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Author's Name: Stephen King
Date: Tue 12 Feb 2019

Stephen King

Professor Stephen King (past panellist)

Stephen King is Professor of Economics at Monash University and a Member of the Economic Regulation Authority of WA. Prior to joining Monash, Stephen was a Member of the Australian Competition and Consumer Commission (ACCC), where he chaired the Mergers Review Committee.

Stephen’s main areas of expertise are in competition economics, regulation and industrial organization. He received the University Medal from ANU for his undergraduate studies in Economics. He also has a Masters in Economics from Monash University and a PhD from Harvard University. He is a Fellow of the Academy of Social Sciences in Australia.

Subject Area Expertise

Subject expertise: microeconomics and economic policy

Website

http://www.monash.edu.au/research/people/profiles/profile.html?sid=24055&pid=4848

 


Responses (20)


The Finkel Review - August 2017

Poll 21

"The Finkel Review has recommended a mandatory certificate scheme that obliges electricity retailers to purchase a certain proportion of the electricity they sell from sources of electricity whose emission intensity is below a defined level. This is preferable to conventional approaches to the pricing of externalities, such as an emission tax or cap and trade scheme."

 

Agree

8

To answer this question it is necessary to look at the Finkel Report and see what the Panel was trying to achieve. First, the alternative schemes the Panel considered are just for electricity generation - so we are not talking all sources of carbon emissions in an economy wide scheme. Second, it is important to recognise that the CET scheme and the alternative EIS scheme looked at in the Report - as with all schemes that are based on a quantity path of carbon emissions - can get to the same level of emissions over time, but with different costs. As the Report notes (p.95) "[b]oth an EIS and a CET can also be designed to achieve a set emissions reduction target, though they get there in different ways".If we are looking at economic costs and incentives then the EIS is clearly superior in theory to the CET scheme for the reason noted in the Report. The CET is asymmetric. "In the long-term, the CET scenario saw more electricity produced by brown coal than the EIS scenario because there is no penalty for high emissions generators" (p.92). The EIS 'punishes' higher emitting sources of generation and 'rewards' lower emitting generators. So is close to a Pigouvian tax. The CET does not do this but simply 'rewards' generators who have emissions below a certain threshold. So the EIS will provide better incentives to reduce emissions in the least cost way.If the only criteria for a 'preferable' scheme was reducing carbon emissions from electricity generation at the lowest economic cost, the EIS would win over the CET.But this is not the only criteria. The additional criteria, as the Report makes clear, is workability and (implicitly) the likelihood of having the scheme implemented via a political process. As the Report states on p.96: "The Panel notes that many stakeholders have expressed strong support for an EIS. The Panel also notes that to date the Australian Government has ruled out implementing an EIS".In other words, an EIS may be a well-supported, efficient and effective scheme, but it would be politically dead in the water if it was recommended. Add on to this the ability to build a CET scheme on the current RET scheme, so a CET is relatively easy to implement, and the Report, in Recommendation 3.2, "recommends a Clean Energy Target be adopted".So is the CET scheme preferable to the alternatives? Yes, if the objective is to actually get a working and reasonably efficient emissions reduction scheme working for electricity generation in the NEM. It is not the best scheme that economists could design, but it is the one most likely to be implemented.


Australian Federal Budget 2017 - Outsourcing Economic Forecasting - May 2017

Poll 18

"Given the Commonwealth Treasury?s ongoing difficulty in making accurate forecasts of some of the key economic variables underpinning the Budget ? in particular nominal GDP growth ? the Government should ?outsource? the economic forecasts used in framing the Budget to an independent agency (such as the Parliamentary Budget Office), as now happens in the United Kingdom."

 

Strongly disagree

9

The only reason to out source the Budget forecasts is if Treasury is unable to do them as well as an external agency. Why could this be the case? There is no reason to believe that an external agency would be more competent at making the forecasts than the Treasury. So the only reason to outsource is if Treasury faces another barrier to producing accurate forecasts. If there is another (say political) barrier, then this should be fixed. The problem is not solved by outsourcing.


Energy shortages - reserving Australian gas - April 2017

Poll 17

"In response to energy shortages around Australia, government policies requiring gas producers to reserve some production for domestic consumption are a good way to ensure that Australian consumers have access to sufficient gas supplies while still allowing for gas exports."

 

Strongly disagree

10

There is a short term problem with gas supply in Australia as we adjust from a domestic market insulated from the world market, to a market where price is set by the export price. The transition is involving significant pain for some businesses. However, a gas reservation policy (like that in place in WA) makes no sense as a solution. First, unless the government was going to make the policy retrospective, it would only apply to future gas developments. These will not occur until the current problem is history. If the federal government did make the policy retrospective then it will be an expost imposition on the gas field developers. The amount of gas reserved for domestic use has to be sufficient to set the domestic price below export parity if the reservation policy is to have any effect in the longer term. So it will lower the price of the gas sold domestically compared to the export parity price. Gas sellers will have to bear the loss - a great example of sovereign risk.Second, even if there was a long term problem, a reservation policy is a poor policy to help ensure the long term viability of businesses that have high demands for carbon intensive fuels like gas. If the government really wants to assist these manufacturers in the long term then it should use a direct, transparent subsidy - not a hidden fuel subsidy. Of course, why the government would actually want to subsidise these high carbon polluting industries is another question.


CGT deductions - March 2017

Poll 16

"Capital gains tax deductions for housing investment should be removed because they overstimulate the housing market, contributing to rising house prices."

 

Disagree

7

The deductions (negative gearing) cannot be considered in isolation. The problem is that the current tax mix (capital gains tax discount of 50% and 'negative gearing') allows wealthier individuals to move highly taxed income to lower taxed capital gains using housing as a vehicle. A better solution might be to remove the capital gains tax discount on housing (or more generally) to stop housing being used as a vehicle to reduce tax at low risk. It is far from clear that this will reduce housing prices in the long term, but it will close a tax loophole used by wealthier Australians.


Economics teaching - micro before macro - February 2017

Poll 15

"It is more effective to teach an introductory course in micro-economics first before an introductory course in macro-economics."

 

Strongly agree

10

To understand intro macro students need to understand the basis of trade and where prices come from - basic microeconomics.


2016 US Election - November 2016

Poll 13

"Hillary Clinton is likely to be the superior US presidential candidate for the Australian economy and for Australia."

 

Agree

6

I only agree because the alternative is so awful. If the Republicans had put up a half decent candidate then they would be a shoe-in by now. Will Clinton be 'good' for Australia? Probably not given her campaign rhetoric. Will she be better than Trump? That is a low bar to hurdle!


Social costs of gambling - December 2016

Poll 14

"The social costs of gambling exceed the benefits (including consumer surplus from recreational gambling and tax revenue for governments)."

 

Disagree

7

I interpret the question as whether the TOTAL economic welfare from gambling is negative. While this is an empirical question, the likelihood that the total economic welfare from gambling at the level we see in Australia (which is altered by taxes) is negative seems rather unlikely. A more interesting question would be whether at the MARGIN gambling creates positive or negative economic welfare (i.e. should there be a marginal change in gambling in Australia). But that is not what is asked.


Part 1: 'Behavioural economics provides new and useful insights into individual behaviour.' Part 2: 'It is unethical for governments to use behavioural economics to

The total benefit of current levels* of migration to Australia will outweigh the total costs to Australia's economy.

 

Agree

8

The name 'behavioural economics' is new - the rest isn't. It is part of a strong stream in microeconomics that goes back at least 50 years (and arguably a lot longer). It is important - because understanding the limitations of our models of decision making, where they apply and when, and adapting these models or developing alternative approaches, is important. The use of laboratory testing is more recent, but the development of alternative theoretical approaches to address issues in decision making (bounded rationality as per Simon and Leibenstein, decision making under uncertainty as per Allais and Savage, etc) has long been part of a good graduate education in microeconomics. And the claims that 'new' discoveries in behavioural economics somehow undermine theory can only be made by those who have not studied microeconomic theory in any depth.


Immigration - November 2016

Poll 12

'The total benefit of current levels* of migration to Australia will outweigh the total costs to Australia's economy'.

 

Strongly agree

9


Behavioural economics - September 2016

Poll 11

Part 1: 'Behavioural economics provides new and useful insights into individual behaviour.'

Part 2: 'It is unethical for governments to use behavioural economics to "nudge" citizens.'

 

PART 1 - Strongly disagree

9

Of course, this is a moral question, so my view and confidence reflects my moral views. 'Nudging' (or 'soft paternalism' or 'libertarian paternalism') policies would have no effect for 'rational' individuals who face no costs of decision making. But for the rest of us, a nudge (such as changing the default on organ transplants) can significantly change behaviour for those who don't care 'enough'. So we get improved social outcomes while people who really care can still make the same decision regardless of the policy.

PART 2 - Strongly disagree

9

Of course, this is a moral question, so my view and confidence reflects my moral views. 'Nudging' (or 'soft paternalism' or 'libertarian paternalism') policies would have no effect for 'rational' individuals who face no costs of decision making. But for the rest of us, a nudge (such as changing the default on organ transplants) can significantly change behaviour for those who don't care 'enough'. So we get improved social outcomes while people who really care can still make the same decision regardless of the policy.


RBA economic growth targets - August 2016

Poll 10

"The Reserve Bank of Australia should be tasked with targeting nominal economic growth rather than inflation."

 

Uncertain (neither agree nor disagree)

8


The Brexit - impact on UK citizens - July 2016

Poll 9

"Assuming it is implemented, Brexit will deliver net economic benefits, on average, to UK citizens within its first 5 years."

 

Strongly disagree

10

A variety of economic analysis leading up to the vote showed the negative economic effects of Brexit on UK citizens. The alternative analysis by 'leave' economists could only model an economic gain on unrealistic assumptions (eg. The UK leaves the EU and implements free trade agreements with a wide range of other countries outside Europe). Further the least costly Brexit alternative (the EFTA alternative as per Norway) would require free movement of people which is unlikely to be acceptable to the 'leave' voters in the UK.


Spend on education or business tax cut - June 2016

Poll 8

"Australia will receive a bigger economic growth dividend in the long-run by spending on education than offering an equivalent amount of money on a tax cut to business."

 

Uncertain (neither agree nor disagree)

9

Unfortunately, this question is simply too vague to answer with a firm view. What would the education spending be on? We know that smaller class sizes are not well related to educational outcomes. So money spent further lowering class sizes is probably money wasted. But funding more one-on-one help for students who are falling behind (particularly at early school and pre-school levels) could be money well spent. What about a business tax cut? Well, what businesses? Are we talking small businesses (under $10m turnover per year) or large businesses with significant foreign shareholdings? Or are we talking all businesses? And is it a cut in income taxes or some of the inefficient state taxes that affect businesses? So depending on the exact policy details, either option could be better for growth. Hence I am very sure that this question has no unambiguous answer because the question just does not have enough detail!


Budget 2016-17 - Returning to surplus - May 2016

Poll 7

"The recently released 2016-17 Commonwealth Budget projects that the Australian Government's underlying cash balance will return to surplus by 2020?21*. Australian politicians should rebalance the budget with greater urgency."

 

Disagree

9

The current level of Australian government spending and government debt is not high by the standards of most developed countries. Further,  Australia is still in a period of adjustment as the end of the resource price boom leads to a change in economic activity from the north and west of Australia back to the south-east, and from mining to services. So this is not the time to be dramatically curtailing government activity. Of course the real question is whether the prediction of a return to an underlying budget surplus by 2020-21 is realistic. I doubt it! Unless there is a dramatic rise in both Australia's and the world's economic activity (leading to increased tax revenues for the federal government) I suspect that the projection of a surplus by 2020-21 is not realistic.


China services boom for Australia? - April 2016

Poll 6

"As the Chinese economy makes its transition from investment-led to consumption led growth, the Australian service sector which currently accounts for around 20% of total exports, will produce a second 'Chinese economic windfall' for Australians."

 

Uncertain (neither agree nor disagree)

10

Continued Chinese economic growth will benefit the world economy and directly or indirectly benefit Australia. Undoubtably some areas of Australia's service exports (such as higher education) will be well placed to benefit. So the key issue is whether China will continue to grow - which has more to do with politics (and beyond my expertise) than economics.


Efficiency of tax Government investments in major sporting events - February/March 2016

Poll 5

"Government investments in major sporting events usually generate net benefits for the city or region where the investment is made."

 

Strongly disagree

10

Major sporting events that are 'sold' around the world (Olympic games, Grand Prix races, Soccer world cups) are very unlikely to generate net economic benefits for the economy. Why? Suppose there were such gains. Then competition to host the event would mean that the gains are transferred to the sporting body that holds the rights to the event - either as explicit fees such as for the Grand Prix or as illegal fees (payments to certain FIFA officials come to mind). So at best competition for such events would lead to no (or very small) net gains. However, politicians, from Roman emperors to today, get electoral benefit out of the events. So they are likely to use public funds to bid more than the economic gains to get hold of these events. So basic economics tells us that when politicians bid for sporting events then the economy is likely to be losing.


Efficiency of tax incentives - February 2016

Poll 4

"New tax incentives for investments in technology and innovation businesses and start-ups are likely to be inefficient."

 

Uncertain (neither agree nor disagree)

5

This is difficult to evaluate without a lot more investigation. The package has targeted tax offsets and a capital gain tax exemption on relatively small investments in start ups, as well as offsets for (much larger) venture capital investments. There is also a change to the 'same business test' for carry forward losses. The economic question is: where is the market failure? It could be argued that individual investors are too risk averse from a social perspective and that socially it is desirable to have a greater level of individual risk taking (e.g. individuals can do 'one draw' on a risky investment but society as a whole gets lots of 'draws'). If so, it might be desirable to have well targeted incentives for risky investment. However, are these changes well targeted? And do they address the key problem (e.g. is it bankruptcy laws that are the problem rather than access to capital?) So I will sit on the fence!


Bah Humbug Australia - December 2015

Poll 3

"Giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash."

 

Strongly disagree

9

There are at least two reasons why giving gifts is efficient (in Anglo cultures). The first is because they are given by another and thus guilt free to the recipient. Guilt stops me spending $30 for the four pack of Trappist Beer. If you gave me $30 I would not buy the beer because of the guilt at such an indulgent purchase. But my guilt-free value exceeds $30. So if someone gives it to me (while I give them a gift of about the same value) then I get guilt-free value. And great beer.Second, giving is also about the giver. If I give my wife $500 ear rings for Christmas I will get a loving response. The response will be a bit different if I gave $500 cash! My act of spending time and choosing the ear rings is a signal from me to my wife that is not conveyed by money.That said - be careful about culture. In some cultures giving money is not merely acceptable - it is expected.


Penalty Rates Reform - November 2015

Poll 2

"Aligning Sunday penalty rates for hospitality, entertainment and retailing industries with the current levels for Saturday, as proposed in the Productivity Commission's draft report, will lead to more employment and greater availability of services in these industries on Sundays."

 

Strongly agree

9

The employment and service effects are likely to be modest (but the statement "will lead to more" is fairly weak). As the PC notes, the real winners will be the consumers with some increase in available services and a reduction in 'Sunday surcharges'. The higher Sunday penalty rates seem a left over from last century. If workers need protection from being required to work too many days in a row then the wage system should directly address this - not by picking 'Sunday' as the day to either have off or be paid significantly more.