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A new policy proposal to combat domestic deflation

Comments on Volz Ulrich “What Japan needs to do to end deflation”, 30/06/2010, http://www.eastasiaforum.org/2010/06/30/what-japan-needs-to-do-to-end-deflation/
We can all be more creative and try something new, as opposed to try the failed old tricks.

Speaking of non-conventional measures, why aren't economists more creative and bold in both domestic macroeconomic policy and international policy using a new kind of international monetary instrument to resolve domestic deflation problem existing in countries like Japan?

Just consider what the US has been doing, it is not too difficult for one to consider a policy from a deflationary country like Japan to lend to other countries specifically for them to buy Japanese goods and services with more favourable interest rates, as long as those lendings can be secured with very low risks.

Risks can be managed and minimised by sovereign guarantee or other secured guarantee.

If Japan is in a deflationary cycle, then it can stimulate other countries to provide sufficient demand for it and in turn stimulate its own production and demand in the process.

That is probably better than using and changing exchange rate.

It is bureacrats not economists who haven't done enough on climate change

Comments on Martin Parkinson “Why economists need to engage in the CPRS debate”, 29/06/2010, http://www.crikey.com.au/2010/06/29/why-economists-need-to-engage-in-the-cprs-debate/
While I agree that economists can and should play a significant role in the debate and design of emission reduction strategy and policies to contribute to their effectiveness and efficiency, it is equally important that economists do not just become or hoped by the government or bureaucrats to become their supporters without critically analyse, evaluate and assess government's policy proposals.

It is important to recognise and acknowledge that there will be costs involved in reducing emissions and give realist expectations to the public on what the likely costs of emission reduction options.

Dr Martin Parkinson's claim that "our experience of reform should give us confidence that we can deliver significant reductions in emissions while maintaining strong and sustained growth" runs the risk of spins without real substance. Emission reductions, though a significant reform, will be significantly different from many of the past reforms, in that the benefits are not necessarily seen or felt except when the science is correct and it is done correctly temperature may not rise as much as a baseline that few knows and in the process costs of the actions will be evidently felt.

Without acknowledge that and being upfront and forthright with the public, there is a risk of misleading.

Secondly, government and its advisors should separate the issue of emission reduction and the issue of redistribution of income due to consideration of the impact of climate change actions. On that front, government should adopt the most efficient and least distortionary approach by using carbon price on emissions and distribute the proceeds to all residents equally. By doing that, two important objectives can be achieved: having public support and be most efficient. If it feels it has to do something more, it should find other means to address the impact on low income people.

There is not much that requires economists to do more than it already did. It is a puzzle that the government and bureaucrats have drafted distortionary and less efficient CPRS as it stood. The government was portrayed as a tax grab and bribing polluters. And the proposed subsidies to some were seen as an unnecessary Labor distribution agenda.

PS: the title is wrong from the start. Why should it be confined to the CPRS debate, as opposed to have the best policy options or actions? The government has moved on, but Dr Martin Parkinson hasn’t and hasn’t caught up even with his political master.

Global economic governance - from G8 to G20

Comments on Pradumna B. Rana “How can Asia strengthen its voice at the G20?”, 30/06/2010, http://www.eastasiaforum.org/2010/06/29/how-can-asia-strengthen-its-voice-at-the-g20/
While I have sympathy to some of the arguments of Pradumna B. Rana, I think it is important to recognise that G20 is much more representative than G8 and has stronger representation of Asian economies. Indonesia, a member of ASEAN, is part of the G20. ASEAN + 3 has 4 members in the G20.

It is important to consolidate G20 and not to derail or damage the progress already made while pursuing further goals.

The Asian members of G20 include economically and politically diverse group. The dual roles of those members should enable them to better coordinate their policies to advance both global and regional interests.

Climte change mission needs a fair international framework

Second comments on Xiujun Xu “China and climate change in the post-Copenhagen era”, 30/06/2010, http://www.eastasiaforum.org/2010/06/25/china-and-climate-change-in-the-post-copenhagen-era/comment-page-1/#comment-126430
This is to answer some comments on the post and my comments.

First to address Davis Gao's points, I am afraid you probably missed and misunderstood my point. I did not say or argue that I hope China does more than it has said it would do and I don't know how you got that impression. Further my point is about a simple and fair principle and framework that can be used to get an international agreement on global actions on climate change and that does not disadvantage any countries including China which may act alone in advance irrespective other countries act or not. My framework is totally consistent with the principle of “common differentiated responsibilities” that, I understood, is China’s public stance.

Second, while I have sympathy for the thrust of admin city’s main argument, I think China can and should take actions together with all other countries based on a practical, pragmatic and effective application of the principle of “common differentiated responsibilities”, rather than arguing for that principle without an effective and fair framework to make that principle stronger to argue and to implement. Again, I think my framework should provide the necessary ingredients for any and every reasonable country, rich or poor to accept.

Third, Mariyas’ speculation appears to ignore and to be contradictory to the fact that China has announced an ambitious action plan of reducing its energy intensity by 40-45% by 2020 from the 2005 level unilaterally even though its stage of economic development (if based on past experiences) requires much higher energy intensity now and its per capita emissions are much lower than most industrialised countries, especially the US. As in my first comments, I asked the question what had occurred at Copenhagen. Your further speculation does not seem to be helpful and is more confusing and misleading. Frankly speaking, that is not the right way to advance the climate change cause.

However, I do agree with countries taking actions in reducing emissions should not be punished. But we should also realise and acknowledge that without actions now it’s the industrialised countries that are emitting much more per capita CO2 into the atmosphere every day and every moment. That itself is not fair, is it?

We need and should be fair to everyone. To achieve that, we must adopt a fair framework to avoid unnecessary and distorted arguments.


Verrender's mischief-making

Comments on Ian Verrender “Mischief-making by big miners is on the nose”, 29/06/2010, http://www.smh.com.au/business/mischiefmaking-by-big-miners-is-on-the-nose-20100628-zf6h.html?posted=sucessful
While I share your idea of modify the proposed RSPT to something similar to the PRRT possibly with a lower tax rate. However, that is where our agreement ends.

Your argument that "For it is the existing mines, particularly those in operation for decades, that actually earn the super profits" seems to be a lot of nonsense. If you had just become a shareholder of those companies the day before the announcement of the RSPT, were you really making super profits by any of your imagination?

Shareholders of listed public companies don't have super profits due to share market arbitrage.

It seems that you simply do not understand the reality, do you?

For the rest of your argument, you can judge for yourself.

Swan still swimming in the wrong direction

Comments on Alan Kohler “CEO PULSE: An unfair tax feast”, 29/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/RSPT-mining-tax-rent-tax-Rudd-Gillard-pd20100629-6USUE?OpenDocument&src=sph
The most irony of the ALP leadership change is the promotion of Swan.

He was the most damaged minister of the Rudd ministry, probably as much as Rudd himself.

But he is from the right faction and it wants a senior representation in the leadership.

I think if Gillard is intelligent enough, she should sideline Swan in real terms while he still is apparently the deputy and Treasurer.

She should let Ferguson to do the hard work carrying her instruction, and step into the front when the deal with the mining industry is reached, leaving Swan only at the side of the room or table.

They should not do a separate deal with the CSG and should do a modified PRRT and call it RRT. There should be a uniform tax regime for the mining industry. The modification is the tax rate – it should be a little lower. It would be also possible to slightly increase the lift rate by a percentage point. By these two modifications, all mining can be accommodated.

Of course, as with the introduction of the PRRT, they should not be applied to existing mining production, except when there are further increases in mineral prices from the time the tax is agreed upon. If mineral prices are further rising, then those increases could be taxed.

Exact details can be worked out down the track, but an in-principle can be agreed.

That should be the blueprint for the mining tax front and that is the only practical strategy for her to take.

PS: the following is the first few paragraphs of the Kohler post:

“Australia’s CEOs are hoping Wayne Swan is not really as silly as he looked in Toronto, and that he comes back from the G20 meeting a wiser man than when he left.
As he strutted around Toronto saying: “we’re miles ahead of the game, you know”, other finance ministers would not have been envious, they would have been laughing. Meanwhile his colleagues back home are desperately trying to find a way out of the RSPT mess he left behind.
CEOs surveyed in the monthly Business Spectator Accenture CEO Pulse want Prime Minister Julia Gillard to fix the RSPT fast, and preferably drop the tax entirely – which is remarkable when you consider that the resource super profits tax is financing a cut in the company tax rate.
Most of the CEOs surveyed are not in the mining industry are therefore beneficiaries of the RSPT through the proposed cut in the company tax rate from 30 per cent to 28 per cent. But they’re not happy about that – they are too worried about the impact of the RSPT on Australia’s international reputation for stable and sensible government.”

McMullan is out of touch

Comment on Glenn Milne “Brutal truth of ex-PM's demise”, 29/06/2010, http://www.theaustralian.com.au/news/opinion/brutal-truth-of-ex-pms-demise/story-e6frg6zo-1225885407911
Understandably, McMullan has been in Canberra for too long to be in tune with what was happening elsewhere that matters. He is clearly out of touch.

For all Rudd's mistakes, the decision not to include McMullan in his ministry turned out to be the right one, even though ironically McMullan, of course wrongly, was arguing for staying with him.

People staying in Canberra for too long may, unfortunately, be exposed to the risk to be out of touch with the public. McMullan is a clear example.

However, don’t get me wrong, I don’t hate Canberra. In fact I am a Canberran and have been living in there for a long time.

But we have to face the fact and be objective, no matter how uncomfortable it is.


It is per capita growth not headline GDP that matters

Comments on Michael Stutchbury “Playing politics on population”, 28/06/2010, http://www.theaustralian.com.au/politics/opinion/playing-politics-on-population/story-e6frgd0x-1225884963233
Australia could accommodate a big population, there is no question about it.

However, it is not necessarily the best option for Australians to have a big one.

It is important to note that it is productivity and per capita growth that is much more important than the simple headline of GDP growth which includes the effects of population growth.

Australia should focus on productivity growth as the core strategy and optimise population through immigration programs.

The welfare of all Australians are the more important and top priority. Sustainability is and should always be secondary. Purely business considerations for more labour to benefit business profitability should be the last consideration of all.

Economics should make it clear and should not play too much of political economics for business only.


Wastes in public programs, statistics and GDP in Australia

Comments on Christopher Pearson “Panic in the ranks over whiff of mortality”, 26/06/2010, http://www.theaustralian.com.au/news/opinion/panic-in-the-ranks-over-whiff-of-mortality/story-e6frg6zo-1225884462916
While some credit should be given to the Rudd government in terms of having steered Australia away from a recession, the costs of achieving it are often neglected by many.

We don't really know in totality the triumph of avoiding a recession has outweighed its costs.

Even the wastes of some of the Rudd government's programs, while being counted in the GDP number to form the statistics of no recession, were large enough to change the headline of the story of a recession or no recession.

The values of some of the BER, for example, were inflated by some factors. In real terms, removing their effects could have tipped the statistics the other way.

Even the economics of Australia's having avoided a recession is murky.

In that light and the wastes in the stimulus packages, what roles were Treasury and Henry played in that process?

The past two and half years represents an excellent and rare case of public policy failures, from politicians to some top bureaucrats. It should be wonderful materials for case studies of public policies in Australia for students for the coming decades.

Role of factions and unions in recent Labor leadership change

Comments on Michael Costello “Unions, factions don't deserve all credit”, 27/06/2010, http://www.theaustralian.com.au/news/opinion/unions-factions-dont-deserve-all-credit/story-e6frg6zo-1225884465587
It is more likely now that the Labor will win the next election under Gillard than under Rudd.

There is no question that Gillard's performance and quality were important for her elected unopposed, but that does not mean that the factions and unions were less important in the recent leadership change.

If they had not started the motion and urged Gillard to run, Gillard would not have done it.

Also, if Gillard had not accepted their urge, they would have found another one to challenge, irrespective its prospect of success or not.

But it is true that the Westminster system is very different from the US presidential system where the president is directly elected by voters, while Australians only vote for their local representatives and they in turn determines the prime minister.


Krugman on macroeconomics and its miss of the GFC

Paul Krugman's article on macroeconomics: "How Did Economists Get It So Wrong?", 2/09/2009, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=1&_r=1&ref=paulkrugman

Gillard more likely to make a difference

Comment on Paul Kelly “Factions, patronage and survival”, 26/06/2010, http://www.theaustralian.com.au/news/opinion/factions-patronage-and-survival/story-e6frg6zo-1225884478423
Paul, I would be a little more kind to Labor and Gillard for the event in the past week.

Rudd's management style means not only that the government had great difficulties in implementing its policies, but also that it was difficult to get the policies right, irrespective what Labor's ideology and tradition.

Without respect for and consult with even cabinet and other ministers and with micromanagement with inexperienced and impractical advice, Rudd (and Swan for that matter) formulated wrong policies, with the RSPT as the most evident example.

Yes, Gillard may be also guilty of those mistakes to a degree because of her close involvement in some of those processes; she was loyal to Rudd and was unable to convince him to change. It was unfortunate for her.

I think she will be able to govern effectively as the Prime Minister, for three reasons: her reform credential, Labor having no other choice and a win by Gillard in the next election.

Firstly, she has reform credentials and can stand up against powerful unions, as you mentioned.

Secondly, Labor has no other choice but to allow her enough authority to do what she wishes to do, even that may mean changes to some of their tradition. Any other change to the Labor leadership is likely to be suicidal for Labor. That means she has a chance to exercise her authority and to make a difference.

Thirdly, if she wins the next election she will have the same authority and perhaps further than that Rudd got after the last election.

Labor's chance of wining the next election is boosted by the leadership change and also because she is the first female Prime Minister.

As long as she can resolve the mining tax and climate change issues quickly, she will win the next election, partly due to the fact that the opposition has a leader who is not very popular with the public.

History is in the making again and Gillard is given an excellent opportunity. She will win the Prime Ministership in her own right.

Giaalrd should get independent advice on RSPT

Comments on Jennifer Hewett “Swan ducks out of town”, 26/06/2010, http://www.theaustralian.com.au/news/opinion/swan-ducks-out-of-town/story-e6frg6zo-1225884439924
I think she might invite some respected and independent business leaders, such as the future fund boss and the government's infrastructure investment advisor and some tax specialists for a private meeting to get some advice how to redesign the RSPT to make it workable to satisfy both the government and the mining industry.

Such people are able to suggest the best way forward, more than both the government people and those miners because they have not very emotionally involved in the previous negotiations, or the Henry Review.

Even to get some fresh views would be important to the government.

Further, it can give the government a way to make significant changes without being seen as a backdown under the pressures from miners.


China should clarfiy its principle in international climate change

Comments on Xiujun Xu “China and climate change in the post-Copenhagen era”, 25/06/2010, http://www.eastasiaforum.org/2010/06/25/china-and-climate-change-in-the-post-copenhagen-era/
Copenhagen has generated many interesting claims, debates and results.

For example, we all know that Australia has just got a new Prime Minister. Some analysts attribute the starting point of the demise of the previous Prime Minister to Copenhagen.

Clearly the Copenhagen outcome was a blow to the former Prime Minister Mr Kevin Rudd, already struggled and unable to get his domestic CPRS legislation passed the senate.

No wonder it was reported he had foul words for China.

Back to China, what really occurred and what was China's stance then at Copenhagen?

It was reported that China even didn't want the developed world to agree or set reduction targets, why?

If China sets a target or reduction in energy intensity by 40-45% by 2020 from 2005, why did and does it not want or agree that to be verified, if other countries are to be under the same verification regime?

What does the principle of ‘common but differentiated responsibilities’ really mean and how to implement it in practice?

Why hasn’t China adopted the principle of equal per capita of emission right and a proper international compensation regime based on that principle in its approach in its international climate change policy and negotiations?

Under that regime, the net costs to China may be just its own action to meet its own international obligation, while industrialised countries will need pay most low emission developing countries for emissions above the allowed or agreed per capita average global level.

In that way, a simple, objective and reasonably fair international framework can be achieved for this complex international issue on climate change. That should be consistent to the principle of ‘common but differentiated responsibilities’, yet it can also easily be implemented and be fair with no or little room for argument.

It will be a show of Labor's tigress only

Comments on Arthur Sinodinos “Can Labor's tigress change her stripes?” 25/06/2010, http://www.theaustralian.com.au/news/opinion/can-labors-tigress-change-her-stripes/story-e6frg6zo-1225884022540
Potentially the more damaging slogan could be the "gang of four", or the "kitchen cabinet", that would clearly link Gillard to the Rudd era mistakes.

But it all will depend on what is done on the RSPT front, really.

If an early resolution with the miners very successfully, then Gillard will be endorsed as an effective leader to achieve good outcomes.

If the RSPT negotiations drag on and no prospects of a good resolution soon, then Gillard's link to the past will be further exposed and seen as equally incompetent as her predecessor she replaced.

So, it seems now everything is hinged on Gillard's performance and Abbott may have only a side role in the contest.

From RSPT to a sensible RRT

Comments on Dennis Shanahan “PM hits gold with her mining tax stance”, 25/06/2010, http://www.theaustralian.com.au/news/opinion/pm-hits-gold-with-her-mining-tax-stance/story-e6frg6zo-1225884022129
I think Gillard is right in being open to negotiation with miners and not being bonded to the $12 billion revenue from the proposed RSPT.

The most sensible strategy for Gillard is to preserve a nominal RSPT and achieve a real outcome that will be seen by both miners and the public as a fair deal and a tax reform.

I would argue that a deal with miner along the line of PRRT taking into account of existing state royalties and exempt existing mining production if minerals price is not higher than current levels, possible in terms relative some measure. If the minerals price goes further higher, then tax only that part of the existing production.

That will be simple and fair to both miners and the public.

Forget that proposed revenue and rebalance the budget using other means. If surplus cannot be achieved as budgeted, then delay for a year to achieve that. Making a sensible retreat will not be seen as a broken promise because of changed circumstances as the RSPT is modified and real progress made under her leadership.

Rebalance the budget shouldn't be difficult

Comments on Michael Stutchbury “True grit needed to balance budget”, 25/06/2010, http://www.theaustralian.com.au/business/opinion/true-grit-needed-to-balance-budget/story-e6frg9p6-1225884048738
The two issues are closely related and the solution to both lies in an overhaul and redesign of the RSPT similar to the PRRT taking into account of State royalties and a rebalance of budget through other savings, such as the potential savings from a smaller and more focused and more efficient federal public bureaucrats, as proposed by the opposition.

The big problem, though, is that Swan, the designer of the current RSPT, is still the Treasurer who is responsible for negotiations with miners on RSPT.

He should have step aside from the Treasury portfolio and move to another one like to finance, employment or education with the hat of the deputy prime minister on.

That is, a seemingly promotion to get him away from Treasury.

He is unlikely to be a good Treasurer after the RSPT debacle.

On the new PM, she does need to move away a bit from her past approach to industrial relations and pay more attention to market efficiency and productivity. That is for sure.

Pirate's logic

Comments on Wendy Dobson “The G8/G20 in Canada—what can we expect?” 24/06/2010, http://www.eastasiaforum.org/2010/06/24/the-g8g20-in-canada%e2%80%94what-can-we-expect/
We have heard over and over again about the imbalances and the need for rebalance.

I think the argument and stresses of international imbalances appears to be a disguised form of merchantism.

Jus consider what caused the GFC and its effects on the world economies of both the GFC causing economies and their victims. Was that the imbalances, or the so called excessive savings of those surplus countries, or the mal-practice and excessive leverage and gearing and misallocation of low cost capitals in some of the borrowing countries the sources of problems that caused the GFC?

Isn't it a pirate's logic for borrowers to say that it was the fault of those savers that lent their savings to them for them to use at their own wills? Why should people using mortgage complain and blame depositors for making the funds available for them to use?

Isn't any different to a drunk to say it was the retailer that sold the alcohol that was the problem of his being drunk?

Were they forced to borrow?

Why didn't they use the low cost capital to more productive purposes?

Didn't they need better infrastructure, like upgrading hospitals, roads and power stations?

Didn't they need to build low emission energies?

Now while it has been all too easy to argue one way or another and blame others for own problems in the wake of the GFC just a drunker could do, the originators of the GFC are not in a strong position to argue that others should save less and consume more and import more from them while their own economies reduced their imports by phenomenal percentages and caused havoc to economies over the whole world.

Isn’t it the case that the most important thing is to restore, stabilise and encourage growth in trade, while maximise world welfare by taking optimal paths of adjustment for the international economies?

Why should that necessarily be an immediate rebalance in international trade?

Duckling Swan still swimming and sweating

Comments on Alan Kohler “Gillard must mop up Swan's mess”, 25/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Gillard-must-mop-up-Swans-mess-pd20100625-6QT66?OpenDocument&src=sph
It indeed has been interesting to see that Swan has been promoted to Deputy Prime Minister and remains Treasurer, after so many Treasury disasters and the fatal RSPT fiasco.

I would have thought Swan should have been promoted from a senior minister. Even he has been promoted to the Deputy, he should have been removed from his Treasury portfolio to another non-economic portfolio to show to the taxpayers and the public that the new government is serious about its past mistakes.

The most interesting irony of this is that Swan has shown no loyalty to his former boss and long time friend Mr Rudd at all, given what he has done and the fact that it was him who had caused his former boss' top job in the country.

Haven’t we heard of “the gang of two” out of “the gang of four”? Haven’t we heard from Rudd what role Swan played in both the shelving of the ETS and the RSPT? (Actually no one needs to be reminded of Swan’s role in the RSPT because he was and still is the Treasurer.)

That does not look good for his character or personality – he does not have the gutter to take responsibility if things go bad.

On the other hand, Lindsay Tanner, whether it was coincidental or not, has shown a quite different story of loyalty from Swan.

It is indeed interesting politics, but I reckon it was for the numbers and political stability and once the election is over, we can expect more significant changes.

Even that, few would deny it is fascinating! That could, however, have laid the seed of future problems for the Gillard ministry.

While it is a matter and business for the ALP and Gillard to decide, I don't think Swan has the ability to do good for the nation, if his past performance is a guide.

Be fair dinkum to Gillard

Comments on Dennis Shanahan “Puppet tag and past errors loom for leader”, 25/06/2010, http://www.theaustralian.com.au/news/opinion/puppet-tag-and-past-errors-loom-for-leader/story-e6frg6zo-1225884045194
I think the change of PM to Gillard is good for the nation, irrespective how it occurred. The country is likely to be better under Gillard than either Rudd or Abbott, though I don't have personal ill feelings towards Abbott.

Politics can be ruthless and even cruel at sometimes, there is no question about it. Not everyone always likes what happens in politics everyday and all the time.

It is also good that Gillard is openly acknowledge her share of responsibility of the Rudd government and is making changes to government directions, such climate change and the mining tax issue.

Gillard has been extremely loyal to her predecessor the former Prime Minister Mr Rudd and no one should deny that. That is an important character of Gillard’s.

Further, while she has her share of the mistakes the Rudd government make, she also did remarkable work and had an enormous portfolio and worked very hard, although I personally would like people to work smarter and work as a team.

We Australians are fair dinkum, and I think the public should give a fair chance to Gillard to show her ability to manage the government as the PM.

Let's see what she will do in the coming months.


Gillard can address challenges

Comments on Paul Kelly “Labor leadership change rewrites rulebook”, 24/06/2010, http://www.theaustralian.com.au/news/opinion/labor-leadership-change-rewrites-rulebook/story-e6frg74x-1225883864100
I think two of the three challenges Paul Kelly listed, i.e. "the ETS retreat, the boatpeople dilemma and the war with the miners over the resources tax", can be handled by Gillard without much difficulty.

The ETS can be transformed to a low carbon levy/tax and then the proceeds be distributed to every resident in Australia equally to keep revenue neutral and return the proceeds to the public.

The boatpeople dilemma, is a relatively tricky issue, though it could be dealt with by announcing a new policy initiatives that indicates that Australia only accept the number of refugees each year in proportion to its share of population in the world.

Australia should encourage refugees to be distributed and accepted by all countries, including developing countries, but the rich countries can make some contributions to poor countries for their acceptance of refugees for a designated period for a refugee accepted.

In that way, it is more likely to deter some economic migrants seeking improvement in living standard in the name of refugees.

Perhaps Australia could negotiate and reach agreements with countries in the Asia Pacific regions.

By having this explicit policy for refugees, Australia sends a message that it will treat refugees humanely but will not be a heaven for refugees to come. Most, if they come, will be settled in possibly developing countries.

The resources tax should be largely abandoned or completely redesigned to mirror the PRRT. The only matter is to rebalance the budget in the out years.

RSPT faulties reflects those in Henry Review

Comments on Karen Maley “Gillard's RSPT minefield”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Gillard-RSPT-Resources-Maley-pd20100624-6Q9JC?OpenDocument&src=sph
It is not just the design of the RSPT that is seriously flawed but also the whole Henry Review that needs to be studied carefully.

For example, while raising the tax free threshold level for personal income tax, the review recommends a land tax of nearly all land use including principal residences for which there are many low income households would be taxed.

The two are fundamentally inconsistent and contradictory.

Yes, it might broaden the base of land tax, but just imagine that some pensioners who don't have much income to pay the land tax for their own homes. What would the government want to do with those who cannot afford that land tax? What kind of distortions that would produce for people’s lives?

Is that a good tax design? Definitely NO.

That is no more than another amateur design of a tax system.

Also on Gillard's new political climate

Comments on Giles Parkinson “Gillard's new political climate”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Gillards-new-political-climate-pd20100624-6Q2H5?OpenDocument&src=sph
The ETS was flawed and it has been a good thing for Australia it didn't get passed and was also good the government didn't spend much on advertisement.

The much more sensible approach is to introduce a low starting carbon levy or tax on energy consumptions and distribute the proceeds to every resident in Australia equally.

Also the levy can also be extended and applied to imports in terms of carbon contents. It may compensate low carbon emission countries from that levy. In this way there should be no or little trade distortions from a unilateral carbon tax from Australia.

In that way there is no or little distortions and exemptions and is revenue neutral and is much more likely to have the public support and most businesses.

It will be very simple and easy to sell.

The government can then provide additional incentives to further encourage production of low emission energies, if it has the financial capacity to do so.

The price paid by Rudd personally - and taxpayers

Comments on Christopher Joye “How Rudd's bad advice won Gillard power”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Rudd-refused-the-best-advice-pd20100624-6PUZL?OpenDocument&src=sph
This rare and useful information provides excellent insights into the pitfalls of decision makings at the top of the national government.

Of course, we can only see how the PMO advisors operated. Some other interesting of the picture would be how Treasury and the Treasurer operated in such an environment.

Ultimately, it was the combination of them, and possibly some other handful people involved in the process.

This is the price Rudd paid, but ultimately the taxpayers have paid for low transparency and mal-management by the government.

PS: I find the information is extremely insightful. In case that the reference would not be available for any reasons in the future, here is a copy of the article:

So Australia has its first female prime minister.

In the inevitable wave of post-mortems written about Kevin Rudd’s prime ministership there will be much made of his political mis-steps.
The absence of a historical constituency of factional support. The school-boy errors committed by his chief of staff, which disenfranchised key powerbrokers when he sought to count numbers on the PM’s behalf – a job typically left to MPs – and then leaked this fact to the media.
Here the lay observer might be confused. Yet to the initiated, Alister Jordan’s actions were insulting to Julia Gillard and her backers, since they insinuated that she’d been seeking to undermine the PM when, in practice, Gillard had been relentless in offering support. In the words of one kingmaker, this was the straw that broke the camel’s back.
Then there was, of course, Rudd’s unilateral decision-making processes, which in the early days of his administration were lauded by the commentariat as commendable reform to the archaic and undemocratic caucus system. In this context, the deliberate centralisation of authority within the closed-circle that was Ruddland was most clearly displayed by Kevin07’s determination to eviscerate caucus’ right to appoint cabinet ministers.
We will doubtlessly hear much talk of the ruthless retribution wrought by the serpentine unions that control caucus, and whose incredibly well-funded campaign against the coalition’s WorkChoices policy were essential ingredients to Rudd’s success at the last election.
Watching the slaying of a Prime Minister on Sky News and in real-time via twitter and text offered political tragics visceral satisfaction rarely experienced since the days of Ancient Rome’s coliseums. The advent of a world enmeshed by the internet has yielded us a new form of gladiatorial bloodsport, which, once shielded by elites behind closed doors, now plays out blow-by-blow in our living rooms.
While there will be many putative victors in this battle, perhaps the most intriguing is the charismatic hitman Paul Howes of the AWU, who in his late twenties is shaping up as the country’s most influential and politically capable union official and an heir to Bob Hawke.
But when all is said and done, the commentariat’s conclusions will miss the point. They will be consumed by the superficial symptoms of Kevin Rudd’s problems, rather than their underlying cause. This was not really about politics. The PM’s political errors were merely visible manifestations of a far deeper and more significant malaise.
At the end of the day, Rudd’s downfall was about leadership in the conventional managerial sense that the owners of small businesses and chief executives understand. And it was about the exceptionally poor preparation professional politics affords one prior to tackling the single most challenging leadership exercise of them all.
The early indication of Rudd’s date with a one-term destiny was his inability to recognise his own shortcomings. In any normal circumstances, the CEO of a major company who lacked experience relevant to his task would promptly compensate for this deficiency by surrounding himself with advisors that possessed the requisite skills. Take James Packer’s decision following his father’s death to immediately establish a council of the most weathered and hard-headed minds in the business. This talent was critical to helping him transition away from the family’s traditional media investments at the best possible point in the cycle.
By way of revealing contrast, Kevin Rudd constructed a benign dictatorship on the back of three influential twenty-somethings with virtually no experience at all. That is to say, his principal political, media and economic advisors had never held down day-jobs in the real world for any meaningful length of time. And how could they have been expected to do so? While brimming with talent, these guys had only been out of university for a handful of years.
Rudd’s decision to surround himself with youngsters who acted as echo chambers of his own opinions was a mistake of both stunning and catastrophic proportions. Having been out of government for a similar period time, his predecessor’s office, which was guided by veterans such as Grahame Morris, Arthur Sinodinos, and Tony Nutt, with decades worth of germane know-how, makes for an awkward comparison.
The composition of Rudd’s office was the most transparent signal that he had no idea what he was doing. If he was indeed a proven managerial maestro, he could have got away with it. (Some argue that Bob Hawke did.) Yet Rudd was none of these things.
Jejune hubris resulted in both Rudd and his advisors attributing their seamless success at the 2007 election to unique political skills, which appeared in no need of support, when, in fact, their ascendancy had more to do with an electorate fatigued with an ageing, multi-term prime minister, and the myopia born from having been inculcated from economic adversity for 18 years.
I was personally exposed to, and could empathise with, Ruddland’s naiveté. After years at Goldman Sachs, the Reserve Bank of Australia, and Sydney and Cambridge Universities, I felt like I could take on the world. I thought that there was really not much more I needed to learn. And it was with this mentality that I decided to start an awesomely ambitious business. Over the ensuing years I would learn that no matter how smart you are, there is simply no substitute for hard won, life experience. Rudd and his advisors will reluctantly arrive at the same conclusion when they reflect on what went wrong.
For better or worse, I also got to see first-hand the writing on the wall. One of Rudd’s consigliere would occasionally call me for economic advice. And these exchanges would reveal the raw inexperience that was driving the country. In the middle of the GFC I fielded a call asking me what the ‘commercial paper’ (CP) market was. Rudd’s office had been accused by the deputy governor of the RBA of inadvertently ‘killing the CP market’ with the government’s bank guarantees. What does all this mean, I was asked.
The commercial paper market provides the short-term funding needs for very highly rated corporations. By offering to lend the Commonwealth’s AAA-rating to banks and building societies with far lesser credit ratings, the government had unwittingly destroyed demand, or liquidity, for debt securities in more highly rated sectors that did not have the benefit of this taxpayer support. This included AAA-rated residential and commercial mortgage-backed securities, mortgage trusts, and highly-rated commercial paper that large companies relied on. I obliged with an explanation while at the same time wondering why I was having to supply one.
Then there was Rudd Bank. Australians were greeted with the surprising news that Rudd had decided to commit $2 billion of taxpayer cash, and nearly $30 billion worth of taxpayer guarantees, to bailing out small commercial property investors on the unstated basis that these assets posed a threat to the major bank’s balance-sheets.
So I asked Rudd’s advisor what their assessment of the risks had been prior to launching this unprecedented and expensive initiative. In particular, I asked what they thought the banks’ loan-to-value ratios (LVRs) were to the commercial property assets in question.
Westpac and ANZ had already had near-death experiences with commercial property in the early 1990s. Since that time all the majors had scaled back their exposures and adopted much more conservative lending practices.
My own intelligence suggested that the vast bulk of the loans were written with low LVRs of 50 per cent of less. This meant that the assets would have to suffer extraordinary hair-cuts in value before the banks were genuinely threatened.
Anyways, the response I received was worrying. The short answer was that the PM’s office did not know. Stunned, I enquired as to how they could possibly have made the decision to commit billions of dollars taxpayer funds without first having this information. After all, it existed—it was just a matter of getting it from the banks.
We cannot make head or tail of APRA’s data, I was told. But mate, you are providing hundreds of billions of dollars worth of taxpayer guarantees to these institutions. Surely you have asked for this directly from them? Nope. We primarily just meet with the chairmen and CEOs.
Shocked, I said, That’s a bit disturbing. The PM’s office should be getting fortnightly or monthly feeds directly from these institutions on all their key operating and risk metrics so long as the insurance is in place.
Backtracking, I was asked whether I could prepare a ‘data request form’ that they could then send to the banks. I naturally obliged and was subsequently told by senior regulators that the PM’s office had implemented the new regime.
The problem for Rudd and his advisors was they did not know what they did not know. The professional inexperience meant that they were being plagued by Rumsfeld’s ‘unknown unknowns’. But this is not the way it had to be. Rudd could have humbly taken the counsel of vastly more learned operators. That he chose not to is precisely why he is no longer Prime Minister today.
The temporary abandonment of the ETS was not the final nail in Rudd’s coffin. It was a politically expedient decision that most thoughtful folks agreed with. Rudd’s ute-gate was the RSPT. The irony of this is that the principle underlying the RSPT had near-universal support from academic and professional experts. The theory was sound. It was once again the ‘execution’, which is the most visible evidence of leadership, that was fatally flawed.
In an election year, Rudd ended up isolating vital nodes of support from the leader of the nation’s sovereign wealth fund, to directors of the central bank, the financially influential resources industry, and even his principal private sector advisor, Rod Eddington.
Perhaps the most unprecedented and withering criticism came from Australia’s most respected macroeconomist and Reserve Bank board member, Professor Warwick McKibbin. Yesterday he laid Rudd’s headstone:
“I also disagreed with the scale of the stimulus package, and I would say I was right... It wasn't evidence-based policy, they panicked…
The government rammed those decisions through the economy even though they were fraught with risk. No-one was consulted about an alternative view and if you did say anything you were attacked by the Treasurer and the Prime Minister in public...
The stimulus created a problem. The government overspent...so they come up with a really badly designed resource tax to try and get the position to look good three years from now, and in the middle of a sovereign risk crisis exposed the economy to a reassessment of sovereign risk...
I am stunned that the Treasury keeps supporting the government. The review of the tax system should have been independent of the Treasury and then critiqued by it and other economic agencies...
The government has ceased to use the Productivity Commission for sensitive questions. It should have been critiquing the National Broadband Network which is a gigantic white elephant waiting to happen.”

Rudd - from huge success to unprecedented loss

Comments on Alan Kohler “Ignorance, hubris, failure”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Kevin-Rudd-Julia-Gillard-leadership-challenge-spil-pd20100624-6PT7V?OpenDocument&src=sph
An excellent piece, Alan.

I think adding to the success or perceived one in tackling the GFC impact was the election victory that laid the foundation of his power centralisation on top of his autocratic management and leadership style. Without that election victory, he would not have been able to ignore the factions.

While his leadership style obviously played an important part, but seemingly good but actually poor advice from the advisors in his office and the federal beauracracy also had a role. He had not been served well by his chosen advisors, or the Treasury and its secretary Dr Henry in the process.
The spending to deal with the GFC was far too excessive and a large proportion of that spending was unnecessary.

That excess laid the foundation for the silly RSPT proposal and possibly the abandoning of the ETS to try to get to budget balance earlier for the purpose of election due to other policy failures, because he thought he needed something to back up his claim of good and conservative economic management.

It is imperative for Gillard to change policy tack

Comments on Stephen Bartholomeusz “Gillard's Labor must now change policy tack”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Julia-Gillard-Prime-Minister-Kevin-Rudd-leadership-pd20100624-6Q36K?OpenDocument&src=sph
Stephen Bartholomeusz has written an excellent summary of Rudd's and his government's problems and the root of those problems. I agree totally.

While Rudd has seriously flawed leadership style, it is not his communication that has been the problem of his government and his fall from grace from the public, it is his policy designs and his approach to leading the government and managing his ministry and the exclusive processes he preferred.

Gillard has her own challenges, but the likely goodwill from the public towards her and the sympathy for a first term government is likely to afford her an election victory.

She now needs to make changes quickly to three and possibly four important policy areas:

either abandon the RSPT altogether or completely redesign it

recommit to a new climate change policy with possibly a low carbon tax/levy with proceeds returned to everyone residing in Australia

new and urgent guidelines for BER spending that has not been spent yet, and

finally, yes, something on the BNB front: release any relevant information related to the NBN and redesign the NBN package.

RSPT must be abandoned or completely rewritten

Comments on Mike Mangan “That's it – the RSPT is dead”, 24/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Thats-it--the-RSPT-is-dead-pd20100624-6PTN8?OpenDocument&src=sph
Agree completely.

RSPT must be dead because it is so flawed and based on unrealistic and false assumptions and wrong and distorted modelling results even people with no modelling experience but with common sense can sense the results are wrong or manufactured to suit political needs.

Gillard also needs to make a quick and calculated move on climate change policy.

Once those two are done, she should be ready to fight and win the election.

China values good relations with Australia

Comments on Rowan Callick “Chinese serious about visiting rights”, 24/06/2010, http://www.theaustralian.com.au/news/opinion/chinese-serious-about-visiting-rights/story-e6frg6zo-1225883386123
China generally values its relationship with Australia greatly, partly as trade, economic and geography. More importantly, China views Australia as an important and possibly strategic partner in the west world. Certainly Australia is viewed as the one that can play an intermediate role between China and the US due to its alliance with the US and pro China stance in many international issues.

For better or worse, China does value good relations with its international friends, perhaps sometimes more than it should, but that is the way it has been in the past 60 years. If others treat it as friends, it has treated others the same and returned enormous goodwill.

There is no doubt that the relationship between the two countries will be further enhanced as the weight of the world economy further moves to Asia as the 21st century unfolds.

Congratulations to Ms Gillard our first female prime minister

News broke out that Julia Gillard has been elected unopposed as the ALP caucus leader and the prime minister designate.

Congratulates to Ms Gillard, well done!

Deep appreciation goes to the Prime Minister Mr Rudd for his gracious gesture of moving aside without contesting the ballot, that will leave the ALP in a much better shape to fight the next federal election. Mr Rudd has done the ALP a great service by leading them into the victory in the last election and was a very and in fact the most popular Prime Minister for much of his prime ministership.

Australia will enter into a new era from today, 24 June, 2010.

Bit surprised by the election of Swan as the deputy leader, but that is politics - anything can happen.

Despite that, the government needs to make significant changes to the RSPT, along the line of the existing PRRT.

Also it will need to make a new commitment to climate change policy, preferably a carbon levy/tax negotiated with the Greens. Start with a low carbon levy and return the proceeds to every Australian, so keep the public on side.

What Gillard can do to win the next federal election

Comments on Dennis Shanahan “Tussle will only make Labor's job harder”, 24/06/2010, http://www.theaustralian.com.au/politics/tussle-will-only-make-labors-job-harder/story-e6frgczf-1225883464291
A Gillard win in the ballot can only improve Labor's election chance, because Rudd has lost the public's trust and he can do nothing about it.

Rudd should stand down rather than fight to the last breath.

What Gillard needs to do is to make a quick reshuffle to replace those ministers seriously damaged, including the Swan and Wong.

In terms of policies, she should abandon the RSPT and recommit to an ETS, or to choose the even better alternative to have a low carbon levy on energy supply but distribute the tax to every Australians for them to choose and switch to low carbon emission energies. A levy on all goods imported can also be considered, but for developing countries some revenue reimbursement can be given.

It will be a real and the best action on climate change in the current international climate and will be revenue neutral.

Abandoning the RSPT will need a rebalance of the budget. But that should not be difficult by finding and making other savings.

The government should abandon the Henry Tax Review report by committing a study of the Henry Report.

Once the RSPT is neutralised, she can focus on climate change, health, education and the economy.


Gillard will be a good prime minister

News broke out that the ALP federal caucus are have a spill and vote for the leadership tomorrow morning. Rudd has called a press conference on that. He said that Gillard asked for a leadership spill and he has called one for that.

The federal government under the Rudd prime ministership has been in a very difficulty position over the past months, starting insulation problems but becoming more pronounced from Rudd's ETS backflip. The RSPT has manifested the difficulties further and the polls show the government has lost the public's trust.

Gillard has been extremely loyal to Rudd. I have argued that it is best for the Labor party if Gillard takes the leadership and it is best for Rudd to step aside for that to happen. It seems Rudd is not going to give up his prime ministership voluntarily and is likely to be forced out.

Should Gillard win the leadership ballot, she will be a very good prime minister for Australia, judged from her performance as the deputy prime minister over the past two and half years. She is competent and confident.

Henry's nice wish but wrong view

Dr Ken Henry, the Secretary of Australian Federal Treasury and the head of the Henry Tax Review which handed its final report to the government in December 2009, is reported saying that the contest of ideas was important for economists, particularly academics, but that had hampered the political debate on reform in the past, particularly on the former carbon pollution reduction scheme (CPRS) and pleading for economists to aid the implementation of major tax reforms by seeking to reach consensus viewpoints. See AAP report "No govt backdown on RSPT: Henry", 21/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/No-govt-backdown-on-RSPT-Henry-pd20100621-6M8L5?OpenDocument&src=srch

That is a nice wish, but a wrong view from the government top economic advisor.

He should concentrate on how to get policy design right, rather than wishing economists supporting his flawed designs, including both the government's troubled RSPT and failed ETS scheme.

As Mikibbin noted, the government responded to the crisis with much too excessive spending or cash handouts which was influenced and a direct consequence by Dr Henry's famous remark of "go early, go hard and go households".

Today's AFR (page 8) also reports some critiques from academics on Dr Henry's view on economists' critiques. Geoff Winestock reports (Henry lets slip the fog of war) John Roskam, the executive director of the Institute of Public Affairs, saying that "just as some natinal leaders have a political shelf-life, Hen Henry has passed the use-by date. His advice has become erratic and error-ridden. He seems more interested in partisan politics than rigorors policy analysis."

McKibbin is correct on Rudd government's crisis handling and RSPT

Comments on report "McKibbin slams Rudd's handling of GFC, RSPT", by businessspectator, 23/06/2010, see http://www.businessspectator.com.au/bs.nsf/Article/McKibbin-slams-Rudds-handling-of-GFC-RSPT-pd20100623-6NTTX?OpenDocument&src=hp2

I share McKibbin's view totally, as the indicated in the following report:

"Reserve Bank of Australia board member Warwick McKibbin has slammed the federal government's handling of the global financial crisis, and labelled Prime Minister Kevin Rudd's response to the downturn as "panicked" and "rammed through", according to a Fairfax Media report.

According to the report, Mr McKibbin said the government had overspent on the stimulus package it implemented during the downturn, and was trying to compensate with a "really badly designed" resources super-profits tax.

Mr McKibbin hit out at Treasury Secretary Ken Henry, saying that his fellow RBA member does not consult experts on economic issues and instead attempts to silence them.

He also said Labor's planned $43 billion National Broadband Network was a ''gigantic white elephant waiting to happen''.

The comments come as Kevin Rudd comes under increasing pressure over his leadership, with the PM privately gauging the extent of support for his position among the Labor party."

PS: for a longer report by Stephen Bartholomeusz titled "Warwick the wise", 23/06/2010, see http://www.businessspectator.com.au/bs.nsf/Article/Warwick-McKibbin-RBA-RSPT-mining-tax-resource-supe-pd20100623-6P3K8?OpenDocument&src=sph
To quote the first few paragraphs:
Reserve Bank board member and leading economist Warwick McKibbin has shown some courage in making an explosive contribution to the debate about the Rudd government’s management of the economy and the quality of the design its proposed resource super profits tax.

As McKibbin himself noted in an interview with The Age, the government – he nominated Kevin Rudd and Wayne Swan – has a tendency to attack their critics, vigorously.

The potency in McKibbin’s criticism of the government’s policies is that it isn’t just a critique of a ‘’really badly designed resource tax’’ or of ”a gigantic white elephant waiting to happen" in the $43 billion national broadband network, but a holistic assessment of the government’s economic management credentials that puts the RSPT in context.

He accused the government of panicking in response to the crisis and ramming through decisions "fraught with risk". It had over-spent in its stimulus package (and, indeed, is still stimulating even as the RBA raises official interest rates to control growth) and had then come up with the RSPT to try to compensate.

In order to get that spending back on track and ‘’because of the politics" claim a fiscal surplus – for which he said there was no economic basis – it had come up with a badly designed tax and "in the middle of a sovereign debt crisis exposed the economy to a reassessment of sovereign risk".

Fighting terrorism and the Afghanistan issues

Comments on Michael O'Connor “Best we can do is to pull out of Afghanistan”, 23/06/2010, http://www.theaustralian.com.au/news/opinion/best-we-can-do-is-to-pull-out-of-afghanistan/story-e6frg6zo-1225882965439
The strategy for the international community is to fight, deter and contain terrorism and sponsors of terrorism.

It should not get involved in any other political, religious or ideological conflicts as long as they don’t endanger people’s basic human rights (need to be defined clearly), especially those conflicts are contained in a country.

For Afghanistan, the international community should stop fighting the Taliban and encourage it to be a constructive party in that country as long as it renounces and does not sponsor terrorism.

If it accepts the conditions of renouncing terrorism, the international community should sponsor a peace deal between all parties in Afghanistan.

It should make it clear that no terrorism is tolerated and will be fought with force.

The strategy should be to fight and destroy terrorism organisations and leave. Give aid to reconstruction.

Timing is essential for Gillard

Comments on Peter van Onselen “Julia may have missed the bus”, 23/06/2010, http://www.theaustralian.com.au/news/opinion/julia-may-have-missed-the-bus/story-e6frg6zo-1225882964227
Gillard has not missed anything!

Anything can happen from now to the polling day.

ALP may still change the leadership at any moment.

I think Gillard's strategy is the correct one, that is, to wait further for Rudd to step aside, or other people to remove him as opposed to her standing up and challenging Rudd. Her strategy would give the voters more sympathy for her. Also voters will not be too harsh on her BER role.

I think Gillard will lead the ALP to the next election and will win it, but not by too many seats probably.

But she will need to change leadership style, be more consultative and inclusive of the whole ministry. That will be assisted by having some more competent advisors.

She will need to build a more effective and cooperative federation. That will require the federal government work with the States on areas where efficiency can be achieved.

There is no need to further centralise powers to Canberra. Every state can contribute to make a better federation.

There is a need to clarify revenue and service responsibility. But that does not mean further centralisation and possibly means decentralisation of revenue powers or sharing revenue.

When differences among the states are detrimental to cooperative and competitive federation priority should be given to encourage harmonising different regulations among them.

It would be better to leave health and public hospitals with the States, but clarify a funding mechanism.

There is a need to have a federal agency for Indigenous people, to work with the States to improve Indigenous wellbeing.

Forget and ignore the Henry Tax Review because it is too damaging. Alternatively, set up a wider and more inclusive panel to study the report and recommendations and start with a new set of recommendations.

Industrial relations need to be more balanced. While workers’ rights need to be protected, efficiency and productivity must be given more weight. That is because in the long run only productivity matters in any given equity considerations.

It is important to aim at small and efficient government. Government spending should be further scaled down and concentrate on essential areas.

More independent public institutions should be encouraged. Those institutions should not be tied to bureaucratic agencies and should be oversight by parliaments.

Another point, deliver more and promise less. That is an important and enduring lesson from Rudd’s Prime Ministership.


It will not be long before Gillard as the Prime Ministership

Comments on Peter van Onselen “Julia needs to act to save the party”, 22/06/2010, http://www.theaustralian.com.au/news/opinion/julia-needs-to-act-to-save-the-party/story-e6frg6zo-1225882500751
While the best thing for ALP is for Gillard to be the leader as early as possible, the best thing for Gillard is for Rudd to step aside voluntarily.

However, Rudd is probably very unlikely to do that just yet.

So it is up for the ALP national machinery and other senior ministers to do some necessary background work to persuade Rudd to take that step. Rudd is very intelligent and may decide to do that when he is convinced that he will not be able to win the next election.

It will hurt personally for Rudd, but he may realise that is the least bad outcome under the current circumstances. It will pave way for a better prospect for his future career.

It is likely that a change in the ALP leadership if the bad pooling continues. Once the leadership changes, the election will follow soon assuming the voters will give Gillard a honeymoon period and enough goodwill for her to win the next election.

Mundell prefers fixed exchange rate for its stability

Bloomberg's Sophie Leung reports that "Robert Mundell, the Nobel Prize- winning economist, signaled that China’s pledge to return to a more flexible exchange-rate policy may erode stability in the global and Chinese economies."

See http://www.businessweek.com/news/2010-06-21/nobel-laureate-signals-yuan-move-to-erode-stability-update2-.html

Mundell appears to support fixed exchange rate for its stability over floating rate's swings.

The report says "Mundell, credited as the intellectual “father” of the euro, has previously called for the European currency to be fixed against the dollar, saying exchange-rate swings were a cause of the global financial crisis."


A solution to some of current problems in euro zone

Comments on Bill Evans “Europe's dark clouds”, 19/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/WEEKEND-ECONOMIST-Europes-dark-clouds-pd20100618-6J9XJ?OpenDocument&src=sph
While having own currency for troubled members could be a solution, there is no need for a new currency or currencies for any euro members.

The euro zone could initiate intra-euro trade measures that have effective currency effects.

Such measures include allowing a troubled country to have a tariff on imports from other euro members and use the revenue to subsidize its exports.

It will be equivalent to own currency depreciation in a common currency area with no own currency.

Those trade measures, while inconsistent with WTO rules, should be only applied within the euro zone and should be acceptable to euro members as a better alternative to re-creating own currencies for some current euro members.

Be accountable and pay political prices

The policy mistakes and delivery debacles and the associated wastes of taxpayers' money by the Rudd government have to be accounted for by some political leaders from the government. They are inexcusable. Someone or persons have to go.

It may be the PM, or the Treasurer, or both.

For the PM, it is ultimately his responsibility, because he has been the prime minister and many issues of his government had are a reflection at least in part his leadership style.

For the Treasurer, it is some of the economic policy designs. The RSPT is an example because it is from the tax review chaired by his department head and ultimately it is his cabinet recommendation.

The deputy prime minister also has serious responsibility of her own, mainly because her role in the BER wastes. That, I think, is one of the main reasons she has not been ready to challenge the leadership. But she may be excused if either the PM or the Treasurer or both are taking the responsibilities for policy failures.

But if the government is to be serious in wining the coming election within a few months time, it has to change course and change leadership.  If the ALP federal MPs and senators are rational, they should take the necessary action to initiate them to allow them the chance to win. The earlier the action being taken, the better the chances for them to change their political fortune. It is in their own hands.

Redesign resources taxes

Comments on Michael Stutchbury “Quick truce unlikely in resource tax war”, 19/06/2010, http://www.theaustralian.com.au/news/opinion/quick-truce-unlikely-in-resource-tax-war/story-e6frg6zo-1225881544801
The government has to abandon the RSPT at the current form and break the link between the planned RSPT revenue and surplus in 3 years time.

It can find savings from reducing public service expenditure just as the opposition proposed.

There is no point in making some cosmetic changes to a fundamentally flawed tax design.

It needs to redesign the resources tax from scratch. It needs to clearly define super profits for the resources industry and tax on those super profits. It needs to exempt the existing operations, but with an extra super profits provision to tax future extra super profits if minerals prices go up further.

It does not need to treat different minerals differently, if the super profits are properly and clearly defined because low value quarries don’t have super profits.


Krugman's right economics at the wrong time

Comments on Paul Krugman “That ’30s Feeling”, 17/06/2010, http://www.nytimes.com/2010/06/18/opinion/18krugman.html

What Krugman argues is probably the right economics but at the wrong time.

Maybe the relationship between the cost and benefit (or perceived or expected ones) of government spending and the government debt level is non-linear.

When government debt gets too big, the costs of a further increase are likely to be greater.

That is certainly how it works for the private sector.

Government is a little different and a government has more room to move, but it is likely to have some limits.

PS: This is what Krugman argues:
"Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.

America's renminbi rumble and need for a sense of reality

Comments on Karen Maley “America's renminbi rumble”, 18/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/Americas-renminbi-rumble-pd20100618-6HSQN?OpenDocument&src=sph
Maybe some of the US lawmakers need to get a reality test for their own senses.

They have always acted as big brothers and threat others this or that.

They have always thought their threat would work and it is true that in the past they have worked as no other countries with strong trade interests with the US were strong enough to confront with the mighty US, politically, militarily and economically.

What will they do if they see one day that their threats are not working and doing more harm than good to themselves?

It is a big game and brinkmanship at the international stage they have played.

The problem with their plays now is that the international situations have changed so significantly that some countries can and will stand up to confront them sooner or later, probably very soon.

Just imagine that they initiate some trade measures against China now and China retaliates, what is likely to happen to the US economy and employment?

When that occurs, those lawmakers will get a dose of reality.

They may realise the story of the emperor's new cloth.

A true super profits tax on mineral resources?

Comments on Henry Ergas “Kevin 7/11 needs to think long term”, 18/06/2010, http://www.theaustralian.com.au/news/opinion/kevin-711-needs-to-think-long-term/story-e6frg6zo-1225881068608
It appears that few taxes are not distortionary in practice.

The Brown tax has its own problems. Firstly, why should the government be a passive partner in mining investments? Secondly, why should the owner of mineral resources to take an equity return with no return to the value of the mineral ownership?

Further, while the PRRT style taxes, like most taxes, can't avoid distortions, the set of the tax-free threshold clearly should surely allow the minimisation of distortions.

If that is considered unacceptable, maybe a resources profits tax based on the movement of resources prices should be considered. Under such a resource profit tax, the tax can be progressive if the prices are above a reference level, or above a reference level relative to other general prices. The higher the resources prices, the higher the profit tax rate.

It would be a really super profit tax on resources if resources are taxed in such a way. It, however, could be a bit more complex.

As with all other similar tax proposals, there is a need to treat existing mining production differently and I am afraid to say that will make it even more complex. But that is life.


Munif Mohammed's ROCE illustration contributes little to RSPT debate

Comments on Munif Mohammed “The tax is a matter of ROCE”, 17/06/2010, http://www.businessspectator.com.au/bs.nsf/Article/RSPT-ROCE-effective-tax-rate-pd20100617-6FUUB?OpenDocument&src=sph
I am not sure this piece isn't more misleading, in the sense that the impact on the real return to the equity investors can be more pronounced after the RSPT and interest payments to lenders, because the RSPT is based on pre-interest payments earnings?

Besides, what the author shows is no more or less than the effects of the 6% RSPT free effect. The limit (of the trend shown in that graph) is clearly 40%, as the headline of the tax indicates.

One is left with what this piece really contributes to the debate.

It seems only more confusion being produced or generated by it.

A flawed tax is a flawed tax. There is no point to "make-up" it to look good.


How to fix the government's proposed RSPT?

There is report that the Rudd government may consider changes to its proposed RSPT. See Dennis Shanahan and Matthew Franklin "Kevin Rudd starts to budge on mine tax", 16/06/2010, http://www.theaustralian.com.au/politics/kevin-rudd-starts-to-budge-on-mine-tax/story-e6frgczf-1225880140102

The report says that "THE Rudd government is considering modifying the resource super-profits tax for the burgeoning coal-seam gas industry and changing the rules on the 40 per cent tax for different minerals - the first sign of compromise in its damaging battle with miners."

A number of broad principles should be adopted to fix the RSPT.

1. Abandon the idea of being an equity partner with mining companies, irrespective the level of partnership. The tax should be a royalty, not a return to equity.
2. Raise the tax free threshold to adequately reflect risks of private capitals in the mining industry, that is, instead of risk free threshold, it should be risk adjsuted tax free threshold.
3. Exempt the existing mining production and already invested and planned investment, with a provision that if the mineral prices are higher relative to some benchmark, then tax on those higher prices.
4. Determine what rate to tax above the risk adjusted tax free threshold.
5. While different minerals should be treated in the same way in principle, low value mineral products should be exempt from the tax. Alternatively, only in extremely rare cases where it is very clear to identify that the risks to private capital are different, a different risk adjustment be applied.

PS: I have developed another idea that may look better than any of the current resources tax proposals or other ideas, see http://mrlincolns.blogspot.com/2010/06/true-super-profits-tax-on-mineral.html


Gang of Two or Gang of Four

Comments on Glenn Milne “Tax backlash leaves Gang of Two isolated”, 15/06/2010, http://www.theaustralian.com.au/news/opinion/tax-backlash-leaves-gang-of-two-isolated/story-e6frg6zo-1225879648020
Gang of Two means Rudd and Swan. Gang of Four also includes Gillard and Tanner. They are all guilty of the significant policy errors and mistakes by the Rudd government, although at the moment, it is the Gang of Two who are in deep trouble because of the RSPT impasse.

In order for the government to survive, it appears that someone or people among the Gang of Four have to be held responsible, because the Rudd government has got to a stage and situation that it has no room to move but to retreat significantly from the RSPT.

It may be Rudd or Swan along, or both. But politics is not necessarily rational.

It will be interesting to see what will happen and when it will happen.

Rudd's problems his own making - even Bishop could not help Rudd much

Comments on Peter Beattie “Rudd needs a Bishop to tell him the truth”, 15/06/2010, http://www.theaustralian.com.au/news/opinion/rudd-needs-a-bishop-to-tell-him-the-truth/story-e6frg6zo-1225879621648
If there had been a Bishop with Rudd it could have been a little better but probably by much.

It is not just others but also the main person to be advised to be important in that business.

Rudd's leadership style in combination with his success in the last election has been his own downfall.

Keynesian not dead but require discretion

Comments on Michael Stutchbury “Crisis puts nails back in Keynesian coffin”, 15/06/2010, http://www.theaustralian.com.au/business/opinion/crisis-puts-nails-back-in-keynesian-coffin/story-e6frg9p6-1225879617867
Frequent interventions by governments in terms of fine tuning the economy in the tradition of Keynesian may not be desirable, given government's ability and capability to get things right, as well as political problems and constraints.

That, however, does not mean Keynesian should be completely abandoned altogether and never be used, such as the case in the wake of the GFC where there was a clear case that prudent government interventions can outweigh the costs of those actions.

It seems that Keynesian should be used for two main purposes. Firstly, it should be used in an emergence or a crisis where market would take too long to correct itself and restore broadly appropriate macroeconomic settings.

Secondly, it may be used for purposes of media and longer term structural adjustment, as opposed to deliberate counter cyclic fiscal policy beyond its autonomous stabilising effects.

If a government has the ability to fine tuning, then it could also conduct counter cyclic fiscal policy, but it is generally much harder and requires much higher policy design and implementation capacity by the government and the bureaucracy working perfectly in close cooperation.


True picture of China's economic issues is far from clear

Comments on “Private sector investment in China: Unshackling the engine of growth”, Special Report by EAF team, ANU, 13/06/2010, http://www.eastasiaforum.org/2010/06/13/private-sector-investment-in-china-unshackling-the-engine-of-growth/
It is very strange that the private sector in China even does not have the same access to industries as foreign companies.

It is sometimes also difficult to understand some Chinese statistics and studies. For example, while the statement in the second last paragraph may have its basis or facts, it is not certain how comparable those facts are.

Clearly, many complaints have been made to the fact that many SOE's pay much higher salaries to their employees. At the same time, it is also reported that workers in many companies are not paid enough.

That is contributing to many social problems, such as income distribution and inequality, workers rights, long working hours and poor working conditions, low or no social securities.

SO, if relating all main economic issues in China and taking a holistic view, is the statement in that paragraph really meaningful? I am not that sure anymore as those researchers, although they are fairly reputable ones.


China and the Chinese are not stupid

Comments on Edward Kus “Is China returning to old ideas?” 11/06/2010, http://www.eastasiaforum.org/2010/06/11/is-china-returning-to-old-ideas/#more-12393
China is never likely to return to those old ideas that Edward Kus mentioned.

For one thing, those ideas were formed in the long history that China knew very little the outside world due to geographical, transportation and communication barriers between China and the outside world.

The west invasion has forever changed those old ideas.

They may never give up certain values of their own as every nation won't, but China and the Chinese have moved on.

They are not as silly or stupid as some other people with their own old and outdated ideas are.

Globalisation and the benefits China has derived from it means it will never retreat from integration with the world.

It is just as simple as that. To say or believe otherwise is not only ridiculers but laughable.

Dump the Treasurer and the RSPT and change tactics

Comments on Paul Kelly “Cornered by his own trap”, 12/06/2010, http://www.theaustralian.com.au/news/opinion/cornered-by-his-own-trap/story-e6frg6zo-1225878635983
The only feasible way solution is to acknowledge that the announced RSPT is flawed and attribute the flaws to its designer, the Henry tax review to distance the government from it or at least to create an acceptable excuse for the government, so it can have some room to manoeuvre and turn its political fortune around.

Either the PM, or the Treasurer should take full responsibility for that, although it is more likely that the Treasurer should, give that the RSPT has been the product of his department.

Then the next step is to replace the RSPT with a similar PRRT and call it MRRT that exempts all existing mining production.

Some other details such as the relationship between the existing state royalties and the federal MRRT can be worked out in negotiations over the next months.

In the media and longer run, the PM needs to change his style of leadership and replace his key advisors.

He needs to be more trustful to other cabinet colleagues. The over centralisation and control freak never work well on very broad tasks like the running a country.

He needs to have more practical advisors with workable policies and policy solutions. The idea to have people work dog years is never to be admired or adopted.

Failing to do that, he has no options by to pass the leadership to another person after the next election.


Very fast train in the eastern states worth considering

Comments on Gary Jones “A Very Fast Train after the election?” 10/06/2010, http://www.theaustralian.com.au/news/opinion/a-very-fast-train-after-the-election/story-e6frg6zo-1225877645958
VFT should be considered and be studied very carefully.

The government should openly conduct a bidding process to commission two initial studies and if the conclusions are positive then openly commission a feasibility study.

The NBN approach should never be repeated and must be avoided.

Irrespective a VFT or not, it is too important to just rely on some persons opinions even though some of them may be "experts".

Australia has built a rail line between Adelaide and Darwin. A VFT in the eastern densely populated areas should intuitively be more economical than the Adelaide Darwin track, given the population there is less than two million while in the east there are more than half of the nation’s population.


Lessons from fox attacks on babies in London

ABC report by Europe correspondent Philip Williams says that "Twin baby girls are being treated in hospital for serious injuries thought to have been caused by a fox in London."

See "Sleeping babies 'attacked by fox'", 7/06/2010, http://www.abc.net.au/news/stories/2010/06/07/2919773.htm?section=justin

The report also says:
"A police spokesman says they are not treating the incident as suspicious.

Reports of fox attacks on babies are not unknown, with the last one occurring in Britain in 2002.
Foxes are common in the British capital, where they live in parks and disused land."

If foxes attack human babies in people's homes, it means their natural environment is severely threatened; otherwise they would not dare to do such dangerous things at such high risk to their lives.

We human beings need to consider this issue and ensure a peaceful environment for animals as well as for ourselves.

Political economy of trade, partial economic theories/models and true optimality

Comments on Ronald I. McKinnon “Why exchange rate changes will not correct global trade imbalances”, 5/06/2010, http://www.eastasiaforum.org/2010/06/05/why-exchange-rate-changes-will-not-correct-global-trade-imbalances/
It appears that there are more than one factor working in the issues of trade balances - the elasticity and more fundamentally savings and investment behaviours, as well as various preferences and behaviour inertias, both short and long terms.

So the economic reality is invariantly much more complex than many nice but mostly partial economic theories and models based on certain assumptions and focus on certain aspects of the reality.

The main issues are largely empirical in nature.

The US has tended to run trade deficits for fairly long period of time, with different countries on the other side of the balance from time to time and as its target of trade wars.

The question is not just China with its currency pegged to the $US has trade surplus with the US, but also some other countries whose currencies are free to adjust that also have trade surpluses with the US.

While the US can blame China for fixed exchange rate, how should it blame those other countries?  Which countries should and can the US to blame for its budget deficits over a very long period that is internal in nature? Still external high savings countries?

Besides, bilateral trade balance is not and should not be the benchmark for trade balance in a multi-country trade in the world as it is. To require bilateral trade balance will mean huge losses in global welfare due to losses in trade opportunities.

Further, optimal trade balance even for a country should be over a sufficiently long period and should not mean balance year by year.

But trade is economic as well as political, so people from short term political point of view often selectively quote or use some partial economic theories to their advance their arguments. Even economists sometimes can act either inadvertently or deliberately in that way.

Paul Krugman, a fairly recent Nobel Economics laureate, is an example in this regard. Of course, he is famous for strategic trade theories, after all.

The RSPT and Brown tax - what are the rationales as a rent tax?

Comments on Ben Smith “Government should pay up front for its share of mining companies' costs”, 7/06/2010, http://www.theaustralian.com.au/news/opinion/government-should-pay-up-front-for-its-share-of-mining-companies-costs/story-e6frg6zo-1225876178390
While the rational and its niceties of a Brown tax may be very clear to some economists, it is unlikely to be so for most people.

Now let's leave the government's proposed RSPT aside and focus completely on the Brown tax argument.

If that is good as it can get as claimed, then why 40%, not any other percent, say 80%, or 10%?

The partner approach of the Brown tax makes the rent argument superfluously unnecessary.

So, in the end, is it a rent tax, or tax, or purely return to a compulsory business partner?

PS: Ben Smith is among the 20 leading economists who made an open statement in support the government's RSPT. It is unclear what relationship of this post to that statement to me now.

PPS: I should point out that Ben was one of my supervisors to my PhD study at the ANU in early 1990s, so I know him well and respect him very much.

Global energy security needs greater global cooperation

Comments on Andrew Kennedy “Rethinking energy security in China”, 6/06/2010, http://www.eastasiaforum.org/2010/06/06/rethinking-energy-security-in-china/
I agree completely that a multilateral approach to energy interdependence is the best way forward for China.

China's rapid industrialisation and urbanisation process has further exposed problems in world energy in terms of efficiency and over reliance on non-renewable fossil fuels and will continue to do so, as well as energy security.

Globalisation requires strengthening global institutions and cooperation more effectively.

Energy is an important part in global cooperation. It has the potential of rivalries and conflicts and Iraq has probably been a case study.

Stop the NBN rot

Comments on Matthew Denholm “Just 16 per cent tipped to take up NBN”, 7/06/2010, http://www.theaustralian.com.au/news/just-16pc-tipped-to-take-up-nbn/story-e6frg6n6-1225876225571
This is why the government is a very poor economic manager and an even worse budget manager.

In that sense, it is encouraging that the government is demonstrating it in full in so many areas full of mistakes, errors and wastes in current projects.

It will be good to stop its further rotting.

That time is coming.

To just quote the first paragraphs from the report:
"ONLY 16 per cent of homes and businesses passed by national broadband network fibre-optic would choose to connect to it, even after 15 years.

The surprisingly low estimates were prepared by the Tasmanian government and have been released to The Australian under Freedom of Information law, in a ruling by state Ombudsman Simon Allston.
Also released are documents showing Tasmania initially wanted the NBN rolled out mostly via wireless technology - rather than fibre - as a more cost-effective delivery method.
This would appear to support criticisms of the Rudd government's eventual NBN plan for relying chiefly on more expensive optic fibre to deliver high-speed internet."


Duel aims of Malaysia's NEM interesting, but realistic?

Comments on Shankaran Nambiar “Malaysia’s New Economic Model as a rebalancing strategy”, 5/06/2010, http://www.eastasiaforum.org/2010/06/05/malaysias-new-economic-model-as-a-rebalancing-strategy/
It seems that rebalancing has been very fashionable and now become a buzz word.

Despite that, I would like to go against the fashionable trend and focus on the other point the author of the post did not discuss much.

I note that Shankaran Nambiar stated that "Malaysia’s New Economic Model (NEM) serves to address two crucial issues that confront the nation. First, Malaysia for some time now has had its feet caught in the ‘middle income’ trap. It is now keen to graduate to a high income status, joining the likes of Singapore, Taiwan and Korea."

Shankaran Nambiar seems to argue that high aggregate savings in Malaysia in the past or at present are abnormal and are only normal in economies where uncertainties are high. High savings, of course, are seen by some as sins that caused global imbalances that need to be rebalanced.

Shankaran Nambiar somewhat appeared to be caught in a difficulty that the GFC seems to imply the death of export driven growth model and yet Malaysia is too small in terms of population to become a sufficient market for it to grow.

I somehow seem also being caught by Shankaran Nambiar's difficulty, but for different reasons.

I was wondering if Malaysia's NEM has duel aims to both catch up with Korean, Hong Kong and Singapore and rebalance, then whether the paths of the latter's growth where high savings and export driven growth may have played an important role have any relevance to the NEM.

It seems to me that Malaysia needs to be much more creative to create a new growth model that is supposed to be better than the models of the other three.

That is my difficulty with Shankaran Nambiar's ambitions duel aims that implies a high degree of uncertainties, perhaps even much higher than that implied by the high savings.