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Author's Name: Rana Roy
Date: Tue 12 Feb 2019

Rana Roy

Dr Rana Roy

Since April 1997, Dr Rana Roy has been the sole owner and director of his independent economics consultancy, specialising in the field of public economics in the service of public policy – based in London, UK, for the most part, and more recently in Hobart, Tasmania.  His principal clients have included London, UK, Tasmanian, Australian and international government agencies, including the European Commission, the European Conference of Ministers of Transport, the OECD and the World Health Organization.  Prior to this, he served in senior roles in government agencies including the Tasmanian Department of Premier and Cabinet, the Australian Productivity Commission, the Australian Department of the Prime Minister and Cabinet, the UK Department of Trade and Industry, and as Chief Economist of ECIS, the European Commission’s think-tank on infrastructure.

Subject Area Expertise

The field of public economics in the service of public policy. 

Website

http://www.icea.co.uk/member-listing/members-cv-by-name

 


Responses (24)


Congestion pricing - November 2018

 

Strongly agree

9

The potential welfare gains from congestion pricing are very large – counting both the certain gains from de-congestion and the gains available if the resulting revenues are used to reduce the level of welfare-minimising taxes and/or raise the level of welfare-maximising investments. Having led several multi-country studies on the topic and having tabled the arguments and evidence to persuade successively the European Commission, the European Transport Ministers, the Transport and Environment Ministers of the OECD member-countries, et al., to endorse the principle of congestion pricing, I have no difficulty in agreeing with the above proposition with a high level of confidence. But having witnessed very little follow-up by way of decisions to introduce congestion pricing in practice, I have some difficulty in finding any useful words to add to the debate. Rather, let me invite readers to consult my short summary of the argument and evidence in the 13-page document, Roy, R. (2007), A Politician’s Guide to Efficient Pricing, ECMT, Paris, and my fuller treatment thereof in the 31-page document, Roy, R. (2008), “Mind-forg’d Manacles – The Constraints to Optimising Urban Transport Policy”, OECD, Paris.


Banking Royal Commission and the Credit Crunch - October 2018

Poll 33

Proposition 1: "There is a significant risk that, either as a result of the findings and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry or as a result of the financial institutions' response to those findings, credit will become less readily available to Australian households or businesses."

Proposition 2: "Assuming credit becomes less readily available to Australian households or businesses, this will in turn have adverse consequences for the performance of the Australian economy."

 

1 - Uncertain (neither agree nor disagree)

2 - Disagree

1 - Any major reform that aims seriously to move from a suboptimal equilibrium to a more optimal equilibrium is likely to be disruptive and to carry the risk of unintended consequences. Consider for example the reforms that put an end to the rule of the Mafia in the Mezzogiorno or that of the drug cartels in Colombia. In principle, the same would apply to any major reform that aims seriously to put an end to the unethical, and prima facie criminal, practices exposed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. In the present case, however, the timetable for major changes to the governance and regulation of the finance sector is likely to be overtaken and overwhelmed by more powerful events: the deepening of the downturn in the housing cycle; a global tightening of liquidity with global QE scheduled to turn negative in early 2019; a global downturn in asset prices and in the real economy in 2019 and 2020. This is why I find it difficult to be certain of the impact of any follow-up to the Royal Commission: it may be that reforms resulting from its findings and recommendations will amplify the impact of other and more powerful events on the availability of credit to Australian households and businesses; it may be that such reforms will not happen early enough to have any discernible independent impact; or it may be that the requisite reforms will be delayed by the relevant decision-makers as part of their response to the downturn. My vote for “uncertain” should be read as the outcome of the above reflections.

2 - The Torah instructs us in Exodus 20:15: “Thou shalt not steal”. If the attempt to implement this instruction in response to the findings and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were indeed to result in a discernible independent impact on the availability of credit (notwithstanding my doubts on this point as expressed in my previous answer), I would respond, paraphrasing Paul Keating, “This is the correction that Australia had to have.”


Electric vehicles and road-use pricing - June 2018

Poll 30

"Pricing of road-use for electric vehicles should be the same as fossil fuel-powered vehicles."

 

Strongly agree

9

If the proposition above is taken to mean that the PRICING of road use should be on the same basis – and not that PRICES for each instance of road use should be the same – then my answer is an emphatic yes. For more than twenty years and in dozens of published studies, I have argued that the only reliable way of internalising the several various external costs of road use – accidents, congestion, air pollution, CO2 emissions, etc. – is at the point of use. Neither the vehicle in the showroom nor its fuel can provide an accurate measure of the externalities in question, considered independently of the trip undertaken, the distance driven and the conditions under which it is driven. It is each trip itself that needs to be taxed so as to raise its price to its marginal social cost. We have the technology to do this and investing in its application to road pricing is the best investment that governments can make in this field. In contrast, every virtue-signalling short-cut proposed over the years, by way of subsidies and tax concessions to favoured vehicles and fuels, has ended in tears – the last major instance being the favourable tax treatment of supposedly climate-friendly diesel-engine vehicles leading to increased deaths from air pollution. Now if a consistent marginal cost pricing system were applied to each trip, some trips by electric vehicles would be charged more than trips of the same distance by conventional vehicles. To take an extreme example: an electric vehicle drawing its power from a National Grid supplied largely by coal and crossing a major-city CBD at peak hour would pay more, not less, than would a petrol-engine vehicle crossing an equivalent distance on an empty road. Of course, one can equally well imagine examples where an electric vehicle would pay less. The point is to ensure that each trip pays its correct price as determined at the time and place in question. The correct price cannot be determined by an a priori government decision to favour the latest product of the latest rent-seeker.


Will building more homes make housing cheaper? - May 2018

Poll 29

"A sustained increase in the number of new homes constructed each year, all else equal, will make housing cheaper than otherwise."

 

Agree

9

Given the phrasing of this proposition, it is difficult to disagree that “a sustained increase in the number of new homes constructed each year, all else equal, will make housing cheaper than otherwise”. But it would be equally difficult to disagree with this proposition: “the withdrawal of one or more or all of the various demand-side incentives to bid up house prices – the tax treatment of negative gearing/the capital tax discount/the capital tax exemption on the primary residence/policy rates set at near-zero or negative in real terms/etc. – all else equal will make housing cheaper than otherwise”. Therefore, whilst I welcome the RBA Discussion Paper as a valuable addition to the evidence base, I am not persuaded that the question of the quantitative contribution of the various “drivers” to house price inflation has a settled answer that will not vary from place to place and from year to year. The key point here is that, as the document notes, “rising house values in supply constrained markets … [are] a driver of changes in the distribution of wealth and income”. Tightening supply is one among several means of achieving the same end –to facilitate rising house values and therewith a regressive redistribution of wealth and income. If for any reason one of these means is temporarily disabled, other means are likely to be deployed more fully and to greater effect. As a general rule, the relevant decision-makers, in the lending institutions as well as in national, state and local government, will be led, by an invisible hand as it were, to take decisions that have the effect of enriching themselves and their kind. (See, inter alia, ABC News). Of course, we could as a society make a collective choice to take the punch-bowl away from the rent-seekers, treat housing as an essential consumer good and enact a suite of policies designed explicitly to bring down the cost of housing to the benefit of the majority. The relaxation and reform of planning restrictions would follow from that choice, as would various other means, including taxing away all residual economic rents, but they would do so as a means to that end. Sadly, we have yet to make that choice.


Australian Federal Budget 2018 - Reduce government debt or provide tax cuts? - April 2018

Poll 28

Proposition 1: "Slowing the growth in the debt to GDP ratio should be a priority for Australian governments."

Proposition 2: "Slowing the growth in the debt to GDP ratio is a higher priority than income or corporate tax cuts."

 

1 - Disagree

2 - Disagree

1 - Long-term forecasts are not without risk of error but my strong expectation is that every well-functioning economy will carry a stock of public debt into the Day of Judgement, yielding a flow to interest to bond-holders up until the day preceding the Day of Judgement. The point is that public debt is the counterpart of an enduring asset class: it does not need to be “repaid”. What needs to be paid is the interest, preferably with a regularity and certainty that ensures that it is not burdened with a risk premium. According to The Economist, public debt in the advanced economies “has been about 105% of GDP on average since 2012”. And according to RBA stats, the differential between Australian and US 10-Year Government Bond Yields as at end March 2018 is zero. On this evidence, the growth in the Commonwealth Government’s net debt toward circa 20% of Australia’s GDP (or indeed of the sum of Commonwealth and State Government debt to circa 40% of GDP) is not obviously a matter of concern and does not signal any urgent need to prioritise a slowing thereof. That said, Australia has made poor use of this debt, with too little being spent on public investment and too much on public consumption (recurrent expenditure). If Australia continues to signal an inability to fund recurrent expenditure without recourse to borrowing, the interest rate at which it borrows may be penalised with a larger risk premium sometime in the future. To date, however, the main loss here is the sum of potential benefits foregone from the worthwhile public investments that governments have failed to execute.

2 - For the reasons stated above, I do not consider slowing the growth in the debt to GDP ratio to be a priority. In contrast – as has been persuasively argued by Saul Eslake in The Conversation – there is a clear case for cutting income tax, to offset the recent increase in the burden of direct taxes on households and in partial recompense for the on-going freeze on real wages. That said, I do not propose that tax cuts be funded by recourse to a higher level of public debt: public debt should be reserved for public investment. Rather, I should prefer to see reductions in income tax funded by reductions in those spending items that deliver zero or minimal additions to welfare and by increases in (and the closing of exemptions from) those taxes that do zero or minimal damage to welfare.


Robots, artificial intelligence and the 'future of work' - October 2017

Poll 23

Question A: "Holding labor market institutions and job training fixed, rising use of robots and artificial intelligence is likely to increase substantially the number of workers in Australia who are unemployed for long periods."

Question B: "Rising use of robots and artificial intelligence in Australia is likely to create benefits large enough that they could be used to compensate those workers who are substantially negatively affected for their lost wages."

 

A - Uncertain

B - Strongly agree

Question A: No, I do not think the outcome in terms of the unemployment count can be derived from these specifications alone. The extent to which robots and artificial intelligence are put to use and their impact on the number of hours worked and the number of workers employed is a composite result of factor prices, aggregate demand and government policies – and these in turn will reflect the relative social power of the relevant “factors” (aka social classes). Where labour is strong, the reduction in hours required for a given level of output can be translated into a reduction in hours worked per worker rather than a reduction in the number of workers employed – or into an increase in aggregate demand and a sufficient increase in output to maintain the level of hours worked at the higher level of productivity. Where labour is weak, the result may be greater and more prolonged unemployment – or it may be a displacement from high-wage employment in the mainstream economy into low-wage employment at its periphery. But then, so long as labour is weak, the downward pressure on wages will act as a brake on continuing automation. Today in Britain, as Paul Mason observed recently, automated car-washes are being replaced by six men with a rag!

Question B: Yes, this statement is true under almost all conditions. Up to and including the point of total automation, the increasing use of robots and artificial intelligence delivers a net gain to society as a whole. It is then a question of how we choose to distribute that gain. At one extreme, we could continue to allow the primary gain to fall to the owners of capital and then attempt to recover part of it in taxes with which to “compensate the losers” to a partial extent – be it in the form of the dole, or “work-for-the dole”, or “retraining” for new “jobs” outside the trade-exposed sectors (for example: in car-washes, shoe-shine stands, etc.). At the other, we could recognise the fruits of centuries of scientific and technological progress as the collective patrimony of all and distribute to each, via a universal income, the consumer goods produced at a decreasing and ultimately zero marginal labour cost. Right now, however, we are stuck in a trap of stagnant wages, stagnant productivity, and stagnant growth. The immediate question therefore is how to spring this trap and return to the high-wage, high-productivity growth path that could take us to the threshold of abundance – not how to distribute the fruits thereof once we arrive thereat.


Public borrowing for infrastructure investment - September 2017

Poll 22

"As interest rates are at low levels by historical standards, federal and state governments, despite their public debt levels, should be borrowing more than they currently are to invest in infrastructure"

 

Agree

9

As I have argued elsewhere (for example: Roy, “Mind-forg’d Manacles”, OECD, 2008), governments should proceed with investments in infrastructure, and all other public investments, where the Net Present Value of such investments is shown to be clearly positive when tested against an economically justified discount rate – which latter will vary in time and place but is at around 3% in the case of the advanced economies today. The fact that market interest rates for government borrowing in recent years have fallen below the level of an economically justified rate discount rate – and have occasionally turned negative, as in the case of German Bunds – is not so much an additional argument in favour of greater public investment as a counter-argument against nervous Finance Ministries who worry that we cannot afford financially to proceed with investments that are indeed economically justified. Nonetheless, the counter-argument does apply here. Federal and state governments should proceed with, and can afford to proceed with, justified investments in infrastructure – which would, given the size of Australia’s infrastructure deficit, entail a higher level of investment that obtains today.That said, there is an important caveat that needs to be attached. Over the last decade of low interest rates, federal and state governments have done precious little to correct Australia’s infrastructure deficit: hundreds of millions of dollars have been collected in pay checks even as the costs of inaction have been in the billions. Indeed, there must now be some doubt as to whether Australia still possesses the requisite intellectual and institutional capacity to select, evaluate and deliver the requisite infrastructure investments. In this context, the most urgent need is a close public scrutiny of infrastructure policy – not a blank cheque to governments to go on a spending spree.


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."

 

Strongly disagree

9

I am unaware of any compelling argument or evidence to suggest that “conventional approaches to the pricing of externalities” – to wit, Pigouvian taxes designed to align prices to marginal social costs – have been superseded by new and better instruments. The findings in the OECD study, Effective Carbon Prices, and in every relevant update in the OECD environmental policy database, demonstrate that the various alternative instruments – feed-in tariffs and other such subsidies for renewables, regulatory targets and quotas, tradeable renewables certificates – are more costly by orders of magnitude than either broad-based taxes on GHG emissions or GHG emissions trading systems. Indeed, this search for unconventional instruments has imposed not only a high resource cost in terms of euros/dollars per tonne of CO2 saved but also unintended environmental and social costs such as the ethanol fiasco in the United States, the shift from less-polluting petrol vehicles to more-polluting diesel vehicles across the world, and here and now a shift to diesel generators for electricity production in South Australia.


Does privatisation of human services hurt outcomes? - July 2017

Poll 20

"For-profit provision of human services like health and education leads to poor client outcomes and high costs to government."

 

Agree

7

I agree with this statement or better still a slightly less emphatic version of it: for-profit provision of human services like health and education can often lead to sub-optimal client outcomes and costs to government. But I do not agree with what is often misread as its corollary: that non-for-profit public provision is necessarily superior. I agree with the statement for the simple reason that information asymmetries alone make it impossible for these sectors to mimic textbook-style competitive markets where rival producers are obliged to take consumer preferences as data and to seek profit solely by means of product improvements and cost-reducing innovations: neither the patient nor the pupil is well-placed to impose “consumer sovereignty”. Moreover, when this is combined with extensive government subsidies prompted by equity considerations, for-profit provision makes it all-too-possible for private providers to profit at the expense of both clients and taxpayers. In contrast, not-for-profit public provision is, in principle, better-placed to pursue and achieve welfare-maximising outcomes. And there is an abundance of examples to demonstrate the point: from the pioneering days of Britain’s National Health Service to the recent record of Finland’s education system. However, for all manner of reasons, from producer/managerial capture of the public provider to the interaction between public procurement and the for-profit supply chain, we also have examples aplenty of public provision delivering outcomes that are far from welfare-maximising. Consider the recent saga of Tasmania’s TAFE system (cf. sundry press article on the subject) or the egregiously sub-optimal results of US Government expenditure on health care (cf. Sir Angus Deaton’s essay in The Economist, July 15th-21st). I conclude therefore that those of us who wish to see a more welfare-positive provision of human services like health and education are best-advised to focus more on the requisite reform of public provision than on the spectre of privatisation.


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 agree

9

An independent Budget Office should help to restore the credibility of our economic forecasts and public confidence therein. Hopefully, it would also help to make the forecasts more accurate. For this last to obtain, we need an informed debate on some of the fundamental assumptions used in these forecasts. To take just one example, the continued use of the assumption that nominal and real GDP growth will always revert to "the average" just around the corner and continue at that average thereafter is an assumption that needs serious scrutiny; whilst any attempt at a fresh forecast each year will carry the risk of error, the use of this default assumption more or less guarantees error.


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."

 

Agree

7

I have not had time to study this question in any depth or do any back-of-the-envelope number-crunching. But my guess is that the probable gains to the winners from the proposed action (the consumer surplus gains from lower prices; the avoidance of industrial shut-downs and bankruptcies and redundancies; the avoidance of deaths from hyperthermia; etc., etc.) will outweigh the probable costs to the losers (a reduction in the flow of economic rent to the monopolies in question; a reduction in the vicarious pleasure that we doubtless experience in witnessing the ever-greater enrichment of the said monopolies; etc., etc.). The only caveat I would enter here is the risk of unintended consequences: hence, given that I have not had time to study the question in depth, I am unable to write “strongly agree” or give my answer a 90% confidence rating.


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."

 

Strongly agree

9

Yes, this is a highly distorting subsidy that should be removed, as should every other subsidy that serves to inflate house prices. But the withdrawal thereof will not suffice to deliver a full correction to the distortions in this market. The increase in land values, which is the main component of the increase in house prices, is pure economic rent accruing to some at the expense of others. It should be subject to a land value tax at an appropriately high rate. This would serve simultaneously to constrain the increase in house prices; to discourage land hoarding and encourage its most efficient use; to transfer any economic rent generated to society as a whole; and to enable government to use these revenues to replace all manner of distortionary taxes. However, I don’t expect any of this to obtain so long as our Ministers continue to spend their time and energy buying up investment properties (though not of course the time and energy required to make the necessary entries in the Parliamentary register).


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."

 

Disagree

7

Enlightenment, said Kant, is the capacity to use one’s reason without the guidance of another. Notwithstanding the guidance of the signatories to the “US Nobel Laureates for Hillary Clinton” Open Letter, my reason dictates an answer in the negative. I may be wrong and I hope I am wrong; but I fear I am right and I think it right to share my fears. If Hillary Clinton were to be elected President, I expect the following to obtain pari passu: she will win the Electoral College with considerably less than 50% of the popular vote; the Republican Party will retain control of the House and very likely the Senate; the Republican-led Congress will make the fullest use of the findings of recent and continuing FBI investigations (see the statements in response to the FBI Director’s letter of 6 November by Speaker Paul Ryan and by the Chairman of the RNC); the Republican leadership will do so armed with opinion polls showing the majority of Americans believe that Clinton acted “illegally” and/or “unethically” (McClatchyMarist poll) and that she is not “honest and trustworthy” (New York Times poll). In consequence, there is a serious risk of a re-run of the Richard Nixon Presidency à la 1973-1974 and, with it, a resulting policy paralysis across the key economic portfolios, including international economic relations – just at a time when bold policy responses are required to meet the mounting economic challenges facing American and global society. At the same time, I agree with the US Nobel Laureates where they identify Donald Trump’s proposals on trade, immigration, tax cuts and debt default as serious risks to the global economy. Thus, irrespective of who wins the Presidential election, I believe the result of the election will deliver a worse economic outcome for the US and for the world, including especially trade-intensive economies such as Australia, in the years immediately ahead of us – at least, over the calendar years 2017 and 2018 – than obtains as at today, 7 November 2016. In the context of this prognosis, the question of which of the candidates would deliver the worst variety of this worse outcome is a secondary issue and depends on too many unknowns to be answered with confidence: what matters is that we are likely heading for choppy waters and need to plan accordingly.


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

5

Although the Mahabharata has been a life-long companion to me, I am not familiar with more recent literature on the social costs of gambling. Hence, I cannot answer this question with a high degree of confidence. Nonetheless, I am prepared to “take a punt” and answer it in the negative for the simple reason that the benefits from gambling are vastly under-stated in public discussion. They exceed by far the consumer surplus and tax revenues identified in the question itself. They include inter alia: a rare opportunity for social mobility in a society with high levels of generational inequality and social immobility (cf. Australia’s location in the Great Gatsby Curve as recorded in the paper by Mendolia and Siminski in the September issue of Economic Record); the educational value of witnessing wealth acquired transparently by luck in a society where many are misled to believe that the relative life-chances of plutocrats and paupers are determined by “merit”; the quantifiable benefits of both philanthropic and far-sighted for-profit investments by those who have made their fortunes in gambling and are therefore less likely to let their minds be dulled by conventional thinking (cf. the recent and prospective transformation of Hobart’s landscape resulting from David Walsh’s investments in Mona and other ventures and his proposed investments at Macquarie Point); and the hard-to-quantify but historically demonstrable benefits of permitting religious liberty for all, given that bans on gambling entail a violation of the religious liberty of some (cf. Stanley Wolpert’s discussion of the meaning of the Emperor Aurangzeb’s “war on gambling”). Let me end with a personal story. In 1983, as a postgraduate student with nothing but my debts to depend upon, I sought to borrow £1,000 from my bank to place on a bet at odds of 100 to 1 (a bet on India winning the Cricket World Cup). My bank manager refused – thereby depriving me of £100,000 (≈ $250,000 in 1983 dollars) and, with it, a passport out of poverty. Today, the ease with which I was able to make a little money through internet gambling on the result of the US Presidential election is something for which I am truly grateful.


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

As a general rule, immigration will increase the general welfare in the sense that the gains to the sum of winners will outweigh any loss to the rest of society. This is usually the result of reductions in both intra- and inter-national barriers to entry, be they for goods, services, capital or labour. We should therefore expect the benefits of current and/or higher levels of immigration to Australia to exceed any costs. There are however three addenda – not amendments but addenda – that I should like to record. First, it is best to specify precisely the subject, the “who”, to whom these benefits and costs apply: welfare gains and losses are enjoyed and suffered by sentient beings rather than abstractions such as “the economy”. On a related note, I would argue that the sentient beings whose benefits and costs need to be counted here are all the residents of Australia, including the new immigrants. Finally, I would urge those who are not content to live by the Hicks-Kaldor rule that the gains to the winners need only be large enough to compensate the losers but rather wish to insist that the losers must in fact be compensated to specify precisely who needs to compensate whom. This could prove enormously helpful: to take a topical example: it would enable the winners from the withdrawal of the recent proposal to over-tax “backpackers” – in this instance, the backpackers themselves as well as farmers, related producers, all Australian consumers, et al. – to compensate the losers – in this instance, the relevant politicians and their PR agents who doubtless experienced some degree of “pain and suffering” once the folly of their proposal was made plain to one and all.


RBA economic growth targets - August 2016

Poll 10

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

 

Disagree

7

In arguing in favour of Senator Xenophon’s proposal, Greg Jericho said: “Targeting nominal GDP resets the conversation.” I too want to reset the conversation – and I disagree with the proposal because I fear it would fail to do so. There is a case to be made in favour of NGDP targeting; and I accept that it might have been a difference for the better before and after the GFC. But, as ever, the answer to the question depends on the context. And the present context is that – as the RBA and central bankers around the world have been attempting to communicate in subtle and not-so-subtle ways – monetary policy is being asked to do way too much even as fiscal policy and other relevant policy tools have been missing in action. The result of this coupling has been a failure to revive demand and growth in tandem with a force-fed increase in asset prices and consequent wealth inequality. We cannot undo the past; and it is probably too late to halt the current downturn in growth before it takes us into recession. But the task ahead is to ensure that governments respond with appropriate action rather than continued inaction: in particular, with a manifold increase in public investment (in infrastructure, urban planning, renewal of energy and transport systems, education and training, the R&D required to realise the full potential of new technology – the sum of investments with high social returns is massive). The “great moral challenge”, to borrow a phrase, is to use public debt to increase public investment so as to bequeath a more expansive future for our “children and grand-children” – rather than scorn the gift that the world’s savers are offering governments at a price of near-zero. It is governments, not central banks, who need to be tasked anew.


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

Posting as I am from the great cosmopolis of London with nary a Brexiter in sight – and desirous as I am of preserving my equanimity in order to enjoy my summer in London – I shall refrain from all further comment.


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."

 

Strongly agree

9

An affirmative answer to this question does not require a complex debate on the relative impacts of education spending versus business tax cuts. It only requires us to recognise that, given Australia’s system of dividend imputation, a change to the company-tax rate will generate little change in incentives for Australian investors. Treasury’s own modelling suggests that the proposed cut in the company-tax rate will yield only a modest increase in GDP “over the medium term” (c. 0.1 per cent per year). And an important paper by Dixon and Nassios at CoPS suggests that, under plausible assumptions, the modest increase in GDP would be accompanied by a fall in national income – by far the more relevant measure. We also need to consider a critical variable briefly flagged in the Dixon-Nassios paper: the current and prospective tax treatment of foreign-sourced income by tax authorities in the United States and other source-countries of foreign investment in Australia. Under plausible assumptions, it is entirely possible that a company-tax cut in Australia will yield little change in incentives for US and other foreign investors, and therefore little change in economic outcomes in Australia, but will represent rather a gift of tax revenues from the Australian Treasury to the US Treasury and those of other foreign governments – doubtless, a generous and high-minded thing to do but not exactly what is being sold to the Australian electorate. In contrast, all serious estimates of the impacts of increased spending on education, including recently by the OECD, suggests the likelihood of an above-zero return.


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."

 

No opinion

9

I am sorry to say that I cannot answer the question for the simple reason that I cannot accept its premises. I refer in particular to the projected cumulative growth of nominal and real GDP growth over the period in question, including at three and five per cent per annum, respectively, from 2017-18 inclusive. IMO, the cumulative growth will undershoot these projections by something like 50% - but I am quite prepared to consider informed opinion to the contrary.  But in any event it does not make sense to substitute an automatic default assumption in place of an informed assessment for the medium term – surely that is something that should be reserved strictly for the long term. To put it another way, I can offer no comment as a fashion critic of the “return to surplus” when the obvious point to be made is that the Emperor has no clothes. It is only when the Emperor is prepared to put on some clothes that we can make a judgement on the degree to which we need to tighten the belt.


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."

 

Strongly disagree

9

If "windfall" refers to rising prices that deliver economic rents, as distinct from expanding volumes at a competitive rate of return, then the answer is no. Thanks to the unprecedented pace of China's industrialisation and urbanisation, Australia has indeed enjoyed an extraordinary "windfall" of rents in the first decade-and-a-half of the present century. For example: from the turn-of-the-century base to its peak, iron ore prices rose by a factor of nine whilst oil prices rose by factor of three. And Australia's monopoly position in iron ore, shared only with Brazil, exceeds that of any single oil-exporter. But there is no reason to expect the new Chinese economy to deliver a comparable "windfall" of rents for the Australian services sector. Rather, Australia will need to compete for its share of the Chinese market with other advanced economies: with the US and the UK in education, with Germany and France in engineering services, with France in tourism, and so on. So, we would do well to recognise that the technologies, skills, practices and mind-sets needed to compete in these fields are not necessarily the same as those needed to collect the fruits of monopoly.


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."

 

Uncertain (neither agree nor disagree)

7

When posed at this level of generality – with no specification of time or place or definition of "major sporting event" in the question itself (as distinct from the e-mail invitation) – this question cannot be answered with much confidence either in the affirmative or in the negative. Hence, the only safe answer here is "neither agree nor disagree". But as a practitioner of cost-benefit analysis (CBA), let me make three observations on the subject. (1) In any given jurisdiction in the OECD world, even the most ambitious CBAs in the field (for example, the London Olympics) are often held to less exacting standards than is required in other fields of public investment (for example, London's CrossRail). (2) And yet, and once again staying within the OECD world only, available benefit-cost ratios (BCRs) for investments in sporting events are nowhere near as high as is often obtainable in several other fields of public investment, such as health, education, infrastructure and environmental protection. (3) It is difficult to judge the relative merits of public investments in Australia since both the standards and the level of standardisation of CBAs leave much to be desired.


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."

 

Agree

7

I agree – with regret. In principle, there is a clear case for intervention to support innovation if, and insofar as, social returns are greater than private returns. And there is much to be welcomed in the Government's Innovation Statement, including the more conventional measures on CSIRO funding, science education, and so on. But in order for an intervention to be "efficient" (i.e., welfare-positive), it must first be "effective": in the present case, it must generate a measurably higher level of innovation that would otherwise obtain. Taken in isolation, the "new tax incentives for investments in technology and innovation businesses and start-ups" are likely to be too limited to be effective: i.e., too limited in size and scope relative to the incentives that the tax system currently provides for investments in all manner of non-innovative, unproductive and welfare-negative activity, including especially in real estate. Arguably, therefore, the best way for Australia to encourage investment in technology and innovation would be to withdraw the current tax incentives to keep bidding up the prices of "little boxes made of ticky-tacky … little boxes all the same".


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."

 

Uncertain (neither agree nor disagree)

1

To respond in the festive spirit: I cannot admit a scenario in which a human agent is faced with such a choice at Christmas time and am therefore unable to answer the question. As every child knows, "we" do not give Christmas presents - Santa does. And it would, I think, be presumptuous of us to advise him. Rather, let us be grateful for what we receive. Merry Christmas to one and all!


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."

 

Agree

7

The answer is probably "yes" but the question itself is a little under-cooked. The proposed re-alignment of penalty rates should lead to an increase in employment and output "in these industries on Sundays" (though the interaction with other aspects of the labour market as well as the tax and social security systems may well limit the gains). But perhaps the more relevant question – and one that is more difficult to answer – is whether such a re-alignment alone would lead to an "economy-wide" increase in employment and output.