Uber suffered a legal blow this week when a California judge granted class action status to a lawsuit claiming the car-hailing service treats its drivers like employees, without providing the necessary benefits.
Up to 160,000 Uber chauffeurs are now eligible to join the case of three drivers demanding the company pay for health insurance and expenses such as mileage. Some say a ruling against the company could doom the business model of the on-demand or “sharing” economy that Uber, Upwork and TaskRabbit represent.
Whatever the outcome, it’s unlikely to reverse the most radical reinvention of work since the rise of industrialization – a massive shift toward self-employment typified by on-demand service apps and enabled by technology. That’s because it’s not a trend driven solely by these tech companies.
Workers themselves, especially millennials, are increasingly unwilling to accept traditional roles as cogs in the corporate machinery being told what to do. Today, 34% of the US workforce freelances, a figure that is estimated to reach 50% by 2020. That’s up from the 31% estimated by the Government Accountability Office in a 2006 study.
Many aren’t ready for the on-demand economy that Uber represents, such as these taxi drivers in Brazil.Reuters
Rise of the gig-based economy
In place of the traditional notion of long-term employment and the benefits that came with it, app-based platforms have given birth to the gig-based economy, in which workers create a living through a patchwork of contract jobs.
Uber and Lyft connect drivers to riders. TaskRabbit helps someone who wants to remodel a kitchen or fix a broken pipe find a nearby worker with the right skills. Airbnb turns everyone into hotel proprietors, offering their rooms and flats to strangers from anywhere.
Thus far, the industries where this transformation has occurred have been fairly low-skilled, but that’s changing. Start-ups Medicast, Axiom and Eden McCallum are now targeting doctors, legal workers and consultants for short-term contract-based work.
A 2013 study estimated that almost half of US jobs are at risk of being replaced by a computer within 15 years, signaling most of us may not have a choice but to accept a more tenuous future.
Robot suit via www.shutterstock.com
The economic term referring to this transformation of how goods and services are produced is “platform capitalism,” in which an app and the engineering behind it bring together customers in neat novel economic ecosystems, cutting out traditional companies.
But is the rise of the gig economy a bad thing, as Democratic front-runner Hillary Clinton suggested in July when she promised to “crack down on bosses misclassifying workers as contractors”?
While some contend this sweeping change augurs a future of job insecurity, impermanence and inequality, others see it as the culmination of a utopia in which machines will do most of the labor and our workweeks will be short, giving us all more time for leisure and creativity.
My recent research into self-organized work practices suggests the truth lies somewhere in between. Traditional hierarchies provide a certain security, but they also curb creativity. A new economy in which we are increasingly masters of our jobs as well as our lives provides opportunities to work for things that matter to us and invent new forms of collaboration with fluid hierarchies.
Sharing into the abyss?
Critics such as essayist Evgeny Morozov or the philosopher Byung-Chul Han highlight the dark side of this “sharing economy.”
Instead of a collaborative commons, they envision the commercialization of intimate life. In this view, the likes of Uber and Airbnb are perverting the initial collaborative nature of their business models – car-sharing and couch-surfing – adding a price and transforming them from shared goods into commercial products. The unspoken assumption is that you have the choice between renting and owning, but “renting” will be the default option for the majority.
Idealists take another tack. Part of the on-demand promise is that technology makes it easier to share not only cultural products but also cars, houses, tools or even renewable energy. Add increasing automation to the picture and it invokes a society in which work is no longer the focus. Instead, people spend more of their time in creative and leisurely activities. Less drudge, more time to think.
The “New Work movement,” formed by philosopher Frithjof Bergmann in the late 1980s, envisioned such a future, while economist and social theorist Jeremy Rifkin imagines consumers and producers becoming one and the same: prosumers.
From self-employment to self-organization
Both of these extremes seem to miss the mark. In my view, the most decisive development underlying this discussion is the need for worker self-organization as the artificial wall between work and life dissolves.
My recent work has involved studying how the relationship between managers and workers has evolved, from traditional structures that are top-down, with employees doing what they’re told, to newer ones that boast self-managing teams with managers counseling them or even the complete abolition of formal hierarchies of rank.
While hierarchy guarantees a certain security and offers a lot of stability, its absence frees us to work more creatively and collaboratively. When we’re our own boss we bear more responsibility, but also more reward.
And as we increasingly self-organize alongside others, people start to experiment in various ways, from peer to peer and open source projects to social entrepreneurship initiatives, bartering circles and new forms of lending.
The toughest tension for workers will be how best to balance private and work-related demands as they are increasingly interwoven.
Avoiding the pitfalls of platform capitalism
Another risk is that we will become walled in by the platform capitalism being built by Uber and TaskRabbit but also Google, Amazon and Apple, in which companies control their respective ecosystems. Thus, our livelihoods remain dependent on them, like in the old model, just without the benefits workers have fought for many decades.
In his recent book “Postcapitalism,” Paul Mason eloquently puts it like this: “the main contradiction today is between the possibility of free, abundant goods and information; and a system of monopolies, banks and governments trying to keep things private, scarce and commercial.”
To avoid this fate, it’s essential to create sharing and on-demand platforms that follow a non-market rationale, such as through open source technologies and nonprofit foundations, to avoid profit overriding all other considerations. The development of the operating system Linux and web browser Firefox are examples of the possibility and merits of these models.
Between hell and heaven
Millennials grew up in the midst of the birth of a new human age, with all the world’s knowledge at their fingertips. As they take over the workforce, the traditional hierarchies that have long dictated work will continue to crumble.
Socialized into the participatory world of the web, millennials prefer to self-organize in a networked way using readily available communication technology, without bosses dictating goals and deadlines.
But this doesn’t mean we’ll all be contractors. Frederic Laloux and Gary Hamel have shown in their impressive research that a surprisingly broad range of companies have already acknowledged these realities. Amazon-owned online shoe retailer Zappos, computer game designer Valve and tomato-processor Morning Star, for example, have all abolished permanent managers and handed their responsibilities over to self-managing teams. Without job titles, team members flexibly adapt their roles as needed.
Mastering this new way of working takes us through different networks and identities and requires the capacity to organize oneself and others as well as to adapt to fluid hierarchies.
As such, it may be the the fulfillment of Peter Drucker’s organizational vision:
… in which every man sees himself as a “manager” and accepts for himself the full burden of what is basically managerial responsibility: responsibility for his own job and work group, for his contribution to the performance and results of the entire organization, and for the social tasks of the work community.
The Author: Bernhard Resch, Researcher in Organizational Politics at University of St.Gallen
Payday lenders have been the subject of trenchant criticism since their popularity exploded following the financial crisis. A recent documentary, “Cash in Hand: Payday Loans”, sought to counter this by giving an insider look at the industry. The show went behind-the-scenes at payday lender Uncle Buck, which possesses a 2% market share behind behemoths such as Wonga and QuickQuid, and followed the daily activities of its customer service and collections operation.
The payday lending market has changed significantly since regulation was announced last year – it appears that the industry is making real efforts to clean up its act. This being the case and in an age of alternative lending models such as peer-to-peer lending and crowdfunding, we should be cautious about automatically dismissing the use of payday loans.
With high interest rates, payday loans are short-term loans that are usually repaid on the debtor’s next payment date. The industry grew exponentially in the wake of the financial crisis and now over 1.2m loans are issued in the UK every year. As the industry has flourished, so has the appetite for their abolition by consumer groups and others, including Labour deputy leader hopeful Stella Creasy.
New rules
It is true that the industry has until recently adopted unsavoury practices such as opaque terms and conditions and illegal collection methods. But as these practices became more apparent the industry attracted the gaze of consumer groups and it was not long before regulatory intervention was the order of the day.
The industry was hit with a raft of regulatory changes at the start of 2015 after public outcry about lending and debt collection practices. In a classic case of public pressure leading to regulatory action, the Financial Conduct Authority (FCA) introduced a series of measures to protect consumers including:
A daily interest rate and fee cap of 0.8% for every £100 lent.
A total cap on the maximum any customer will pay in interest and default fees equivalent to double the amount advanced.
A cap on late payment fees of £15.
The new regulations led to many smaller industry players shutting up shop and prompted many of the industry leaders to revise their business model and their approach to customer care and debt collection.
In some US states, payday loans have been abolished, and interest caps introduced in others. This is primarily due to predatory lending practices targeted at ex-military personnel and single parents.
But the consumer profile of the payday loan customer in the UK is significantly different to customers in the US. According to IRN Research, UK payday loan borrowers are most likely to be young adults with below average incomes, using payday loans with more savvy than is popularly depicted.
In the UK, 67% have a household income of below £25,000 compared to the US where it is closer to 75%. Moreover, while payday borrowers in the US tend to be adults without bank accounts and with poor, “sub-prime” credit histories. This is not the case in the UK.
The IRN research also shows that 33% of payday loan customers have a household income exceeding the national average – 6% of users at more than £50,000 per annum. The truth is that payday loans are a money-saving mechanism for some young professionals.
For example, a £100 payday loan, operating at 0.8% daily interest, paid back in 30 days will cost significantly less than going £100 into an unauthorised overdraft. This is something Steve Hunter at Uncle Buck said in the recent show:
If you were to take out a loan for £300 you would pay back about £458 over three months. We are expensive but it’s very, very short-term. It could be a lot more if you went into your overdraft in an unauthorised way.
It is difficult to argue with this logic. An unauthorised overdraft, with Santander for example, can cost anything up to £95-a-month in fees. Choosing a payday loan in these circumstances is a rational buying decision informed by the cost of both options.
Regulation in action
Of course, the majority of people that use payday loans have household incomes below the national average. The FCA estimates that since it took over regulation of the industry, the number of loans and amount borrowed has reduced by 35%. Up to 70,000 customers have now been denied access to the market. This is a positive step forward.
With new emphasis on affordability checks, it is right that those who cannot afford to repay a short-term loan are denied from taking it out in the first place. But it is vital that those who are denied access do not turn to unregulated money lenders or other unsavoury finance streams. To this effect, efforts must continue to improve people’s financial literacy and consumer support groups need funding to cater for those who find themselves in financial difficulty.
The new regulatory terrain in this industry signals a new dawn for payday lenders. They now have an opportunity to reconstruct their reputation and operate more responsibly. As long as they adhere to the new regulations and abide by the laws of the industry, there is no reason why payday lending cannot be a useful financial tool for many.
Author: Christopher Mallon, PhD Candidate – Financial Regulation at Queen’s University Belfast
Australia’s economy grew by just 0.2% in the June quarter, below expectations of 0.4%, largely as a result of reduced mining and construction activity and a decline in exports of 3% during the quarter.
Nominal Gross Domestic Product grew by 1.8% during the year, which the Australian Bureau of Statistics said was “the weakest growth in nominal GDP since 1961-62”. Despite this, Australia has now recorded 24 straight years of growth.
The news has some analysts and economists spooked, and politicians blaming each other for the slowdown.
Treasurer Joe Hockey said:
At a time when other commodity based economies like Canada and Brazil are in recession, the Australian economy is continuing to grow at a rate that meets and sometimes beats our most recent budget forecasts.
He also said it was “factually wrong” to say it was the weakest growth since 1961.
The fact is that the economic growth we had in the last quarter was in line with expectations. Of course it bounces around from quarter to quarter, but it was in line with our overarching expectation to have two and a half per cent growth in the last financial year.
Shadow Treasurer Chris Bowen said:
Growth has flat-lined since the Abbott government’s first damaging budget last year and cost of living pressures are continuing to increase. This is the biggest quarterly decline in living standards since the global financial crisis.
This is a very weak set of figures and for the government to cast around for international comparisons to try and make it sound better is a pretty pathetic excuse.
The Treasurer says Australia is still doing better than Canada, Brazil, the US and New Zealand. How should people view these numbers in a global context? To what extent is the slowing rate of growth due to global economic headwinds, and to what extent is it due to domestic factors?
Griffith Business School Professor Fabrizio Carmignani answers:
In the past, the Australian economy has proved to be quite resilient to global economic shocks. Today we are facing what could be potentially a perfect storm.
For one thing, international commodities prices are very volatile and have resulted in a sharp contraction of Australian’s terms of trade. For another, China is going through a complicated economic phase and it is not, at this moment, the same solid anchor for the Australian economy as it might have been previously. So, it is not surprising to see that on a seasonally adjusted basis, quarterly growth in Australia has been oscillating between 0.2% and 0.3% for the last five quarters.
We owe it to some good old Keynesian stimulus on the demand side (read: government consumption and to a lesser extent public gross fixed capital formation) if we are not entering a technical recession.
The comparison with Canada, on surface, is favourable to Australia. Canada has officially entered a recession after recording two consecutive quarters of negative GDP growth in the first half of 2015. This is essentially due to low oil prices. However, according to media reports, Canada is still committed to achieving a target of annual growth of 2.5% this year, which is exactly what the Treasurer has stated for Australia. So, it seems to me that the difference between Australia and Canada here is thinner that what might appear at first sight. A fraction of a percentage point below or above the zero growth line is not really indicative of substantially different structural positions.
Both Australia and Canada are facing similar challenges in terms of diversification. The current “crisis” to me shows that these challenges are still far from being fully addressed in both countries.
Australia has had 24 years of consistent growth. How much of this can we attribute to the mining boom? And given the cyclical nature of the economy, can we expect a downturn?
Griffith University Professor Tony Makin answers:
Australia has performed relatively well compared to other OECD economies over recent decades, though did actually experience a recession during the GFC according to income and production measures of GDP.
Taking population growth into account, Australia’s economic performance since the global financial crisis has been worse than the raw GDP numbers show. On a per capita basis, national income has grown on average below one per cent per annum, less than half the almost two and a half per cent per head per annum average rate in the decade before the GFC.
The extraordinary boost to the terms of trade from the world commodity price hike, especially between 2005 and 2011, substantially raised Australia’s international purchasing power. However, GDP growth during the mining boom was actually less than during the economic reform era from the mid-1980s through to the end of the 1990s when commodity prices were fairly flat.
The main culprit for Australia’s sub-normal economic growth in recent years has not been falling commodity prices, which have undoubtedly played a role, but Australia’s underlying competitiveness problem, combined with a productivity slowdown that began from the turn of the century.
While the recent depreciation of the dollar will go some way to restoring Australia’s competitiveness and help stave off recession, genuine productivity-enhancing reform focusing on the economy’s supply side remains as important as ever for returning GDP and income per head growth to long-term average rates.
One journalist at Wednesday’s press conference said the new data showed “the weakest growth since 1961”, but the Treasurer said that was factually wrong. Who is right?
UNSW Australia Professor Richard Holden answers:
The statement that it is the slowest growth since 1961 seems, to me, to be false. We have had recessions in the 1990s and 1980s, which is two successive quarters of negative growth. And yesterday we had positive growth, so it was a slowdown but not the worst we have seen since 1961. I think the journalist’s statement doesn’t seem correct to me, on the face of it. I think the Treasurer is right.
It is possible the journalist was referring to the Australian Bureau of Statistics comment yesterday that:
GDP growth for 2014-15 was 2.4%. Nominal GDP growth was 1.8% for the 2014-15 financial year. This is the weakest growth in nominal GDP since 1961-62.
Nominal growth and growth are not quite the same thing. Nominal growth means GDP growth that is not adjusted for inflation.
But yes, yesterday’s numbers are still below projected growth. It is below market expectations. I think the Treasurer saying we have projected 2.5% annual growth this year and this is basically on target is a bit disingenuous. This is slow growth, it’s actually very troubling.
I understand the Treasurer can’t talk down the economy so his comments are understandable and he is in a difficult position. But the low rate of growth is genuine cause for concern.
I have written before about the concept of secular stagnation, which is the idea that growth of advanced economies looks like it has slowed down dramatically. The figures yesterday are further evidence of that theory.
Victoria University Senior Research Fellow Janine Dixon answers:
While it is factually correct that real GDP – the volume of production in the economy – has grown, the low growth in nominal GDP points to an underlying weakness in the economy. This is our exposure to the very large fall in commodity prices. When we translate real GDP into real income, we take into account that fact that the prices of the things we produce for export have fallen relative to the prices of the things we consume, some of which are imported. This has been a very important determinant of real incomes in the last few years.
Real net national disposable income is a better measure of our living standards than GDP. As well as adjusting for prices, we take into account the fact that some of the income generated domestically actually accrues to the rest of the world if the factors of production are foreign owned. We also deduct the value of capital that is “used up” or depreciated during the year.
Real net national disposable income per person has now fallen for 14 quarters in a row. This represents the most sustained fall in standards of living in the last 50 years.
What’s especially interesting about this period is that falling incomes have not been associated with falling output or particularly high unemployment. In the 1990-91 recession (the one we had to have) or the early 1980’s, incomes fell, but the solution to the problem was fairly clear. More than 10% of the workforce was unemployed. Fixing unemployment would boost production, incomes and living standards.
This time around, incomes are falling because commodity prices are falling. Commodity prices, set on world markets, are largely out of our hands. The labour market is much more flexible these days, and unemployment is 6%, not 10%. We are left with just one way to turn things around. In the words of Nobel laureate Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything”.
Is GDP really in line with expectations, both of the government and the market?
Griffith University Professor Ross Guest answers:
These GDP expectations are continuously being revised down as new information comes to hand.
The projected growth is lower than nearly everybody expected and everybody is having to revise downward their expectation.
What will the slowing annual growth mean for the federal budget, which had forecast growth for 2015-16 of 2.75%?
Ross Guest answers:
If growth were to remain at its current level of 2%, the budget deficit would be A$15 billion larger, in ball park terms, than the government projected. To put that in perspective, the total amount we spend on unemployment benefits is A$10 billion.
Australia living standards and the Australian government budget are being hit by a perfect storm of lower commodity prices and lower productivity growth.
Victoria University Senior Research Fellow Janine Dixon answers:
The GDP growth forecast for 2015-16 is fairly subdued at 2.75% and the budget not overly ambitious – a deficit of 2% of GDP. The trouble lies in 2016/17 and beyond, when annual GDP growth is forecast to be above 3%.
Over the next five years a couple of downside risks exist that will make it unlikely that GDP will grow this strongly, and consequently the budget’s return to surplus will be more difficult to achieve.
If the terms of trade fall further than allowed for in the budget forecasts, and if productivity growth remains weak, as it has been in recent years, real national income could be 3% lower than forecast by 2020. Roughly, this means the tax base for the government will be 3% smaller than expected. Rather than having a balanced budget by 2020, we would still be running a deficit, of around 0.75% of GDP or $12 billion in today’s terms.
When French academic and economist Thomas Piketty wrote a 700-page book about social inequality few would have expected it to become a bestseller.
Puzzled reviewers attempted to pin what merited the huge popularity it received. The popular Occupy movement? Moral support for improving human welfare? A gifted writer amongst academics?
Now, another inequality book, also with a red and black cover, has arrived in bookstores. At a much-shorter 384 pages, it’s written by economist Anthony Atkinson, who has been working on the topic of inequality for 50 years. Can lightning strike twice? Inequality, the sequel?
There is good news for those who liked Piketty’s book but didn’t manage to finish it. You can save yourself (and your summer reading list reputation) by just going to page 158 of Atkinson’s book where in one humble paragraph he gives you the answer at the end of Piketty’s universe: r > g.
More importantly, he translates it. The key mechanism governing the distribution of wealth is the difference between the rate of return on capital which is the r, and the rate of growth of the economy which is g. Even better news – you can buy the t-shirt.
Harvard University Press
Inequality: What can be done goes beyond Capital in the 21st Century by offering answers. Answers addressed hopefully to those who are minded to and can do something. A prescription for fixing the ailing patient.
Rather like the prosecution in a court action, the book starts by setting out the case exposing inequality: the evidence. The arguments that follow put aside reasons for action, and instead set out a factual “action to do list”.
The first answers are in part two. It turns out there are already common pills available that could just be done better, progressive taxes and transfers. He adds a call for smaller wage differentials within firms – yes, CEOs could give more back to their workers and slightly less to themselves.
Part three addresses the raised hackles part two always gets, the arguments against the excuses for inaction are given. This is a very valuable rebuttal primer for those that will need to make their case, again and again. Rather like Marie Antoinette, the cake often gets mentioned by opponents objecting dreadfully to the medicines Atkinson puts forward (they plead there will be a shrinking economic cake, but in this case the peasants don’t even get to eat it).
The best part is the eight-page climax: a concise bullet point list. Just right for action-minded readers.
But, what about Australian readers, do we need this medicine? Is Australia a fair society? Go to the index: Australia is listed. Spoiler alert: Australian inequality has risen since the 1980s.
My subtle gripe with the “what to do” answers: even if you get into government and do try to fix things by working through Atkinson’s list, you will need to read another book about “how to successfully do it”, especially if you try the transfers aspect. Something like “How to run a government so that citizens benefit and taxpayers don’t go crazy” by Michael Barber.
Playing devil’s advocate –- if these are the answers, then those minded to could use Atkinson’s list to deliver more inequality, by playing the record in reverse.
Because economics relies on a benevolent leader, the benevolent visible hand of government makes the economy fairer using policy that is in the public interest. A fly in the ointment is when public interest isn’t served, perhaps for re-election motives.
Helpfully, Atkinson’s list diagnoses their sound bytes and the inequality delivered.
Beware reductions of the top tax rate that deliver more inequality (but serve silver spoon lobbyists). Atkinson’s prognosis is progressive income tax rates with a marginal top rate of 65%, and broadening of the tax base.
Atkinson seems tuned in to the politics. “Heavy lifting” he says, falls to all levels of government, not just national!
Beware central bankers pleading efficiency (same old cake argument). Atkinson emphasises that distribution links GDP to citizens’ real life experiences.
Firstly, take action! Your choices can change things.
Atkinson’s manifesto argues countries still need investment in health, education and training. Explicit targets for unemployment reduction. A “Public Investment Authority” with a sovereign wealth fund that builds State net worth beyond taxes by investing in property and companies. A substantial child benefit amount paid to all children, but which can be taxed as income. “Social insurance”, with raised amounts and extended coverage – essentially a system of government transfers financed by contributions from employers, employees and government, protecting for economic hazards such unemployment, disability, injury and sickness, or old age.
Other suggestions include a capital endowment paid to all on adulthood (a grant of money that can be invested that gives a minimum inheritance to all). A progressive property tax based on regular valuations. Progressive lifetime capital taxes, with a progressive tax regime applied to inheritances and gifts received during a citizen’s life.
A cynical guess at what readers thought Piketty said that made a bestseller with new audiences? Capital (stocks, shares, real estate), will grow faster than income from earnings. An investment mantra on where your money will grow!
Author: Genevieve Knight, Senior Research Fellow, National Institute of Labour Studies at Flinders University
“All Australians should be able to retire with dignity and decent living standards.”
So states the recently released superannuation report of the Committee for Economic Development of Australia (CEDA).
CEDA’s report is commendable. And although I agree with most of its recommendations, including what the purpose of super should be, how retirement income products dealing with longevity risk should be developed and how super tax laws should be made more equitable, I have one serious misgiving: I do not believe active employees should be able to use their super funds to invest in owner-occupied housing.
The American 401(k) system (also a defined contribution model like Australian super) provides a cautionary tale on the damage caused by what’s known as pre-retirement leakage. Unlike Australia, it is fairly easy for US workers to access their 401(k) retirement accounts during active employment. Even prior to preservation age, which is 59½ in the US, individuals are able to use their workplace retirement accounts for a number of purposes, both with and without tax consequences.
For instance, the US tax code allows individuals under specified circumstances to take loans against the value of their retirement funds without tax penalty. Although such funds are required to be secured and paid back like any other commercial loan, studies show many employees are never able to restore the money to their 401(k) accounts. Not only does this lead to diminished pension pots, it also means there will be less money upon which interest or investment returns can build on in the long-term.
The US 401(k) system also permits employees to take hardship distributions for a number of reasons, including purchasing of a first home, university education and medical expenses. In these circumstances, not only does the individual not face any tax penalties for the withdrawal (except for having to pay ordinary income tax), they are also not required to pay back the money to their account.
Finally, employees can take money out of their 401(k) accounts if they “really” want. What I mean is, absent even an authorised loan or hardship distribution, employees before preservation age can withdraw funds from their retirement accounts. We call this “expensive money” because both a 10% excise tax and 20% employer withholding of funds apply. In the end, these employees receive 70 cents in the dollar for withdrawing money prematurely from their retirement account.
Such leakage in the US causes a significant erosion of assets in retirement – approximately 1.5% of retirement plan assets “leak” out every year. This can potentially lead to a reduction in total retirement assets of 20% to 25% over an employee’s working years, according to experts.
Remember the role of super
I do not disagree with the CEDA report that housing makes a critical contribution to sustaining living standards and helping to address elderly poverty. Needless to say, there should be a multipronged federal government response to the spectre of increasing poverty in old age because of the lack of home ownership. Many useful suggestions are made in the CEDA report in this regard.
But using super, even if only for first-time home buyers, should not be the answer. Indeed, CEDA agrees with much of the recent Financial System Inquiry report (the Murray report), which concludes that super legislation should state explicitly and clearly that its purpose is to provide retirement income.
While increasing home ownership for younger workers is an admirable policy prescription, it is not consistent with the retirement income focus of super. Allowing workers to use their super funds to buy homes means there will be much less money in the pension pot to grow over time to provide the necessary retirement income.
And the harm is ongoing. Making such a change would lead to a further constrained supply of housing, meaning more money chasing the increasingly limited stock of property, tending to drive home prices up even further.
Of course, when, not if, the housing market crashes, much of the super savings tied into such property will also be lost. This problem stems from a lack of diversification in one’s retirement portfolio through an over-investment in the family home. The consequent lack of investment diversification among asset classes means super is less likely to be able to survive future shocks to the Australian economic system.
The lesson from the United States is clear: pre-retirement leakage from super should be permitted only under the most exceptional of circumstances. Even for the very best of reasons, like first-time home ownership, Canberra should prevent super fund leakage during active employment to ensure the primary objective of super: retirement income adequacy.
Author: Paul Secunda, Senior Fulbright Scholar in Law (Labour and Super) at University of Melbourne
Wild swings in global stock markets have made investors edgy, the economic news coming out of China is not favourable and domestic private investment has plummeted. On the other hand, US growth surged to 3.7% annually and fears of a debt crisis in the Euro zone have abated. Latest estimates still put inflation at 1.5%, below the Reserve Bank of Australia’s target band of 2-3%.
The Shadow Board’s confidence that the cash rate should remain at its current level of 2% equals 77% (up from 68% in August). The confidence that a rate cut is appropriate has edged up three percentage points, to 9%; conversely, the confidence that a rate increase, to 2.25% or higher, is called for, has decreased considerably for the third time in a row, from 35% in July and 25% in August to 14%.
Latest figures show that Australia’s unemployment rate increased to 6.3% in July, according to the Australian Bureau of Statistics, even though total employment rose by nearly 40,000 in July. Nominal wage growth remains muted at 2.3% and is forecast to remain low in the next quarter.
The Aussie dollar depreciated further against major currencies. It now fetches less than 72 US¢. Yields on Australian 10-year government bonds remain low at 2.71%.
As already pointed out in last month’s statement, the Australian property market appears to be cooling and the local sharemarket is retreating further from its highs earlier this year.
The elephant about to enter the room is the dramatic fall in new private capital expenditure, equalling a sizable 4.0% in the June quarter, bringing the annual decline to 10.5%, the largest drop since the last recession in 1992. The large drop is largely attributable to the contraction of the mining sector; however, firms in other sectors are also planning to cut spending, posing a serious threat to the Australian economy.
The recent gyrations in worldwide stock markets have highlighted the frothiness in global asset prices. To what extent volatility and uncertainty in asset markets spills over into the real economy is, of course, unclear. However, few economists doubt that asset markets are relying on ultra-low interest rates to persist. Concerns about any debt crisis in the Euro zone have waned since the recent 80 billion Euro credit extended to Greece.
As in previous months, the deteriorating outlook for the Chinese economy pose the biggest immediate threat to Australia’s export markets and thus to Australia’s GDP. US growth, on the other hand, has been revised up to 3.7% (annualized) for the second quarter 2015, presenting a dilemma for the Federal Reserve Bank: the strong economic performance suggests an increase in the federal funds rate is around the corner but if volatility in stock markets persists, signalling heightened uncertainty about the future, the Fed may be tempted to postpone the interest rate increase. Commodity prices have continued to fall, with crude oil dipping below $40 a barrel.
Also of concern is the sizable contraction of world trade in the first half of this year. The volume of global trade shrank by 0.5% in the June quarter, while the figures for the March quarter were revised to a 1.5% contraction, indicating that world trade recorded its largest contraction since the 2008 global financial crisis.
Consumer and producer sentiment measures paint a motley picture. The Westpac/Melbourne Institute Consumer Sentiment Index jumped from 92.3 in July to 99.5 in August. Business confidence, according to the NAB business survey slumped from 10 in July to 4 in August, at the same time as the AIG manufacturing and services indices, both considered leading economic indicators, recorded notable improvements.
What the Shadow Board believes
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 2% equals 27% (23% in August). The estimated need for an interest rate increase lies at 65% (73% in August), while the need for a rate decrease is estimated at 8% (4% in August).
A year out, the Shadow Board members’ confidence in a required cash rate increase equals 72% (six percentage down from August), in a required cash rate decrease 9% (7% in August) and in a required hold of the cash rate 18% (up from 15% in August).
Comments from Shadow Reserve bank members
Mark Crosby, Associate Professor, Melbourne Business School:
“The longer term outlook is still uncertain.”
Recent global gyrations should make the RBA hold rates this month, and with a recovery in equity markets outside of China there seems little reason to cut rates. The longer term outlook is still uncertain, with global trade falls the most recent worrying data in the global economy and far more consequential than falls in Chinese equity markets.
“International interest rates are likely to rise.”
International interest rates are likely to rise, as growth and employment in the US appear to be stabilising at normal rates. While Australian asset markets are expected to continue to be volatile, the exchange rate is expected to remain low. Keeping the official rate steady at 2% would help offset some of the negative effects of uncertainty in the international environment on the domestic economy – as well keep the policy rate well above the zero lower bound.
James Morley, Professor of Economics and Associate Dean (Research) at UNSW Australia Business School:
“The RBA should not provide a ‘Greenspan put’.”
Given the recent turbulence in financial markets and underlying inflation being at the low end of the target range, the RBA should hold its policy rate steady rather than raise it. But with a stable real economy, an overheated housing market, and a low dollar stimulating the foreign sector, the RBA should not provide a “Greenspan put” by cutting rates in response to the stock market. Instead, it should carefully monitor conditions to determine when it will need to start raising the policy rate back towards its neutral level.
Jeffrey Sheen, Professor and Head of Department of Economics, Macquarie University, Editor, The Economic Record, CAMA:
“Monetary policy needs to avoid reversing recent currency falls.”
The current fragility in global stock markets appears to be more of a dash to liquidity than to value. It is likely an over-reaction to expected future interest rate increases, beginning with the federal funds rate perhaps this year. Nevertheless some downward adjustment was probably necessary because the boom in global stock prices generally did not mirror the sluggish recovery in the global real economy.
The trade-weighted Australian dollar has fallen about 15% in the last year, and fortunately has not risen with the recent competitive depreciations across Asia. Monetary policy needs to avoid reversing this contributor to Australia’s improved export competitiveness. In the current volatile financial environment, the RBA should maintain the current cash rate in September, though I have modestly increased the probability of a desirable cut.
Author: Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis at Australian National University
The discussion paper released by Assistant Treasurer Josh Frydenberg suggests that businesses be “levied” to pay for a large part of the costs incurred by the Australian Securities and Investment Commission.
At present ASIC is largely funded from consolidated revenue. The new proposal is that industry should pay a much larger share. In essence costs would be shifted from government onto business.
The arguments made in the discussion paper in support of this increase in business taxes are:
the Financial System Inquiry suggested it;
the change would ensure that the costs of the regulatory activities undertaken by ASIC are borne by those creating the need for regulation (rather than all taxpayers);
it would establish price signals to drive economic efficiencies in the way resources are allocated in ASIC;
it would improve ASIC’s transparency and accountability.
There are a number of problems with the proposal.
The fact that it was suggested by the Financial System Inquiry is important but not decisive. It seems likely that the Government will pick and choose amongst the recommendations of the Inquiry, supporting some and not others. The recommendation is thus a factor but not a deciding one.
The second argument is far more interesting. The discussion paper pitches the proposal as an example of user pays. The logic is that consumers of financial products need to be protected and that the costs of ASIC providing that protection should be paid by the firms operating in that industry.
By similar logic all consumer product protection undertaken by the ACCC should also be costed out to the industries involved. All food safety protection might be dealt with the same way and all border protection might be farmed out to all international travellers. We would not even need public schools, because students could be charged for the educational services they receive.
Clearly we could operate that way. In effect, our taxation system would not be necessary and it would be replaced by a complex system of user charges. Unfortunately the Minister is not proposing to reduce general taxes, just to raise some specific ones.
The suggestion that the system of levies paid by industry would improve ASIC’s transparency and accountability appears naïve. Under the current arrangements ASIC has to fight for its funding in the budget round with a Finance Department determined to restrain the growth of public spending.
The new proposal shifts ASIC towards a cost-plus framework, overseen by an array of committees to entities it regulates. Thee would still be some budgetary oversight but inevitably the disciplines would be weaker.
The proposal is rather like asking the players before a match to announce publicly how much they were going to pay the referee. It will be difficult for the groups being regulated by ASIC to complain about its spending for fear of potential retribution. Costs are likely to rise as a result.
The way in which the system will be managed creates further problems. Frydenberg proposes setting panels of industry representatives to oversee the ASIC budget proposals. For a minister responsible for reducing red-tape, it is a very unusual proposal. It is complex, it shifts even more costs onto industry, and is likely to be completely ineffective.
Inevitably it will result in groups fighting with each other to shift ASIC’s costs from between categories and ASIC has the potential to set them off against each other. And there will still be some budgetary oversight so there are no savings just costs.
The proposal will have strong support from ASIC and Finance, and will probably succeed. ASIC has lobbied hard to have accepted its cost-plus model of funding raised from the parties it regulates. The Finance Department too will appreciate having more of ASIC’s costs shifted off budget.
However it is not clear that the proposal is in the public interest. It does not reduce costs. It is an increase in business taxes. The budgetary pressure on ASIC will be reduced and ASIC is likely to grow a lot bigger. The mechanisms proposed to raise the funds are also complex and shift further costs onto the industry.
Looking further ahead, if ASIC succeeds in shifting costs onto industry, other regulators will surely follow. The consumer protection functions of the ACCC are almost the same as those of ASIC so it will certainly follow the new funding model.
Separating the regulators from most of the normal disciplines in the budget round could make them lazier, cost-plus operations, but there are also examples in the international experience where by encouraging the regulator and the regulated closer together creates increased potential for regulatory capture.
Author: Rodney Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics at Monash University
Back in 2001, former Goldman Sachs chief economist Jim O’Neill coined the acronym BRIC to highlight the immense economic potential of the emerging markets of Brazil, Russia, India and China in the decades to come. They would be the economic engines of tomorrow, he wrote.
The BRICs, which cover a quarter of the world’s landmass and contain 40% of its population, had a combined GDP of US$20 trillion back in 2001. Today these increasingly market-oriented economies boast a GDP of $30 trillion (or 20% of global GDP), a figure forecast to reach $120 trillion by 2050. Together, they control more than 43% of the world’s currency reserves and 20% of its trade.
But times have changed. Every BRIC country is struggling, and the group’s growing footprint means their problems are bad news for the global economy. That’s especially true for the troubles of China, where recent economic gloom triggered a rout in stock markets around the world. All but India’s is now in bear market territory – a decline of at least 20% from its peak.
Does this suggest the nascent age of the BRICs is already over – even before it really began – and if so, what does this mean for the rest of us? And what does it mean for companies in the US, Europe and elsewhere that have been increasingly targeting the BRICs for future growth?
These are the kinds of questions we ponder at Michigan State University’s International Business Center, which I’ve directed for the past 17 years. To help shine some light on them, I’m focusing on one issue that each of the BRIC nations is facing. How each country’s leaders choose to tackle them may well determine where they go from here. And in this analysis, I’m sticking to the original BRIC members: that is, excluding South Africa, which joined the group in 2010.
Past promise
When I first wrote about the BRICs in 2009, the political leadership in Brazil, Russia, India and China were beginning to demonstrate their collective economic and political potential by joining in a loosely defined partnership.
To them, the 2008 financial crisis exposed the weakness of the so-called advanced economies, and these four emerging markets saw themselves at the center of a new world order that would supplant the one led by the US, Europe and Japan. It was in their political and economic interest to join forces.
It was never about forming a union akin to Europe’s or even North America’s. The BRIC partnership was formed to coordinate the four countries’ efforts globally, formulate common views of global economic problems, reform the world financial system and become a major factor of multilateral diplomacy.
While O’Neill probably chose the order of the acronym – B, R, I, C – for the way it sounded rather than relative significance, the true ranking today is pretty clear: it’s not BRIC, it’s really ICRB.
India is doing the best economically; China follows (even with its recent troubles). The laggards are Russia, with its petroleum-dependent economy, and Brazil, which is suffering a crisis of confidence as a result of significant financial, economic and political turmoil.
Indian Prime Minister Narendra Modi must find a way to keep rising US interest rates from curbing his economy’s growth.Reuters
India plays lead in ‘Chindia’ as Fed rate hike looms
At the outset, India leads the BRIC pack, a sentiment displayed by its stock market, which hasn’t tanked nearly as much as its peers during the recent China-led sell-off.
Some argue India is in the best shape to handle China’s economic slowdown because of its political system and the economic freedoms that go along with it. While China maintains a top-down economy plagued by political interference and corruption, India has a vibrant private sector and more competitive freedom.
But an imminent hike in US interest rates is the biggest risk on the horizon and could hammer India. The country has attracted a flood of US cash in recent years thanks to the greater yields on offer, but higher rates in the US could reverse the tide. That in turn would cause India’s stock market to slump and currency to slide. Taken together with deep problems at its public sector banks, a sudden drop in the rupee would be potentially disastrous and could shatter consumer confidence.
Increased exports could offset some of the pain, but what India really needs to do is privatize its banking system to make it robust and better able to handle fluctuations in the global financial system such as a rise in US rates. That would help ensure India is able to keep its top spot on Asia’s dream team.
China’s slowdown may be President Xi Jinping’s biggest test.Reuters
China’s hubris
China, meanwhile, is learning its ability to control has its limits.
The People’s Bank of China, the country’s central bank, earlier this month decided to change its formula for calculating the reference rate of the yuan, prompting its currency to fall to a four-year low. Just a few days later, China reversed course to keep it from falling any further. In a rare public move, the central bank’s chief economist said that China is “fully capable” of intervening in the global currency market as it see fit.
Hubris comes to mind. China can certainly affect things, but not as much as it thinks – and this note can be applied to its handling of the economy and stock market as well, which it has been actively working to jack up.
With the stock market down more than 40% from its peak and economic growth slowing, China’s leaders must learn a tough lesson: they can’t control the market, economy and currency like play toys. If China truly wants to be the major player in the global marketplace that it thinks it already is, then the country has to give up some control and let market forces, internally and externally, play the dynamic role that they do in developed nations.
Russia’s Vladimir Putin has long promised economic reforms, to little avail.Reuters
Russia’s commodity curse
Russia, with its diverse population spanning 11 time zones, might make you think the country’s economy would be just as diverse. But despite paying some lip service to reform, the country remains highly dependent on oil to keep it going. And that’s very bad news because the price of oil is hovering near six-year lows.
Very few companies, let alone countries, can achieve sustainable success by focusing on commodities. With little upward movement in oil prices expected and the ongoing sanctions taking a toll, there is little hope that Russia will come out of its full-blown recession any time soon. The massive devaluation of the ruble vis-à-vis international benchmark currencies has helped exports, but not anywhere near enough.
What does Russia need to do? President Vladimir Putin has been promising reforms since taking the presidency at the end of 1999. Apart from an unlikely rebound in the oil market, Russia will have to follow through on those long-promised reforms or something better. The key is to move the economy away from commodities in order for the country to achieve the potential prophesied in 2001.
Brazilian President Dilma Rousseff suffers from single-digit approval ratings, making it harder to turn her economy around.Reuters
Brazil’s lack of confidence
Of the BRICs, Brazil seems the furthest from reclaiming its role as a future powerhouse. Record-low consumer confidence has curbed consumption, industrial production is contracting, and the economy appears to be in a recession. At the same time, the president’s approval rating is in the single digits thanks to an ongoing corruption scandal.
So it’s pretty clear that Brazilians are in a sour mood, and their economy continues to disappoint. Can the 2016 Olympics turn that around? If it’s anything like the 2014 World Cup, it doesn’t seem likely.
But nonetheless, the Olympic Games present an opportunity to showcase Brazil around the world and offset the problem of its currency and the accompanying dearth of tourists. Big stadiums, fancy parties and lavish spending on everything but the Brazilians themselves won’t cut it.
Leveraging the Olympics better than the World Cup, in a way that really gets the economy moving again and benefits citizens by spending on infrastructure like transportation, is a must for the country (though perhaps a lot of medals in the Olympics will be necessary to erase the memory of Brazil’s losses during the World Cup).
End of an age? Not just yet
The BRIC economies may be stumbling, but it’s far too soon to declare their era over, the current market rout not withstanding. Stumbling doesn’t signify crumbling, and each of the BRICs could easily rebound tomorrow (well, in a few years), depending on whether their leaders follow smart policies that begin to fix the disparate problems that plague their economies.
The year 2050 remains a long way off, leaving plenty of time for the current $120 trillion prediction to come true. The problem for the BRICs, though, is that the economic prediction for 2050 (and beyond) is a moving target. The fluidity of moving targets require savvy political and business leaders, sound decision-making, market forces, strategic thinking and building on industry globalization drivers.
To concretely realize the 2050 forecast, Russia has to become less oil-dependent and commodity-based; China has to build stronger trust in the global money and banking community; Brazil has to succeed economically in the 2016 Olympics and, most importantly, elevate consumer confidence; and India has to privatize some of its banks to offset the impending US rate hike.
Despite these troubles, the BRICs remain sound investment areas for companies and cannot be ignored. The size of the countries’ populations alone is enough to warrant strong attention (India and China have more than a third of the world’s population).
Just keep that less catchy acronym in mind: ICBR.
Author: Tomas Hult, Byington Endowed Chair and Professor of International Business at Michigan State University
The closer one looks at the government’s recent decision to levy a deposit tax against Australia’s Big Four banks, the more it seems like a revenue grab. Nothing more, nothing less.
An inspection of the legislation reveals that in the event of the failure of an Australian bank, there is no need for a levy to fund a depositor bailout. That means this proposal is not a deposit levy. It is simply another tax, with little to do with protecting depositors in the event of a bank failure.
Three crucial factors substantiate this assertion: the Banking Act, the levels of retained capital, and hypothecation (the practice of pledging collateral against debt).
We’ll explain why.
First, to the Banking Act of 1959, in particular s 13A, which provides that in the event of insolvency, an Australian bank (referred to as an authorised deposit taking institution, or ADI) is required to reimburse Australian “protected” depositors before settling claims by international creditors or offshore depositors.
Section 4 of the Act defines a protected account as:
An account, or covered financial product, that is kept under an agreement between the account-holder and the ADI requiring the ADI to pay the account-holder, on demand by the account-holder or at a time agreed by them, the net credit balance of the account or covered financial product at the time of the demand or the agreed time (as appropriate).
Effectively therefore, protected accounts are all demand deposits. That is to say, deposits where the owner of the funds can withdraw their funds at any time.
The University of Melbourne’s Professor Kevin Davis has run the numbers, and his findings are that in the event of insolvency, no Australian bank would be so bankrupt that it would not, at least, be able to reimburse Australian depositors.
If Australian depositors are protected as preferential creditors (which they are), and if at current capital adequacy levels no Australian bank would be unable to refund domestic depositors, then the obvious question is why do we need this levy?
Secondly, the notion that this is some kind of “user pays” scheme is disingenuous. Today in Australia it is almost impossible to exist, in any meaningful economic sense, without a bank account.
That means any deposit into an account in any of the big four – drawing a wage or conducting any kind of business – will be covered by this levy. So as revenue grabs go, this one catches in the net something like 80% of all deposits.
In theory, the monies collected by the levy will be held in (that is, hypothecated to) a new entity, the Financial Stability Fund (FSF). Other than its name, little is known about this new fund. It is obviously meant to be a long-term mechanism as it will take many years – the exact timing being dependent on the levy rate chosen – before the fund will cover even a small percentage of potential pay-outs to depositors.
However, the fund is not designed to cover all pay-outs to depositors in the event of a bank failing, but only any amounts not recovered by other means. Calculating the size of the levy is problematic and must then take account of other measures, particularly the amount of capital that banks hold.
In suggesting that a so-called “ex-ante” levy be introduced to promote financial stability, the IMFalso recommended that additional capital, in the form of so-called Higher Loss Absorbency (HLA), be required for “systemic” banks (which in the case of Australia would be the Four Pillars).
This recommendation has been accepted by banking regulator APRA and, from January 2016, the big four banks will be required to hold an additional 1% HLA capital buffer. This additional 1% capital, which APRA admits is at the low end of international levels, must be met through so-called Tier 1 Equity capital, which helps to explain the current capital raising efforts of the banks and the negative impact on their share-prices.
Since it is expected that a bank’s capital should be sufficient to withstand all but the most severe shocks, it is a moot point whether the belt-and-braces approach of collecting an additional levy would add much towards ensuring financial stability. As it is not yet known how much of a buffer the new levy will actually provide over time and no mechanism has as yet been created to manage the monies collected, the decision to go ahead with the levy appears to be a path of least resistance (blame it on the previous government) rather than well-considered public policy.
In particular, the use of a fixed levy (of the order of 0.05% of deposits) is not in line with international experience, where a risk-adjusted fee is often used, and may be more appropriate to the Australian banking system.
The Murray inquiry went so far as to reject the idea of a deposit levy in favour of requiring Australian banks to be “unquestionably strong” and in the top tier of international banks as regards capital. It appears that by cherry picking recommendations from the IMF and the Murray inquiry, the government may be in danger of increasing the costs of banking in Australia without improving the stability of the system. Who would have guessed?
Authors: Andrew Schmulo, Principal, Clarity Prudential Regulatory Consulting Pty Ltd. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg. at University of Melbourne; Pat McConnel, Honorary Fellow, Macquarie University Applied Finance Centre at Macquarie University
As we come to the end of another financial year end reporting season and await the deluge of impenetrable financial reports, we can only lament that another year has passed and an important reporting mechanism widely used in many international exchanges, is still not with us.
In Australia financial statement information continues to be provided to users in detailed and complex reports, that are not user friendly. These may now be provided electronically in pdf format, but the problem is that the data can’t be extracted electronically; accurately and efficiently. There is a solution which is passing us by.
I am talking about XBRL – which stands for eXtensible Business Reporting Language – and it represents a standardised form of electronic reporting by companies which facilitates the preparation and exchange of financial statement information.
The formats for the preparation of data are now well established and the International Accounting Standards Board publishes a taxonomy that reflects the requirements of International Accounting Standards which are in use in most countries around the world (http://www.ifrs.org/xbrl/ifrs-taxonomy/Pages/ifrs-taxonomy.aspx).
It is required in many countries and if Australia wants to be a financial centre it needs to catch up. In the US the Securities Exchange Commission has since 2011 required all public registrants to file XBRL information. This is no longer new or untried technology and there many companies providing services for the preparation and use of XBRL information.
What are the benefits of XBRL? At a very practical level XBRL is a relatively straight-forward format for sharing financial information. As it uses standardised formats, which financial reports already follow, it allows for software to be developed which extracts relevant information and presents it in formats that makes it more relevant, understandable and facilitates it use.
Importantly, XBRL can make annual reports more transparent and reduces the risk of important information being lost in the notes. Not surprisingly XBRL usage has been found to improve analyst forecast accuracy. Software using XBRL may be proprietary or publicly available for sale, and it may allow sophisticated analysis to be undertaken.
This is simply not possible at the moment as financial data is provided by various data aggregators who manually key data. This naturally limits the amount of data provided and there are potentially issues of accuracy. Requiring firms to provide XBRL information will reduce the cost of data collection and increase the ability for international investors who might otherwise overlook Australian firms.
Australia operates in a global economy and this is part of the membership price. There is evidence that the provision of XBRL information reduces the cost of capital, and this is most pronounced for small, high growth firms that likely have low analyst coverage. So, while the relative costs might be higher for small firms, the benefits might be relatively higher too.
Has there been progress with implementing XBRL? There have been a number of initiatives to bring XBRL to Australia and these envision widespread application, encompassing all companies rather than just listed companies and the provision of information to multiple government agencies, including the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Australian Taxation Office.
This level of ambition while on the face it desirable, has committed us to a long and tortuous negotiations about format rather than achieving outcomes in a timely manner.
Our immediate focus should probably just be on firms listed on the Australian Stock Exchange and including this requirement in their Listing Rules.
Author: Peter Wells, Head of Accounting Discipline Group, Accounting at University of Technology Sydney
