The Conversation – Page 20 – Digital Finance Analytics (DFA) Blog

Why the big four asked for a parliamentary inquiry into banking

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.

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

Turnbull backed against the wall by rebel Nationals on bank inquiry

From The Conversation.

Prime Minister Malcolm Turnbull and Treasurer Scott Morrison appear to have become hostages to rebel Nationals determined at all costs to secure a commission of inquiry into the banks.

On Monday a second federal National, Llew O’Brien, from Queensland flagged he is likely to cross the floor in the House of Representatives to support the private member’s bill sponsored by Queensland Nationals senator Barry O’Sullivan to set up a commission of inquiry that would investigate a broad range of financial institutions.

O’Brien, who has inserted an extra term of reference to protect people with mental health issues from discrimination, said “I like what I see” in the proposed bill. But he added that he would respect his party’s process. The bill is due to go to the Nationals party room on Monday.

The bill, which has the numbers to get through the Senate, is supported in the House by Queensland Nationals George Christensen, who after Saturday’s Queensland election apologised to One Nation voters for “we in the LNP” letting them down.

Backed by Christensen and O’Brien, together with Labor and crossbenchers, the bill would have the required 76 votes to enable its consideration by the House – although when it can get to be debated there is not clear.

In a discussion last week – later leaked – cabinet considered whether the government should adopt a pragmatic position and give in to calls for a royal commission. But Turnbull and Morrison have refused to do so.

Now the cabinet looks like it will have to decide whether to own the process of an inquiry or have it forced on it.

If Monday’s Nationals party meeting endorsed the bill, that would escalate the situation dangerously for the government, unless it had softened its opposition to an inquiry. It would amount to the minor Coalition partner formally rejecting a government position.

Cabinet would have to back down, or find some other way through.

As the crisis over the banking probe deepens for the government, there is currently no one with the authority or availability within the Nationals to manage the situation.

Barnaby Joyce remains leader but he’s absorbed in Saturday’s New England byelection, which is his path back into parliament. Senator Nigel Scullion is parliamentary leader but has little clout to curb the determined rebels.

With the commission push gaining momentum there is also less desire from some senior Nationals to fight it. Joyce is said to be relaxed about having a banking inquiry, which would be popular among voters and could be chalked up as a win for the Nationals.

The election loss in Queensland has strengthened the federal Nationals’ determination to pursue brand differentiation.

O’Sullivan has repeatedly referenced the example of Liberal Dean Smith’s use of a private member’s bill to pursue the cause of same-sex marriage, arguing he is following Smith’s pathway.

But there are still divided opinions within the parliamentary party about the bank probe. Resources Minister Matt Canavan, a member of cabinet, on Monday reaffirmed his opposition to a royal commission.

Joyce is likely to attend Monday’s party meeting although he will not be formally back in parliament by then.

Nationals are not clear whether they will elect their new deputy on Monday to replace Fiona Nash, who was ruled ineligible by the High Court because she had been a dual British citizen when she nominated. There is some speculation that this might be delayed to give aspirants time to lobby.

If there is no deputy leader chosen on Monday, it would mean that the minor party would be literally leaderless on the government front bench in the House of Representatives. Infrastructure Minister Darren Chester would be the most senior National sitting behind the Prime Minister in question time.

Christensen on Monday launched a website with a petition seeking signatures for a banking inquiry.

“Misconduct is not in the ‘past’”, he says on the site. “It is not being fixed by the industry to a standard acceptable to the community. Although positive steps are being made by government reforms, gaps still exist.

“Enough is enough…. unless the government acts to establish a Royal Commission, I will be acting before the end of this year to vote for a Commission of Inquiry into the banks.” The site also invites people “bitten by the banks” to ‘“tell your story”.

A commission of inquiry differs from a royal commission in being set up by and reporting to parliament, rather than being established by and reporting to the executive.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

Budget 2017 fails to reset or rebalance anaemic UK economy

From The Conversation.

Given the May government’s weakness and instability, and the ongoing toxic, Brexit-laced personal and political divisions within the cabinet, not much was expected from Philip Hammond’s Autumn 2017 budget. He did not disappoint.

During a rambling, hour-long speech of nearly 8,000 words, weak jokes torturously delivered were interspersed with a raft of policy announcements whose sum total fell far short of resetting UK economic policy away from austerity. This was not a budget to redress the “burning injustices” and interests of the “just about managing”, which the prime minister once promised would be the mission of her government.

Hammond’s announcements fell far short of the £4 billion in investment required to redress the impact of a lost decade of cuts in welfare, including the freeze on benefits. Or the £4 billion required to maintain services in the National Health Service in England in 2018-19. And little to redress the financial unsustainability of England’s schools or its local government.

Hammond’s statement announced token investment in driverless vehicles, but onlookers could be forgiven for thinking that this was the anaemic budget of a driverless government. Like his next-door-neighbour in 10 Downing Street, Hammond lacks the necessary gumption to lead the UK economy at this critical juncture.

The Autumn 2017 budget represented the opportunity to make good Hammond’s July 2016 promise “to reset fiscal policy if we deem it necessary to do so in the light of the data that will emerge over the coming months”. The data that has emerged subsequently should have convinced him that the time for a reset was long overdue. Austerity has clearly failed to revive the British economy and there is an urgent need to prepare businesses – and not just government departments – for Brexit.

Rising debt

Austerity – the notion of balancing the books by cutting spending – has singularly failed to rebalance the nation’s finances. Since Hammond’s appointment as chancellor, a further £176 billion has been added to the UK’s public sector net debt, which now stands at more than £1,790 billion. This has maintained the pattern since May 2010, which has seen the Cameron-Clegg coalition’s “unavoidable deficit reduction plan” add £772.5 billion to public sector net debt.

The budget now forecasts that in 2022-23, public sector net debt will still be £1,909 billion or 79.1% of GDP, and the government will be borrowing £25.6 billion or 1.1% of GDP.

This is contrary to what Hammond’s predecessor George Osborne promised would have been achieved by 2015-16. When the Conservatives came into government in June 2010, Osborne promised “to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export”.

That new, balanced economy has proven to be a fiction. In 2016, the UK ran a record current account deficit of £115.5 billion, equivalent to 5.9% of GDP, and a trade deficit of £43 billion, equivalent to 2.2% of GDP.

There was little in the latest budget to reverse these trends. Instead, the independent Office for Budget Responsibility (OBR) downgraded its forecasts for real GDP growth between 2017-18 and 2021-22 from 7.5% to 5.7%. The British economy is now forecast to grow by less than 2% in each year of the current parliament, and, as the OBR also noted, this contrasts with “a pick-up in other advanced economies”.

Storing problems for the future

The budget concluded with a raft of announcements to address the housing crisis in England, including the abolition of Stamp Duty on properties up to £300,000. This was Hammond’s crowd-pleasing rabbit out of the hat. But the OBR has observed that “the main gainers from the policy are people who already own property” rather than first-time buyers, and will likely push up prices, thus making properties less affordable.

Official government statistics have revealed that over the past 20 years, land values have increased by 479% and property values by 203%. The latest budget has done nothing to reverse these trends towards investment in property and rent-seeking, rather than in the real economy of businesses.

David Willetts, who until May 2015 was complicit in the implementation of austerity, as a cabinet minister in the Cameron-Clegg coalition government, recently warned:

We are reshaping the state and storing problems for the future by creating a country for older generations. The social contract is a contract between the generations and in Britain it is being broken.

The truth is more stark than that. Philip Hammond’s failure to reset UK economic policy by perpetuating fundamentally flawed austerity policy means the May government is reshaping the state and storing problems for the future by creating a country for older, rentier and asset-rich interests. This risks breaking down the political contract between the governing elite at Westminster and the people of Britain.

Author: Simon Lee , Senior Lecturer in Politics, University of Hull

Increasing wages would make the Australian economy safer

From The Conversation.

Australian wages have again failed to meet expectations – rising by just 2% on an annual basis. This is bad not just for workers, but for the economy in general. Wages need to rise, especially for those on low to middle incomes.

Research shows that even a small increase in interest rates disproportionately harms borrowers who are on lower incomes, and especially those at the start of the debt repayment process.

The Bank of England recently raised interest rates for the first time in a decade. The US Federal Reserve and European Central Bank will eventually follow suit. And as interest rates rise across the developed world, Australia will also be forced to follow.

Around 29% of Australian households are “over-indebted”. As interest rates rise, many of these households will be unable to meet their mortgage repayments. An increase in mortgage defaults will hit banks’ balance sheets, and will spread through the financial system.

Increasing wages would not only ease some of this financial stress, but would also jolt inflation as these newly enriched workers buy themselves things. Rising inflation will erode some of the debt repayment the household sector faces over the coming years.

Warning signs

A study in Ireland (which has similar household debt levels to Australia) found that a 1-2% increase in interest rates leads to a 2-4% reduction in a typical borrower’s disposable income after debt repayments.

Households are considered “vulnerable” if their debt service ratio (the share of debt repayments to income) is over 30%. If you earn A$1,500 after taxes every week, but are barely making a A$850 mortgage repayment, you’re going to be in trouble if repayments rise to $A900.

Part of the reason for the increased household debt is that the “labour share” of the Australian economy has been declining.

In 1960, Australian workers took home 62% of the value of what they produced. Australian owners of capital got 38%. This split was similar in the rest of the developed world.

In 2018, workers will most likely take home less than 50% of the value of what they produce. The average drop in the labour share as a percentage of GDP since 1960 is 12% across the OECD.

Wages have been growing at less than 2% a year since 2014. This is despite the fact that unemployment is 5.5% and falling, which is around the level where we would expect to see wages rise because workers can command a premium in the market.

But the Australian labour market is also changing. Underemployment (workers who would like to work more hours) is a key problem in many households. Underemployment is relatively high among 15-24-year-olds and is projected to rise.

According to the Oxford Internet Institute’s online labour index, Australia is number three in the world for “gig economy” jobs, behind Britain and the United States. These jobs provide cash flow but no security. They also build up other vulnerabilities – many Uber drivers will be short on Super, for example.

As you can see from the previous chart, Australian corporations aren’t doing too badly even as the labour share declines. The chart shows the gross profits, compared to the last month of 2008 – pretty much the peak of the crisis. This comparison allows us to see the changes in profits before and after the crisis more clearly.

The raw data show the same pattern.

You can see clearly a drop after the global financial crisis hits, and then a very sharp recovery in 2015 and 2016. Gross operating surplus, our rough measure of the profits of the private sector, are more than 24% higher than they were in 2008. One important reason for the increase in profits is the lack of wage growth for households.

What should be done?

In the longer term the ratio of debt to income and assets will have to fall. This could happen via write-offs, sell-ons and bankruptcies, or via increases in incomes. But we don’t live in the longer term.

Right now, middle-income workers need more cash in their pockets. There are a couple of options available.

The first is to reduce the burden of debt repayment on those new entrants to the mortgage market. One solution is to provide tax relief on the interest that a household pays in the first few years of a mortgage (as Ireland and the United Kingdom do). This will keep the property market working well and support younger borrowers, if only temporarily. But it could also bid up house prices if not properly targeted.

The second is the simplest approach – reduce taxes, combined with tax reform. But the federal government is already running a budget deficit of around 2% of GDP, so this doesn’t work in the short term.

The third option is to reduce the cost of living by making public transport easier to access, improving early education, and reducing energy prices. But research shows that the “worst” infrastructure projects are the ones that generally get built, so this isn’t advisable either.

The solution, then, is to increase wages, especially at the middle of the income distribution. Minimum wages have already gone up by more than 3% this year, but this is unlikely to help those on middle incomes, who have access to enough credit to afford current house prices and so have become stretched.

There are models Australia can learn from internationally. In Germany, the Variable Payment System links pay increases to profit sharing and bonuses. When the company or the sector does well, the worker does well. The reverse is also true.

A survey of 23 different wage-increasing mechanisms found almost all countries bar the US, Hungary and Poland have some collective bargaining and minimum wages. These range from hard wage indexation enforced by law, to intra-associational coordination (roughly what we have here in Australia). The right model for the 21st century and the changing nature of work may be very different, however.

As we’ve seen, private sector is doing very well and can afford a wage hike. And productivity increases in the Australian workforce has long outpaced wage increases. A wage increase is not only feasible and justified, it is in the national interest.

Australia’s tenuous place in the new global economy

From The Conversation.

The Committee for Economic Development of Australia (CEDA) has released a report titled Australia’s Place in the World, which considered how Australia should respond to changing attitudes to globalisation.

At home and around the world, there is a backlash against free trade and globalisation. The report asks what course Australia should navigate through these choppy economic and political waters.

The backdrop, of course, is the UK Brexit vote and the election of Donald Trump as US President.

If that’s not motivation enough, one could easily add to CEDA’s list: the performance of Marine Le Pen in France’s recent presidential election, the election of the far-right AfD to the German parliament, and the looming role of Pauline Hanson’s One Nation in the Queensland election.

Tariffs and trade

The report is broken into three sections: Global Economy, Global Security, and Global Governance, but it is the first and third that speak directly to Australia’s economic fortunes in the age of Trump.

One obvious, but correct and important observation the report makes is that Australia has been a huge beneficiary of free trade over the past 30 years. Not only have our exporters gained access to major overseas markets, but consumers in Australia have also benefited from reduced tariffs.

For example, the price of a typical sedan has basically halved in real terms due to the removal of a 100% car tariff. But while trade and globalisation have made the economic pie bigger, the sharing of those benefits has been much more uneven. Just ask manufacturing workers.

What is missing from the report’s recommendations is how to deal with and compensate the losers from globalisation in Australia. That is important, both economically and politically.

Global rise of populism

The rise of populist parties around the world has been associated with this failure to compensate globalisation’s losers.

Part of what it takes to address this issue is so-called “place-based policies” which Rosalind Dixon and I have previously discussed. Broadly, this refers to the people who are affected when industries move away from particular areas and employment opportunities dry up.

The CEDA report argues, however, that:

Policies such as moving from transaction taxes on property to broad-based land tax to address housing affordability and labour mobility need to be designed along with transition pathways. GST reform with a broader base to remove the need for stamp duty could be another option.

The report also points out that Australia’s company tax rate is uncompetitive, and that the proposed shift to a 25% rate under the Coalitition’s “Enterprise Tax Plan” would only happen by 2026-27, if it happens at all. These are all good points, and would make for good policy. Yet the only one that looks vaguely likely to happen is replacing stamp duty with land tax – and that would be done at a state government level.

The federal government floated the idea of GST reform and retreated almost immediately after the opposition predictably attacked it viciously and effectively as being “regressive”. The Enterprise Tax plan also looks to be in danger, as several crossbench MPs seem likely to side with Labor and want tax cuts only for small businesses. That’s utterly stupid economics, but apparently good politics.

Middle power leadership?

As the report notes: “Global cooperation is growing increasingly important in a world that faces a number of crises that require cross-border solutions.”

This is surely true, although the report paints a rosy picture of Australia’s potential role as a “middle power”, claiming that we were important in the establishment of the United Nations.

True, Australia played a relatively important role in establishing APEC and the G20. But that involved leadership from figures like Hawke, Keating and Rudd. I, for one, don’t see anyone on the present political landscape with those leadership and persuasion skills.

Perhaps the bigger challenge is that President Trump seems determined to radically undermine international institutions. Even Canadian Prime Minister Justin Trudeau was unhelpful in the Trans Pacific Partnership rebound effort that Malcolm Turnbull and others were trying to arrange.

What can Australia do in the face of orchestrated attacks on global institutions by the biggest and most important nations? Very little, I fear. The age of Trump is a difficult time for Australia and its leaders. Many things are out of our control.

What we can do, however, is resist the tide of populism at home, and provide stable and functional government. Both major parties have a patchy recent record in that regard, and the federal opposition has made some populist-type moves on trade and protectionism.

Let’s hope they don’t really believe it.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

Could we nationalise the superannuation system even if we wanted to?

From The Conversation.

Two decades of reforms, reviews and inquiries appear to have better served the financial sector than the interests of super fund members.

At first glance Australia’s 214 major superannuation funds are performing well, giving a healthy 9.2% return on the A$1.4 trillion we have deposited with them. But there are issues with our publicly mandated but privately controlled superannuation system.

Admittedly, our current system provides a range of benefits – increasing retirement incomes, giving us plenty of choice between funds (in theory if not in practice), and investing in the Australian economy.

But the operating expenses for Australian funds consistently and significantly outstrip those in other OECD countries. Fees are high and there is little evidence that higher fees lead to better services.

In 2009 the Inquiry into Financial Products and Services in Australia recommended there be an annual check on the quality of advice. The only superannuation-related survey that has been undertaken to date found that 39% of advice was poor and only 3% was good quality. No further surveys have been conducted.

Australians are forced to contribute to superannuation funds, without the right of exit, but they aren’t protected from high fees or bad investment strategies. A nationalised superannuation system, or one that combines private and public super funds, could simplify the system and reduce costs.

Baked in problems

Australia’s system wasn’t originally intended to be entirely privately-run, which has left us without many necessary protections (such as appropriate disclosure of fees and charges).

Australia was almost alone among OECD countries in reaching the 1980s with no national employment-related retirement income scheme. There had been at least ten attempts to set one up between the 1890s to the 1970s. All failed to win support from employers, existing superannuation funds, life offices and state governments.

An additional attempt was made in the last Parliament of the Liberal government in 1972. The incoming Whitlam Labor government also tried to introduce a national superannuation scheme in 1973, establishing the Hancock inquiry.

Consistent with its recommendations, the Hawke/Keating Labor government intended to move forward with a national scheme. However, against the backdrop of past nationalisation failures, recession, high inflation, a wage freeze, strikes, declining union membership, and the increasing discontinuation of superannuation products, the government instead privatised it.

Thus, the Hawke/Keating Labor government was a major winner of a privatised scheme gaining electoral support from a coalition of private interests.

Absent from this coalition were the fund members. There is no evidence of any consultation process with either the fund members themselves and/or any consumer representative groups prior to the development of our present, privatised regime.

The Superannuation Guarantee scheme introduced a minimum employer contribution to superannuation for most employees. This scheme was a windfall for the financial sector, as they received a guaranteed, trillion-dollar stream of superannuation contributions to look after with no exit rights for members.

The union movement would also appear to be a winner from privatisation. The privatised system allowed the unions to expand the number of their existing industry funds to earn more administration and investment-based fees. The 41 industry funds currently hold A$545.2 billion, compared to the A$587.8 billion held by the 128 for-profit retail funds.

It could be argued that the losers in this mandatory regime are the fund members who were marginalised from the outset. As it was originally intended to be a government-run system, many of the administrative processes necessary for an efficient and effective privatised system were originally absent.

For example, there were no codified accounting, reporting and disclosure requirements. No mandatory requirements for the disclosure of fees and charges. No codified audit report requirements. And, for nearly a decade, the regulator did not have appropriate constitutional powers to enforce civil and criminal penalties against non-complying trustees.

Two-decades of reforms have remedied the constitutional, auditing and accounting issues. But significant issues remain, including limitations in the disclosure of fees and charges and the related issue of conflicted payments.

Alternative super systems

In theory, there are alternative superannuation models for Australia to consider. For example, there are nationalised schemes such as the government-run Canadian Pension Plan.

All of the funds from the Canadian Pension Plan are invested by Canada’s Pension Plan Investment Board, which operates with a clear mandate to maximise returns, without undue risk of loss.

Nationalising the superannuation industry in this way appears to have benefits – members would receive the same return for equal contributions, employers and employees would only have to deal with one fund, and the amount spent on running the fund (for example on administration, marketing) would be reduced.

There is also the option of adopting a combined system, as in Norway, which features both national and privately-run superannuation funds.

In reality however, given the coalition of vested interests that have forged Australia’s existing, publicly mandated, privatised system, only the voice of the members themselves can force an honest and open debate on this important issue.

Author: Suzanne Taylor, Lecturer/Co-Ordinator, Queensland University of Technology

The world is in economic, political and environmental gridlock – here’s why

From The Conversation.

The crisis of contemporary democracy has become a major subject of political science in recent years. Despite this, the symptoms of this crisis – the vote for Brexit and Trump, among others – were not foreseen. Nor were the underlying causes of this new constellation of politics.

Focusing on the internal development of national polities alone, as has typically been the trend in academia, does not help us unlock the deep drivers of change. It is only at the intersection of the national and international, of the nation-state and the global, that the real reasons can be found for the retreat to nationalism and authoritarianism.

In 2013, we argued that the concept of “gridlock” is the key to understanding why we are at a crossroads in global politics. Gridlock, we contended, threatens the hold and reach of the post-World War II settlement and, alongside it, the principles of the democratic project and global cooperation. Four years on, we have published a new book exploring how we might tackle this situation.

But before we look into this, what exactly is gridlock?

Gridlock

The post-war institutions, put in place to create a peaceful and prosperous world order, established conditions under which a plethora of other social and economic processes associated with globalisation could thrive. This allowed interdependence to deepen as new countries joined the global economy, companies expanded multinationally, and once distant people and places found themselves increasingly — and, on average, beneficially — intertwined.

But the virtuous circle between deepening interdependence and expanding global governance could not last: it set in motion trends that ultimately undermined its effectiveness.

In the first instance, reaching agreement in international negotiations is made more complicated by the rise of new powers like India, China and Brazil, because a more diverse array of interests have to be hammered into agreement for any global deal to be made. On the one hand, multipolarity is a positive sign of development; on the other, it brings both more voices and interests to the table. These are hard to weave into coherent outcomes.
The General Debate of the 71st Session of the General Assembly of the United Nations. Golden Brown / Shutterstock.com
Next, the problems we are facing on a global scale have grown more complex, penetrating deep into domestic policies. Issues like climate change or the cross-border control of personal data deeply affect our daily lives. They are often extremely difficult to resolve. Multipolarity coincides with complexity, making negotiations tougher and harder.

In addition, the core multilateral institutions created 70 years ago, the UN Security Council for example, have proven resistant to adapting to the times. Established interests cling to outmoded decision-making rules that fail to reflect current conditions.

Finally, in many areas, transnational institutions, such as the Global Fund to Fight AIDS, Tuberculosis and Malaria, have proliferated with overlapping and contradictory mandates. This has created a confusing fragmentation of authority.

To manage the global economy, prevent runaway environmental destruction, reign in nuclear proliferation, or confront other global challenges, we must cooperate. But many of our tools for global policy making are breaking down or inadequate – chiefly, state-to-state negotiations over treaties and international institutions – at a time when our fates are acutely interwoven.

Crisis of democracy

Compounding these problems, gridlock today has set in motion a self-reinforcing element, which contributes to the crisis of democracy.

We face a multilateral, gridlocked system, as previously noted, that is less and less able to manage global challenges, even as growing interdependence increases our need for such management.

This has led to real and, in many cases, serious harm to major sectors of the global population, often creating complex and disruptive knock-on effects. Perhaps the most spectacular recent example was the 2008–9 global financial crisis, which wrought havoc on the world economy in general, and on many countries in particular.

These developments have been a major impetus to significant political destabilisation. Rising economic inequality, a long-term trend in many economies, has been made more salient by the financial crisis. A stark political cleavage between those who have benefited from the globalisation, digitisation, and automation of the economy, and those who feel left behind, including many working-class voters in industrialised countries, has been reinforced. This division is particularly acute in spatial terms: in the schism between global cities and their hinterlands.

The financial crisis is only one area where gridlock has undercut the management of global challenges. For example, the failure to manage terrorism, and to bring to an end the wars in the Middle East more generally, have also had a particularly destructive impact on the global governance of migration. With millions of refugees fleeing their homelands, many recipient countries have experienced a potent political backlash from right-wing national groups and disgruntled populations.

This further reduces the ability of countries to generate effective solutions to problems at the regional and global level. The resulting erosion of global cooperation is the fourth and final element of self-reinforcing gridlock, starting the whole cycle anew.
The vicious gridlock cycle. The Conversation
Beyond Gridlock

Modern democracy was supported by the post-World War II institutional breakthroughs that provided the momentum for decades of sustained economic growth and geopolitical stability, even though there were, of course, proxy wars fought out in the Global South. But what worked then does not work now. Gridlock freezes problem-solving capacity in global politics. This has engendered a crisis of democracy, as the politics of compromise and accommodation gives way to populism and authoritarianism.

While this remains a trend which is not yet set in stone, it is a dangerous development.

In our new book, Beyond Gridlock, we explore these dynamics at much greater length as well as how we might begin to move through and beyond gridlock. While there are no easy solutions, this does not mean there are no ways forward. There are some systematic means to avoid or resist these forces and turn them into collective solutions.

Different actors and agencies are devising new ways to solve global challenges, be it philanthropies teaming up with governments to tackle disease, cities teaming up across borders to fight climate change, or local communities taking in migrants. Ambitious agreements like the Paris Agreement or the UN Sustainable Development Goals point toward common projects. And in some countries, politicians are even winning elections by promising greater cooperation on shared challenges.

If we succeed in building a better global governance in the future, we will sap a key impetus behind the new nationalism. If we fail, we fuel the nationalist fire.

Authors: David Held, Professor of Politics and International Relations, Durham University; Thomas Hale, Associate Professor in Public Policy, University of Oxford

The US economy is outpacing Australia’s

From The Conversation.

Data this week pointed to a continued shakiness in the Australian economy, while the robust US recovery continued.

In Australia, private-sector lending grew at just 0.3%, compared to 0.5% in August. Perhaps more worryingly, business lending dropped 0.1%. It was, again, housing credit growth that propped up the overall figures, growing 0.5% for the month.

Worse still, new home sales fell 6.1% in September, compared to August, according to the Housing Industry Association. So Australians aren’t borrowing much, except to finance the swapping around of each other’s houses at higher and higher prices. Note to picky readers: yes, prices fell a tiny bit in Sydney last month (0.1%), but are still up 10.5% year-on-year.

The US labour market bounced back from the hurricane season, adding 235,000 private sector jobs, according to data from payroll provider ADP. This wasn’t merely a bounce back — it exceeded expectations of a 200,000 gain. This was the biggest gain since March and further evidence of the strong US recovery.

It was not surprising, then, that Conference Board figures showed strong consumer confidence. What was striking, however, was just how strong those figures were. The confidence index rose to 5.3 points to 125.9 – the highest since December 2000. The present conditions measure was also at its highest level since 2001.

The US Federal Reserve kept interest rates on hold at a band of 1.0-1.25% at this week’s meeting, but signalled a fairly high likelihood of a rate rise when they meet in December. As the statement put it:

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.

Perhaps the only real wrinkle is that inflation remains stubbornly low, despite unemployment being at 4.2%. Some measures of inflation expectations are rising, so the best bet is for a 25 basis point rise in December.

The Fed’s statement made pretty explicit how they think about balance these factors, stating:

the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.

Of course, current Fed Chair Janet Yellen’s term concludes in February next year, and it is being widely reported that President Trump will not reappoint her. Rather he seems set (to the extent that is possible with him) to appoint Jay Powell as Chair.

I will have more to say about that in future columns, but the main thing to note here is that Powell is extremely likely to continue with the path of monetary policy that Yellen has laid out.

So why is it that the US – which suffered a major downturn – seems to have a stronger economy than Australia – which did not even go into recession in 2008-09?

One view is that the US went through a process of Schumpetarian “creative desctruction”. Homeowners who couldn’t afford their properties got foreclosed on, investment banks that weren’t viable went bust, and the rest of the financial system was recapitalised.

Australian banks, by contrast have made some progress in getting their funding structure to be less short-term and dependent on US capital markets – but only so much. And it seems quite possible that they continue to make questionable loans – particularly interest-only loans – as I wrote about here, and spoke about here.

A second view is that the US economy is better able to adapt to the changing nature of the modern economy. It has much more flexible labour markets – although much harsher and less rewarding for average workers.

Perhaps it is neither of these, but presumably both the Reserve Bank and Treasury are trying to understand what looks like a striking different between the US and Australian experiences.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW