Author Archives: Fred Argy

Gillard’s broken promise

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Gillard is still the best person to lead the ALP (there is no one else). How deal with the loss of trust following her broken promise on carbon tax? This is a difficult question but it must be resolved.

Abbott keeps making stupid remarks and then saying “it was an inappropriate comment”. Why not try something similar? Gillard could say “what she said then was an inappropriate comment and she regrets it”.

She can argue that there is still a strong case for a carbon tax but only in the right circumstances. She now faces a hung parliament (a tied, minority government). She either had to sit on her hands and do nothing on carbon pollution. OR she could make some effort to negotiate a new carbon tax scheme, through a Labor-Greens agreement (such as the one signed in September 1, 2010), which could have the general approval of Parliament (including the Independents). It went for the latter.

It was the right decision – but she went too far with her promise. She wishes she had never made it. But that’s politics.

Has anyone a better suggestion?

Economic Growth v/s distribution

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In the USA (a presidential election year), there is a considerable debate on how much emphasis government policy should assign to economic growth (properly interpreted to encompass all externalities and market failures) and how much to income and welfare distribution. The argument in the US revolves around economic efficiency, individual freedom and fairness.

Let us deal first with economic efficiency. Conservatives tell us that an increase in income tax policy will discourage economic growth, even at current levels of taxation. A contrary view (http://economistsview.typepad.com/economistsview/2012/03) is that the “optimal” income tax rate in USA – before it would deter the wealthy from trying to earn more – is well above the present 36% level and is much closer to 50 to 60%. One can at least say that the effect of a higher marginal tax is small to insignificant.

On the question of individual freedom, there is no doubt that many Republicans, which are now condemning gay marriage, abortion, access to contraception etc., are effectively attacking individual freedom. As Reich says, “a society where one set of religious views is imposed on a large number of citizens who disagree with them is not a democracy. It’s a theocracy”. See http://economistsview.typepad.com/economistsview/2012/03/the-difference-between-private-and-public-morality.html I am sure that most libertarians would agree with this view. As to the impact of smaller government on freedom, this depends on one one’s perspective on fairness.

One’s notion of what is fair is a subjective issue. The average income of the vast majority of Americans is today slightly below the average back in 1966, whereas the top 1 percent share of real income growth has been strongly increasing over this whole period. The gains of the super-rich have made the US one of the most inequitable in the developed world..

Personally, I do not accept the view that distribution effects do not matter. The US has a long way to go to ensure that it has an adequate safety net to provide enough income mobility (at least relative to Scandinavia and Australia). More importantly (and less subjectively), the enormous rise in relative income of the super-rich has occurred in a period of rapid productivity growth – with all of the productivity growth going to the super-rich! It is hard to accept that there is any semblance of “fairness” in the US system.

Can something be done in the USA to shift power to the working class? Reich says: Congress has lost interest; Unions have no voice; most of the press are controlled by vested interests which seek to retain the present distribution of political power; and the working class have neither the time nor access to wealth nor the sense of unity it needs to demand change. In some cases the Republicans are trying, with its deficit reduction policy, to make distribution worse.

This is one good reason why Governments need to balance fairness against alleged economic efficiency effects. What do you think?

Politics of economic reform

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Now that my days of writing and blogging are over, I am spending my time reading books. I have almost finished reading John Howard’s book on Lazarus Rising, which is easy to read and generally quite enjoyable (although at times self-righteous). One thing about the book struck me.

Howard admits that he was “forced” to introduce new legislation on Work Choices, even though many of its provisions were never fully planned or announced prior to the 1996 election. It provided for:
• an end to the “no disadvantage” test, which had previously guaranteed a part of the person’s pay packages, including penalty rates and leave loading;
• covered firms employing fewer than 100 persons when applying the unfair dismissals; and
• Howard’s industrial relations legislation covered all persons in an enterprise-based agreement, even where there was an overwhelming majority of the work force who stated a clear preference to retain collective agreement.

Why did Howard do this? The reason is that he unexpectedly now had full control of the Senate. The Government would be deemed as “policy cowards” if they did nothing to take advantage of this blessing. Howard admits this decision turned out to be a “political mistake”.

Now isn’t that the very same problem Gillard now faces with the Carbon Tax reform? It faced a change (this time adverse) in the Senate composition, with the Green in control. Gillard decided to accept the “changed circumstances” and proceed with its reform. Whether that too proves a “policial mistake” we will not know for the next two years or so. But there is a clear precedent in what Howard did.

Relationship between wages and employment

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  Paul Krugman looks again at the relationship between deficit reduction, wages and employment in the USA. 

http://krugman.blogs.nytimes.com/2011/03/27/wages-and-employment-yet-again/

Yglesais says that a decline in deficit could lead to further employment expansion if it led to lower general wages (through a more flexible wage system) .

Krugman argues that this misses a key point: when you cut the price of something, it normally get cheaper relative to other things and this allows a redistribution of spending towards the cheaper good. But “when you cut the price of everything -which is more or less what happens when wages fall across the board – there is nothing to substitute away from”.

So, Krugman contends, the argument is not just morally wrong (because it inflicts further pain on people who are not responsible for what happened to the financial system) but it also technically wrong. It won’t have any positive effect on employment and could well prove negative.

This issue does not arise in Australia because (a) Australia has a much higher relative minimum wage than in the USA (b) we have a much stronger Fair Work Act and (c) Australian levels of unemployment are much lower than in the USA.

Continue reading →

How welfare impacts on the poor

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Attached is a post by James Kwak. It strongly rejects a comment by Caplan and Beaulier that Behavioral Economics will Undermine the welfare state by expanding the set of choices.

Caplan and Beaulier believe that poor people are more inclined to make irrational judgments because their judgment biases are more extreme and their self-control problems more severe than those of the rest of the population. Giving them more choice will simply give them more opportunity to hurt themselves.

They argue that poor people are more likely to exhibit heavy alcohol use, to suffer from obesity, more inclined to smoke, commit crimes and use illegal drugs and to have earlier children while in their teens.

The issue, as Kwak sees it, is simple: is the so-called bad judgment of the poor “causing” obesity, crime, drug-taking etc. or is it the result of poor education, the high cost of eating healthy food, limited care options, worse health care options etc.? In other words, are poor education and health the product of inequality and won’t a reduction in inequality (e.g. via social security) improve poor people’s welfare? (This is apart from the fact that things like unemployment insurance and EITC increase the incentive to work).

It is a well argued piece but perhaps taken a little too far. For example, are education levels entirely a product of poverty or are they more gender-based?

Any alternatives to a levy?

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I might have preferred for the Government to take a risk with the surplus in 2012/13, and perhaps to have a go at middle-class welfare, but that would have been politically too hard. It has been seen as “an intellectual defeat” to the Coalition – but is it not a fact of life with the present minority government?

Instead, we have got a modest tax levy and many spending adjustments. The levy can be justified on several grounds:

(i) 60 per cent of workers will be exempt from the levy and most of the remainder will pay $1 or $2 per week;
(ii) it is quite possible that the Australian labour market will remain very tight, with shortages of workers forecast in Queensland and WA; wage pressures will add to high food prices, so the levy and spending cuts should thus reduce pressure on interest rates;
(iii) any further cuts i(to meet new disaster relief) will be met (we are told) by further cuts in spending, not by drawing on the levy;

What is the alternative to the levy – e.g. to slug a few rich and poor public servants? How is that fairer than hitting relatively high income earners?

Economic growth and distributive justice

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I have often worried about whether promoting ‘efficiency” – in the economic sense – ensures maximum well being where it makes some people better off but others worse off – even if the Kaldor-Hicks criterion is fully met e.g. by ensuring those who gain from the policy could potentially bribe those who lose from it.

I discussed at length the issues involved in “The Distribution Effects of Labour Deregulation” (see article in AGENDA, Volume 14, No 2, 2007). I reached an inconclusive answer: it depends on what mix of social values appeals most (distributive justice and equality of opportunity versus choice and self-reliance).

Now Uwe Reinhardt and Steven Landsburg debate this issue in a piece highlighted in Greg Mankiw’s blog, August 27, 2010. It is most interesting discussion which I strongly recommend.

Outlook for macroeconomy

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I hate to say this but all my forecasts over recent months seem to be proving right.

First, we have over-done monetary policy (see my contributions in Club Troppo, January 29 and February 4th 2010).

Second, our expansionary fiscal policy was on the right scale (although mismanaged at times) e.g. see my Club Troppo piece of February 25).

Third, the world is now entering the “early stages of a third depression”, due to a general fetish about public debt (e.g. see Krugman piece of June 28th).

Finally, any future macro-policy change (to the extent it is needed in this country) must rely more on additional spending (on health, education and infrastructure) and less on labour market deregulation and reductions in taxes (see for example my CT piece of March 18, 2010). The people who are most vulnerable (the medium to long-term unemployed and under-employed) are the real victims of the global financial crisis.