Parental leave changes will hurt more than the Government believes

The government offers new parents 18 weeks parental leave paid at the minimum wage. It’s worth $11,500. Until now that policy was available to everyone. But the government will now retract the offer for people whose jobs offer them parental leave.

I can see the attraction of cutting it, to save $1 billion. And I don’t expect vast waves of public sympathy for the kind of people who have good employer parental leave schemes. These people are wealthier and well-attached to the labour force.

“At the moment people … are effectively double dipping — we are going to stop that,” – Treasurer Joe Hockey.

But the “double dipping” terminology is partly responsible for the positive initial reaction to this announcement. I was surprised to see even the redoubtable Peter Martin using that terminology in his report on the policy this morning.

Looking at it like that is insufficient. The question is complex. How to take away government services as the private sector provides them is one of the trickiest parts of any policy sphere.

In some policy areas, no matter your private endowments, the government provides. Public transport is available to people whether or not they own cars. Medicare is universal – even those with private health insurance can use it.People with Foxtel are still able to tune into the ABC. Public schools are not reserved for those who can’t afford private ones, etc.

In other areas, we means-test things tightly. Welfare payments are removed as quickly as possible as people earn more money, even though that creates high effective marginal tax rates.  (There is a strong movement arguing for a “basic income” which would effectively be a universal and non means-tested welfare payment).

In each of these cases, a range of questions comes to bear. Is the offering in question a universal right, or a safety net? Is it very expensive to provide widely without means-testing? Is it advantageous to have public and private provision alongside each other? And what will be the effect on private sector provision if the government means-tests?

This last point is crucial in this case.

If you work for a university like the Australian Catholic University that offers 52 weeks paid leave, your employer might not see the new policy arrangements as competitive. The government’s 18 weeks at minimum wage is no substitute. But the average duration of paid parental leave in Australia is under 10 weeks.

For most companies, I expect they will see that their expensive-to-provide policies are offering little or no net benefit to their employees, so they will have no reason not to cancel them.

This policy might actually provide savings to employers, but it will lead to a real fall in the amount of paid time new parents can spend with their children.

Instead of drawing on both, parents will then draw on only the government scheme and there will therefore be a drop in the amount of parental leave taken.

Faced with this shorter period of parental leave, parents will then choose whether to return to work. It could even cause some new parents to sever their connection to the workforce. The consequences could be further reaching than they seem.

Land Tax is having its annual meek and ineffectual resurgence. Can we give it some oomph?

Land tax is a great tax.

Just today, Treasury released a report that shows how much more efficient Land Tax is than all the alternatives.

land tax

I’ve previously argued that to promote land tax, we should emphasise that it is unavoidable. But I’ve gone cold on that idea.

It is true, but not a great argument when the government is going soft on tax dodgers. It simply encourages people to say we should enforce our existing taxes. [They’re right, we should. But we should have land tax too.]

Today the SMH economics guru Jess Irvine wrote a long and very welcome piece about land tax. But it conflated the hard-to-grasp concept of a low distortion tax with the easier-to-grasp concept of a tax that’s hard to “dodge.”

“Land tax is one of the most efficient taxes for precisely the reason it is unpopular: it is hard to dodge. They know where you live. You can hire as many accountants as you want, but it is difficult  to hide that mansion in Point Piper.”

I found myself wondering why land tax is not on the agenda. And I think I’ve figured out why. The conceptual framework you need to grasp its benefits is not commonly shared. And you can see that by flicking to the hundreds of comments that followed the article.

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The comments on the article were almost exclusively focused on fairness. Fairness is just one of the keys to good tax policy. Efficiency is the other. And there is a gulf of understanding between economists and the general public on tax efficiency, with economists to blame.

To get land tax out there you need to teach people why distortion is bad.

Economics students learn about a model of the economy like this: Trade is mutually beneficial. Taxes prevent trade. Therefore taxes prevent that mutual benefit. The amount of prevention (aka the distortion) is called deadweight loss.

deadweight loss
Deadweight loss from a price ceiling works much the same as a tax. From Wikipedia

The distorting effect of taxes is one of the great insights of microeconomics. It is counter-intuitive and hard to see, because deadweight loss is always a counter-factual. But can we transmit this flash of inspiration and insight from economics to the general public without messing around drawing supply and demand curves, or measuring utility?

A stumbling block is that the purpose of current taxation is so muddled.

We use taxes on “good things” to raise revenue. And we use taxes on “bad things” to change behaviour.

From observing the tax system, it may be unclear why smoking and working are both taxed. Does the government hate work?

The progressivity of the tax system – which I emphasise I support – doubtless contributes to this confusion. Being a low-wage worker, buying healthy fresh food and education attracts lower rates of tax. Being rich, buying luxury cars, eating at restaurants and making capital gains in shares attracts higher rates of tax.

It would be easy for some to see the tax system as a kind of moral agent, punishing bad behaviour and rewarding good. In this scenario, land tax makes no sense.

Explaining that taxes distort behaviour – but we want to minimise that! – is going to be a hard sell when the public sees we use taxes to distort behaviour all the time.

We tax all these things, and you want me to believe that’s because you want to stop some of these things, but you don’t want to stop others? 

Fixing this will be hard. The terminology is a good place to start.

It cannot be helpful to use one word – “tax” –  for both imposts on activities we actually want to encourage, like work, buying goods and services, making profits and owning land; and for things we actually want  to discourage.

I’ll accept suggestions for how we could rename these taxes – Maybe they could be divided into Detrimental but Oh Well, it’s Necessary Taxes and Useful Pricing Taxes (DOWN and UP)?

This distinction would help plant the seed that some – but not all – taxes should be designed in a way that minimises distortion.

The journey to give land tax a fighting chance will be a very long one. The first steps in that journey will be to help give people the capacity to grasp why land tax might be desirable.

Has the government stuffed up its tax review already?

What’s the hashtag for the new tax review? There are several: #taxreview, #rethink, #bettertax, which means there may as well be none.

To describe Australia as excited for this review would be, shall we say, intemperate.

Was there a time when a major review was major? When the big splash of a report launched a thousand editorials and inflamed as many angry talk back callers?

It’s easy to imagine the answer is yes.  But that is probably based on us remembering the big ones, the ones that cut through. Plenty of reform drives run out of fuel.

It is early days, but this review seems to be sputtering. Yesterday morning at 9am The Age had up two stories about the review by Economics editor Peter Martin. One reporting, one editorialising.

By 12.17pm they were both gone from the front page.

They were replaced by a strange little story about how Uber made Joe Hockey worry about GST. (I know mentioning Apple in headlines creates a huge number of clicks and suspect Uber is also on the keyword list editors love.)

Surprised, I went hunting around the net at that time to see what other coverage I could find. Both the Australian and the AFR had the tax review as their top story. But The Age had the Uber story in the 7th spot on its site, and the Herald Sun offered me over 100 links before I found a Breaking News section right at the bottom of the page where, in tiny font, there was mention of the tax review.

The tax paper itself worried about this on page iii.

To deliver lasting, workable reforms, the community needs to be on board and engaged in the conversation.

I kept finding evidence the community wasn’t.

On the ABC news, a story about a suburban church burning down – with no casualties – ran higher than the tax story. And on Reddit, a link about the review got 20 upvotes, while this cat with a map of Australia on its nose got over 1000.

STRAYA CAT

Is this one of those articles that says “social media is making us dumb!”? Then spends a few paragraphs yearning for a golden age that didn’t exist, before vaguely hoping everyone will “grow up”?

No.

I see people discuss policy all the time. Online and off. Social media can be a powerful force for good, when people care.

So why has this review not engaged us yet?

I see three big reasons, two of which represent mistakes by a government I believe is sincere in its desire to achieve something – anything! – before the next election.

1.  The discussion paper contains a headline idea that is undeliverable. Nobody need worry about the government raising the GST.

They lack political capital to do things that should be much, much easier. Like passing their first Budget. Seeing this idea revivified once more just gives people license to pay no further attention.

Props to Mr Hockey for ruling nothing out of this tax paper. It’s brave and principled. But is it wise? I’m unsure.

2. Treasury wrote the discussion paper. This .pdf lacks gravitas, has no imprimatur. If you want people to pay attention to something, it is helpful to have a name behind it. The Henry review had weight because at the time, Henry himself was extremely influential. The ideas in and implied by this discussion paper lack a visible patron.

3. Partly, I think people are disengaged about tax reform because they do not see tax as an input to economic activity. We see tax as something that happens after. We make money, then we pay income tax. We buy food, then we pay GST. We don’t observe all the dissuaded activity and so fail to grasp the systematic effect of taxes, i.e. the link between tax and growth.

Most public discussions I see on tax reform focus on the fairness aspect – who should pay from a justice point of view – not from a growth point of view. This is a shame, because it leads parts of the public to assume Treasury doesn’t care about fairness. I believe they do care, but they are also trying to optimise the effect of tax on growth.

The links from tax to growth are highly debatable – plenty of rich countries have higher aggregate tax takes than us, and plenty of rich countries have different ratios of consumption to income taxes.

Commenter from the Age is at least engaging with the idea that tax affects growth.
Commenter from The Age actually engaging with the idea that tax affects economic decision-making. I’d describe them as skeptical.

Treasury makes this claim:

“each additional $1 collected by way of company income tax reduces the living standards of Australian households by around 50 cents in the long run because of reduced investment.”

I’d like for everyone to be talking about that idea, which rests on assumptions about the mobility of capital. But 99% of the public discussion is about revenue adequacy and fairness questions. If the frameworks people had for discussing tax were the same as the frameworks Treasury was deploying, a more fruitful discussion may take place and Chart 2.9 – marginal excess burden – would be a national obsession.

Chart 2.9

This discussion process is only just beginning, and I hope I’m wrong that people have already tuned out.

I note good articles in the Guardian and New Matilda have appeared today. But at the same time, a new review has been released – on competition policy! We are asking a lot of the polity to absorb both at once.

I guess it is the role of the public sphere – including humble blogs like this – to try to bring ideas in these reviews out of the tarpit and spray them with the hose, in order that they may be introduced to wider society. I shall try to write more about the tax review in coming days and weeks!

How do you get a country excited about tourism?

1. Tourism is super important, accounting for 10 per cent of Australia’s export earnings.

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Services are our second biggest export sector and tourism is Australia’s largest services export.

2. Tourism’s moment has come.

Source: Yahoo Finance
Australia: on special. Source: Yahoo Finance

3. International tourism is understood to have public good aspects (e.g. brand Australia) that warrant some public spending on attracting visitors. Tourism is also a public policy issue because regulations around immigration and customs, aviation and airports can determine the cost effectiveness of a trip to Australia.

But at this crucial moment for the industry, government funding for Tourism Australia has gone from $132 million in 2012 to $129 million in 2014.  That’s a fall from $21.29 per visitor to $19.64.

sydney

4. The Government does not have a minister holding the title of Minister for Tourism (they do have a Minister for Sport). The Trade minister has tourism in his portfolio. But he has been accused of “neglect” for the sector.

5. There have been no data released on overseas arrivals since September 2014. The Department of Border Protection changed the arrival cards and completely screwed up the system that had delivered excellent monthly data for the previous 14 years. The timing of this mistake, at a likely inflection point in inbound tourism, is truly remarkable.

6. To make matters worse, right now the Productivity Commission is trying to put together a major report on tourism, in the absence of that data.

I have written before about the best way to invest to take advantage of the coming tourism boom, with AirBnB seeming like the safest bet. But as well as dispersed individual actions, we need a big coordinated push, and that doesn’t look like happening yet. Services industries remain a side-show to the “real” economy of tangible things in too many people’s minds.

Can the PC report shock the government into doing more? Or will the government remain focused on issues like foreign purchase of agricultural land?

What Mr Hockey will do next.

Last night on ABC’s 730 program, the Australian Treasurer demonstrated that he has a lot of changing still to do.

Mr Hockey insisted the government would press on with a stringent Budget full of cuts. He bemoaned the total government debt and the legacy current generations are leaving behind. His catchphrase of choice with respect to cuts was this:

“We have no choice!”

But the loudest message was that he had not fully understood the events of recent weeks. He appears to think that the Government’s problems are all about Tony Abbott, because he insisted that all he needed to do was better explain his policy choices to the electorate.

Of the two – Abbott and Hockey – it is Abbott who got closest to the fire and Abbott who has learned the most. Abbott has spoken about listening more, to both the public and the party room. Mr Hockey may think that is yet more spin. But I doubt it is. The 2015 Budget is going to be designed with a lot less guidance from Hayek and a lot more from Roy Morgan. The problem is that Joe Hockey doesn’t realise that yet.

So Mr Hockey is going to have to adapt. Adapt or perish. If and when he adapts, in some small part of his being he may wish he’d been rolled as Treasurer on Monday.

But in his 730 Report interview he said several times “the customer is always right.” Let’s generously assume that motto means he can and will adapt.

So what will he do in this new, constrained environment where ideology is out and the Budget is worse than it has been for a long time?

Worst case scenario as estimated by Deloitte Access Economics
Worst case scenario as estimated by Deloitte Access Economics

If commodity export prices keep falling, Hockey could beat Wayne Swan’s record of highest Budget deficit ever ($54.5 billion in 2009-10.)

The new, chastened, post-realisation Mr Hockey will be faced with a set of unenviable choices. He can let the deficit blow out, he can cut spending, or he can raise more revenue.

The most unenviable part of his dilemma is that he will probably have to do all three. Suffer the ignominy of a great big budget deficit, trample all over his own principles by raising taxes, and risk the wrath of the electorate by making more cuts.

Mr Hockey’s task in the next few months is to make this something other than a political suicide note.

After surprising the hell out of the electorate with his first budget, he won’t be allowed make the same mistake again. You can be pretty sure that the key ideas in the document to be released on the second Tuesday in May will have been given a thorough airing.

Cuts will be thin on the ground. Reinforcing the message that the Coalition slashes and burns will not be welcome in the party room. That leaves a gaping hole of a deficit.

Unless he can somehow arrange to include tax increases. If he wants to stop the deficit increasing, Hockey’s best option is to look at tax expenditures.  You can cut tax expenditures and simultaneously claim you are not levying new taxes. (A tax expenditure is just a big exemption to tax, so cutting a tax expenditure raises more revenue.)

tax expend
Source: Treasury tax expenditure statement 2014

As you can see, the numbers involved are real. Many many billions. GST and the family home are probably no go areas. But some of these tax expenditures – on superannuation and capital gains – overwhelmingly help the Coalition’s older, richer, higher marginal tax rate base.

Politically, removing or changing them may be the best option, because the Government has lost the centre, and needs to regain it. Tax hikes that hurt working families will be off the agenda in 2015.

This will go against almost everything Joe Hockey believes in, except his belief that his government should win the next election. But as I wrote last year, Joe Hockey is likely to resolve his cognitive dissonance in favour of an election-winning strategy. There’s always another choice.

Australia’s cheapest house.

Today data came out showing Australia’s house prices rocketing up.

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Source: ABS

The average price for a home in this country is now $571,500. We hear a lot about the homes at the top end of the distribution, places that cost 100 times as much as the mean, like this Mosman Park pile for $57.5 million.

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We don’t hear so much about the other end. There must be houses in this country that cost a lot less than the mean. I went looking for them.

This place in outback NSW costs $40,000.

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You could imagine living there, stepping out onto the verandah with a cup of Bushell’s tea as the sun rises through the eucalypts, thinking: I made a good choice.

This place 200km away costs $39,000 and I thought you couldn’t go much lower.

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Not pretty, but (presumably) effective.

But I reckon I found the cheapest advertised house in the whole country when I tracked down this one:

Cunnamulla house
Three bedrooms, one bathroom. Large block.

The lack of interior shots in the listing should rouse suspicions, but if you’re game to renovate this place, it’s near to a supermarket, a hospital and a park.

Cunnamulla has a river, and a train station with services twice a week. It’s also host to the Cunaumulla Fella Festival, an annual celebration of rodeo riding, etc. The closest town you may have heard of is Bourke, about 250km away.

cunnumulla map
Surrounded by red dust.

Paying $13,000 for a whole house seems incredible. In Melbourne, that would buy you 2 per cent of the median home, five nights accommodation in certain fancy hotel suites, or a sedan with 156,000 km on the clock.

But here’s where this story goes from being a fun way to think about our crazy housing market to a rather more serious reflection on race and poverty.

Cunnamulla’s Wikipedia entry highlights domestic violence and flooding.  Seek has two jobs listed based in Cunnamulla – both social workers, one related to drought and one related to domestic violence. Cunnamulla was the subject of a controversial documentary produced in 2000 that depicted its bleak side, with quotes like this:

“In Cunnamulla, that’s the only thing you can do. Drink, smoke marijuana, fight, look for women and break in. That’s it.”

The most recent news article about Cunnamulla is about a teenage mum who got her scuba license by practising in the river and wants to leave to work on the Barrier Reef. The official unemployment rate is 5.9 per cent, but the region’s population of 1900 supports only 892 jobs, suggesting labour force participation is low.

In short, there’s a reason houses in Cunnamulla – even ones in decent condition – sell for so little. And those reasons are not nice.

This is a country of extremes – not just of drought and flooding rains, but of wealth and poverty. It’s easy sometimes to forget about the poverty. I’m somewhat ashamed to have started writing this post thinking only of the amusement value of a cheap house, and not at all about the conditions that explain it.

An interest rate cut next week?

What will the RBA do next Tuesday?

Last year, the RBA left rates on hold. Despite increasing unemployment and modest inflation, the bank decided that “a period of stability” was the best course for interest rates.

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At the December meeting of the RBA board, they seemed calm. The statement released said

“…most data are consistent with moderate growth in the economy……. monetary policy is appropriately configured. … the most prudent course is likely to be a period of stability in interest rates.”

But the meeting was followed the very next day by the release of the National Accounts which showed “dreadful” growth in the quarter, of 0.3 per cent. And shortly thereafter, unemployment figures came out looking like a horror show. Trend and seasonally adjusted measures converged on 6.3 per cent. A record high.

The bank suddenly seemed perturbed. In an interview published by the AFR on 12 December, the Governor said:

“…if at some point we can be more helpful for confidence by doing something different, then obviously that will be on the table, and we will take a fresh look at all these things in the new year”

In the minutes of the meeting, released two weeks after the meeting and four days after publication of that interview, the labour market was singled out:

“…members noted that subdued labour market conditions were likely to weigh on consumption growth and consumer confidence more generally.”

So perhaps Glenn Stevens spent the long summer fretting he’d left the interest rate unchanged for too long. Perhaps he sipped light beer by the pool and bored his bbq guests by extemporising on how a two-month break between the December and February meetings was inappropriate for a modern economy. Perhaps his long summer nights were filled of dreams of a rate cut.

But then the New Year began and with it came more positive news on the economy.

Unemployment, when the December figures were released in mid-January, was suddenly much better.

November figures released in December.
November figures released in December.
December figures released in January
December figures released in January. (note, for all the fans of the trend line, how it moves in several periods on the release of new data. The seeming predictive power of the trend line is achieved via retrofitting!)

This gelled with labour market survey findings that showed job advertisements had been rising for seven consecutive months (PDF in link).

At the same time, the Aussie dollar went into freefall. It has gone from US85c at the time of the December meeting to just under US78c today. (under seventy-eight?! oh my god this upcoming American trip is going to kill me.) The speed at which the economy can expand is affected not only by interest rates but also the exchange rate, which are lumped together under the terminology “monetary conditions.”

The lower exchange rate boosts the economy in several ways. Both by making imports less competitive, and by making it easier to export. It should also reverse the enormous disparity between the number of Aussies who go offshore and the number of tourists who arrive. (A lower exchange rate is not without costs, of course, as many goods, especially capital equipment, is imported).

In all these ways, a lower exchange rate does the same work as a rate cut, all without Mr Stevens lifting a finger. Best of all, the lower exchange rate should not lead to higher house prices, which is very welcome as bubbles remain a topic of great importance to the RBA.

Last but probably not least, the falling oil price is going to put stacks of cash in consumer pockets. I filled up the car with glee the other day. Unlike falling interest rates, which rob from savers to give to borrowers, lower oil prices are pure upside for consumer buying power, and therefore a more powerful spur to consumer confidence.

Source NASDAQ
Source: NASDAQ

Which is why it’s interesting to see that the actual measure of consumer confidence is down in the dumps, still.

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It fell 5.7 per cent in December and recovered just 2.4 per cent in January (PDF in link).

That same PDF, authored by Westpac, predicts two rate cuts this year. But is that really going to happen? For that to come about, the bank would need to have changed.

Inflation was not a major concern and probably won’t be so long as the falling dollar is pushing average prices up, cancelling out the falling oil price.

The bank’s two big worries have been the housing market and the unemployment rate. With house prices still rising at the end of last year, it must surely be frightened of a 2015 full of headlines featuring a median house price nearing $1 million in Sydney. And unemployment looks like easing.

I bet the RBA will leave rates on hold again.

But the one thing that sticks in my mind is this article in the Herald Sun. Business Editor Terry McCrann has a long report on why the RBA will cut interest rates. It is specific enough and well-researched enough to appear to be a leak rather than (like this piece) the author’s own ideas.

McCrann writes:

“The RBA will be reducing both its growth and inflation forecasts in this statement [a report to be released after the board meeting]….

Critically, on (underlying) inflation, the RBA will also make its first point-forecast for June. It is likely to be 2.25 per cent, it could be as low as 2 per cent — either way, significantly, very significantly,below the 2.5 per cent midpoint of its 2-3 per cent target range.

Almost as significantly, it will cut its December forecast inflation range to 2-3 per cent and do the same for at least the first half of 2016.

In short it will be forecasting weakish growth and inflation below target. It quite simply could not release those figures on the Friday and have left its official rate unchanged on the preceding Tuesday. Or at least signalled a pending rate cut.”

If he is right and the forces pushing down on inflation are far greater than those lifting up, then you can’t help but expect a rate cut. It’s an inflation-targeting bank, after all. Tuesday will tell.

Can Mr Hockey be saved by a big idea?

There’s a very interesting article in The New Daily today, about what our Treasurer Mr Hockey might be up to.

It suggests Mr Hockey’s insistence that Australians spend six months working for the government is a deliberate ploy to turn us against income tax, which will dovetail with an idea from the Commission of Audit:

“providing the States with access to part of the Commonwealth’s personal income tax base.”

The Commission expands on that idea like this:

“A further option to increase State source income is a combined Commonwealth-State personal income tax, which could include providing the States with a designated share of personal income tax raised, or allowing the States to levy a State income tax surcharge (with the Commonwealth ‘making room’ so that overall income tax rate need not rise).”

The article‘s logic linking recent statements to this policy idea may be a tiny bit convoluted, but that doesn’t make it necessarily false, and it is well worth remembering that there is a Federation White Paper lurking, due for completion this year.

The first issues paper of the Federation White Paper was released just prior to Christmas (and I mean just, it came out on the 23rd of December). The amount of coverage it got was slightly less than the NORAD Santa tracking radar. Is the idea that the Abbott government going to reform our whole federation as fictional as the man in the red suit?

Maybe it’s the best idea this government has left.  States spend all the money, but can’t raise enough. This is bad from an accountability perspective, and also because it diverts effort to rent-seeking. States spend time scrapping over the GST shares and the conditions on Specific Purpose Payments.

States don’t appear set to introduce a land tax, which I reckon is the only other solution. So giving them the power to raise their own income taxes is a potentially sensible move. This is a classic small-l liberal solution, allowing each state to set the income tax that best suits its needs, and also encouraging competition between jurisdictions. Vertical Fiscal Imbalance could be over!

(I’ve always thought Vertical Fiscal Imbalance was a terrible bit of terminology and it should be known as something more catchy. I quite like calling it the Federal-State Tax Mismatch.)

This could be the high-minded idea that the Coalition need to administer a shock to the electorate, to make people realise they are actually full of ideas, not just a team of cutters. If done right it could deliver positive media alongside well-liked (probably Labor) state premiers.

The only problem now is that the narrative is all but set. Mr Hockey is seen as a hardline right-wing ideologue, so even a rather sensible plan to optimise subsidiarity will likely be seen through that lens. Will Mr Hockey gamble and introduce this idea – doubtless new to many voters and potentially confused with a tax hike – in these conditions?

Not long until the SUV is Australia’s most popular vehicle

The SUV is rapidly becoming Australia’s favourite kind of car. In every state, SUV sales look set to outstrip sales of passenger vehicles soon, if they have not done so already.

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Congratulations NT, the only state where more SUVS are now sold than passenger vehicles.Screen Shot 2014-12-16 at 9.40.46 am Screen Shot 2014-12-16 at 9.40.18 am

The Toyota Hilux, Mistubishi Triton, Ford Ranger and Hyundai i35 are among the top selling SUVs.

SUVs are great. They’re safer for drivers, they give you a better view, they can mount any terrain, and they have lots of boot space. But they come with costs. More vulnerable road users get hurt. And we can see those costs across the whole country.

The results for non-drivers are substantially more mixed than the results for drivers, which show clear falls. Some of the states with the biggest proportional increase in SUVs (especially Tasmania) show the worst results for pedestrians and motorcylists..

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For comparison, here’s the rate of change in driver deaths. It’s worth noting that Tasmania’s population has been pretty stable in this time while WA has grown.

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These “hatchbacks on stilts” are a game theory problem. If everyone else has one, we want one too, to be able to feel safe and to see what’s happening on the road. They come with clear externalities. There is a case for the government to intervene. 

Why this could be the summer Joe Hockey turns Keynesian.

Next year’s budget offers the Government a horrible array of choices.

The government was badly burned by this year’s budget. Ideas like the GP co-payment saw their popularity plunge in May, and they’ve been in an election-losing position since.

polls
Source: the inestimable Edmund Tadros, AFR.

They burned their fingers badly, and what’s worse, didn’t even grab substantial fiscal gain from it. The Treasurer’s office is staring down the barrel of a budget with another big deficit next year.

If they try to push the budget back to surplus, the public will have their worst fears confirmed – these guys really are mean!

So the Treasurer can’t cut too hard.

The alternative – running a deficit and being proud of it – looks unpalatable. But there are ways to change one’s tastes …

Australia’s growth in the last quarter was poor, falling to 0.3 per cent.

gdp grwoth
Source: ABS National Accounts

There is a big school of thought in economics that says when growth is poor, governments should spend to prop it up. This is broadly known as Keynesianism, named for John Maynard Keynes, who was a major theorist of the great depression. The more contemporary theorists are known as New Keynesians

Spending to support growth is common. That’s what Kevin Rudd and Wayne Swan did in the GFC, giving us school halls, insulation and $900 cheques. The Rudd stimulus left Australia with a medium-sized amount of debt, and arguably prevented Australia from falling into recession alongside the rest of the western world.

The opponents of this policy included one of the national daily papers, The Australian. They hated it in 2009, and they hated it even more by 2013 and 2014.

But by 2015, might their rigidities soften? The political needs of the current government may demand it. The only way to not commit political hara-kiri while setting a framework for the 2015-16 Budget will be to adopt a far more generous way of thinking.

Torn between two forms of cognitive dissonance, “I am setting the national Budget in a wholly political way” and “I am a late convert to the need to support aggregate demand,” I suspect Mr Hockey may be tempted by the latter.

This summer, as he lies on his towel, listening to the Pacific Ocean waves crash on the beach, Joe Hockey may well be turning the pages on a biography of Keynes. Perhaps the same one Mr Rudd read in 2009. It might be the thing that saves him.

Bill Shorten should probably zip it about next year’s budget deficit.

Next May, Tony Abbott and Joe Hockey are going to feel very uncomfortable indeed. They’ll be bringing down a Budget that is completely the opposite of what they hoped for.

The 2014-15 Budget was full of spending cut plans and forecasts of rising tax revenues. The spending cuts are mainly in shreds on the floor of the Senate, and the rising tax revenue projections got vapourised by weak growth and falling iron ore prices. The few measures they did pass, like a temporary tax hike on high income earners, aren’t likely to be enough.

The Abbbott/Hockey game plan was to get their horror budget out of the way early. But the ghost train didn’t stop at the station, and it looks like they’re stuck on the ride as it enters the tunnel once again.

The Budget, when it comes out, is going to include some large negative numbers. They were expecting deficits of $30 billion this year and $17 billion next year.

deficit

But revenue fell hard in the most recent quarter as growth fell to 0.3 per cent.

Budget update

I expect the government will be forced to admit the deficit this year is very much like the last Labor year (around $50 billion), and that the 2015-16 one will be at least twice the size they expected.

What’s worse for them is this – the more they try to correct this scenario, the worse their reputations become.

I wouldn’t want to face the dilemma Hockey faces – try to put the budget on track and cement once and for all the impression of having a heart of stone, or try to salvage a bit of popularity while letting the nation’s finances spiral away. Perhaps he will happily give up his job to Mr Turnbull.

So, from a fiscal perspective, Opposition leader Bill Shorten has been given a free kick in the goal square. This is political gold!

But should he go hard on this topic? Should he try to drive a fiscal stake through this government’s heart?

I see three reasons he should not.

1. Don’t perpetuate Deficit-phobia.

The fear of deficits is extremely corrosive to our national debate. Governments are absolutely petrified of borrowing, for fear of being accused of running a deficit.

Interest rate the government faces on a 10-year loan. Source: Bloomberg
Interest rate the government faces on a 10-year loan. Source: Bloomberg

The cost of borrowing, right now, is exceedingly low, and the benefits of borrowing could be very high. Almost everyone thinks Australia could use a big whack of infrastructure to set it up for the next century. Obsessing about spending only what you earn is for people who can’t get credit, or for people whose expenses are smooth and predictable. A mid-size first world nation can get credit cheaply, and might want to occasionally build a huge project. In those cases a deficit should be celebrated.

If Shorten accusing Abbott of incompetence because of the existence of a deficit, then he further limits the policy options of all governments of all stripes.

2. Focus on something important.

Budget day I argued in April that Labor should have made equality a big budget figure. You could hoard all the relevant data on equality until Budget day, brief the right people that an important measure was coming out that day, and then boom, get some cut through on a topic that wasn’t so meaningless.

If Mr Shorten goes after Mr Abbott on the defict, he adds his imprimatur to the idea that managing a deficit is the most important job a government can have. Assuredly, it’s part of the government’s role. But to place it at the centre of responsibilities is to show a distinct lack of imagination. Find something important and make Budget day about that instead.

3. Tying your own noose.

If Mr Shorten wins government in late 2016 and the deficit is all he’s talked about for the preceding three years, he’ll be forced to fix it, fast. That could prove uncomfortable for him.

Mr Shorten’s approach will depend to some extent on what Mr Hockey has planned. We will know a but more about that once the mid-year economic update (MYEFO) comes out.

It was exactly 51 weeks ago that I wrote about the first MYEFO that Mr Hockey brought down, which was clearly setting the stage for big cuts. I wrote this

“What is the last “cut” that is heralded as a major political reform? Howard strangled the dole payment down below some estimates of the poverty line, but that’s oddly omitted in his hagiography. Even right-wing economist Judith Sloan has argued the dole should now be raised.

When we list the economic reforms that have made Australia great we include microeconomic reform, floating the dollar, an inflation-targeting central bank and the GST.  Not cuts.

If the Abbott government’s first term economic reforms can mainly be labelled “cuts”, what will be its legacy?”

It will be very interesting to see what themes we can read into this year’s MYEFO (perhaps coming out next week, and required by law before the end of January).

The man to sell tax hikes to the Australian people … is John Howard.

Australia’s budget is in a spot of trouble. The ABS released its latest Government finance statistics this week and they show a slump in revenue. 

Budget update

 

This, to me, is not a crisis. It’s not good news, but just as you don’t judge a game of football on a 2 minute period, you don’t judge a fiscal situation on a quarter (or even a year, or even a group of years). You ned to judge the fiscal position in the long run.

I’m interested in this high-level measure, the tax-to-gdp ratio. And that’s an interesting thing, with a few moving parts.

Tax to GDP ratio

Treasury has relatively recently begun spruiking it. (This began in the Rudd era, I believe, when he wanted to seem fiscally prudent while spending a lot.) It can be affected by deliberate actions of government, or by shifts in GDP and prices of key exports.

That spike in the red line at the end is now at risk, due to factors beyond the government’s control. In the 2014 Budget, the government announced it would increase revenue as a percentage of GDP, from 23 per cent to 24.9 per cent.

Given the way everything economic and budgetary has come up turds since, the MYEFO is likely to replace this optimistic assumption when it comes out (soon).

A 1 per cent fall in the terms of trade is estimated to have a $2.6 billion impact on the budget, according to published sensitivty analysis. And this week’s national accounts show an 8.9 per cent fall in terms of trade over the last 12 months.

So we’re likely to get a budget deficit that is expanding and a tax to GDP ratio that is falling.

So what should the government do? In the short-run, it should keep spending to prop up growth. But in the medium to long run it needs to do more.

The most senior figure in Australian economics, Max Corden, strips the issues back to their essentials in the Conversation today.

“Given the deficit prospect, the government faces three choices: (1) Run a bigger deficit, (2) raise taxes, or (3) cut government spending… What the government should consider is raising taxes.”

Cutting spending is important where programs are ineffective, or where you’re trimming fat. That is crucial. But it won’t be enough. The Australian people want the government to do more, not less – we want important things like the NDIS and funding childcare and kindergarten.

I’d support raising taxes, slowly and in a clever way, to try to right the structural budget deficit.

This might seem like an impossible PR job for the government. But with the help of one man, it may not be.

John Howard, Prime Minister 1996-2007

The name John Howard is like a magic charm in contemporary politics.  A man who wins four elections  (96, 99, 2001, 2004) gets a lot of kudos in retrospect, even if he had a seriously easy incumbency, bountiful in threats to national security and bumps to government revenue.

Mr Howard presided over an era that saw the tax-to-GDP ratio rise over 24 per cent, even as he gave away income tax cuts as fast as he could. People remember that time fondly. The song that pleaded for us to not take a rose coloured glasses view of his legacy? That record broke.

The man is viewed (wrongly) as a fiscal genius.If I were Joe Hockey, and I was facing up to the fact I needed to to try to sell tax hikes, I’d stick his name on it.

“Reverting to a John Howard era tax-to-GDP ratio” sounds a lot more palatable than simply “hiking taxes.”

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.

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.

The best way to fix Australia’s road and rail might be out of left-field.

Australia has a problem with Infrastructure. We keep building the wrong things.

We spend a huge amount of time developing proposals that have benefit cost ratios less than one. Then, for want of alternative proposals, we turn those proposals into reality.

There are many reasons for this – politicians serving certain electorates, powerful lobby groups, bias to action, and inability to fix infrastructure through pricing .

But part of the problem is a lack of options. We build the East-West tunnel in Melbourne because it is the only idea that’s been properly developed and discussed. We put Sydney’s new airport at Badgery’s Creek because it’s the one location that has been kicked around for years. We plan a light rail line up the middle of Canberra, because that concept has been publicly flogged since Burley Griffin.

To find one great infrastructure plan, you need to discard 99 good infrastructure plans. But Australia doesn’t have 99 to throw away.

There’s a lot of talk about developing a “pipeline” of infrastructure ideas. But politicians are very risk averse, and big infrastructure companies don’t want to waste money on business plans. So our pipeline is the diameter of a carpet python, with a couple of big lumps where it has been fed an approved mega-project.

Computers could do this part.

Infrastructure Australia was set up by the Rudd government to try to help develop a pipeline of ideas, and independently test them. But it only has a few staff, and its leader was recently fired by the Abbott Government. Just as that was happening, he took a stand, publicly saying ”Entrenched truculent bureaucracies have impeded progress… It has been heard that some good ideas cannot go ahead because they would set ‘precedents’. Among other things, this implies knowledge of, but unwillingness to address, widespread deficiencies. Such wilful attitudes test the patience of our elected masters, industry, and the public.”

Even with this courageous bureaucrat in charge, the old Infrastructure Australia was unable to renew the infrastructure planning system. With his blood all over the carpet, the new Infrastructure Australia is cowed.

Even if it makes our political leaders uncomfortable, Australia desperately needs a truly independent infrastructure development and analysis capacity. But how?

I think the answer is not a bureaucracy. I think the answer is by using technology. The same technology that has helped humanity create the biggest encyclopaedia in history and a hugely detailed map of the entire world.

A Wiki.

Imagine a website where you can start a page for any infrastructure project you might dream of.

  • You want to extend a train line by a few kilometres? Start a page with a description and a map.
  • You want a helicopter pad installed at the local sports ground? Start a page with a project description and a map.
  • You want to build a very fast train between Melbourne and Brisbane? Start a page with a project description and a map.

Each page would be able to be edited by absolutely anybody. There would be a section for environmental impacts, a section for cost estimates, a section for estimating time for planning and building, a section for land-use changes and implications, a section for creating a cost-benefit analysis.

flinders st w bikeMost pages would be the hare-brained schemes of the lone wolves of suburbia. The pages would be underdone and silly. But by asking the community to rate each page, the better ideas would attract contributions from a range of talented people and rise out of the muck.

This could bring unforeseen solutions out of obscurity.

For example, when I was writing about the ridiculousness of the state government’s plan to put a new railway station in South Melbourne, right on top of an existing tram stop and miles from the new development it ostensibly serves, I found in the depths of the internet forums the suggestion that the problem could be solved better with a train line that runs from north-east to south-west.

Fisherman’s Bend should be on a new line from Merri (Northcote) to Newport (Wydham Vale – Mernda line).”

This idea may have a cost-benefit analysis ten times better than all the existing plans. But how would we know? There is a choke-point for shining light on new ideas, and its name is the Department of Transport. Risk-averse and slow-moving, DoT can only be expected to properly consider a few ideas that it thinks the government is interested in.

Choosing between a big group of well-developed projects that each have a range of intriguing benefits and positive cost-benefit analyses is going to be difficult, politically. But it’s a better problem than the one we have now, which is a small group of infrastructure plans that mainly look like wastes of money. (I refer here to Melbourne’s East-West tunnel and airport rail, but an honourable mention should go to the plan for a very fast train up the east coast)

If you want to find one project with a cost benefit analysis good enough to build, you need to look at 100 or 1000 projects across the country. The current pipeline is starved of proposals, so it is no wonder the infrastructure policy space is so sickly and anaemic.

train pic b and w

PROBLEMS:

1. The majority of analyses on the wiki would be defective. But the community should privilege the ideas that have the most potential and these should attract rational people to contribute. I expect projects will be submitted with wild underestimates of their cost, and there will be a push by more rational people to actually use cost estimates that reflect realistic Australian pricing. On the ‘discussion’ pages  I imagine there would be fierce argument about why it is we can’t have projects delivered at the prices that apply in China, America, etc. Projects with decent estimated benefits should be most willing to use realistic pricing.

2. Monorails and personal rapid transit. It’s going to be hard to keep really wild ideas out of there, but perhaps that’s the point.

3. Splintering into too many pieces. Every little change in a proposed plan (should this freeway have an exit here or here?) would potentially lead to a new page being created, with a new set of costs, environmental impacts, etc, etc. Conventions and rules may need to be developed to guide when a change is big enough to warrant a whole new entry. But wikis are good at developing cultures and rules that make them effective.

4. The whole thing would be at risk of being ignored if there was no suggestion governments would at least look at it. The project would be a really great thing to seed with some official resources, for example, freely available mapping software for wiki users to use, some models for doing traffic and demand forecasting, recommended ranges for cost per kilometre of roads, bike lanes, tram lines etc. I’d like to see it hosted at infra.wiki.gov.au to give it a sense of official imprimatur and encourage involvement. Perhaps the government could loose a few bureaucrats or pay a few infrastructure experts to play with the wiki to get it started, anonymously having them make edits and bring in a bit of rigour.

So, is this a good idea or a mad one? Is there some aspect of wikis I have overlooked or some problem I’ve not foreseen? Leave a comment below or hit me up on Twitter!

 

Australia and China: an unbalanced relationship.

I think this must be the most-seen three-word phrase in the history of humanity:

Made in China

Unlike liberte, egalite fraternite, or love thy neighbour, Made in China crosses national boundaries with ease, creating only a minimum of tension.

Australia, however, is in the unusual position of running a merchandise trade surplus with China.

Screen Shot 2014-10-21 at 1.14.23 pm

This graph shows merchandise imports and exports from Australia’s perspective. Somewhere around 2009, our exports to China started growing much much faster than our imports from China.

So far, so nice. But the imbalance in our relationship has another aspect.

Far more Chinese visit Australia than Australians visit China. This is intriguing.

Should we be worried about this? What does it imply about our level of interest in our #1 customer?

Do Australians not even care about the culture and the people of China?

Screen Shot 2014-10-21 at 1.13.53 pm

Or is this just the result of there being 60 times more Chinese people than Australian people in the world? Certainly it is the case that the 23 million richest Chinese are richer on average than the 23 million richest Australians. (That’s all of us).

What will be interesting to see is if there is any correlation between the exports of merchandise and the exports of tourism services. When the taste for our iron ore drops off, will our hotels suddenly lie empty?

IN the meantime, I strongly recommend Beijing, especially if you can get there on a day when it’s not too smoggy.DSC00552 DSC00631 DSC00707 DSC00834


photo (2)photo (5)
DSC00559

Buy Australian: About as sensible as F*ck Off We’re Full.

Dick Smith Foods is at risk of closing down. 

The not quite-iconic Australian brand has seen sales halve and its future is cloudy. But Aussies are voting with their feet. They are happy to buy from overseas.

Is this bad? Shouldn’t we buy Australian?

australian mde

I say buy it if the quality or price is good. But not if you have to trade off price or quality. I think this is an example of how global markets are actually a powerful force for good. Let me explain.

I like to think of myself as socially aware. But I take a Rawlsian approach to social justice. I think support is wasted unless it is aimed at the worst off. The very rich giving money to the merely rich is not really charity, in my view.

This is why I support the charity rating system Givewell. And also why I support global trade.

Trade with poor countries helps people who might otherwise live on $1 day, while buying Australian might be the difference between someone driving a car and catching the bus. Trade has helped 1 billion people move out of poverty in the last 20 years.  Those people aren’t under our nose, so its easy to forget about them when you’re considering whether to buy jeans made in China or jeans made in Australia.

The only reason to value the welfare of Australians above those of foreigners is unexamined subconscious bias. I think that bias should be brought into the open and tested for how it impacts our actions and how our actions impact the lives of others.

Here’s a little argument I got involved in online today, in response to someone noting that their crumbed fish fillets had been caught in NZ, crumbed in China and sold in Australia.:

A: Apparently that is cheaper than just doing everything in the same country

B: Oh nooooo, that would be more jobs for our people, and we’d have to pay them gasp!

Me: “our people”

C: Get back to us on this when you’re a gen Y uni graduate with no job, work experience or any connections.

So, Do you buy Australian? Why or why not? Leave a comment below.

Terror and travel: What changes where Aussies go?

The data for overseas arrivals and departures was released today and I decided to see if there was any sign this latest ISIS conflagration was changing Aussies’ travel.

August travel

 

This chart shows the travel by Australians to Indonesia, Malaysia, Egypt, Turkey, Lebanon, UAE, Pakistan and an ABS category called “Other Middle East and North Africa.”

If the government is trying to instil fear, it hasn’t been that effective, apparently. Let’s look at a longer time scale.

travel to islamic countriesThe red line gives us the simple answer. You can’t put the frighteners on us for long. Record numbers of Aussies are out there in majority Muslim countries, from Bali to Karachi.

(It’s worth noting that the number of Australians who identify as Muslim increased from 280,000 in 2001 to 480,000 in 2011. Some of them have family backgrounds in these countries, and might account for a modest share of that increased travel, so it isn’t all exploratory tourism.)

The share of total travel going to that group of countries dips from a peak in 1998 to a low in February 2003. It might be tempting to blame that on the terrorist attacks of September 11, 2001, but half the fall had already happened when those attacks occurred.

The reason for the peak and the pre-2001 fall is prosaic and sensible. IN 1998 opportunistic Aussies were riding a wave of Indonesian exchange rate appreciation that pulled back by 2000.

AUD IDR

September 11 may explain a short blip but a more powerful explanation for the weakness in the middle of the graph is the 2002 and 2005 Bali Bombings. Both these events had sharp effects on travel to Indonesia.

Screen Shot 2014-10-07 at 1.35.28 pmBut by 2008, that effect had passed.

And it seems Aussies weren’t turned off Islamic countries in general. In fact, between the 1998 peak and now, the numbers  of Aussies visiting Islamic countries rose 150 per cent.

And we’ve been more willing to get off the beaten path of Indonesia and Malaysia. The following graph shows how the shares changed.

destinations 1998

destinations 2014

Statistics show Australians aren’t as jerky and petrified as the opinion leaders might think. I’m not surprised.

Let’s hope some of this tourism helps spread a message that even if our government falls into the trap of following the US into war after war, friendship is possible between Australian people and people of Islamic states.

 

 

 

What will you buy more of when you are rich?

Want to know what you’d do if you suddenly got rich?

One way to find out is to listen to rappers.

Iggy Azalea’s track Fancy suggests the money of a wealthy Australian rapper goes on booze, clothing, watches.

“Cup of Ace, cup of Goose, cup of Cris
High heels, somethin’ worth a half a ticket on my wrist”

A very nice new dataset from the ABS allows us to check whether Iggy is reppin in a way that is actually representative.

Alcohol spend

Data confirms Iggy is legit. Rich people spend more on alcohol. The top quintile by equivalised disposable income is spending 3.5 times as much on booze as the bottom quintile.

As for high heels and watches? Clothing shows a similar pattern, but not as pronounced. For every dollar a poor person spends, a rich person spends three.

Unlike alcohol spending, the expenditure shares are skewed to the very top. Someone in the very top quintile spends 34 per cent more on clothes than someone in the second top group.

Clothing So rappers seem to be a good subsitute for data. What about cartoonists?

Cartoonists often show the rich smoking cigars – they’re a classic trope.

cigarettes spend

Sadly this depiction is not backed by the data. When you’re in the top quintile by equivalised disposable income, you’re actually going to spend less on smoking than anyone else. So if you’re trying to fake it before you make it, don’t trust the cartoonists – throw out those Romeo y Julietas. 

What about TV shows? Can we trust their depictions of the lives of the wealthy? In The Slap – perhaps my favourite Aussie TV show ever – the richest character is Harry, who has a fancy house and a nice german car. Is that accurate?

vehicle purchase spend

The rich buy nicer cars. Far moreso than the poor, with a ratio of 3.3. But notably, not much moreso than the next bracket down. If you want to really foretell how you will spend when you are truly rich, you have to look beyond the driveway to the house itself.rent spend

If its rented, that’s a fair sign you’re not in the top bracket. The richest income bracket spends less on rent than the poorest.

But they spend more, a lot more, on housing overall. (Note the scale on the vertical axis. The ratios may be less dramatic but the raw numbers in this graph are the biggest).

imputed rent

(This graph shows imputed rent, which allows comparison of owner-occupiers).

So thanks TV for being careful with your depictions of the wealthy. The classic big car and big house are true signs of wealth.

But they are not the category that shows the most dispersion. The truest single sign that you’re now loaded is that you get your shampoo out of a tiny little bottle.

Accommodation spendWhen you are rich you might have a lovely house (or two), but you will spend a lot more time in hotels. The ratio of 7.9 between the richest and poorest quintiles is the strongest difference of any of the categories.

Globally, the super rich even live permantly in hotels. In LA, the Chateau Marmont is famous for having celebrities check in for years at a time. And don’t forget Coco “The Ritz is my Home” Chanel.

The second sharpest spending difference between rich and poor is in a category I’ve never seen mentioned on TV and a category only one rapper I know of has ever mentioned, and that’s insurance.

Insurance spend

Kanye West name-checks Geico insurance in the 2005 track Gold Digger. it’s not sexy, but there you go. More money, more problems, and more insurance against all those problems.

So that’s a summary of where your disposable income will and won’t be going when you’re loaded. But it’s not the end of the story. Because some of your income isn’t disposable. To find out what I’m talking about, let’s check in with poet/musician/millionaire, George Harrison, and his 1969 song Taxman.

tax spend

Australia in 2014 might not have a 95 per cent wealth tax like Britain did in the 1960s, but the wealthy still pay a lot of income tax. We’ll know Iggy Azalaea’s not just faking being rich when she channels her George Harrison and releases a song about Treasurer Joe Hockey.

Jocks not nerds: Why dumb politicians may be better.

The era of the warrior king was awe-inspiring. The leader that rode his troops into battle, survived arrow puncture wounds and chopped off a dozen enemy heads really earned the right to sit on that throne.

Richard iii shortly before his reign ended, at the Battle of Bosworth
Richard III – shortly before his reign ended – at the Battle of Bosworth

But over time, it became clear that the two skill-sets – sagacious governing and vigorous neck-hacking – were rarely found in the same individual.

We saw specialisation and gains from trade.

Kings paid knights to do their warring for them while Knights benefited from having a bookish type on the throne – someone inclined to spend hours contemplating the merits of the laws, rather than lifting heavy rocks.

So we come to modern politicians. There’s a lot of complaints that these people are  “too dumb”.

But is that fair? Since when did we expect the parliament to do the heavy thinking to come up with new policies?

That’s why we have the public service, the think tanks, the vast commentariat. There is no shortage of good ideas in Australian politics. Take today’s call for the end of negative gearing, for example. That idea doesn’t need to be invented, just implemented.

What we need in parliament is people who can make parliament work.

We need coalition-builders. We need people other people are happy to follow. We need people who can bolt together a coalition of interested parties to make something happen. We need leaders.

If your community is chock-full of bookish types, then they may be delighted to be led by a former university professor.

But will that inspire and delight the community at large?

PUPS

Recent evidence says no.

I’m not saying the level should be brought down that low, mind you. The politicians still need to be able to tell a good idea from a bad one.

The Dunning Kruger effect, wherein a person may be too stupid to tell they are stupid, is an ever-present risk among candidates for parliament. Many of them self-select, thinking they are the first person who ever wanted to take “common sense to Canberra”.

The structure of the political system also influences who you should vote for. If one person will rule, you want a sensible centrist. But where there’s lots of negotiation, you’re better off sending a hardline crazy person. (This may explain the Senate.)

There’s a roughly translated quote from Plato:

“Those who are too smart to engage in politics are punished by being governed by those who are dumber.”

That may have been true once. But these days we are barely governed at all. Years pass without any real reform, while reams of sensible but bold recommendations printed on glossy A4 blow emptily round the inner-city streets of Canberra.

So don’t be afraid to vote for a Jock. Someone who seems smiley and friendly and very popular, if a little bit dim. Someone whose electoral success is not explained by a dazzling academic CV. They might be the the exact politician we need.