Читать книгу Bite Size Advice - Paul J. Thomas - Страница 10
ОглавлениеLike it or not, you can’t escape politics. Every day around the world, governments make decisions that affect our day-to-day lives. Politicians determine how much tax we pay, what laws we obey and how much money the state spends on essential services like roads, education and healthcare. The blog posts in this opening chapter examine public policy in a range of areas including regulation, competition, trade, privatisation and globalisation. There’s also a comment on government bureaucracy and the need to eliminate red tape.
In defence of bailouts
At the height of the Global Financial Crisis (GFC) in 2008, the world was on the edge of an economic precipice. Financial markets were in meltdown, global banks were on the cusp of failing and powerful shockwaves were being felt around the world.
Faced with financial Armageddon, governments moved to rescue the troubled banking system. Household names like Citigroup and Bank of America were in a state of peril. Lesser known institutions like Fannie Mae and Freddie Mac were also in distress.
Governments, quite rightly, could not sit idly by and watch their banking systems crash. If banks were allowed to go under, the damage to national economies would have been incalculable. Bailouts were, therefore, used as a circuit breaker to mitigate contagion risk.
The risk of contagion in banking, also called systemic risk, is akin to a chain reaction. Bank failures create a domino effect. Financial difficulties at one bank can quickly spill over to other banks or the financial system as a whole, resulting in a wave of distressed institutions.
The GFC starkly revealed how interconnected the financial world has become. Problems in the US subprime mortgage market spread rapidly to other parts of the market and impacted the stability of institutions everywhere. This ripple effect had the potential to fell both solvent and insolvent banks.
Contagion arises because banks are financially exposed to one another, both through the payments system and through other types of activities such as loans and derivatives. These balance sheet linkages (or interbank liabilities) between financial institutions mean that they are too interconnected to fail.
Banks and other financial institutions play a critical intermediation role in the economy. They act as an intermediary (go between) in moving money between investors and borrowers. Put another way, banks act as a middleman between suppliers of funds and users of funds.
Moreover, banks clear cheques, settle ATM transactions and effect electronic transfers and other payments. No banking activity is as fundamental to society as payments. The list of payment instruments includes debit cards, credit cards, direct debits, direct credits and Internet banking.
Not to be forgotten is the role of banks in credit creation. Banks create money through their lending activities. When a bank makes a loan to a customer and deposits the proceeds into a bank account, new credit money is created.
Money borrowed from a financial institution increases the money supply. A distressed banking system provides reduced credit which results in a lack of money (credit squeeze) for the rest of the economy. Without access to capital, businesses contract and unemployment rises.
Virtually every business and individual in the world has a bank (or credit union!) account. Modern trade and commerce would be almost impossible without the availability of banking services. This is why governments acted in unison to bring stability to the global banking system.
Not every distressed institution received a bailout. Both in Australia and abroad, authorities arranged “shotgun marriages” with stronger institutions taking over ailing competitors at knockdown prices. Examples include JP Morgan’s buyout of Bear Stearns and the acquisition of BankWest by the Commonwealth Bank of Australia.
Many people remain angry that taxpayer funds were used to prop-up the banking sector. Citizens around the world are unhappy that they had to pay for the mistakes and oversights made by banks. However, as I outlined above, rescuing troubled institutions was the lesser of two evils.
The public backlash to what many saw as rewarding bad behaviour is understandable. I too feel annoyed. Smaller financial institutions, like credit unions, did nothing to bring about the financial crisis. Yet we now face increased regulation because of the cavalier behaviour of others.
Posting Date: 4 February 2013
In defence of globalisation
The car that I drive was made in Japan. The watch that I wear was made in Switzerland. The suit that I don was made in Malaysia. The iPhone that I use was made in China. Like all Australians, I have access to a wide range of affordable yet quality products. I benefit from the lower price of these items since they are made more cost-effectively overseas.
But what if the government told Australians that they could no longer buy imported goods. I suspect there would be riots in the streets as globalisation impacts our everyday lives. Australians would no longer be able to spray French perfumes, drive German cars, self-assemble Swedish furniture or watch flat-screen televisions from Korea.
The strongest argument for globalisation is that it enables you to profit from specialisation. For example, the Chinese are very good at producing low-cost goods. Economists refer to this as a comparative advantage. China’s comparative advantage is due to its cheap labour and low production costs.
As a result, China has an edge in making clothes and, Ralph Lauren, the designer of the uniforms for the 2012 US Olympic team, arranged for the uniforms to be manufactured in China. Predictably, some US senators engaged in populist politics and were up in arms that American athletes had to don “Made in China” uniforms.
There was outrage on Capitol Hill with calls to “burn the uniforms” and that it was “embarrassing” for the athletes to wear them. For my money, these comments reflect a lack of understanding of comparative advantage and how trade works. A Forbes Magazine contributor put it well in saying that “someone should tell these folks that if you want to have exports, you also have to have imports”!
The reality is that the Made in China uniforms were good for the US economy and for US jobs. In the lead up to the London Olympics, a blogger for Bloomberg Business explained it this way:
Garment manufacturing is a low-cost commodity business. Most of the value in the apparel industry comes from design, technology, sales, marketing and distribution – not manufacturing. The successful players in apparel, such as Ralph Lauren and Nike, figured this out long ago. ... But just because America doesn’t manufacture apparel anymore doesn’t mean we can’t lead the industry.
In fact, the world’s largest apparel companies are almost all US-based, including Nike, (and) ... Ralph Lauren, to name a few. ... Nike has created more than 15,000 new jobs in the US (during the past decade), and Ralph Lauren almost 10,000. And unlike the low-paying production jobs next to sewing machines, these are well-paying jobs in marketing, accounting, design, and management.
These companies are winning globally by out-designing, out-innovating, and out-marketing the competition. Nike, for example, is unveiling a new TurboSpeed running suit at the London Olympic Games. …Nike’s gear will be used by teams from many countries, including Russia, China, and of course, the US. What Nike and Ralph Lauren don’t do is make their own products, in the US or elsewhere – and this has become their competitive advantage.
It’s clear that the Chinese are good at producing low-cost garments. The US, on the other hand, is good at innovation and design, software and medical equipment. Meanwhile, Japan has a highly skilled labour force that uses technologically advanced equipment to produce cars and electrical equipment.
The Italians, of course, are known for their fabrics and fashions. And Australia exports its raw materials to the world. We have an abundance of natural resources that we cannot use and are able to sell the surplus to other countries, giving us a world market of over 7 billion people.
Everyone benefits when countries specialise in the type of production at which they’re relatively most efficient. This includes the millions of people in emerging markets who have climbed out of poverty because of the free flow of goods and services across borders.
Regrettably, this fact is often overlooked by the anti-globalisation protest movement. Ironically, these activists are more than happy to use the outputs of globalisation – cheap cars, low-cost electrical items, affordable designer clothing and iPods to name a few.
What the protesters fail to understand is that global free trade promotes economic growth, creates jobs, makes companies more competitive and lowers prices for consumers. Free trade is a global economic engine which is the biggest eliminator of poverty and creator of opportunity that the world has ever seen.
Posting Date: 12 November 2012
Should governments privatise?
Margaret Thatcher started doing it in the late 1970s. Ronald Reagan jumped on the bandwagon in the early 1980s. The Japanese followed suit in the mid-1980s. Now everyone’s doing it – privatisation is sweeping the world. Both developed and developing nations are divesting themselves of government owned enterprises including railroads, airlines and telecommunications.
The motivation to privatise is typically driven by a combination of three factors: (a) the desire to raise cash to retire government debt; (b) the need to reduce subsidies to profit-losing state enterprises; and (c) the hope that private investors will bring managerial practices and technology to upgrade utilities.
In the extreme, privatisation results in the transfer of ownership and control of state services and enterprises to private ownership. But more common are public-private partnerships in which the facilities are still owned by the government but managed privately.
Supporters of privatisation claim that governments are bureaucratic, inefficient and incompetent at providing services. Public sector defenders, on the other hand, label the private sector as greedy, unethical and prone to corporate failure. While neither sector has a perfect track record, it’s unhelpful to tarnish either with sweeping generalisations.
For my part, I do not see privatisation as inherently good or bad. My contention is that it has to be done right. Privatisation works best when there is vigorous competition among alternative service providers. There also needs to be a clear understanding of which enterprises are best suited for a public-private partnership approach.
Privatisation in Australia started in earnest with the sale of the first tranche of the Commonwealth Bank in 1991. It continued with the privatisation of Qantas airlines (which began in 1992) and has since gained momentum to include the partial sale of Telstra and the sale of Sydney Airport.
Australian governments, both Commonwealth and State, have now privatised a significant portion of the public sector. This includes electricity and gas in Victoria and electricity in South Australia. We’ve also witnessed the sale of the State Bank of NSW, the State Bank of Victoria, GIO in NSW and SGIO in Western Australia.
Privatisation is not a panacea to public sector woes nor is it a licence to print money for the private sector. While many people worry about the government selling off the family silver, privatisation is an important element of microeconomic reform which is designed to improve market efficiency by limiting government interference in the economy.
Like all public policy debates, the privatisation debate is an emotive battlefield. Politicians, interest groups and the general populace treat privatisation arguments like warfare. Once you pick a side, you’re expected to support all of your side’s arguments and attack every argument mounted by the enemy side, lest you be accused of being a traitor.
I think we need to be a bit more pragmatic. A case-by-case approach to privatisation is essential – as is an open mind – to the potential social and economic benefits of any asset sale. Transparency is also crucial as taxpayers understandably want to know that asset valuations are realistic and that procedures for calling for bids and evaluating offers are fair.
Posting Date: 14 March 2011
Global banking laws
While on holidays recently, I saw many things which are legal in Europe but illegal under Australian law. In London, I saw crowds of people drinking on footpaths outside pubs. In Dubrovnik, I saw dogs being walked in the lobby of a five-star hotel. In Zurich, I saw scores of cyclists riding on roads without bicycle helmets. And in Frankfurt, I saw smokers light-up in sidewalk bars, cafés and restaurants.
What’s right and what’s wrong depends on where you are in the world. From how much income tax you pay to which side of the road you drive on, nation-states determine their own sovereign laws. But this is changing. While elected governments still make national laws which are binding (“hard law”), unelected experts are increasingly making non-binding international rules (“soft law”) which countries are adopting.
In a globalised world with cross-border trading, the emergence of “soft” international law invariably results from the inadequacy of “hard” national laws. A good example of this is banking regulation. Until the early 1970s, banking regulation was considered the exclusive preserve of national policy makers. However, the collapse of a German bank and a US bank in 1974 showed that financial crises were no longer confined to one country.
It became clear that coordinated international action was needed to prevent shock waves from one nation’s problems reverberating worldwide. As a result, the central bank governors from the G10 countries began meeting at the offices of the Bank for International Settlements in Basel, Switzerland. Their aim was to develop uniform international safety standards for banks. The Committee became known as the Basel Committee on Banking Supervision.
The Committee – which has since been expanded – acts as an advisory body and produces Accords (banking regulation recommendations) rather than laws. Even though it has no legislative power, the Committee’s members are senior representatives of bank supervisory authorities from around the world and its views hold great sway. The Basel Accords have become the regulatory standards for virtually all nations with international banking activities.
Among other things, the Accords specify the amount of capital that banks and other financial institutions must hold. The original Basel Capital Accord (now called Basel I) was reached in 1988. This had some shortcomings, so a New Capital Accord (Basel II) was released in 2004. Neither Basel I nor Basel II prevented the Global Financial Crisis. Therefore, a third Accord – Basel III – was endorsed by the G20 Leaders in 2010.
Few see the new set of Basel III regulatory requirements, which will be phased in globally from 2013, as a panacea. Notably, Mervyn King, governor of the Bank of England, believes “Basel III on its own will not prevent another crisis” and that the new levels of capital are insufficient to avoid a further disaster. The harsh reality is that no set of rules can ensure the solvency of the banking system or its resilience in a crisis. Like driving a car, banking involves risks which can’t be totally eliminated.
Banking regulation will continue to evolve, punctuated by bursts of activity every time that there is a serious crisis to manage. In broad strokes, my contention is that the likelihood of future crises can be reduced through better risk management systems and strengthened governance processes – two things which are continually under the spotlight at Gateway.
I’m conscious that the Basel Accords seem obscure and irrelevant to people outside banking. Yet they are the backbone of the financial system and are designed to protect depositors’ and taxpayers’ money. In Australia, we are fortunate that our banks, building societies and credit unions are well-managed and well-regulated. Australian depositors have good reason to be confident in their financial institutions.
Posting Date: 12 September 2011
Explaining political leanings
I understand the difference between up and down. I also know the difference between north and south. But when it comes to left and right in a political sense, I’m less clear. What does it really mean to be left-wing? How does this differ from those who lean to the right?
The terms left-wing and right-wing define opposite ends of the political spectrum. Yet, there is no firm consensus about their meaning. Over time, these labels have become blurred. Former British Prime Minister, Tony Blair, once argued that the distinction between the two had melted away into meaninglessness.
The genesis of the terms “left” and “right” date back to eighteenth century France and the French Revolution. Members of the First General Assembly were seated according to their political orientation. Supporters of the king sat to the right of the Assembly president with supporters of the revolution to his left.
In line with this historic division, contemporary left-wingers are said to be anti-royalists who favour interventionist and regulated market economic policies. Right-wingers, on the other hand, are said to be monarchists who favour laissez-faire, free market economic policies.
In Australia, the Labor Party has traditionally been seen as left-wing (socialist) with historic ties to the union movement. The Liberal Party has customarily been considered as right-wing (capitalist) with long-standing ties to the business community. Many see these labels as outdated in describing Australia’s modern political landscape.
Take, for example, the issue of Australia becoming a republic. Based on traditional ideology, you would expect this cause to be championed by the “anti-royalist” Labor Party. Yet the push for a republic has been spearheaded by a member of the “monarchist” Liberal Party.
Liberal frontbencher, Malcolm Turnbull, is a Liberal blue-blood. (Note: Left-wing parties are typically associated with red, the colour of revolution, while right-wing parties are often associated with conservative blue.) Turnbull is a millionaire former investment banker who, uncharacteristically for a conservative politician, is also a staunch supporter of the Australian Republican Movement.
In trying to discard the monarchy, Turnbull was seen to take a left-wing stance which caused some right-wing hardliners to label him a turncoat. But he is not the only politician to be off course in a strict ideological sense. Former Labor Treasurer, Paul Keating, lurched to the right economically.
Keating’s laudable economic reforms included deregulating the financial system, floating the dollar, reducing import tariffs and introducing compulsory superannuation – things that a Labor Treasurer was not expected to do. It is said tongue-in-cheek that Keating was Australia’s best “Liberal” treasurer and the architect of neo-liberalism in Australia.
Many of Keating’s reforms were based on the 1981 Campbell Inquiry Report into Australia’s financial system. John Howard commissioned the inquiry when he was Liberal Treasurer. But Howard disappointed his traditional supporters – capitalists – by implementing only one of Campbell’s 260 recommendations.
Ironically, it was Keating, post-1983, who introduced many of the Campbell recommendations. He implemented a globalisation agenda which made Australia internationally competitive and opened our economy to the rest of the world. Not surprisingly, big business embraced Keating – even though the Labor Party and corporate Australia are supposed to be adversaries.
So, how left-wing was Keating as a left-wing politician? The reality is that he moved the Labor Party to the right of centre. The message is clear: While academics may argue that ideological differences are reflected in the policies of each party, this is not always the case. Voting purely along traditional party lines is now not a guarantee that you will get policies that are classic left or classic right. I believe that we need to shun this binary thinking since it represents an obsolete linear paradigm. Whether you swing left, lean right or aim dead centre, it’s incumbent on all of us to keep abreast of the workings of our political system.
Posting Date: 16 September 2013
The media politician
In the lead up to the 1960 US presidential election, John F. Kennedy and Richard Nixon squared off in the first televised presidential debate in American history. The viewing public gleaned little about the policies of each candidate but learned a great deal about their looks and presentation. Kennedy came across as calm and confident while Nixon appeared sickly and sweaty.
As the story goes, those who listened to the debate on the radio thought that Nixon had won while those who watched the debate on TV believed Kennedy came out on top. Nixon’s problem was not his debating skills but his staid image compared with the young, charismatic and handsome Kennedy. It is said that Americans were asked to vote “for glamour or ugliness”.
The new medium of television caused citizens to focus on image as well as issues which changed the political landscape forever. The movie-star-looking JFK is credited with sparking the political shift from policy to personality. Many believe this shift has gone too far with contemporary politicians seemingly focussed more on likeability than substance.
There’s no doubt that modern day politicians need to be media savvy and able to work a crowd. But has the politics of style over substance gone too far? Like many, I believe it has but as I opined in an earlier blog post about political leadership that it’s largely our fault since we (as citizens) get the government we deserve.
Many citizens of democracies around the world now vote for the personality more than the policies. I’ve lost count of how many times I’ve heard people say they like or dislike a given politician without offering any coherent and rational argument. Political parties have responded by manufacturing images at the expense of providing authentic leadership.
Being a political media darling is one thing but having the ability to truly articulate a clear vision of the future is something quite different. My view is that political leaders can drive change in the face of opposition if they have the courage of their convictions. Regrettably, such bold leadership is increasingly difficult to find in politics.
Politicians have become scared of upsetting the electorate (that’s us!) and let opinion polls and minority groups unduly influence policy formulation. This often results in long-term economic credibility being sacrificed for short-term populist reforms. The end outcome is a public which gets policies that are against their own best interests.
An example is our obsession in Australia with national public debt. We have been conditioned to believe that debt is bad and so any political leader who does not pledge to lower our national debt is not worthy of our vote. However, it’s a sweeping generalisation to say that debt is inherently bad. Frankly, I would welcome more national debt as long as it is “good debt”.
In a previous post, I explained the difference between good debt and bad debt. Public debt which fuels economic growth is good debt. Why then are we as a nation so afraid to borrow to invest in our future? Currently, we need to borrow to build and upgrade essential public infrastructure like roads, airports, sewerage plants, hospitals and schools.
One prominent Australian banker believes, quite rightly, that Australia has a debt problem – we don’t have enough to fund desperately needed infrastructure! Nobel Laureate and leading global economist, Joseph Stiglitz, agrees. In an article about Australia’s irrational attitude to public debt he wrote:
Instead of focusing mindlessly on (budget) cuts, Australia should instead seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.
Most economists agree that the actual amount of national debt is less important than the percentage of debt to GDP. Japan’s debt-to-GDP-ratio is 214.3 per cent, the USA’s is 73.6 per cent while Australia sits at a low 26.9 per cent. The reality is that we are not heavily indebted, so our politicians should stop whipping up public panic. In Australia, no one needs to be afraid of the Big Bad Debt!
Posting Date: 30 September 2013
Free trade versus protectionism
Long held and deep-seated beliefs are hard to change. Open competition is an example where much of the dialogue is ill-informed. Virtually every economist will tell you that free trade beats protectionism any day. Yet arguments for anti-globalisation (protectionism) continue in political and social discourse.
Over 200 years ago, Adam Smith, the father of modern economics, espoused the benefits of free markets in his magnum opus, The Wealth of Nations. Smith argued that it is irrational to produce at home that which can be imported more cheaply. He criticised the idea that protectionist tariffs serve the economic interests of a nation by protecting local industries.
Another legendary economist, David Ricardo, built on the work of Smith and developed the most important concept in international trade – the theory of comparative advantage. According to Ricardo, nations should specialise in making goods they can produce most efficiently (their area/s of comparative advantage) and trade for goods they make less well.
To be clear, free trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. Protectionism, on the other hand, is the deliberate restriction of international trade by means of government policies designed to shield domestic industries and jobs from foreign competition.
The belief that protectionism can preserve jobs in the long-run is an illusion. The prime example of this is the Australian car industry. Over the past decade, Ford has received an estimated $1.1bn in government subsidies. Notwithstanding this taxpayer funded assistance, Ford is leaving Australian shores in 2016 which will result in the axing of 1200 manufacturing jobs.
Announcing the closure, the head of Ford in Australia said: “Our costs are double that of Europe and nearly four times Ford in Asia. The business case simply did not stack up, leading us to the conclusion that manufacturing is not viable for Ford in Australia in the long-term”. Holden, which has received around $1.8bn in government handouts, is also battling for survival.
It’s blindingly clear that Australia does not enjoy a comparative advantage when it comes to car manufacturing. So, at what stage do we embrace this reality and write the car industry’s obituary? Throwing good money after bad will not make the car industry self-reliant and sustainable. No amount of protectionism can force consumers to “buy Australian”.
Consumers behave as economic models predict in that they acquire what they want, for the best price. Federal Treasurer, Joe Hockey, made this observation last year saying: “People are not buying Australian-made cars because they don’t want to buy Australian-made cars, and the cars are not meeting their demands as consumers”.
I suspect that there would be riots in the streets if the government told Australians they could no longer buy imported goods. Free trade provides the cheapest goods and services for consumers. (Note: Japanese consumers pay five times the world price for rice because of import restrictions protecting Japanese farmers.)
The harsh reality is that protectionism costs more jobs than it saves. Protectionist laws that reduce consumer spending power actually end up destroying jobs. Free trade, on the other hand, creates more jobs than it eliminates since it allows countries to specialise in the production of goods and services in which they have a comparative advantage.
Over recent decades, Australia has transitioned from a highly protectionist economy to one open to foreign investment and exports from around the world. The creation of this open and competitive economy has led to 22 years of recession-free economic growth. This transition, of course, has not been seamless or uniformly welcomed.
While job losses in one sector are always painful, local production should not be defended from imported competition. Australia operates in the 21st century which is why we can’t continue to protect 20th century industries. As the 19th century English philosopher, John Stuart Mill, wisely noted: “Trade barriers are chiefly injurious to the countries imposing them”.
Posting Date: 28 October 2013
Who controls the economy?
Politicians do a lot of huffing and puffing about their economic credentials and claim to be able to control the economy. In reality, governments have some influence and, therefore, only some impact on economic activity, but it matters a lot less than people think.
The global economy can be likened to a vast ocean. Each nation-state is free to steer its own ship and set its own course in open waters. But each vessel has to deal with similar headwinds, like the Global Financial Crisis, which cross national borders.
The fate of domestic economies is impacted significantly by what blows in from offshore. No economy is immune from higher oil prices, movements in exchange rates and other seismic changes. Which is why the fate of most economies is largely determined by global conditions, not domestic ones.
In Australia’s case, our recent resources sector boom led to a surge in national income from exports. But the government can’t take credit for this boom cycle as it was driven by the voracious demand from developing nations in Asia, particularly China, for our raw materials.
Our central bank has more influence over the economy than the government. The Reserve Bank of Australia is independent of the government and has total autonomy over interest rate setting. Monetary policy directly impacts the demand for credit and consumer sentiment.
Interest rates go down when times are tough and go up when things are overheating. It is ironic, therefore, that glory-seeking governments take the credit when interest rates fall (a sign of a weak economy) and nit-picking oppositions are critical when interest rates rise (a sign of a strong economy).
As noted by author, Albert Alla, not only do politicians have no say in the rise and fall of interest rates, they cannot create jobs in the private sector. Moreover, they are unable to force companies to invest in declining industries and can’t micro-manage workers in order to increase productivity.
Consumption by consumers, investment by businesses and government spending are the three major parts of an economy. In Australia, personal consumption is the main driver of the Australian economy and represents more than 50 per cent of our nation’s GDP.
Personal consumption represents you and me. Collectively, we have more influence on the economy than the government. Ronald Reagan quite rightly noted that “a government can’t control the economy without controlling people” and no democratic government seeks to control the populace.
The Australian Government does not interfere in personal economic choices. We are best able to decide our wants and needs. As a result, the government can’t stop us living beyond our means. Nor can it force us to spend or compel us to save (except superannuation savings).
We operate an open market economy where people are free, within the bounds of the law, to engage in commerce at their will and their peril. All markets have rules (the term “free market” is an oxymoron) and governments play an important role in setting industry standards.
With regard to economic competition, the Federal Government is the rule-maker, the referee and the umpire – it regulates markets, ensures a fair playing field and enforces the law. Importantly, it also invests in infrastructure.
In short, the government’s job is to improve the functioning of the marketplace and not play a direct role in markets. While government interventions to improve market infrastructure such as roads are necessary and welcomed, over-regulation is not and can be counter-productive to the workings of a capitalist society.
It can be seen that our economy is based on the market forces of supply and demand and the economic interactions between millions of people. Our politicians have little control over most things that actually affect the economy. Yet we unfairly hold them responsible for short-run ups and downs.
The way forward is clear: We should stop blaming politicians for our financial woes and our elected leaders should cease grabbing credit for things that are beyond their control. Let’s all be honest about the respective roles that we play in the functioning of our economy.
Posting Date: 3 March 2014
Over regulation
Politicians have made an art form of over engineering things. Governments often rush through knee-jerk legislation in response to consumer or media pressure. Yet, sometimes the best response to an event or crisis is to take a collective deep breath and wait until the dust settles instead of making policy on the run.
In the era of the 30 second TV grab, our political leaders are quick to jump on the bandwagon of consumer sentiment and pander to voters and the popular press. However, in their bid to act decisively, governments often behave impulsively and fail to address or solve the underlying issue. The end result is unnecessary regulation on business, the cost of which is invariably passed on to the consumer.
In a recently released report, Deloitte Australia estimates that government regulation costs the Australian economy a staggering $94 billion a year. This red tape, together with private sector rules and regulations, is “...the biggest single drag on our nation’s productivity”, according to Deloitte. In the report, Deloitte laments the proliferation of new government rules:
Not even the federal government knows how many rules you are meant to obey. In fact, we don’t even know how many government bodies currently have the ability to set rules in the first place, let alone the number of rules those agencies have laid down.
The Report, Get out of your own way: Unleashing productivity, also takes aim at business. Deloitte argues that while the private sector needs rules, it has “...overdone it, spawning an entire industry”. Australian businesses spend $21 billion per annum on self-imposed rules, which generate a stunning $134 billion a year in compliance costs. “When combined”, says Deloitte, “the costs of administering and complying with public and private sector rules equate to a quarter of a trillion dollars a year.”
Deloitte notes that a cost saving of just 10 per cent of that total would equal 1.6 per cent of national income. This is an achievable target and one that business and government should set as a goal. However, both the public and private sectors “regulate in haste and repent at leisure, with each additional rule ratcheting up the pressure on our economy”.
Alarmingly, Deloitte claims that one in every 11 employed Australians now works in the compliance sector.“As a result there are already more ‘compliance workers’ across Australia than there are people working in the construction, manufacturing or education sectors”, the report states. The rise in new ‘compliance workers’ is a key reason why Australian productivity growth has been in low gear:
New technologies are delivering a huge dividend but we’re not seeing the gains... ‘back-office’ workers such as switchboard operators, mail sorters and library assistants have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia’s compliance culture.
In any country, the key drivers of economic growth are population size, workplace participation rates and productivity levels. An increase in any one or more of these factors leads to economic growth and improved economic prosperity. Deloitte, quite rightly, notes that one way to improve productivity is to reduce red tape.
Improving productivity is not just important for businesses – it’s also linked to higher standards of living for us as citizens. The reality is that if we don’t find ways of becoming more productive, our way of life will suffer. Our need to boost productivity by reducing regulation is critical. The time to act is now.
Posting Date: 10 November 2014
Depositor protection dilemma
We all know you can’t insure a car for more than it’s worth. This is because insurance companies understand something called moral hazard. Moral hazard is a concept saying that people will take risks if they have an incentive to do so. Ergo, if my car is valued at $10,000 but is insured for $20,000, I might be tempted to torch it.
Moral hazard can entice individuals insulated from risk to behave differently than they would if fully exposed to the risk. Examples include tenured professors becoming indifferent lecturers, insured drivers being less vigilant about car theft, protected managers making poor decisions and unemployed workers being less inclined to look for a job while on government benefits.
The subprime crisis is another example of moral hazard. Many US financial institutions recklessly lent money to people with poor credit histories to buy overpriced houses. They deliberately lowered their credit assessment standards knowing that they could package dodgy loans into mortgaged backed securities and pass off the risk of default to unsuspecting investors.
Moral hazard is commonly associated with any type of safety net including deposit insurance. At the height of the Global Financial Crisis (GFC), governments around the world guaranteed the deposits of citizens in banks and other financial institutions. Most commentators believe that this unprecedented intervention was necessary to protect the global financial system from meltdown.
As the crisis passes, the OECD is urging Australia to fulfil its promise to remove its deposit guarantee which, it argues, is a moral hazard. Nevertheless, the OECD acknowledges that both depositors and banks now believe the Federal Government will always come to their rescue in times of trouble.
The belief that a bank is too big to fail represents a classic moral hazard. If the public and the management of a financial institution believe it will receive a financial bailout to keep it going, management – in theory – may take more risks in pursuit of profits. Yet, there’s no evidence that the deposit guarantee has actually encouraged Australia’s Approved Deposit-taking Institutions (ADI’s) – i.e., banks, building societies and credit unions – to behave recklessly.
We have a strong prudential regulatory system governing ADIs in Australia. While there’s no doubt that moral hazard in financial services is real, our robust regulation and good practices prove that this risk can be mitigated.
The GFC shows that governments will act to save banks which are too big to fail. This gives our ‘Big Four’ Australian banks an implicit guarantee and an unfair advantage over smaller credit unions. That’s why I believe the current retail deposit guarantee scheme should be maintained after its proposed review date in October 2011.
As someone who is a staunch believer in free markets and survival of the fittest, I can fully understand why the Reserve Bank of Australia opposes the extension of the deposit guarantee. I too accept that governments should not be the first port of call in times of crisis. However, some form of depositor safety net for all ADIs is essential to provide a more level playing field for Australian credit unions and building societies.
The deposit guarantee scheme provides protection for ordinary depositors, fosters competition in banking and doesn’t cost the taxpayer a cent. In short, it’s a necessary evil if we are serious about the mutual sector being a viable alternative to the Big Four banks.
Posting Date: 6 September 2010
Stop the pandering
Everyone has theories. We all have our own explanation for why things work the way they do. I’ve had a theory for as long as I can remember and it relates to short-term thinking. Whenever we make decisions based on quick fixes, instant gratification and populism, we suffer long-term consequences. We see this time and time again in politics, business and even our homes.
We all intuitively know that true leadership is not a popularity contest. This is why prime ministers, CEOs and parents must be capable of making unpopular decisions at times. The good news is that most constituents, employees and children will respect you in the end for making the right choice.
To do and say what is right – as distinct from popular – means that you sometimes have to stand alone which takes strength of character. But if you have a clear vision of the future and how it ought to be, then you can drive change in the face of opposition through the courage of your convictions.
Regrettably, such bold leadership is increasingly difficult to find in politics as politicians have become scared of upsetting the electorate. Opinion polls and minority groups now unduly influence policy formulation resulting in long-term economic credibility being sacrificed for short-term populist reforms.
Paradoxically, when political leaders make decisions based on opinion polls they end up being followers, not leaders. They also become reactive rather than proactive. Moreover, inspired leadership gives way to emotive and ill-informed slanging matches.
The end result is the public gets policies that are against their own best interests, particularly those that threaten business. There are many examples of this in Australia. The Australian Retailers Association branded the government’s push to ban plastic bags as populist politics.
The Business Council of Australia believes the immigration debate has descended into populist rhetoric, noting that we need continued, sustainable growth to ensure that our children inherit a strong economy. The ANZ Bank boss recently warned that populist policies were spooking foreign investors.
For my money, former Western Australian Premier, Geoff Gallop, got it right in a recent article, When populism raises its ugly head, wherein he stated that populism:
... prefers nationalism to internationalism, protectionism to free trade and fundamentalism to multiculturalism. Populists want politicians to support “us” as against “them”... They distrust business and support local environmental activism but don’t like... the philosophy of economic rationalism.
Okay, here comes the sting in the tail. Brace yourself – it’s largely our fault if we end up with poor political leadership. As French political philosopher, Alexis de Tocqueville said: In democracy, we get the government we deserve.
We all “have a say” in voting governments in and politicians should be worthy of the people they serve. Equally, we have an obligation to behave responsibly and to avoid short-term community hysteria just because we don’t get our way on a particular issue.
For example, when it comes to rising interest rates, I know, politicians know and every first-year economics student knows that they are a sign of economic growth and prosperity. Yet many in the electorate expect the government to say the opposite – and it does – as it knows mortgage rates are a political hot potato. Boy, I’m glad I can speak the truth.
Posting Date: 16 May 2011
Modern day Greek tragedy
Is it a case of life imitating art? We’ve had the Big Fat Greek Wedding, now we’ve got the Big Fat Greek Debt. Unlike the light-hearted movie, the drama that’s unfolding in Greece is a sobering tale of the crippling impact of government largesse and corruption.
This sorry saga – let’s call it The Art of Political Deception – started long ago. While Greece’s economic mismanagement does not date back to the time of her famous sons, Socrates and Plato, it can be traced to the establishment of the modern Greek state in the early nineteenth century.
A welfare state mentality emerged and a marathon of fiscal trouble began that continues to run its course today. The benevolent Greek Government introduced automatic indexed salary increases rather than base annual pay raises on market indicators such as productivity.
The resultant lack of economic growth created few opportunities and caused the large-scale emigration of Greeks to Australia and the US after World War II. With one of the highest rates of emigration in the world, remittances soon became the largest component of Greece’s GDP.
Meanwhile back in the homeland, economically incompetent Greek Governments continued to build an oversized and pointless civil service. The average government job now pays almost three times the average private-sector job. Civil servants are also protected by law from being fired and retire with bloated pensions creating the best working conditions in Europe.
The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. According to a Vanity Fair article, more than 600 Greek professions have managed to get themselves classified as arduous including hairdressers, radio announcers, waiters and musicians and all receive generous state-funded pensions.
The spendthrift attitude of successive Greek governments is one of the root causes of Greece’s current sovereign debt crisis. However, the government is not solely to blame. The Greek people themselves must also accept some responsibility for the country’s economic mess since tax evasion is rampant.
Greece’s deep rooted culture of tax evasion costs the country about 30 billion Euros annually in lost revenue. Tax dodgers can be found everywhere. Plumbers, electricians and taxi drivers are notorious for not giving receipts. Doctors grossly understate their income while wealthy home owners deliberately lie about owning a pool to avoid paying a luxury tax.
And so ends Act I of our human tragedy. With a short interlude to reflect on the fact that Greece – at both a sovereign and personal level – has been living beyond its means for decades – we move to Part II and meet the third “villain” (metaphorically speaking) in our plot – the Euro currency.
The Greek crisis became a European crisis due to the common use of the Euro. A single currency is only as strong as its weakest link, as the 16 other Euro nations have discovered. Tiny Greece has been dominating the headlines with speculation it could bring down the Euro if it defaults on its debts.
If Greece still had its own currency, it could employ the standard policy of devaluing its drachma to become more competitive and restart growth. Devaluation makes a country’s exports less expensive for foreigners and makes foreign products more expensive for domestic consumers. This helps increase exports and decrease imports, thereby reducing the current account deficit.
However, Greece’s monetary union with the Eurozone means it cannot follow the devaluation path. So just over a year ago the European Union put together a €110 billion bailout package for Greece that briefly calmed markets. The IMF recently warned that a second bailout package is necessary to prevent the world’s second global financial meltdown in three years.
The crumbling ruins of the Parthenon are testament to the fact that the Greeks have failed once before. This latest tragedy could again leave the country in ruins. How this tragedy ends is still to play out but the cradle of Western civilisation and birthplace of democracy is fighting for economic survival.
Posting Date: 4 July 2011
Government concessions for many
When it comes to decision making, politicians are pulled in multiple directions. The judgments that politicians make can affect thousands or millions of lives. An endless stream of business associations, community organisations and pressure groups lobby governments to influence outcomes.
These special interest groups play a legitimate role in all democratic systems of government. They are an important mechanism through which citizens can make their ideas and views known to elected officials. The ultimate aim of this advocacy is to shape public opinion or affect public policy.
An individual acting alone has little political clout but, as part of a special interest group, can assert considerable sway. Interest groups come in all shapes and sizes, can be transient or permanent and cover a multitude of issues e.g., anti-abortion, environmental protection or workers’ rights.
A well-known interest group in America is the National Rifle Association (NRA). This gun lobby is considered by many congressional staffers and lawmakers to be America’s most influential lobby group. The NRA has vigorously opposed many legislative proposals for the control of firearms.
In Australia, the mining sector flexed its considerable muscle in 2010 and unleashed the most ferocious lobbying campaign ever seen in this country. Mining powerhouses Rio Tinto, BHP Billiton and Xstrata joined forces to stop Prime Minister, Kevin Rudd’s proposed Resource Super Profits Tax from becoming law.
The lobbying campaign cost $22m, brought down a Prime Minister and led to accusations of “rent-seeking” by the mining industry. Rent-seeking is an economic term used to describe attempts to lobby a government for loan subsidies, funding grants, beneficial regulations or monopoly privileges.
Some believe these economic concessions fail to create benefits for the overall society since they merely redistribute resources from taxpayers to special interest groups. With regard to the changes to the originally proposed resource tax, the public coffers missed out on $60 billion in forecast revenue.
One way for governments to create “rent” is by limiting competition. For example, restricting the number of taxi cabs prevents new entrants and protects the profits of incumbents. This rent-seeking enables taxi owners to obtain a greater rent (return) than would be possible in an open market.
Rent-seeking takes many forms. Historically, farmers obtained government help through tariff protection. Similarly, local manufacturers engaged in rent-seeking by securing restrictions on imports via quotas. Brick and mortar retailers now want protection from foreign, online competitors.
A high-profile Australian retail stalwart spearheaded a campaign to have the government impose the goods and services tax (GST) on Internet retail purchases under $1,000 arguing that overseas retailers had an unfair advantage. The campaign infuriated consumers with local retailers labelled as “rent-seeking whingers”.
Bailing out banks is another example of rent-seeking as rescuing banks does not create value. Rent-seeking means “obtaining an economic gain at the expense of others without reciprocal benefit”. This definition covers any economic activity that expands one’s share of existing value rather than creating value.
As profit-seekers (wealth creators), many financial institutions recklessly expanded their lending activities. They lent money to people who they ought to have known could not pay them back. Mortgage securitizers compounded the problem and destroyed value.
This behaviour ultimately resulted in a number of institutions becoming rent-seekers as governments around the world were forced to prop-up banks with taxpayer funds as a result of the Global Financial Crisis. The auto industry in Australia and in the US also received government financial assistance.
Many saw the bailouts as taxpayer welfare for business with citizens angry that rent-seeking corporations were given fistfuls of cash. The US Government was also forced to pick winners and losers. Lehman Brothers was allowed to fail but insurance giant, AIG, was given a bailout.
In the aftermath of the financial crisis, many questions remain. Key among these is whether taxpayer dollars should have been used to bail out banks and other private companies or should they have been left to their own devices and allowed to sink or swim? I’ll answer that question next week.
Posting Date: 28 January 2013
Democracy in danger
In a recent post I expressed concern that politics is degenerating into a farce, with short-term popular sentiment increasingly impacting long-term policy formulation. Hopefully, I left readers with a clear sense of the dangers of the don’t-offend-anyone politics which now characterises Australian political life.
What I did not focus on was the role of the media in whipping up emotive opposition to sensible social and economic reform. The media, according to Lindsay Tanner, a former minister for finance in the Labor Government, is turning political reporting into a “carnival sideshow” driven by entertainment imperatives.
In his recently released book, Sideshow: dumbing down democracy, Tanner tracks the relentless decline of political reporting in Australia and abroad. He describes in great detail how the media manipulates the discussion of substantive issues in ways that entertain rather than inform. “Policy initiatives are measured by their media impact, not by their effect”, laments Tanner.
Tanner, quite rightly, asserts that “genuine democracy requires an informed electorate” but bemoans the fact that the media controls access to the electorate. “The media publishes what people want to read or watch and the public demand for serious news is in decline”. Consequently, politicians have been pushed into a self-defeating game of feeding the news cycle with stunts.
Tanner notes that as political coverage gets sillier, politicians are forced to get sillier to get coverage. “As politicians need to be interesting to compete in a world governed by the rules of entertainment, they happily collaborate”. Yet he believes that Australians deserve much better than the carefully scripted play-acting that now dominates our nation’s politics.
Journalists are always looking for quirky and amusing items that divert or titillate the audience. Tanner cites the 2008 presidential primaries where Hillary Clinton attracted saturation coverage for allegedly revealing some cleavage on the campaign trail. “The amount of flesh on display would have barely troubled a middle-class maiden aunt in Victorian England. Yet it was enough for the media to make it the lead news story across the country”, writes Tanner.
Tanner contends that the hyperbole which characterises media reporting is blatantly designed to manipulate the public’s emotions. He cites a number of examples where the media created unnecessary panic including the Global Financial Crisis, the Year 2K computer bug and the swine flu epidemic. The media reporting of these events produced a public response out of proportion to the threat.
A popular tool used by the media to distort impressions of politics and current events is “selective coverage” says Tanner. “When petrol prices spike, the media go into overdrive. When they fall, coverage is much more low-key.” Equally, every time interest rates rise, we see stories featuring struggling families. Yet when rates fall, little is said about the plight of self-funded retirees.
I think that Sideshow: dumbing down democracy should be compulsory reading for all journalists and reporters. Some reviewers have rated Tanner’s book as “refreshingly frank”. Others have labelled it a “scathing critique” of contemporary political journalism. Personally, I’d go one step further and categorise Tanner’s description of the media as “alarmingly true”.
Finally, and in fairness, I must acknowledge the media’s claim that they simply produce what consumers want. As a society, we would rather read about the sordid private lives of celebrities than have a serious debate about the long-term benefits of public policy. Just as we get the politicians we deserve, we also get the media that we deserve. As citizens, we are complicit with falling standards.
Posting Date: 20 June 2011
What fuels petrol prices?
Some things in life are a mystery. Petrol prices fall into that category. Many find it difficult to explain why the price we pay at the bowser fluctuates daily. While most motorists know there is a price cycle, many question why petrol prices shoot-up just before long weekends and holidays.
To understand how the local pump price for petrol is calculated, we first need to look at global forces. Three international factors drive the wholesale price of petrol in Australia – the world price of crude oil, the petrol price in Singapore and the value of the Australian dollar. Let me explain each in turn.
The single greatest factor influencing Australia’s petroleum prices is the cost of crude oil which is measured in barrels. The international price of crude oil accounts for around 50 per cent of the domestic price we pay per litre at the service station. Since the cost of a barrel of crude oil has risen dramatically over recent years, so have retail prices.
But crude oil is not the product you buy at the pump – it’s simply an ingredient in the petrol production process. Just as a paper mill turns timber into paper, a refinery takes crude oil and earns a “refiner margin” for turning it into petrol. Ninety-eight per cent of Australia’s total fuel requirements are controlled by four refiners – Shell, Mobil, Caltex and BP.
The petrol they refine is an internationally traded commodity whose price is largely determined by movements in global markets. Petrol prices in most countries are established with reference to the relevant refined petrol benchmark price. Australian retail petrol prices closely follow the Singapore Mogas 95 Unleaded benchmark, which is the price of refined petrol in Singapore.
The international benchmark prices of crude oil and refined petroleum are typically traded in US dollars. Thus, the value of the exchange rate between the USD and the local currency influences the retail petrol price. The recent strength of the Australian dollar has protected consumers from the effects of higher international petrol prices.
The next factor to be added to our wholesale fuel price breakdown is government taxes. There are two components to petrol taxes – a fuel excise and GST. All petroleum fuels in Australia have an excise tax of 38.143 cents per litre which represents the second-largest component (25-30 per cent) of the price of petrol in Australia. GST is also applied to the total price, at 10 per cent.
When all of the above components are added together, the price is referred to as the Terminal Gate Price (TGP). The TGP is the wholesale price for petrol in each Australian capital city but does not include distribution costs and retail margins.
With regard to distribution, once fuel leaves capital city ports it is sent to rural and metropolitan areas. A large part of the increase between retail and wholesale prices is the transport cost of getting the fuel to the bowser which is why fuel prices are generally higher in rural and remote areas.
Finally, competition also accounts for variances in retail prices and this is what drives the daily fluctuations that you see at the bowser. Petrol retailers discount prices to gain additional sales volume. Competitors respond and prices spiral down until they reach unprofitable levels. The market then corrects itself by ceasing or reducing the discounts.
This “normal pricing” holds only for a short while until someone starts the discount price cycle again. The big retailers, Coles and Woolworths, are key players in these price wars. It is claimed that they are killing independent service stations. With 90 per cent of Australian households keeping at least one registered vehicle in their garage or dwelling, petrol prices directly impact most Australians.
Posting Date: 13 February 2012
Regulation gone mad
Is Australia becoming a police state? Do we have too many rules and laws? Has common sense been replaced with legislation? Is the level of regulation unnecessarily burdening business? In answering these questions, let me begin with three examples.
First, my parents have lived in the same house for 52 years and there has NEVER been a car accident outside their home. But that did not stop their local council from erecting a “No Standing” sign in front of their home a few years ago. When my father and his neighbours complained, they were told the bend in the road where they live had been classified as a dangerous blind spot.
Second, at lunch times I swim in a private pool in the city. Last year, following a periodic routine health and safety inspection of the pool by the city council, the gym manager was forced to erect a “No Diving” sign. The new inspector decided that the pool was too shallow for diving, even though there has NEVER been an injury at the pool in its entire 29 year history caused by someone diving into the pool.
Third, earlier this year, the Gateway Credit Union team celebrated the end of the financial year with a night out at Sydney’s Luna Park. We had a great time and, for me, it brought back happy childhood memories. But the unsupervised fun I used to have as a youngster was replaced by safety inspectors on every ride. Even the more sedate rides in Coney Island now attract a watchful eye from the ride attendants.
So, let’s recap. I can’t park outside my parents’ home, I can’t practise my dive starts at the pool and I can’t be too adventurous at amusement parks. Frankly, I’m staggered that I’ve managed to live as long as I have given my “reckless” childhood. I slept in a cot adorned with lead paint, rode a bike without a helmet and travelled in a car without seatbelts.
Risk is inherent in everything we do but it should not paralyse us from doing things. I compete in ocean swims even though I could get eaten by a shark, stung by a blue bottle, dumped by a wave or caught in a rip current. Please don’t tell the authorities or ocean swims might also become heavily regulated – or banned completely!
The serious point I am trying to make here is that it’s impossible to go through life or run a business without taking risks. Indeed, it’s unhealthy to even try as you’ll risk stagnation. Companies which can see beyond risks to the opportunities they present are much more likely to prosper. But what is an acceptable level of risk appetite for a business?
Well, if you are in the business of financial services you cannot adopt a cavalier attitude to risk. In fact, the business of banking is all about managing risk. One of the lessons of the Global Financial Crisis (GFC) is that it’s not enough to manage risk within individual banks. Risk needs to be examined on a system-wide basis.
Around the world regulators and governments agreed to restructure the approach to risk in the financial sector. The cornerstone of this global initiative to contain risk is an international accord – Basel III – which contains sweeping new regulatory standards for banks on capital adequacy and liquidity.
Basel III was primarily intended for internationally active and systemically important banks. But the same regulatory standards are being applied to smaller institutions in a one-size-fits-all approach, putting smaller players with fewer resources at a competitive disadvantage. The new requirements will drive the cost of regulatory compliance to potentially unaffordable levels for credit unions and building societies (mutuals). This represents a risk to competition.
The efforts by regulators to bolster financial system stability and to avoid a repeat of the GFC turmoil are laudable. Few would challenge the goal of a more resilient banking sector. But care must be taken not to punish those, like mutuals, which did not engage in the reckless behaviour that contributed to the GFC.
At the end of the day, most regulation is a reaction to the last big disaster and, as I noted in an earlier post, Global banking laws, no set of rules can ensure the solvency of the banking system or its resilience in a crisis. Like driving a car, banking involves risks which can’t be totally eliminated. Let’s not unnecessarily burden mutuals with legislation that will diminish competition.
Posting Date: 19 November 2012
A fairer tax system
Albert Einstein once said that the hardest thing in the world to understand is income tax. There’s no doubt that our tax system is baffling, which is why more than 75 per cent of Australians use a tax agent. Tax reform in Australia is long overdue – the system needs to be made easier and fairer.
I suspect that most Australians would readily agree to tax reform if it resulted in a smaller tax bill for them personally. Of course, that’s utopian and therein lies the problem. We all want governments to raise sufficient revenue to provide common infrastructure but we don’t want to individually pay any more tax.
But with a growing and ageing population, taxes need to rise to cover increased public spending. We need more schools, more hospitals, more roads and the list goes on. Without an increase in government receipts, we are setting ourselves up for permanent structural deficits.
The bottom line is that our current tax structure is fiscally unsustainable and we (i.e., you and I) will be asked to pay more – it’s just a matter of time. Over the longer term, governments cannot continue to boost spending without addressing the revenue side of the equation.
The low-hanging fruit in putting more funds in government coffers is the goods and services tax (GST). Shortly after the recent federal election, Treasurer Joe Hockey said there would be “no change to the GST, full-stop, end of story”. My suspicion is that it will be a second term agenda item.
While no politician wants to talk about tax increases during an election campaign, the government knows that it has a problem. The GST as it stands is no longer a growth tax – household consumption (spending patterns) has softened resulting in GST revenue not growing as fast as it once did.
As a result, like it or not, the GST has to climb above its current flat rate of 10 per cent. As well as increasing the GST rate, I suspect that we will also see changes to the GST tax base. This will likely be broadened to cover “products” which are currently GST exempt including health, education and fresh food.
Being a consumption tax, the GST is classified as an indirect tax and the prevailing rate is low in comparison to most other nations. Conversely, our direct (income) tax rates are high in a comparative sense. I believe we need a shift from direct to indirect taxation to favour the taxing of spending over the taxing of income.
Indirect tax is where a proportion of the money spent on goods is taken, whereas a direct tax is levied as a proportion of a person’s income. Taxation schemes can be classified as progressive (the more one earns, the higher the tax rate) or regressive (those with lower incomes pay a higher percentage of tax).
There are classic arguments for and against progressive and regressive taxes. It’s said that progressive income taxes penalise hard work and ambition since the more someone earns the more they pay to the government. The standard counter-argument is that the “rich” should pay more.
Conversely, it is argued that regressive taxes hurt the poor more as they take a larger percentage from low-income earners than from high-income earners. The rebuttal here is that all consumers should pay the same dollar amount (flat tax) regardless of income level.
Putting aside individual beliefs and biases, I repeat my assertion that we are well overdue for a serious debate in Australia about tax reform. We owe it to ourselves and our grandchildren to develop a more efficient and stable form of revenue generation for the continuing prosperity of our nation.
Posting Date: 18 November 2013
Corporate welfare
In 1974, corporate Australia witnessed one of the costliest new product failures in its history. A year earlier, the vehicle manufacturer, Leyland Australia, launched a large family car called the P76. The car was plagued with quality problems from poor assembly practices and was quickly labelled a lemon.
Aside from the quality problems, Australians did not want a petrol guzzling car at a time when the world was in the midst of an oil crisis. Australian car buyers felt the P76 was too big and too thirsty – not to mention its ugly wedge shape – and opted to stick with their Holdens and Fords.
Fast forward forty years and it is now Holden and Ford that are producing cars Australians don’t want. Due to changing consumer preferences, we have lost our appetite for home grown cars. Fewer than half of Australia’s 15.6 million drivers prefer to buy an Australian made car.
Australia’s car market is now primarily composed of cars imported from Asia and Europe. Our local auto sector cannot compete with cars made better and cheaper overseas. Sales of locally made cars are at record lows with Australian manufacturers propped up by government subsidies.
Just like Leyland, Holden and Ford misjudged the market, yet they – along with Toyota – have been enjoying a $5.4 billion aid package to the industry. According to the Productivity Commission, subsidies to the industry have averaged about $550 million a year for the past six years.
The Commission recently recommended that Federal Government assistance to the embattled local car industry should stop. It said that the justification for subsiding car makers is weak and that “ongoing industry-specific assistance to the automotive manufacturing industry is not warranted”.
Workers in the auto sector are paid allowances which are more generous than in most other areas of manufacturing. The perks include Sunday pay of 2.5 times the normal rate, ‘wash up time’ after shifts, paid time to donate blood, cash bonuses and forced plant shutdowns over Christmas.
These uncompetitive work practices contributed to the decisions made over recent months by all three car manufacturers – Ford, Holden and Toyota – to close down their Australian car manufacturing operations. The harsh lesson is that government spending alone cannot sustain an uncompetitive industry.
This also applies to the agricultural sector and the recent decision by the Federal Government to reject a request for $25m in financial assistance to fruit canner, SPC Ardmona. Our national carrier, Qantas, also made a request for government support.
The Federal Government recently signalled that multi-billiondollar corporate rescue packages will become a thing of the past. “The age of entitlement is over, the age of personal responsibility has begun,” warned Treasurer, Joe Hockey.
As I opined in my post, Free trade versus protectionism, it’s in Australia’s best interests to specialise in those things in which it has a comparative advantage. It’s clear that protectionism cannot preserve jobs in the long-run and taxpayers should not be subsidising underperforming industries.
Only profitable industries create jobs and while job losses in one sector are always painful, local production should not be defended from imported competition. As a general rule, I believe that markets should be allowed to operate free from government interference.
To be sure, I don’t believe in unrestrained competition where one wins at any cost. Governments have a role to play in defining the rules of competition so that it’s not survival of the most ruthless or the most deceptive. Beyond that, it’s up to each market participant to avoid extinction.
At the end of the day, it’s consumers and not governments who really determine business survival. As in the natural world, Darwinian selection should determine the winners and losers in the corporate world. In this jungle, the brutal reality is that some companies will thrive while others will perish.
Posting Date: 24 February 2014
