Could this be a better way to pay politicians?

Australia’s 824 politicians are paid well.

The lowest paid MPs are certain members of the ACT legislative assembly, who get $132,800.On the other side of Canberra, federal parliament is even more lucrative. The lowliest federal backbencher* makes $195,130. The highest paid is the Prime Minister, who makes $507,000.

State MPs seem to get about 70 per cent of the federal pay. The Premier of NSW gets $358,853 .

The following table is taken from a recent report in parliamentary salaries in Victoria. Since then, pay rates have been hiked for inflation once or twice.

MP pay

Politician pay is a fraught issue. The annual pay rises create a furore in the media, especially during times of budget stringency. It got me wondering if there might be a better way.

What if politician pay were anchored to something that we can all believe in? What if politician pay was somehow linked to how well the rest of us are going?

This could be an effective way to not only manage the PR aspect of politician pay rises, but to properly align their incentives with our own.

Here are some anchors we could use, for starters.

Average annual full time earnings (for the employed) is $78,821, GDP per capita is $67,218. The median wage is $60,112, and the minimum wage is $33,327.

Pay packets
Pay packets

There is a case to be made for paying politicians well, in order that they are not swayed in their duties by fat brown envelopes, or promises of lucrative employment after their retirement from public life. Generosity also prevents the other problem you get when you pay peanuts – you get the homo but not the sapiens.

So while it is tempting to say that politicians should be on the median wage, it may not be practicable.

Instead, a bundle of all of the above might make a sensible balance. If you add the four categories together, and multiply by 0.8, you get  $191,580 – a number that roughly approximates current politician pay.

You could easily argue, at this point, that this pay structure is entirely mis-focused and materialistic, and if we’re going to have performance pay for MPs it should be linked to a far broader basket of KPIs, including a rating of the health of the great barrier reef, carbon emissions per capita, spotted numbat populations, ambulance waiting times, NAPLAN testing results in western Sydney, etc, etc. I’d totally support all of that.

At this point, it’s worth mentioning that I really do not think any sort of MP pay reform is worthwhile without sorting out entitlements, which are absolutely arcane and create a culture where MPs are disproportionately focused on getting the public to pay for bookshelves and travel allowances.

Is this a good idea? What would you suggest putting in the mix to align politicians’ incentives with our own? Leave a comment below!

* Please feel free to use the comments section to nominate precisely who you believe is Australia’s lowliest federal backbencher.

Supply and demand for city views? The economics of skylines.

A skyline is one of the most iconic things a city can offer.

best skylines

Great skylines are rare – New York and Paris have terrific, unique skylines. But most cities are just a cluster of square towers.

Melbourne’s skyline, from many angles, is a classic example. Nice in the right light, but far from distinctive.

skyline 1

Melbourne’s more iconic features (Arts Centre Spire, Wheel, Bolte Bridge) are hard to get in frame with the CBD.

skyline melb

 

The Eureka Tower – Melbourne’s tallest building – isn’t a great building to my eye, but it is so prominent that it is now a feature in tourist mementoes.

tea towel

Skylines are a classic economic problem. The benefit of the skyline accrues not the to building’s owner, but to the people who gaze upon it. These are externalities, and so the market for a city skyline is clearly subject to market failure.

skylines

 

Worth mentioning – these external benefits are more than just warm fuzzy feelings. There is a reason houses on top of hills sell for a lot more. “City views” is a magic word in real estate.

When a building owner decides to make another 25-storey square grey tower, they’re not thinking about the city at large. What is most profitable for them is not necessarily what’s best for the skyline.

London’s Gherkin, Shanghai’s Pearl TV tower, Beijing’s CCTV building are great examples of where a bit of financial largesse has made for amazing, distinctive buildings. But the two Chinese buildings were not the result of market forces. And the Gherkin was put into receivership earlier this year.

 

Can the market deliver a great skyline?

The Eiffel Tower was not a result of market forces. Neither was the Statue of Liberty.  The Empire State Building was privately built, but that was in the 1920s, when market failures were left free to thrive and vast fortunes were sloshing around New York. Then, a handful of wealthy new Yorkers could afford to put up a signature building that would lose money for its first 20 years.

Will the sharpness of modern market forces deliver us only the drabbest lumps to adorn our horizons? If so, that’s truly a shame.

There has never been a better time to kill negative gearing.

Talk about killing negative gearing is like elevator music in our national debate. It is ever-present and we’ve tuned it out.

But there will never be a better time than now to rip negative gearing from the tax code. That’s because right now investor activity in the housing market is a major macroeconomic problem.

The RBA would love to cut official interest rates – if it weren’t for the strength in housing. It is worried trimming the interest rate even more could create further mad results, like this terrace house around the corner from me that sold for $1.96 million.

This is what Glenn Stevens said last month.

“A situation where:

  • prices have already risen considerably in the two largest cities (where about a third of our population live)
  • prices are rising, at present, faster than income by a noticeable margin, and
  • an important area of credit growth has picked up to double-digit rates,

should prompt a reasonable observer to ask the question whether some people might be starting to get just a little overexcited.”

The strength in housing is very much on the investor side, not the owner-occupier side.

investment housing
Source: ABS catalogue 5609.0 Housing Finance Australia September 2014

 

The share of lending going to investors is at historic highs.

And the rest of the economy is in a morass with unemployment moving sluggishly higher.

unemployment
Source: ABS Catalogue 6202.0 Labour Force, October 2014

 

If the strength of the housing market was more in line with the rest of the economy, rates would fall like a tonne of bricks. Reducing investor demand for housing could give the RBA the freedom it needs to cut rates to the point where the economy picks up.

rates, unemp
Traditionally, if the red line is rising while inflation is controlled, the RBA will make the blue line fall. But house prices are impeding them. (Data: RBA. ABS Labour Force)

 

In summary, this is what the experts call a policy window.

If there was ever a time where scrapping negative gearing (on existing homes at least) was going to fly, it would be when the topic is macro-economically important.

Negative gearing has haunted the Australian policy landscape since 1985, doing much to enrich property investors while having an altogether ambiguous effect on the social outcome it was designed to address – housing affordability

A brave treasurer would reach back to the Henry Review and say, ‘ in order to reduce the policy bind the rba finds itself in, it’s high time we looked at this recommendation.’

The Treasurer would find plenty of backing in the Henry Review. It did not argue that cutting negative gearing would cause an immediate reversal in house prices. But it did point out that the policy represented a big fat subsidy, and recommended something a lot more modest.

“When negatively geared, asymmetries in the treatment of expenses and  receipts give rise to a more favourable treatment (see Chart A1–20). This asymmetry ranks  amongst the greatest tax induced biases to the savings choices of households. “

henry graph negative g
Source, Henry Review, page 419

The beat of the drums against negative gearing will never be louder than now. Let’s see if policy makers can hear them.

Victoria is cold on the Liberal Party – what can they can do about that?

The state government of Victoria lost power this weekend. The election saw their narrow majority reversed, and by losing government after just one term in office, they set a record. No other government has done that since 1955.

Since Jeff Kennett’s reign as premier from 1992 to 1999, the Coalition’s appeal to the electorate has been slight. They’ve lost elections in 1999, 2002, 2006 and 2014, some by big margins. They won in 2010 by just two seats.

The state is lurching away from the Coalition. (The Coalition is an alliance between the large city-based Liberal Party and the smaller, country-based National Party).

coalition blue

The Liberals can console themselves with a decent-looking result in first-preference terms (766,000 votes to Labor’s 820,000 on the count so far). But there are plenty of voters that do not put Labor first whose vote ends up with them thanks to the magic of preferential voting.

greens first preferences

The Liberal party do not have an equivalent. The Nationals operate mainly in different areas to the Liberals and are in any case a smaller, less popular party. The Greens took 11.2 per cent of the vote in 2014, to the National Party’s 5.6 per cent.

The whole state is lurching away from the Coalition. It’s not just the Greens. The National party are losing seats to Independents all over the bush.

Faced with this remarkable recent record of underperformance, The Liberal party can either follow the population or fade into irrelevance. They need to tack to the centre to become believable on key issues for voters at state elections, like schools, transport and hospitals.

The choice of a new leader will be essential in remaking the party. In some ways, the selections on offer look good: An man in his 30s of Ukrainian descent or a prize-winning lawyer known for his pro bono work . But Matthew Guy is a former staffer to Jeff Kennett and an unpopular planning minister while Michael O’Brien is a former adviser to Peter Costello.

These two are the front-runners for Liberal leadership. If you keep building a new house out of the same bricks, there’s a limit to how much better you can make it. And when you can narrow down your field to two senior cabinet ministers so soon after a crushing defeat, it indicates a “steady as she goes” attitude. Perhaps the Liberal party is unable to reform itself, and the voters will have to do it for them.