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This is Rudd's integrity

A video on misuse of taxpayer's money for political advertise by a journalist:

It is a pity that the video does not have teh TV footages of Rudd's orginal shows on TV before the Australian federal 2007 election.

The last Sunday's Insider of the ABC replayed thsoe TV footages.

Two economists - Smith and Fane on the RSPT

Comments on George Fane “Reputation of the nation on the line”, 31/05/2010, http://www.theaustralian.com.au/news/opinion/reputation-of-the-nation-on-the-line/story-e6frg6zo-1225873225249

Swan should realise that economists have many different views. Some economists have supported the idea of a profit based royalty regime in preference of price based royalty regime as shown by the so called 20 leading economists' statement, although unhelpful to the current debate of the RSPT, does not mean his chosen RSPT is good.

It seems that some economists are political rather than non-political, and normative as opposed to positive in their advocate.

Please not that both George Fane mentioned that he (the current author) and Ben Smith (one of the 20 leading economists) made the point about point in 1986 on the issue of the credit that the Swan and the government are claiming.

Fane's article is excellent and in my view much better than the statement by the 20 so called leading economists last week or before last. Fane is more objective and the particular RSPT specific, as opposed to the 20 economists' ignorance of the particulars of the specific RSPT and argue about differences between royalty regimes between profit based and price based.

Further, the 20 economists are pro-government and highly political, while Fane is largely acdemic, in my view. The latter requires much more courage than the former, even in Australian context.

What a difference between economists that makes!

PS: by the way, I know both Smith and Fane and have attended their lectures at the ANU in the 1990s. Smith should also remember me if he is not very forgetful.

The Australian on Rudd

Thie following appears to be editorial from The Australian, and is an useful reference for how the media have become disilllusioned with Rudd:

KEVIN Rudd's double standard in abandoning his own rules on government advertising is self-evident. So blatant and audacious is the backflip that any further commentary would be superfluous. Nor will we take issue with the unfortunate timing that saw the Prime Minister opening an important cancer research facility in NSW on the day that his election campaign claim from 2007- that government advertising was "a long-term cancer on our democracy" - returned to haunt him. That unfortunate coincidence, however, underlines the carelessness of Mr Rudd's choice of words in an otherwise justifiable complaint about the Howard government's extravagant use of taxpayer-funded advertising.

Hyperbole has been a feature of the Rudd government's rhetoric on numerous occasions and, not for the first time, it has come back to haunt it. Two years ago, Mr Rudd branded artist Bill Henson's controversial photographs of naked adolescents "absolutely revolting". He warned of a binge-drinking "epidemic" among the young and, later, condemned people-smugglers as the "vilest form of life", implying that their crimes are worse than serial child molestation or mass murder. The government repeatedly claimed last year that we were "amidst the most savage global recession since the Great Depression." In his Monthly essay on the death of neo-liberalism, Mr Rudd announced that unchecked market forces had brought capitalism to the "precipice", triggering "events of a truly seismic significance, events that mark a turning point between one epoch and the next". And who could forget our "the greatest moral challenge"?

On a crucial and complex issue like the taxation of the mining industry, the government must tone down its rhetoric and clarify its position. The problem with its $38 million television advertising blitz, however, is that it is a belated, desperate attempt to fix something that the government has broken, just as it has broken the pink-batts and school building programs.

Up to a month ago, there was a broad consensus between government and business that resource taxation needed reform. The intellectual case for a profits-based tax to replace state-based royalties was clear. A single tax, collected by Canberra and distributed to the states, would be more efficient. It would be based not on the volume of minerals extracted, but on super profits or rents. Regular profits would continue to be subject to company tax and only those profits deemed to be "rent", that is profit not needed as an incentive for production, would face the RRT. It was and remains a sound proposition that would spread a share of the nation's resources wealth among all citizens and allow the government to lower company tax.

In a sector responsible for more than one-third of Australia's exports, however, the impost should not be punitive or discourage further investment or exploration. Any flight of capital from the Pilbara and Queensland to overseas mining nations would be disastrous.

Some degree of resistance from the mining sector about a new tax was probably inevitable. But the government hampered its cause by failing to identify the pitfalls in the scheme designed by Treasury secretary Ken Henry. The super-profit threshold of 6 per cent was too low when a more realistic level of about 11 per cent would have brought the onshore resources tax broadly into line with the offshore petroleum tax. And the matter was complicated by the ill-conceived notion of underwriting up to 40 per cent of miners' losses.

Such ham-fisted management saw the issue escalate into a divisive debate between the main protagonists as the public looks on nervously. They will not be reassured by Special Minister of State Joe Ludwig's admission on Friday that the changes "affect the value of capital assets and impact on financial markets", an apparent contradiction of Mr Rudd's position.

Throughout the row, the problem with the government's sales pitch has been that the tax needed more thorough consultation and policy work. Now the government is resorting to advertising to salvage public support for the measure, despite Mr Rudd's 2007 promise that he would submit every campaign to the auditor-general. That promise, not written down but delivered to reporters with "my absolute 100 per cent guarantee that that will occur . . . and each one of you here can hold me accountable for that" was a good sound bite on the election trail. The lesson, however, is as old as King Canute. If something is too good to be true, leaders should not promise to deliver it if they want to remain credible.


Rudd government's huge BER waste

It was suspected that a large sum of the BER money was wasted after some cases were reported.

Now The Australians reports about $5 billion of the dozen billions of the BER was wasted. See:


To quote: "THE $16.2 billion schools stimulus scheme is set to become the biggest single waste of money in the nation's history, with about $5bn to be wasted in overcharging, needless bureaucratic costs, pointless over-design of buildings and fee gouging by managing contractors.

The Weekend Australian has found there is a systemic problem with the cost of buildings provided to public schools, with most paying double -- in some cases up to 10 times -- what they should be for buildings. Of the $11.27bn handed to the state governments to deliver schools to public buildings, about $5bn has been wasted, when compared to construction rates achieved by Catholic and private schools and industry benchmarks."

This has been a hallmark of Rudd government's budget management and program delivery.

It seems to be bordering on economic crime to a very high order.

China in action for reducing emissions

Comments on Huw Slater “Why China could be leading the world on climate change”, http://www.eastasiaforum.org/2010/05/29/why-china-could-be-leading-the-world-on-climate-change/

There are, however, a number of points.

Firstly, it seems unclear or confusing to what really China's strategy and tactics at Copenhagen, with different parties claiming different things. The outcome of the meeting is clear, but the real causes are not.

Secondly, there are, of course, unfortunate consequences following Copenhagen, as reflected in delays in actions in some countries.

Thirdly, if Slater is right in that China is introducing a carbon tax, there are implications for both China and other countries.

Carbon tax is the most efficient and transparent instrument to reduce emissions if it applies to all carbon sources or uses. If China is to adopt such a tax, it is in the right direction.

Due to its transparency, it can also send a much clearer and more irrefutable signal other countries in terms of its action in climate change and emissions reduction.

The point is that China, as a developing country, is moving fast in combating climate change.

It would lay an interesting foundation for future emission reductions work, such as what had also been talked about as carbon leakage by some other countries. A carbon tax is better in understanding that leakage than administrative measures.

I should add that an integral issue associated with carbon leakage is international equity in emissions and their reductions.

The most equitable solution is equal emission right or quota allocation and then each pay for their emissions and everyone has the same entitlement to the global revenue from that. But we are a long way from that principle yet.

That issue needs very careful and just consideration.

Only when that issue is done properly, the global task of emissions reduction has more chances to succeed.


Who is guilty in the RSPT war?

Comments on George Megalogenis “Shrill leaders bicker”, 29/05/2010, http://blogs.theaustralian.news.com.au/meganomics/index.php/theaustralian/comments/shrill_leaders_bicker/

GM makes the matter like that every side is equally bad and no sides are good or better. That itself is a problem, isn't it?

On this particular matter of RSPT, the Rudd government is clearly the guilty side, becoming more so by spending taxpayers' money on advertising.

Miners are justified in their actions for a just right to be taxed fairly.

GM's analysis is a bit speculative and suffers from a narrow and selfish perspective, that is, no matter government does, it has the rights and can be justified.

That put the government above everyone. Is that right? The answer is definitely no.

It should be noted that it is that very line of thinking among some Australians that is the very environment that some government is so irresponsible, arbitrary and wayward, and in gross contempt of the taxpayers.

Of course, it is true that the opposition is also guilty in some areas, like the resorting to the “pacific solution”.

But the miners are different to the two political parties in the current state of affairs.


Monetary policies and allocative efficiency

Second comments on Feng Lu “China needs to raise interest rates”, 27/05/2010, http://www.eastasiaforum.org/2010/05/27/china-needs-to-raise-interest-rates/
In my last comment (see here), I said the importance and benefits of using price signal as a monetary policy instrument. In addition to what's been said there, the allocative efficiency should not be overlooked and underestimated.

Having said that, I was wondering how the Chinese monetary authority is going to use other measures to rein in excessive money already supplied and in circulation.

I am not sure the normal monetary policy of open market operation in west countries, especially in the US, may necessarily apply with the same effects in China.

If money in circulation is excessive and banking intermediaries are restoring their lending to the normal levels prior to the GFC onslaught, then it is imperative to use measures to reduce the amount of money in circulation to combat inflation pressures.

It remains to be seen how the Chinese monetary authority will do that in the most effective and efficient way in the sense that it has the minimum effects on allocative efficiency in the economy.

Henry has lost political independence

Comments on Robert Gottliebsen “Rudd will pay for RSPT intransigence”, 28/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/Mining-BHP-Rio-RSPT-Australian-dollar-pd20100528-5UTB2?OpenDocument&src=sph

Gottliebsen has made the correct observation that "Treasury as the designers of the flawed tax and one of the key groups publicly attacking the miners has lost its public service independence. Under the Westminster system it is the politicians who should do the attacking and the public servants should implement polices. The position of Ken Henry as the head of Treasury is not sustainable."

The public generally does not want to lay blames to public servants. However, the more the public look at the mistakes the Rudd government has made in the past 2.5 years, the more they realise it was likely due to the combination of Rudd management and leadership styles and the impractical, inexperience and poor quality in some quarters of the top public bureaucrats in charge.

That is unfortunately and sadly true.

Australia needs more independent voices, as opposed to the bureaucrats who serve the government of the day and government commissioned studies or modellings.

We only need a small part of the savings from either the wastes in government programs, or from savings from the ineffectiveness of some programs to fund independent institutions to improve the quality of the governance government.

Those IOUs don't work

Comments on John Abernethy “A way Europe can survive”, 28/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/European-debt-crisis-pd20100527-5U5E8?OpenDocument&src=sph

Do any of the proposed inter-government and Central Bank IOUs which will be forgiven at a future date make the moral hazard issue between different European member countries more or less a problem?

It does not sound quite right from that point of view.

My solution to the current European economic and financial problems would be to allow intra-euro trade measures to have effective "devaluation" of some euro members.

Roskam exposes flaws of Rudd economics

In a featured article in The Australian Financial Review today, 28/05/2010, page 58, John Roskan has an excellent exposition of Rudd's distorted and selective approaches to economics.
Roskam states that Rudd, in his economic essay published in the Monthly in February 2009, went so far in attacking the so called "neo-liberals and their belief in the efficient-market hypothesis", and branded their "economic modelling for causing the global financial crisis".

But now Rudd is using a never tried theoretic modelling involving many assumptions as the basis for his Resource Super Profits Tax.

What Roskam concludes is that "it seems Rudd has no qualms about theoretical models when it's social democrats instead of neo-liberals doing the modelling."

By the way, the AFR editorial, on the same page, is titled: "a way out of the quagmire" and has the following advice to Rudd and Swan and their government:

"The RSPT is nor so neutral after all. Another to dislike the silent partner model is that it merely postpones the risk of fiscal shocks."

"The government needs to examine all these options, and more."

Note: Those options include: Professor Garnaut's suggestion of replacing the RSPT with a version of the petroleum resource rent tax. The "neutral" mentioned above means the Brownian theoretical basis of the RSPT that it does not distorts investment incentives and decisions.

Interest rates the preferred policy instruments

Comments on Feng Lu “China needs to raise interest rates”, 27/05/2010, http://www.eastasiaforum.org/2010/05/27/china-needs-to-raise-interest-rates/

Clearly the monetary authority in China should use both interest rates and other quantitative measures to have the most effective and optimal monetary policy effects.

One of the problems with not using interest rates is that it undervalues the costs of finance and the value of savings in the most direct way.

The benefits of savings are not accruing to savers, but are realised by the banks or wasted in the inefficiency in finance due to quantitative measures.

If it is not in a liquidity trap situation, monetary authorities should use price signals as much as possible, that is, interest rates, as their policy instruments.

Optimality in valuing individuals and community, as well as referencing and substance

Second and third comments on Peter Friedman “Plagiarism and China’s future economic development”, http://www.eastasiaforum.org/2010/05/26/plagiarism-and-chinas-future-economic-development/

It would make the points of my earlier clear by stating the following:

1. There is a difference in terms of the weights given to individuals and community/nation between East Asian countries and the mainstream western countries. There may be a case of optimal weighting, although even optimal weighting may mean different weighting in different countries.

2. There are both tendances of under-referencing and over-referencing in the world.

3. Under-referencing has the danger of under valuing the sources and plagiarism.

4. Over-referencing has the danger of referencing for referencing sake and using referencing rather than own creativity to shore up a paper, document and etc. That is to say, some papers or documents may not have their own real substance, but use impressive references as a cover for poor quality.

5. Again, there may be a case for optimal referencing. Yet again, optimal referencing may vary between countries, even professions.

An important point that I left out just a moment ago is that Peter Friedman may have inadvertently created an undesirable and wrong impression that the Chinese don't value property rights especially intellectual ones and plagiarism is deemed as the right thing by the Chinese.

Clearly that is not the case in China and the absolute majority despise plagiarism.

A strong Australian federation needs strong States

Comments on Richard Court “States must stop Canberra”, 28/05/2010, http://www.theaustralian.com.au/news/opinion/states-must-stop-canberra-stealing-their-wealth/story-e6frg6zo-1225872283186

Sadly but the main points of Richard Court are true.

The imbalance in the Australian federation is ever increasing and towards a higher and higher degree of centralisation.

There should be some counter balancing factor to prevent further power centralisation to Canberra, because the Rudd government has shown federal government can be even worse in service delivery and policy development, demonstrated by home insulation, the BER, the Indigenous housing and the RSPT policy.

The balance should be that a State right will remain State's only and only if the State agree to hand it to Canberra.

Further, the GST allocation by the CGC should also need to catch up with contemporary policy development and needs to take efficiency and incentive and property rights into consideration, just as we move to efficient funding for health, for example.

CGC is seriously out of step with contemporary thinking.

Old high School economics not good for the nation

Comments on Samantha Maiden “Ken’s of Keynesington”, 28/05/2010, http://blogs.theaustralian.news.com.au/samanthamaiden/index.php/theaustralian/comments/kens_of_keynesington/

Comments on Unfortunate, Ken does not appear to have a sense of general equilibrium economics in his mind when he said that because his memory of high school was so strong.

Businesses may bear more of a profit tax, but they also have the option to pass some of the tax if all relevant businesses with the same competing products have to pay the tax to reduce the impact on the profits.

That may be even primary school economics, or more pertinently business without schooling.

No wonder why the government has been in deep shit on so many fronts in terms of policies.

No one of the sources is clear enough for the public to see.


Pointed and detailed comments on leading economists' statement

The following is the 20 leading Australian economists' statement yesterday with annotated comments by me.
[Introduction: The statement by those economists was meant to be correctly informative to the public. But unfortunately it adds to more misinformation that very statement alleged to clear up. It is not only the economic principle those economists rely on but also the particular design and the proposed implementation that matters.
The following, shown in brackets, is some comments by an anonymous and amateur economist (as opposed to those leading economists), purely for purpose of balancing, or looking at the issue from a slightly different point of view. It is not meant to be very formal and completely self-contained, but as a response to some of the points in the economists’ statement.
While those comments are for the points in the economists’ statement, there is an important to make, that is, the proposed application of the RSPT to existing mines that is one of the most problematic issues of the RSPT at its current form.]


The following economists support the introduction of a resource rent tax to replace existing royalties. Although it is appropriate to debate modifications to the design of the proposed Resource Super Profits Tax (RSPT), the current public criticism of the proposed tax has been dominated by misinformation. [Both sides of the current debate have used and are guilty of misinformation.]

Mining is different to other industries in that it uses and depletes natural resources, Some return on those resources should flow to the Australian public [though correct, a bit unclear given that royalties exist already]. The existing royalty system reflects the fact that it is desirable to levy a charge for access to publicly owned mineral resources, in addition to normal corporate income tax.

There is no reason to expect a net contraction in mining over the longer term as a result of replacing royalties with the proposed resource rent tax [correct if done properly, but the proposed RSPT is not designed properly at its current form]. This is because a tax on economic rent of non-renewable resources is a more efficient way of raising revenue than taxing mining production (royalties) [correct, however, it does not mean any tax in the name of a rent tax will be good or equally good].

Royalties tax production no matter how profitable [that effectively reflects the costs of non-renewable resources, not just demand for them. Why is that not good?]. A resource rent tax only taxes production when it is profitable and only after all costs have been deducted [so in some circumstances the non-renewable resources are given away freely that certainly does not reflect any value of those nonrenewables]. If the project does not make a profit, some of its costs are potentially refundable or otherwise claimable [why should taxpayers be subject to those risks?]. This means the Government shares the risk associated with exploitation of our minerals resources. So, the proposed design for the RSPT effectively only taxes those profits over and above the hurdle rate of return for a mine (that is, its risk-adjusted cost of capital), after allowance is made for the proposed 40% rebate of the cost of developing each mine [these famous economists should talk to bankers and financiers to understand real world financing].

Given the Government’s commitment to bearing some of the risk by refunding losses, uplifting undeducted capital and losses by anything above a risk free rate would create potential distortions. Any increase in the uplift rate would require a corresponding modification of the risk shared with government. Any modifications in the design of the RSPT should be underpinned with evidence about the relative shares of returns for natural resources as well as returns on other factors of capital. [This is one of the key shortcomings of the current RSPT, isn’t it? If the economic principle is to get the mineral rent, why should the government need to get into risk sharing? The economic rent should reflect the non-renewable nature.]

Moving from taxing mobile capital towards less mobile tax bases in this way is consistent with economic theory and recent work of the OECD and IMF on the application of economic principles to guide taxation policy [isn’t the tax on capital as well? Isn’t capital more mobile than other factors or mineral production?]. Australia has a long history of resource taxation and resource economics. The Petroleum Resource Rent Tax that started almost 24 years ago only applies to some sites offshore and represented a significant practical and conceptual advance in our thinking and tax practice [why did the government use that design as the basis of the new tax design?]. Applying this principle more broadly to other minerals represents the next measured but difficult step [devil is in the details, isn’t it?].

The RSPT will reduce the profitability of mining companies and the value of the exploration and mining rights allocated to them by Australian governments on behalf of the public. The current high profitability of these companies means that this is an appropriate time for them to adjust to a more efficient and equitable system of sharing the value of those rights. [While it is always not a bad time to make taxes more efficient at any time, there is a danger that the current design if largely based income distribution could highly distort good principles of tax design, by purely grabbing any profits available at the time and sacrificing the underlying efficiency of a more efficient tax.]

The RSPT has been criticised on the basis that revenues are dependent on cyclical fluctuations in mining sector profitability [not sure this is one of current criticisms]. In reality, this is a substantial advantage of this aspect of the tax [both good and bad from rent point of view for non renewable natural resources. Imagine no rents collected at all when no “super profits realised in some years, is that a good thing?]. The counter-cyclical nature of tax revenues will help to stabilise both the macro-economy and the level of activity of the mining sector [so is the current royalties, it falls with both outputs and prices of minerals].

Fred Argy AO, former director of the Economic Planning Advisory Council (EPAC)
Jeff Borland, Professor of Economics, University of Melbourne
Deborah Cobb-Clark, Director of the Melbourne Institute of Applied Economic and Social Research and Ronald F Henderson Professor, University of Melbourne
Timothy Coelli, Professor of Economics, University of Queensland
Richard Denniss, Executive Director, The Australia Institute
Allan Fels AO, Dean, Australia and NZ School of Government
John Freebairn, Ritchie Chair of Economics, University of Melbourne
Quentin Grafton, Professor of Economics, Crawford School of Economics, Australian National University
Nicholas Gruen, CEO Lateral Economics, Director of the Business Council of Australiaʼs New Directions economic reform project from 1997 to 2000.
Ross Guest, Professor of Economics, Griffith University
Clive Hamilton, Professor of Public Ethics at Centre for Applied Philosophy and Public Ethics and Vice-Chancellor's Chair, Charles Sturt University.
Michael Keating AC, former head of the Australian Public Service and Department of Prime Minister and Cabinet
John Langmore, Professorial Fellow in the Political Science Department at the University of Melbourne
John Mangan, Professor of Economics, University of Queensland
Flavio Menezes, Professor and Head of School of Economics, University of Queensland
Christopher OʼDonnell, Professor and Deputy Head of School Economics, University of Queensland
David Pannell, Federation Fellow in Agricultural and Resource Economics, University of Western Australia
John Quiggin, Federation Fellow in Economics and Political Science, University of Queensland
Prasada Rao, Australian Research Council Professorial Fellow, University of Queensland
John Rolfe, Professor of Economics, Central Queensland University
Ben Smith, Associate Professor of Economics, Australian National University
David Throsby, Professor of Economics, Macquarie University

Frankel's proposal on "Gulfs in America’s energy security"

Comments on Jeffrey Frankel “Gulfs in America’s energy security, and the Louisiana oil blowout”, 26/05/2010, http://www.eastasiaforum.org/2010/05/26/gulfs-in-americas-energy-security-and-the-louisiana-oil-blowout/

An interesting proposal and point.

For the proposal to be more valuable and relevant, it would be useful to also calculate the costs of that proposal under reasonable and plausible assumptions and probabilities for different scenarios.

Alternatively, instead of preparing for the emergent scenarios, it would be better to develop strategies that promote cooperation, peace and stability in the world to prevent them from occurring.

Imagine all the world major and large countries are to do the same as Professor Frankel proposes, what a world will that be?

A collective security mechanism and system is better than the situation of prison’s dilemma and everyone considering only his own interest.

So, it is an issue and question of cost and benefit analysis, and choices, after all.

PS: I made the following second comments:
The point I was making is:

Jeffrey Frankel raises and attempts to answer the following question "what larger implications should we draw for domestic oil drilling?"
To me, the implications he draws do not appear to be large enough.
From a more strategic or higher level, a different set of implications can be drawn.

Is Henry kidding himself and the nation?

Comment on report "Mining super-profits tax won't hit cost of living, Ken Henry tells Senate estimates", by Samantha Maiden of the Australian, 27/05/2010, http://www.theaustralian.com.au/business/in-depth/mining-super-profits-tax-wont-hit-cost-of-living-ken-henry-tells-senate-estimates/story-fn5eo6td-1225871907112

Dr Henry says he had learned in high school that a “profits-based tax should not affect prices" (see the report belwo).

Was that underlying the design of the company taxes especially the mineral tax in his tax review report and the government's super resource profit tax?

Isn't it ridiculous misunderstanding of economics, businesses and taxation?

Does he really believe that businesses don’t pass on any of profit tax to consumers in a country?

Just imagine that capital is taxed just like businesses have to pay 90% of profit tax in a country and no tax in all other countries. Does De Henry really mean that businesses profitability after tax in this country would be only 10% of businesses in all other countries?

Is that what Dr Henry implies?

Businesses will pass some of the profit tax, though not as much as a sales tax, on to consumers.

His high school economics knowledge, unfortunately, is not good and far from enough on this matter!

He has exposed himself clearly and shown that unambiguously!

It is a pity that Australia has this person as the secretary of its Treasury department in charge of economic policies.

Poor, poor!

The following is the report:
TREASURY secretary Ken Henry has rubbished Tony Abbott's claims that the government's mining super profits tax would raise the cost of living.

And he has also dimissed assertions that resources companies saved Australia from recession, telling a Senate hearing that if the nation had followed the pattern of mining job losses it would have had an unemployment rate of 19 per cent.
Dr Henry is appearing before the Senate estimates hearing in Canberra this morning where he is being quizzed on the Rudd government's resource super profits tax, which he helped design through his work on the Henry tax review.
Asked about the Opposition leader's claim that the tax would hit the cost of living, Dr Henry said he had learned in high school that a “profits-based tax should not affect prices.”
“Prices should not be affected,” he said.
He also said the mining industry had actually experienced quite a deep recession, undermining claims it had saved the nation from the global financial crisis.

“I've heard it said on a number of occasions, in fact I have lost count, that the mining industry saved Australia from recession,” Dr Henry told the hearing.
“These statements are not supported by the facts.”
In fact, he said, the mining industry had shed 15 per cent of jobs in the wake of the GFC.
“Had every industry in Australia behaved in the same way our unemployment would increase from 4.6 per cent to 19 per cent in six months,” he said.
Earlier this month, Liberal frontbencher Julie Bishop criticised the government's mining tax arguing it would hurt the industry that helped Australia the most during the GFC.
“Kevin Rudd likes to say that he saved Australia from the global financial crisis. In fact it wasn't his pink batt scheme or his scandalous school building program that saved us from the recession. It was the mining sector that continued to export our resources to booming economies like China,” she told Sky News on May 4.

This morning, the top public servant has also been asked about a front-page story in The Australian flagging a likely concession by the government in which it would lift the threshold definition of a super profit from 6 per cent to 12 per cent. This would be offset by removing the 40 per cent write-off for failed projects.
Dr Henry said he had no information to date that the government was considering any changes such that would affect the Rudd government's timetable to surplus by 2013.
If no offsetting decision was made it would effect the budget bottom line he conceded, but this was a “very big if”.
He also took aim at figures promoted by the Minerals Council of Australia suggesting mining companies are subjected to a much higher effective tax rate than the 17 per cent nominated by Wayne Swan when generous deductions are taken into account.
And he has also suggested a proposed rise in the superannuation guarantee from 9 to 12 per cent for workers to be paid by employers would come out of wages, not profits, suggesting the reforms will affect families' take home pay.

Different referencing styles

Comments on Peter Friedman “Plagiarism and China’s future economic development”, 26/05/2010, http://www.eastasiaforum.org/2010/05/26/plagiarism-and-chinas-future-economic-development/

I acknowledge that there are fundamental differences in values placed on community/country relative to individuals between China and East Asian countries as compared to West countries and that has been embedded in the education system.

There is no doubt about it in my mind and I interpret that as part of the differences in values between the two societies. I also expect that difference may play a role in shaping the future average of the “value” system for human beings.

In that sense, Peter Friedman has made an important contribution by pointing that out and highlighted.

However, that does not mean the whole education system in East Asia and China in particular is based on plagiarism and non-acknowledgement of inventions and ideas. That would be a gross over simplistic presentation and highly misleading.

I can just use two or three most famous and well known examples to show why that presentation is problematic and wrong. I guess most people with enough knowledge of China are likely to know Confucius, Marxism, Mao Zedong thought, including historical, foreign and indigenous ideas.

Few Chinese would dare not to acknowledge them and do plagiarism on them.

They show that the Chinese, even under communism, acknowledge property rights.

Some high profile plagiarism cases in the Chinese academic circle or at large are roundly firmly condemned in China, especially by many academic staff and intellectuals including students that can be seen from internet social or academic websites.

They are a disgrace, abnormal and represent a tiny element in Chinese intellectuals. They are equated to crime equivalent, in my view.

Having said that, I would like to argue that there is also a difference in the emphasis of referencing. While there is a tendance of insufficient referencing in some or most papers by Chinese authors, there is an equal tendance of “over” referencing by some western authors, in my view. Some of the references are unhelpful and probably irrelevant.

Referencing is seen as very important, especially for less well known authors so they “have” to show they have done enough research and are on top of the materials and the topics. So many publications may not have enough own real materials but use referencing to strengthen their reputation. That can be a potential problem for research, development and advance.

Of course, there is an equal danger in insufficient referencing on the other hand.

In short, I am not saying that Peter Friedman is completely wrong and as I said he made a useful contribution in understanding. But it should perhaps need to be pointed out what he presented is a small part of a whole and a partial story, although some difference in referencing is likely to firstly and strongly felt by people from the west or who are used to western style referencing, if one is observing enough.

Effective mining tax rates across countries

Comments on Dennis Shanahan “Kevin Rudd to backflip on mining tax rate”, 27/05/2010, http://www.theaustralian.com.au/business/in-depth/kevin-rudd-to-backflip-on-mining-tax-rate/story-fn5eo6td-1225871786155

If what the graph (copied from the article and attached below) shows is true, it means the effective tax rate on mining is already higher than most large producers for mineral and at the middle for petroleum, bearing in mind that some large oil producing countries are not shown.

Then what is the point to have the RSPT and why does Australia move to an even higher mining tax country?

While minerals are immobile, mining production is capital intensive. So why did those leading economists who issued a statement yesterday note this? Professional negligence, or economic incompetent?


Leading economists but with poor thinking

Comments on AAP report “20 leading economists, academics back Rudd's resources super-profits tax”, 26/05/2010, http://www.theaustralian.com.au/business/in-depth/leading-economists-academics-back-rudds-resources-super-profits-tax/story-fn5eo6td-1225871433101

These leading Australian economists are trying to clear the air, but they actually mudded the water even more.

They claim that the current debate is dominated by misinformation, but their biased statement without a full picture of the RSPT including its proposed application is highly and even more misleading.

They only talk about the principle of a resource rent tax in its best shape and form, but ignore completely the main shortcomings already embedded in the current RSPT.

This debate is not the general principle of a good resource rent tax, it is about the particular design and features of the RSPT. The mineral council has openly acknowledged a profit based resource rent tax is superior and made submissions for it in the Henry tax review process.

Those leading economists confused these two points, and are doing their partial analysis in vacuum.

And that is the most unfortunate part of the leading economists’ contribution.

One has to wonder how those leading Australian economists could do such a lousy job.

I am afraid to say that they are clearly and unfortunately abusing their reputation and do disservice to the nation.

Maybe that is the nature of the beast: partial analysis – that is their strength.

More capable people needed to lead the country

Comments on Paul Kelly “Labor is caught in a catch-22 of its own creation”, 26/05/2010, http://www.theaustralian.com.au/news/opinion/labor-is-caught-in-a-catch-22-of-its-own-creation/story-e6frg6zo-1225871284897

The whole RSPT drama turning now to a fiasco created by the Rudd government with Swan as the Treasurer and other two senior ministers also at the core of decision making without full cabinet participation in that process shows the four people at the core are totally incompetent and do not have a proper sense of economic management.

If this was the only economic issue they have created, it would be forgivable though nothing short of disappointing. Sadly that is not the case here in Australian federal politics over the past two and a half years.

There have been so many and big economic mistakes and mismanagement by this government in its first term in less than three years. The list is long: home insulation disaster, the BER program wastes, the Indigenous housing, the NBN, the public hospital take over, whatever you name it. Added to that was the case of cash handouts, not once but twice when the budget in deficits and debt rising.

We don’t really know what have been the core causes of the Rudd government’s problems. Rudd’s leadership clearly should be one of them, because not only he is the prime minister, but also he has shown a strong inclination of excessive personal control, he’s media driven and non-inclusive and does not like proper and effective consultations but media opportunities.

But on so many economic issues, other senior minister, especially the Treasurer and the deputy prime minister at the core should have also played their due roles. It is ultimately the Treasurer’s responsibility of economic management. One may also ask what role top Treasury bureaucratic advisors have played in so many economic policy fronts.

Besides, given the so many portfolios the deputy prime minister has, she should also have been an important part of it. She appears to be very intelligent and sensible. But the BER has been unfortunately badly designed, managed or implemented. Whether it was her role or the department role has been unclear.

Taking together, the public would be wondering: is it only the senior government ministers who messed up so many issues? Or may some parts of the bureaucrats have also been a significant part of it?

The work has been exposed, and summarised already.

It is hardly possible for old dogs to learn new tricks!

We need more competent people with strong leadership who can deliver to lead us forward.


Who are telling the truth and who are telling lies?

Comments on Agencies “Ken Henry a gun for hire, say Coalition”, 25/05/2010, http://www.theaustralian.com.au/politics/ken-henrys-mining-tax-figures-cant-be-trusted-coalition/story-e6frgczf-1225870939831

The reports says “FEDERAL coalition MPs have unleashed a savage attack on the credibility of Treasury boss Ken Henry saying he can't be trusted on figures showing the amount of tax mining companies pay.
The federal government yesterday released a Treasury minute showing mining companies paid an effective company tax rate of just 17 per cent during the decade to 2004/05. That's 12 per cent below the average rate for all industries.
The minute was released after the opposition produced tax office figures showing miners paid an effective rate of 27.8 per cent.”

What is the real and hard truth?

Some report appears to say that Treasury used the figures from the US source.

It is unbelievable that mining companies could only pay 13-17% tax, if the company tax rates were 30 or higher.

Does that mean the ATO has not done its job properly?

Somewhere people are talking different things, and compare apples with oranges.

So both politicians and bureaucrats need to tell the true and should not spin for own particular purposes.

This has been a serious problem in Australia and Australian federal politics - very simple matters can be highly distorted and endless political spins can be generated to serve own political purposes, and with no legal constraints or punishment.

Democracy is decay, or the quality of politics in Australia is so incredibly low!

IMF has no innovative solution to Greek problems

Comments on John Irish of Reuters “Doubts over Greek aid package remain: IMF”, 25/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/IMF-chief-economist-doubts-over-Greek-aid-package--5RP3D?OpenDocument&src=hp5

It appears that few top economists or government officials have come up with a credible and innovative solution to the problems of some euro members are having.

That is unfortunately a pity.

To me, there is an alternative to the conventional austere approach to Greek and Spain.

That alternative is to allow temporary intra-euro trade measures to be introduced to increase the relative competiveness of those weak euro economies against those strong ones, within the framework of monetary union and independent fiscal sovereignty.

Greek and Spain should be allowed temporarily to impose a tariff on imports from strong euro members and use the revenue to subsidise their exports to those strong economies. Their competiveness is improved and other members will enjoy lower prices of imports from Greek and Spain.

The temporary trade measures should be scheduled to be removed, either gradually over a number of years or at once at some time in the future.

That is no different from currency devaluation when a country has its own currency.

As long as it is restricted within the eurozone, it will be an “internal” issue and should not cause any issue with WTO rules.

Costs of instability

Second comments on David Kelly “Costs of maintaining stability in China”, 23/05/2010, http://www.eastasiaforum.org/2010/05/23/costs-of-maintaining-stability-in-china/

After some thought about the article, I think the title might be more pertinent if it is called "Costs of maintaining stability in a wrong way in China".

The current title gives the impression that the costs outweigh the benefits, but implicitly implying no costs of not maintaining stability.

The post on Thailand's recent unrests following is a useful and timely reminder the costs of not maintaining stability.

And the potential costs in China would be much far greater by some factors.

Of course, I am not saying the way the Chinese government has relied on is a good one.

Clearly it can do better with much lower costs.

The last paragraph may be unfortunately misinterpreted by some:

“The Tsinghua report indicates that concern about the negative impact of institutionalised state paranoia is rising in influential, even official, circles. The time has clearly come for the pendulum to swing of in favour of seeking long-term reductions in tension rather than quick fixes. The international policy community needs to develop thinking and strategies that are sympathetic to this trend.”

John Ralph on the RSPT

Comments on John Ralph "Retrospective tax a risk to national sovereignty", 25/05/2010, http://www.theaustralian.com.au/news/opinion/retrospective-tax-a-risk-to-national-sovereignty/story-e6frg6zo-1225870760693

Now the PM, Treasurer, government ministers, as well as Treasury officials should take a note of what Ralph has to say on the RSPT, modelling assumptions and model logic.

The article is quoted as below for my future reference:

"HAVING retired from corporate life I am reluctant to become involved in the present debate about proposed tax measures, but I am perplexed about the apparent lack of understanding by the commonwealth government of the long-term damage they are about to inflict on the Australian community if the proposed resource super-profits tax is implemented as planned. Governments can increase or decrease tax rates and, while these changes will have an effect on future investment decisions, they do not affect the external perception of the nation's standing in relation to sovereign risk.
Prudent management will have assessed the sensitivity of a project's viability and attractiveness to a change in tax rates in making its investment decisions.
A decision to impose a 40 per cent tax rate on earnings above the bond rate will reduce future investment because of the substantive effect on projected after tax returns. Projects that promised to meet, or just exceed, the company's cost of capital without the new tax would not do so with the new tax, and so would not proceed. Only those projects with a very high projected return would proceed. A suggestion that an increase in taxation would result in an increase in investment could only be made by somebody not living in the real world.
If a computer model predicts this, then the assumptions on which the model is based need to be re-examined. As always with computers, remember GIGO (garbage in, garbage out).
There clearly seems to be a fundamental misunderstanding that the prospect of a refund of 40 per cent when a project fails or makes losses will make a project more financially attractive to undertake. The expected after tax return from a project being considered for investment will largely determine whether the project proceeds. Projects are not undertaken when losses or failure are expected. Knowing that part of a loss will be underwritten by government if the project fails, does not do anything to improve the after tax return when the project does not fail. Consequently, the imposition of the additional tax burden will reduce expected returns and, therefore, reduce investment at all levels in the industry.
There will, of course, be some offsets in the resulting lower value in the Australian dollar for exporters accounting and reporting in Australian dollars, but an increase in import costs, with implications for inflation.
An additional fallout that can be expected will be that a reduction in investment attractiveness will almost certainly result in a lower level of exploration activity. Why would companies be expected to retain a high commitment to exploration if there are likely to be fewer viable projects?
All of the above considerations relate to the fact that there will be consequences for investment and jobs from changes in tax arrangements. Provided it understands the implications, this is a matter for government to weigh up and decide if it wishes to trade off future investment and jobs in the mining and associated industries for an immediate increase in revenue.
The aspect of the proposed arrangements that is of most concern to me, however, and should be to most Australians, is the retrospective nature of the proposed tax in applying it to existing operations. This will heighten significantly the sovereign risk assessment of Australia when it comes to investment in, and lending to, Australian entities.
This changed assessment of risk will be priced into transactions and make borrowing more expensive for a country very dependent on foreign capital. This will affect all Australians. One only has to look at what is happening in Greece, admittedly a more extreme case, to appreciate how heightened sovereign risk increases borrowing costs and limits access to funds. The Hawke government clearly appreciated this issue of sovereign risk when it introduced the resource rent tax on petroleum, by not applying it retrospectively.
Whether an individual, a company or a country, reputations take a long time to build but they can be tarnished or destroyed in an instant and, once lost, take a long time to rebuild. If the sovereign risk assessment of Australia is downgraded from the strong position the nation has enjoyed for many decades, it will take a long time for this perception to change. The precedent will have been seen to have been set and investors and lenders will be questioning for some time where next may retrospectivity be applied? They will reflect this in their pricing decisions affecting Australia.
It is this risk to the nation's standing in relation to sovereign risk that concerns me most because of its long-term adverse implications for the Australian community."

John Ralph AC was formerly chief executive of CRA, a director of BHP Billiton and chairman of the Commonwealth Bank, former president of the Business Council of Australia and chairman of the Ralph report into corporate tax reform.

Megalogenis helpless or Meganomics unhelpful

Comments on George Megalogenis “Mining the figures uncovers deception”, 25/05/2010, http://blogs.theaustralian.news.com.au/meganomics/index.php/theaustralian/comments/mining_the_figures_uncovers_deception/

While George Megalogenis has apparently attempted to clear the air in the debate, he unfortunately and actually has added more confusions and had produced an effect of misleading.

His claim that "Mining is taxed less than most other sectors when it comes to corporate tax" missed the point of the big picture of distortions in the debate, that is, the Treasurer and government ministers have used 13-17% as the effective tax rate for mining.

Swan's distortion is 10 times worse than the point George Megalogenis is making.

So is George Megalogenis trying to help, or trying to help one side in the distorted debate?

Swan likely a worse offender

Comments on Matthew Franklin and Richard Gluyas “Wayne Swan mining tax claims undermined”, 25/05/2010, http://www.theaustralian.com.au/news/nation/wayne-swan-mining-tax-claims-undermined/story-e6frg6nf-1225870782755

If Swan wants the public to believe his saying that the 70% tax rate due to the RSPT is "blatantly false" and that "every dollar they made above a 6 per cent profit would be subject to the tax" as "either lying or ignorant", he should states that his claim of mining companies paid an effective tax rate of 13-17% as the worse that all those.

He and government ministers don't use ATO figures and resorted to exotic "research paper" as their source. Isn't laughable to the extreme?

It seems that he and the government have either lying or ignorant but highly likely deliberately, misled the public on its RSPT from day one.

For a government and ministers, that is a shame, a disgrace.


China's urbanisation and fixed investment

Comments on John Lee “Don't buy China's growth mirage”, 24/05/2010, http://www.businessspectator.com.au/bs.nsf/article/china-economy-fixed-investment-urbanisation-migrat-pd20100520-5m6hl?opendocument&src=blb&

I have some questions for John Lee in terms of urbanisation in China.

If urbanisation is not what it is understood earlier by us here, then what did the investment go and what purpose did it have in Chinese economic growth?

If it was not quite the case in the past, will it be in the future?

Isn't that the case that China starts to reform its household registration system to loosen the limit on rural people to move to urban areas?

Further, what is urbanisation? Isn't a change from rural villages to urban towns or small cities part of that?

In short, please define urbanisation and clarify where China's huge fixed investment has gone.

Swan's faulty line of argument


The problem with Swan's argument is that if what he says about the effective tax paid by miners in Australia is true, then why does not the government remove those concessions and get the tax to the level it is supposed to be?

Why not do the first best as opposed to the second best to start another line of argument of the super profit tax when normal profit is not taxed properly?

That is the fault line in Swan's argument.

I suspect that Swan may have used the wrong data, i.e. use BHP's profits from all countries as the base to calculate the effective tax rate in Australia. Alternatively, he may have used only parts of mining companies’ tax in Australia, as he and the government did when they misrepresented the picture in their false claims earlier.

That would certainly be wrong, wouldn't it?

But that does not and will not help to advance his case.

To the contrary, his mistakes or distortions will come back to haunt him in the future.

What to say when Chinese currency is now strong?

Comments on Karen Maley “America's tougher line on China”, 24/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/China-US-trade-policy-US-Dollar-pd20100524-5QSXX?OpenDocument&src=sph

It might be acceptable for the US and many commentators to argue that the Chinese currency is too weak and needs to be rise to resolve international imbalance when the $US is also weak.

But now the $US is strong. So is the Chinese currency accordingly just as what occurred during the 1997 Asian financial crisis, isn't it?

What would those commentators say now?

One is sure that they will have something to say even if to invent something completely new, whatever it is, because they are what they always do.

And, they are very good at it and nothing will be difficult for them.

Improve government governance

Comments on Natasha Stott Despoja “Legislate to keep the bastards honest”, 24/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/Abbott-Rudd-Gillard-ETS-Democrats-pd20100524-5QS35?OpenDocument&src=sph

It is not just false advertisement, but mismanagement of the budget and policy deliveries, such as the home insulation program, the BER, the NBN, the Indigenous housing program, and etc, which all need more effective control with due punishments.

Please note those are in billions and billions, more than the HIH collapse.

Why should the taxpayers tolerate such irresponsibility and malpractice?

There are fundamental problems with the current governance of government.

Of course, there should be a balance, so governments are not unduly constrained to do a proper job.

But accountability in addition to elections must be a significant part to improve government governance.

The China model to be developed

Comments on David Kelly “Costs of maintaining stability in China”, 23/05/2010, http://www.eastasiaforum.org/2010/05/23/costs-of-maintaining-stability-in-china/

The so called China model does not really exist, or is so fluid or evolving or in transition that is not a model. It is like what Deng said of Chinese economic reforms, "cross the river by toughing stones".

However, it is likely that China has got to a stage that it needs to consider its future strategic directions that may lead to China model eventually.

Such considerations should adopt the same overarching strategies as Deng did for economic reforms, but in a much broader context.

Swan needs more independent advice on RSPT

Comments on Wayne Swan “A tax that will boost growth”, 24/05/2010, http://www.theaustralian.com.au/news/opinion/a-tax-that-will-boost-growth/story-e6frg6zo-1225870279541
Mr Treasurer, it is good to see you try to explain the tax to the public. It has become absolutely necessary, hasn’t it?

However, it seems very likely that the Treasury modelling was problematic, either with wrong assumptions used, such as the differential impacts of the marginal effects on less profitable mines versus the industry effects of the tax proposed, (the results of the two effects are obviously dependent on the assumptions used) or with the wrong internal model logic, including but not limited to the international effects.

The international effects include capital mobility, demand and supply of mineral products and the outlook of international prices for a longer period, different impacts of the tax on international supply from different regions.

If you and the government believe the tax is important for the economy and a significant tax and economic reform, you should support and provide more independent studies to get the modelling absolutely right and correct.

Only independent studies can have the credibility for the public to support the tax reform. It is not too late for the government to do it.

By the way, if the purpose of the tax is to get a fair share of the resource rent taking into account of risks involved in mining, there is no need at all for the government to be involved in undertaking the risks imposed by any businesses.

In the same logic with the same purpose, the current State royalty regime may not be as bad as most people currently think it is. It gets at least some rent value for the finite resources even when a mine is not very profitable as long as it produces and sells minerals. Why should the owner of an asset give it away for free if the renter of the asset can’t make much money? Further, when prices go up, the mineral rents also go up accordingly, so does company tax.

In hindsight, it would have been better to release the Henry tax report when the government received it, but stating that the government was considering all the recommendations but having made no decisions to rule in or rule out any.


Why do economists prefer monetary to fiscal policy?

I was always puzzled by the fact that many economists prefer using monetary policy to manage the economy to using fiscal policy to counter cyclic activities when I was learning economics. I had thought that fiscal policy could be tailed much more flexibly to suit different situations and needs, while monetary policy applies to all business, industries and households indiscriminately.

Over the last two and half years, I gradually realised the main reasons why many economists prefer that.

Governments are not as pure as people think and are politically affected in decision making. In that process, political considerations as opposed to national interests and influences of different interests groups can compromise the quality of fiscal policy to such a degree that it is ineffective and inefficient.

Incompetency by governments also plays a role, especially when they try to do different things for which they have little expertise.

Wastes can occur at an alarming scale, such as the home insulation program and the building the education revolution program in Australia over the last two years.

The end results can be the costs of fiscal policy may outweigh its benefits.

On the other hand, monetary policy has a simple objective, less politically affected and easier to implement.

Bizarre logic by the government

Media reports that both Gillard and Swan state that multinational mining companies like BHP and Rio Tinto only pay 13% effective company tax rate. See “Mining companies pay only 13% tax: Gillard”, 23/05/2010, http://www.smh.com.au/national/mining-companies-pay-only-13-tax-gillard-20100523-w3gg.html
The report starts:

The federal government has opened a new front of attack against miners in the fight over the proposed resource rent tax, saying multinationals such as BHP Billiton and Rio Tinto pay just 13 per cent tax.
Deputy Prime Minister Julia Gillard says the low effective company tax rate proves big mining companies can afford to pay more.
"These are the cold, hard facts - the truth," she told the Nine Network.
Domestic mining companies pay an effective company tax rate of just 17 per cent, Ms Gillard said.
"For the overseas companies, the multinationals, (it's) around 13 per cent.
"This is not a fair share and that's why we're moving to introduce the resources super-profits tax."

The claim seems ridiculers. If it is true, then why the Australian government has allowed that to happen?

It appears to demonstrate how desperate the government has become.

Garnaut on interests groups

Distinguished economist Professor Ross Garnaut has joined the current debate of the government's resource super profit tax.

Garnaut is one of the most respected economists in Australia and has my highest respect both personally and professionally.

His argument that it is now dangerous time including a danger of powerful interest groups dominating and influence public policy making, though has merits, raises some questions.

In abstract and theory, public policy should not be influenced by special interest groups and should be made in the national interests as opposed to special interests of some groups.

However, the problem is that how one defines special interest groups that are most fascinating.

For example, Garnaut appears to imply that the voices from current mining companies represent voices from special powerful interest groups, and Treasury does not.

One may ask Garnaut some questions in relation to this:

1. is the Treasurer not a special interest group?

2. is the prime minister a special interest group?

3. why is Treasury not a special interest group?

4. is he not a special interest group, given that he was the author of the PRRT and the chairman of a mining company whose assets are overseas and is to benefit from a higher Australian tax on mining in Australia?

5. what about the wastes in the build education revolution programs and some other programs that the current government has got them seriously wrong and had been particularly reluctant to acknowledge and to correct until it become absolutely untenable?

6. what if the Treasury has got the theory, modeling and parameters wrong?

7. what if the mining companies are correct in their arguments?

The upshot is: while it is easy for people to argue a case using a theoretical concept and construct, it is not always clear that argument is relevant or correct or not in particular circumstances, such as the current RSPT.


Rationale for super profits: what is it?

Comments on Jennifer Hewett “Holes in super-profits rationale have created an impasse”, 22/05/2010, http://www.theaustralian.com.au/news/opinion/holes-in-super-profits-rationale-have-created-an-impasse/story-e6frg6zo-1225869801423
The questions related to the RSPT raises another important question that John Hewson raised on the AFR yesterday: is Treasury the best way to determine fiscal policy, or should there be an independent fiscal authority to assist the nation as opposed to the government with its own political interests?

It seems Treasury, though normally respected and accustomed by the public, is not independent enough. And further, its work is generally not scrutinised sufficiently by the public, because it can often hidden behind the government (and the government on the other hand claims it is Treasury independent advice!)

It has not worked well for the nation's interests, particular over the last 2-3 years.

Limited choices for the public and relativity in politics

Comments on Christian Kerr “That stubborn Gillard question begins with the word 'when' “, 22/05/2010, http://www.theaustralian.com.au/politics/opinion/that-stubborn-gillard-question-begins-with-the-word-when/story-e6frgd0x-1225869529076
It is all relatively.

Gillard is not without her own fault, like the problems with the BER, and she is one of the four or so of Rudd government's core.

But it is Rudd's failures, if you like, that make Gillard a much better choice.

Besides, there are no obvious better person in the opposition that also makes the choice easier for the public.

The public's choices are fairly limited, indeed.

Why don't rich countries use easiest and most cost effective way for reducing emissions?

Comments on Peter Wood “Lessons from the US for strategies to put a price on carbon in Australia”, 21/05/2010, http://www.eastasiaforum.org/2010/05/21/lessons-from-the-us-for-strategies-to-put-a-price-on-carbon-in-australia-3/

Although it is extremely unlikely that the Australian states will do it given the changed circumstances, but were the Australian States to restart their process of introducing an emissions reduction scheme, it will show the ultimate failure of the Australian government in its emissions reduction policy at the national level.

Wood's idea of imposing a carbon tax when companies' reporting their emissions, though worth considering, but has been ruled out by the Rudd government. So from present to 2013 it is unlikely for both main political parties to have any carbon pricing or tax in place or introduced in Australia.

The difficulties with many emissions trading schemes are due to their fundamental flaws in not letting the public to decide the issue. They have been politically driven and highly politically manipulated so that the public don't see the costs and benefits of such schemes and left the main interest groups engaging in self interests seeking and distorting the policy, costs and benefits of any proposed schemes.

A much fairer and easier scheme is to provide no or little free permits to emitters, but distribute the carbon revenue to the public on equal per capita basis. In this way the costs of emissions will passed onto consumers and they will choose emission products like power based on prices. Energy producers will choose the most appropriate emission technologies to reflect the costs of emissions.

Of course, main political parties in industrialised countries don't like such an idea, because firstly it will leave political parties largely out of their power to manipulate to seek their own interests in the process, and secondly it will have international implications that industrialised countries don't want to have.

They have always been very skilful in hiding the easy, fair way and most cost effective way of reducing emissions and tend to blame others for any failures, either domestically or internationally.

That is the main reason why it has been so difficult to reach an international agreement on emissions reductions, because industrialised countries, the high emitters on per capita basis have been reluctant to embrace the just and fair principle in paying the prices for their high emissions.

It everyone is fair dinkum, it should be much easier to have an international agreement and to act on climate change globally.

It is noted that Wood did not mention what to do with the revenue from his idea of carbon pricing. Without giving it to the public, supports for it is unlikely to be very strong.

Of course, there is also an issue of how to deal with the issue of one country going it alone and most other countries not following suit.


A cure to modern Greek tragedy

Comments on Jamus Lim “The Modern Greek Tragedy Follows a Classical Script”, 20/05/2010, http://blogs.worldbank.org/prospects/the-modern-greek-tragedy-follows-a-classical-script
There is a likely nice policy response to the current Greek woes.

It requires a temporary trade measure to change the relative prices between Greek and other euro member countries, similar to an effective devaluation of a country's currency.

It is an innovative thinking, targeting a real world problem. Much better than Paul Krugman's conventional but empty argument.

International financial and economic agencies need to be innovative too. Otherwise, they will be helplessly reactive and ineffective in their policy responses and recommendations.

When a new issue arises, one needs to study its characteristics and find a solution. If the existing theories and policy tools can't address the issue, then one needs to go one step further and create a new theory and policy tools to do it. It is not good enough to just to say that existing theories and policy tools don't work and therefore it is an unsolvable problem.

See a couple of blog articles for this and hope they are helpful to World Bank and IMF staff and researchers


A framework for managing excessive short term international capital inflows

Comments on Mathew Joseph “Capital controls: The way forward for India”, 21/05/2010, http://www.eastasiaforum.org/2010/05/21/capital-controls-the-way-forward-for-india/
I have not read the IMF report and don't have first hand information. According to what Joseph says, it shows that the IMF is yet again showing its incompetence in terms of managing or advising international economic matters especially on emerging economies.

As to options for macro management of capital inflows, I think it is important to distinguish shorter and longer terms objectives. They have quite different implications.

I believe that a better alternative or option is to levy refundable tax on capital inflows if it becomes necessary. Such a refundable levy works in the following way:

the levy is temporary in nature with a duration for managing capital inflow stability

it is set at an appropriate levy

it will be refunded after a specified period if the capital has always stayed in the country, otherwise it will not be refunded

it should attract a return at or slightly below the government bond rate of the same duration

in this way, so serious long term capital inflow is not unduely punished with little costs, but short term hot money or capital can be prevented or limited through the increased costs

It is better to have an international framework, agreement or principle to govern such regulations or management of international capital flows by individual national governments.

Dr John Hewson argues for an independent fiscal authority

It is good to see that Dr John Hewson, a former liberal leader and the one who lost the unlosable 1993 federal election due to his GST component and Paul Keating's successful scare campaign tactics, is now arguing for an independent and depoliticised fiscal authority. See the feature article on the Australian Financial Review, page 58, 12/05/2010.

I have previously argued for more independent public institutions, including an economic authority on both fiscal and monetary matters, for scrutiny and public and independent advice, as well as evaluation.

Such an economic authority will be able to design the best mix of fiscal and monetary policies in the national interests beyond partisan politics, as what is taught in economics textbook.

Publically funded independent institutions will strengthen the quality of public policy making and implementations.

It will complement the current form of democracy by combining elected politicians with much stronger, independent and non-political advisory and information. It will improve the current form of democracy.

Hewson's advocacy is a very helpful development and an important step in that direction.

Paul Krugman on euro union is wrong

Comments on Bronwen Maddox “Enmeshed in legal maze of the euro”, 21/05/2010, http://www.theaustralian.com.au/news/opinion/enmeshed-in-legal-maze-of-the-euro/story-e6frg6zo-1225869340719
It seems that there is an easy way to solve the problem associated with the euro monetary union and independent fiscal sovereign.

Any country in the eurozone does not have the freedom to devalue its currency to increase its international competitiveness.

However, it can use temporary trade policy to achieve what currency devaluation can achieve, that is, to temporarily tax on imports from the zone countries and subsidise its exports to those countries.

That is not quite completely equivalent to devaluation, but only relative to the zone members.

This practice is not in accordance with WTO rules. But monetary union is different too and has some characteristics of a "country".

As long as that temporary "trade policy" is internal to the eurozone and does not apply to other countries outside the eurozone, it should be regarded as acceptable.

Monetary union has its own advantages and limitations, as a result, some special public policies are also necessary.

How and how the RSPT is wrong?

Comments on Dennis Shanahan and Rowan Callick “Ross Garnaut backs mine tax changes”, 21/05/2010, http://www.theaustralian.com.au/business/mining-energy/ross-garnaut-backs-mine-tax-changes/story-e6frg9df-1225869389776

I was Prof. Garnaut's student at the ANU when I did my economics degree there, so he has my highest respect both personally and intellectually.

However, it seems that Prof. Garnaut may have got some of his understanding of the government RSPT incorrect, or some of his reasoning may be problematic.

Changing a tax so dramatically and applying it retrospectively does not constitute a sound public policy, because it is equivalent to communist assets seizure and redistribution.

First, the problem is that those assets do not all belong to the rich. To the contrary, some of the shareholders including superannuation members are quite poor.

Second, there is no super profit for the current shareholders of those mining companies at the current share prices adjusted for their risks. That is a simple principle of current share market trading.

In short there is no rationale for applying the RSPT retrospectively whatsoever.

Further, there is no need for the government to become a partner of mining companies to tax on mineral rents. It is completely unnecessary, and the whole design is to create a public impression that can be applied retrospectively to grab super tax revenue on ordinary company profits.

It is poor economics and even worse politics.


A policy response to the Greek dilemma

In addition to my earlier comments (see here), I have developed another idea - a policy response if you like, related to the Greek dilemma. I include it below. Though it is a bit long, but the easiest way is through a temporary emergency regime of tariff and export subsidies within the eurozone only, contained in the bracket. See the following:

The current Greek economic problems associated with its fiscal deficits and sovereign debts raise an important question: how can it get out of the economic problem without own currency but a member of euro zone?

A normal economy has its own currency and can devalue its currency to export its way out of domestic troubles assuming external world is healthy enough to absorb that, but Greek does not have that luxury.

What a devaluation of own currency does is to lower the price of its products relative to that of other countries’, so they are cheaper internationally and demand for them increases and its demand for products overseas falls. This adjustment to currency and the chain reactions ensuing increase domestic employment and GDP in own currency and the economy is boosted, without domestic deflation, wage cuts and etc.

Theoretically, the same effects can be achieved through wage cuts and price falls of domestic products. But wages cuts are much more painful and politically difficult to do. Employees don’t like them.

There is very little difference between own currency devaluation and uniform wage cuts including a fall in interest rates and company profits. The main difference lies in the perception.

Practically, uniform reduction in wages, interests and wages are not easy to realise, because company profits may not fall or fall less than wage cuts. Also assets prices are another difficult issue. So there are more redistribution issues when “deflation” is concerned.

So what is the best strategy for Greek, if it continues to remain in euro?

Maybe one way is to apply a special tax on everything with the aim to have a uniform deflation without the need to cut wages and etc. The tax revenue can be used to provide subsidies to exports to lower prices.

(Maybe the best way is to tax imports and subsidise exports to change the relative prices. In the current Greek case, those trade duties should only apply to its trade with euro members only. That is not generally in accordance with WTO rules probably, but that could be a way reflecting the unavoidable costs of a monetary union with independent fiscal responsibilities like the euro zone without incurring violation of WTO rules with other non-euro countries.)

However, whether the Greek public will accept it or not depends largely on government communication of the issues involved and its rationale.

A question is: how to treat assets? Maybe, a way is to just tax transactions/sales of assets, in the same way as taxing wages, interests and profits.

A dam and canal system or systems in the northern parts of Australia

This is a past submission to Australian insurance council's competition completed on 6 April 2010, but it did not win.

What: to gradually build a dam and canal system or systems in the northern parts of Australia

Purpose: prevent floods and to regulate rain water to improve water supplies in other parts of Australia or river systems


1. Making an overarch and flexible plan

2. Survey the geographies

3. Gather rain fall information, floods and etc

4. Start with the easiest parts

5. Start with the parts that contribute directly to floods control and prevention for communities with maximum benefits

6. Start with smaller dam and canal sizes and increase them gradually

7. Gradually build some dams first

8. Gradually build some canals/rivers to guide rain waters to dams and away from communities on flood routes

9. Gradually build canals to connect those dams with rivers, towns or cities where water is needed and water supply has increasingly become an issue

10. Parts of the canals may be large water pipes

11. Partner with local communities, councils, State and federal governments for priorities, cost and benefit

12. It could be imagined that over time, such system or systems will have huge benefits in terms of local floods control, community floods prevention, water ways improvement and water storage, providing more secure water supply for towns and cities


1. The northern parts of Australia have more rainfalls and can often encounter floods

2. Many communities in those areas are often subject to floods and damages by floods

3. There are often water shortage and droughts in many parts of Australia

4. It makes sense economically and environmentally to have a system that can both use the more abundant water from rainfall in the north and overcome or at least alleviate water shortages in other parts of Australia

5. Of course, it will improve the living environment of many parts of Australian communities


1. It can start at any time once some basic work has been done and designs are made


1. Starts with Queensland, and canals can flow to NSW

2. Then extends to the NT


1. reduce floods to some communities and farms in the relevant areas

2. potentially improve the environmental flows of rivers

3. improve water supply to some parts of Australia


1. Variable, depending on scale of the scheme

2. Could use work for the dole type employment scheme

3. Increase work scale when economic activities are slack

Journalists confused sometimes

Comments on Ian Smith “Rogues' gallery of ill-mannered journalists”, 20/05/2010, http://www.theaustralian.com.au/news/opinion/rogues-gallery-of-ill-mannered-journalists/story-e6frg6zo-1225868875541

I also had the same feel that some journalists were acting too over the top and showed no respect of what best journalists should and could do to best service the public.

On the other hand, Hockey was a little too intimidated and not strong enough to defend or point out the flaws of those journalists.

Kerry O'Brien is one of my most respected journalists, I don't mean in any way to discredit him, but the question on whether Hockey’s abandoning the government's budgeted spending from the RSPT is real cuts or not, just show how confused sometimes even the best and brightest journalists can be.

That is the government budget and undoubtedly the baseline that the opposition has to rely on. What else can it use? To create a confusion by another non-budgeted and no source baseline? Was that those journalists want or wanted? Would those journalists pounce like a kill on that if that had occurred?

That is just a small and slight point compared to those journalists in the gallery who asked some bizarre questions yesterday.

Besides, the Rudd government kept the Henry tax review for 5 months before releasing it and the health reform plan was dripping out bits by bits over many days if not weeks or months. It was the NSW premier who demanded Rudd release its health reform plan in total that succeeded with some effects, not the journalists.

And now those journalists were demanding that Hockey to provide them with more materials half or an hour earlier!

What a joke!

However, most journalists, especially in Australia, are doing excellent jobs most of the times, reporting and informing the public and contributing to a much better society. It is only sometimes they also need some time to think about what is most important substance as opposed to what would be the best headlines or best opportunities to embarrass other people with no real or little benefits.


Interesting period ahead for Australian federal politics

Comments on Matthew Franklin “Malcom Turnbull backs Tony Abbott on climate”, 19/05/2010, http://www.theaustralian.com.au/news/nation/malcom-turnbull-backs-tony-abbott-on-climate/story-e6frg6nf-1225868416369

Australian federal politics now has entered into a new phase, with Rudd in trouble and Turnbull remaining in politics.

Rudd is unlikely to turn his political fortune around.

Abbott's own leadership weaknesses mean his stay at the leadership of the Liberal Party will be temporary.

Turnbull now has probably learnt a great deal from politics from his failures at the Liberal helm and since the loss of his leadership of the coalition. He is much more mature politically and tactically, I should say.

It may be the case that both main political parties may change their top leaders either before or shortly after the coming election.

It will be interesting political stuff to observe in the next 6 months to a year or so.

Cap and trade on red-tape costs - an excellent idea

Comments on Oliver Marc Hartwich “Cap and trade our way out of red-tape pollution”, 19/05/2010, http://www.theaustralian.com.au/news/opinion/cap-and-trade-our-way-out-of-red-tape-pollution/story-e6frg6zo-1225868389302

An excellent idea!

I would make two additional points:

1. Any accounting and future audit should be conducted by independent agencies/institutions with highest transparency possible to ensure their reliability.

2. Specify personal penalties for the chief person in charge of a bureaucratic agency any breach of that cap. The first chief must bear the penalties to ensure the accountability. Penalties should include severe monetary losses, demotion or sacking.

A side but related issue is that some kind of similar accountability should be imposed on elected politicians as well for their effects on regulations, and for serious public policy failures.

Important context for East Asian Community and Japan-China relations

Comments on Yoshihide Soeya “An East Asian Community and Japan-China relations”, 17/05/2010, http://www.eastasiaforum.org/2010/05/17/an-east-asian-community-and-japan-china-relations/comment-page-1/#comment-118099

It is encouraging to note the author also acknowledged that "of course, there are still modern elements in Japanese society and politics, which particularly tend to surface in an emotional vicious cycle over historical and territorial issues between Japan and China."

However, an important context that the author didn't say is the military alliance between Japan and the United States that is the most significant modern element (to borrow a word from the author) in Japanese society and politics.

Yes, it is true that Japan does not have the same military spending as a share of the GDP as China does. No one denies that fact.

Isn't that modern element part of the equation and the key to that situation?

How much military spending in the US? How many times is that of China's?

Has Japan ever seriously criticised the US for its military spending or its modern elements of diplomacy and international politics?

Has Japan ever seriously thought about to terminate the military alliance and remove the US military bases from its territory? That is to say, has Japan ever really stay away with those modern elements from Japanese society and politics?

One is left to wonder what relevance the author's arguments are if the most important issues or elements are omitted from the discussion.

A more direct question is why a piece of academic analysis has left those important elements out in the first place?

Was it due to negligence or deliberation?

Is Treasury Secretary Henry independent enough from the government?

Comments on Jennifer Hewett “Adviser backs up his design principle”, 19/05/2010, http://www.theaustralian.com.au/business/opinion/adviser-backs-up-his-design-principle/story-e6frg9px-1225868408907

First, what else could Ken Henry say? Did he have any choice but to back the government line that is partly the making or Treasury?

That is the big problem with such this particular tax design, why should the government do it this particular way?

The answer is it needs quick revenue/money to balance its short term budget.

So, taxpayers' interests are sold in favour of short term partisan politics.

That is the source of the problem.

Unfortunately, normally perceived independent Treasury assisted in such a poor design. That is a lesson for public policy making.

There is a strong need for more institutions much more independent from the government of the day to be apolitical in policy advice and evaluation and be more transparent and open.

Because of that, namely pursuing short term political interest, Australia's sovereign risks have increased to unprecedented levels.

PS: in an email to a colleague re a news report of Henry's speech, I made the following observations yesterday afternoon:

Henry uses Treasury modelling. That modelling uses assumptions. Those assumptions would have to be strange, either in long term prices or the share of marginal versus non-marginal mines, to produce the results he is relying on.

In econometrics, there is the term of spurious estimation.

It seems in Treasury modelling, there should be a similar term existing and applying, that is, spurious modelling.

See below for Henry's arguments.


My colleagure had teh following reply:
Thanks. I'm inclined to mostly agree with Henry without having seen his assumptions. I think there will be an impact on new investment to make it less attractive in the case of some larger projects, but for existing projects, the view that China and India's demand are likely to persist for some time yet is probably true. Mining companies will have a choice of using their existing investments and production at marginal cost to fill orders or look to new, riskier Greenfield ventures with long lead times. If I were a miner, I'd wear the profit reduction and make incremental investments in existing projects so I could keep filling orders now.

In the end, only time will tell though. I suspect the govt will be as conciliatory as possible when negotiating the details of the new tax given the looming election and public opinion on this.


I further responded with the following this morning:

I don't like to give blank cheques to politicians especially when they have shown to be lousy.

But seriously, a few basic principles of economics should be useful. One is the direction of a change. The second is price is determined by demand and supply, with short term supply constraints, but long term cost as key determinant. A third one is global demand and supply and capital mobility internationally, so Australia is only part of the story.

Further, I notice an interesting thing: In China, people are more critical of the government though not say it openly and can't do much about it; in Australia people are more kind to government and have a low expectation of them and their quality, though they can vote them out but are reluctant to do so. Of course, when all politicians from both sides are dumb, then there is not much choice. Abbott is no better and probably worse. That limit choices.