The Labor Party propose restricting natural gas exports from Australia to ensure greater availability (and lower prices) for domestic gas supplies. This is a poorly thought through policy proposal.
The basic economics of international trade suggest we will export goods we can produce more cheaply than those produced in our export markets. Therefore, when we do export goods, the price will rise for domestic consumers assuming that a single price is charged both domestically and internationally. Moreover, competitive, profit-maximizing firms seeking to optimize their returns will force a single price. Thus, local consumers are worse off as a consequence of exporting. This is not only so for natural gas but for other products we export – beef, wine, and many other products provide recent examples.
Economics 101 teaches that these losses are exceeded by the gains to local producers who naturally earn extra returns from being able to export at higher prices. This is the source of what economists call the “gains-from-trade” in exporting. Our consumers are worse off but our producers get greater gains. We pay more for our beef when we export it but gain more than we lose through the increased value of our exports.
An exception to this argument can arise if the companies doing the exporting are multinationals who can transfer price away the profits they earn so that Australia gets no gains net on the supplier side and loses on the demand side as well. Several points here. (i) If multinationals cannot transfer price and face the same tax liability as local firms on the true profits they earn then there is no problem provided that, when if they purchased the Australian assets, they did so at their true value accounting for their future export potential. Cutting back on transfer pricing options or using tax-raising measures such as output- or revenue-based taxes are ways of addressing the transfer pricing issue. These are “second-best” policies that come into their own because true profits cannot be readily identified. (ii) The core issue of foreign ownership of natural resources such as mineral deposits (and land) needs to be addressed if transfer pricing cannot be addressed. If foreign multinationals will pay premium prices for Australian natural resource assets simply because they understand they will be able to secure extra profits from cheating the taxman then there may be a case for imposing controls on such purchases. (iii) In practice, for natural gas sales, it seems unlikely that the issue of transfer pricing cannot be addressed so that issues of immiserising foreign ownership become less urgent in this case.
Chris Bowen and his AWU mate, Scott McDine, who wrote the AFR article I link to, want to set up a regulatory agency to assess the case for gas exports on the basis of the “national interest”. These weasel words should send shivers down the spine of every thinking Australian. They will certain scare off investment in this currently troubled sector of the economy. Firms such as Santos and Origin Energy (both dominantly Australian owned) are already facing real difficulties – indeed issues of corporate survival – recovering the billions they have invested in natural gas because of the recent decline in the prices of gas. The proposed Labor policy will increase the real problems faced by such firms and again Australia would shoot itself in the foot were such policies to be introduced.
These authors claim that other countries (particularly the US) do not allow markets to determine gas prices and restrict supplies onto international markets. Those policies benefit Australia by providing extra returns to Australian exporters because of these artificial restrictions. But the general point here is that Bowen/McDine are restating the oldest argument in the world for protectionism – we should do it because others do so. This is nonsense. If other countries seek to damage their national self-interest Australia need not follow suit.
A student pointed out to me the Doddle Software for organizing meetings. It is easy to use and effective for seeking “majority rules” solutions to scheduling. Here.
The move by Chinese interests to purchase 1.3% of Australia (the Kidman properties) for $300m is against Australia’s economic and political interests. The land will be used by the Chinese to pursue pastoral activities in Australia using imported Chinese capital resources and, at least down the line, Chinese workers. In fact the land – apart from taxes paid to the Australian Government – will effectively become part of China. Moreover, the taxes paid will be minimized by transfer pricing of the meat and other products produced so that the transfer of ownership will be effectively complete with Australia gaining little if anything. The only possible economic benefit to Australia will be the pathetically small contribution of $300m to the Australian land owners.
Gains-from-trade and from trade in factor flows rely on increasing the value of non-traded goods and factors. Foreign investment will drive up the value of the wages of non-imported labour and land. Foreign labour flows will drive up the value of non-traded capital and equipment and land. International trade increases the return to non-traded inputs and to locally-owned land. All these changes from gains to Australia. But if all inputs are foreign owned then all gains go to the foreign owner except perhaps for those small profit tax receipts that cannot be transfer priced away. The difficulty here is that the underlying land asset does not exchange at its value – the Australian vendors of the asset cannot benefit from cheap Chinese labour and cannot transfer price as the Chinese will do. The land value reflects the value that the Australian vendors can realize. The economic losses are the difference between the gains that accrue to Australia from having Australian-owned land and from the resulting profits being taxed and accruing to the Australian Government.
The measure goes through because although there is a benefit to the private vendor Australia loses.
Politically this type of move is disastrous for Australia since it sets up a totally Chinese enclave in Australia. Australia loses autonomy with respect to land management policies such as environmental policy. Indeed what incentives do the Chinese face to observe Australian environmental standards on the fragile landscapes they have purchased? I have focused on this particular sale because of its scale. But the analysis applies to any fixed land asset. We should welcome Chinese trade and investment but not their ownership of our primary factors. This is Australia not China.
This land sale if it proceeds will be a really poor policy decision. I would base the 2016 election campaign based on o. Who supports it and who opposes it opposing this terrible move? The deal is anything but complete. Indeed the position has not really changed since last November when it was announced that Kidman had been sold – the Foreign Investment Review Board (FIRB) still have to approve the sale and they have said this will not occur until after the federal election, which is tipped to be held on 2nd July. Furthermore, the Kidman offer is scheduled to close on 5th August
An interesting debate on superannuation was initiated in the AFR a few days back by Geoff Carmody. His argument was that the current system of superannuation should be scrapped and replaced by an age pension entitlement for all. He argues this would save the government money in the sense that the value of the tax concessions implied in the current superannuation arrangements would exceed the cost of simply providing a full pension entitlement for all.
Shifting to a full pension system now would raise the costs of the pension by 54% now (about 50% of eligible people now get a full pension and another 30% get a part pension) or about $24b. The cost of superannuation concessions now, however, is only around $30b. Indeed, these figures understate the net saving since wealthy individuals receiving a full pension would gain incomes that yielded some tax revenue.
The universal pension scheme is much fairer too since the current superannuation scheme benefits mainly the rich.
The net gains from switching back to a full pension for all are disputed. John Freebairn and Andrew Podger in a subsequent AFR article argued they would be smaller using arguments that were unusually opaque.
But there would be other gains from rejecting Paul Keating’s “compulsory savings” plan. First would be the savings in superannuation fees – Brian Toohey in today’s AFR estimates these as $22b annually. Watch this lobby scream like crazy if this proposal gets any air. Superannuation is not manna from heaven despite the devotion of the labour movement to it. Whether superannuation payments are made by workers or employers they are all born by workers now. A future gain is borne by lower living standards now.
Relying on a compulsion to drive savings does not make a lot of sense. Families, for example, often need the money when they are young and raising a family. Of course, the biggest gain of all is simply to allow people to decide themselves how much they want to save.
Draft subject to revision. Comments appreciated.
This Age journalist complains about the $18 cost of his son’s cross town journeys to visit his girlfriend. His diagnosis of the problem is, however, wrong. The costs of using CityLink in Melbourne are based on guaranteeing a secure profit for Transurban. The objective is cost-recovery with a margin. The more sensible reason for road pricing is to address traffic congestion in which case, if his son travelled away from the peak, he would pay nothing. Congestion should only be priced if there is congestion.
Monsieur Dupuis in the 18th century understood that, without congestion, public goods like roads should be provided free but funded from the public purse using taxes. Then people are not charged for use that exceeds the marginal cost of providing a facility.
User pays is not generally a sensible proposal for roads because it violates this last requirement. People are inhibited from using a road if the value to them of use is positive (though less than the road toll) even though their social cost from congestion of using the road is zero. It is better under these circumstances to provide the road for free and to only charge when there is congestion.
I think roads should be privately constructed but managed by the government on the basis of congestion charges. Given that private owners already own most of Australia’s toll roads a “second-best” way out would be to force their operators to congestion price perhaps by making a lump-sum compensation from government to compensate for any profitability losses. The latter compensation should not be that expensive since operators, as local monopolists, will appreciate the opportunity to charge high prices on roads that are in high current demand and this is roughly what congestion pricing requires.
I always told my economics students that while retailers often did not know the elasticity of demand for their products – how sensitive demands are to prices – they could easily infer this information by experimenting with price variations. If prices are increased a bit and firm revenues from a product fall then demands are elastic (they depend sensitively on price in the sense that, for example, a 10% increase in price causes more than a 10% reduction in quantities demanded); if revenues increase then demands are inelastic (a 10% increase in price causes less than a 10% reduction in quantity demanded).
Cigarette products have conventionally been assumed to have inelastic demands – the price elasticity is around -0.4 so a 10% increase in price causes about a 4% reduction in the number of cigarettes smoked. They are assumed to be inelastic because smoking involves an addiction to nicotine, a habit that is notoriously difficult to kick. But elasticities are not fixed numbers – they vary with the level of prices as a consumer operates at different points on their demand curve. At high enough prices all demands will become elastic as consumers substantially reassess the desirability of goods. So if cigarettes are costing $40 per pack, as proposed recently by the Labor Party, this might make people think twice about smoking – a packet per day then costs $280 weekly. Have prices for cigarettes reached levels where demand is elastic? Have cigarette prices become so high that further price increases will produce more than proportionate reductions in cigarette consumption and hence less revenue?
There is now some evidence that this might be the case. Cigarette prices have increased strongly in Australia in recent years because of excise tax increases. These taxes are “specific taxes” that are levied per stick or per cigarette. The ABS’s latest volume measure of tobacco consumption published in early December showed that, since mid-2014, cigarette consumption has declined at double digit pace. This is higher than at any time since 1983 and 4 times the average decline over the past 10 years. Excise revenue is expected to fall by 2.3% from 2015 to 2016 and by a further 4.7% from 2016-2017. Spending on cigarettes fell to a record low of $3.4b in the September quarter of 2015.
The qualifications to the claim that price sensitivities have increased are that, in recent years various non-price disincentives (plain packaging, anti-smoking propaganda) will likely have also had an effect on consumption.
The importance of the view that elasticities have increased is that, if this is so, the labor Party’s plans to fund further expansion of schools by charging higher excises on tobacco, will fail with certainty. They will fail because there will be a reduction in cigarette consumption that is proportionately greater than the excise increase. It might still be a good idea to increase the excise to force more cigarette quitting – with high prices such excise increases will be particularly effective at doing that – but relying on increased excises to fund increased education spending will fail.
I posted this on FaceBook on 27th August, 2015 but current events in world equity markets invite a repost and some further comments. Quote:
“There is hysteria over the alleged “China slowdown”. 7% growth in an economy that has been growing at 8-10% for a decade is substantial growth.
Do the arithmetic.
Incomes of 100 units 10 years ago in China were generating growth in demand of 10 annually. Those incomes are, as a result of compound growth, now worth at least 200 units and 7% growth adds to demand at least 14 which is an increased absolute growth. The difficulty for countries like Australia is that much of this growth is not resource-based. Services in China have grown strongly particularly in recent years and that is where Australia’s export drive needs to focus. Australia’s recent FTA with China helps”.
My own view is that current pessimism regarding the world economy is grossly overdone. The US economy is recovering well and Europe is beginning to move. China may not hit the 7% figure portrayed in the numerical example above but should grow at 6.6%+ in the immediate future until it converges with developed country growth rates around 2050. The basic point remains that China is contributing more to growth in global demand than it was 10 years ago. If course if enough people are pessimistic because of the current wave of pessimism – however poorly based – the expectations will become self-fulfilling and our economic future will be imperilled. But on balance I think this is likely to be unrealistic – it might drive a temporary slowdown in equity markets but the economic fundamentals are sound. There are economic incentives for third rate economists to make repeated pessimistic forecasts in the hope that they will eventually have a higher perceived market value. There are also incentives for large investors to talk down markets in order to generate buying opportunities.
Australians particularly are unduly pessimistic about their economic future. Our growth is forecast by Treasury to be a respectable 2.75% over the next few years rather than 3% as assessed earlier mainly because population is growing slower and people are working less. Yes we have a rather important minerals sector that gets buffeted by Cobweb Cycle imbalances between demand and supply – currently excess supply. We have seen it all before repeatedly. The minerals sector will recover – perhaps on the basis of new strong demands from India and eventually Africa – and and optimists will take over and start to talk again of new never-ending booms,. Remember that the China Boom was forecast to last for a century! Foolish exaggerated views take hold in the community and among CEOs of firms.
Have a cup of tea, a BEX and a good lie down.
Draft of a book review of Gernot Wagner & Martin L. Weitzman, Climate Shock: The economic Consequences of a Hotter Planet, Princeton University Press, Princeton, 2015. Comments very welcome.
This is a brief, non-technical and rather witty introduction to the economic implications of global warming. It will be easy reading for resource economists but taxing, given the density of some arguments, for the general citizen. It was a fun read for me because I fall into the former category and appreciated the basic messages.
The core premise is that anthropogenic climate change raises serious risk management problems because of potential catastrophic effects linked to climate change. These management issues are difficult to resolve because switching from traditional carbon-based fuels is not straightforward. High carbon taxes are viewed as essential and energy transitions may not be smooth unless technologically optimistic forecasts pan out. The problem of climate change will however be even more difficult if left unaddressed. On balance, there is a convincing case for immediate decisive action. Without substantive action we will likely face a more hostile and erratic climate with, at non-negligible probability, dramatically adverse implications for all human and non-human life and particularly for agriculture and human use of the oceans. Continue reading Book review of “climate Shock”
The discussion of company tax and firms that don’t pay it often seems to me to be confused. Company tax is a tax on profits, on income earned after costs. These profits could be distributed as dividends to shareholders or held in firms as retained earnings and eventually paid out as dividends. When they are paid out as dividends (now or in the future) to residents they are subject to the income tax paid by residents but, under the imputation system, to avoid these dividends being double taxed, a credit is given for any tax paid by the firm as company tax. Thus resident shareholders are only levied the generally positive difference between their marginal tax rate and the company tax rate of 30%. Thus the firms as as acting as “withholding tax” agents for the government.
Thus reducing the rate of company tax will make very little difference to total taxes paid by residents. More will then simply be paid by resident shareholders as personal income tax since their personal tax rates invariably will exceed those of companies. .
The only difference cutting company tax rates will make is to the taxes paid by non-resident shareholders who will now pay less tax since they generally do not benefit from dividend imputation. Thus cutting company taxes can only be motivated as a means for cutting the taxes paid by foreign shareholders in Australian-based companies. This effectively increases the rate of return foreign shareholders receive on Australian equity investments. Are there arguments for reducing taxes on foreign investors in Australia? The main argument is that such increases in the rate of return on equity will increase the foreign capital flows that enter Australia thereby promoting business and, in particular, increasing the returns to Australian workers who will, therefore, be better equipped with physical capital. This depends on how mobile capital is internationally and therefore how responsive capital flows are to the rate of return improvement. It is difficult to believe differential tax rates are a major issue in driving investment given that most of our mining industry and much of our industry anyway is foreign owned.
Of course if local firms already transfer price most of their profits into inflated costs borne overseas then the effects on capital inflows will be zero since there will be no effect on returns on equity of tax reductions since the firms pay no tax.
My own view is that the company tax-cum-imputation system has that the two great advantages of (1) providing just tax treatment to residents and, (ii) bringing foreign shareholders into the Australian tax base. Impact (ii) is more important the more the transfer pricing games paid by multinationals can be stopped and it seems to me that tax reform efforts should concentrate on this rather than reducing a rate which falls only on foreign holders of Australian equity.
The claim that the Australian company tax rate – and taxes generally – exceed those payable in China (including Hong Kong) and Singapore seems to me a point of irrelevancy. We do attract plenty of foreign investment from these countries which suggests that high rates of tax are not having a strong deterrent effect.
This book by George Akerlof and Robert Shiller, “Phishing for Phools” deals with the deep issues that arise in rejecting the “rationality” assumption in economic theory. If, as economic actors, we are rational and well-informed then free markets make a lot of sense. If we make irrational choices (choices that create an unforeseen disadvantage for us) and this disadvantage can be turned into profits by someone else then, applying the rationality assumption to this other person, means that they will take advantage of our stupidity. That is clearly unless they have ethics that go beyond self-aggrandisement. Then the view that free choice works in the sense of guaranteeing social optimality then becomes a theoretical point of zero practical interest. Continue reading Foolishness (by Phools) & its exploitation (by Phishers)
This nit complains that Uber charged him a 3.6X multiple of the ordinary taxi fare during a period of high demand – namely Melbourne Cup day. The alternative was for the usual flat fare to be charged and therefore for the excess demand to remain unmet on this day with some punters in urgent need of a taxi consequently being left stranded at Flemington. Continue reading Optimality of pricing high when there is an excess demand
I drafted this paper for the forthcoming Beijing Forum at Peking University. Preliminary. Comments very welcome.
Climate Policy Decisions Under Uncertainty
Honorary Visiting Fellow, Department of Economics, University of Melbourne, Parkville, Vic, 3052.
Abstract: The economics of climate mitigation decisions is discussed when there is imperfect knowledge of likely future climatic changes, of policy effectiveness and of the policy responses of other countries. Simple frameworks recognizing the role of pure uncertainty are derived from heuristics based on classical decision rules. These frameworks are analytically imprecise but offer plausible decision rules that are not informationally demanding. Continue reading Climate Change Policy Under Uncertainty
I’ll present this paper in a week or so at the Water Forum, Wodonga. Comments more than usually welcome.
Drought, Uncertainty and Water Supply Planning
Visiting Fellow, Department of Economics, University of Melbourne, Parkville 3052.
Abstract. Water supply planning when there is a threat of uncertain drought is discussed in terms of anticipatory and adaptive policies as well as the links between these classes of policy. Sound anticipatory policies tend to be low cost and to have complementary effects in enhancing the productivity of adaptive policies as well as in promoting policy flexibility. Continue reading Droughts & climate change: Some ideas about policy
I have never understood why events such as this happen. 267 apartments were sold in Glen Waverley in 90 minutes for $70m. It doesn’t seem to me to maximize profits to the developer – charging higher prices and stretching out the period of sale (or using a simple auction procedure) would make more sense. It isn’t socially efficient either since this queue-based first-in, first served system does not allocate the units to their highest valued uses.
I have heard many explanations but none satisfy me. Comments welcome particularly from those with real estate expertise.
Around 1992 the Spanish wildlife publisher Lynx began its 16 volume Handbook of the Birds of the World. It is an extraordinary achievement with hundreds of photographers and artists contributing and with a vast amount of general as well as specific ornithological information supplied. It is the only animal family to be completely chronicled in this way and is a major scientific undertaking. At several hundred Euros per volume I indulgently started off by adding a volume every year or so but a few lean years (private school fees etc) left me 4 volumes short of the complete collection. In addition an add-on volume of new species has been published. Volume 11 – which I own – has just gone out of print and it seemed likely that my chance to complete the collection was fading. Fortunately Lynx have offered the 4 volumes I want (along with the add-on volume of new species at a substantial discount so I snapped them up. Still not cheap but, for a bird enthusiast such as myself, it is a happy acquisition. In conjunction with the online resources made available by Lynx it provides all the general information one could conceivably require about the world’s avifauna. I like the species distribution maps.
I also have the 8 volume series of Australian, New Zealand and Antarctic Birds that was prepared over 20 years by what is now called Birds Australia. This is a much more detailed account of all the birds I am likely to encounter in Australia. I use it occasionally for specialised information but, despite its glorious colour plates of bird paintings, it does not quite offer the excitement of the Handbook.
The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. These authors propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. They emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Their detailed arguments build on the policy histories of the United States, Great Britain, and Sweden. Full paper in pre-print form here.
I have been a recreational bird watcher for about 20 years although I do less birdwatching these days than in the past.
In Australia, up to at least 1935, bird observers recorded their exploits by shooting birds with guns and laying out their carcasses on the ground after an expedition. This was accompanied by collecting “skins” and bird eggs: See the history by Robin (2001) *. Obviously this destructive activity led to a decline in populations. Eventually (and fortunately) “sighting” a bird became just that – you saw it and recorded the observation – indeed, sometimes “hearing” a bird was enough to declare an “observation”. Photographic records of bird nests and eggs began around 1900 but there were few photographs of birds because of the slowness and complexity of the photographic equipment. However there was some limited photography. Lessor Noddies were photographed in 1899 by A.J. Campbell – the earliest published bird photograph. Also photos were taken of the now extinct Paradise Parrot in the 1920s (Robin, p. 118). These days with the advent of digital photography, of high quality relatively inexpensive telephoto lens and with zero cost processing of photos “sighting” has often come to mean gaining a photograph of a species. Of course too, with a photo there are fewer arguments about whether a bird was actually seen.
Most bird watching clubs and societies (e.g. Birds Australia) have photography chapters and even chapters devoted to particular types of bird photography such as seabirds. I pursue this hobby myself in a limited casual way – I don’t have the patience and care of others who pursue this hobby and who are happy to spend days gaining a single shot. The quality of much of the amateur photography is extraordinary and the work of professionals, such as Varesvuo et al (2011)**, is a serious art form.
* A history is provided by Libby Robin, The Flight of the Emu: A Hundred Years of Australian Ornithology 1901-2001, Melbourne University Press, 2001.
** See Markus Varesvuo, Jari Peltomaki & Bence Mate, The Handbook of Bird Photography, Rocky Nook, Santa Barbara, 2011.
One of the first decisions of Prime Minister Turnbull is to transfer responsibility for national water policy to the Nationals, specifically to Barnaby Joyce. Apart from the fact that this puts water in the hands of a particular interest group – water-using farmers – this makes me uneasy for two interrelated reasons. First, the main state impacted on by the Murray Darling Agreement is South Australia and the Nationals hold no seats in South Australia. Second, water policy has significant environmental implications an area where the Nationals have a terrible reputation.
I assume the move is designed to sure-up Turnbull’s support within the Coalition but it does seem to be a case of giving away a lot too early in order to gain support. There are 150 seats in the Australian Federal Parliament’s House of Representatives and 90 of these are held by Coalition members of which only 16 are National-Country National Party (NCNP) members. In terms of power index measures the NCNP members are barely pivotal to forming a majority although they would gain greater power by alligning themselves with the more reactionary elements of the Liberal Party. But the Nationals as a whole are simply not important enough to the Coalition to warrant a gift of the family silver.
I think other gifts could have been given to secure NCNP support. This offering seems particularly costly to our nation’s environmental future.
The consensus on tax reform that is emerging (see e.g. AFR today, editorial, paywalled) is a continuation of the tax reform trends that have been around for at least two decades. The basic idea is to swap the tax mix around so that there are fewer adverse effects on working, saving, investing and taking risks. I summarise the main elements as 5 points. Continue reading Consensus on tax reform