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Swan's long last legacy - a 3 D creation

Comments on John Daley "Surplus hopes pinned on heroic assumptions", 15/05/2013, http://theconversation.com/surplus-hopes-pinned-on-heroic-assumptions-14240
Leaving the budget measures details aside, Swan should and will be remembered for his three D creation to Federal public finance: deficits, debts and defeat.

The Labor Government inherited a budget surplus and a future fund showing a net government wealth/assets of tens of billions. He, however, has so successfully turned them into consecutive budget deficits - the first D creation. Through those deficits, he has created his second D - a huge debt a long lasting legacy of Swan's incompetent management of the Federal budget.

Of course, that is not all and through his management of the RSPT he created the downfall of Rudd prime ministership and his MRRT and carbon tax disasters that turned a projected surplus to a 12 fold budget deficit. Through this, Swan has completed his third D creation, that is, the guaranteed defeat of the Gillard government in September.
Swan and the government has developed and used a deceitful trick of saying revenue write down by inflating revenue estimates.
Of course, no one should forget his dishonest manipulation of the accounting standard by shifting spending and revenues across years just to create a projected budget surplus for 2012-13 that is not 1200% larger in the red.
What a treasurer! What an achievement! One has to marvel?!


Measure housing affordability in Australia

Comments on Gennadi Kazakevitc, Lionel Frost and Luc Borrowman "Just how stressed are we when it comes to housing affordability", 9/05/2013, http://theconversation.com/just-how-stressed-are-we-when-it-comes-to-housing-affordability-13937
Genadi, Lionel and Luc, the methodology you mentioned in this article is obviously a step n the right direction and you should all be congratulated for making and using it.
Another method could be simply use a ratio of average housing costs to household disposable income. Average housing costs can be defined by renting costs and/or by average mortgage payments, or a combination of them in some weights.

In answer to Gennadi's reply: "Lincoln, Many thanks for your comment. Unfortunately, using average housing costs in the ratio does not help avoiding the fundamental problem with the ratio approach - it does not allow for singling out the groups/types of households that are really in stress."

Thanks Gennadi. Is it possible to calculate the ratios by groups/types then compare and rank them to form an order of stress?
I've though such ratios would produce better measurements, i.e. irrespective rent of buying, different preferences in terms of voluntarily paying more or less and the differences in size of houses/properties, etc, as well as the stages of mortgage payments.
Anyway, it may be my thought bubbles is bubbling.

The ACT should adopt a new model of governing structure and model

Comments on Peter Jean "Assembly expansion plan hits a wall", 10/05/2013, http://www.canberratimes.com.au/act-news/assembly-expansion-plan-hits-a-wall-20130509-2jb4k.html
The ACT, as a small and compact city, should not simply follow the model of other state jurisdictions in administration. ACT government and the Legislation Assembly should think creatively and consider the most efficient and effective administration style and model to suit such a small city state/territory.

I would argue that one way is for the ACT to have a default or fallback position to use laws and policies in the NSW, and only to have a different one if there is a two third majority in both the assembly and the general ACT population. After all, the ACT is within NSW and a part of Australia and one would not expect there are so many different situations between it and NSW, apart from the ACT virtually does not have rural, agriculture, mining and is much simpler to administrate.
This means there would only be a need for front line services as opposed to duplication of unnecessarily so many central administrative agencies/politicians/bureaucrats staff for policy and central administration. The ACT government should effectively, largely and essentially be a city administration like a small council.

The two main sides of politics and the Greens should have the welfare of the ACT residents in mind and should endeavor to be more efficient in administration of the ACT affairs. It is not too dissimilar to the differences in business administration and management between large and small businesses.

In that context, the idea of further expansion reflects very poorly on the creativity of those proponents of such an bad idea.


Know what they say - economists may have positive and normative analyses

Comments and rejoinders on Phil Lewis "Howard’s End: how the coalition’s last budget created the ground for the current deficit", 8/05/2013, https://theconversation.com/howards-end-how-the-coalitions-last-budget-created-the-ground-for-the-current-deficits-13848

I probably don't need to read the article to point out the central argument is wrong and totally unconvincing to politically independent and competent analysts, economists and policy makers who are not mechanical and dogmatic in their thinking.
It has been nearly 6 years since the Howard and Costello government was voted out and the current ALP government came to power. SIX YEARS!
Budget policy can change every year and the current government has had FIVE YEARS and FIVE budgets to change the course.
What has happened?
We've got huge debts and every years there were budget deficits.
Yes, the government can use various excuses, but it is not right for economists to accept any of those.

In answer to Felix's question: "Lincoln, for a self-proclaimed 'economist' to speak of 'huge debts' is a bit unimpressive - tends to make me wonder about the objectivity of your entire post."

Felix, to answer your question, firstly, I am not a self-proclaimed 'economist', but with a PhD degree in economics from the ANU. So what is your definition of economists?
Secondly, my objective is to inject some sanity into the debate. If you understand basis macroeconomics you would know that government expenditure is a policy tool to get the economy to the most desirable state and can be changed to achieve that objective. The underlying assumption is to get the budget balanced over a economic cycle.
Now it has been 5 and a half years since the current government in being control, that is how many days that the course of G could have been changed to bring the budget into balance?
Neither Rudd or Gillard have been bound by Howard/Costello policies, have they? Then why blame Howard/Costello for the current deficits 5 and a half years later?
In terms of debts, they are huge, if you looked the rate of change and the magnitudes of yearly average, aren't they?
So let not be arguing according to whether one has benefited from either side of political side and be objective and independent. AND apply a little economics, if one can.

In answer to Ted's questions "Lincoln, can you elaborate on why debts denominated in the currency over which the government has sovereignty are ever an issue?
"And could you also please elaborate on why deficits are bad for an open economy with a current account deficit and a positive savings ratio?

Ted, firstly, government debts, like private debts, incur interest costs at least, irrespective which currency it is denominated in, not to mention situations may change in the future that even the principal of the government debts may be forced to pay or may need to pay. Currently due to very low interest rates due to the state of the international economies, the costs of interest payments for governments are relatively low compared to otherwise. Just think about the case where interest rates were as high as nearly 20% a year occurred before.
Secondly, there is an inter-generation fairness issue, not too different from leaving your children with debts or wealth. Current government debts if not paid, represent a liability for future generations, that is, our children and grand children.
Thirdly, there is a moral hazard issue here too. If everyone thinks and acts as if government debts don't matter, then what governments and politicians would do? And what are the limits to the levels of debts in that situation? And also, the current political arrangement, not only in Australia but in many countries, mean either one side of the main political streams or both have an incentive to spend beyond its means, because they don't face hard budget constraints and public debts are not their individual debts and often it is the case that a political party may get more votes if it spends more. That is not a good governing system, though there is little that we can do about it.
For the second question, it involves obviously more factors. However, the key situation in that case s the domestic savings are seems not to be enough for domestic investment needs in aggregate. Alternatively, there maybe international competitiveness issue involved, either shorter term or longer term.
In the former case, government deficits is a contributor to the imbalance between domestic savings and investment needs and competing with private investments for funds. While it is not always, but is generally the case that private investments are more efficient. Of course, there are some investments that are more suited for government to make their the private sector due to various equity considerations and administrative costs involved.

In answer to Peter's argument "Depends largely on what the debt is for surely, Lincoln.
"If we do what some European countries have done - like Greece - and use it to plug holes in the budget and to maintain unsustained living standards - then yeah Government debt puts you on the road to ruin - or the IMF which is essentially the same thing.
"But if the overwhelming bulk of debt is undertaken to invest in infrastructure - both human (schools) and physical (NBNs) and there is a reasonable prospect of these investments yielding a decent return in future then we are not simply saddling the future with our debts at all - we are providing the means of not only paying off those debts but also towards improving living standards.
"My point is that there are few absolutes in economics - few simple aphorisms or slogans - for example that surplusses are always good deficits always bad. Depends when and what for over the longer term. What the level of demand in the economy is doing. What the money is to be used for.
"And that's where governments have the inside running on the private sector - the long term. Private sector investors don't - can't - afford a long term view. Governments can and do if they have the courage. Sadly the Howard Governments didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."

Peter, you raised a good question, although the previous discussions have not gone to that far.
You are correct that there are different uses of government expenditures. However, even with your examples, one may find issues with governments debts in worthwhile causes.
For example, the school education revolution programs, one can argue that there were both design and implementation problems that some of the investments are not effective and productive, say even the state governments were trying to skip some fats out of those programs, not to mention some school halls and libraries are not necessarily what those school needed most.
From policy design the restriction of school halls and libraries was problematic. From implementation when it became clear that there were problems with those programs and that stimulus were no longer necessary, the government could have make some changes to increase the effectiveness of those spending.
For the NBN, leaving the politics aside, it is still open to debate to whether it is cost effective or not and whether it is the best course of action or not. Clearly, no CBA was done or publicly available.

Peter, for your last paragraph's mention of "the Howard government didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Although I am not a defender of either government, I think the future fund established by the Howard government may provide an example that does not support or is contrary to what is argued there.
I have to say that I don't know how many billions that was and whether that is significant as compared to the NBN amount, though.

In answer to Henry "Lincoln, please illustrate these huge debts by quoting figures and percentages of GNP etc rather than making unsubstantiated, emphatic comments. Comparative figures also are needed.
"My position is that of most economists: our debt is relatively small as a proportion of GNP."

Henry, yes you are correct if that is compared to other high debts countries in the current levels and that is clearly one way to argue it. But there are other aspects, such as rate of increase and the increased amount in a year.
Perhaps you can calculate that to substantiate I am "making unsubstantiated, emphatic comments" and to see for yourself?

In answer to Ngoc's second part "Lincoln
There are three issues in fiscal management; (i) the revenue constraint; (ii) economic efficiency of gov spending; and (iii) distributive efficiency of gov spending.
I think Prof Lewis' article focused on (ii) and (iii), that is, squandering excessive revenue in time of economic (mining) booms without paying much attention on how and where to spend, leaving bad budgetary problems in the long run, especially in downturns of the business cycle shows lack of vision. May I add here that if gov of the time reform the tax system at the beginning of the mining boom to keep a share of the excessive profits generated from minerals export sales for the people. Part of this additional revenue can be saved in income generating assets for future generations. Another part can be used to help non-mining industries where competitiveness and productivity are severely disadvantaged by the mining boom via its impacts on terms of trade, labour markets etc and to finance long awaited reforms of the education and health care systems as well as the protection of environment. The rest can be saved in gov coffer to help balance the budget when the economic downturn comes without incurring excessive debts. (That said, I think the debts you mentioned is a by-product of past budgeting practice the current gov has to bear.)
For your information, just go to ABARES statistics, get data on minerals export sales in the last 10 years and sum them up, use price elasticity also available from ABARES' various model adjust this sum, take a percentage of the adjusted sum, say between 5 and 10 per cent, then you can see how much opportunity has been missed in the last boom boom and how much harder to manage the economy in the coming years due to a faux pas in the past.
BTW, if you only use your posting name then innocent people (including me) can mistakenly say you are a 'self proclaimed economist', can't they? Anyhow, forget this and accept my thousand apologies if it is not true."

I really don't understand your logic and you really lost me in your arguments.
As I have mentioned earlier, I am not a defender of either government.
However, your arguments seem inconsistent and appear saying one thing is good but ignore the history. E.g. save for the future and save for downturns. Didn't the Howard government paid the debts and established the future fund with billions of dollars of money in it? Those are not save for the future and not save for the downturns? And those were done with no the new mining tax. And dare I say that money in the funds is better than money squandered in some government investments.
Those who argue that the Howard government should have far greater foresight and forecasting power than others so they could foresee things that others even couldn't see later than their time?
Is that a reasonable expectation? Isn't it saying we are not super rich because our ancestors didn't invent the computer thousands of years ago?


What is the basis for 'global macroeconomic balance'?

Comments on Hiro Ito, PSU, and Ulrich Volz “Correcting China’s macroeconomic imbalances”, 3/05/2013, http://www.eastasiaforum.org/2013/05/02/correcting-chinas-macroeconomic-imbalances-2/
As an economist, I may ask some questions in this area as follows.
First, how global macroeconomic imbalance and rebalancing are and should be defined? What is the theoretic foundation of global macroeconomic balancing?
Second, isn't or is it the case that imbalance and rebalancing has been used as some trade protection and an excuse of some countries poor macro and micro economic management that had laid the foundation for the GFC?
Third, the authors state the following: "China is one country with a long-standing current account surplus, and this surplus derives from microeconomic or sectorial distortions that have led to excessive saving. In particular, underdeveloped public social safety-net systems and a repressed financial sector are commonly blamed for excessive saving."
Many countries have even poor and more underdeveloped public social safety-net systems and a repressed financial sector than China has had and they don't necessarily have trade surplus. So why should China, a developing country, have the same gold plated social security as some developed countries have? Further, even developed countries have different standards of social security, and some countries with higher standard may have seen either some budgetary or economic growth/competitive issues that they will have to deal with sooner not later. Aren't current euro zone woes a lesson in too high social security? So why should China simply fall into those high social security traps that burdens economic growth, efficiency and productivity?
Fourth, while it is true that China's interest rate control depress deposit rate and is an effective tax on savings, liberalising financial market is likely to actually lead even more savings and how that can contribute to address the high savings that some people are attributing to a cause of global macroeconomic imbalance?
I think economists need to stand back from political debates and think rationally rather than simply follow some politicians' arguments.
Economists should recognise that people have different savings and consumption preferences and those may change cross countries, regions and families and vary according stages of economic development.
We need a “global model “ to show the benefits and costs of balance and imbalance. Without a transparent model, all the arguments can be very confusing and many arguments may sound ‘right’ but actually be wrong.
As long as there are those differences and people are divided into countries, it is irrational and wrong to demand every country should have current account balance.
Imbalance is normal and balance is and should be rare.
But globally, there is no imbalance - it is all balanced out.


Australia's car manufacturing cannot rely on continued heavy subsidies

Comments on Phillip Toner "A view on: Australia’s manufacturing industry", 2/05/2013, http://theconversation.com/a-view-on-australias-manufacturing-industry-13868

I agree with the view of one of the commentators that this sounds like a grants/subsidy application, or appeal.

I think whoever argues for continued subsidies to support some ailing manufacturing industries need to consider how Singaporean and Hong Kong economies that don't have a car manufacturing industry are in general more competitive than the Australian economy.

Neither economies have a car manufacturing industry, nor mining and agricultural industries. We are luck enough to have a very strong mining sector and a significant agricultural sector with abundant natural mineral reserves and vast land. At the same time, we are heavily subsidising an very uncompetitive car manufacturing industry. It is absurd, and stupid.

This is particularly so given the current stage of the world economy where software and creativity are increasingly taking a more important role in the economy, just think about smart phones (Iphone, Samsung and so one), Google, Facebook, Youtube, etc.
Those who argue for continued supports through very costly subsidies seem to be living in the past and have not caught up with the advances of the past 20 years or so.

Unless we keep the same pace as the rest of the world and be equally be innovative and creative, we will be going down the hill no matter how much the car manufacturing industry is subsidised.

Euro zone may benefit from reforming the system

Comments on Oliver Marc Hartwich "Is Germany edging towards the exit", 2/05/2013, http://www.businessspectator.com.au/article/2013/5/2/economy/germany-edging-towards-exit

While the euro zone has experienced significant difficulties in the wake of the GFC, there are some measures that could be taken to overcome or at least lessen the shortcomings of the current euro zone design.

For example, one measure is to create a fixed rate of dual euro currencies that can provide the flexibility for one or more euro members to effectively devalue within the dual euro currency zone. This is because the most significant shortcomings of current single currency is the lack of flexibility of members to devalue to adjust to a less competitive situation they may be caught in.

Another second more effective measure is to issue euro bonds but charge different countries different rates according to its economic situations and macro economic management outcomes, so there is some accountability to avoid the moral hazard from arisen. At the same time, the other members will have some return or security for their collective guarantee of the euro bonds.

The second measure would utilise the strengths of the euro group of countries to lower costs of government funding, but still have disciplines in place for any national governments.
Nevertheless, all remedy measures need the courage of reforming the current system design, as opposed to stubbornly and stupidly stick with a flawed system design.


Reappraisal of exchange rate regimes

Comments on He Fan “China must push ahead with exchange rate reforms”, 30/04/2013, http://www.eastasiaforum.org/2013/04/29/china-must-push-ahead-with-exchange-rate-reforms/

The real appreciation of the RMB is much more than the 30 per cent since the exchange rate reforms of 2005 as mentioned in the post, given that inflation in China has been far greater than that in the US.
Having an annual limit on the total movement of the exchange rate has merits, although the exact figure can be hard to determine and it is not necessarily asymmetry between the upper and lower bounds. It should ideally be linked to some measure of equilibrium level of exchange rate, based on relative inflation rates and trade situations.
In that sense, the 7.5% limits appear to be arbitrary, as the author seems to have acknowledged.
In terms of sequence of reforms, removing trade distortions, such as export subsidies and imports restrictions should probably take a higher priority than exchange rate reforms.
Further, it is not necessarily certain that free exchange rate regime is better than a fixed exchange rate regime if the effects of exchange rate bubbles on the real economy are taken into account.
The advantages of monetary policy freedom must be balanced with the distortionary effects on resource allocation in the real economy and potentially damaging adjustments.
So far, people take the easy way, that is, monetary policy freedom, but leave the blames of real damage to the markets to avoid accountability.
That is not necessarily optimal for the world economy or indeed any individual economies.
In my view there is a need for a reappraisal of exchange rate regimes with a new framework in which both the effects of both monetary policy and the effects of exchange rate on the real economy are taken into account, and consider whether there are any new policy design for the international system to work better.
There should be a system that has a set of well-designed rules to allow countries to choose a fixed or flexible exchange rate regime and should a fixed regime is selected how the system will adjust under a set of agreed rules.
Such a system can and should include provisions that will allow monetary flexibility for every country supported by a set of agreed international rules.