Reducing overtime (penalty) rates in Australia

There is a long tradition of paying workers extra when they work hours that fall outside the normal working week. In Australia these are called Penalty Rates, and called Overtime Rates elsewhere.

Australia has a strong labour movement and was the first country to establish the 'eight hour day', five days a week as standard. They guard their free time jealously and so a system of paying penalty rates to whoever works at certain times has grown up. A particularly difficult area is Sunday trading where many workers earn 'double time', including casual staff who might only work on Sunday.

Now the Australian Fair Work Commission have concluded an enquiry and recommended that the rates be reduced.

There are several points to be made on each side of the debate.

• Penalty rates allow low paid workers to boost their pay to a level where they can earn a reasonable living wage. Therefore reducing penalty rates may reduce equity in Australia. 
• Also penalty rates provide the incentive to workers to supply additional hours of work. When the incentive is removed then the capacity of the Australian economy will be reduced (affecting Aggregate Supply).

• Against these points must be set the higher costs penalty rates impose on businesses. these will now be reduced and consumers may benefit through lower prices and improved supply. The labour market will become more flexible and Australian competitiveness will be improved.

This measure is a supply-side policy that aims to lower costs and improve long-run growth.

The Sydney Morning Herald covers the story here

The ABC 7.30 report has a video here

This story is directly relevant to VCE students and represents an excellent example of Australian Supply-side policy. IB students can equally use it as an example.

Are incentives irrelevant?

Finland has begun an experiment where it will pay unemployed citizens a fixed monthly sum. The idea is based on a 'universal basic income'. Other countries are going to start similar experiments.

The idea of a basic minimum income, regardless of economic activity, is one that is very attractive to those who are concerned with addressing inequality. It is controversial because opponents say it will simply encourage idleness.

Traditional supply side economic theory says that if the difference between in-work and out-of-work income is too small then there is too little incentive to take up job offers. People remain unemployed until a better offer comes along. When the difference is large then the unemployed jump at a job offer, therefore governments have cut the real value of the unemployment benefit sine the 1980's.

Supporters say that it is more important to deal with inequality which has risen continuously since the 1980s. This was not promised by supply side theory which said that the initial the rise in inequality would be reversed due to faster economic growth. (Unkindly some say this is the 'trickle down' effect, but actually they envisaged faster productivity growth and so higher wages throughout the economy.)

Others point to the fact that the system is very cheap to administer. There are no tests, no adjustments (even if the recipient finds work) and so minimal clerical effort. Therefore government expenditure is partly offset by lower costs of administration.

It's something you may want to watch.

The Guardian covers the story here

The new VCE study design has downplayed the study of inequality. However at IB it is an important economic goal. There is an IA in this one that looks at the effects on LRAS and AD. Read the article carefully, I have not put in every important detail here.

Monetary Policy ineffective?

As IB students move to looking at macroeconomic policy I will provide some articles that highlight some recent issues and also help give context to the importance of understanding the theory of policy is important to understanding its use in reality.

The article below makes lots of points. It talks about how the Australian Treasurer (Finance Minister) believes that Monetary Policy has become ineffective in boosting economic activity at present. It also talks about how Fiscal and Supply-side policy must work together to achieve macroeconomic goals.

I am going to concentrate on monetary policy here. Morrison asserts that further interest rate cuts (Australian interest rates have fallen from 4.75% to 1.5% since 2012) will do nothing to stimulate the economy. This is suggesting that the transmission mechanism by which lower rates stimulate economic activity and raise the price level has stopped working.

The theory, which you will learn, suggests that lowering interest rates will raise Consumer and Investment spending and probably Net Exports, all components of Aggregate Demand. However when interest rates are very low many believe that the incentives to change behaviour cease to be significant. If coupled with lower consumer and business confidence even negative interest rates cannot help stimulate the economy on their own.

This is very much a current policy debate. Similar arguments are being had in Japan and Europe where the central banks not only set negative rates but are printing money to try to stimulate the economy.

Notice Morrison's use to the phrase 'pushing on a piece of string' - a classic term used to describe how lowering interest rates does nothing to solve a recession. The answer is more government spending and infrastructure investment. Of course that policy will be cheaper to finance when interest rates are low - so maybe low rates still have a role.

The Age covers the story here

Note that there is a lot of politics in this. Morrison, for example, refuses to acknowledge that more government spending is needed because the political priority is to cut spending to 'solve' the budget deficit. 

There are lots of articles on this argument - look for them for your IA.

Is Australian privatisation making the economy less efficient?

Australian Competition and Consumer Commission chairman Rod Sims has stated that in his view many Australian privtisations have made the economy less efficient and led to prices in those markets being higher, not lower.

Privatisation is a supply-side policy and takes two broad forms, one is removing rules from a market (called deregulation) and the other is where government owned corporations are moved to private ownership (denationalisation). Denationalisation is usually accompanied by the breaking up of the monopoly power of the organisation concerned by allowing new firms in to compete with it. A classic case is in telecommunications where Telstra in Australia and BT in the UK had monopolies on providing phone services before privatisation.

The aim of privatisation from an economists perspective is to move the market back to one where increased competition drives down costs and so increases allocative and productive efficiency. Allocative efficiency is provided by firms trying to better meet the wants of consumers. 

Successful privatisations lower the barriers to entry (often through deregulation and denationalisation together). In addition to the efficiency gains there are also improvements in productive capacity, increasing the level of Aggregate Supply. 

Governments have another motive in privatisations. They want to raise money. They can use the money to cut taxes (popular) or reduce government deficits or debt. Rod Sims is accusing the government of putting this motive in front of the others and as a result harming the interests of consumers.

A classic case is the sale of Medibank health insurance. The Abbott government shamelessly allowed premiums charged by health insurance companies to rise quickly prior to privatisation to make the potential profits look more attractive and drive up the share price.

The Sydney Morning Herald covers the story here

This article has interest to both IB and VCE students. IB students will recognise it as an example of how poorly planned privatisations can create private monopolies and work against consumer interests and failing to deliver the hoped for gains. VCE students can use it as an example of supply-side policy and a legitimate criticism of such policies in Australia.

'Remove dole payments after sixth months' call presumes a cause

A Queensland LNP MP is calling for unemployment benefits to be ceased to people under 45 after six months. The aim is to reduce government spending so it can be given to those with large superannuation funds instead - a reason sadly beyond our remit here.

The MP suggests that if somebody knows they will cease to get unemployment benefit then they will indeed get a job. This is of course assuming that those who are unemployed are voluntarily unemployed.

Since the 1980's governments have worked to improve incentives to work through supply-side policies. This has included lowering marginal income tax rates, so that people keep more of what they earn, making working more attractive. Governments have also reduced the real value of unemployment benefits to again make work more attractive relative to unemployment.

The theory is often expressed in terms of 'search costs'. Lowering income tax rates and reducing unemployment benefit makes the cost of 'searching' for new work more costly (in an opportunity cost sense) and so workers will therefore accept a new job more readily, probably one which does not match their ideal job, but it gets them back to work. This would be seen as an increase in economic efficiency.

There are a couple of issues with the MP's proposal. Firstly there is the tricky issue of involuntary unemployment (caused by structural or cyclical factors). The proposal will strand those who genuinely cannot find work. They will most likely have to move on to other benefits because their income is so low, meaning the savings to government will be minimal anyway.

Secondly there is the impact on the distribution of income. The unemployed are, by definition, the lowest income earners and this proposal makes them even worse off. The people who would benefit from the MPs proposed use of money saved would be from the higher income deciles, those with large superannuation savings. The effect on the distribution of income would be to make it more unequal (a higher gini co-efficient).

The New Daily covers the story here

This story has application to the goals of macroeconomic policy and their conflicting nature (equity vs efficiency). Both IB and VCE students can use this as an example of policy.

A problem of supply side reform

France has an unemployment rate of 10.5%, far higher than other EU countries of similar standing (but not as high as the basket cases of Spain, Portugal, Italy and Greece). That France's unemployment has been consistently higher than the UK's and Germany's really should concern the French.

The charts below show the French and UK unemployment rates. They show that UK unemployment has been consistently lower than Frances and that the UK has recovered from the Global Financial Crisis while France has not. Yet these two countries are neighbours, with broadly similar populations and similar industrial/service based economies.

One explanation offered for this is France's inflexible labour market. The maximum working week is set at 35 hours, there are strict laws about when people can work, generous minimum paid holiday (30 days a year compared to Germany's 20) and employment protection which makes it very difficult for firms to let workers go.

The French government wish to relax labour laws so that while those in work might be a little worse off there will be more jobs overall. 

This is a supply-side policy and copies the process begun in their neighbour, the UK, as early as 1981. This type of supply-side policy is called deregulation. The hope is that the reforms will give firms greater flexibility, so they become more responsive to customers and profitable, and encourage them to take on more employees because there is less risk they become 'stuck' with staff they don't need.

This is being strongly opposed by French Trade Unions who are engaging in nationwide strikes.

The article below explains the policy changes and also suggests that this is a battle between those currently in work and those who would like to be, but can't get jobs in the current climate.

The data certainly suggests that there is something stopping the French labour market from working efficiently and that this will cost France economic growth and give the French generally a lower standard of living.

The BBC article is here

This article is more directly applicable to IB students, but VCE students also need to understand the nature of Supply-side policies and their effects and also the difficulties that can be encountered in implementing them. There is no doubt that creating a more flexible labour market is one aim of supply-side policy and it will result in lower wage rate, but higher employment in the short-run, while allowing higher long-run growth.

The 'Prepare - trial - hire' initiative aims to reduce youth unemployment

An important measure in the Australian Federal Budget is the so called PaTH initiative. It replaces 'Work for the dole' for young people (although that is available after a year of unemployment).

The PaTH initiative (it stands for Prepare, Trial and Hire) is a supply-side policy initiative to try to tackle the problem of structural unemployment among young workers.

Structural unemployment arises because of a mismatch between the skills workers have and the skills needed to fill job vacancies. Young workers have the disadvantages of no experience and no in-work skills. Training workers is expensive and is therefore a cost of employment. If the cost of employing workers can be reduced somehow then firms will hire more of them.

The chart clearly shows unemployment among young workers is higher than over 25's

The ultimate goal of this policy is to shift the Aggregate Supply curve to the right. The policy does this by increasing the supply of skilled workers. It does not assume that all young unemployed workers have no skills, but does assume that the lack of current skills means that some unemployed are not really employable and so not truly part of the workforce (or labourforce/labour supply) available to the economy.

The scheme works by paying the young unemployed  $100 a week extra on their benefits to take part in the early stages of the scheme. This is important because they need an incentive. If there was no additional payment the disadvantages of travel to work costs and getting up early each day etc. would mean many would prefer to stay out of work.

After the first two stages of the scheme employers receive help for six months to pay the wages of the young workers they hire - anothVCEer incentive. This is in addition to $1000 paid to firms at the early stage of the scheme. This payment, of between $6,500 and $10,000 helps offset the training costs of the new workers. With hope after six months of employment the new worker is adding more than the value of their wages to the firms revenue and will keep their job.

Will this work? We don't know until we try it. The incentives on both sides of the market have to be enough to fill the 30,000 places a year. It is clear not all 30,000 will go on to full time permanent jobs, but some should. Overall this measure should help to contribute to Australia's economic growth and lower unemployment. However it will do so only slowly.

The Age explains the scheme in detail here

This article relates to an important measure in the Australian Federal Budget 2016. VCE students need to know the details (plenty in The Age article). IB students can use it as an example of supply-side policy and should be able to analyse the effects in the AD/AS model.

Some reflections on the lowering of company profit tax

The Budget proposed lowering the rate of company tax to 25%. This is an example of supply-side policy and deserves some examination.

The first point to make is that the way this tax reduction is being implemented is getting some bad press. This is because the smaller the business the sooner the profit tax rate will fall. 'Small businesses' will enjoy the cut first, defined as companies turning over (have revenue of) $10 million. That's up from $2 million.

Over the next few years that turnover limit will gradually be increased to $1 billion. Some have chosen to ridicule the use of the term 'small business' in this context. Clearly that is irrelevant - this is a supply-side measure to encourage investment and so long-term economic growth.

The issue is that Australia now finds itself with a relatively high corporate tax rate. This means the incentive to make Australia your base of operation is diminished. And the problem has got worse since the Henry Commission on tax reform recommended dropping the rate to 25% in 2010, over the period many countries have dropped their company tax rate even further.

So the Australian profit tax rate has become far less attractive over the period 2005 to 2015. This may be diverting potential Foreign Direct Investment from Australia and is leaving Australian companies a smaller pool of retained profit to reinvest in their businesses. 

So the aim of the company tax cut is to improve the supply-side performance of the economy, raising the rate of economic growth (shifting the Long Run Aggregate Supply Curve to the right more quickly.

It is important to remember that supply-side policy is competitive too. Having a supply-side policy isn't enough, it has to be a policy that narrows the gap between you and the 'leader' otherwise they just get more competitive than you.

The Guardian looks more widely at tax and the 2016 Budget here

This article has equal relevance to IB and VCE students. VCE students need to know the detail of the tax cut exactly, but both groups need to understand the operation of supply-side policies.

2016 Australian Federal Budget

The 2016 Budget contains many measures and it is vital that VCE students are familiar with the major ones and the effect they have on the Budget outcome. The good news is that because there is about to be an election there are fewer new measures than usual. (However there may be a second Budget this year so this may be a short lived advantage.)

It is not possible to analyse the Budget in full in a blog. For now I am providing links to useful articles which can help you get to grips with the important measures and outcomes.

The first article from the ABC is called by them, a 'Cheat Sheet'. It provides important data on the Budget outcomes and provides estimates for economic indicators. It shows also the level of Australian National Debt compared to other countries and the changes to major expenditure programs.

A BBC article gives the main highlights of the Budget. Because it is a foreign publication the BBC only picks out the really significant announcements, so reducing the clutter. That does not mean you must not look at individual measures more closely - but this is a start. It sees the 'Google Tax' as the most noteworthy item.

Traditionally we look at which groups gain and which loose from a Budget. The ABC has an interactive page for you to check through.

The Age has a portal page to its full Budget coverage where you can find articles on the major measures in the Budget.

The chart below is from SBS. It shows the effect of 'Bracket Creep' (fiscal drag). That is as wages rise due to inflation compensating pay increases people start to pay a higher rate of tax because they move into a higher tax bracket. The graph illustrates how this has happened over the years. In this Budget there was a one-off rise in the 32.5% to 37% tax bracket threshold from $80k to $87k. A key question then is why not index link all tax thresholds every year automatically?

ABC Cheat Sheet is here

BBC Summary is here

ABC Winners and losers here

The Age Budget portal is here

This post is critical for VCE students who must know the measures included in this Budget for the exam. Try to classify measures by 'Demand side' and 'Supply side' measures. Consider the effects the measures will have on economic goals and understand the pressures which have led to those measures being implemented.

IB students can treat this as a case study in Fiscal Policy.

"Monetary policy is not enough."

The Governor of the Reserve Bank of Australia (RBA) has told a New York conference that monetary policy is not enough to allow faster growth. he suspects that the world has entered a period of much lower 'trend growth'.

Stevens has made a number of points and this is a quick summary of what I think he means:

1. With nine years of low interest rates there is no longer any room to boost Aggregate Demand (AD) with lower rates.
2. Simply 'printing money' ('Quantitative easing' or 'helicopter money) will also be ineffective.

Low confidence among both consumers and firms contribute to these first two points, but simply that the incentive provided by these measures is now too small. He therefore thinks the use of negative interest rates (as in Japan and the EU) will fail to raise economic growth.

3. More than monetary policy is needed to promote growth and that should be provided by increased government infrastructure spending.

He makes the point that this can be funded very cheaply by issuing bonds (government debt) at record low interest rates and that the return on this investment will far exceed the borrowing cost.

Stevens is not calling for a naive Keynesian fiscal boost. However he is calling for an end to 'austerity' and a blind adherence to the idea that any government Budget deficit is bad. (Some are, some are not.) What Stevens is calling for are projects that will assist the private sector to grow through active supply side policies which have the advantage of adding to AD as well.

Finally Stevens talks about the wider implications of monetary policy. He pointed out that the low interest rates are destroying retirement plans. Pension (superannuation) funds rely on investing in safe assets such as bonds. The interest rates earned on these assets are so low many find their retirement plans are being ruined. A short period of low interest rates will not affect pensions too badly, they can catch up, but we are now nearly a decade into low rates and that has serious implications.

Business Insider covers his comments here

This article is applicable to VCE and IB students. Australia has record low interest rates and the 'policy mix' between monetary and budgetary policy in Australia is a crucially important area of study. For IB students the limitations of monetary policy and the interaction between fiscal and monetary policy and the operation of supply side policy in the policy mix is directly relevant to Paper 1.

RET, forgotten for a long time, but not gone yet.

The RET is the Renewable Energy Target. It states that Australia should source 20% of its energy generation from renewable sources by 2020.

For Australia the most obvious renewable sources are wind and solar. Wind because huge wind farms can be built in the empty spaces of Australia with minimal environmental impact. Solar because parts of Australia get plenty of sunshine, although actually solar works on cloudy days too.

The point of the RET is to reduce carbon emissions. If renewable sources are used then less coal needs to be burned. Australian coal, especially Victorian coal (brown coal) is really quite 'dirty' with high CO2 emissions.

The government does not like renewable energy. They don't really think action on climate change is important and many suspect they are just pro-mining as they receive strong financial support from that sector.

The government now have a report on what to do with the RET. Written by a climate change sceptic it's likely to add to Australia's disgraceful reputation as a nation of environmental terrorists too poorly educated to grasp the nature of scientific probability.

The Guardian discusses the likely impact of cutting back or abolishing the RET below.

The Guardian article is here

Politics vs Economics - it's about the facts.

The government want to reduce welfare spending and appointed a multi-millionaire to look at Indigenous welfare and employment to advise them on how to do it. You might think that's an odd choice.

Even odder is that Andrew Forrest decided to report on all welfare spending, not just Indigenous welfare.

He reported that basically welfare is wasted and it should be cut. The trouble is there is not really any evidence to back up his claims that 'welfare spending is out of control'. Nor is Australia's welfare spending large by international comparison, its actually quite similar as a proportion of total government spending.

The argument put forward by government is a supply-side one. If welfare is cut people will be more inclined to work.

However I don't need to bang on about this because below is an article which explains it very clearly. 

Greg Jericho's article is here 

Work for the dole. Will it work?

The government wish to introduce a 'Work for the dole' scheme that will see all unemployed people under 60 being required to do community based work at some point. Details can be found in news reports.

The policy is a supply-side measure. There are several arguments for it.

* There is an increased incentive to the unemployed people to take a job, any job, as they no longer get as much leisure time while out of work.
* The unemployed maintain a 'working routine' and therefore their skills and habits don't decline as quickly making them more attractive to employers despite their period of inactivity.
* The cost to the state of unemployment is not as great as something of value is recovered in return for benefits.

The argument really revolves around the idea that the unemployed are voluntarily unemployed to some extent. Some don't want jobs and others are waiting for the 'right job'. By making unemployment more costly (this includes falls in the value of benefits announced in the budget) by demanding more effort then those out of work are more likely to accept a job offered to them. This effectively shortens the period of unemployment and helps match people to vacancies more willingly.

The problem is that the economic research on this issue says that it does not work. The Saturday Paper reviews this topic below.

The Saturday Paper article is here

The Economic consequences of Mr Abbott

Joe Stiglitz is possibly the economist who behaves most like Keynes in the modern era. He is never short of advice.

In his current visit to Australia he has been quick to point out the consequences of the current governments policy and he does not much like them. 

This is directly relevant to Budgetary and Supply side policy for Unit 4.

Independent Australia provides words and video here

Signpost to 2014 budget

The Treasurer, Joe hockey, spoke last night about likely measures in the 2014 budget and his vision of the future for public finances.

The Budget is a major issue for the exam and understanding the philosophy of the budget measures is important. His speech last night gave important clues to this and it is useful to get a head start on that before the mind-numbing detail of the actual budget itself.

Hockey is concerned that government spending is growing in an unsustainable way and that this will lead to a growing structural budget deficit in the future. It's simple, if spending always grows faster than revenue then this will happen.

Note that most countries are envious of Australia's public finances. Australia has a low level of public debt and a low borrowing requirement as a share of GDP compared with other developed countries. 

That isn't what Hockey is worried about despite his attempt to persuade people there is a 'Budget crisis'. That's just politics.

Hockey is worried that unless the projected rise in spending is brought down then taxes will have to rise in the future to balance the budget.

He may be right. Australia's public spending rises by about 3.75% a year. If growth is less than 3.75% and tax rates stay the same then the budget deficit will widen. 

Some question the need to act drastically now. Growth could easily exceed 3.75% and 'bracket creep' would actually raise tax revenues faster than that. Government's would however be foolish to rely on that rate of growth.

Actually what Hockey is saying is that the growth years are over for Australia. Australia is a low productivity, high cost developed country which has lived off natural resource income while the comparative situation got worse. He also knows that an ageing population is going to put more strain on welfare spending over the next few decades. He is saying 'Winter is coming'.

The Age covers his speech here

Emphasising long run growth and the supply side

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. 

The Guardian covers the issue here

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 movement of the PPF represents long run economic growth.

Stevens speech is reported by SBS here

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 Guardian reports the Productivity Commission findings here

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.

The Guardian covers the story here

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?

The ABC cover the story here