Some ideas about the kind of economy we should be headed towards

Here is today’s column in the Fin – in which I try to outline some ideas for a ‘post financial crisis’ economy not just for their own sake, but also as illustrations of the kinds of principles that should lead us as we craft the contours of the mixed economy. If there’s one theme it’s that rather than see things as a simple swinging of the pendulum between (in this case) left and right leaning interpretations of the role of the public and private sectors, there should be some progressive movement which shows us to have learned from and built constructively on the past. At one stage I reached for a slogan from Burke to outline the general form of what I was trying to get at. The slogan was this “A disposition to preserve, and an ability to improve, taken together, would be my standard of a statesman.” That’s fine by me and a bit of a touchstone as to a higher theme, but it didn’t fit in the word length and I thought it might distract a little. So it didn’t end up in there.

Some months ago one of my childrens teachers – Ill call her Tania sought my advice. Having recently sold her house, she was terrified of her life savings disappearing in some bank failure before shed had a chance to reinvest it in another house. I told her, shamefacedly three quarters of a century since the Great Depression you still cant keep your money completely safe.

The Government’s guarantee should have calmed Tania’s nerves (though I hear shes still nervous and authorities report that demand for $100 bills has surged). When the market calms down and the guarantee is lifted in three years shouldnt we have somewhere for people to keep their money safe?

I’ve previously outlined in this column how it could be done. You already have an account with the Tax Office. Since the government helps itself to penalty interest if you’re late paying tax it seems only fair that it pay interest on your surplus.

You can already make internet payments from your bank to your ATO account. The Government should commission the software to enable you to use your ATO account to make internet payments enabling you to pay anyone with an ATO account. Voila! A simple, safe and dirt cheap savings and payments system.

And the system could also interface with the existing bank payments system – the one you use to pay people over the net. None of this should be subsidised. Indeed, the government could fund it including an appropriate return on investment from interest margins and/or charges, just as banks do.

I reiterate the idea not just for its own sake, but also to illustrate a particular approach to that vexed question of the role of government at a time of great questioning. Note two things:

First, though the proposal expands government services, it doesnt lurch back to the pre-reform era. Back then, governments owned banks only to have them operate just like private banks which eventually made it hard to see the point of public ownership. So I’m not suggesting branches around the country though governments could allow account holders to pay for those services and contract them out to existing public and private retail networks like banks, post offices, supermarkets and gas stations.

Instead, existing government infrastructure would be leveraged to create a powerful new facility that would cost less and offer more instantaneous payments without counterparty risk between government guaranteed accounts than existing arrangements offer.

Second, its cognitively efficient. Rather than send the Tanias of the world on the anxious wild goose chase of assessing banks respective creditworthiness, we build the simple, safe solution theyre looking for whilst leaving them free to seek more exotic, higher risk and return solutions elsewhere.

Oh and Im waiting for Tania to ask me where to invest her super, because, while super choice is a great thing for those in the know, for Tania its another nightmare of cognitive inefficiency. Tania’s a great teacher. But since she wouldnt fancy her chances of choosing a good fund, what advisor will she consult? How will she tell how knowledgeable they are of if theyre mainly motivated by commission payments?

Theres one further choice Tania should have. Its already provided to public servants: unless they take charge and put their super elsewhere, theres a large default fund, professionally managed (at arms length from government) with scale economies and an absence of commission payments that minimises management fees.

Wouldnt these low cost government services crowd out the private sector?

Australias pioneering HECS scheme provides the model. HECS crowds out private lending partly because its interest rate is subsidised (which I dont support). But the main reason it crowds out the private sector is that the governments access to the tax system makes income contingent loans practicable, where private lenders would shy away from all but the best risks.

Im a big fan of the private sector Im in it! But just as more efficient private firms crowd out less efficient firms in markets, providing theyre not subsidised, if government services out-compete private firms, so much the better. It helps us evolve our way towards a more truly complementary relationship between private and public endeavour, as private resources that are crowded out resurface where theyre more productive to do things that governments are too big and awkward to do well.

This entry was posted in Economics and public policy. Bookmark the permalink.
Subscribe
Notify of
guest
15 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Sinclair Davidson
Sinclair Davidson
13 years ago

While we’re still in agreement that the ATO should pay interest on balances, I’m not sure that they would want to become part of the payments system. For a start I suspect they would find paying interest too onerous (I have in mind the same rates that they charge). Over time this would lead to the PAYG system being fine tuned so that the ATO did not hold excess balances and did not have to refund too much money (with the corresponding interest charge).

That’s neither here here nor there, I’m seeking clarification on the second point. I’m not sure what you mean by the default fund – the future fund? Your recommendation here is unclear – can you elaborate please?

pedro
pedro
13 years ago

If I read this correctly, you want the ATO set up as an ADI. How is the Govt/ATO to set the interest rates on your balances? Do you see the ATO lending money to the private sector or just to government? The electronic payments system involves software failure risk and hacking risk, which need to be priced into fees or whatever and there is an estalishment, maintenance and administrative cost. Do you think that there should be charges for the use of those functions, or should the deposits be nil interest to compensate?

Is there a risk that your default super fund would become too big? Surely such a fund would attract so much of the super revenue just from laziness and then become massively dominant and inefficient as a result.

By the way, didn’t Albanese float the idea of getting into the superfunds for infrastructure investment just a couple of weeks ago. You’re suggesting a pretty big temptation.

Niall
Niall
13 years ago

I smell yet another tilt at the AussieMac scenario, Nicholas, and can’t help but wonder whether your impetus isn’t less than altruistic.

Damian Jeffree
Damian Jeffree(@damian-jeffree)
13 years ago

I think the idea of the govt bank account is a good one, with the selling advantage that it looks innovative and responsive. Could be expanded to allow easy retail purchase of govt bonds etc which might be interesting.

Just on Tania’s theoretical super question, I have been thinking that the current super set up may be leveraging the country too much to the fortunes or otherwise of the stock market. The nation is already has a natural leverage to the fortunes of the market through ownership of shares, the effect on employment of the share prices of companies etc. This is now combined with margin loan share accounts and CFDs etc to create additional leverage to share market outcomes for willing punters. Which is all fine natural and voluntary exposure, but what concerns me is that the most popular super options are heavily weighted to domestic shares.

This super exposure is fine too while, as one of my favorite bloggers Larry Levin says, “Shares go up for ever and ever, Amen.” I think it is unlikely but it is theoretically possible that we could now face 10 years where shares go nowhere, or in a worst theoretical case, like Japan is now experiencing, fall for 20 years.
Again, I do not think this is the likely outcome for the Australian share market, but just supposing that it were, where would that leave the Tania’s of the world when it comes to retirement? The risk transfer outcome of this tendency for local share exposure could be very bad in terms of reducing reliance on public funded retirement.

While I fully support the freedom of choice for superannuation investment options, perhaps the government mandated default should be something more conservative with a portion in something like one of the govt accounts you are suggesting, some in foreign currency etc.

What are your thoughts on reconciling this need for freedom of choice with the current outcome which as I say I think leaves the country overly leveraged to share price movements?

Damian Jeffree
Damian Jeffree(@damian-jeffree)
13 years ago

Hi Nicholas, thanks for your thoughts.

Fully foreign certainly would be a nice counter balance to Australian fortunes, and more approximate to what a truly globally balanced portfolio would look like. I suspect the ideal though would be somewhat slightly more weighted to the local economy than a completely country neutral portfolio, but a lot more than even 20% foreign.

20% foreign/80% local is still very much weighted to the local market. And if that local market does not come through for an extended period, Australia’s exposure to itself, if you like, will end up costing the taxpayer in pensions.

May be the risk bias that the dividend imputation credit arrangements create for the government long term makes them worth revisiting?

Niall
Niall
13 years ago

Bad Mouthing, Nicholas? Methinks he doth protest too much.

I’m simply drawing parallels between your previously declared preferences within the mortgage lending game, and what appears to be an obvious predilection for government-backed mortgage industry competition. Personally, I believe your direction to be flawed, and am simply saying so.

pedro
pedro
13 years ago

More foreign is a good idea, I hated watching superfunds chase the cap-rates on commercial property up to such unsustainable levels.

Off-topic, but now would seem a good time to bite the bullet on reducing company tax rates as you discussed in the linked article on imputation.

Damian Jeffree
Damian Jeffree(@damian-jeffree)
13 years ago

Following on from Pedro, for a government with a $40B hole being blown in its budget, cutting a poorly understood tax concession, passing on, say, half of it to company tax relief, boosting dividends and share prices, and coming up $10B ahead sounds like a no brainer. Particularly for a Labor govt who would probably be less impacted electorally.

Somebody get Wayne on the phone!

trackback

[…] an earlier column I outlined the problems of the cognitively challenged ‘Tania’. Tania is not […]

trackback

[…] I’ve argued that payments could be commoditised here. […]