Global inequality is on the rise – but at vastly different rates across the world

From The Conversation.

Inequality is rising almost everywhere across the world – that’s the clear finding of the first ever World Inequality Report. In particular, it has grown fastest in Russia, India and China – places where this was long suspected but there was little accurate data to paint a reliable picture.

Until now, it was actually very difficult to compare inequality in different regions of the world because of sparse or inconsistent data, which lacked credibility. But, attempting to overcome this gap, the new World Inequality Report is built on data collection work carried out by more than a hundred researchers located across every continent and contributing to the World Wealth and Income Database.

Europe is the least unequal region of the world, having experienced a milder increase in inequality. At the bottom half of the table are Sub-Saharan Africa, Brazil and India, with the Middle East as the most unequal region.

Since 1980, the report shows that there has been rising inequality occurring at different speeds in most parts of the world. This is measured by the top 10% share of income distribution – how much of the nation’s income the top 10% of earners hold.

Places where inequality has remained stable are those where it was already at very high levels. In line with this trend, we observe that the Middle East is perhaps the most unequal region, where the top 10% of income earners have consistently captured over 60% of the nation’s income.

Inequality is always a concern

Even in Europe, where it is less pronounced, equality always raises ethical concerns. For example, in Western Europe, many do not receive a real living wage, despite working hard, often in full-time employment. Plus, the data shows that the top 10% of earners in Europe as a whole still hold 37% of the total national income in 2016.

Rising income inequality should be focal to public debate because it is also a factor which motivates human behaviour. It affects how we consume, save and invest. For many, it determines whether one can access the credit market or a good school for our children

This, in turn, may affect economic growth, raising the question of whether it is economically efficient to have unequal societies.

Going into the details of what drives the rise in income inequality, the report shows that unequal ownership of national wealth is an important force. National wealth can be either publicly owned (for example, the value of schools, hospitals and public infrastructure) or privately owned (the value of private assets).

Since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries. In particular, the UK and the US are countries with the lowest levels of public capital.

Arguably, this limits the ability of governments to tackle inequality. Certainly, it has important implications for wealth inequality among citizens. It also indicates that national policies shaping ownership of capital have been a major factor contributing to the rise of inequality since 1980.

Inequality in the developing world

Resource rich economies are traditionally considered to be prone to conflict or more authoritarian in terms of how they are governed. What this new report tells us is that some resource rich economies, such as “oil economies”, are also extremely unequal. This was often suspected because natural resources are often concentrated in the hands of a minority. Until this report, however, there was no clear evidence.

The World Inequality Report appears to show us that the Middle East region may be even more unequal than Central and South America, which have long been held up as some of the most unequal places on Earth.

Another significant finding is that countries at similar stages of development have seen different patterns of rising inequality. This suggests that national policies and institutions can make the difference. The trajectories of three major emerging economies are illustrative. Russia has an abrupt increase, China a moderate pace and India a gradual one.

The comparison between Europe and the US provides an even more striking example – Western Europe remains the place with the lowest concentration of national income among the top 10% of earners.

Compared with the US, the divergence in inequality has been spectacular. While the top 1% income share was close to 10% in both regions in 1980, it rose only slightly to 12% in 2016 in Western Europe, while it shot up to 20% in the US. This might help explain the rise in populism. Those left behind grow impatient when they do not see any tangible improvement (or even a worsening) in their living conditions.

It is not just important to reduce inequality to make society more fair. Equal societies are associated with other important outcomes. As well as political and social stability, education, crime and financial stability may all suffer when inequality is high.

With this new data at our fingertips, we can now act to learn from the policies of more equal regions and implement them to reduce inequality across the world.

Author: Antonio Savoia, Lecturer in Development Economics, University of Manchester

A bubble? We don’t even know how to value Bitcoin

From The Conversation.

Bitcoin is a “speculative mania” according to the governor of the Reserve Bank of Australia. But it’s not so easy to say that Bitcoin is a bubble – we don’t know how to value it.

Recent price rises (close to A$18,000 in the past three months) may be too great and can’t continue. But the Bitcoin market is only just maturing as an investment and as a currency, and so it may still have room to grow.

A bubble is when the price of an asset diverges from its “fundamentals” – the aspects of an asset that investors use to value it. These could be the income that can be earned from a stock over time, a company’s cash flow, the state of a country’s economy, or even the rent from property.

But Bitcoin does not pay out profits (like shares) or rent (like property), and is not attached a national economy (like fiat currencies). This is part of the reason why it is hard to tell what the underlying value of Bitcoin is or should be.

In the search for fundamentals some have suggested we should look at the supply of Bitcoins in the market (which is regulated by the technology itself), the number of Bitcoin transactions through the market, or even the energy consumed by Bitcoin miners (the computers that validate transactions and are rewarded with Bitcoins).

Diverging from fundamentals

If we take a close look, we can see how the price of Bitcoin may be diverging from these fundamentals. For instance, it is becoming less profitable to be a miner, especially as the energy required increases. At some stage the cost may exceed the price of Bitcoin, making the network less worthwhile to both mine and invest.

Bitcoin may be the best known cryptocurrency but it is also losing marketshare to other cryptocurrencies, such as Ethereum and Litecoin. Bitcoin currently accounts for 59.4% of the total global cryptocurrency market, but at the beginning of 2016 it was 91.3%. Many of these other cryptocurrencies have more functionality than Bitcoin (such as Ethereum’s ability to execute smart contracts), or are more efficient and use less energy (such as Litecoin).

Government policy, such as taxation or the establishment of national digital currencies, may also make it riskier or less worthwhile to mine, transact or hold the cryptocurrency. China’s ban on Initial Coin Offerings earlier this year reduced the value of Bitcoin by 20% in 24 hours.

Without these fundamentals the price of Bitcoin largely reflects speculation. And there is some evidence that people are simply buying and holding Bitcoin in the hope it will keep rising in value (also known as Greater Fool investing). Certainly, the cap on the total number (21 million) of Bitcoins that can exist, makes the currency inherently deflationary – the value of the currency relative to goods and services will keep increasing even without speculation and so there is a disincentive to spend it.

Bitcoin still has room to grow

Many big investors – including banks and hedge funds – have not yet entered into the market. The volatility and lack of regulation around Bitcoin are two reasons stopping these investors from jumping in.

There are new financial products being developed, such as futures contracts, that may reduce the risk of holding Bitcoin and allow these institutional investors to get in.

But Bitcoin futures contracts – where people can place bets on the future price of stocks or markets – may also work against the price of Bitcoin. Just like gamblers place bets on horse races rather than buying a horse, investors may simply buy and sell the futures contracts rather than Bitcoin itself (some contracts are even settled in cash, rather than Bitcoin). All of this could lead to less actual Bitcoin changing hands, leading to less demand.

Although the rush to invest is apparently encouraging some people to take out mortgages to buy Bitcoin, traditional banks won’t lend specifically for that purpose as the market is too volatile.

But it’s not just on the finance side that the Bitcoin market is set to expand. More infrastructure to support Bitcoin in the broader economy is rolling out, which should spur demand.

Bitcoin ATMs are being installed in many countries, including Australia. Bitcoin lending is emerging on peer-to-peer platforms, and new and more regulated marketplaces are being created.

Many companies are accepting Bitcoin as payment. That means that even if the speculation dies down, Bitcoin can still be traded for some goods and services.

And finally, although the fundamentals of Bitcoin are still up for debate, when it comes to transaction volume through the network there appears to be a lot of room for growth.

It’s good to remember that people have been calling Bitcoin a bubble for a long time, even when the price was just US$35 in 2013.

In the end, this is uncharted territory. We don’t know how to value Bitcoin, or what will happen. Historical examples may or may not apply.

What we do know is that the technology behind most cryptocurrencies is enabling new models of value transfer through secure global consensus networks, and that is causing excitement and nervousness. Investors should beware.

Authors: Alicia (Lucy) Cameron, Senior Research Consultant, CSIRO;
Kelly Trinh, Data Scientist, CSIRO

The ‘utopian’ currency Bitcoin is a potentially catastrophic energy guzzler

From The Conversation.

The recent upsurge in the price of Bitcoin seems to have finally awakened the world to the massively destructive environmental consequences of this bubble.

These consequences were pointed out as long ago as 2013 by Australian sustainability analyst and entrepreneur Guy Lane, executive director of the Long Future Foundation. In recent months, the Bitcoin bubble has got massively bigger and the associated waste of energy is now much more widely recognised.

In essence, the creation of a new Bitcoin requires the performance of a complex calculation that has no value except to show that it has been done. The crucial feature, as is common in cryptography, is that the calculation in question is very hard to perform but easy to verify once it’s done.

At present, the most widely used estimate of the energy required to “mine” Bitcoins is comparable to the electricity usage of New Zealand, but this is probably an underestimate. If allowed to continue unchecked in our current energy-constrained, climate-threatened world, Bitcoin mining will become an environmental disaster.

The rising energy demands of Bitcoin

In the early days of Bitcoin, the necessary computations could be performed on ordinary personal computers.

But now, “miners” use purpose-built machines optimised for the particular algorithms used by Bitcoin. With these machines, the primary cost of the system is the electricity used to run it. That means, of course, that the only way to be profitable as a Bitcoin miner is to have access to the cheapest possible electricity.

Most of the time that means electricity generated by burning cheap coal in old plants, where the capital costs have long been written off. Bitcoin mining today is concentrated in China, which still relies heavily on coal.

Even in a large grid, with multiple sources of electricity, Bitcoin mining effectively adds to the demand for coal-fired power. Bitcoin computers run continuously, so they constitute a “baseload” demand, which matches the supply characteristics of coal.

More generally, even in a process of transition to renewables, any increase in electricity demand at the margin may be regarded as slowing the pace at which the dirtiest coal-fired plants can be shut down. So Bitcoin mining is effectively slowing our progress towards a clean energy transition – right at the very moment we need to be accelerating.

How much energy is Bitcoin using?

A widely used estimate by Digiconomist suggests that the Bitcoin network currently uses around 30 terawatt-hours (TWh) a year, or 0.1% of total world consumption – more than the individual energy use of more than 150 countries.

By contrast, in his 2013 analysis, Guy Lane estimated that a Bitcoin price of US$10,000 would see that energy use figure climb to 80 TWh. If the current high price is sustained for any length of time, Lane’s estimate will be closer to the mark, and perhaps even conservative.

The cost of electricity is around 5c per kilowatt-hour for industrial-scale users. Miners with higher costs have mostly gone out of business.

As a first approximation, Bitcoin miners will spend resources (nearly all electricity) equal to the price of a new Bitcoin. However, to be conservative, let’s assume that only 75% of the cost of Bitcoin mining arises from electricity.

Assuming an electricity price of 5c per kWh and a Bitcoin price of US$10,000, this means that each Bitcoin consumes about 150 megawatt-hours of electricity. Under current rules, the settings for Bitcoin allow the mining of 1,800 Bitcoins a day, implying daily use of 24,000MWh or an annual rate of nearly 100TWh – about 0.3% of all global electricity use.

Roughly speaking, each MWh of coal-fired electricity generation is associated with a tonne of carbon dioxide emissions, so a terawatt-hour corresponds to a million tonnes of CO₂.

So much energy, so few users

An obvious comparison is with the existing financial system.

Digiconomics estimated that Visa is massively more efficient in processing transactions. A supporter of Bitcoin, Carlos Domingo, hit back with a calculation suggesting that the entire global financial system uses about 100TWh per year, or three times as much as the Diginconomics estimate for Bitcoin.

As a defence, this is far from impressive. First, as we’ve seen, if the current high price is sustained, total annual energy use from Bitcoin mining is also likely to rise to 100TWh.

More importantly, the global financial system serves the entire world. By contrast, the number of active Bitcoin investors has been estimated at 3 million. Almost all of these people are pure speculators, holding Bitcoin as an asset while using the standard financial system for all of their private and business transactions.

Another group is believed to use Bitcoin for illicit purposes such as drug dealing or money laundering, before converting these funds into their own national currency. The number of people who routinely use Bitcoin as a currency for legitimate transactions might be in the low thousands or perhaps even fewer.

Shifting the whole global financial system to Bitcoin would require at least a 200-fold increase, which in turn would entail increasing the the world’s electricity use by around 500%. With the current threat of climate change looming large globally – this constitutes an unthinkably large amount of energy consumption.

Better alternatives to Bitcoin

The disastrous nature of Bitcoin’s energy consumption should not lead us to abandon the associated idea of blockchain technology altogether.

There are alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. Projects such as Gridcoin are based on calculations that are actually useful to science. But these ideas are in their infancy.

For the moment, the problem is Bitcoin and how to deal with it. There is no obvious way to fix the inherent problems in its design. The sooner this collective delusion comes to an end, the better.

Author: John Quiggin, Professor, School of Economics, The University of Queensland

Being middle class depends on where you live

From The Conversation.

Politicians are fond of pitching to the “average Australian” but judging by the income of Australians, whether you are middle class depends on where you live. And where we live tells a rich story of who we are as a nation – socially, culturally and economically.

Income is at the heart of access to services and opportunities, which are differing and unequal based on where you live.



Our ability to afford housing that meets our needs largely determines where we live. In turn, where we live influences access to other important features of our lives which shape lifelong and intergenerational opportunities. For example, student performance is associated with everything from where a student lives to their parent’s occupation.

Household incomes in capital cities are typically among the highest, with incomes declining the further you live from major cities. So it’s understandable why Australians living outside or on the fringes of cities might feel somewhat left behind.

The Australian Bureau of Statistics presents “average” income as a range based on where you live. This range is marked by a lower number (30% of incomes) at the beginning and the higher number (80% of incomes) at the top.

This “average” income varies substantially between different rural areas from A$78,548 – A$163,265 in Forrest (ACT) to A$10,507 – A$26,431 in Thamarrurr (NT). This is actually an equivalised household income which factors in the economic resources like the number of people and their characteristics, between households.



The difference between the top and bottom of this range of “average” household income also shows greater inequality within areas.

Even within the greater Sydney metropolitan area, there’s significant differences in household income between areas. The average household equivalised income in Lavender Bay is around A$40,000 – A$95,000 higher than it is in Marayong.

The difference in income is marked, and there are other differences too. People in Marayong are on average younger than Lavendar Bay. Family size is smaller in Lavendar Bay. Over half of the Lavendar Bay residents hold university degrees, compared to a more skill-based workforce in Marayong.

Why there is no one “average” Australian

Cities offer access to myriad employment options. Industries associated with relatively high incomes are typically concentrated in cities to take advantage of global connections.

Sydney, Melbourne and Canberra are notable standouts based on household income. So if you live close to these major cities you’d be getting the most opportunities in terms of employment and income, given the you’re the right candidate.

But not everyone wants to live in the centre of cities. Housing, lifestyle and neighbourhood preferences also play a role in where we live, but are still influenced by income and proximity to such things as employment and family and friends.

Also, infrastructure which supports social and economic wellbeing is essential in communities, regardless of where we live.

What politicians should be talking about instead

Improving the different and unequal access across areas requires better internet connectivity and advances in the way we work. Policies around housing and family-friendly workplaces go some way to supporting Australians in work.

Any measures to redress inequalities require understanding the needs and wants of communities. Proposed planning to reconfigure the greater city of Sydney around population and socioeconomic infrastructure offers an example of a data-driven approach to planning. Whether the proposed reconfiguration of Sydney leads to improvements or greater segmentation will be revealed in practice.

Politicians rarely reflect the characteristics of the people they represent, particularly when we consider the remuneration, entitlements and perks of political office. The longer politicians are in office, and somewhat removed from the people they represent, the further they potentially become from gauging their electorate.

Yet politicians profess to know what the average Australians they represent needs and wants. They apply this to a range of things from service delivery to representation on political matters. And this is within reason.

But without current experience we struggle to see things from perspectives other than our own. Take for example the way some have come to label themselves outsiders from the social and political elite to advance their credibility with average Australians.

Bringing politicians in touch with the diversity of needs and wants of Australians starts with a self-check and recognition of individual bias (conscious or unconscious). This is the first step toward really understanding and connecting with Australians – be it in the “average” or otherwise.

Author: Liz Allen, Demographer, ANU Centre for Social Research and Methods, Australian National University

Bitcoin isn’t a currency – and unless it becomes one it could be worthless

From The Conversation.

Bitcoin is in decline. Not its price, which has increased 900% this year and (at the time of writing) stands at over US$12,000 per unit, but its actual use as a currency. And this makes its rapid appreciation all the more puzzling.

A few years ago, enthusiasts triumphantly shared announcements from businesses that had started accepting Bitcoin. Over the last couple of years, such announcements have become scarce. Instead, businesses that once accepted the currency have begun to drop it.

The BBC contacted ten businesses in London that once advertised accepting Bitcoin. Four no longer accepted it, and two that did said they hardly ever received payments in Bitcoin. The same is even true online. The Wall Street Journal, citing a report by Morgan Stanley, recently reported that Bitcoin is now accepted by just three of the top 500 global online merchants, down from five last year.

If growing adoption as a currency can’t justify Bitcoin’s rapid appreciation, what can? Many enthusiasts have started to promote the idea of Bitcoin as a store of value. In economics, this is usually defined along the lines of “an item that people can use to transfer purchasing power from the present to the future”. In simple terms, it’s somewhere safe to invest your wealth that won’t lose its worth over time.

Apples can be used to barter services from a neighbour while they’re still fresh, but their purchasing power will disappear as they rot. The purchasing power can be retained into the future by exchanging the apples for money, gold, government bonds or some other store of value.

Some items have attributes that make them better stores of value than others, whether we are talking about physical items or digital objects. Gold is a good store of value because it’s durable. Electronic bond certificates are also durable as long as banks’ systems don’t fail, and have the added benefit of being easier to secure than physical valuables. Money, both physical currency and digital bank money, has the advantage of being very liquid, so it’s easy to convert into a purchase when needed.

Bitcoin does share many of these attributes of a good store of value. It also offers potentially high levels of financial privacy, somewhat similarly to the offshore banking system. This is an important attribute of a store of value for some people, although it also creates a lack of accountability and the potential for tax evasion.

But the most important attribute of a store of value is that it’s valuable. Gold is valuable because it has many industrial and decorative uses. Its price can fluctuate because of speculation on financial markets, but it can never fall to zero. There will always be someone willing to accept gold because it’s a useful commodity.

Similarly, US government bonds are ultimately valuable because they entitle the owner to a relatively secure flow of interest payments. Dollars and euros are valuable because they are widely accepted as a means of payment, and will continue to be so in the foreseeable future. In contrast, the future acceptability of the Venezuelan bolivar is in doubt, so people are desperately trying to exchange it to better stores of value.

Is Bitcoin valuable? It has no industrial or decorative uses, and it doesn’t entitle the holder to receive interest. It was intended to be valuable as a currency that is accepted the world over, but that doesn’t seem to be happening. The only major value that Bitcoin has now is its exchange value. Many people are willing to pay a lot of money today to get hold of some Bitcoin.

But what they are getting for their money is simply the hope that another buyer down the line will pay even more money for the coins. Once the music stops, there is no fundamental value to prevent the coins’ price from falling close to zero, save for their tenuous position as the currency of choice in the online drug trade and grey-area gambling.

Beanie Babies lessons

The idea that Bitcoin is valuable because it’s a store of value is upside down. In reality, something becomes a store of value because it’s valuable. In the 1990s, people started to trade Beanie Babies on eBay. Prices of these limited-edition plush toys rose to thousands of dollars, and by 1997 they made up 6.6% of the entire site’s transaction volume.

Some people invested their life savings into Beanie Babies, fully expecting their value to be preserved and more. But eventually people came to their senses and the market bombed. Beanie Babies are useful as toys and collectables, but that doesn’t justify thousand-dollar valuations.

My advice to individuals and institutions tempted by the headlines is to keep their savings away from Bitcoin and other cryptocurrencies and “initial coin offerings” (ICOs). I know serious blockchain developers won’t mind me saying this, because they see speculative bubbles and bursts as a distraction. For Bitcoin to truly function as a store of value, it first has to gain acceptance as a currency.

Author: Vili Lehdonvirta, Associate Professor and Senior Research Fellow, Oxford Internet Institute, University of Oxford

How lending startups like Afterpay make their money

From The Conversation.

Startups like Afterpay that allow consumers to “instantly” borrow money for purchases are using a business model that has been around for centuries

It’s called “factoring” of accounts receivables. This is when a company sells its accounts receivables (money owed for a good or service that has already been delivered) to a lender, typically at a discount.

Typically, factoring arrangements are between a business and a lender, with the customer being oblivious to the arrangement. Afterpay’s innovation was to turn this centuries-old, back-office financial arrangement into something customer-facing.

In 2016-17, Afterpay generated about A$23 million in fees from retailers and another A$6.1 million in late fees. It wrote off only A$3.3 million in bad debt.

An example of traditional factoring would be a company selling A$100 in accounts receivables to a lender for A$95. The company gets A$95 cash up front (to spend on wages or ingredients) and eliminates the risk of not being paid. The lender makes a A$5 profit once the A$100 has been collected.

Similarly, if you make a A$100 purchase using Afterpay, the merchant immediately receives A$96. Afterpay then collects four instalments of A$25 from the customer, making a A$4 profit.

The A$4 difference is essentially the interest that Afterpay charges (equivalent to 4.17%). The unusual nature of the transaction is that Afterpay lends to the business and the customer repays Afterpay.

The 4.17% Afterpay charges in this example is quite a modest interest rate, at least compared to credit cards. However, since each loan is outstanding for only a short time, generally six to eight weeks, or a maximum of two months, Afterpay can earn much more than 4.17%.

This is because of compounding interest. Suppose a A$1,000 loan is made on January 1 at an interest rate of 4%, for two months. On March 1, A$1,040 is collected – the original A$1,000 plus A$40 interest.

Another loan is made on March 1 – A$1,040 at a 4% rate, for two months. On May 1, A$1,081.60 is collected – the original A$1,040 plus A$41.60 interest.

This can be repeated again and again. By December 31 the initial A$1,000 has grown to A$1,265.32. This equates to a 26.5% annual interest rate.

Except Afterpay doesn’t have to wait two months to collect the entire amount as a lump sum. Instead, it collects the money lent in instalments, which means the the annual interest rate is approximately 30%!

So, what are the risks?

There are three reasons a merchant may enable Afterpay on their site. The merchant could make a sale it would otherwise not make, hence revenue increases. It’s collecting cash upfront, which improves its balance sheet. And the merchant eliminates the risk it won’t be paid if a customer defaults.

However, there is a risk to Afterpay if the customer defaults and does not pay the amount due. Afterpay’s business model is akin to factoring without recourse.

There are two types of factoring of accounts receivable – with and without recourse. In factoring with recourse, the lender will return uncollected debts to the business.

In factoring without recourse, the lender is responsible for the collection of unpaid invoices from the customer and cannot return them. In other words, when factoring with recourse the business retains the risk of non-payment.

To discourage this behaviour, Afterpay charges fines if the customer fails to make payments (a A$10 late fee, and a further A$7 after seven days). If the customer still does not pay, Afterpay writes off both the initial loan and the fines charged. The fines are still counted as revenue in Afterpay’s accounts.

The greater risk that Afterpay faces is not from the customers defaulting on their loans, but from those who aren’t even using the service.

Customers making cash or credit card purchases may soon demand that online merchants give them a 4% cash discount – the same amount they pay Afterpay. If merchants comply and give everyone a 4% cash discount, the uniqueness of Afterpay’s business model will suffer. The cost of its loans would no longer be invisible.

Author: Saurav Dutta, Head of School at the School of Accounting, Curtin University

Australia isn’t dominated by big businesses that gouge customers: Grattan report

From The Conversation.

When we see excessive spikes in fuel prices, rapid annual increases in health insurance premiums, and a confusing array of electricity options to choose from, it is easy to conclude that big companies are using their market power to gouge their customers.

But the latest report from the Grattan Institute finds claims about Australia being dominated by oligopolies are overblown. Only about 15% of the economy is dominated by large firms.

In the “natural monopolies”, such as electricity distribution, a single firm typically serves the market. And where the largest firms enjoy strong scale advantages, such as in mobile telecoms, just a handful of options are available to consumers.

Then there are sectors where competition is constrained by regulation, such as banking and pharmacies. In such sectors, the largest four firms earn more than two-thirds of revenue, on average.

Australians have long been concerned about oligopoly power. But in the largest sectors with barriers to entry, markets are not much more concentrated in Australia than they are in other economies of a similar size. Supermarkets in Australia are the exception to this rule.

While the United States is less concentrated at a national level, much of this is explained by its larger population. In Florida, for example, a state with a population of 21 million, its sectors are typically just as concentrated as Australia’s, if not more so.

The report also finds no clear trend toward higher concentration in Australia, unlike the case in the US. The revenue of the top 100 Australian listed firms relative to GDP has changed little since the early 1990s.

While the market share of Australia’s big four banks increased through mergers and acquisitions, Coles’ and Woolworths’ dominance appears to be in decline with the rise of Aldi and Costco.

Whether high concentration in Australia is a problem depends on its impact on consumers. Our report finds that sectors with high barriers to entry are about 20% more profitable than sectors with no significant barriers, although there is plenty of variation.

The most profitable sectors include supermarkets, telecommunications (wireless and fixed-line), internet publishing, electricity distribution and transmission, airports and gambling. The banks’ profitability has fallen since the global financial crisis, while their cost of equity has risen due to increased risk.

In some regulated sectors, consumers could clearly do better. Banking regulations push up costs and can weigh heavily on smaller firms as well as on consumers. In the pharmacy sector, competition is directly restricted.

In natural monopoly sectors, where super-profits account for 10% of what consumers pay, on average, it’s also difficult to conclude that consumers benefit.

But less concentrated markets may not make consumers better off. Many profitable big firms must have lower costs than smaller ones; otherwise they would lose market share.

For example, average prices at Coles and Woolworths are lower than IGA, even while profits are higher: it seems that some of the large chains’ scale economies are passed on to consumers. Regulation that limits the size of the largest firms might reduce profits, but could push costs and prices up.

What can policymakers do to get better outcomes for consumers? In the natural monopolies, regulators need to get tougher. For example, they could start regulating prices at airports, rather than just monitoring them.

Across the economy, regulators should continue to focus on protecting competition and preventing the misuse of market power. Government should increase the penalties for cartels and other concerted practices.

Governments could help cut entry barriers, for example by harmonising product standards to reduce trade costs, or freeing up zoning to make it easy for competing supermarkets to expand. And they should make it easier for consumers to switch between providers and control their own data in sectors like banking and even social networks.

There is also much that can be done where retail competition is not working well, such as in superannuation and in retail electricity.

But overall, Australia’s oligopoly problem is a lot smaller than many believe. It’s also not getting worse; our competition policy and regulation is broadly working well.

Authors: Jim Minifie, Productivity Growth Program Director, Grattan Institute; Cameron Chisholm, Senior Associate, Productivity Growth, Grattan Institute; Lucy Percival, Associate, Grattan Institute

Why the big four asked for a parliamentary inquiry into banking

From The Conversation.

The major Australian banks are following familiar public relations tactics in requesting a parliamentary commission of inquiry into banking and financial services.

When the public mood is against an industry, it will try to win the public over, while getting the politicians to ignore the public mood. If that fails, the industry gradually concedes ground until attention goes elsewhere.

For this reason, the banks went from being steadfastly against a commission, to offering the option of self-regulation, to proposing a new “banking tribunal”, to eventually conceding, after the battle had already been lost, to a parliamentary inquiry.

The big problem for the banks, and a big part of the reason that their previous lobbying failed, is that their popularity with the Australian public is very low. This allowed, or pressured, politicians to call for the commission, and presents significant problems for the banks going forward, especially if they wish to avoid tougher regulation.

The banks capitulated only once it became “all but inevitable” that an inquiry of some sort would be held.

Due to the recent citizenship saga, it was looking likely that a coalition of crossbench, Labor, Greens and some Nationals MPs would pass a bill for a commission of inquiry into the banks and other financial institutions.

Labor had already promised to set up a royal commission into the banking and financial services industry if it won the next election.

Concede ground only when it’s already lost

A royal commission will almost certainly bring many months of bad press for the banks.

As the industry has repeatedly made clear, it never wanted a royal commission. The banks claimed they had corrected the mistakes of the past and that a commission was “unwarranted”.

So the banking industry’s public and private lobbying efforts were geared towards convincing politicians to resist calls for the commission, while trying to boost public opinion by highlighting their corporate social responsibility.

This involved sacking executives over this scandal or that, removing certain ATM fees, and cutting bonuses and director pay.

The banks have also launched advertising campaigns, such as one highlighting that many Australians own bank shares through their superannuation.

Concurrently, the banks hoped that threatening to launch a “mining tax”-style ad campaign might scare politicians away from calling for a commission.

These campaigns have become a common threat since the success of the 2010 mining tax campaign opened corporate Australia’s eyes to the potential effectiveness of advocacy ads.

Tactics similar to those the banks are employing now have been used to varying degrees of success in the United States by the tobacco industry and the gun, finance and healthcare lobbies.

In 1998 the American tobacco industry agreed to make payments of over US$200 billion to dozens of states. But this happened only after decades of public education and campaigning against smoking.

Similarly, the American healthcare lobby successfully fought off several attempts to reform healthcare. Obamacare managed to pass in 2010 only after the industry got to substantively write it.

The public relations game

Appearing to co-operate and atone is the best way to try to influence the terms of an inquiry. It also helps to mitigate the worst of any bad press to come. This reflects a wider, pragmatic strategy of lobbying and public relations employed by the banks and other industries.

The focus for the banks will now shift towards damage control, along with heavy promotion of the banks “doing the right thing” by Australia.

To that end, expect to see even more banners proclaiming a bank’s sponsorship of the local footy team, and ads promoting the good work done in your local community.

These, along with an insistence that the commission is a witch hunt, that its findings are “old news”, that the banks have already taken steps to deal with the issue, will underpin the industry’s public relations battle while the royal commission takes place.

Author: George Rennie, Lecturer in American Politics and Lobbying Strategies, University of Melbourne

Governments haven’t always shirked responsibility for our low wages

From The Conversation.

For the last four years or so average wages in Australia have barely kept pace with inflation, meaning no real pay rises. And all the while, the government has been betting on the market to improve things.

Treasurer Scott Morrison stated:

As the labour market tightens, that’s obviously going to lead over time to a boost in wages.

As the Treasurer asserted, economic theory says these conditions should lead to rising wages, but they aren’t. The country continues its record run of 26 years of economic growth and the banks and other big corporations continue to post record profits.

The Reserve Bank of Australia is at a bit of a loss, speculating at its latest meeting that maybe globalisation and technology are to blame.

However, to understand what’s really going on it’s helpful to look at something most economists and politicians ignore: history.

How past governments have dealt with low wages

There was a period in Australia, and much of the rest of the developed world, from the end of the second world war to the early 1970s, that is often referred to as the “post-war boom”. During this roughly 25-year period, unemployment averaged 2%, inequality fell steadily and economic growth was strong.

Australia’s unemployment rate, 1901 – 2001

Unemployment in Australia. Treasury, Author provided

This didn’t happen by accident. Towards the end of the war, policymakers and economists began planning for the post-war period.

They had lived through the Great Depression with unemployment averaging 20% and then they had lived through the war, where the war effort resulted in full employment. They asked the obvious question: “If we can achieve full employment through government spending during the war, then why not during peace time?”

That question and the resulting policy answer, outlined in the Curtin government’s 1945 white paper Full Employment in Australia, resulted in the post-war boom with full employment and falling inequality for the next 25 years.

The 1945 white paper (a remarkable political document by today’s standards) tackled the complex questions of inflation, unemployment, wages and economic growth with mature nuance. Policy proposals weren’t made to appear win-win but weighed up costs and benefits, accepting that we must take responsibility for the costs.

One of the costs of a capitalist, market based system is unemployment. In this context, unemployment was not seen as an individual failing but as a collective responsibility. The paper stated the government should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment.

How far we have come from 1945. Today we blame and demonise the unemployed for not being in work, even though there are many more unemployed people than there are available jobs.

Rather than governments taking responsibility for full employment, they set up punitive “employment services” regimes that require the unemployed to jump through meaningless and often demoralising bureaucratic hoops or face financial penalties.

So, what happened in the 1970s to change our attitude to full employment so radically?

During the post-war boom, inequality had been steadily falling. That is, for 25 years, the proportion of the country’s output that was going to the rich was steadily falling. Unsurprisingly, the rich fought back.

Skyrocketing inflation combined with high unemployment (stagflation), caused by the oil shocks of the 1970s, allowed business representatives to claim that the Keynesian system that had given us the post-war boom was a failure.

Enter the age of individualism. Neoclassical economics and its political counterpart neoliberalism were all about individual choice and individual accountability.

To use the words of US billionaire Warren Buffet:

There’s a class war, all right, but it’s my class, the rich class, that’s making war, and we’re winning.

Andrew Leigh, Battlers and Billionaires

The current stagnation of wages we are seeing in Australia is no accident and no mystery. It’s the result of the intentional erosion of worker power (largely due to the successful campaign to demonise unions) and the end of the bipartisan federal government commitment to full employment.

The impact of full employment on wages is profound. The greatest bargaining chip a worker has is to withdraw their labour.

When it’s difficult to get a new job, unemployment benefits are well below the poverty line and the unemployed are demonised by politicians and the media alike, workers are much less inclined to push hard for improved wages or conditions.

I’m not arguing that we could simply adopt the policies of 1945 and magically return to the golden years of the 50s and 60s; Australia is a very different country and too much has changed. However, we can learn a great deal from the 1945 white paper in terms of ambition, commitment, and the embrace of complexity and nuance.

The federal government could restore its commitment to creating full employment in Australia, using its spending power to make up for any shortfall in private jobs as it did during the post-war boom. History demonstrates that the careful and coordinated use of both fiscal policy (spending and taxing), and monetary policy (interest rates) to manage the economy can create a more prosperous and egalitarian Australia.

It’s well past time for a 21st century update to the 1945 white paper on full employment.

Author: Warwick Smith, Research economist, University of Melbourne

Poorer Australians Bearing the Brunt of Rising Housing Costs

From The Conversation.

Rising housing costs are hurting low-income Australians the most. Those at the bottom end of the income spectrum are much less likely to own their own home than in the past, are often spending more of their income on rent, and are more likely to be living a long way from where most jobs are being created.

Low-income households have always had lower home ownership rates than wealthier households, but the gap has widened in the past decade. The dream of owning a home is fast slipping away for most younger, poorer Australians.

As you can see in the following chart, in 1981 home ownership rates were pretty similar among 25-34 year olds no matter what their income. Since then, home ownership rates for the poorest 20% have fallen from 63% to 23%.

Home ownership rates also declined more for poorer households among older age groups. Home ownership now depends on income much more than in the past.

Lower home ownership rates mean more low-income households are renting, and for longer. But renting is relatively unattractive for many families. It is generally much less secure and many tenants are restrained from making their house into a home.

For poorer Australians who do manage to purchase a home, many will buy on the edges of the major cities where housing is cheaper. But because jobs are becoming more concentrated in our city centres, people living on the fringe have access to fewer jobs and face longer commutes, damaging their family and social life.

Prices for low-cost housing have increased the fastest

The next chart shows that the price for cheaper homes has grown much faster than for more expensive homes over the past decade. This has made it much harder for low-income earners to buy a home.

If we group the housing market into ten categories (deciles), we can see the price of a home in the lowest (first and second) deciles more than doubled between 2003-04 and 2015-16. By contrast, the price of a home in the fifth, sixth and seventh deciles only increased by about 70%.

Tax incentives for investors may explain why the price of low-value homes increased faster. Negative gearing remains a popular investment strategy; about 1.3 million landlords reported collective losses of A$11 billion in 2014-15.

Many investors prefer low-value properties because they pay less land tax as a proportion of the investment. For example, an investor who buys a Sydney property on land worth A$550,000 pays no land tax, whereas the same investor would pay about A$9,000 each year on a property on land worth A$1.1 million.

Rising housing costs also hurt low-income renters

As this last chart shows, more low-income households (the bottom 40% of income earners) are spending more than 30% of their income on rent (often referred to as “rental stress”), particularly in our capital cities. In comparison, only about 20% of middle-income households who rent are spending more than 30% of their income on rent.

Why are more low-income renters under rental stress?

First, Commonwealth Rent Assistance, which provides financial support to low-income renters, is indexed to the consumer price index and so it fell behind private market rents which rose roughly in line with wages.

Secondly, rents for cheaper dwellings have grown slightly faster than rents for more expensive dwellings. Finally, the stock of social housing – currently around 400,000 dwellings – has barely grown in 20 years, while the population has increased by 33%.

As a result, many low-income earners who would once have been in social housing are now in the private rental market.

What can be done about it?

Increasing the social housing stock would improve affordability for low-income earners. But the public subsidies required to make a real difference would be very large – roughly A$12 billion a year – to return the affordable housing stock to its historical share of all housing.

In addition, the existing social housing stock is not well managed. Homes are often not allocated to people who most need them, and quality of housing is often poor. Increased financial assistance by boosting Commonwealth Rent Assistance may be a better way to help low-income renters meet their housing costs

Boosting Rent Assistance for aged pensioners by A$500 a year, and A$500 a year for working-age welfare recipients would cost A$250 million and A$450 million a year respectively.

Commonwealth and state governments should also act to improve housing affordability more generally. This will require policies affecting both demand and supply.

Reducing demand – such as by cutting the capital gains tax discount and abolishing negative gearing – would reduce prices a little. But in the long term, boosting the supply of housing will have the biggest impact on affordability. To achieve this, state governments need to change planning rules to allow more housing to be built in inner and middle-ring suburbs.

Unless governments tackle the housing affordability crisis, the poorest Australians will fall further behind.

Authors: John Daley, Chief Executive Officer, Grattan Institute;
Brendan Coates, Fellow, Grattan Institute; Trent Wiltshire, Associate, Grattan Institute