The Climate Change Authority has said Australia's emissions reduction target should be trebled to 15%. This will fall on the deaf ears of the Idiot Abbot's government who not only want to abolish the Authority they also don't believe in climate change at all.
The Authorities point is that the current policy won't even achieve the 5% target and the conditions to do more have been met. Other countries are straining to cut emissions (UK target 80% reduction by 2050).
To reduce carbon emissions it will be necessary to raise the cost of carbon somehow. It is necessary to persuade people to use less goods and services that have high carbon emissions. This will mean people have to pay more and the repeal of the Carbon Tax is a backward move in this sense.
Below is a Guardian Australia article that has some discussion on this.
Wednesday 26 February 2014
Sunday 23 February 2014
Medicare - safe in their hands?
The government is talking about Medicare being 'too expensive' and are preparing to find ways to cut expenditure or raise more revenue.
Australia came to funding public health care in the 1970's, about 25 years after the UK. Why is that relevant? Australia claims Medicare was based on the British National Health Service, a dubious claim at best.
It is important to understand why medical care is provided by government. Health care is an imperfect information good and is often referred to as a merit good. The market will not provide the optimal quantity of health care because consumers don't fully appreciate the value of it.
The diagram shows the situation for health. The true value of health care is given by the red demand curve MSB, but consumers only see the value to themselves as the blue demand curve MPB.
For example when somebody decides to have a flu vaccination they do so to prevent them catching the virus, but don't consider how this also helps stop the flu from spreading to others. Therefore some people don't get vaccinated because they only consider their own benefits against the cost.
The result is that the market only provides 0Q1 units of health care and not the market optimal quantity 0Q*.
So governments subsidise health care, reducing the price to people so they are prepared to seek more medical advice and undergo more treatments. This helps raise overall welfare as people miss fewer days of work, seek preventative medical treatment and so avoid more serious illness and prevent epidemics through vaccinations.
The debate on Medicare will now rage. However it is important to remember that Medicare is not the comprehensive, "free at the point of use" system the UK offers. A comparison of the two would be instructive.
Australia came to funding public health care in the 1970's, about 25 years after the UK. Why is that relevant? Australia claims Medicare was based on the British National Health Service, a dubious claim at best.
It is important to understand why medical care is provided by government. Health care is an imperfect information good and is often referred to as a merit good. The market will not provide the optimal quantity of health care because consumers don't fully appreciate the value of it.
The diagram shows the situation for health. The true value of health care is given by the red demand curve MSB, but consumers only see the value to themselves as the blue demand curve MPB.
For example when somebody decides to have a flu vaccination they do so to prevent them catching the virus, but don't consider how this also helps stop the flu from spreading to others. Therefore some people don't get vaccinated because they only consider their own benefits against the cost.
The result is that the market only provides 0Q1 units of health care and not the market optimal quantity 0Q*.
So governments subsidise health care, reducing the price to people so they are prepared to seek more medical advice and undergo more treatments. This helps raise overall welfare as people miss fewer days of work, seek preventative medical treatment and so avoid more serious illness and prevent epidemics through vaccinations.
The debate on Medicare will now rage. However it is important to remember that Medicare is not the comprehensive, "free at the point of use" system the UK offers. A comparison of the two would be instructive.
Tuesday 18 February 2014
Wages rise more slowly
The last time that wages rose as slowly as they did last year was 1997. Should we be surprised by this?
The previous post talked about unemployment being at a ten year high, and this should give us a clue to the wages data. When unemployment is high employers are under less pressure to grant wage rises because people might prefer to keep their jobs than force the issue and find themselves unemployed.
A.W. Phillips first identified this wage rise/unemployment link in 1960, using data from nearly one hundred years. There was a clear trade off between unemployment and wage rises.
The previous post talked about unemployment being at a ten year high, and this should give us a clue to the wages data. When unemployment is high employers are under less pressure to grant wage rises because people might prefer to keep their jobs than force the issue and find themselves unemployed.
A.W. Phillips first identified this wage rise/unemployment link in 1960, using data from nearly one hundred years. There was a clear trade off between unemployment and wage rises.
The diagram shows the data up to 1913, the data from 1919 to 1957 looked identical.
The link between wage rises and inflation was soon established and often the Phillips Curve is shown as a relationship between inflation and unemployment (a point not made by Phillips himself). So one good piece of news is that Australian inflation might be expected to moderate in the next six months. However the price is higher unemployment and some will feel that inflation is the lesser of two evils.
The article also suggests that Australians are going to experience lower incomes as wages rise less quickly than inflation. This is probably inevitable as the Australian dollar falls in value causing imports to be more expensive. Also it is part of the essential readjustment of wages to allow Australia to be competitive in the world market.
Thursday 13 February 2014
Unemployment hits ten year high
Unemployment has risen to 6%, that's the worst it has been for ten years.
In global terms 6% isn't that high and just 3700 fewer jobs were available compared to last month. But what is really worrying is that most economies are seeing unemployment head in the opposite direction.
The charts below compare unemployment in some major economies to Australia.
In global terms 6% isn't that high and just 3700 fewer jobs were available compared to last month. But what is really worrying is that most economies are seeing unemployment head in the opposite direction.
The charts below compare unemployment in some major economies to Australia.
Compared to the Euro Area, Australia is doing better, with about half the unemployment rate of that region, but the trends in the data are similar and we all know Europe is a basket case.
Compare this to the trends in the UK and USA. Unemployment is falling quickly and this is a very stark contrast to Australia.
Of course Australia did much better than any European country and the USA after the GFC, but the current trend suggests that there is very great cause for concern. Usually developed economies see their economic fortunes move together. This is due to the strong links between economies through specialisation and trade. It would seem that Australia is not on a different economic cycle to the large developed economies.
Is there a bright side? Well Australian unemployment is still lower than the UK or USA and their growth will mean larger export markets for Australia. With fall in the value of the dollar that should help.
Wednesday 12 February 2014
Closure of Toyota raises many (old) issues
The closure of Toyota should come as no surprise. Australia is not a place where anyone can make standard cars competitively.
There are three areas to be interested in this story, which is a VERY LIKELY candidate for the exam in November.
* Why Australia is an expensive place to make cars
* Whether governments should provide assistance to declining or uncompetitive industries
* The winners and losers from putting a tax on imports
There are so many issues here that I can't attempt to talk about them in one post, but I will return to each in the future and expand upon each heading.
For now lets think about why the car makers say it costs them four times as much to make a car in Australia than in Asia and twice as much as in Europe.
One issue is the Minimum Efficient Scale of production. The Economies of Scale of car making mean that as the size of a plant increases the long-run average cost of production falls. But unlike the 'text-book' examples Diseconomies of Scale never occur meaning that there is a point at which every additional unit of production costs the same. This is shown in the diagram below.
There are three areas to be interested in this story, which is a VERY LIKELY candidate for the exam in November.
* Why Australia is an expensive place to make cars
* Whether governments should provide assistance to declining or uncompetitive industries
* The winners and losers from putting a tax on imports
There are so many issues here that I can't attempt to talk about them in one post, but I will return to each in the future and expand upon each heading.
For now lets think about why the car makers say it costs them four times as much to make a car in Australia than in Asia and twice as much as in Europe.
One issue is the Minimum Efficient Scale of production. The Economies of Scale of car making mean that as the size of a plant increases the long-run average cost of production falls. But unlike the 'text-book' examples Diseconomies of Scale never occur meaning that there is a point at which every additional unit of production costs the same. This is shown in the diagram below.
For the Australian car makers the scale of production never reaches the quantity MES, (Minimum Efficient Scale) indeed it is probably at best 40% of that quantity.
Although there are other factors to consider, such as comparatively low productivity and high wages in Australia, the small scale of production is major reason why the car making industry was always doomed.
The Guardian has an excellent article which connects most of the relevant issues.
Saturday 8 February 2014
Important reading for Year 12, and a useful start for Year 11 students
Understanding the issues that are affecting the economy is something all students must understand before the exams come around. This understanding is acquired slowly and built up over the course.
An essential source of unbiased information on how the Australian economy is doing is the RBA's Statement on Monetary Policy. This is issued every three months.
The statement gives a summary of what has been influencing the economy and provides forecasts on key variables such as inflation, growth and unemployment. The latest statement was issued on Friday.
In summary the statement says that growth is likely to be a little higher than was previously expected, inflation will be at the top end of the target range (2 to 3%) until the end of the year and that exporters are benefiting from the lower Aus$.
The Age article gives an excellent summary of the statement and is linked below. I have also linked to the RBA website page with the full statement. At this stage of the course working through the full statement after reading the Age's summary and get a feel for the issues and trends. You will then be able to build on this over the year (or two if you are in Year 11).
An essential source of unbiased information on how the Australian economy is doing is the RBA's Statement on Monetary Policy. This is issued every three months.
The statement gives a summary of what has been influencing the economy and provides forecasts on key variables such as inflation, growth and unemployment. The latest statement was issued on Friday.
In summary the statement says that growth is likely to be a little higher than was previously expected, inflation will be at the top end of the target range (2 to 3%) until the end of the year and that exporters are benefiting from the lower Aus$.
The Age article gives an excellent summary of the statement and is linked below. I have also linked to the RBA website page with the full statement. At this stage of the course working through the full statement after reading the Age's summary and get a feel for the issues and trends. You will then be able to build on this over the year (or two if you are in Year 11).
Thursday 6 February 2014
Renewable Energy Targets to be dropped?
It is important not to get carried away or influenced by what be a 'scare stroy'. Politicians love scare stories, but its all politics, not truth.
However there is a concern that the RET's, Renewable Energy Targets, might be dropped. This is consistent with the Abbot government's climate change denying agenda that is also seeing them trying to abolish the Carbon Tax.
The RET is an example of a regulation to deal with market failure. The Carbon Tax is using the price mechanism. While Economists prefer to use prices to influence behaviour, regulation is also important in the case of many market failures - a belt and braces approach.
It is important to concentrate on the issues here:
Why has the market failed in the case of climate change?
What direction must policy move the market in?
What is the best way to achieve the desired goal?
When you approach the issue from this direction you will be applying economic thinking, not political rhetoric.
However there is a concern that the RET's, Renewable Energy Targets, might be dropped. This is consistent with the Abbot government's climate change denying agenda that is also seeing them trying to abolish the Carbon Tax.
The RET is an example of a regulation to deal with market failure. The Carbon Tax is using the price mechanism. While Economists prefer to use prices to influence behaviour, regulation is also important in the case of many market failures - a belt and braces approach.
It is important to concentrate on the issues here:
Why has the market failed in the case of climate change?
What direction must policy move the market in?
What is the best way to achieve the desired goal?
When you approach the issue from this direction you will be applying economic thinking, not political rhetoric.
Wednesday 5 February 2014
No change in interest rates, but a change in attitude?
As expected the Reserve Bank of Australia (RBA) left the cash rate at 2.5%.
Since 2011 the RBA have been steadily reducing interest rates (from 4.75% to the current 2.5%) because they saw that the Australian economy was not growing as fast as it had been. The RBA was therefore able to try and stimulate the economy (try and get it to grow faster) while inflationary pressures were subdued.
In announcing this decision the RBA made one important point, and signalled another by what they did not say.
The RBA suggested that the current rate is likely to remain the same for some months. A 'period of stability' was foreseen, which means rates staying where they are. This is probably because they feel at 2.5% they are providing enough stimulus to the economy.
The thing they didn't say was that the exchange rate of the Australian $ is too high and should fall. They had been saying this consistently for over a year and absence of this comment suggests they think the Aus$ has fallen far enough.
The exchange rate affects the price of imports and exports. When the exchange rate falls it means the price of Australian exports falls abroad, leading to higher sales volume. However the price of imports rises and this will put upward pressure on inflation.
The graph shows how the exchange rate against the US$ since 2011.
Since 2011 the RBA have been steadily reducing interest rates (from 4.75% to the current 2.5%) because they saw that the Australian economy was not growing as fast as it had been. The RBA was therefore able to try and stimulate the economy (try and get it to grow faster) while inflationary pressures were subdued.
In announcing this decision the RBA made one important point, and signalled another by what they did not say.
The RBA suggested that the current rate is likely to remain the same for some months. A 'period of stability' was foreseen, which means rates staying where they are. This is probably because they feel at 2.5% they are providing enough stimulus to the economy.
The thing they didn't say was that the exchange rate of the Australian $ is too high and should fall. They had been saying this consistently for over a year and absence of this comment suggests they think the Aus$ has fallen far enough.
The exchange rate affects the price of imports and exports. When the exchange rate falls it means the price of Australian exports falls abroad, leading to higher sales volume. However the price of imports rises and this will put upward pressure on inflation.
The graph shows how the exchange rate against the US$ since 2011.
Question
Why does the interest rate affect the exchange rate?
Monday 3 February 2014
Cadbury gets a subsidy but SPC don't
The Prime Minister has defended the government's decision to give Cadbury a $16m grant to re-open its tourist facility in Hobart.
This has enraged those who thought SPC should have been given $25m to restructure.
The governments argument is that Cadbury are adding to Tasmanian tourism and not to their own operations and so profit levels. Therefore it's not subsidising private enterprise, it's supporting a struggling State.
Is there a real difference though? The argument could be made that both projects have wider effects on the local community. Because there will be more employment and spending in each area (Hobart and Shepparton) there is a multiplier effect (second round effects) that employ even more people.
Some might say that the government has applied a double standard. Others will argue that there is a difference between helping a company make a profit and helping one assist the local community.
What do you think?
This has enraged those who thought SPC should have been given $25m to restructure.
The governments argument is that Cadbury are adding to Tasmanian tourism and not to their own operations and so profit levels. Therefore it's not subsidising private enterprise, it's supporting a struggling State.
Is there a real difference though? The argument could be made that both projects have wider effects on the local community. Because there will be more employment and spending in each area (Hobart and Shepparton) there is a multiplier effect (second round effects) that employ even more people.
Some might say that the government has applied a double standard. Others will argue that there is a difference between helping a company make a profit and helping one assist the local community.
What do you think?
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