Until the 1980's governments concentrated on boosting the demand side of the economy when they wanted to accelerate economic growth. Since then most governments have realised that long-run non-inflationary growth is achieved by balancing the demand and supply sides of the economy and that most of their work needs to be on the supply side.
The reason governments must pay such careful attention to the supply side is that the market rarely will. The market tends to concentrate on the immediate needs of firms and households, so roads, power grids and internet capacity all need a bit of help.
Joe Hockey, the Treasurer, wants to help boost the capacity of the Australian economy by accelerating infrastructure provision. As he does not want to increase the deficit to do this he is encouraging the State governments to sell off assets and invest the funds in new infrastructure. However he is offering to add to the funds raised (15%) from selling off assets if the proceeds are used as he wants.
The Federal government is leading the way, selling off the government owned health insurer Medibank and promising the proceeds will be used on infrastructure. The Victorian government might sell off Melbourne's port to raise funds.
This is a long term project. Infrastructure takes many years to complete. While his heart is in the right place Mr Hockey seems to have the wrong end of the stick on two counts.
Firstly he says "We need to fill an infrastructure hole in the economy and we need to do it fast," which misses an essential point on the nature of supply side policy.
Secondly he thinks the government deficit is too large to borrow more. This misses a vital point in public finance. That is it is sensible to borrow to fund long-term capital projects and tax those who benefit from their provision over decades rather than having the current generation foot the bill.
Sunday 30 March 2014
Tuesday 25 March 2014
Policy mix has to be right
Governments have a range of tools they can use to influence the economy. The trouble is that they have to be used together and in the 'right way' so they don't counteract each other.
The Governor of the Reserve Bank of Australia, Glen Stevens, has spoken of the need to not rely on the tool of monetary policy. In a speech he has pointed out that whilst getting the short and medium term demand side policies right (monetary and budgetary policy) in addition it is necessary to get the conditions for growth right too.
It is important to realise that economic growth is a long-run phenomenon. When politicians refer to growth 'this year' being a certain amount they are usually referring to a rise in GDP which represents moving towards the Production Possibility Frontier (PPF), known as short-run economic growth.
Economic growth is a really a movement of the PPF, an increase in the potential output of the economy. To distinguish this from simply moving towards the PPF we refer to it as long-run economic growth.
To achieve a movement of the PPF it is necessary to increase the factors of production or improve the quality of the factors of production. For this the economy will need investment in capital and people.
Hence Governor Stevens is suggesting that there must be conditions which promote competition, innovation and investment. This is the stuff of supply-side or microeconomic policy.
The Governor of the Reserve Bank of Australia, Glen Stevens, has spoken of the need to not rely on the tool of monetary policy. In a speech he has pointed out that whilst getting the short and medium term demand side policies right (monetary and budgetary policy) in addition it is necessary to get the conditions for growth right too.
It is important to realise that economic growth is a long-run phenomenon. When politicians refer to growth 'this year' being a certain amount they are usually referring to a rise in GDP which represents moving towards the Production Possibility Frontier (PPF), known as short-run economic growth.
Economic growth is a really a movement of the PPF, an increase in the potential output of the economy. To distinguish this from simply moving towards the PPF we refer to it as long-run economic growth.
To achieve a movement of the PPF it is necessary to increase the factors of production or improve the quality of the factors of production. For this the economy will need investment in capital and people.
Hence Governor Stevens is suggesting that there must be conditions which promote competition, innovation and investment. This is the stuff of supply-side or microeconomic policy.
The movement of the PPF represents long run economic growth.
Dealing with negative externalities
Congestion is an excellent example of an externality.
By driving along a road you actually hold up other road users. You consider only the benefits of making the journey to yourself and the cost of the journey to you*. However you impose on other road users the cost of a longer journey for them and impose on the world at large the costs of noise and pollution from your car.
The market will allow far too many cars to use a road. You only need to look at the queues of traffic heading into the City in the morning, or out again in the evening.
The reason why there are too many cars on the road is the failure of drivers to consider the full social cost of their journey. The way to correct this market failure is to 'internalise the externality' by imposing a charge on the drivers. This will raise the cost of the journey to them and fewer will want to use the road (simply the 'Law of Demand').
Economists have long recommended 'road pricing' as a solution to the problem of congestion. It meets with a lot of opposition and was recently rejected by the Abbot government when recommended by the Productivity Commission.
Road pricing means charging road users according to the time of day and level of congestion. It is a variable charge that tries to smooth out the 'peaked demand' of rush hours. By using such a system the market is moved closer to allocative efficiency, the journey times of those prepared to pay is reduced, pollution is lower as less fuel is used and money is raised to subsidise public transport.
Despite the economic sense of road pricing it is unlikely to be introduced anytime soon. There might be a London style congestion charge or a small charge per kilometer on drivers in small areas at peak times. Only Singapore has so far introduced electronic road pricing with variable fees.
By driving along a road you actually hold up other road users. You consider only the benefits of making the journey to yourself and the cost of the journey to you*. However you impose on other road users the cost of a longer journey for them and impose on the world at large the costs of noise and pollution from your car.
The market will allow far too many cars to use a road. You only need to look at the queues of traffic heading into the City in the morning, or out again in the evening.
The reason why there are too many cars on the road is the failure of drivers to consider the full social cost of their journey. The way to correct this market failure is to 'internalise the externality' by imposing a charge on the drivers. This will raise the cost of the journey to them and fewer will want to use the road (simply the 'Law of Demand').
Economists have long recommended 'road pricing' as a solution to the problem of congestion. It meets with a lot of opposition and was recently rejected by the Abbot government when recommended by the Productivity Commission.
Road pricing means charging road users according to the time of day and level of congestion. It is a variable charge that tries to smooth out the 'peaked demand' of rush hours. By using such a system the market is moved closer to allocative efficiency, the journey times of those prepared to pay is reduced, pollution is lower as less fuel is used and money is raised to subsidise public transport.
Despite the economic sense of road pricing it is unlikely to be introduced anytime soon. There might be a London style congestion charge or a small charge per kilometer on drivers in small areas at peak times. Only Singapore has so far introduced electronic road pricing with variable fees.
*Actually drivers only tend to consider their fuel costs and not the cost of maintenance, insurance and wear and tear that they have to pay as well. Therefore they underestimate their true costs and drive even more than they would if the full cost of motoring was considered.
Sunday 23 March 2014
Youth unemployment. Something to be worried about
A charity has highlighted the rise in youth unemployment in Tasmania as a grave cause for concern, and they are right in this. However youth unemployment in Australia generally is on the rise and we should not be too surprised.
Below is the Australian unemployment rate and youth unemployment rate.
by employers. "If they have not worked there must be a reason."
Below is the Australian unemployment rate and youth unemployment rate.
Notice the similar trends, but youth unemployment is around twice the national average. In Tasmania the youth unemployment rate is up to 20% in some areas.
The phenomenon of higher youth unemployment is one seen world wide. Newly qualified school and university leavers are at a huge disadvantage when unemployment is rising. Firstly they have no experience and so require expensive training, which makes them unattractive to employers. Secondly, and more importantly, when there is a downturn or slowdown in the economy firms reduce their recruitment activity, and the young are the very people who would fill those vacancies if they exist.
What tends to happen is that a year group or two miss out and a large proportion can't find work. When there is an improvement in the economy the people hired are the recent school leavers and graduates as those who have not worked for a year or two are treated with suspicion
The result is that short turn youth unemployment can turn into long term unemployment for some. This is a significant and harmful cost of unemployment.
Having said this things are not as bad in Australia as they are elsewhere. British, US and Greek youth unemployment figures are shown below.
Monday 17 March 2014
Market Failure and a lack of information
The most common cause of market failure is a lack of information. For example not knowing the full social costs of consuming tobacco or alcohol. Another very serious market failure is asymmetric information, when one party knows more than the other.
If a seller knows more about a good than the buyer then a price can be struck that exceeds the fair value of the good. Good examples are second hand cars and shares in companies.
In Europe there were huge problems with financial advisers selling financial services that were not appropriate for their customers. The financial advisers sold products which maximised their commission, which was not disclosed to their clients, and were often not what the client needed. This was therefore heavily regulated in the early 1990's with full and written disclosure required.
Australia has caught up with legislation and this has recently been enacted or is coming in to force in the next year.
It is remarkable that the idiot Abbot wishes to stop this legislation as he considers it superfluous. He states that "..because it was already an “ethical given” that professional advisers would take into account the best interests of their clients." So he completely ignores all of the evidence of mis-selling from around the world and Australia.
It is perhaps too easy to poke fun at a simple minded man like Abbot, and maybe unfair to say that this is a case of a right wing government helping out its paymasters. However it is a shocking example of a government failing to protect its people from a known market failure.
If a seller knows more about a good than the buyer then a price can be struck that exceeds the fair value of the good. Good examples are second hand cars and shares in companies.
In Europe there were huge problems with financial advisers selling financial services that were not appropriate for their customers. The financial advisers sold products which maximised their commission, which was not disclosed to their clients, and were often not what the client needed. This was therefore heavily regulated in the early 1990's with full and written disclosure required.
Australia has caught up with legislation and this has recently been enacted or is coming in to force in the next year.
It is remarkable that the idiot Abbot wishes to stop this legislation as he considers it superfluous. He states that "..because it was already an “ethical given” that professional advisers would take into account the best interests of their clients." So he completely ignores all of the evidence of mis-selling from around the world and Australia.
It is perhaps too easy to poke fun at a simple minded man like Abbot, and maybe unfair to say that this is a case of a right wing government helping out its paymasters. However it is a shocking example of a government failing to protect its people from a known market failure.
Unemployment figures good and bad news
The latest employment figures show both unemployment and employment up. This seems strange.
The number of employed people rose 47,300 with full time employment up by 80,500 (there was a fall in part time employment which accounts for the difference).
This is really good news. Expectations was for around 10,000 new jobs, so this is well ahead of expectations. Although there has been good news recently, such as the retail sales data and trade balance, unemployment is usually a 'lagging indicator'. This means that when there is an upturn in the economy it is usually months before employment rises and it takes a while for unemployment to rise in a downturn.
However unemployment also rose by 9,800, and stands at 6% of the workforce. How can that come about?
The reason that both employment and unemployment rose is that the workforce itself increased. This often happens in Australia due to the relatively high net migration.
There was also a rise in the participation rate by 0.2% to 64.8%. The participation rate tends to fall when people become discouraged from looking from work and so give up their search. When people are optimistic the participation rate rises as people are encouraged by the success of others to find work. Overall the rise in the participation rate is another good sign.
Tuesday 11 March 2014
Time to remember the Henry review
Australia's tax system is a mess. Quite shambolic in fact, with lots of concessions to special interest groups that only make sense in the pursuit of votes. Undoing this mess is politically difficult, because it will lose votes.
The Henry Review of 2010 tried to make sense of the system and suggest sensible reforms. Henry's ideas were welcomed, but little has been done to implement them, except for the changes that accompanied the Carbon Tax (such as the significant rise in the tax free allowance).
Now Mr Henry has suggested that the government might like to look at his proposals again as they try to tackle what they have termed a 'budget emergency'.
Among other things Henry suggested that GST should be widened and raised. Not a popular move at all. However his point was that taxes should be simple and fair, and a sales tax is both transparent and simple, although not always fair as it is usually regressive.
It would be a good opportunity to remember what the Henry Review suggested and use it as a yardstick to judge any current proposals. the Executive Summary is linked below.
Here is something to think about. What sort of tax system allows the authorities to knowingly take more tax from a person than they owe and then makes them claim their own money back up to a year later? And what sort of tax system allows a landlord to claim tax relief on a loss, even when they bought a property knowing they would make a loss on the rental? The answer is Australia's tax system.
The Henry Review of 2010 tried to make sense of the system and suggest sensible reforms. Henry's ideas were welcomed, but little has been done to implement them, except for the changes that accompanied the Carbon Tax (such as the significant rise in the tax free allowance).
Now Mr Henry has suggested that the government might like to look at his proposals again as they try to tackle what they have termed a 'budget emergency'.
Among other things Henry suggested that GST should be widened and raised. Not a popular move at all. However his point was that taxes should be simple and fair, and a sales tax is both transparent and simple, although not always fair as it is usually regressive.
It would be a good opportunity to remember what the Henry Review suggested and use it as a yardstick to judge any current proposals. the Executive Summary is linked below.
Here is something to think about. What sort of tax system allows the authorities to knowingly take more tax from a person than they owe and then makes them claim their own money back up to a year later? And what sort of tax system allows a landlord to claim tax relief on a loss, even when they bought a property knowing they would make a loss on the rental? The answer is Australia's tax system.
Monday 10 March 2014
Evidence of climate change continues
The idiot Abbot continues to claim that climate change isn't a serious issue and is still trying to replace the carbon tax with a less effective 'direct action' policy.
It is quite clear that the current level of carbon tax is inadequate to reduce carbon emissions to a level that will mitigate the worst effects of global warming. The best solution, a tradeable pollution permit scheme, is not currently on the table in Australia.
The latest report by the Climate Council shows that 156 temperature records were broken during the summer. And these were not on the lower boundary.
It is quite clear that the current level of carbon tax is inadequate to reduce carbon emissions to a level that will mitigate the worst effects of global warming. The best solution, a tradeable pollution permit scheme, is not currently on the table in Australia.
The latest report by the Climate Council shows that 156 temperature records were broken during the summer. And these were not on the lower boundary.
Saturday 8 March 2014
The impact of ceasing car manufacturing
The Productivity Commission has estimated that 39,000 jobs will be lost due to the closing of the car industry. The overall effect on South Australia will be a 2.7% fall in economic activity and a 2.2% fall in Victoria.
The figures seem to be a simple addition of car manufacturing employees and the jobs of those in the component/supply industry. However it is more complicated than that.
The type of unemployment that is being caused is structural unemployment. It has been caused by a change in the structure (pattern) of the economy. The big problem with this type of unemployment is that many people in the same area and with the same skills are made redundant at the same time, leading to unemployment 'black spots'.
Reducing this type of unemployment is difficult. Simply raising demand through budgetary or monetary policy is spread out across the economy and the new jobs created will probably not need the skills the newly unemployed car industry workers have. The policy that is needed is microeconomic, or supply-side, policy.
Sensible policy to help the affected areas will provide retraining for workers so they have skills needed in growing industries and will encourage those industries to locate in the areas most affected. Sadly these policies take five or more years to be effective and there is no guarantee they will actually work.
A further point to make is that the car industry closures will have a multiplier effect. Those made redundant will suffer a fall in earnings. This will lead to a fall in consumer spending and so a fall in aggregate demand. This will reduce overall national output further. Of course this multiplier effect will be most notable in the areas that the car industry operates in as local services suffer a fall in business.
The figures seem to be a simple addition of car manufacturing employees and the jobs of those in the component/supply industry. However it is more complicated than that.
The type of unemployment that is being caused is structural unemployment. It has been caused by a change in the structure (pattern) of the economy. The big problem with this type of unemployment is that many people in the same area and with the same skills are made redundant at the same time, leading to unemployment 'black spots'.
Reducing this type of unemployment is difficult. Simply raising demand through budgetary or monetary policy is spread out across the economy and the new jobs created will probably not need the skills the newly unemployed car industry workers have. The policy that is needed is microeconomic, or supply-side, policy.
Sensible policy to help the affected areas will provide retraining for workers so they have skills needed in growing industries and will encourage those industries to locate in the areas most affected. Sadly these policies take five or more years to be effective and there is no guarantee they will actually work.
A further point to make is that the car industry closures will have a multiplier effect. Those made redundant will suffer a fall in earnings. This will lead to a fall in consumer spending and so a fall in aggregate demand. This will reduce overall national output further. Of course this multiplier effect will be most notable in the areas that the car industry operates in as local services suffer a fall in business.
Thursday 6 March 2014
The Carbon Tax is working
Australia's small carbon tax has apparently having an effect. One group believe that Australia's carbon emissions fell by 7% last year, mainly due to the carbon tax.
Of course that is the point of the tax. It raises the price of goods and so fewer are bought. The idiot Abbot, for reasons that are hard to rationalise, wishes to remove the incentive to reduce carbon emissions and replace it with a series of grants he calls 'direct action'.
The bad news for Abbot is that no independent observer thinks his alternative will work. They don't believe that there is enough in the budget to reduce emissions sufficiently.
There is another problem looming for Abbot. The US wants the subject of climate change measures on the G20 agenda for the Brisbane meeting in November. This is probably going to be embarrassing for Australia, although it is unlikely that Abbot is bright enough to feel the shame.
Of course that is the point of the tax. It raises the price of goods and so fewer are bought. The idiot Abbot, for reasons that are hard to rationalise, wishes to remove the incentive to reduce carbon emissions and replace it with a series of grants he calls 'direct action'.
The bad news for Abbot is that no independent observer thinks his alternative will work. They don't believe that there is enough in the budget to reduce emissions sufficiently.
There is another problem looming for Abbot. The US wants the subject of climate change measures on the G20 agenda for the Brisbane meeting in November. This is probably going to be embarrassing for Australia, although it is unlikely that Abbot is bright enough to feel the shame.
More good news!
Following on the growth figures it appears Australia is doing even better than thought.
Retail sales are growing strongly. This is more than good news for retailers and those who make the goods and services they sell. It suggests that Consumer Sentiment (consumer confidence) is very strong and this is good news for the national economy.
Households don't raise their spending when they are uncertain. When they are confident they spend and are prepared to borrow. This can lead to higher total (aggregate) consumption an important part of Aggregate Demand. Rising Aggregate Demand leads to higher growth and national income.
There is also news of a bigger than expected trade surplus - the amount that exports exceed imports. That means Australian firms are doing well in selling to overseas customers. Selling more means more jobs in Australia and that will help moderate the expected rise in unemployment.
Of course net exports (exports - imports) is also a part of Aggregate Demand. A larger trade surplus leads to a faster rise in AD and so faster growth.
Overall then the signs are that the slow down in growth caused by the winding down of the mining boom may be coming to an end. However the 'headwinds' causing the economy to slow remain strong, but the 'tailwinds' that speed the economy along seem to be getting a little stronger.
Retail sales are growing strongly. This is more than good news for retailers and those who make the goods and services they sell. It suggests that Consumer Sentiment (consumer confidence) is very strong and this is good news for the national economy.
Households don't raise their spending when they are uncertain. When they are confident they spend and are prepared to borrow. This can lead to higher total (aggregate) consumption an important part of Aggregate Demand. Rising Aggregate Demand leads to higher growth and national income.
There is also news of a bigger than expected trade surplus - the amount that exports exceed imports. That means Australian firms are doing well in selling to overseas customers. Selling more means more jobs in Australia and that will help moderate the expected rise in unemployment.
Of course net exports (exports - imports) is also a part of Aggregate Demand. A larger trade surplus leads to a faster rise in AD and so faster growth.
Overall then the signs are that the slow down in growth caused by the winding down of the mining boom may be coming to an end. However the 'headwinds' causing the economy to slow remain strong, but the 'tailwinds' that speed the economy along seem to be getting a little stronger.
,
Australian Retail Sales - year on year change 2010 to present
Australia's Balance of Trade (Exports less Imports) 2011 to present
Tuesday 4 March 2014
Good economic news?
Yesterday the reserve bank of Australia left interest rates at 2.5%, a record low for Australia. there was also news that Australia grew by 0.8% last quarter (3 months), faster than was expected.
The RBA feel that export growth will continue, but wish to remain accommodating as the rest of the economy grew only slowly. Interesting despite low interest rates borrowing is not growing strongly and this may indicate weak confidence among firms and consumers.
There is little doubt that unemployment will continue to rise, probably for the rest of the year, but the lower dollar is helping exports (as a lower exchange rate causes export prices to fall). The RBA would, however, still like to see the dollar even weaker (perhaps as low as 80c to the USdollar.
Below are articles on the rate decision and the growth figures.
The RBA feel that export growth will continue, but wish to remain accommodating as the rest of the economy grew only slowly. Interesting despite low interest rates borrowing is not growing strongly and this may indicate weak confidence among firms and consumers.
There is little doubt that unemployment will continue to rise, probably for the rest of the year, but the lower dollar is helping exports (as a lower exchange rate causes export prices to fall). The RBA would, however, still like to see the dollar even weaker (perhaps as low as 80c to the USdollar.
Below are articles on the rate decision and the growth figures.
What is wrong with foreign ownership?
The Government have said they want to remove the cap on foreign share ownership of Qantas. This has led to a massive outcry against the move. But what is the economic argument for this opposition?
I have to say I can't think of a single valid reason to oppose allowing foreigners to purchase a controlling interest in Qantas. All of the reasons put forward seem to be simple national pride and a misguided idea that there will be more Australian jobs in an airline owned by Australian superannuation funds.
Tim Congdon, a British free market economist who is fiercely nationalistic (he stood for the UK Independence Party in 2010) stated, "I don't mind who owns the British car industry, or all of British industry, as long as everyone has a job." He said this in around 1999, in 2013 the UK car industry, which is almost exclusively foreign owned, again produced more cars in the year than EVER BEFORE (they did the same in 2011 and 2012).
So we need to be sensible when looking at Qantas and avoid the knee jerk reactions of politicians and unions pursuing their vested interests.
Qantas operates in a highly competitive industry (although it is protected by the government which prohibits more flights by foreign airlines). It is known as a highly contestable market. Firms can enter and leave easily when they already have aircraft. Suppose the traffic between Melbourne and Sydney drops off by 10%. Then airlines switch aircraft around. Smaller ones fly Melbourne-Sydney, or the airline switches flights to other destinations. If things change then they reorganise again.
However what a modern airline needs is a fleet of modern aircraft that is flexible. Modern aircraft are efficient and require far less maintenance than previous models, so they can allow airlines to cut prices. Large fleets mean that aircraft can be substituted for one another as route demand changes.
Foreign capital would allow Qantas to modernise and expand their fleet. That is the best way to keep jobs in Qantas.
But let's suppose Qantas can't compete in the market. Then they deserve to go under. Will people stop flying then? Of course not. Other airlines will emerge and they will employ people locally. In 2012 Emirates employed 5000 Australians, Qantas employed 37,500.
Does it matter if foreign airlines employ the Australians? Not at all as long as Australians get airline seats at competitive prices. Passengers are the people we should be worried about, and for that we need an 'Open Skies' policy where no one airline is favored by a government more concerned with Herlad Sun headlines and their poll ratings than the long term welfare of the country.
I have to say I can't think of a single valid reason to oppose allowing foreigners to purchase a controlling interest in Qantas. All of the reasons put forward seem to be simple national pride and a misguided idea that there will be more Australian jobs in an airline owned by Australian superannuation funds.
Tim Congdon, a British free market economist who is fiercely nationalistic (he stood for the UK Independence Party in 2010) stated, "I don't mind who owns the British car industry, or all of British industry, as long as everyone has a job." He said this in around 1999, in 2013 the UK car industry, which is almost exclusively foreign owned, again produced more cars in the year than EVER BEFORE (they did the same in 2011 and 2012).
So we need to be sensible when looking at Qantas and avoid the knee jerk reactions of politicians and unions pursuing their vested interests.
Qantas operates in a highly competitive industry (although it is protected by the government which prohibits more flights by foreign airlines). It is known as a highly contestable market. Firms can enter and leave easily when they already have aircraft. Suppose the traffic between Melbourne and Sydney drops off by 10%. Then airlines switch aircraft around. Smaller ones fly Melbourne-Sydney, or the airline switches flights to other destinations. If things change then they reorganise again.
However what a modern airline needs is a fleet of modern aircraft that is flexible. Modern aircraft are efficient and require far less maintenance than previous models, so they can allow airlines to cut prices. Large fleets mean that aircraft can be substituted for one another as route demand changes.
Foreign capital would allow Qantas to modernise and expand their fleet. That is the best way to keep jobs in Qantas.
But let's suppose Qantas can't compete in the market. Then they deserve to go under. Will people stop flying then? Of course not. Other airlines will emerge and they will employ people locally. In 2012 Emirates employed 5000 Australians, Qantas employed 37,500.
Does it matter if foreign airlines employ the Australians? Not at all as long as Australians get airline seats at competitive prices. Passengers are the people we should be worried about, and for that we need an 'Open Skies' policy where no one airline is favored by a government more concerned with Herlad Sun headlines and their poll ratings than the long term welfare of the country.
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