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Better economic policy means less central bank independence

Comments on Graeme Wells “Stiglitz is wrong to dismiss central bank independence”, 29/01/2013, https://theconversation.edu.au/stiglitz-is-wrong-to-dismiss-central-bank-independence-11745

The independence of central banks from government of the day has its merits, although a central bank should be more ideally subject to the overall coordination of an integrated economic oversight committee so the best combination of monetary and fiscal policies can be more easily achieved, as what is meant in economics.

This view on the independence of cantral banks is different from the conventional view of dependence in relation to government of the day.

Based on this criterion, Stiglizt's idea is not too bad.

The key is how to have a national economic oversight committee that serves the people as opposed to political parties that have their own political interests that can often be in conflict with the people's interests.

Further, how to deal with a government formed by elected political party members by such a committee also needs careful considerations.

But a national debate should be had on these sorts of questions. Without such debates, new and more effective economic governance is unlikely to appear.

A proposal to amend the constitution to achieve long term benefits

Comments on Robert Gottliebsen “Abbott's controversial new foundation for Australia”, 29/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/How-Abbott-would-lay-a-new-foundation-for-Australi-pd20130129-4DSH5?OpenDocument

While the aspirations are fine, but to me Australia needs more bold and creative thinking.

Perhaps, the most important strategic policy Australia could do is to amend the constitution to achieve two important goals:

1. to enable a stable and more equal relationship between the commonwealth and the states. That will be a lot of work to improve the federation, but the past experience suggests that the federal government has too much power at the expense of the states to be a good federation.

2. to mandate a fiscal framework that automatically constrains any federal government's expenditures and revenue to not exceed a set ratio to the GDP.

Without a hard constraint, government of the day can choose easy and lazy ways as opposed to better and effective ways to govern.

With a hard constraint, political parties will have to compete for better skills in governing and administration, leave the private and household sectors with more resources to use and a better policy environment to be creative and better off.

Australia will be much better off if amendaments to the constitution to such effects are introduced. And the sooner it is done, the better it will be for all Australians.

An international strategic monetary gaming has begun

Comments on Stephen Koukoulas “Don't cool the world growth jets too early”, 29/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/global-economic-growth-GDP-stock-market-rebound-pd20130129-4DRQN?OpenDocument&src=sph&src=rot

The risks now are not on the side of cooling too early. Instead, they are on the side of pending worldwide inflation. In the new competitive loosing monetary policies internationally (at least in major western industrialised countries including the US and EU, and now Japan has joined), would any stimulating policies of such type have any effect on the real economies in those countries and the world as a whole?

The effects of loosing monetary policy in all the countries when they already face the liquidity trap are likely to be no effects on real outputs of those economies.

In the short run, they may boost assets prices such as the stock markets and cause hot money to flow to the major emerging economies to cause headaches to their economies. In return, the authorities in those countries will have to respond by taking measures to keep their exchange rates not rising too much.

In the longer term, international inflations are likely to rise significantly, causing policy makers headaches and forcing costly adjusts.

The world economy is having a wild run in the near future. In such a worldwide monetary policy game to compete with each other, who will be the winners and who will be the losers are unclear.

The game started with the Fed. It has now turned to a strategic gaming internationally.

The skills for relatively good policies in a country to win the game eventually are required not only for this stage of monetary easing, but also for the period in its wake to combat inflation and to continually stay internationally competitive.

In that sense, your concluding sentence is very insightful: “These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.”

Australian authorities have to and must be ready for this.


Premature to say "why rates have no further to fall"

Comments on Stephen Koukoulas “Why rates have no further to fall”, 22/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/RBA-Reserve-Bank-interest-rates-AUD-Australian-dol-pd20130122-46QQR?OpenDocument&src=sph&src=rot

While domestic economic condition and inflation is one thing, the international conditions are another totally different beast.

The recent few years in the wake of GFC indicates that the conventional wisdom or policy prescription is no longer the best approach, not just for the big players but also for Australia.

There is no ending to the quantitative easing policies in the US, EU or Japan as the last just embarked on this path under its new government.

In such an international environment, your analysis appears completely out of kilt with what the best policy really should be based on real world cases as opposed to the inapplicable conventional thinking at the moment.

One should never be mechanical in thinking and must know the limit of a particular line of thinking and adopt the best even it may mean you have to break with the tradition.

In this occasion, unfortunately, you seem to have fallen into the trap that most economists do in most of the time.

What would be the best policy for Australia? It should be the one to stay comparatively the same as those big players, do similar things (though not necessarily in the same manner) to keep Australia international competitive or to at least neutralise the international effects.


A plague on Aussie housing?

Comments on Philip Soos “A plague on Aussie housing”, 16/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/residential-property-house-prices-housing-mortgage-pd20130115-3Y4BY?OpenDocument

While the article and some comments provide insights to some of the issues related to the housing market in Australia, there is one important point that none of them have touched upon.

That point is: the housing market in Australia is no longer a market for Australian alone and is affected by some international factors.

There are a number of points related to that.

Firstly, the housing market in Australia is relatively small in size.

Secondly, population density is small relative to its land mass.

Thirdly, Australia is geographically located closer to Asia where population is large and population density is much larger.

Fourth, there are rapidly growing economies in Asia and with it many have become relatively rich.

Fifth, the house prices in some Asian countries are relatively high.

Sixth, Australia housing market is relatively open internationally.

All these factors suggest that house prices in Australia are probably higher than otherwise they should be if there were not those international factors.

Having said that, how important those international factors in affecting the prices in Australian housing market needs to be quantified to be clear of their effects.

Of course, relatively low interest rates and the taxation rule allowing negative gearing and deductions undoubtedly have their roles to push the prices higher than otherwise too.

Pollutions in China and its ETS - a wrong priority

Comments on Alex Lo “Carbon trading in the Asian Century: China’s ETS on track”, 16/01/2013, https://theconversation.edu.au/carbon-trading-in-the-asian-century-chinas-ets-on-track-11438

What you mentioned is too complicated than necessary.

One of the problems in international negotiations on climate change is that it has included too many details. Instead, it should be focused on important ones, such as CO2 and leave most relatively unimportant emissions out.

Further, the many problems you mentioned in the Nordhaus study/paper have the same relatively easy solutions. For example, the key for a global solution is the fairness of an agreement. Once that is achieved, participation other problems will be easy to dealt with.

What solution is there for international fairness? In economics, it is fairly simple, that is, a system of user or emitter pay would do.

Is that system difficult to achieve? No, once one realise to set an international carbon price and every country is taxed for carbon emissions and the revenue is then distributed by population shares to each country.

Such a system may not achieve all the objectives from the start, but over time it will be effective and achieve the target. This is because there will be enough incentives for innovations to reduce emissions and for the use of alternative and more economic energy sources.

The difficulties Nordhaus got is the unrealistically perfection that created unnecessary problems. If everyone falls into that kind of trap of thinking, then it would be a problem of unsolvable.

But once a different thinking is adopted, it is a whole different story.

Why is it so difficult to reach an international agreement, given in economics the principles and methods are so clear for a solution? The reason is that applying the economically sound principle and method would mean the rich and powerful countries would have to pay more, much more because they emit more on the per capita basis and powerful countries would not like to do it. That is why the US has refused to do Kyoto, that has caused a serious other problems, including developing countries refusal to commit to a legally binding regime for them.

Now large developing countries are strong enough to resist the pressures from powerful countries to an unfair agreement.

Effectively, it is a loss-loss situation, unless powerful countries realise there must be a fair agreement.

Now back to the focus of the article, that is, ETS in China. Looking at the air pollution in China including in Beijing recently it is clear that China has a huge task in dealing with environment.

It also points to priorities in its task in terms of benefits and costs of analysis to determine what is most urgent and what can be left for a different time.

From that point of view, while ETS may achieve that, it does appear to be the best approach to adopt, unfortunately.  
Focusing on the more visible and localised pollutions should be the priority and for that the international experience from industrialised countries is very valuable.


Perhaps it's time for changes in Australian federation

Comments on Julie Novak “Cut leviathan's hunger for tax”, 15/01/2013, http://www.theaustralian.com.au/national-affairs/opinion/cut-leviathans-hunger-for-tax/story-e6frgd0x-1226553883178

The Australian federation has been unique in comparison to most other western federations, due to its small population and its geographical and possibly cultural isolation.

Because of its isolation, it may have largely been the case that the sum of the states together as a federation is relatively much greater than in those other federations.

If that speculation/assumption is correct, then it explains why Canberra has been much stronger fiscally and hence the large vertical imbalance without the states to secede.

Fiscal equalisation in its current form worked in the past because for most of the time the donor states were the two largest states, namely NSW and Victoria. Other states benefited from such equalisation, so few would secede.

But now the situation has changed. WA and Queensland have also become donors, due to their mining boom and the strong revenue from mineral royalties and associated stronger performance in the housing market.

International trade and globalisation have removed some of the isolation factors Australia had endured in the past. Economic integration and people exchanges have linked Australia to the increasingly stronger Asia.

What that means is not yet very clear.

It could mean the force of internal bound has weakened and one or more states may use succession as a means in gaining more concessions from Canberra in their negotiations.

So far the story has been unsuccessful for any states yet, although the agreeing to a review of the GST distribution by the PM and the Treasurer in 2011 announced in WA may be an indication of the potential power of WA – it has gained virtually nothing.

And that was expected given that WA had no representation in the review panel – that was consisted of former premiers of NSW and Victoria and a business person from South Australia.

Although WA was successful in forcing that review, it is far from satisfied by the review outcome. As a result, it is likely that WA will push for more changes – just think about the original design and subsequent legislation of the MRRT by the federal government and what it means for WA if that revenue could stay within WA.


Mass emotions and government policies

Comments on Hai Hong Nguyen “Does Hanoi deal with Beijing for its people, or for itself?”, 14/01/ 2013, http://www.eastasiaforum.org/2013/01/12/does-hanoi-deal-with-beijing-for-its-people-or-for-itself/

Power of masses can be more problematic than government’s cool heads.

If government acts for mass’ feeling, then who knows what the world would be.

Just have a look at some Chinese social media websites one would appreciate how mass feeling can be too emotional and cannot be relied upon to make policies.

One website is: http://www.sina.com.cn/

It has a military section.

A need for a better house price indicator

Comments on Toby Johnston “Coast watch: the best and worst performers”, 14/01/2013, http://smh.domain.com.au/real-estate-news/coast-watch-the-best-and-worst-performers-20130111-2cjm2.html

While it is a general practice to use median price to compare price movement over time, that very indicator can be problematic, particularly when the market is thin and the number of properties sold in a particular time is small.

They may not always be comparable and can be very misleading. The very large percentage changes listed in the article are likely to indicate the problems with such comparison as opposed to real changes in prices in those areas. The current Australian hosing market does not support those big changes.

Having said that, it is difficult to tell a simple story on price movement, I have to admit.

But some property research and information gathering organisations should develop a more effective method to tell the true picture of housing market.

I would recommend trying to use some kinds of weights using the characteristics of properties sold, including types, size, bedrooms, location, etc.

Unless one uses a more meaningful and more reliable method, lot of the property reports and analyses are non-sensical.

A conceptual issue with an IMF study

Comments on Henry Ergas “Deceptive attack on Howard's record”, 14/01/2013, http://www.theaustralian.com.au/opinion/columnists/deceptive-attack-on-howards-record/story-fn7078da-1226553110377

I could not be sure the exact specifications of the IMF econometric exercises, but was assuming they include the debt related variable as opposed to its lag or lags.

If my assumption is correct, then there can be some conceptual difficulties with that specification.

One would naturally think that when debt level increases the government deficit also increases in the same year.

So to test the influence of debt on deficit, it should use past debt on the current deficit.

I would argue that the IMF should examine its specifications and re-estimate the relationships.

It should not be constrained by the original specification by Bohn (1998).

Of course, the exact specifications are not clearly shown in the IMF paper, so my assumption may be incorrect.


A method to make reforms easier to be introduced

Comments on David Uren “Swan searches for a surplus strategy”, 10/01/2013, http://www.theaustralian.com.au/news/swan-searches-for-a-surplus-strategy/story-e6frg6n6-1226550691942

It seems a mutually accept method for the most appropriate resourcing of the PBO is to make a law before an election and make that law effective after the election, so whoever is in the government of the day does not matter much. Then any changes to that legislation should meet a stronger and more stringent condition than simply majority in both houses.

For example, have a legislation to cap the ratio of government revenue to GDP, as well as certain accountability of government policies, can all be made in such a way.

In fact, many difficult policies that may favour or harm the government of the say can be made in such a way to neutralise its effects on the government of the day, but binding on future governments.

A house price hike this year?

Comments on Stephen Koukoulas “All signs point to a house price hike”, 10/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/Australian-house-prices-property-market-interest-r-pd20130110-3SR4N?OpenDocument

While I understand the point of both Stephen Koukoulas' and Bill Edwards'. However, I'd add one point that both may have missed, that is, the international factor particularly the housing situation in the US.

It may work either way, that is, either for a housing rebound or a continuation of stagnation.

Should the US housing market show strong signs of recovery, then the Australia housing market will follow suit and possibly overshoot.

On the other hand, if the US housing market continues to struggle, then the Australian housing market will stay put.

It is a confidence contagion internationally, following the GFC.

Another international factor is buyers from overseas into the Australian market, including those associated with international students studying in Australia when some of their families may buy properties here.

Effect of globalisation on the supply side

Comments on Stephen Grenville “Why forecasting has broken down”, 10/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/Global-economy-fiscal-policy-forecasting-models-ec-pd20130108-3R4MS?OpenDocument

I think the reasons why those international forecasters consistently got their forecasts wrong you mentioned are correct ones, though there might be more than those.

I think there might be a different effect of globalisation on the aggregate demand and supply of an economy.

The conventional frameworks for macroeconomics may suffer from lacking a closer look at the effect of globalisation on the supply side in the context of a serious supply side shock in the wake of the GFC and the ensuing various other related government debts and fiscal problems.

Let's say various macro policies do have an effect on increasing the aggregate demand of an economy, but that may not necessarily restore the domestic supply side when international supply can substitute domestic supply due to their advantages in being unaffected by the supply side forces that exist in the more advanced economies such as the US and EU.

This increased effect of globalisation and trade substitution on the side supply may suggest that the full recovery of the advanced economies to their normal growths may take longer time even though the macroeconomic policy particularly the monetary policy is much more accommodating now as compared to the 1930s.

Unless the governments can come up with new ways to restore the domestic supply side of an economy, the road to recovery will be long and hard for those economies.

Shale gas and a US manufacturing renaissance?

Comments on Alexander Liddington-Cox “Can America step up to a manufacturing renaissance?” 10/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/US-manufacturing-shale-gas-GE-China-pd20121227-3D368?OpenDocument&src=sph&src=rot

The shale gas advantage to the US remains to be seen, given that energy is internationally traded goods. If shale gas could make the US advantageous internationally, many countries could subsidise their energy sector too to the degree that the only advantage to the US is its intrinsic values of the shale gas.

How much is that relative to the size of the US economy, particularly in the international context when there are huge differences in labour costs even after taking account of differences in labour productivity?

Would that suggest a US manufacturing renaissance?

The answer is likely to be negative as long as a bit of simple reasoning is applied.


Should people be worried about aging population that much?

Comments on Stephen Kirchner "Increasing the super contribution rate is a second-rate solution", 8/01/2013, https://theconversation.edu.au/increasing-the-super-contribution-rate-is-a-second-rate-solution-11467

Jeff raises a very good point that many commentators, analysts, modellers, bureaucrats, policy advisers and policy makers may have not been able to take account in their work.

When people's average lifespans increase, people's working life should increase accordingly. This would be particularly true with the current trend that many people are not working as a physical labourer.

The current modelling assumes a largely fixed retirement age with an increasingly longer lifespan, which is itself illogical and internally contradictory. As a result, many of the policy instruments/measures are unlikely to be needed for the concerns of an aging population.

However, those policies may induce people to retire earlier than their ability to work allows when they reach the retirement age, given that those policies would have a redistributive effect for a person from young to older ages.


Be innovative in fighting bushfires

Comments on Geoffrey Luck “Fire support from air long overdue”, 7/01/2013, http://www.theaustralian.com.au/national-affairs/opinion/fire-support-from-air-long-overdue/story-e6frgd0x-1226548555748

Leaving using what aircrafts aside for the moment, why don't bushfire fighters use unmanned small scale air craft system to monitor, assess and aid to direct fighting bushfires?

Nowadays, small unmanned aircrafts should be very cost effective, particularly with modern ICT technologies and GPS. They should be used, together with analysis centres using specially developed softwares. Indeed, they can be integrated with both aircrafts and ground fire fighters into a whole of bushfire control system.

Australia is the most bushfire prong country and the costs due to losses each year are very large. We should adopt innovative thinking in how to deal with it most effectively and least costly.

Such an unmanned airborne system for fighting bushfires shouldn't be too difficult or costly to develop and it is high time that we Australians to develop this.

Indeed, households may also benefit from more accurate assessments and be informed on bushfire situations surrounding them and to make the best decisions on whether to leave for lives or stay to protect properties.

A better Australian federation shouldn't be difficult to make

Comments on Henry Ergas “Tony Abbott should flesh out plan to fix federalism”, 7/01/2013, http://www.theaustralian.com.au/opinion/columnists/tony-abbott-should-flesh-out-plan-to-fix-federalism/story-fn7078da-1226548558033

The Australian federation has worked reasonably well, even though it could do even better.

I think there is likely a small window of a good opportunity for reforming the federation, in terms of roles, responsibilities and revenue arrangement should the coalition win the next federal government - it could work together with the 4 largest states to undertake reforms, along the line of a more efficient federation with clear responsibilities and the means they each can use to raise revenue.

Fiscal imbalance should be restricted to largely nominal, like the GST and possibly a sharing of income taxes including company taxes. A new inter-governmental agreement should be made to protect state rights. Once made, any change can only be by a consensus agreement.

The federal government's role and functions should be in national defence, foreign policy and external trade, national social security, macroeconomic policies, and possibly inter-state policies. The rest should be with the states.

Fiscal equalisation should gradually decrease in proportion to state total revenues and move to almost equal per capita distribution or proportional by population shares.