this year means that the budget deficit is likely to remain very high, at around 7.5 percent of GDP this year, and plans to adopt the Euro have been abandoned until at least 2014.

One might think that the fact that Hungary has its own currency might help as it should be possible to depreciate the currency, or inflate away some of Hungary’s debts. Indeed, Hungary holds the record for the highest inflation rate in history, with inflation in 1946 hitting 300% plus per day! But inflation and or depreciation are unlikely to help Hungary. Much of Hungary’s debt is denominated in Euros or Swiss Francs, so a depreciation just means that more forints have to be earned to repay existing debts. Approximately 60 percent of Hungarian mortgages are denominated in foreign currency, and so a depreciation would be a disaster for Hungarian households – precisely this same issue of foreign currency denominated loans caused major problems for Iceland in 2008, and during the Asian crisis in 1997. And in Australia we remember the problems with Swiss Franc loans to farmers and small businesses during the 1980s.

As in Greece, the problem in Hungary has nothing to do with the currency in use, but rather with weak public finances and an inefficient economy. Government spending is more than 50 percent of GDP. Along with many other European countries Hungary spends more than it is willing to pay for on health, education and pensions, but it also has one of the most inefficient public sectors in Europe. Public sector service delivery requires much higher employment levels than in other similar emerging market economies. Add to this a high cost to starting new businesses and other administrative burdens to private businesses and it is not hard to see further economic weakness and problems with public debt financing in Hungary.

As with all of the other countries with debt difficulties in Europe, Hungary’s problems need to be solved both by a determination to reduce debt, and widespread economic reforms to strengthen the economy. Unfortunately governments have waited for the worst time to enact such reforms, rather than starting when times were better earlier this decade.  But Hungary and other European economies are not the only ones in this boat – Hungary’s net public debt today is around 60 percent of GDP, compared with 67 percent for the United States. The major difference is that Hungary has to borrow in foreign currency and suffer the consequences when the forint depreciates while the US is able to borrow in US dollars at low rates. Depreciation in Hungary can very quickly cause foreign currency denominated debts – both public and private – to rise to unsustainable levels. In the medium term it remains the case the Hungary would be better off to be part of the Euro system so that currency mismatches cannot cause major economic problems. As to whether Hungary can avoid default I am with the financial markets. At this stage the odds on default are reasonably high with good reason.

Jun

23

Henry and the Academics

by Joshua Gans | Filed Under Economics | 15 Comments

You know, you have to believe that Ken Henry really doesn’t understand academics at all when he publicly says stuff like this:

“Whenever an idea is ventured publicly by a person, whether that person is a policy advisor or whether it’s a government minister, there’s at least a handful of academics who will contest it,” he said. “I’ve seen it on both sides of politics – this is not a partisan comment at all – but for governments, government ministers who are seeking to get ideas legislated – it is unbelievably frustrating, incredibly frustrating.”

“It is a great strength of economics as a discipline. It is one of the things that as a young person I found very attractive about the study of economics, this contest of ideas. But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus”…

Warwick McKibbin, appropriately sums up the position of we academics:

“I have enormous respect for Ken Henry, but he can’t believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get god policy that will work.”

He goes on:

If the government won’t engage you behind closed doors then an academic has no other choice than to express their opinion in the public interest in public for the public to assess.

Warwick, like many, have opposed the Government strongly on many policies. And in so doing, he has added to the debate and in some cases there is arguably success in getting sense put in place. It is tough thing to do and it frustrates me to see it so derided.

But I want to add a few things here. First, let me tell you, praising the Government is as thankless a task as critiquing it. I was someone who fell behind the Government and wanted to get the ETS done and said so publicly in the face of criticism myself. I was someone who fell behind the Government and argued that we should pay attention to the evidence on FuelWatch and give it a go. And I was someone who, after years of critiquing their broadband policy, praised them when they moved in the right direction. And was I ever able to be brought in to help improve these policies (something they could clearly use)? No. Whenever I tried I was given the clear message that there are insiders and there are outsiders. Warwick is actually one of the insiders. I write blogs and occasionally newspaper pieces only to find the Government abandoning those policies that I supported for political and expedient reasons rather than on the basis of evidence. I find myself often wondering these days if it is really worth the effort to write long submissions to Parliamentary inquiries, conduct research in policy-relevant areas and stick my neck out at all only to wake up and find that we are all really just an annoyance anyway.

Second, this is isn’t a problem with just this Government. They are all like this. The Howard Government in the face of the clearest evidence that it was poor policy went ahead with the introduction and then increments to the baby bonus despite the strain that put on maternity hospitals. Where was Treasury then? How could it be that the mistake was made and then repeated two times with ample time and options to get around it? And I will continue to harp on me and fortunately I get to write textbooks so that our students can see what a broken evidence-based policy system looks like.

In the US, I can see that things are very different. The Government consults regularly with outsiders and genuinely solicits advice. I have seen it happen, not just here at Harvard but all over the place. In Australia, the aura is one of distance. Now I am not saying that Ken Henry or anyone else has to engage with me personally. Just being a professor commands no such right. But I would like to see him and the Government actually engage with some outsiders regularly rather than project the image of distance. But regardless, there is surely no right to consensus until the Government has earned it. They have far to go. If asked, I’ll gladly help. Otherwise, I speak my mind from the sidelines.

Jun

23

Vale John Martin

by Stephen King | Filed Under Economics | 1 Comment

Sad news that John Martin, former ACCC Commissioner, passed away at the weekend. John was my colleague at the Commission. When I first started, John ‘showed me the ropes’. His input to debate was invaluable and he was an incredibly nice person. He will be greatly missed.

Jun

23

Winner of Student Contribution Contest

by Joshua Gans | Filed Under Economics | Comments Off

After reviewing many entries, the judging panel (i.e., me) has found a winner … David Ong.; an undergraduate student at UNSW. While there were many interesting entries — mostly focused on issues related to the financial crisis — this one spoke to me as being interesting, original and provocative. Congratulations David and thanks to all those who entered.

Jun

23

A Nudge for Giving

by GuestPoster | Filed Under Economics | 3 Comments

This is a guest contribution from David Ong. David is a fifth year undergraduate arts/medicine student at UNSW currently doing research on the ethics of health-related humanitarian aid in the developing world.

Bill and Melinda Gates and Warren Buffet have recently announced that they are going to ask their fellow American billionaires to pledge at least half their net worth to charity. This has already achieved results: four billionaires have made the pledge. To the extent that this initiative helps shift a culture of conspicuous consumption towards a culture of conspicuous giving, it can only be a good thing.

Could we extend the idea and consider an opt-out registry of each individual’s charitable donations, for which they claim tax deductions?

We know that people (and companies) look at their peers when they make decisions about how much money they should give to charitable causes. Companies that give donations are keen to share this fact. Their motivation is clear – they want to project the impression that they are socially responsible. But equally important is that less generous corporations are punished whenever customers choose to give their custom to more philanthropic firms.

The same does not apply to individuals. They do not always want to talk about their generosity, lest they be seen as showy or conceited. This makes it hard to know how much your peers are giving. Furthermore, as Peter Singer remarks in his famous essay Famine, Affluence, and Morality, giving money away is ‘regarded as an act of charity in our society’. Because of this, ‘it is not thought that there is anything wrong with not giving’.

However, donators tend to oblige when others want to acknowledge their generosity and use it to encourage others to contribute. Many concert programmes, for example, list the names of patrons who have donated over a certain threshold. People can give anonymously, but few do. Because the recognition is opt-out, nobody could accuse benefactors of being showy or conceited.

Unfortunately, this does not work for less visible causes. Nor does it tell of a particular person’s total generosity over a variety of causes.

To summarise: Society would benefit from having information about donations shared (it would increase generosity). The generous want the information shared, but can’t do it themselves. The answer is a registry.

Is there any harm to conspicuous giving? Perhaps those who don’t choose to give might feel shame, when information on how much each person gives is readily available.  But there’s a similar harm to conspicuous consumption – the shame of not being able to match your neighbour when he buys his yacht.

Jun

23

US Credit Card Act tanks

by Joshua Gans | Filed Under Economics | Comments Off

… and Visa and MasterCard share prices rise. That is the news today when proposed ‘Australian-like’ regulations of credit card associations were amended.

The first amendment was that the Fed wouldn’t be able to regulate network charges alongside interchange fees. Actually, that amendment is fairly innocuous as arguably, the interchange fee cap should apply to just that rather than other charges. It is good to see that lawmakers were aware that there was a potential to use other charges as a workaround but that seems adequate.

The big problem with the amendment is that while it allows merchants to discount based on payment instrument — check versus credit card — it doesn’t protect them from card association rules that prevent discounting based on the card brand itself. So if Visa had a high interchange fee relative to MasterCard, the merchant can’t pass on those higher costs to consumers. This means that price signals are distorted but more seriously that Visa and MasterCard can’t compete with one another on that side of the market. There is no point discounting if consumers don’t see it and you don’t get more transaction volume as a result. This means that the interchange fee regulation will do all of the work in controlling the industry. This seems like a heavy handed approach that doesn’t enable a well functioning payments market. Little wonder that their shares are rising as it appears almost akin to (that is functions like) a license to collude.

Jun

22

Continuing confusion on broadband

by Joshua Gans | Filed Under Broadband | 1 Comment

Here is a question: what does duplication mean and when is it bad?

And here is the answer: duplication means building two or more of the same thing where just one would be enough. It is potentially bad when you already have one of those things and you build another. Of course, if by building another, you get say, competition, the benefits from that might offset the costs of duplication.

What relevance does this have to the Telstra-NBN agreement that effectively proposes preventing Telstra’s cable network from offering broadband? The answer is nothing. Why? Because what is being proposed is to incur all of the costs of duplication with not one bit of the benefits.

What is more, no one seems to understand that. Today’s case in point, Robert Merkel (who is singled out for being clear and for referencing me):

Joshua Gans is disappointed that Telstra’s existing networks aren’t going to be competing against the NBN. I’m not; duplicating telecommunications infrastructure to the home makes about as much sense as running multiple competitors’ power or water networks to individual homes and businesses.

What he is saying is that he thinks it is just fine that we shut down (effectively) a perfectly good network and build a new one over the top of it. That is, we duplicate — because we are building a new network — but don’t get any benefits — competition, extra capacity or whatever. If you think duplication is bad when thought about sensibly, how can you possibly advocate the most senseless duplication imaginable?

Personally, while I might have lamented the loss in facilities-based competition, I would have been far less concerned if NBN Co were purchasing the HFC network and then allowing others (e.g., Foxtel) access to it. At least there would be no duplication — well, at least until far into the future when the HFC network was actually obsolete. This proposed plan has no public benefit associated with it.

And while I am at it: we already have a ton of duplication of the cable network — anyone know what happened to Optus’ network?

Jun

22

A GSPT (General Super Profits Tax)?

by Stephen King | Filed Under Economics | 9 Comments

When I blogged on the RSPT earlier I asked a simple question: If the tax is a good idea, why only apply it to the resource sector? It looks like the answer is simple – it should be applied more generally. Or at least that is how the Australian is interpreting a speech by Ken Henry at the ATAX – Monash University conference in Sydney. As the article notes, if you debt finance, the interest is a tax deduction. If you equity finance, the ‘normal return’ on equity is not tax deductible. This creates a bias towards debt financing. A GSPT will get around this problem.

A general discussion on how to tax company profits is a good thing. It would have been desirable to start the debate there rather than focus on one sector that is currently booming. Unfortunately, the approach to the RSPT has conflated two completely different propositions:

  1. The Australian mining industry has won the equivalent of ‘Chinese roulette’ and the Australian tax payer should get a share of these windfall profits through an additional levy on the mining industry; and
  2. Current company profit taxation creates a bias to debt and is inefficient so the way we tax company profits needs reform.

Both of these propositions are worth debating – but they are separate. The RSPT debate has meant that, by confusing the two issues, we may not get sensible debate on either.

As an aside, thanks to John Head, Rick Krever and the ATAX people for organizing what looks like a great conference.

Jun

21

Confusion on broadband

by Joshua Gans | Filed Under Broadband | 8 Comments

I have to admit that the supposed deal between the NBN Co. and Telstra has me confused about the Government’s intentions here.

Let me see if I understand things correctly and please, if anyone has any real details please let me know.

1. One of the big reasons the Government went with the NBN plan was to create competition in telecommunications and broadband which we were surely lacking. It was also an opportunity to rationalise regulation.

2. The government went so far as to insist that any Telstra involvement in the NBN and even wireless spectrum may well be contingent on it ditching its stake in Foxtel — one of the benefits of that being that it would be a potential NBN Co competitor.

3. The agreement proposed yesterday does a U-turn on all of that by saying that Telstra will continue to have a Foxtel stake but now the potential competition that might come from cable will be neutralised as part of the agreement. That is, no more BigPond cable including all of the upgrades that would have given Australia two competing telecommunications networks across a great number of localities.

Here is why I think No.3 is what is occurring:

Telstra will transfer customers from its copper and hybrid fibre coaxial cable networks to the new network in return for further payments from NBNCo.

Telstra will then decommission its copper and cable networks, getting out of the business of wholesale networks to concentrate on providing retail services and mobile and wireless services.

Senator Conroy said this would achieve ”structural separation” by splitting up Telstra’s long domination of the wholesale and retail aspects of the communications sector.

“Structural separation” my foot. It isn’t structural separation if you shut down the upstream entity. That is decommissioning. Separation involves putting those assets in independent hands so they are a source of competition. I don’t relish handing over domination by one firm to domination by a new one.

As I said, I might be missing something here but that is how I read the news. If anyone clarifies, I’ll be happy to update. But at the moment this is truly worrisome for the whole NBN plan and its potential social dividends. That said, if I am right I can’t believe that the ACCC will ever authorise what effectively amounts to a merger between the only two potential competitors in an industry.

Jun

20

The GFC and regulation

by Stephen King | Filed Under Economics | 6 Comments

I am giving a talk on the GFC and regulation tomorrow (Monday). As a result I have done some background reading and my notes are attached. They end with some ‘lessons’ for regulation in Australia. Thoughts most welcome.  Read more

Jun

18

The SPT shouldn’t be such a tough sell

by Chris Lloyd | Filed Under Economics, Politics | 10 Comments

The government have made some solid major decisions during their first term. In my opinion, the size and delivery vehicles for the stimulus were appropriate. I think the Super Profits Tax (SPT) is sound, though you can argue over the details and which minerals it should apply to. Unfortunately, the government are not only incompetent administrators but positively autistic communicators. The SPT was well received in the days immediately after the budget. What happened? The SPT should sell itself. Especially because it feeds well into what should be the government’s two strand narrative.

 

The first strand should be that they saved us from the GFC. Never mind whether you agree with this or not. It is a strong positive for them and they will win a landslide if the election is fought on this issue. The SPT is the flip side of the stimulus and an excuse to keep the stimulus front and centre of political debate.

The government put us into a big fiscal hole with the stimulus package. They have taken some criticism for the implementation (i.e. pink bats and school canteens) but the voters are mostly glad of the fact of the stimulus, while having misgivings about the debt going forward. The government have always claimed the country should get back into surplus over the business cycle. The money has to come from somewhere. Where else are we going to get the huge sums required?

Yet Wayne Swan denies that this is the main reason for the SPT. He wants to claim credit for getting us back into surplus by 2012-13 but is coy about how he is doing it. He should openly acknowledge his strategy. Yes, we need the money to balance the budget in 3 years.

This not only moves the focus back to on the consequent early surplus, but it feeds beautifully into what should be the second strand of the government’s narrative, namely investment in infrastructure and long term management of inter-generational wealth. Back when they were able to communicate, the ALP ran very hard with the idea that Howard had squandered the resources boom, pointing to slow trains and under-resourced schools. Regardless of whether you accept this view, it gained a great deal of traction. They should be positioning the revenue gained from the SPT as the avoidance of losing revenue the way we did in the last boom. People hate to lose revenue. If they position it this way, every time the punter hears the SPT mentioned, they think of all the money that would be lost  if we did not have it.

But Rudd lives in Canberra and doesn’t know how ordinary people think. How else to explain calling it a Super Profits Tax? This is the greatest own goal of all time – a minor variation on the opposition’s “Great Big New Tax” mantra.  They could have called it the 10% Excess Profits Premium, which carries the message that (a) it is only on high profits, (b) it is only a marginal change from 30% to 40% and (c) the country receives a premium on their resources. Premium is such a nice positive word compared to tax. Does the government have anyone who knows how to sell a product?

Apparently not. Instead, their shifting message is drowned out by mining industry propaganda which does not bear the slightest critical scrutiny. Journalists apparently think that they must not point out nonsense in the interest of appearing balanced. The mining lobby’s campaign has the following elements.

The SPT tax is excessive. It is only a change from 30% to 40% on profits over 6%. I am sure that most punters think that mining companies are being taxed an extra 40% on all their profits, if not on all their revenues. Rudd should have called it a 10% premium, not a 40% tax. The fact that this is worth $9 billion per year tells you how much profit is being made.

The SPT will harm investment. Since it is only a marginal charge on excess profits, it could not cause any existing profitable projects to close. It could certainly affect the economics of future ventures, since the rewards on the denominator of the risk/reward ratio will be smaller. So we might see less projects in future. This is not such a problem though. First, it will roll out slowly over time so there is a chance to react. If necessary, we can encourage new projects in the future by allowing more of the exploration costs to be deductible. Second, the resources are still in the ground so nothing (or little) is actually lost.

The marginal rate of 40% is internationally uncompetitive. It is suggested that the 40% rate being higher than say 25% in Chile is somehow relevant. This is nonsense. A decision to invest in country A or B will depend on the relative profit margin, not the tax rate itself. If Australia had diamond fields where you could just walk around and pick them up then we would be well advised to tax profits at 99%. I reckon mining companies would still fall over themselves to pick the diamonds up. No journalist has called the marginal tax rate argument for the nonsense it is.

The SPT tax is retrospective. It applies to future profits only. The mining companies complain that they made the decision to pursue these projects under a different tax regime. That’s true but in that case every time a landlord puts up rent on a commerical property it is retrospective. As the unfortunate holder of Tabcorp shares I know first hand that the value can decrease when government removes a monopoly right.  Retrospective? This is just abuse of language.   

The SPT increases sovereign risk. If they mean sovereign risk of the country then Kyran Curry from S&P disagrees. He says the mining tax would have no effect on our  credit rating, which is an indicator of  sovereign risk. In fact, he says the tax raised over the first two years could strengthen the rating. 

The SPT will harm the whole economy. It is only a change from 30% to 40% on profits over 6% for one industry sector that is currently thriving. Moreover, most of the big mining company dividends go to foreign based shareholders. If you had to find $9 billion per year to take out of the economy to get us into surplus, you would be hard-pressed to find a less damaging way to do it.

None of this means that I support every aspect of the SPT. Many economists prefer a purer Resources Rent Tax. Nor do I think that the SPT would necessarily be an easy sell even if Rudd was at the top of his game. Nick Gruen thinks that the political landscape has fundamentally changed from when the RRT on petrol was introduced, and he may be right.

So what has been the effect of the SPT on the fortunes of the big miners and the country? I downloaded the share prices of RIO, BHP and the ASX for this year and looked at the month prior to the budget announcement and the month after. I calculated the movements of $1 equally invested in RIO and BHP on January 1 and subtracted off value of the same $1 invested in the  ASX. The graph is below. The zero does not mean anything in particular. It is changes in the graph that tell you how mining is faring compared to the general market. I also downloaded the DJI for the same period so I could compare Australian and US shares.

The budget was May 11, about the middle of the graph. I guess you can tell two stories here. The mines drop compared to the ASX on May 11 and 12 and the ASX drops compared the DJI over the next week. Or you can look at the previous month which suggests that the market already knew the SPT was coming. If the drop from April 12 to May 12 is all due to the SPT then it is around a 10% loss for the mines. If you only count post announcment it is about 4%. Either way,  mining share prices have been moving up compared to the market over the last month – as has the ASX compared to the DJI – recovering perhaps half the lost ground. This might represent the market perception of the likelihood of the SPT actually ever being implemented.

I wish I had the time to do a similar graph for “small miners” but I do not know enough of their names and there are too many of them. If the SPT designers are to be believed, small mining shares should show the opposite pattern to that of the large miners.

 

Jun

18

Preying on the dying

by Stephen King | Filed Under Economics | 2 Comments

Andrew Bolt has an article on the death of Pen Dingle here. As a person who believes in individual liberty, I could easily say: “Well, it is an individual’s choice. People who believe in alternative medicine should be able to choose. And if they die, so be it”. Unfortunately, experience has shown that at least some of the proponents of ‘alternative medicine’ are simply profiting from misery and death.

One of the most disgraceful practices that came to the ACCC in my time there was the NuEra ‘cancer cure’ clinic that preyed on terminally ill people by offering quack treatments. Fortunately, the ACCC was able to prosecute the clinic for misleading and deceptive conduct. The judgement is here.

However, prosecuting fake medical clinics under consumer protection laws is not a great solution. Most sellers of ‘quack cures’ or ‘alternative therapies’ that have no empirical validity do not break the Trade Practices Act. They are open and blatant about their treatments. But sick and dying people can become desperate and this is grist to the charlatan’s mill.

I have no easy answers on this one. But we do need a debate about alternative health therapies, their sales practices and their regulation.

Jun

18

More contests

by Joshua Gans | Filed Under Economics | Comments Off

The Core Economics student post contest closes in just a few days but if you are looking to earn money as well as glory consider the Governor-General’s essay contest. Details over the fold. Read more

Jun

18

High technology consumer banking

by Joshua Gans | Filed Under Economics | 8 Comments

Whatever else you might say about the US banking system, it is way ahead of Australian banks in terms of integration with technology. Just some examples:

  • Multi-check ATMs: Bank of America have these multi-check ATMs where you put in a bunch of checks, the ATM scans them and then deposits them with a print out of the check images on the receipt. So easy. That said, it makes errors. Once it reported that a check I had offered was for $50,000 but it was for no such thing. But there is an opportunity to catch such errors (if you wish — and I did).
  • Quicken Online: Quicken has an online and free consumer software service that allows you to check balances and keep track of finances. There is also an iPhone app. The service accesses your banking information and so everything is updated in real time. That said, Bank of America does the same thing too and it can also put my Australian banking details there. So let me just repeat: I can access multiple bank accounts from the same service including Australian banks in the US something that I can’t do in Australia!
  • Quickbooks Online: If you are running a business, Quickbooks online is a great way of managing accounts. You can get this service in Australia but it is PC only — operating in some virtual Microsoft environment — and so it is slow and it can’t interface easily with your bank and credit card information meaning all that has to come in by hand.

That all said, one area where Australia comes up better is bank to bank transfers. Here in the US, the best you can do is get your bank to mail someone else a check. If you want to transfer money between your own accounts you are better off writing yourself a check. It is hard to understand why US banks find this sort of thing so difficult when they get other stuff so right.

Jun

17

FIFA promotes Bavaria beer

by Stephen King | Filed Under Economics | 1 Comment

The Bavaria Beer ambush marketing stunt at the world cup must have worked beyond their wildest dreams. Mainly because of FIFA. Their over-reaction has made it a world wide story. An example (with video of the orange dresses) is here.

I might suggest this as a case study to the Monash Marketing Department – how not to respond to ambush marketing by a rival! If I was Budweiser (the official world cup beer) I would be torn at present. They are benefitting by the ‘collateral exposure’ but the heavy handed approach of FIFA cannot be good for public relations.

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