Koukoulas analysis is biased

Comments on Stephen  Koukoulas "Western Australia's easy ride", 18/02/2013, http://www.businessspectator.com.au/bs.nsf/Article/Western-Australias-easy-ride--Why-Western-Australi-pd20130218-4ZRNT?OpenDocument&src=sph&src=rot

Stephen, you may have a point (Western Australia's easy ride, February 18).

However, one important point is missing from your analysis, that is, how much WA has been contributing to the federation financially in recent mining boom years, not only through taxation revenues, but also through higher FIFO workers possibly from Eastern states.

As an experienced economist, presenting only one side and ignoring the other side of a story is not convincing and cannot achieve the objective of decent and professional analysis.

Yes, federation does have its advantages and part of them are mentioned by you, that is, the scale and diversity of the federation over a much smaller state. It is like a in-built insurance that the federation affords without the need to pay for it.

But that does not equate to a one-sided story ad analysis.

To be comprehensive, a complete and representative analysis is needed to see and tell the costs and benefits of the federation to WA, not for recent years, but also for longer periods, including the past and possibly the future.

Dutch Disease can be managed to minimise ill effects

Comments on Ken Henry "

Ken Henry: why Australia’snon-mining sector will continue to struggle", 12/07/2012,  https://theconversation.edu.au/ken-henry-why-australias-non-mining-sector-will-continue-to-struggle-8224 

This is where many economists and government officials have been lacking in creativity and in bringing a whole practical package together to deal with challenges, although the current challenges from mining boom is a good one.
Dr Henry should realise that the Henry Taxation Review's recommendation on the mining tax is a good economic theory but is not very applicable in practice and it was this combination together with bungles by politicians and bureaucrats that have resulted the current poor state of the MRRT.
Undoubtedly, the initial design of a mining tax by the Henry Review was very ambitious and elegant in theory. But the problem was it is too theoretical but not practical. An alternative one could be as simple as a pure addition to the company tax with an link to either terms of trade using mineral exports and all imports or the relative prices of mineral exports.
Of course, that additional tax should be mostly given to the states where the additional profits are generated, with some left the to the commonwealth for national adjustment to the mining boom.
States, of course, would be part of the adjustment process using that additional profit tax revenue from mining companies.
This can limit the rise of the Australian dollar and a lower dollar is conducive to lessen the impact of the mining boom, that is, the Dutch Disease.
The so called Dutch Disease can be managed with a good national policy.
Only purely relying on the market that gives to the rise of Dutch Disease.
The main viewpoint and argument in this article belongs to the latter.

Government revenue in two speed economy

Comments on Rob Burgess “Gillard's unhedged liability”, 17/05/2011, http://www.businessspectator.com.au/bs.nsf/Article/federal-budget-Treasury-trade-MRRT-Gillard-pd20110518-GXT3T?OpenDocument&src=sph&src=rot

While I agree with the main argument of the post, I find it amusing that many people including commentators don't apply the same logic of the two speed economy for its reversing effect.

Why isn't the current revenue, with the current extremely high terms of trade, is as high as past expected? Many say it is due to the high $A, that reduced the profits of many firms (the low speed part of the economy), including miners (the high speed part) because a high $A translates the same amoung of profit in $US to a lower profit in $A.

If that is true, wouldn't the $A also fall with it then when the terms of trade falls at some stage?  As a result, wouldn't the effect (a fall) on government revenue also be smaller than what most now fear, due to a lower $A? In another word, the part of now low speed economy will become more competitive and increase in speed.

Of course, there may be a lagging effect that should also be taken into account and it would be useful to estimate how long that may likely be.

PS: It appears that the two speed economy has some in-built hedge in it due to the floating exchange rate.

Australia is undoubtedly a lucky country

Comments on Mumble blog “Australia’s miracle economy: fact or fiction?”, 16/05/2011, http://blogs.theaustralian.news.com.au/mumble/index.php/theaustralian/comments/australias_miracle_economy_fact_or_fiction/

While the points could be regarded as well made, it would be more helpful to or clearer to readers if a table showing period averages for the three countries were presented.

Secondly, while worldwide forces affect many countries, the charts, particularly the budget balance one, do show that Australia has been lucky due to the mining boom, so has been Canada. Improved and higher terms of trade helped to achieve better budget outcomes in both countries.

Thirdly, the chart with employment shows Australia benefited more than Canada, due to labour shortage as a result of the mining boom.

In contrast, Britain has not got this luck. And it is still struggling in the wake of the GFC, while we Australians are riding on another mining boom as commodity prices rise through the roof again and even higher!

Argument of structural budget deficits nonsensical

Comments on Michael Stutchbury “We don't have a budget to manage boom”, 12/04/2011, http://www.theaustralian.com.au/business/opinion/we-dont-have-a-budget-policy-to-manage-boom/story-e6frg9p6-1226037422178

It would be better people make a clear distinction between the Howard/Costello tax cuts and family benefits and their successors' wasteful spending in BER, home insulation, and the kind.

If the mining bounty is returned to people, that is in one way one of the most efficient way to distribute the mining boom proceeds, that is, let people be richer and decide what they want to do with the mining bounty.

It is regrettable that Treasury people started and continue to use the argument of the line of structural deficits of the Howard/Costello late years in government. It has completely ignored the fact that people don't need government or bureaucrats to make decisions for them - most of them are wise and intelligent enough to make their own to the best of their own interests.

It is an empty, imaginary, illogical and false argument – an excuse for the current budgetary wastes to confuse people, to divert attentions. It is a ludicrous act.

Whoever invented that should have the intelligence to know that.

Further, there is no point for commentators to follow that line of argument, even though that is what the media does best.

John Lee's confusion of short versus long terms

Comments on John Lee “Haunted by China's ghost cities”, 29/03/2011, http://www.businessspectator.com.au/bs.nsf/Article/China-property-Australian-economy-pd20110325-FA9SR?OpenDocument&src=rot

It seems that John Lee may have either inadvertently and unknowingly, or intentionally and wilfully confused two important issues that have quite different implications, that is, the shorter term and longer or long term of Chinese housing market and urbanisation.

He mentioned that “a small but increasing number of notable investors such as Jim Chanos and Garry Shilling are shorting China”. To me those investors are more likely to look at the short term but very unlikely to look at the longer term, especially when the purpose of those investors is “shorting”. The fact is that some financial investors can change their position from long to short or vice versa very quickly.

It remains a fact that there is still a very large proportion of Chinese, far exceeding that in any of the industrialised countries now, living in rural areas and as Chinese industrialisation proceeds further they will become part of the urban resident cohort – that is, part of further urbanisation. That longer term urbanisation trend in China is unlikely to be disrupted by shorter term housing market corrections.

And dare I say that the big miners are looking at the longer term trends as opposed to shorter term fluctuation in the markets for their investments in mines and mining production.

By confusing those two very different issues unfortunately, John Lee is confused himself and is confusing others at the same time.

I would predict that it is extremely unlikely that any big miners will employ him to assist in their decision making.

However, there is a limit to industrialisation and urbanisation in any country including China. Besides, once industrialisation and urbanisation is complete or near complete, the demand for commodities may well fall, sometimes significantly. That obviously needs to take into account in any long term mining investments and metal production and supply.

PS: it appears that John Lee likes to paint China negatively in almost everything, that is probably a form of serious bias. And that is likely to result in mistakes in his analysis and conclusions in most of the times.

A Sovereign fund from resources good but hard to secure its proper use

Comments on Peter van Onselen “Greens' support for a sovereign wealth fund to quarantine mining proceeds deserves praise”, 9/03/2011, http://www.theaustralian.com.au/business/opinion/greens-take-a-bow-for-the-sovereign-wealth-fund-policy/story-e6frg9if-1226018002862


A sovereign wealth fund is not a bad idea, though it would be better called a sovereign natural resources fund.

There are a number of issues related to such an idea.

Firstly, the Greens may want to increase the tax for mining much more heavily than reasonable, that can cause enormous damages to the Australian mining industry and hence the whole economy.

Secondly, the current government is only interested in suing the mining tax for its own budgetary purpose, and is not really interested in the long term, especially for the future generations. The Future fund set up by the previous coalition government has been used already by the Rudd/Gillard Labor government. That is a very bad precedent.

Thirdly, there can hardly be real guarantee that the current and any future government do not use it to cover its own short term budgets.

Should such a fund be established, there must be much stronger and more stringent conditions for any government to use it.

MRRT should be given to the states

Comments on Rob Burgess “Gillard's risky MRRT splurge”, 14/02/2011, http://www.businessspectator.com.au/bs.nsf/Article/Julia-Gillard-politics-government-MRRT-mining-heal-pd20110214-E2RW6?OpenDocument&src=sph

Maybe a compromise for the use of the mining tax inclusive of state mining royalties is that a proportion of the total revenue be spent on current expenditure and the rest being put into a future fund.

It is difficult for the current governments to put aside all the mining revenue for future use.

But it is also prudent and indeed a must to have this resource rent that is depleted for the use of future generations.

Hence the compromise comes.

However, the federal government got it wrong in the first place in terms of the RSPT and MRRT - it simply is grabbing the revenue from the states and use it for its own purpose, as opposed to propose to put it aside for the future.

It shouldn’t have done that way.

On the one hand, it pressures the states by saying that their future revenue is not enough to foot the health bills, on the other hand it chokes the states off one of their very important own revenue source, that is, mining royalty in the guise of RSPT or MRRT.

Strictly speaking it is not a reform for the benefit of the nation, but a revenue grab by the federal government!

Can you have poorer government than that?

Both the Greens and MCA must play positive roles in pricing carbon

Comments on Sid Maher “Greens, miners hit carbon bid from both sides”, 7/02/2011, http://www.theaustralian.com.au/national-affairs/greens-miners-hit-carbon-bid-from-both-sides/story-fn59niix-1226001110919

While the Greens attitude towards the mining industry is wrong and hardly sustainable, given the role of the industry plays in the Australian economy and its contribution to Australians' economic fortune, the MCA also needs to be careful about its tactics.

The MCA should be positively participating in the process of pricing carbon, as opposed to an opposition to it.

What it should do is to ensure that a competitive carbon price that can achieve emissions reduction but does not disadvantage Australian industries in their international positions.

In that regard, it should argue for trade neutrality of carbon pricing. It should also argue for a consideration of the carbon pricing on the proposed new mining profit tax to avoid double hit on the mining industry.

It, however, should not unreasonably ask for subsidies to the industry.

Carbon emissions reduction has been on the agenda for many years. The Kyoto Protocol, an international agreement on emissions reductions, has been in place for more than a decade.

Any industry, or firms should have taken that into account in terms of investment decisions. There is little ground for any of them to ask for subsidies or compensation.

Better ways to milk the BHP cash cow

Comments on Stephen Bartholomeusz “Milking the BHP cash cow”, 1/02/2011, http://www.businessspectator.com.au/bs.nsf/Article/BHP-Billiton-Rio-Tinto-copper-gold-iron-ore-pd20110201-DN3SR?OpenDocument&src=sph&src=rot

It appears that the big mining companies might need to establish capital assets management teams within.

Clearly they have the expertise in their own mining industry.

But they probably lack the expertise to fully take advantage of their cash or liquid assets and the world equity markets over both shorter and media terms.

Further, this type of assets management teams can combine the flexibility of movement between equity markets and merger and takeovers to generate returns that are not available without such synergy. It is the economies of scope, perhaps.

In that respect, Telstra is probably in the same basket in terms of cash flow, although it should have diversified much earlier.

Mining boom and dutch disease

Comments on Tony Makin “Dutch disease no excuse for poor productivity”, 29/12/2010, http://www.theaustralian.com.au/news/opinion/dutch-disease-no-excuse-for-poor-productivity/story-e6frg6zo-1225977420144

Some points to consider:

1. If the mining boom really delivers some positive benefits to the Australian economy including those above mineral royalties, then part of that should be saved for compensating the use of minerals and for the benefit of future generations, as opposed only to lower tax rate for other industries in response to the Dutch Disease effects.

2. The slow down in productivity in the past decade, is that only in Australia or is that also in other industrialised economies? That can have significant implications. If it is a wider phenomenon, then Australia is at least not alone to blame.

3. While reducing government spending may reduce pressure on interest rates, what is the cost of lower government spending? Or government spending is only negative to the economy or neutral? Optimal government spending, excluding ineffecient policies and wastes, should be positive to the economy, it seems.

The fate of MRRT

Comments on Matthew Stevens “Scrap MRRT and start again”, 22/12/2010, http://www.theaustralian.com.au/business/opinion/scrap-mrrt-and-start-again/story-e6frg9lx-1225974669534

Maybe the proposed tax summit next year could provide a useful and convenient opportunity for changing the course of the current MRRT, to make it better and have the effect of scraping it and starting "designing this thing all over again".

That could provide a compromise for everyone currently involved, and also could meet the demand of the Greens.

But people need to guard against the Greens push for a higher effective mining tax than the current MRRT. The Greens have a wider agenda and tend to ignore the practical side of common economics in their single minded pursuit of environmental objectives.

A higher effective mining tax would be very much detrimental to the nation’s interest by killing off the mining industry in Australia and force it to move overseas, or at least to reduce their investment in Australia significantly.

Gittins' one extreme against another!

Comments on Ross Gittins “Only a small part of our good fortune is down to minerals “, 15/12/2010, http://www.smh.com.au/opinion/politics/only-a-small-part-of-our-good-fortune-is-down-to-minerals-20101214-18wqm.html
I note Gittins says that "our material standard of living is around average for the rich countries", as well as more on the average.

This is despite we have been exporting a lot of mining products and agricultural products that all are related to our natural endowment.

Would we still be able to be on the average if we did not have that lucky natural endowment?

So, let's don't use one line of extreme argument against another line of extreme argument, Mr Gittins.

On industry assistance

Comments on Paul Kelly “No time to rest on our laurels”, 15/12/2010, http://www.theaustralian.com.au/news/opinion/no-time-to-rest-on-our-laurels/story-e6frg6zo-1225971162407
Paul, as you pointed out, "Labor's double dilemma is to deliver fiscal restraint post the global financial crisis yet to manage the structural pressures arising from the mining boom."

In that context, it is interesting to see how to interpret and apply correctly one of Banks' listed items, namely "less industry assistance", as well as the introduction of a new mining tax MRRT.

Broadly speaking, the introduction of the MRRT and the lowering of company tax rate is a form of general industry assistance, isn't it? That is because they assist all other industries against the mining industry.

So to manage the mining boom and the two speed economy does require differential treatment to different industries and that is broadly industry policy or assistance.

Someone may say that is not the same as industry assistance, but that betrays the underlying logic of the MMRT and using the proceeds to lower company tax rate. That is no less than or no different from using spin in argument.

In a sense, that would not necessarily to increase or decrease productivity, given that it is our export market customers that pay for this adjustment through the high prices they have to pay for our minerals.

However, that does illustrate the dilemma of the indiscriminate argument against industry assistance.

Governments everywhere do it, albeit in different forms and guises. Needless to say some are good and some are bad in their effects.

Distance between good economics and good public policies

Comments on Dennis Shanahan “We should be economically rational about mining”, 14/05/2010, http://www.theaustralian.com.au/news/opinion/we-should-be-economically-rational-about-mining/story-e6frg6zo-1225866340058

While there is some merit in the two-speed economy argument, both the Treasury prescription and the government SRPT design are problematic and very poor.

From their downside, firstly, changing the rule of game when it suits the government for an industry that could many many years to build a project inevitably increases sovereign risks to say the least.

Secondly, if the threat of a mining boom driven by overseas demand by pushing the A$ higher, then there are at least other macroeconomic policies, such as monetary policy options and instruments or increasing imports of more essential capital equipment to improve productivity and infrastructure, which could slow the rise of A$, as opposed to suffocating the mining industry associated with the external demand driven mining boom.

Thirdly, even though the concept of super profits from mining may be correct, how to define it and tax it is much more complicated than both the Treasury and the government have realised and done in their argument and designs of the government’s SRPT as they stand.

One has to wonder how the modelling came about or was done that show an industry will grow more if you tax it more, really begging or stretching everyone's belief.

Translating good economics to good public policies is not a casual work! It requires much better efforts and quality than both Treasury and the government have put in so far.

There is also a high probability that it may not necessarily possible for them to get it right – it depends not only on efforts, but more importantly on true ingenuity and quality that may be sadly and badly lacking in both parts, if the theory of revealed inner quality (similar to the revealed preference theory) is to be believed!

Can Australia regulate global mining boom?

On today's ABC Insiders program, George Me. said the government's super profit resource tax is trying to moderate and slow down mining boom.

The question is that whether the idea or assumption that the Australian government can moderate mining boom is reasonable and realistic or not.

The fact is that Australia is only one part of the global mining industry to supply/export minerals and petroleum, and that global mining boom is largely driven by demand factor, though Australia has a very large mining industry and is well located geographically close to the boom areas of the world economy, namely Asia.

But mineral and petroleum deposits are not monopoly located in Australia, no matter how much Australia has.

In that global environment of global mining boom as a result of demand driven by industrialisation and urbanisation in Asia especially China, one has to ask the above question.

The very idea that through tax the Australian mining industry more heavily can regulate global mining boom is likely to be naive and lack of rationality.

I hope people don't confuse a legitimate tax reform of mining royalty with unrealistic goal of regulating global economy in which Australia does not have much control. International trade switch means that Australia will bear a significant loss if it attempts to do a silly thing as that.

WA reaction critical

Given the Australian government's initial response to its commissioned Henry tax review is to impose a 40% super profit tax on mining companies to fund its other commitments, the implications are to be felt by many gradually.

The most significant implication of this tax impost is its geographically differential impact. The states with large mining production will bear the brunt of this tax, while other states with little or no tax will be big winners.

As a result, it can be expected that the reactions across the nation are likely to be very different.

Compare West Australia with the ACT, for example. WA is the largest mining state in Australia, with abundant minerals deposits, such as iron ore, etc. It has been the engine room for the mining boom associated with the China boom. So the mining companies operating in WA will be hit by the proposed new super profit tax. The consequences are likely to be big the share prices of mining companies will fall due to reduced profits for their shareholders as compared to the case with no such taxes. New mining investments are also likely to not grow as much as otherwise. This will have an employment effect in terms of both numbers and wages.

On the other hand, the ACT does not have mining production. This tax proposal will have no negative effects on it. In fact, it will be positive as the positive redistribution effects work their way to the ACT economy.

It would be interesting to see how WA will react to this taxing and redistributing idea. It had in the past tried to leave the Commonwealth.

Now given that everyone can expect the mining boom to last and its implications for WA, would it consider that parting issue again?

Times of mining super profit

Comments on Paul Cleary “Miners a special tax case”, 1/05/2010, http://www.theaustralian.com.au/news/opinion/miners-a-special-tax-case/story-e6frg6zo-1225860481471

While it appears the argument to grab more tax revenue from mining when it is very profitable seems very attractive especially when branding mining companies as multinational companies, its soundness is really questionable.

One can argue this at profitable times, what about when mining companies are not profitable or less profitable than other industries? Will the government be compensating their below profitability at those times?

One can be very passionate and emotional when looking at other's profits or high income. Everyone wants to have a share or a grab. Envy can inevitable become part of the equation.

That is how communist revolution came to reality in some countries. That still dominates some people’s thinking.

What is the best mining royalty regime?

Comments on Mitchell Hooke “Just a case of hypochondria”, 15/04/2010, http://www.theaustralian.com.au/news/opinion/just-a-case-of-hypochondria/story-e6frg6zo-1225853793603

Most of Hooke's arguments are correct.

There is, however, an issue of how mining royalties should be levied, that is, should be based on value of mining production, or should it be based on profit or value added. It seems that the latter may be more preferred.

Even under a royalty regime based on profit or value added, then there is also an issue whether it should be flat or progressive based on rate of profitability measured by capital.

It is reasonable to argue that the latter is superior given the dramatic changes in the prices of mineral products and oil.

However, the nation should guard against unnecessary jealous of mining companies’ profitability when mining boom is going on. Boom and bust are much more significant for mining than many other sectors.

Use mining boom wisely

Comments on Michael Stutchbury “Save some prosperity”, 6/10/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/save_some_prosperity/

While the idea of a national wealth fund is not too bad in itself in theory, but it is unlikely to be so good in Australia in practice.

There are both revealed historical reasons and political ideological reasons.

Australia’s history shows that Labour governments have traditionally been a big spending government and a generator of national debts while the Liberals have generally been a smaller government and a source of government savings.

Ideologically, Labour has unsaturated want to spend as long as there is any inequality. Problems with Labour’s economic and budgetary management do not end there because many of its spending can be wasteful and inefficient as well as ineffective to achieve its intended policy outcomes.

So as long as the government has the power to spend, there is no guarantee that any national wealth funds will be safe when Labour is in government.

While Labour has shown its tendance and inclination to spend more than they possibly have, there is no guarantee that the Liberals will not learn from that and follow the suit.

The logic is not dissimilar to the reasons for an independent central bank even though both fiscal and monetary policies are government policy instruments to manage the economy and in theory should be considered and implemented as a package or a whole.

Why does an independent central bank have more merit? It is because only its independence from the government political party can save it from the influence of the government of the day and guarantee its policy disciplines to fight inflation.

A better alternative to a national wealth fund is to have the taxpayers be the real and tangible shareholders of any such funds with a management board independent from the government.

A taxpayer has a definitive entitlement to a certain share of the fund but cannot withdraw and use it until he or she is retired from the workforce and reached the retirement age. His/her shares can be passed on and inherited, just as any private superannuation or wealth.

The parliament can pass a legislation to specify how such a fund should and can be funded through booming mining activities and mining profits.

The initial entitlement can be determined as a combination of an equal per capita of a certain proportion of the windfall income and a proportionate allocation of the rest to every taxpayer.

The government can borrow from such fund when its revenue is below the trend, possibly with interest rates below the prevailing market rates.

So the essence of the idea can be implemented, but government cannot be trusted for managing the fund when it is available and can be spent by it when it has financial difficulties, or even at good times. A government can spend it and also bribe voters.