emmeline's blog

The Economic Challenges Facing a Rudd Labour Government - musings on the Fabian Society forum

2008-02-21T21:27:46-08:00

The saying goes “ask five economists a question and you’ll get five different answers – six if one went to Harvard”. At Wednesday night’s Fabian Society forum, three interesting economists managed to produce a lot more than three answers to the question: “what are the key economic challenges facing a Rudd Labour government”. The general conclusion was: it’s going to be tough. The recurring theme was the upward trend in inflation, and the consequent need for fiscal restraint, tempered with concerns about the impact of a sharp downturn in the US economy, and the level of indebtedness in the Australian economy.

ANZ’s Chief Economist Saul Eslake identified inflation as the key short-term challenge, which is likely to see interest rates rise further, and require fiscal restraint by the Rudd government. He argued (as in a previous interesting speech) that settings of fiscal policy have in the past been too loose, and that revenue windfalls associated with the resource boom should have been spent more on enhancing the productive capacity of the economy rather than on cuts in income tax. (This presentation was also the most broad ranging of the three, also touching on longer term economic challenges including global warming and the ageing population.)

A similar line was taken by HSBC’s Chief Economist John Edwards, who noted that the Rudd Government has been elected in much less favourable economic circumstances than previous governments. The Hawke government took office at the trough of the 1980s recession, with economic conditions gradually improving though its first term. The Howard government’s first term was characterised by the emergence of the Australian economy from a mid-cycle lull. Edwards argued that the Rudd government, in contrast, faces significant short-term economic challenges: an overheating domestic economy, which will require contractionary monetary and fiscal policy, despite the possibility of a significant downturn in the US economy.

In contrast, Associate Professor Steve Keen of the University of Western Sydney focussed on the high and rising levels of household debt in the Australian economy, suggesting that – as in the US economy – a serious and protracted debt-induced recession may be on the horizon. In that context, he argued that higher inflation may in fact aid households, by reducing the real value of their debt. This was subject to some subtle criticism from Saul Eslake, who noted in discussion following the presentations that rising debt is also a consequence of the development of financial systems, and that it was not clear cut to argue that the level of debt per se is a problem, but rather the capacity of households to service that debt.

Ghosts of PMs past

2007-10-21T06:34:46-07:00

One the the things I’ve found frustrating about the federal ALP’s approach to economic policy in recent years has been the way that the Hawke/Keating economic reforms - and their contribution to our current prosperity - have been disowned.

So I found it fascinating to see three allusions to Keating in the first 15 minutes or so of tonight’s Leaders Debate. It was just a pity that the leader making those points was Howard, not Rudd! First, a reference to the “10 to 20 years of economic reform” in Australia. Then - asserting his commitment to reform - a mention of voting for “reforms to tariffs and deregulation of the financial system”, under Keating. And finally, he characterised himself as a “true believer”.

Generational generalisations

2006-07-17T04:57:15-07:00

Liam and Arleeshar have created a dilemma: while I love the idea of attending a Stoush get-together, I’ve thus far tended to avoid much exposure to discussions on Gen X, Gen Y, Gen Z or whatever they’ll be calling my children. (As an excel junkie, I suggest Gen AA.)

The first thing that makes me suspicious of these labels is that no-one can ever tell me which one I’m in. (According to Wikipedia, Gen X ends in 1981, and Gen Y starts in 1977, and I was born in 1979.) I seem to flick between generations, depending on who the speaker is, and what they’re trying to prove.

Then there’s the fact that I mostly hear these generational generalisations trotted out by marketing or management types. Apparently baby boomers respect managers because they respond to hierarchies, while Gen X employees will respect a manager they perceive as competent. And Gen Y, well, they don’t want to commit to a job or a hierarchy, but see it all as a life-style decision. Really?

While digging around in the empirical literature on life cycle savings patterns recently, I came across a concept that clarifies my objection. It can be hard to identify the life-cycle pattern of savings in cross-sectional data, because other factors are at work. The asset holdings by an individual of age a in time period t will reflect an age effect, time-period specific effect and a cohort effect for those born in the period t - a. The age effect reflects the point reached in the individual’s life cycle; you save during your working life, in order to spend in retirement. The time effect is the impact of the particular period when the survey is taken. Savings might be higher for all age groups, for example, following a period of favourable stock market returns. Finally, the cohort effect is related to a person’s date of birth. For example, cohorts who lived during the Great Depression may have lower life-time earnings, and so lower savings at all ages.

So why did I bore you with all of that? Well, it seems to me that a lot of the generalisations we hear about a particular “generation” purport to be observations about the characteristics of the cohort (t – a), which allow us to gain insights into how this group will behave in the future. But can we really do that? The behaviour we observe of a particular “generation” now may be a function of a time effect, an age effect and a cohort effect. Are gen Y really bored and keen to change jobs at the drop of a hat, or is it just that they’re all in their early 20s at the moment (a), and have grown up in a part-time and deregulated workplace (t) which has influenced their views on the nature of employment? And if I can’t separate the behaviour that makes them gen Y from the time and age effects, how do I have any idea of what they’ll be like in the future?

It all just seems like a thrown together make-a-quick-buck-and-book-deal analysis of evidence that by its very nature is incomplete. Perhaps we could all get more insight out of reading horoscopes.

PS. See you all on the 28th anyway…

Quotable Galbraith

2006-05-01T06:23:49-07:00

To take up Alex’s challenge to offer some thoughts on Galbraith… I’m struck by the continued relevance of his observations. For example, The Australian quotes a passage from The Affluent Society, published in 1958, which I think speaks to the current IR debate:

The notion that economic insecurity is essential for efficiency and economic advance was a major miscalculation – perhaps the greatest in history of economic ideas – in fact, the years of increasing concern for economic security have been ones of unparallelled advance in productivity.

And in an Australia where ‘aspirational’ households carry obscene amounts of debt in order to finance their McMansions, fuel-inefficient four wheel drives and private school educations, we see parallels with Galbraith’s view of 1950s America. To quote the New York Times:

… [Galbraith] depicted a consumer culture gone wild, rich in goods but poor in the social services that make for community. He argued that America had become so obsessed with overproducing consumer goods that it had increased the perils of both inflation and recession by creating an artificial demand for frivolous or useless products, by encouraging overextension of consumer credit and by emphasizing the private sector at the expense of the public sector.

Galbraith was a strong proponent of the view that there are more important things than mere economic production, as he made clear in a recent Radio National Background Briefing: “Let us bear in mind that William Shakespeare was the product of a country with a very low Gross National Product.” And when prompted to nominate the book he was most proud of, he nominates his book on Indian Art, before conceding that, perhaps, The Affluent Society and The New Industrial State were his most influential pieces.

A fair share of the GST?

2006-04-04T06:31:06-07:00

I’m getting sick of the NSW Government’s current campaign for the state to get its “fair share of the GST”. The ad bleats that NSW unfairly gives $3 billion to other states, and that we’d like it back. Should a party that claims to have a progressive agenda really be calling for the scrapping of a system that aims to redistribute taxes from richer states to poorer ones?

The current system was designed to share funds between the states based on their ability to raise funds and their needs. Relative to other states, NSW has a greater capacity to raise revenues because property values and household incomes are higher, and because a lot of company head offices are in Sydney. As Saul Eslake noted recently in an AFR piece (14 March 2006, p63) this makes the Iemma government’s claim on all of the taxes raised in NSW sound as ridiculous as the residents of Pymble, Killara and Double Bay demanding the full amount of land tax and stamp duty collected in their suburbs.

Yes, the system is not working. The NSW economy is sluggish, yet it is a net donor of GST revenues while funds are allocated to the booming Queensland and WA economies. Of course, if the resources boom continues, Queensland and WA will end up contributing GST revenues back to the other states. The graph below, from the Commonwealth Grants Commission’s report (pdf file), shows that if the allocation had been done using just the Grants Commission’s latest estimates of each state’s relative fiscal capacities, rather than an average, Queensland and WA would have also been net donors.

Let’s not throw the baby out with the bathwater just yet.