Life in the punditocracy

Here’s today’s AFR column.

No pain no gain. Were all familiar with the cliché. Meet its twisted sister. Courting the pundits respect for taking tough decisions, our politicians simply make the economy worse. Call it all pain, no gain.

In the next few weeks the Federal Government will lower tariffs for cars and apparel even though simple economics says tariffs shouldnt fall further unless matched by our trading partners. Why? Because if we cut tariffs we import more thats the point of the exercise. And to pay for those imports we export more. And exporting more will slightly cut our export prices. Bearing that small cost is fine if were reducing high tariffs, but low tariffs impose miniscule costs, and they raise revenue that will have to be raised some other (costly) way.

Many of the major decision makers know all this. But they explain patiently they can’t stop tariff cuts because it just wouldnt look right. Theyre not referring to the economic merits here, but rather to the pundits.

Now, pointing to the emperors lack of attire can be hard work from Opposition. But its usually a doddle from government where your decisions control of the agenda and can be chosen to illustrate the tradeoffs being made. When, after years of economic reform the zero tariffs parcel was passed to Dr Hewson did it do Paul Keating any harm? Does the Federal Government really want to find the billion odd dollars extra revenue tariff cuts yield every year?

Still this is small beer compared with the pundits fiscal policy. It sounds so responsible to minimise debt. But debt can fund more infrastructure which improves amenity and accelerates economic development. Whats not to like about the economics or politics of that?

And the alternative? Well behold the NSW Government still shuffling towards its political grave with the contradictions behind its arbitrary minimisation of debt still ripping it apart AAA rating and all.

All this because State Governments havent had the stomach to give their opponents a few cheap shots about rising debt though of course theyre taking them anyway! In addition to controlling the political agenda, governments should also develop independent institutions to ensure infrastructure projects are well chosen and to reassure the public of their fiscal prudence.

Thus when battling perceptions of his partys past fiscal laxity Steve Bracks as Victorian Opposition leader promised to get the Auditor Generals seal of approval on government budgets. And so he did, but then retired back into debt aversion and under-investment in infrastructure which is now making life interesting for his successors.

And all this could really matter at the Federal level sometime soon. A few years ago I proposed that governments should start moving the institutions of fiscal policy towards the model offered by monetary policy. For instance the government could build some independent institution to publicly advise it on its fiscal stance, including on borrowing to invest in infrastructure and other assets (including financial assets). This would have cramped the Governments profligate style during the boom and so went nowhere.

But what if the economy turns down? Forecast budget surpluses would be at risk. Then, as the inevitable political pressure comes on, well be told – even though we’ve sensibly posted tens of billions of dollars in surpluses (and yes it should have been more) – that we have no choice but to prune the budget. Why? Because letting the budget bottom line suffer might be good for the economy, but it would look bad. It would offend the pundits.

Economists who want to run the economy according to the best guidance our discipline gives us will be complimented on our candour and forthrightness. But it will be patiently explained to us that doing the wrong thing economically will play better with the pundits as indeed it will at least for a while.

Still Im hoping that some in the Government, looking at the demise of Morris Iemma and with their eyes focused on making it through the political cycle over the next 24 months might be prepared to brave a few 24 hour news cycles to talk the talk and build the institutions that can help us apply ourselves to fighting the next downturn as best we know how. Some long term futures might depend upon it.

It mighnt be all beer and skittles. But then, as they say, no pain, no gain!

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Jim Belshaw
Jim Belshaw
13 years ago

Part of the problem, Nicholas, is that we are still caught in mind traps from the past. If you remember back to your time in JB’s office, we were coming out of the admittedly crazy protectionist world. This made it very hard to get anything up that smacked of direct assistance. This thinking is still around.

hc
hc
13 years ago

These claims are recycled nonsense Nicholas and (I suspect) you know it.

“In the next few weeks the Federal Government will lower tariffs for cars and apparel even though simple economics says tariffs shouldnt fall further unless matched by our trading partners. Why? Because if we cut tariffs we import more thats the point of the exercise. And to pay for those imports we export more. And exporting more will slightly cut our export prices. Bearing that small cost is fine if were reducing high tariffs, but low tariffs impose miniscule costs, and they raise revenue that will have to be raised some other (costly) way.”

Simple economics? My ass. There is no presumption in international trade theory that a small country such as Australia should condition tariff reductions on tariff reductions by neighbours. What you are recycling is your idiosyncratic and absurd theory that because Australia has price setting power in export markets and does not exploit this power, by setting an optimal tariff that this failure can be redressed by imposing low tariffs on imports.

Even if I was wrong in my claims (and I am not) there is no way that this is ‘simple economics’. It is absolutely not ‘simple economics’.
At best it is idiosyncratic economics.

It is also just wrong because what you are suggesting is that the factor substitutions that would be engendered by a tax on exports will be equivalently achieved by input shifts resulting from a tariff on imports. That’s wrong in fact – restricting exports by an optimal tariff will not shift resources in the same way that a tax on imports will in an economy with more than two economic sectors – and doubly wrong because of the a priori assumption you make that monopolies governing our mineral exports are not already extracting rents. If monopoly power captures these rents then an optimal tariff on these exports is redundant anyway.

There is not a reputable international economist in Australia who would agree with your views and I wonder about your motives for expressing them. Is there a commercial interest or just a pig-headed insistence that a theory that you espouse which would have zero support from anyone who knows anything about trade is right regardless of the illogic?

The article is a harmful input (one repeated many times before) into Australian trade policy debate.

I asked one of Australia’s most prominent trade theorists about your earlier attempt to rescue protectionism and before I got half way through my inquiry he said ‘Don’t tell me its one of these silly ‘optimal tariff’ arguments. But in the end it was and I felt embarrassed that I even wasted 10 minutes of his time with the inquiry.

Try another line in op-eds. Perhaps one that doesn’t draw on international trade theory.

NPOV
NPOV
13 years ago

Where did Nick say anything about “optimal” tariffs? I gathered his argument was that Australia’s tariffs are already lower than those of our trading partners, and indeed generally very low, so we stand to lose by cutting ours further before they at least cut theirs to match ours. I don’t see any implication that there is some optimal (non-zero) tariff all trading partners should ultimately be aiming for.

NPOV
NPOV
13 years ago

Nick…hmm…ok…so if our trading partners all had zero tariffs today, there would still be a case for us maintaing our tariffs?

NPOV
NPOV
13 years ago

That would seem to ignore the likelihood that our trading partners would look over this way and think “hmm, well if they still have tariffs, we might just have to introduce them here too”.

pedro
pedro
13 years ago

Sorry, but I don’t get it. I completely accept that cutting tariffs will lead to more imports, but where is the problem with that? After all, what is the point of exporting anything if it is not to buy imports. If we reduce imports we have to either miss out on those goods or have dearer local substitutes. Where’s the gain? I also accept that the benefit for further cutting already very low tariffs is limited and I don’t mind the idea of a tariff as a tax to pay the cost of AQIS.

derrida derider
derrida derider
13 years ago

NPOV, here are 3 seperate arguments about tariffs here:

– the traditional view, founded in some rigorous logic, that tariffs always cause you a net loss in income, no matter what others do. So you cut them no matter what others do.

(Personally I agree with this but unlike Harry I think our current tariffs are so small that it’s not a big issue anyway).

– Nic’s view, only slightly less traditional and just as logically rigorous, that if your exports are monopolies or near monopolies you can make an extra buck by keeping some tariffs, no matter what others do. So you keep them no matter what others do.

(The logic’s fine, but just point us to the export monopolies, Nic).

– the “strategic” one that our tariffs cause us loss in net income but cause others even more loss. So you keep them “temporarily” as bargaining chips in agreements to make others reduce their tariffs.

(This one is beloved of trade negotiators – it gives them a reason for existing. In the real world keeping tariffs makes others more, not less, likely to keep theirs – as you point out.)

derrida derider
derrida derider
13 years ago

My use of “monopoly and near monopoly” was for clarity of exposition, rather than saying “inelastic demand”. Sorry for the looseness of expression.

I’m still not sure that our long run pricing power in commodities is significant – the time series econometrics can really only pick up the short run quantity responses. These are always much higher than the long run ones because we have competitors who will eventually react.

But why single out cars? It seems to me you’re only making a case for a low and broad-based tariff (with consequent effects on the exchange rate), rather than one that picks out a single narrow import sector. Even if the optimal rate of the broad-based tariff was 11%, it doesn’t follow that the optimal rate of a narrow based one is, because a narrow tariff will only have a muted effect on the exchange rate while causing the internal distortions of resource use that traditional theory predicts.

I think your penultimate sentence may be double counting, BTW – the conventional comparative static net welfare calculations of tariffs implicitly includes the transfer of consumer and/or producer surplus to the tariff imposer (ie the government).

pedro
pedro
13 years ago

Nicholas, how do cheaper import costs make exporters reduce prices to increase exports? Won’t the immediate impact be on the current account with flow on adjustments to currency values? It seems to me that your theory assumes a visible hand for our market.

Tariffs are a combination of consumption tax and rent and so the general benefit comes from the reduction in the rent and the missing tax could be made up with a different tax. Even a general tariff produces something of a rent because it benefits manufacturers focusing mainly on the local market at the expense of everyone. But a small general tariff to pay for AQIS etc seems like a good idea to me.

Yesterdays drop in the currency did more for Holden than any tariff retention could. don’t know how much ford and toyota export.

pedro
pedro
13 years ago

Isn’t more accurate to say that the lower exchange rate makes exports cheaper to the buyers and therefore increases demand for them? How does a lower exchange rate make exports more profitable? to the extent that other imports are a factor of production of the export goos then they will be dearer surely?

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