Changes in the terms of trade should be reflected in GDP measure

Comments on Peter Martin "Election 2016: GDP growth nowhere near as good as it seems, but it'll do for the prime minister", 1/06/2016

It seems there is a need to incorporate the very different effects on the living standard of changes in the terms of trade in the GDP measure. This is because that changes in the terms of trade is quite qualitatively different from changes in domestic relative prices irrespective they are inflationary or deflationary.

While changes in prices generally have the effects of transfering wealth from one group to another, the effects have quite different impacts if they occur through changes in the terms of trade.

Changes in prices purely domestically, the transfer of wealth is within a country and therefore they total wealth of the nation has not changed.

When changes in the terms of trade, the transfer, however, is between two different nations. As a result, the nation's wealth will increase if the terms of trade increases and it will decrease with the deterioration in the nation's terms of of trade.

To conclude, there should be some measure to distinguish these two kind of changes in relative prices to capture the changes in the terms of trade on a nation's living standard for any given real GSP growth as currently measured.

Australian dollar, industry policy and economic transition

Comments on Shiro Armstrong "Asian integration a key part of Australia’s economic transition", 29/05/2016

The author argues that “As the dollar strengthened and productive resources shifted to the mining sector, manufacturing became less competitive and many industries suffered or shut down.”

That can only be partly true, as the falling Australian dollar in recent two years will not in any way to stop the closure of the only remaining car manufacturing plants in Australia.

As a result, there are more important factors than the fluctuating Aussie dollar in determining manufacturing in Australia.

The issues with the future submarines to be manufactured by the France, possibly with some part of that making process in Australia, may not necessarily represent a good policy, if Australia can not maintain a car manufacturing plant while attempts to be part of manufacturing and maintaining submarines. It may be actually a loss if Australia does not have that comparative advantages in doing the submarines, if the standard trade theories are to be believed!

It could be an example of poor industry policy at the taxpayers expense.

Australia do need to find its comparative advantages!

Hamilton's account of Australia's Kyoto

Comments on Clive Hamilton "Australia hit its Kyoto target, but it was more a three-inch putt than a hole in one", 16/07/2015

It is an interesting account of Australian government's strategy and tactics on the Kyoto negotiations, although we need also analyse why the rest of the world accepted Australia's demand back then.

One of the main reasons could be that studies showed that the impact on the Australian economy of an equal proportionate reduction in emissions was projected to be harder than on most other international economies. I remember that the Australian Bureau of Agricultural and Resources Economics (ABARE) had done researches and policy simulations that may have fed into the Australian government's policy stance.

Of course, research is one thing and how research is used by people and/or governments is entirely another.

Further, it is probably not too much a stretch of imaginations that each and every country would have done some studies on emissions reduction policies and adopted what it thought the best in those negotiations. ABARE's research was probably qualitatively correct, even though one may argue about the specific results ABARE had got and supplied to the Australian government.

On another point, the author has argued quite reasonably why Russia got its bargain. If that argument is true, then the quoted of being "bracketed Australia with OPEC and Russia as the principal obstacles to progress in the negotiations", by two German analysts, Sebastian Oberthur and Hermann Ott, that was "two years later, when the dust had settled", as follows was unreasonable at least as far as Russia was concerned as it didn't take into account Russia's special circumstances:

"The Kyoto targets surely have two main winners: Russia and Australia… The considerable increase in emissions allowed to Australia … has set a bad precedent for future negotiations, especially with regard to developing countries."

If those two Germans are serious researchers, their arguments showed significant weakness. As a result, it simply demonstrates that even serious people can get their arguments wrong, either deliberately to be misleading or unintentionally as innocent errors.

A better regime for foreign investment and macroeconomic policies

Comments on John Denton and Peter Drysdale "Time to re-position Australia’s foreign investment regime", 14/06/2015

There are clear benefits to integrate policies toward and implementation of foreign investment into a seamless regime, such as a ministerial-level Foreign Investment Council as the author nicely proposed. Another approach may be a national economic management council which integrate economic policies and implementation at the national level and the tasks proposed for the foreign investment council forms a part of it.

At macro level, economic textbooks say there should be optimal combination of fiscal and monetary policies to achieve most desirable outcomes. But in reality, it does not seem such coordination of those two classical Macroeconomic policies really exists in many countries. So there is a gap between theory and practice there.

Now if we treat foreign investment as something similar to government spending but differing in degrees of the host country’s direct control in the GDP equation (as part of the investment - I component), the council proposed by this article’s authors may naturally fall into the macroeconomic policies area. As a result, a national economic council would be handy to include foreign investment coordination in its tasks.

Treasurer needs to act on jobless rate

Comments on Mark Kenny “Joe Hockey feels sting of shock rise in jobless figures”, 13/02/2014, http://www.canberratimes.com.au/federal-politics/political-news/joe-hockey-feels-sting-of-shock-rise-in-jobless-figures-20140213-32ndm.html

While his rhetoric is understandable, Joe Hockey needs to recalibrate his approach to the coming budget in the wake of significant deterioration in the jobless rate.

Government has a duty in keeping unemployment low and fiscal policy is a major tool in achieving that. Monetary policy is another major macroeconomic tool in managing jobless rate and economic growth and it has done its fair share in regard. Now it is fiscal policy that must do its fair share which requires Hockey to act sensibly.
Six per cent unemployment rate is not too bad in international comparison, but it is not good at all when compared historically within Australia, if the report that it is a 10 year high is correct.
It is understandable that it would not look good for him to suddenly change what he has been arguing in terms of repairing the budget. But it is the real action in the making a good budget that counts.
On that it is hoped that Joe Hockey will not disappoint as the Treasurer.

Australia is too small compared to the US

Comments on Robert Gottliebsen "Skinny returns sing a shameful tune", 22/10/2013, http://www.businessspectator.com.au/article/2013/10/22/markets/skinny-returns-sing-shameful-tune

Robert, there may be some more fundamental macro factors in play than what you analysed.

The Australian stock market and its investment market too is small and is at the mercy of international capital movement, while the US enjoys the benefit of being safe heaven status.

Further, QEs and its resultant low interest rates in the US has been conducive to its capital returns including both the real economy and the stock markets there.

Back in Australia here, while the interest is at historic lows, it has been and still is significantly higher than that in the US.

Change the GST or not?

Comments on LAUREN WILSON "Tony Abbott dismisses fresh push to re-examine the GST", 20/09/2013, http://www.theaustralian.com.au/national-affairs/tony-abbott-dismisses-fresh-push-to-re-examine-the-gst/story-fn59niix-1226723309057

The current government prior to the federal election said GST will be included in its planned tax review and also said earlier GST won't change in this term of government and any change will need to get a mandate from the next election, although latter on it was changed to GST will not change.

My reading of the government's approach is that it will continue to say GST won't change until the review report is publically available  with recommendations that the GST should be changed. There appears a case that the GST should be changed to either replace some of the inefficient state taxes, such as stamp duty on conveyances, or to reduce personal income taxes.

Any changes to the GST whether it is to broaden the base, or to increase the rate should be traded with a reduction in some taxes so to keep the level of overall taxation roughly unchanged. The aim is to increase the efficiency of taxation rather than to increase the level of taxation.

There are two other important issues related to potential changes in the GST. One is there should be a compensation to low income earners through tax reduction to minimise its impact on them and at the same time to increase the incentives to work.

Another is that if the GST is to be changed, it would present an opportunity to change the GST distribution system. Fundamentally, the federal government should consider to distribute the GST on population shares and should move the fiscal equlisation role through another general grants in a trade off with the states to support GST changes.

Since the introduction of the GST, fiscal equalisation is done through GST distribution. Given that GST is fully provided to the states and the federal government does not have any direct benefit from GST one way or another, it lacks interest in how it is distributed.

By moving fiscal equalisation into using another general grants from the federal general revenue pool, it would have an interest in the size of the redistribution, and hence how it is done. More importantly, it would provide a circuit breaker for the disagreement between the states on how GST should be distributed.

I see this as a practical way to move forward on the GST issue. And it is likely that a change to the GST will on the card in the next election.

PC inquiry on Australia's car industry

Comments on Sid Maher and John Ferguson "Coalition calls for 'urgent' report on car industry", 20/09/2013, http://www.theaustralian.com.au/national-affairs/coalition-calls-for-urgent-report-on-car-industry/story-fn59niix-1226723160050

The new government should let the PC conduct its inquiry into the car industry without any preconditions and should not preempty the PC inquiry and report on the future of the car industry in Australia, although politically it may continue the line that its supports the car industry until the report comes out.

More importantly, the government should fully respect the verdict from the independent economic body and accept rational and economically sensible recommendations on the future of the car industry without yielding to special interest groups.

It is too important for all Australians to be emotional rather than rationally making  difficult choice between the car industry and possibly better national wealth and welfare, particularly when the output of Australia's car industry has been declining and will decline more when Ford closes its production here. As a result, the costs of continuing government subsidies are likely to increase as car production falls.

My instinct feel is that it is very difficult for car manufacturing to survive in Australia for long. However, we should wait for the PC to report on this.

Complexity demands more monetary policy tools

Comments on Stephen Koukoulas "House price bull heaven", 18/09/2013, http://www.businessspectator.com.au/article/2013/9/18/property/house-price-bull-heaven

Leaving how the housing market price in Australia will develop and how the RBA will deal with that aside, it should be acknowledged that the current monetary policy tool is not enough to deal with both the broad economy and the asset markets prices with only uniform official interest rates applied to all.

The RBNZ policy development regarding housing lending as Koukoulas mentioned (New Zealand’s bold move against the housing bubble)  partly mirrored China's approach and has some merits, though the approach of restricting the LVR is not an efficient economic policy because it lacks clear price signals for both lenders and borrowers. In another word, it is not really a market approach but a administrative approach.
A better policy approach is a market based on price, that is, by introducing and applying differential 'official' rates that could be applied when dealing with different situations such as the broad economy and the housing market.
That itself may raise some costs, but that may be a price that needs to be paid in dealing with complex situations. Otherwise, you may continue to have the sort of risks of the GFC to reoccur. Further, it is not too dissimilar to fiscal policies that have its own structural content.

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.

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.

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.

Understand why and how productivity has slowed in recent years

Comments on John Freebairn "Evolution of the productivity pariahs", 2/08/2012 https://theconversation.edu.au/australias-productivity-problem-why-it-matters-8584 and
http://www.businessspectator.com.au/bs.nsf/Article/productivity-australian-economy-private-sector-pub-pd20120802-WS2RU?OpenDocument

I think governments, businesses and economists probably need to have more realistic expectations and understand where the most important constraints to productivity improvements are and how to go about them to help raise productivity.

It probably means quite a number of new points or more creative thinking.

For example, the improvement in the terms of trade, as a luck gift to many Australians including Australian businesses, may mean they don't want to work that hard to raise productivity in the comparative sense, so they are happy to enjoy the life with better living standards. Alternatively, they need to be given greater incentives to work as hard as they did in the of no improvements in the terms of trade to produce the same improvement in productivity.

So this kind of work/leisure choice must be taken into account in analysing our productivity to really understand the true underlying factors on productivity in Australia.

However, I do share Professor Freebairn's view that government has important roles in raising productivity. Freebairn mentioned two of them: government policies such as taxation and government supply of services, like education, law and order.

Another important area the government has an important role is to ensure consumers get the maximum benefits from adequate competition, including from competition from overseas through trade policy.

It has been reported that Australians are charges much higher prices for many products or services than their overseas counterparts. This is not only detrimental to the welfare of Australians, but also is unconducive to competition and productivity.

The government must examine why that has been the case and develop the most appropriate policies to change it.

It is a mystery why the government hasn't done such work for so long.

No cause for pessimism for the Australian economy

Comments on Henry Ergas “Policies standing in the way of management can do great damage”, 16/07/2012, http://www.theaustralian.com.au/news/opinion/policies-standing-in-the-way-of-management-can-do-great-damage/story-fn7078da-1226426636726

Ergas has made an important contribution to the current debates on the multi-speed economy associated with the mining boom and on productivity.

The latter first. I have made a comment on the shortcomings of the viewpoint by Gruen et al that poor manager performance was the main reasons for the latest productivity slow down, by referring the charts consisting of one cross section international data with a time seires of Australia's productivity. That mix is problematic, because it says little how the international comparison has changed over time. Further, it is doubtful that international productivity would have performed better in recent years over the pre-GFC period.

For Henry's viewpoint on the Dutch Disease in the Australian economy, although it is correct to say that adjustments are inevitable when mining booms as a result of increases in international demand for mineral and a consequential rise of the Australian dollar, the view that no policies can offset or lessen the adverse impact of the mining boom on other trade exposed sectors is likely to be false.

For one thing, his mining tax design was one of policies that could just do that if the policy was designed and implemented properly.

Further, monetary policies could be designed in such a way that lowers both the demand of Australia for international capitals and the Australian dollar.

A fine combination of fiscal and monetary policies together would make the adjustments much less painful than they have been.

Why Australian have to pay higher interest rates and higher retail prices?

Comments on David Uren "Politicians make lousy bankers" 7/02/2012, http://www.theaustralian.com.au/business/opinion/politicians-make-lousy-bankers/story-e6frg9qo-1226264125617
I've lost the copy of my comments but will get it when it is available from the Australian.

RBA can further improve Australian welfare

Comments on Robert Gottliebsen “Don't bank on mortgage rate cuts”, 27/01/2012, http://www.businessspectator.com.au/bs.nsf/Article/Interest-rates-deposits-RBA-house-prices-Mike-Hirs-pd20120127-QVQZQ?OpenDocument

Thus reflects an anomaly with the Australian money markets or at least in the effectiveness of RBA monetary policy.

The RBA should do what the Fed has been doing recently, that is, to allow at least the four major banks to borrow from it with their high quality mortgage backed securities to make the RBA interest rate a really market rate that banks can borrow.

This may include a revised definition of deposits of banking institutions with the RBA, that is, the reserve ratio to facilitate this, but still retain effective control and effectiveness of monetary policy. So how high quality mortgage backed security is accounted in such new definition may need some thinking.

RBA officials need to consider this move to improve the Australian money market in terms of effectiveness. Arguably, Australian real effective interest rates can be lowered and hence welfare can be enhanced. This can be reasoned from the borrowing costs (the interest paid for borrowing at the international markets be our banks for example) that could be paid to the RBA so would be part of gain by Australians!

RBA should reflect why it has not done this earlier.