tag:theconversation.com,2011:/uk/topics/vital-signs-24164/articlesVital signs – The Conversation2021-11-18T19:06:19Ztag:theconversation.com,2011:article/1718402021-11-18T19:06:19Z2021-11-18T19:06:19ZVital Signs: Chill, this week’s news on wages points to anything but hyperinflation<p>Suddenly people are talking about inflation, even hyperinflation, in a way they haven’t since the 1980s. </p>
<p>In October the United States posted its highest annual consumer price index increase in 30 years, <a href="https://www.bls.gov/cpi/">with inflation up 6.2%</a> and “core” (excluding volatile prices) inflation of 4.6%.</p>
<hr>
<p><strong>US underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US consumer price index for all urban consumers, all items less food and energy, city average.</span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/graph/?g=rocU">US Bureau of Labor Statistics, St Louis Fed</a></span>
</figcaption>
</figure>
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<p>Former US Treasury Secretary Larry Summers – arguably the finest policy economist of his generation – contends that what’s happening is not transitory.</p>
<p>He says soon inflation could soon climb to double digits, where it hasn’t been for 40 years.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1460235085937053700"}"></div></p>
<p>There are plenty of other leading economists, including Nobel Prize winner <a href="https://www.nytimes.com/2021/11/11/opinion/inflation-history.html">Paul Krugman</a>, who argue that what’s happening is just temporary, part of the adjustment to post-pandemic life, akin to the tyres of a car <a href="https://www.nytimes.com/2021/05/27/opinion/us-economy-growth.html">spinning uselessly</a> before they gain traction.</p>
<p>Closer to home, the data are less alarming.</p>
<p>Only <a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-next-year-171731">12</a> of the 55 top economists surveyed by the Economic Society of Australia and The Conversation saw a serious risk of prolonged above-target inflation.</p>
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<p><strong>US and Australian underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=301&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=301&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=301&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">Australian Bureau of Statistics, US Bureau of Labor Statistics</a></span>
</figcaption>
</figure>
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<p>On Tuesday, in an address entitled <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-11-16.html">Recent Trends in Inflation</a>, Reserve Bank Governor Philip Lowe said in most economies inflation was expected to be lower next year rather than higher, with inflation rates generally clustered around 2%.</p>
<p>That’s RBA-talk for “chill, folks”.</p>
<h2>Many wages are barely moving</h2>
<p>The Bureau of Statistics reported on Wednesday that the wage-price index climbed <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.2%</a> over the year to September, up from 1.8% over the year to June.</p>
<p>It’s an improvement, but some wages are barely moving. Public sector wages were up just 1.7% and the bureau reported the private sector increase was partly inflated by <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release#spotlight-frequency-of-wage-increases-c-">changes in timing</a>, with fewer September quarter increases than normal last year during lockdowns and a more typical proportion this year.</p>
<p>Four out of ten Australian workers haven’t had an increase for more than a year, compared to 21% at the same time in 2019, before COVID.</p>
<h2>Price growth is weaker than it seems</h2>
<p>Consumer price inflation appears to be well above wages growth at 3%, but much of this is due to the unwinding of the free childcare available a year ago. Averaged over the past two years, annual headline inflation is just <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release#data-download">1.5%</a>.</p>
<p>The official underlying rate of inflation is <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-2021">2.1%</a></p>
<p>This doesn’t sound like the <a href="http://scihi.org/hyperinflation-weimar-republic/">Weimar Republic</a> to me.</p>
<p>Is it difficult to renovate a home in Sydney right now? Sure. Is it expensive to buy a car in the US at the moment? Yes it is. But ask yourself why. </p>
<p>Since living through this pandemic, many of us realised we might need and want to spend more time at home and decided to invest in homes better suited to that. And in the US, which is less vaccinated than Australia, many commuters now prefer to drive to work rather than take their life in their hands by catching public transport.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-in-2022-171731">Top economists see no prolonged high inflation, no rate hike in 2022</a>
</strong>
</em>
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<p>Any debate that sees former US Treasury Secretary Larry Summers on one side and current Treasury Secretary Janet Yellen as well as Paul Krugman on the other has got to be legitimate.</p>
<p>But it’s been joined by “<a href="https://noahpinion.substack.com/p/inflation-is-up-but-the-inflation">inflation "truthers</a>”, conspiracy theorists who claim the US government – in cahoots with corporate interests – have been cooking the books on inflation, something that hasn’t been happening.</p>
<p>While there is always room for debate about the “<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">basket</a>” of goods and services used to calculate the consumer price index, in the US the method hasn’t changed for years.</p>
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<iframe src="https://flo.uri.sh/visualisation/6827820/embed" title="Interactive or visual content" class="flourish-embed-iframe" frameborder="0" scrolling="no" style="width:100%;height:800px;" sandbox="allow-same-origin allow-forms allow-scripts allow-downloads allow-popups allow-popups-to-escape-sandbox allow-top-navigation-by-user-activation" width="100%" height="400"></iframe>
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<p>The Massachusetts Institute of Technology <a href="http://www.thebillionpricesproject.com">Billion Prices Project</a> has trawled through massive quantities of daily data and arrived at much the same conclusions about inflation as the official data.</p>
<p>Australia’s underlying inflation rate has been below the centre of the Reserve Bank’s target band for a record seven years. Too little inflation runs the risk of causing people to delay buying things, sending the economy backwards, which means it has been important to get inflation back up.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
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</em>
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<p>Doing it, as we are beginning to, ought to be seen as a policy success.</p>
<p>Yes, we have to be careful not to push inflation too high. But we should also be careful to avoid not finishing the job of getting inflation (and wages growth) back to where they should be. We’ve got some way to go.</p>
<p><iframe id="5ETFV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/5ETFV/12/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/171840/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>True wages growth, and true price growth, is probably less than the official figures suggest – meaning there’s no need for alarm about inflation in Australia.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1716022021-11-11T19:00:40Z2021-11-11T19:00:40ZVital Signs: Marketing is getting in the way of markets that could get us to net-zero<p>This week the prime minister entered full marketing mode.</p>
<p>Scott Morrison’s topic was climate change and his plans to get to net-zero.</p>
<p>At the Victorian Chamber of Commerce and Industry on Wednesday, he tried out a few <a href="https://www.pm.gov.au/media/address-victorian-chamber-commerce-and-industry">slogans</a>.</p>
<p>Among those he test marketed:</p>
<ul>
<li><p><em>can do capitalism, not ‘don’t do governments’</em></p></li>
<li><p><em>no one passed a law or introduced a tax or passed a resolution at the UN that led to the world developing a COVID vaccine, no one passed a law for the world to move digital, Google and Cochlear were not invented at a UN workshop or summit</em></p></li>
<li><p><em>Australia has already reduced our emissions by more than 20%, now, our emissions are going down, not up, they’re down by more than 20%</em> </p></li>
</ul>
<p>He said a bunch of other stuff, but those are my top three.</p>
<p>He wants to contrast his approach with certain United Kingdom and US environmentalists, who do indeed want to restrict what people can buy or do. Ideas like mandatory “<a href="https://www.mondaycampaigns.org/meatless-monday/news/nyc-expands-meatless-monday-schools">meatless Mondays</a>” and <a href="https://www.theguardian.com/environment/2020/aug/03/ban-suv-adverts-to-meet-uk-climate-goals-report-urges">banning advertising for SUVs</a> do indeed have no place in Australia, or even in the UK for that matter.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/economists-back-carbon-price-say-benefits-of-net-zero-outweigh-costs-169939">Economists back carbon price, say benefits of net-zero outweigh costs</a>
</strong>
</em>
</p>
<hr>
<p>And nor does telling people where to drive, although the prime minister assured us he was not going to tell people “<a href="https://www.minister.industry.gov.au/ministers/wilson/transcripts/press-conference-prime-minister-hon-scott-morrison-mp-and-minister-industry-energy-and-emissions-reduction-angus-taylor-toyota-hydrogen-centre-altona-north-victoria">where to drive or where they can’t drive</a>”. </p>
<p>Economists don’t like such ideas either. The whole idea behind a price on carbon (whether through a carbon tax or a system of tradable permits) is to respect people’s preferences, while making sure their decisions take account of the costs they impose on others.</p>
<h2>Innovations often come from government</h2>
<p>His second claim was that innovation (things like the COVID vaccine, Google search and digitisation) isn’t sparked by governments.</p>
<p>While it’s true that “Google and Cochlear were not invented at a UN workshop or summit”, to suggest that governments played no role is to wilfully ignore history.</p>
<p>The miraculous Moderna mRNA vaccine was developed… checks notes… in partnership with the US National Institutes of Health. <a href="https://www.nytimes.com/2021/11/09/us/moderna-vaccine-patent.html">Moderna received</a> nearly US$10 billion in taxpayer funding.</p>
<p>Much of the work on the Cochlear ear implant was done at the largely government-funded <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4921065/">University of Melbourne</a>; the internet revolution grew from the US Department of Defense’s <a href="https://historycooperative.org/who-invented-the-internet/">Advanced Research Projects Agency</a>; and Google’s search algorithm was developed by fully-funded graduate students at <a href="http://infolab.stanford.edu/pub/voy/museum/pictures/display/0-4-Google.htm">Stanford University</a>, whose endowment is tax exempt.</p>
<h2>Very often, cuts in emissions come from government</h2>
<p>Morrison emphasised on Wednesday that Australia has reduced emissions by 20%. </p>
<p>It’s natural to ask what brought it about. Much of it was a cutback in land clearing, which is counted as emissions reduction under the rules. Land clearing is <a href="https://theconversation.com/land-clearing-laws-bring-out-worrying-libertarian-streak-29978">regulated by government</a>.</p>
<p>Much of the rest happened during the two years Australia had a carbon price in place, as this chart shows. </p>
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<p><strong>Australian emissions excluding land use, land-use change and forestry</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431464/original/file-20211111-27-mha6a7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Million tonnes of carbon dioxide equivalent per annum, updated quarterly.</span>
<span class="attribution"><a class="source" href="https://www.climatecouncil.org.au/wp-content/uploads/2019/04/Climate-Cuts-Cover-Ups-and-Censorship.pdf">Climate Council, Department of Industry</a></span>
</figcaption>
</figure>
<hr>
<p>The claimed 20% reduction owes much to the laws and summits the prime minister derides.</p>
<p>All prime ministers are politicians, so isn’t surprising they spin narratives. But to spin one so sharply at odds with reality is surprising.</p>
<p>When it comes to “<a href="https://www.pm.gov.au/media/press-conference-berkeley-vale-nsw">technology not taxes</a>”, the truth is it is often taxes that drive the development and uptake of technologies.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-call-for-measures-to-speed-the-switch-to-electric-cars-162883">Top economists call for measures to speed the switch to electric cars</a>
</strong>
</em>
</p>
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<p>Importantly, taxes don’t specify the particular technologies that will emerge. </p>
<p>Perhaps that’s why the nation’s peak body for can-do-capitalitsts – the Business Council of Australia – has asked the government to subject more businesses to Australia’s existing little-known (weak) <a href="https://d3n8a8pro7vhmx.cloudfront.net/bca/pages/6612/attachments/original/1633693581/BCA_Achieving_a_net_zero_economy_-_9_October_2021.pdf?1633693581">price on carbon</a>.</p>
<p>If we are going to get to net-zero, we’ll need less marketing and more markets. Now there’s a slogan.</p>
<p><iframe id="bKoWR" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/bKoWR/35/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/171602/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>The prime minister road-tested an avalanche of slogans on Wednesday, some of them clearly false.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1462942020-09-17T19:48:57Z2020-09-17T19:48:57ZVital Signs: 50 years ago Milton Friedman told us greed was good. He was half right<figure><img src="https://images.theconversation.com/files/358537/original/file-20200917-24-1rbg63k.jpg?ixlib=rb-1.1.0&rect=427%2C122%2C1909%2C1019&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://miltonfriedman.hoover.org/collections">Hoover Institution</a></span></figcaption></figure><p><em>The point is, ladies and gentleman, that greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind.</em></p>
<p>– Gordon Gekko, <a href="https://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html">Wall Street</a> 1987</p>
<p>Fifty years ago, well before the movie Wall Street, Chicago economist Milton Friedman set down what for many was the essence of the famous speech in Wall Street in an article for the New York times magazine entitled “<a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html">The Social Responsibility of Business is to Increase its Profits</a>”.</p>
<p>His point, which along with his other contributions was recognised when he was awarded the <a href="https://www.nobelprize.org/prizes/economic-sciences/1976/summary/">Nobel Memorial Prize in Economic Sciences</a> in 1976, was that businesses serve society best when they abandon talk of “social responsibilities” and solely maximise returns for shareholders.</p>
<p>Incredibly influential (the past week has seen <a href="https://fund-shack.com/podcast/the-milton-friedman-new-york-times-csr-debate/">special conferences</a> and <a href="https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-doctrine-social-responsibility-of-business.html">anniversary analyses</a>), the essay has been credited with ushering in the doctrine of “<a href="https://corporatefinanceinstitute.com/resources/knowledge/other/what-is-shareholder-primacy/">shareholder primacy</a>,” and with it short-termism, hostile takeovers, <a href="https://www.investopedia.com/updates/enron-scandal-summary/">colossal frauds</a> and savage job cuts.</p>
<p>It’s a doctrine not seriously challenged until the 2008-2009 global financial crisis.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/358521/original/file-20200917-20-s8k87t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The essay that sparked a revolution, 50 years ago this week.</span>
<span class="attribution"><a class="source" href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html">New York Times</a></span>
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</figure>
<p>But in an important respect it was misread.</p>
<p>Although not clear from the <a href="https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html">title of the essay</a>, Friedman himself was quite concerned with broader social aims. </p>
<p>His essay was about how best to achieve them.</p>
<p>His point was that if companies made as much money as they could for their shareholders, those shareholders could spend it on social goals, “if they wished to do so”. </p>
<p>For the company to attempt to guess what goals its shareholders would want to support and to support them itself would be for the company to do its main job badly.</p>
<p>Although it made a certain sort of sense, the Friedman doctrine has turned out to be incomplete.</p>
<p>As Harvard University’s Oliver Hart (who also won the Nobel Prize for Economics) has pointed out, corporations are often <a href="https://promarket.org/2020/09/14/shareholders-dont-always-want-to-maximize-shareholder-value/">much better</a> than their shareholders at achieving the goals their shareholders care about.</p>
<h2>Corporations can achieve more than individuals</h2>
<p>Individual shareholders can’t do much to avert climate change, but the corporations they own can.</p>
<p>A mining company could either stop operating an environmentally-damaging mine or run the mine, make a bunch of money and pay it to shareholders who could use the money to mitigate the damage “if they wished to do so”. </p>
<p>Its hard to argue that, if shareholders do indeed “wish to do so”, the first option isn’t better.</p>
<p>To cite a recent instance, is hard to “un-blow-up” <a href="https://theconversation.com/corporate-dysfunction-on-indigenous-affairs-why-heads-rolled-at-rio-tinto-146001">46,000 years of Indigenous heritage</a>.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/corporate-dysfunction-on-indigenous-affairs-why-heads-rolled-at-rio-tinto-146001">Corporate dysfunction on Indigenous affairs: Why heads rolled at Rio Tinto</a>
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<p>In contrast, Friedman was almost surely right about corporate charitable contributions, which was in many ways the impetus for the article.</p>
<p>In what way are corporations better at giving money to charities (and political parties) than individuals? In none that are obvious (and not potentially corrupt).</p>
<p>So where do we draw the line about what corporations do and don’t do?</p>
<p>Proponents of the “stakeholder view” now endorsed by an <a href="https://theconversation.com/super-funds-are-feeling-the-financial-heat-from-climate-change-146191">increasing number of superannuation funds</a> think corporations should have a composite objective that takes into account the interests of shareholders, bondholders, workers, suppliers, the environment, and more. </p>
<h2>Yet a point in every direction…</h2>
<p>The problem with this, as recognised by the arrow-covered pointless man in the animated Harry Nilsson film <a href="https://brightlightsfilm.com/whats-the-point-the-legendary-1971-animated-feature-on-dvd/">What’s The Point?</a> is that “a point in every direction is the same as no point at all”.</p>
<p>As Friedman put it, composite objectives suffer from “looseness and lack of rigour”.</p>
<p>Others, such as Hart and University of Chicago professor Luigi Zingales think firms should find out what shareholders most want, and “<a href="https://promarket.org/2020/09/14/shareholders-dont-always-want-to-maximize-shareholder-value/">pursue that goal</a>.”</p>
<p>This has the virtue of permitting a social objective while creating a concrete, measurable goal.</p>
<p>It’s a way of giving shareholders (and super fund members) a voice that is more direct than simply electing directors every few years.</p>
<p>Friedman helped start an important discussion. Fifty years on, it isn’t finished.</p><img src="https://counter.theconversation.com/content/146294/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Firms should attempt to maximise profits, but if shareholders want it, there’s no reason why they can’t have other goals.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1454842020-09-03T20:00:23Z2020-09-03T20:00:23ZVital Signs: How do you fight a recession without precedent?<p>It became official on Wednesday. The Australian economy is in recession for the first time in nearly three decades.</p>
<p>And the drop in economic activity is unprecedented. GDP fell 7% in the June quarter. The previous biggest post-war fall in Australia was 2% in June 1974.</p>
<p>But Treasurer Josh Frydenberg noted that in March he was told the June quarter contraction might be 20%. In Britain it was.</p>
<p>Bookkeeping aside, the question that matters is how to fight this recession. </p>
<p>Answering it requires an understanding that it is a different type of recession to those we’ve seen before.</p>
<p>As I pointed out <a href="https://theconversation.com/vital-signs-covid-19-recession-is-different-and-we-need-more-stimulus-to-deal-with-it-141037">earlier this year</a> the recessions some of us grew up with in the early 1980s and 1990s were “business cycle” recessions. </p>
<p>They happened because the economy overtook its inbuilt speed limit and pushed up inflation. To curb it, central banks pushed up interest rates, pushed them up too far and choked off investment and spending, sending economic activity backwards.</p>
<h2>A recession like no other</h2>
<p>In 2020 we face a different sort of shock. </p>
<p>COVID-19 has hammered economic activity, even more so in countries such as the United States where it has run out of control.</p>
<p>Many of the opportunities we used to have to spend money (such as airlines, theatre tickets and cafe meals) simply haven’t been there.</p>
<p>They’ll come back when things return to closer to normal, perhaps though the wide deployment of a vaccine.</p>
<p>But we might not spend as we used to.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/six-graphs-that-explain-australias-recession-145445">Six graphs that explain Australia's recession</a>
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<p>Some people, out of work or on shorter hours won’t have the capacity to spend. Others will want to rebuild their savings.</p>
<p>And others who have been saving big might decide to keep doing it.</p>
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<p><strong>Household saving ratio</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/355997/original/file-20200902-22-yq9rjf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">ABS Australian National Accounts</span></span>
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<p>Australia’s household saving ratio surged to 19.7% in the June quarter. </p>
<p>It’s a peak not reached since 1974 at a time when there was much less of an age pension and superannuation, no Medicare and surging unemployment. In other words, its at a height not reached since people really needed to save.</p>
<p>The Bureau of Statistics says that if household income from all sources including early access to super was counted, the ratio is even higher. Its estimate of what it calls the “household experience savings ratio” is 24.8%.</p>
<p>That means households saved an extraordinary one in every four dollars that came through their doors in the June quarter, up from mere percentage points a few quarters earlier.</p>
<p>Much of it would have been what economists call <a href="https://academic.oup.com/qje/article/132/3/1427/3071924?casa_token=NaR4tX3aSioAAAAA:5a0tN7y4nXtjvyxhO1tit2wcRHuU-NmyYeUJD2Md_gw6wnoLrLkYAwfNWxBE4XkYCfTVh4NeLIfL4rQ">precautionary saving</a>, understandable given how much of the future is uncertain.</p>
<h2>There’s such a thing as too much saving</h2>
<p>But what if this extraordinarily high saving rate lasts beyond the point it is understandable, as it did in Japan.</p>
<p>As with Japan in the 1990s when saving soared, real interest rates are negative. We are so <a href="https://web.mit.edu/krugman/www/japtrap.html">keen to save</a> we don’t need a financial return.</p>
<p>There were signs of it worldwide, well before the pandemic. President’s Clinton’s Treasury Secretary Larry Summers referred to it as <a href="http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/">secular stagnation</a>, a term first coined in the 1930s.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/have-we-just-stumbled-on-the-biggest-productivity-increase-of-the-century-145104">Have we just stumbled on the biggest productivity increase of the century?</a>
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<p>Saving more than we are prepared to invest shrinks economic activity. It creates unemployment which itself creates uncertainly, prodding people to save still more than they invest.</p>
<p>It’s one of the reasons worldwide economic growth is low, interest rates are low, and inflation is low.</p>
<p>During the pandemic the government is spending more than A$100 billion on measures such as JobKeeper and JobSeeker.</p>
<h2>If we won’t spend, out government will have to</h2>
<p>Post pandemic it might have to keep spending big on physical and social infrastructure – things such as major projects and better aged care and health care.</p>
<p>If we won’t spend big again, it’ll have to. It’ll need to get the economy’s long term growth rate back up to 2%, or even the <a href="https://treasury.gov.au/speech/the-macroeconomic-context">near 3%</a> the Treasury thinks it is capable of.</p>
<p>It’ll require a lot. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/when-it-comes-to-economic-reform-the-old-days-really-were-better-we-checked-145296">When it comes to economic reform, the old days really were better. We checked</a>
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<p>Australia used to have one of the lowest company tax rates in the developed world, now we have one of the highest. We tax labour income too much and consumption too little. And we have a hopelessly out of date and absurdly complex industrial relations system. </p>
<p>Each of those things are a handbrake on economic growth.</p>
<p>This is an unusual recession and an unusually deep one. </p>
<p>Digging our way out will require us to at first contain and defeat the virus, and then spend like Keynes and <a href="https://www.afr.com/policy/economy/we-can-spend-like-keynes-and-cut-taxes-like-friedman-20200728-p55g2s">cut taxes like Friedman</a>.</p><img src="https://counter.theconversation.com/content/145484/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most recessions are caused by an overreaction to too much inflation. This one is because we are not spending.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1265792019-11-08T03:48:35Z2019-11-08T03:48:35ZVital Signs: does monetary policy work any more?<p>In its quarterly <a href="https://www.rba.gov.au/publications/smp/2019/nov/overview.html">statement on monetary policy</a>, released today, the Reserve Bank of Australia declared its preparedness to “ease monetary policy further if needed”.</p>
<p>This suggests the bank still thinks monetary policy – in this case lowering interest rates to stimulate the economy – could help “support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target”.</p>
<p>But in the wake of the bank last month lowering the official interest rate to a record low and the current somewhat sad state of the Australian economy, <a href="https://www.afr.com/policy/economy/monetary-policy-has-run-its-race-costello-20191015-p530ys">many commentators</a> have speculated that <a href="https://www.rba.gov.au/monetary-policy/">monetary policy</a> doesn’t work any more.</p>
<p>Is that right?</p>
<hr>
<p><strong>Reserve Bank cash rate</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=158&fit=crop&dpr=1 600w, https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=158&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=158&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=199&fit=crop&dpr=1 754w, https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=199&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/294952/original/file-20191001-173393-1b2cjw9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=199&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.rba.gov.au/statistics/cash-rate/">Source: RBA</a></span>
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<p>There are a number of variants of the “monetary policy doesn’t work” argument. The most basic is that the Reserve Bank has this year cut rates from 1.50% to 0.75% without any improvement to the Australian economy.</p>
<p>This is a textbook example of one of the classic logic fallacies known as “<a href="https://www.britannica.com/topic/fallacy#ref1102390">post hoc ergo propter hoc</a>” (from the Latin, meaning “after this, therefore because of this”). </p>
<p>Put simply, it assumes the rate cuts have had no effect and doesn’t account for the possibility things might have been worse had there been no cuts.</p>
<p>Things might have been even worse. We’ll never know. </p>
<p>It also ignores what might have happened if the RBA had cut sooner. Again, we can’t know for sure. It is possible, though, to make an educated guess. </p>
<h2>When to cut rates</h2>
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<a href="https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/300967/original/file-20191110-194650-2metj6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Reserve Bank governor Philip Lowe should have acted earlier.</span>
<span class="attribution"><span class="source">DARREN ENGLAND/AAP</span></span>
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<p>Had Reserve Bank governor Philip Lowe acted, say, 18 months earlier to cut rates, he would have signalled that Gross Domestic Product growth was indeed lower than desired, that the sustainable rate of unemployment was more like 4.5% than 5%, and, most importantly, that he understood the need to act decisively. </p>
<p>That would have sent a powerful signal.</p>
<p>It would also have ameliorated the huge decline in housing credit that pushed down housing prices in Sydney and Melbourne by double digits. </p>
<p>That, in turn, would have prevented some of the weakening in the balance sheets of the big four banks that has occurred (witness this annual general meeting season). </p>
<p>All of this would have pumped more liquidity into the economy and put households in a much stronger position, likely leading to stronger consumer spending than we have seen.</p>
<h2>Bank pass through</h2>
<p>One gripe both the Reserve Bank governor Philip Lowe and federal treasurer Josh Frydenberg have had with the banks is their <a href="https://www.abc.net.au/news/2019-10-14/josh-frydenberg-asks-accc-to-investigate-banking-sector/11598614">failure to fully pass through the RBA cuts</a>.</p>
<p><a href="https://theconversation.com/four-questions-about-mortgages-the-accc-inquiry-should-put-to-the-big-four-banks-125224">It is true there is a problem</a> with banks not being able to cut deposit rates below zero, and as a result having less scope to cut mortgage rates, which are majority funded from deposits.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/our-leaders-ought-to-know-better-failing-to-pass-on-the-full-rate-cut-neednt-mean-banks-are-profiteering-124874">Our leaders ought to know better: failing to pass on the full rate cut needn't mean banks are profiteering</a>
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<p>But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE). </p>
<p>This is where the central bank pushes down long-term interest rates by buying government and corporate bonds. At the same time this expands the money supply, thereby adding some upward inflationary pressure. </p>
<p>There is <a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843">little reason</a> to think such measures wouldn’t work.</p>
<h2>The power of free money</h2>
<p>Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.</p>
<p>To put it bluntly, if someone shoves a pile of money into your hand and asks almost nothing in return, you’re likely to use it. In fact, you would be pretty silly not to.</p>
<p>Suppose your mortgage rate really goes to zero – as <a href="https://www.abc.net.au/news/2019-09-13/european-central-bank-ecb-cut-rates-negative-record-low/11508704">has happened in Europe</a>.</p>
<p>You might decide to redraw that and spend the money on a home renovation or some other productive purpose. Or you might decide to buy a more expensive house. </p>
<p>Such spending provides an economic boost. </p>
<p>The effect is all the more pronounced if people expect interest rates to be low for a long period of time. Aggressive cutting coupled with quantitative easing – which lowers long-term rates – signal just that.</p>
<h2>But not only monetary policy</h2>
<p>Just because monetary policy still has some effect at near-zero rates doesn’t mean we should pin all of our economic hopes to it. </p>
<p>A near consensus of economists have argued repeatedly for the use of more aggressive fiscal policy – including more infrastructure spending and more tax cuts. </p>
<p>Indeed, Philip Lowe has raised eyebrows by <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-08-09.html">speaking so forthrightly</a> on this issue. That doesn’t make him wrong, though.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/we-asked-13-economists-how-to-fix-things-all-back-the-rba-governor-over-the-treasurer-126283">We asked 13 economists how to fix things. All back the RBA governor over the treasurer</a>
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<p>There is little doubt the Reserve Bank should have acted much earlier to cut official interest rates. There is also a very good chance it will need to begin to use other measures such as quantitative easing in the relatively near future.</p>
<p>All of that says the Australian economy, like most advanced economies around the world, is in bad shape.</p>
<p>But it doesn’t mean monetary policy has completely run out of puff.</p><img src="https://counter.theconversation.com/content/126579/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank of Australia says it’s prepared to ease monetary policy further if needed to stimulate the economy. But is the policy working when interests rates are so low?Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1258032019-10-24T18:59:10Z2019-10-24T18:59:10ZVital Signs: talk of a US wealth tax is about symbolism as much as it is about economics<figure><img src="https://images.theconversation.com/files/298490/original/file-20191024-170484-15pzd4l.jpg?ixlib=rb-1.1.0&rect=429%2C205%2C1396%2C799&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Democratic candidate frontrunner Elizabeth Warren's signature policy proposal is to tax the rich. </span> <span class="attribution"><a class="source" href="https://edition.cnn.com/2019/10/15/politics/gallery/ohio-democratic-debate-cnn/index.html">Gabriella Demczuk/CNN</a></span></figcaption></figure><p>The race for the Democratic Party’s presidential nomination is hotting up, and so is academic debate about one of the leading contender’s signature proposal – a wealth tax.</p>
<p>The US Democratic primary is becoming a race of four (<a href="https://www.predictit.org/markets/detail/3633/Who-will-win-the-2020-Democratic-presidential-nomination">odds</a> in parentheses): Elizabeth Warren (34%), Joe Biden (25%), Bernie Sanders (12%), and Pete Buttigieg (12%).</p>
<p>The statistical front-runner, Warren, wants to impose a wealth tax of 2% on all Americans with wealth in excess of US$50 million.</p>
<p>This plan was developed by University of California Berkeley economics professors <a href="http://gabriel-zucman.eu/files/saez-zucman-wealthtax-warren.pdf">Emmanuel Saez and Gabriel Zucman</a>. </p>
<p>They believe it would generate as much as US$187 billion a year, along with another US$25 billion from a separate so-called “billionaire surcharge” in the first year.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/so-you-want-to-tax-the-rich-heres-which-candidates-plan-makes-the-most-sense-111945">So you want to tax the rich – here's which candidate's plan makes the most sense</a>
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<p>Former treasury secretary Larry Summers believes the measures would raise a mere eighth of that, about US$25 billion all up. </p>
<p>The debate on <a href="https://twitter.com/search?q=%23econtwitter">#econtwitter</a> came to a head a few days ago at the <a href="https://www.youtube.com/watch?v=oUGpjpEGTfE">Peterson Institute</a>.</p>
<p>Check out the video. It’s what economists call a “vigorous discussion”.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/oUGpjpEGTfE?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
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<h2>Who’s right?</h2>
<p>For me, Summers <a href="https://www.washingtonpost.com/opinions/2019/04/04/wealth-tax-presents-revenue-estimation-puzzle/">and economist Natasha Sarin</a> make a compelling case.</p>
<p>And they don’t come to the debate empty handed. </p>
<p>They’ve got their <a href="https://www.washingtonpost.com/opinions/2019/06/28/be-very-skeptical-about-how-much-revenue-elizabeth-warrens-wealth-tax-could-generate/">own ideas</a> for taxing the better-off, which include boosting auditing resources for the Internal Revenue Service, cracking down on corporate tax shelters, ending loopholes for private equity and hedge fund managers, and eliminating special deals for real estate investors and investors who bequeath capital gain.</p>
<p>They reckon their ideas would <a href="https://www.bostonglobe.com/opinion/2019/03/28/broader-tax-base-that-closes-loopholes-would-raise-more-money-than-plans-ocasio-cortez-and-warren/Bv16zhTAkuEx08SiNrjx9J/story.html">raise more</a> than even the rosiest estimates of Warren’s wealth tax. </p>
<p>But what about the theory?</p>
<p>There are four main arguments in favour of a wealth tax:</p>
<ul>
<li><p>it will raise money that can be spent on socially useful programs like universal childcare</p></li>
<li><p>it will limit the political power of the uber-wealthy</p></li>
<li><p>it will enhance fairness</p></li>
<li><p>it will have few negative side effects on innovation because it’s small, relative to the massive pay packets taken home by the Jeff Bezos’s and Mark Zuckerberg’s of the world.</p></li>
</ul>
<p>In terms of revenue raising, nobody on the progressive side of politics seriously disputes the social value of programs like universal childcare. What’s at issue is the best way to pay for them.</p>
<h2>Each argument has a counter argument</h2>
<p>As to limiting the political power of the uber wealthy, they would still have a lot. Lobbyists don’t cost much, and corporations themselves will still be able to spend as much as they like thanks to the US Supreme Court’s 2010 <a href="https://www.history.com/topics/united-states-constitution/citizens-united">Citizens United</a> decision that found it was unconstitutional to restrict independent expenditures on political communications.</p>
<p>Fairness could be enhanced by a wealth tax that collected a good chunk of revenue, but it could also be enhanced by the other measures on offer. </p>
<p>The effects on innovation are hard to discern. It certainly seems as if Amazon president Jeff Bezos would be as motivated by US$80 billion as by US$120 billion. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-jeff-bezos-gets-wrong-and-right-with-his-populist-philanthropy-79740">What Jeff Bezos gets wrong (and right) with his populist philanthropy</a>
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<p>But it mightn’t be that simple. For highly valuable people (lots of “human capital”) passing up a certain high salary (perhaps at a university) for an uncertain higher one is a risk. A cut in the uncertain payoff might tip the balance in favour of caution.</p>
<h2>And then there’s politics</h2>
<p>If it did tip the balance in favour of caution, a wealth tax might lead to less innovation, but the size of the effect is hard to guess at.</p>
<p>While economists like to muse about these issues, it’s the politics that matter.</p>
<p>A wealth tax <a href="https://www.vox.com/2019/2/4/18210370/warren-wealth-tax-poll">polls well</a> among American voters, even <a href="https://www.cnbc.com/2019/06/12/most-millionaires-support-tax-on-wealth-above-50-million-cnbc-survey.html">among millionaires</a>, but Donald Trump might be able to turn that around.</p>
<p>It’s the politics as well as the economics that will matter, and symbolism will matter a lot.</p><img src="https://counter.theconversation.com/content/125803/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Other measures might raise as much as her proposed wealth tax, but Democratic front-runner Elizabeth Warren likes big gestures.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1226142019-08-29T20:03:35Z2019-08-29T20:03:35ZVital Signs. Business investment is flatlining, and it isn’t clear that suasion or a special allowance will help<figure><img src="https://images.theconversation.com/files/290042/original/file-20190829-106517-1ymupiy.jpg?ixlib=rb-1.1.0&rect=0%2C173%2C3988%2C1898&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's easy to ask businesses to invest more, hard to get them to do it.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>You know the economy is in trouble when a clever and successful Liberal Party treasurer resorts to doing an <a href="https://en.wikipedia.org/wiki/Elizabeth_Warren">Elizabeth Warren</a> impersonation in front of the Business Council of Australia in hopes of boosting investment.</p>
<p>That’s what <a href="https://joshfrydenberg.com.au/latest-news/making-our-own-luck-australias-productivity-challenge/">Josh Frydenberg</a> did on Monday, saying:</p>
<blockquote>
<p>Share buybacks and capital returns are becoming increasingly prominent and the default option for corporates. But is a buyback always the best option for the future growth of the company and therefore the economy?</p>
</blockquote>
<p>Let’s set aside the fact that the recent uptick in buybacks was almost entirely due to a $15.4 billion capital return from BHP after selling off what was left of its ill-fated shale oil and gas investments in the United States.</p>
<h2>Are buybacks bad?</h2>
<p>A bunch of US Democratic presidential hopefuls sure think so. Self-proclaimed “Democratic Socialist” Bernie Sanders joined with the more centrist Senate Minority leader Chuck Schumer to <a href="https://www.nytimes.com/2019/02/03/opinion/chuck-schumer-bernie-sanders.html">propose legislation</a> that would require companies spending money to buy back their own shares to raise the minimum wage of their workers $15 an hour and provide seven days of paid annual sick leave.</p>
<p>A number of other prominent Democrats have similar ideas, including Warren, and fellow Senators Kamala Harris and Cory Booker.</p>
<p>There is a myth that share buybacks are some kind of “sure thing” benefit to shareholders that is worth dispelling. </p>
<p>The myth goes like this.</p>
<p>A company buys back some number of its outstanding shares from willing sellers. That reduces the number of shares, but future profits haven’t changed. So, earnings per share go up, and so does the stock price. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/back-yourself-treasurer-frydenberg-tells-business-but-its-not-that-simple-122397">'Back yourself' Treasurer Frydenberg tells business. But it's not that simple</a>
</strong>
</em>
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<hr>
<p>That’s said to be is a win for the remaining shareholders, but the business won’t invest as much in capital expenditures and workers might miss out on pay rises.</p>
<p>This logic is tantalising, but wrong. What is overlooked in that the business used cash on hand to buy back its stock. So the value of the company to the shareholders who didn’t sell isn’t the same – it’s been reduced by the amount of the buyback.</p>
<p>The key question is whether that cash can be used more productively inside the company than paid out. US firms like Apple and Boeing have recently undertaken significant buybacks and seen their share price rise relative to the broader stock market. That’s the market telling us that the money is better used outside of Apple and Boeing than in.</p>
<p>The correct term for buybacks like that that increase value is “good corporate governance”, not “short-sighted capitalism” or “theft”.</p>
<h2>How to get business to invest more</h2>
<p>Having said that, Frydenberg was spot on in his analysis of what is needed to boost wages in Australia:</p>
<blockquote>
<p>If we are going to create new jobs and enable people to earn more for what they do, we need businesses to increase their capital expenditure and to adopt new technologies and business practices that effectively integrates capital with labour.“</p>
</blockquote>
<p>The question is how to do that.</p>
<p>One thing’s for sure, trying to bully companies into doing it isn’t the answer.</p>
<p>Business invest earnings in plants and equipment when the economic environment is attractive. </p>
<p>Bureau of Statistics figures released Thursday made clear that business have a <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">negative view</a> of that environment. </p>
<p>Capital expenditures were down a seasonally-adjusted 0.5% in the June quarter – worse than market expectations – and down 1% over the year.</p>
<h2>The problem with an investment allowance</h2>
<p>One idea the treasurer is reportedly considering is a so-called ”<a href="https://www.bca.com.au/in_the_absence_of_tax_cuts_investment_allowance_is_key">investment allowance</a>“, much like the investment allowance the <a href="https://www.acra.com.au/government-investment-allowance-10-tax-rebate/">Rudd government</a> introduced during the global financial crisis between December 2008 to December 2009.</p>
<p>It would give businesses an immediate tax deduction of, say, 10% on spending on equipment and plant and machinery, in additional to the normal annual deduction for depreciation.</p>
<p>The problem with such allowances is that they don’t provide certainty. The fact that they have been brought in and quickly ended makes it look as if they will be taken away. So businesses use them to bring forward investments rather than make long term plans.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-next-government-can-usher-in-our-fourth-decade-recession-free-but-it-will-be-dicey-116887">The next government can usher in our fourth decade recession-free, but it will be dicey</a>
</strong>
</em>
</p>
<hr>
<p>And it is hard to limit them to "additional investment” as Frydenberg said he wanted to on Monday.</p>
<p>By contrast, cutting the company tax rate would signal a permanent shift in policy. It’s politically difficult, which perversely would make it a credible signal about future conditions.</p>
<p>Cutting the rate right away, to 25%, would help move us away from one of the highest corporate tax rates in the developed world, and would boost investment.</p>
<p>The best <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20130570">empirical evidence</a> is that about half the benefit of company tax cuts goes to workers. And as <a href="https://www.afr.com/opinion/the-evidence-is-in-cutting-australias-corporate-tax-will-cut-inequality-20180129-h0prje">I wrote early last year</a>, that evidence suggests that young, low-skilled, and female workers benefit the most.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387">Vital Signs. If we fall into a recession (and we might) we'll have ourselves to blame</a>
</strong>
</em>
</p>
<hr>
<p>We also need major government investments in physical and social infrastructure to deal with flagging demand and create an environment in which companies will find it worthwhile to invest. </p>
<p>In the low-growth, low-inflation, secular stagnation world we are in budget surpluses are neither prudent nor evidence of sound economic management. They are a death sentence for jobs and growth.</p><img src="https://counter.theconversation.com/content/122614/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government can help boost business investment, but it would take a boost in government investment and would keep the budget in deficit.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1159312019-04-25T20:13:24Z2019-04-25T20:13:24ZVital signs. Zero inflation means the Reserve Bank should cut rates as soon as it can, on Tuesday week<figure><img src="https://images.theconversation.com/files/270893/original/file-20190425-121224-z24k1w.jpg?ixlib=rb-1.1.0&rect=455%2C305%2C2455%2C1419&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The last time inflation was zero the Reserve Bank cut rates twice. It'll get the chance on May 7.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What do US pizza executive Herman Cain, US conservative commentator Stephen Moore, US Chief Justice Earl Warren, and Australia’s Reserve Bank governor Philip Lowe have in common?</p>
<p>More than you might think.</p>
<p>The immediate issue for Lowe is Wednesday’s <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">inflation figures</a> released by the Bureau of Statistics. Inflation for the first quarter of 2019 came in at 0.0%. Zero. Nada. </p>
<p>Taken together, the sum of consumer prices moved not at all between the last quarter of 2019 and the first quarter of 2019. The annual increase (all of it in the last three quarters of last year) was 1.3%.</p>
<p>However you cut the numbers, inflation is now incredibly low. The Reserve Bank’s measures of so-called underlying inflation (that mute the effects of sharp movements in things such as the prices of fruit and vegetables) are at the same level they were in 2016 when the Reserve Bank cut rates twice – in May and then August.</p>
<h2>The Reserve Bank must cut</h2>
<p>It has to do it again. The market expects it and is pricing in a cut.</p>
<p>Trading on the Australian Securities Exchange implies that 67% of those wagering real money expect the Reserve Bank to cut its cash rate from its present record low of 1.5% to another uncharted low of 1.25% when it next meets to consider rates on Tuesday May 7, a fortnight before the election.</p>
<p>A day earlier, before the release of Wednesday’s shockingly low inflation figure, only 13% expected a cut on Tuesday week.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/270856/original/file-20190425-121258-y0y6ht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.asx.com.au/prices/targetratetracker.htm">ASX Target Rate Tracker</a></span>
</figcaption>
</figure>
<p>Three days after the Reserve Bank meeting, and just one week before the election, Lowe is due to release his quarterly report on the state of the economy and <a href="https://www.rba.gov.au/">his stance on interest rates</a>. He’ll find it easier to write if he justifies a cut.</p>
<p>Not only is inflation far lower than he is his aiming for, but economic growth has plummeted to levels that imply annual growth of closer to 1% than the present 2.3%
or his forecast of 3% by December. Strong house price growth, that would have once been a reason for caution about cutting rates, is no longer a consideration.</p>
<p>A broad cross-section of market economists expect a cut on Tuesday week. </p>
<p>Westpac’s Bill Evans has long predicted 50 basis points of cuts this year, and on Wednesday ANZ economists <a href="https://www.afr.com/news/economy/anz-joins-election-rate-cut-club-20190424-p51gui?et_cid=29176144&et_rid=1925788778&Channel=Email&EmailTypeCode=&LinkName=https%3a%2f%2fwww.afr.com%2fnews%2feconomy%2fanz-joins-election-rate-cut-club-20190424-p51gui&Email_name=MW5-04-24&Day_Sent=24042019">Hayden Dimes and David Plank</a> said </p>
<blockquote>
<p>The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 points at its May meeting, with another basis points likely to follow in August</p>
</blockquote>
<p>The Reserve Bank’s inflation target of 2-3% has become a joke. Inflation has rarely even entered that range the entire time Lowe has been governor.</p>
<p>Lowe keeps hoping for lower unemployment to spark wages growth, but despite unemployment being consistently at or near its long term low of 5%, nothing much has happened, for almost a decade. </p>
<p>Most observers think that unemployment would need to be much lower – closer to 4% than 5% – for wages to take off.</p>
<h2>Politics makes it urgent</h2>
<p>Then factor in the election. Labor is odds-on to win. If it does, then there is a chance of fairly radical industrial relations reform. Think about the wish list of <a href="https://www.theguardian.com/australia-news/2017/jul/22/the-power-and-passion-of-union-boss-sally-mcmanus">Australian Council of Trade Unions Secretary Sally McManus</a>. That seems unlikely to me because of Labor’s extremely sensible economic team, but it’s possible.</p>
<p>Whether it happens or not, until the industrial relations landscape becomes clear businesses are unlikely to do a lot of hiring. Why hire a bunch of folks if you don’t know what you might have to end up paying them or how easy it will be to let them go or change what they do?</p>
<p>That uncertainty is likely to put more downward pressure on wages than whatever upward pressure comes from Labor heavying the Fair Work Commission into <a href="https://www.smh.com.au/federal-election-2019/bill-shorten-s-penalty-rates-pledge-under-threat-20190417-p51exr.html">reversing its recent penalty-rates decision</a>.</p>
<h2>The Bank is losing credibility</h2>
<p>All this suggests that the Reserve Bank has waited far too long for wages to tick up of their own accord.</p>
<p>We’ve had recent lessons from the US about the importance of credibility in central banking.</p>
<p>Donald Trump’s nomination of pizza executive Herman Cain to the board of the US Federal Reserve has been withdrawn after <a href="https://www.nytimes.com/2019/04/05/business/herman-cain-federal-reserve.html">sexual harassment</a> allegations, his nomination of Stephen Moore is in doubt after a series of <a href="https://www.nytimes.com/2019/04/23/business/stephen-moore-trump.html">derogatory public remarks</a> he made about women.</p>
<p>They have political problems. Their nominations are in trouble because they are, to put it bluntly, grossly unqualified to govern the Federal Reserve.</p>
<p>The Reserve Bank’s problem is obviously different. It enjoys an impeccable reputation. But repeatedly seeming to ignore inflation numbers (and its own targets for inflation) is putting that reputation at risk.</p>
<p>Having resolve is important. The Reserve Bank isn’t supposed to just do exactly what the market expects or wants it to do.</p>
<p>But getting way out of whack with informed public sentiment without offering good reasons for doing so is very dangerous.</p>
<p>US Chief Justice Earl Warren – the great liberal reformer who desegregated education, ensured the right to a lawyer in criminal cases, and established the principle of one person one vote – was famously mindful of the Court not getting too far ahead of public opinion.</p>
<p>In Brown v Board of Education, which ruled racially segregated education unlawful, Warren worked hard to ensure a unanimous opinion of the Court. That opinion required desegregation “with all deliberate speed” – a phrase that was <a href="https://www.pbs.org/newshour/show/essay-with-all-deliberate-speed">justly criticised as</a> allowing desegregation to proceed far too slowly, but ensured that the court wasn’t too far out ahead of the Southern states and allowed them to adapt rather than defy it.</p>
<p>The Reserve Bank’s problem is not getting too far ahead of public opinion, it is lagging too far behind.</p>
<p>The consequences can be similar, though. If the public and the markets lose faith in the Bank as an institution – if it seems radically out of touch – then it will lose its ability to persuade and it will risk forced change from the outside.</p>
<p>Forced change is a possibility. Each new government strikes a new agreement with the Reserve Bank governor setting out what it expects of him. </p>
<p>The present one <a href="https://rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">specifies</a> “inflation between 2% and 3%, on average, over time”. If it can be seen that the governor has paid scant regard to the agreement, the new one might make the target more binding, or replace it with a different target. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=336&fit=crop&dpr=1 754w, https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=336&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/270879/original/file-20190425-121220-1csg8ma.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=336&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Treasurer and Reserve Bank Governor, Statement on the Conduct of Monetary Policy, September 19, 2016.</span>
<span class="attribution"><a class="source" href="https://rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">Reserve Bank of Australia</a></span>
</figcaption>
</figure>
<h2>It’s time to stop waiting</h2>
<p>Governor Lowe waiting for wages to tick up without any underlying factor to cause it to happen is like <a href="https://www.enotes.com/topics/waiting-for-godot">Waiting for Godot</a>. And it’s getting absurd.</p>
<p>He needs a better narrative than “something will turn up”, and he needs to cut rates. Not with all deliberate speed, but fast.</p><img src="https://counter.theconversation.com/content/115931/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation has barely been within the Governor Philip Lowe’s target band his entire time in office. Zero inflation means he should cut now, before the election.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1130262019-03-07T02:28:18Z2019-03-07T02:28:18ZVital Signs: Australia’s sudden ultra-low economic growth ought not to have come as surprise<figure><img src="https://images.theconversation.com/files/262576/original/file-20190307-100799-dua322.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Both Australia's trend and seasonally adjusted GDP per capita growth rates have dipped below zero.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s big little economic lie was laid bare on Wednesday.</p>
<p>National accounts figures show that the Australian economy grew <a href="http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/7F1A83D8EEABAF73CA2583B40018551F/$File/52060_dec%202018.pdf">by just 0.2%</a> in the last quarter of 2018. This disappointing result was below market expectations and official forecasts of 0.6%. It put annual growth for the year at just 2.3%.</p>
<p>But the shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter. </p>
<p>These are the first back-to-back quarters of negative GDP per capita growth in 13 years - since 2006.</p>
<h2>We’re going backwards, for the first time in 13 years</h2>
<p>The reason this is significant is that the Australian convention around what constitutes a recession is two back-to-back quarters of negative GDP growth. </p>
<p>Since more people in the economy mechanically increases overall GDP, you might think that measuring things on a per-person basis gives a better sense of whether we are better off or worse off.</p>
<p>And you would be right. Why then, do we talk so much about overall GDP?</p>
<p>One answer is that in a lot of advanced economies there isn’t very much population growth, so overall GDP is a good enough measure.</p>
<h2>Population growth hides it</h2>
<p>The more insidious answer in Australia is that, for a long time, our high population growth, fed by a high immigration rate, has masked a much less rosy picture of how we are doing. And neither side of politics has wanted to admit it.</p>
<p>At 1.6% a year, Australia’s population growth is roughly double the OECD average, which is perhaps why we hear politicians say things like “Australia continues to grow faster than all of the G7 nations except the United States,” as Treasurer Josh Frydenberg did this week.</p>
<p>The good news is that standard economic theory tells us that in the long run, immigration has very little impact on GDP per capita in either direction, unless it drives a shift in the population’s mix of skills.</p>
<p>But in the short term, it depresses GDP per capita because fixed capital such as buildings and machines has to be shared between more workers.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/solving-the-population-problem-through-policy-110970">Solving the 'population problem' through policy</a>
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<p>The business lobby doesn’t want us to focus on that because population provides more customers as well as more workers, allowing them to grow without growing domestic market share or exports.</p>
<p>Governments don’t want us to focus on it because adjusting for population growth makes GDP growth look small or, as at present, negative. Also, the tax revenue from the population growth is factored into the official budget forecasts – but the extra social spending needed isn’t always factored in.</p>
<p>Pro tip: watch for population growth as a fudge factor generating a return to surplus in next month’s budget.</p>
<h2>There’s a better way of getting at the truth</h2>
<p>That said, GDP itself – per capita or not – is not a great measure of the standard of living. That’s why in 2001, the Bureau of Statistics began also reporting <a href="http://www.abs.gov.au/ausstats/abs@.nsf/3d68c56307742d8fca257090002029cd/3fa94a5da5f20eddca256b7400730b78!OpenDocument">real net national disposable income</a>.</p>
<p>It is a measure with advantages over GDP. As the bureau points out, it takes account of changes in the prices of our exports relative to the prices of our imports - our terms of trade. If the prices of our exports were increasing much faster than the prices of our imports (as happened during the mining booms), our standard of living would climb and real net national disposable income would reflect it, where as gross domestic product would not, although it would reflect increased income from increased export volumes.</p>
<p>To get at living standards per person, which is what we are really interested in, the bureau also publishes real net national disposable income per capita.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=355&fit=crop&dpr=1 600w, https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=355&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=355&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=446&fit=crop&dpr=1 754w, https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=446&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/262582/original/file-20190307-100799-crlh9b.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=446&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The graph shows that so far the growth rate of real net national disposable income per capita hasn’t changed much, and that it has been negative for far fewer quarters than in the Coalition’s first term in office. </p>
<p>It bounces around with changes in the prices of imports and exports, and is generally climbing less than when export prices were really high.</p>
<h2>A year of two halves?</h2>
<p>The treasurer painted 2018 as a “year of two halves”.</p>
<p>The first half was great - the annualised GDP growth rate (what it would have been had it continued all year) was a very impressive 3.8%.</p>
<p>The second half was just 1%.</p>
<p>I’m not sure the change was that clear cut. As I wrote <a href="https://theconversation.com/vital-signs-national-accounts-show-past-performance-no-guarantee-of-future-results-102717">last September</a>, there have been troubling signs for some time, despite the solid headline growth. </p>
<p>Household savings have been plummeting, real wage growth has been stagnant, housing prices have been falling in Sydney and Melbourne. Together they put significant pressure on household spending, which accounts for about 60% of GDP.</p>
<p>Those concerns are now mainstream. Good news on export prices has rescued tax receipts for the time being, and will probably also rescue real net national disposable income per capita.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-national-accounts-show-past-performance-no-guarantee-of-future-results-102717">Vital Signs: National accounts show past performance no guarantee of future results</a>
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<p>But the fundamentals of the Australian economy are looking somewhat weak. Like the US and other advanced economies, we are living in an era of secular stagnation – a protracted period of much lower growth than we had come to expect.</p>
<p>And until we do something to tackle it, such as a major government investment in physical and social infrastructure, we will continue to face anaemic wage growth, shaky consumer confidence, and mediocre economic growth per person.</p><img src="https://counter.theconversation.com/content/113026/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The treasurer says 2018 was a year of two halves, but there were signs of a downturn well before mid year.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1126802019-02-28T19:13:39Z2019-02-28T19:13:39ZVital Signs. Do deficits matter any more?<p>It seems that whoever wins the White House in 2020, the US federal deficit will blow up.</p>
<p>President Donald Trump has already signed into law massive tax cuts that are estimated to expand the deficit by <a href="https://www.thebalance.com/cost-of-trump-tax-cuts-4586645">at least US$1.5 trillion over the next decade</a>. </p>
<p>The list of Democrats seeking their party’s presidential nomination has moved into double digits, but there aren’t many fiscal conservatives among them.</p>
<p>Bernie Sanders looks set to try and outdo his own 2016 campaign and its big-spending proposals that include “Medicare for all” and <a href="https://berniesanders.com">free public tertiary education</a>. Other leading contenders such as senators Elizabeth Warren and Kamala Harris have announced similar plans.</p>
<p>And the rock star du jour of US progressive politics, Alexandria Ocasio-Cortez (or @AOC as the cool kids say), has gone even further with her “Green New Deal” — a grab bag of gigantic spending projects being presented as an environmental policy. They are estimated to cost <a href="https://www.americanactionforum.org/research/the-green-new-deal-scope-scale-and-implications/">between US$51 trillion and US$93 trillion</a> over a decade.</p>
<p>The big question amid all this red ink is: does it matter?</p>
<h2>Red ink for a return</h2>
<p>There have generally been two schools of thought on this. On the conservative side, elected representatives and commentators have emphasised that higher spending eventually results in higher interest rates as borrowers compensate for risk, and <a href="https://www.heritage.org/budget-and-spending/commentary/deficit-reminds-us-all-no-such-thing-free-lunch">higher taxes as a result</a>. In short, there’s no free lunch.</p>
<p>The more liberal position on deficits is that it depends what the government spends the money on. Economic stimulus during a downturn, such as during the Great Recession of 2008, is a good idea provided that it is temporary. And even in ordinary economic times, there may be large investments in physical and social infrastructure that have high returns, far exceeding the government’s cost of borrowing.</p>
<p>If spending on early-childhood education has <a href="https://www.jstor.org/stable/pdf/43940580.pdf?refreqid=excelsior%3A8923102c0e865b1443541e46d17d87d1">double-digit rates of return</a> and the government can borrow long-term at 3%, these investments are a no-brainer.</p>
<p>Notice the logic in that argument. The returns need to be carefully assessed and compared to the actual government cost of borrowing.</p>
<h2>Not red ink without reason</h2>
<p>Various commentators on the political left – explified by Paul Krugman of the New York Times – argue that this logic is licence for serious government spending on infrastructure, but with an eye to the overall size of the spending. As <a href="https://www.nytimes.com/2019/01/03/opinion/house-democrats-budget-deficit.html">Krugman puts it</a></p>
<blockquote>
<p>Am I saying that Democrats should completely ignore budget deficits? No; if and when they’re ready to move on things like some form of Medicare for All, the sums will be so large that asking how they’ll be paid for will be crucial.</p>
</blockquote>
<p>I have said repeatedly in this column and elsewhere that the same is true in Australia. We can borrow cheaply, there are high-return government investments to be made, and we are suffering from “<a href="https://theconversation.com/vital-signs-if-needed-this-man-can-and-will-cut-rates-during-the-election-campaign-111254">secular stagnation</a>” – a protracted period of lower growth.</p>
<p>But that doesn’t mean that @AOC’s socialist (her own term) wish list can be funded in a consequence-free way just because the US prints its own currency.</p>
<p>Accompanying the @AOC-Sanders-Warren agenda is a cottage industry of “heterodox” economists like <a href="https://stephaniekelton.com">Stephanie Kelton</a> who say deficits don’t matter for countries that issue their own currencies. Why? Because they can always print more. They risk hyperinflation if they do enough of it, but heterodox economists argue that’s unlikely.</p>
<p>Except in Weimar Germany. And Zimbabwe. And Venezuela.</p>
<p>The recent tragedy in Venezuela is instructive. When the crude oil price collapsed in 2014 the government was left with a huge deficit, but still needed to pay the salaries of government workers and the military. So it printed money. With more money in the economy, but no increase in the number of things available to buy, the price of goods climbed. </p>
<p>That meant the government had to print still more money for the workers whose incomes bought less, which led to more inflation, more money printing, even higher prices, and pretty quickly hyperinflation of over <a href="https://www.forbes.com/sites/garthfriesen/2018/08/07/the-path-to-hyperinflation-what-happened-to-venezuela/#331f0a3b15e4">1,200,000%</a>.</p>
<h2>Just because Australia has avoided hyperinflation…</h2>
<p>Economists who promote the idea of large deficits point out that that hasn’t happened in Australia or the United States, but one of the reasons for that is that they have avoided really large deficits.</p>
<p>After the next US election, who knows.</p>
<p>In a timely warning, Federal Reserve Chair Jerome Powell told <a href="https://www.bloomberg.com/news/articles/2019-02-26/jay-powell-is-no-fan-of-mmt-says-the-concept-is-just-wrong">the US Senate this week</a>: “the idea that deficits don’t matter for countries that can borrow in their own currencies I think is just wrong”.</p>
<p>More importantly, the idea that deficits need not matter is dangerous.</p>
<p>It is a proposition with zero appeal among mainstream economists, but populist politicians are drawn to it and are increasingly keen to sell it to the public.</p>
<p>Let’s be clear. We should invest more in education, health, high-speed rail and child care if the numbers stack up, even if it means increasing deficits. But deficits do matter. We would be unwise to think we could do it without limit.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/now-is-the-time-to-plan-how-to-fight-the-next-recession-111497">Now is the time to plan how to fight the next recession</a>
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<img src="https://counter.theconversation.com/content/112680/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are limits on how much governments can spend without earning, although increasingly politicians are behaving as if there are not.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1112542019-02-07T19:06:26Z2019-02-07T19:06:26ZVital Signs. If needed, this man can and will cut rates during the election campaign<p>It was a great story.</p>
<p><a href="https://www.smh.com.au/business/the-economy/meet-guy-debelle-and-philip-lowe-the-odd-couple-wholl-be-running-the-reserve-bank-20160916-grho4t.html">Philip Lowe</a> had taken over as Reserve Bank governor after 25 years of uninterrupted economic growth. The Australian economy was transitioning nicely away from the country’s biggest-ever mining boom. Interest rates had been cut to historic lows in the wake of the 2008 financial crisis and had bottomed out. Inflation and wages growth were about to pick up. Unemployment was falling. And the new governor would preside over a return to “new normal”, with gradual rate rises up to a cash rate of 3.5-4.0%.</p>
<p>Then a funny thing happened on the way to the fairytale ending.</p>
<p>In <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-02-06.html">a remarkable speech at the National Press Club on Wednesday</a>, Lowe essentially admitted that the bank might well need to take extra remedial action to get the economy moving again.</p>
<p>Gone was the mantra that “the next movement in interest rate will likely be up”. Rather, Lowe said:</p>
<blockquote>
<p>…here are scenarios where the next move in the cash rate is up, and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.</p>
</blockquote>
<p>Translation: “I don’t want to freak you out, but we’re probably going to have to cut rates. And do it sooner rather than later.”</p>
<p>Consider the two main things driving the Reserve Bank’s decision.</p>
<p>Inflation is stubbornly low. <a href="https://theconversation.com/vital-signs-yet-another-year-of-steady-rates-whats-the-point-of-the-rba-inflation-target-110574">As I pointed out last week</a>, the bank has long had an inflation target of 2-3%, but it keeps undershooting it, and not just missing the centre, but missing the lower bound. In two and a half years with Lowe as governor, inflation has averaged just 1.87% – and has never been inside the target band. The latest figure is 1.8%.</p>
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<img alt="" src="https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/256541/original/file-20190131-42594-1p06f0z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Related to that, wages growth is anaemic. For five years it has barely kept up with inflation.</p>
<p>This is broadly true in advanced economies around the world (although our wages are doing worse than those in the United States) and suggests the unemployment rate will need to be pushed down further than in the past in order to reignite wages pressure and hence inflation. That suggests we’ll need even lower interest rates than we’ve got in order to provide what the boffins call monetary stimulus.</p>
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<a href="https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=396&fit=crop&dpr=1 600w, https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=396&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=396&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/257672/original/file-20190207-174867-1i44ukt.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>And the Reserve Bank’s cash rate — the rate that most other rates are set in reference to — is already the lowest on record, at just 1.5%.</p>
<p>Meanwhile, the housing market has taken a big hit, which isn’t over. Nationwide, the market is down 6.1% from its October 2017 peak. In Sydney and Melbourne, the falls are double that.</p>
<p>They are the mainly the result of a credit crunch that flowed from the Australian Prudential Regulation Authority’s decision to wake from its multi-year slumber and tighten lending rules at about the same time the banks responded to the royal commission by impersonating frightened turtles.</p>
<h2>Sinking property prices sink spending</h2>
<p>Sliding property prices shrink household spending, which makes up roughly 60% of economic activity.</p>
<p>On Tuesday, in the statement it released after its first board meeting for the year, the bank obliquely signalled that it had cut its GDP growth forecasts, mentioning forecasts of <a href="https://www.rba.gov.au/media-releases/2019/mr-19-01.html">3% this year and less in 2020</a> instead of the <a href="https://www.rba.gov.au/media-releases/2018/mr-18-31.html">3.5% this year and less in 2020</a> it had mentioned after its December meeting.</p>
<p>Add in the global headwinds from the US-China trade tensions and the fallout from the bungled Brexit, and it’s hard to find much that’s encouraging about the Australian economy in the year ahead.</p>
<p>Lowe didn’t want to state explicitly that he might have to cut rates between now and the election (and if necessary during the campaign itself), but he didn’t need to. He has been as clear as governors get. </p>
<h2>Rates could be cut on budget day</h2>
<p>A decent bet is the bank will cut 25 points on the first Tuesday in May, after the release of the updated (and possibly weak) inflation data on April 24. </p>
<p>Another possible date is the first Tuesday in April, April 2, after the March release of the December quarter economic growth figures, especially if economic growth turns negative. Coincidentally, April 2 is the day the government has set aside for the early budget, so it can hold the election in May. </p>
<p>If it does there will be some who will try to spin it as good news. In 2007 John Howard campaigned under the slogan that rates would be “lower under the Coalition”.</p>
<h2>Don’t think it couldn’t happen</h2>
<p>His treasurer Peter Costello was under the impression the bank wouldn’t dare move rate during the campaign, unwisely telling broadcaster Jon Faine it would <a href="https://www.smh.com.au/business/costello-quiet-on-offair-rates-comments-20071107-18kq.html">keep them put</a>.</p>
<p>“He looked me in the eye. He put his thumb down as he sat there…and he said, ‘There will not be a rate rise in November. Take it from me’,” Faine said.</p>
<p>Having marked out the territory, there is no doubt the bank will use it if needed. To do otherwise would be to invite questions about whether it had favoured one party or the other by holding off.</p>
<p>The hard truth is that we live in a <a href="http://larrysummers.com/category/secular-stagnation/">secular-stagnation world</a>, with too much saving chasing too few profitable investment opportunities. </p>
<h2>Rates no longer need to be particularly high</h2>
<p>That means that interest rates don’t need to be anything like as high as they once did to attract enough money to fund good ideas. And even if the ideas are good, it is likely they won’t need as much money as they did. Whereas once it took tens of billions of dollars to create a globally significant company (like BHP or US Steel) all it takes now is maybe $2,000 and a laptop, as with Facebook and Google.</p>
<p>A massive mining boom caused by the transition of China to a market economy and then a huge property bubble masked the new reality here for while.</p>
<p>Now it is here for all to see, the Reserve Bank governor included.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election</a>
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<img src="https://counter.theconversation.com/content/111254/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rates might need to be cut urgently, and because things are good. Governor Lowe has signalled he won’t wait.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1095682019-01-10T18:24:06Z2019-01-10T18:24:06ZVital Signs: so far, it’s more of a house price blip than a bust in the making<figure><img src="https://images.theconversation.com/files/253188/original/file-20190110-32130-15x2iqa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're unpredictable, but this could be a one-off adjustment.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Home prices slid in 2018, in some places by quite a lot.</p>
<p>According to the widely-used <a href="https://www.corelogic.com.au/research/monthly-indices">Corelogic Hedonic Home Value Index</a>, home prices were down 4.8% across the nation in 2018. Sydney was particularly hard hit, down 8.9% and prices in Melbourne slipped 7.0%. Hobart was a bright spot, but an exception, up 8.7%.</p>
<p>You might be dying to ask what “hedonic” means. The word relates to pleasure, in this case the pleasure of owning a home.</p>
<h2>Hedonic. It’s how we compare like with like</h2>
<p>In earlier times monthly house price moves were calculated by comparing the average price of houses sold in one month with the average price of houses sold in the previous month. </p>
<p>But what if the “pleasure” that was sold in that month was different from the pleasure that was sold the previous month? What if, for example, in December mainly good five-bedroom mansions in good suburbs were sold, whereas in January it was mainly one bedroom dumps located where people didn’t want to live? The average recorded price would go down even if the price of individual houses had not. </p>
<p>The hedonic index gets around this by comparing <a href="https://www.corelogic.com.au/research/rp-data-corelogic-home-value-index-methodology">like with like</a> - the price of three-bedroom homes in a middle ranking suburb with the price of three-bedroom homes in the same middle ranking suburb and so on. It’s made up of a lot of indexes combined, and is unaffected by the mix of properties that happen to be sold in any particular month. </p>
<p>The results are not good news for current home owners, but they are worth putting into perspective.</p>
<h2>How far back do you want to go?</h2>
<p>In Melbourne prices are down 7.2% from their peak, but they are no lower than they were as recently as February 2017. In Sydney, prices are no lower than they were in August 2016 according to Corelogic.</p>
<p>So, should we focus on the latest very recent drop in prices, or the incredibly strong growth over the previous 20 years? </p>
<p>The following chart from Corelogic’s Head of Research Tim Lawless demonstrates that long-run growth in Sydney, as well as the fact there have been pretty significant short-run dips along the way.</p>
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<p>The most obvious point to make is that if you bought recently then the current price drops hurt. If you had a 20% deposit, the latest falls in Sydney and Melbourne have wiped out about half of your starting equity; more if you factor in stamp duty and moving costs.</p>
<p>If you bought a longer time ago, you might feel the sting of the latest price slide just a touch, but you are still well ahead.</p>
<p>So from a personal perspective, it’s natural that some people will care a lot about what’s happened, and others won’t much mind.</p>
<h2>What’ll it mean for the economy?</h2>
<p>The biggest concern is the so-called “wealth effect”. </p>
<p>When home prices fall, homeowners feel (and are) poorer. </p>
<p>It affects how much they are prepared to spend, although as the <a href="https://www.rba.gov.au/publications/rdp/2015/pdf/rdp2015-08.pdf">Reserve Bank and others have pointed out</a> the size of the effect remains unclear.</p>
<p>But it might be bigger than you think. Many of us aren’t rational. We have <a href="http://www.columbia.edu/%7Emd3405/RD_lecture_1_handout.pdf">“reference points”</a>. If, because of the barrage of media reports at the time, we use the start of 2018 (the top of the market) as our reference point, then even those of us who have owned properties for a long time will feel poorer. And because of that, we might spend less.</p>
<p>Since private spending <a href="https://tradingeconomics.com/australia/household-final-consumption-expenditure-etc-percent-of-gdp-wb-data.html">accounts for well over half of Australia’s gross domestic product</a>, spending less can have a big effect.</p>
<h2>What’ll it mean for the banks?</h2>
<p>Australia’s big four banks are the biggest lenders to residential property owners and are among the biggest companies in Australia. </p>
<p>Could the slide in property prices put them in jeopardy?</p>
<p>If a few homebuyers had a 20% deposit and suffered at most maybe a 15% fall in prices, there isn’t a problem, right? </p>
<p>That view is basically correct – except when it’s not.</p>
<p>Some lenders have been bulking up loans to borrowers who earlier took out, say, A$600,000. When their homes came to be worth, say, $1.5 million they lent them more - boosting their loans by most of the extra value.</p>
<p>The practice calls into question the view that only a small number of the most recent buyers are highly leveraged. Many more folks could be – but without the loan-level data that the banks have, we don’t know.</p>
<h2>Is 2018 a good predictor of 2019?</h2>
<p>At the heart of all of these questions is whether the 2018 price falls are likely to continue, which would mean them getting much bigger. </p>
<p>That depends on what caused them.</p>
<p>A key part of it was that banks (at least the big four) lent less than they used to. With less money borrowed, there was less money to bid up prices.</p>
<p>As I have noted before, Australian banks were arguably lending too much; about 25% more than US banks to equivalent borrowers.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-why-now-is-the-right-time-to-clamp-down-on-negative-gearing-107370">Vital Signs: why now is the right time to clamp down on negative gearing</a>
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<p>Post Royal Commission, that’s changed. As has been widely discussed, banks are now looking at borrower’s expenses much more carefully. Too carefully, according to Treasurer Josh Frydenberg who has <a href="https://www.afr.com/news/politics/josh-frydenberg-tells-banks-to-ease-up-on-lending-crackdown-20181109-h17q2g">called on them to lend more</a>.</p>
<p>The important point is that if there has been a one-off adjustment in the borrowing capacity of Australians, then the price falls should stop fairly soon: predictions of more modest falls in 2019 followed by a reset and uptick in 2020 mightn’t be too far off the mark.</p>
<p>If so, the short-term slide will remain for most people, just that.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-we-are-witnessing-a-slowly-deflating-property-bubble-for-now-98624">Vital Signs: we are witnessing a slowly deflating property bubble, for now</a>
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<img src="https://counter.theconversation.com/content/109568/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Prices are off, but from unprecedented highs. It could be a one-time adjustment.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1080522018-12-06T18:55:08Z2018-12-06T18:55:08ZVital Signs: 35 extraordinary years. What the float of Australian dollar bought us<figure><img src="https://images.theconversation.com/files/249158/original/file-20181206-186070-1vmgt7n.png?ixlib=rb-1.1.0&rect=0%2C28%2C622%2C356&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How the float was greeted, 35 years ago on December 10, 1983.</span> <span class="attribution"><span class="source">The Australian, December 10, 1983</span></span></figcaption></figure><p>If a week is a long time in politics, then 35 years must be an eternity.</p>
<p>35 years ago, on Monday December 12, 1983, the Hawke-Keating government <a href="https://media.theaustralian.com.au/static/50th-birthday/images/903309-aus-web-file-50b-1983-front-page.pdf">announced the Australian dollar would be floated</a>. </p>
<p>That is, the prices set by willing buyers and sellers would determine the value of the dollar in US cents rather than decisions made at occasional and later daily meetings of Reserve Bank and Treasury.</p>
<p>Even by the mid-1970s the huge amounts of cash sloshing around international markets had made it hard to pick the right value. </p>
<p>Too expensive a dollar would mean Australians couldn’t get access to the foreign exchange they needed. </p>
<p>Too cheap a dollar would make imports expensive.</p>
<p>Yet floating it was not a white flag. </p>
<p>It was a bold decision – former RBA governor Glenn Stevens once described it as “<a href="https://www.rba.gov.au/speeches/2013/sp-gov-211113.html">one of most profound economic policy decisions in Australia’s modern history</a>” – and one that set the stage for the 27 years of uninterrupted economic growth that began less than a decade afterwards. </p>
<h2>It gave us a giant shock absorber</h2>
<p>Since it floated, the Australian dollar has bought as much as US$1.10 (in July 2011) and as little as 47.75 US cents (in <a href="http://www.nma.gov.au/defining-moments/resources/australian-dollar-floated">April 2001</a>).</p>
<p>At first glance that looks like a whole lot of instability. In fact, the opposite is true.</p>
<p>Each time the Australian dollar falls, it makes the products we produce cheaper for overseas buyers, and it makes them cheaper for us compared to overseas products.</p>
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<p>After the mining boom ended and overseas buyers of our minerals had less need for our currency, the Australian dollar slid from US$1.10 to US$0.70.</p>
<p>As it happened, other Australian exporters and businesses gained a new lease of life, smoothing the adjustment and creating other homes in other parts of the economy for the labour and other resources that had been devoted to mining.</p>
<p>The floating dollar was just as useful as the mining boom was ramping up.</p>
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Read more:
<a href="https://theconversation.com/sense-think-act-the-principle-that-governs-everything-from-rocket-landings-to-interest-rates-91391">Sense, think, act: the principle that governs everything from rocket landings to interest rates</a>
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<p>As foreign buyers tried to get hold of the Australian dollars they needed to pay for our minerals, the dollar climbed, making life harder for other exporters and firms that competed with imports who ceded labour and other resources to mining.</p>
<p>The higher dollar made imports cheaper, meaning we didn’t need to make as much, and pushing down inflation in order to give even Australians not connected with mining a higher standard of living – effectively spreading the benefits of the boom.</p>
<p>Australian businesses were also able to import as they couldn’t before – everything from earth-movers to robot production lines to personal computers –investing for the next boom.</p>
<p>It was an automatic stablisation that could never have been achieved by bureaucratic price-setting. </p>
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<figcaption><span class="caption">Extract from ABC documentary “Labor in Power”, 1992.</span></figcaption>
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<p>Even if the bureaucrats had known what prices to set, the political pressures they would have faced from manufacturers lobbying for a low dollar, and retailers and consumers lobbying for a high one, would have made the process agonising.</p>
<p>Political food fights make for bad economic policy. The floating dollar enables politicians to duck them, blaming “the market”.</p>
<h2>Then we freed the Reserve Bank</h2>
<p>It was a bit the same with the Reserve Bank. Until the mid-1990s it needed to consult with the Treasurer before moving interest rates.</p>
<p>Its <a href="https://www.rba.gov.au/publications/bulletin/1996/sep/pdf/bu-0996-1.pdf">declaration of independence</a>, in a document countersigned by the newly appointed Treasurer Peter Costello in 1996, opened the way for it respond to shocks – such as the financial crisis of 2008 – without involving politicians. </p>
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Read more:
<a href="https://theconversation.com/call-to-change-reserve-bank-charter-raises-important-questions-about-macroeconomic-policy-6354">Call to change Reserve Bank charter raises important questions about macroeconomic policy</a>
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<p>The Treasurer does no more than ask it to keep inflation low (2-3% pa) while keeping employment and economic growth sustainability high. The rest is up to the Reserve Bank.</p>
<p>Because it is less likely than the government to succumb to political pressure, its resolve to do these things isn’t doubted. It has been able to embed low inflationary expectations in a way the government might not have been able to, making disastrous wage-price spirals a thing of the past.</p>
<p>And while there is <a href="https://www.brookings.edu/research/why-the-fed-needs-a-new-monetary-policy-framework/">an important debate</a> about what the right monetary policy framework should be in a post-2008 world, there is little debate that Reserve Bank independence <a href="https://www.rba.gov.au/speeches/2017/sp-dg-2017-09-28.html">is crucial</a> for implementing it.</p>
<h2>The world’s fifth most traded currency</h2>
<p>Australia is the world’s <a href="https://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx">15th to 20th</a> largest economy – depending on how it is measured – but it has the fifth most traded currency. </p>
<p>As I noted in a report for the <a href="https://assets.ussc.edu.au/view/7e/63/99/70/48/2b/ef/4f/bd/9f/49/b9/b2/9e/fb/88/original/959a3d253927020b0ed1a1bd671e65306f29b4f4/Indispensable-economic-partners-The-US-Australia-investment-relationship.pdf">US Studies Centre and American Chamber of Commerce</a>, the Australian dollar is globally relevant. It is increasingly used as a proxy for Asia and for commodity currencies.</p>
<p>The Australia-US dollar pair is the fourth most traded pair in the world. That wouldn’t be possible without a freely floating currency.</p>
<p>It’s about more than vanity. Much of the funding that Australian banks need comes not from deposits but from overseas capital markets. It allows them to lend as needed, unconstrained by the extent of their deposits.</p>
<p>They wouldn’t have that access to overseas capital markets unless the Australian dollar floated; unless it was always possible to find a price at which they could bring in overseas funds. </p>
<h2>What’s next?</h2>
<p>Bob Hawke and Paul Keating’s floating of the dollar was a one-off. It can’t happen again.</p>
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<a href="https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/249197/original/file-20181206-128202-1htprl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Geoff Pryor cartoon depicting Paul Keating, Bob Hawke, Opposition Leader Andrew Peacock and deputy John Howard.</span>
<span class="attribution"><a class="source" href="https://www.nla.gov.au/">National Library of Australia</a></span>
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<p>But there are other big reforms in prospect. On issues from climate change to tax reform to immigration, it is important to get the underlying settings right. </p>
<p>As could have happened with the dollar, the costs of getting them wrong might be enormous.</p><img src="https://counter.theconversation.com/content/108052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Floating the dollar 35 years ago was a leap into the unknown. Here’s how it has served us well.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1073702018-11-29T19:05:50Z2018-11-29T19:05:50ZVital Signs: why now is the right time to clamp down on negative gearing<figure><img src="https://images.theconversation.com/files/247879/original/file-20181129-170232-9424n6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Negative gearing makes it hard for renters to become home owners. Now would be a pain-free time to wind it back.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>When I wrote a report for the McKell Institute about negative gearing, <a href="https://mckellinstitute.org.au/app/uploads/McKell_Negative-Gearing_A4_WEB.pdf">Switching Gears</a>, in 2015, Australia had a housing affordability crisis and negative gearing was costing the budget A$4 billion per year.</p>
<p>Three years on, Australia still has a housing affordability crisis, and negative gearing is costing the budget A$5.5 billion per year.</p>
<p>Bank then, more than half of the money lent for housing (an unprecedented 55%) went to investors rather than people buying homes to live in. Only one in seven loans went to first home borrowers, down from one in five a few years earlier.</p>
<p>Since then the Australian Prudential Regulation Authority has leaned on the banks to wind back investment loans (they are down to a still-high 42%), and loans to first home buyers are back up to nearer one in five.</p>
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<a href="https://theconversation.com/policycheck-negative-gearing-reform-58404">PolicyCheck: Negative gearing reform</a>
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<p>It’s not yet clear how the changes will stick. Loans to investors have just started to creep back.</p>
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<p>But negative gearing is still costing the budget billions, and its worst effects are being contained only by threatening the banks and by the (possibly temporary) easing in house prices.</p>
<h2>How to clamp down</h2>
<p>My report put forward five different options, ranging from doing nothing to abolishing negative gearing forthwith.</p>
<p>My preferred option (<a href="https://mckellinstitute.org.au/app/uploads/McKell_Negative-Gearing_A4_WEB.pdf">scenario 4</a>) would have outlawed negative gearing except for “grandfathered” existing negatively-geared properties, and for newly constructed dwellings.</p>
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Read more:
<a href="https://theconversation.com/three-myths-on-negative-gearing-the-housing-industry-wants-you-to-believe-54732">Three myths on negative gearing the housing industry wants you to believe</a>
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<p>Even where outlawed, people could continue to claim a investment losses against investment income, just not against their salary.</p>
<p>The exemption for newly constructed dwellings would boost construction jobs and housing supply, helping affordability and economic growth. </p>
<p>It would also deliver a boost to the budget bottom line of more than A$30 billion over ten years, and assist financial stability by cutting the proportion of the housing market in the hands of footloose investors.</p>
<p>Labor adopted a <a href="https://www.alp.org.au/negativegearing">version of it</a> in 2016.</p>
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Read more:
<a href="https://theconversation.com/negatively-geared-against-younger-australians-59792">Negatively Geared – Against Younger Australians</a>
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<p>At that time even the then treasurer Scott Morrision wanted to target “<a href="https://www.news.com.au/national/politics/tax-reform-treasurer-scott-morrison-investigates-negative-gearing-distribution/news-story/4c0ae584e9c15cc2f4db24f456831f12">excesses</a>”. </p>
<p>More than 120,000 people have three or more leveraged investment properties. Staggeringly, more than 20,000 have six or more. </p>
<p>The Reserve Bank of Australia <a href="https://www.afr.com/news/economy/rba-financial-stability-review-warns-of-investment-%20property-risks-20171012-gz04fn">thinks it puts the financial system at risk</a>, noting that “investors with multiple properties have likely contributed to higher risk”.</p>
<p>The Treasury found the sort of changes Labor and I were proposing would have only a “<a href="https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf">relatively modest</a>” effect on home prices, instead of the “<a href="https://www.theaustralian.com.au/national-affairs/malcolm-turnbull-rules-out-negative-gearing-reforms/news-story/7723bb53f1a4c3c2c90e7c4a9ae4a132?nk=f36f4826c0ef0ba18b866304ad560614-1543465343">sledgehammer</a>” alleged by Morrision and the then prime minister Malcolm Turnbull.</p>
<h2>What negative gearing is</h2>
<p>Negative gearing property involves two steps. </p>
<p>First, you invest in a property and get less income from it in rent than the cost of the investment (such as the interest on the loan and the cost of maintaining the property).</p>
<p>Second, you use that loss on the property to offset your income from unrelated streams such as wages or salary, thereby cutting your tax bill.</p>
<p>It’s this second part that is peculiar, and where Australia is out of step with most countries, including the United States, Canada and the UK.</p>
<p>Other countries will allow you to use investment losses to offset investment profits, but not to offset income from wages and salaries.</p>
<p>The tax deductions impose a big hit on the federal budget, now costing more than A$5.5 billion per year. The Treasury says that more than half of that A$5.5 billion goes to families <a href="https://static.treasury.gov.au/uploads/sites/1/2018/01/FOI_1876_Documents_for_release.pdf">in the top 20% of the income distribution</a>.</p>
<h2>It hurts intending owner occupiers</h2>
<p>Here’s how it locks genuine (residential) buyers out of the market. </p>
<p>An investor who fronts up at a typical Saturday auction faces the prospect of the federal government paying roughly half of his or her interest bill, given the top marginal tax rate and medicare levy.</p>
<p>An owner occupier, in contrast, gets no help. Even if they have the same deposit saved and earn the same income as the investor, they can afford to borrow much less – perhaps just half as much.</p>
<p>They get outbid. Sometimes they end up renting from negatively gearing investors who elbowed residential buyers such as themselves out of the way.</p>
<h2>Crimping it would level the playing field</h2>
<p>My McKell plan levels the playing field right away. The day after the policy is enacted, owner occupiers and investors have the same firepower at auction.</p>
<p>But existing investors – those who already have negatively geared properties – would be able to keep those tax breaks until their loans were paid off.</p>
<p>It would mean a smooth transition away from negative gearing, rather than an abrupt change. It would also respect the investment choices that had been made in good faith under existing policy settings.</p>
<h2>Few think otherwise</h2>
<p>It’s hard to find a credible economist – or even a non-credible one – who doesn’t think that negative gearing should be reformed. </p>
<p>There has been a consistent call for reforms from leading voices like <a href="http://research.economics.unsw.edu.au/richardholden/assets/eslake-holden-afr.pdf">Saul Eslake</a> and Chris Richardson.</p>
<p>Even the then-sensible Malcolm Turnbull said in 2005 tht Australia’s rules on negative gearing were <a href="http://australianpolitics.com/2005/08/26/turnbull-taxation-reform-paper.html">“very generous”</a> compared to those of other countries. He said it was a form of <a href="https://melbourneinstitute.unimelb.edu.au/outlook/assets/2005/malcolm-turnbull.pdf">tax avoidance</a>. Quite so.</p>
<p>Of course, with another federal election coming up, Treasurer Josh Frydenberg has run a <a href="https://www.2gb.com/labor-should-dump-proposed-negative-gearing-reforms-says-%20treasurer/">the same predictable scare campaign</a> about Labor’s negative-gearing policy as last time.</p>
<p>This time he says “Labor’s policy will make sure people who own their home will see the value of their home be less and fall, and if they rent their home, their rent will go up.”</p>
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Read more:
<a href="https://theconversation.com/will-house-prices-collapse-if-negative-gearing-is-changed-55383">Will house prices 'collapse' if negative gearing is changed?</a>
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<p>His claim is dubious at best.</p>
<p>House prices have fallen 12% in Darwin in the past year, but risen 19% in Hobart, none of it due to negative gearing. </p>
<p>Because negative gearing would still be available for new construction under Labor’s plan (and mine), it would add to the supply of new homes and push down rents. </p>
<p>Also, as existing renters who want to purchase find they are able to, they will be move from being renters to owners, cutting the demand for places to rent and also putting downward pressure on rents.</p>
<h2>Now is the time</h2>
<p>Negative gearing is a costly and peculiar provision of the Australian tax code – one that creates both intergenerational inequality and financial instability.</p>
<p>It was long overdue for reform in 2015, and the case has strengthened since.</p>
<p>The best time to crimp it is when the heat has already been taken out of housing prices and relatively few investors are rushing in anyway.</p>
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Read more:
<a href="https://theconversation.com/what-the-reserve-bank-memo-really-says-about-negative-gearing-59169">What the Reserve Bank memo really says about negative gearing</a>
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<p>Opponents of reform need to explain why they would want to continue to spend A$5.5 billion per year encouraging yet another wave of negatively geared property speculation which would lock still more young people out of the dream when the market picks up.</p><img src="https://counter.theconversation.com/content/107370/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The best time to shut down negative gearing is when few people are taking it up. That time is now.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1061502018-11-08T19:31:41Z2018-11-08T19:31:41ZVital Signs: Why we distrust the consumer price index<figure><img src="https://images.theconversation.com/files/244477/original/file-20181108-74778-oeahjq.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Officially, our inflation rate is lower than at any time since the 1950s, but we've reasons for doubting it.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Officially, Australia’s rate of inflation <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">is 1.9%</a>.</p>
<p>It’s the lowest it has been on a sustained basis <a href="https://www.datawrapper.de/_/xMn5P/">since the 1950s and early 1960s</a>.</p>
<p>But try to tell that to anyone and they will laugh at you, or worse.</p>
<p>The Bureau of Statistics is careful to say that the consumer price index <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6467.0Explanatory%20Notes1Sep%202018">isn’t a measure of living costs</a>. </p>
<p>It creates that slightly differently, producing a collection of <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6467.0">less-reported indexes</a> that were updated this week. </p>
<p>On these measures, over the past year living costs have climbed 2% for households headed by an employee, 2.2% for households headed by Australians on most types of benefits, 2.3% for households headed by age pensioners, and also 2.3% for households headed by self-funded retirees.</p>
<p>The main difference between the consumer price index and the living cost indexes is that “living costs” include interest paid on mortgages whereas “consumer prices” do not.</p>
<p>Regardless, most of us would be pretty certain that even on these measures, what’s reported is too low.</p>
<h2>We’re irrational</h2>
<p>In part, this is because we are not rational. As Nobel Laureate <a href="https://faculty.chicagobooth.edu/richard.thaler/research/pdf/mental%20accounting%20and%20consumer%20choice.pdf">Richard Thaler has pointed out</a>, we often engage in “mental accounting”. </p>
<p>In general this means we notice losses more than gains. In this context, it means we focus more on the things that have gone up in price than on those that have gone down or remained unchanged.</p>
<p>Also, our mental basket of goods is generally not the same as the basket of goods the bureau measures, even though it should be.</p>
<h2>It’s not our basket</h2>
<p>Four times a year in multiple locations throughout each capital city the bureau attempts to collect information about the prices of the thousands of goods (and some services) that make the “basket” it thinks represent they typical household’s purchases.</p>
<p>The basket is divided into about 100 subgroups; things such as bread, milk, eggs, fruit, men’s footwear, women’s footwear, men’s clothes, women’s clothes, restaurant meals, electricity and so on.</p>
<p>Because it can’t price everything, it zeros in on a few <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6403.0.55.001/">representative items</a> within each category.</p>
<p>For meat and fish the ABS includes beef sausages (1kg) and pink salmon (210g can). For processed fruit and vegetables it includes sliced pineapple (450g can) and frozen peas (500g pkt). </p>
<p>If you buy something different, the exact changes in the prices you pay won’t be fed into either the consumer price index or your living cost index, but the indexes are likely to move in line with your living costs in any case.</p>
<h2>Things get left out</h2>
<p>Many things are missing from the index, among them recreational drugs, gambling and prostitution.</p>
<p>Being bean counters, rather than priests, the bureau says it excludes these sorts of items on <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6461.0Main%20Features52017?opendocument&tabname=Summary&prodno=6461.0">practical rather than moral grounds</a>. </p>
<blockquote>
<p>Gambling is excluded as it is difficult to establish the service or utility that households derive from gambling, and thus to determine an appropriate price measure. Recreational drugs and prostitution are both excluded as it is very difficult and indeed dangerous to obtain estimates of prices and expenditures, or to measure quality change.</p>
</blockquote>
<p>Other things are excluded because their prices are deemed to be too volatile. The price of bank deposits and loans was <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/519273BD961F38E2CA2577EE000D7692">removed from the main index</a> a few years back.</p>
<h2>And goods keep getting better</h2>
<p>Where our views about prices are most likely to differ from the bureau’s is where goods get better.</p>
<p>The bureau factors quality improvements into the measures prices it reports. If, for instance, your next mobile phone costs as much as your last one but includes extra features such as more memory or an improved camera, the ABS will report that it has fallen in price.</p>
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Read more:
<a href="https://theconversation.com/moores-law-is-50-years-old-but-will-it-continue-44511">Moore's Law is 50 years old but will it continue?</a>
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<p>This sort of adjustment for quality makes sense when adjusting down the price of a can of baked beans because it has been replaced by one slightly bigger, but is a grey area when it comes to improved features. </p>
<p>If the speed of the chip on your next laptop doubles, does that really mean the laptop is twice as good as the old one and should be said to have halved in price? Or should its price be recorded as having fallen by a lesser amount, or not at all seeing as the price hasn’t changed and it remains a standard laptop?</p>
<p>Often older models with lesser features are often no longer available. It’s impossible to buy a cheaper replacement. </p>
<h2>The CPI is infrequent</h2>
<p>The Reserve Bank is worried about <a href="https://www.rba.gov.au/publications/submissions/prices/16th-series-review-of-cpi/">the frequency of the index</a>. It comes out only once a quarter, and up to a month after the quarter has finished. </p>
<p>Every developed country other than Australia and New Zealand releases its index <a href="https://www.smh.com.au/business/rba-casts-doubt-on-cpi-figure-20100317-qfrg.html">monthly</a>.</p>
<p>Given that the bank considers changing interest rates once every month, and given that the consumer price index is one of the two key measures it uses to guide its decisions (the other is the unemployment rate), a quarterly index leaves it somewhat in the dark and (when things are changing fast) potentially dangerously misled.</p>
<p>The bureau <a href="http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/CA1092C90BF15BCDCA2581CD000C44AD/$File/6470055001_2017.pdf">responds</a> that it is prepared to release its index monthly, if it is paid to do it.</p>
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<p>The ABS is persuaded there would be a significant benefit from more timely and responsive economic management if a CPI of equivalent quality to the current quarterly index were available monthly. Additional funding will be required to meet the costs involved in compiling a monthly index.</p>
</blockquote>
<p>It’s just what we need – bureaucratic blackmail.</p>
<h2>But it’s improving</h2>
<p>On the positive side, new technologies have allowed more accurate price collection to make the index more precise. A key innovation is the rise of so-called “scanner data”, tracking expenditures at checkouts based on the prices people actually pay.</p>
<p>Scanner data has been used since 2014 and is now responsible for about one quarter of the prices reported. Field officers compile much of the rest using <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6461.0Main%20Features82017">hand-held devices to type in prices they read off supermarket shelves</a>.</p>
<p>The move to scanner data was spearheaded by the work of my UNSW School of Economics colleague <a href="https://theconversation.com/vital-signs-weak-inflation-means-interest-rates-arent-rising-anytime-soon-90924">Professor Kevin Fox</a>.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/a-cashless-society-and-the-five-forms-of-mobile-payment-that-will-get-us-there-26779">A cashless society and the five forms of mobile payment that will get us there</a>
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<p>There is a prospect of it becoming more widespread as more and more purchases are made with debit and credit cards and with point-of-sale software on devices such as tablets at coffee shops.</p>
<h2>And important</h2>
<p>Whether or not we like what it says, the consumer price index is important and lies behind much of what we do.</p>
<p>A whole range of government payments and duties are indexed to it – these change when the consumer price index changes. Benefits such as Newstart and family payments are indexed as are excise duties such as those on petrol and beer.</p>
<p>Even the private sector relies on the consumer price index to adjust payments under contracts such as rental agreements or construction charges.</p>
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Read more:
<a href="https://theconversation.com/joe-hockeys-user-pays-plan-for-the-abs-doesnt-add-up-32790">Joe Hockey's user pays plan for the ABS doesn't add up</a>
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<p>Collecting it is an enormous and painstaking exercise.</p>
<p>Governments of both stripes would do well to remember that when next they think of cutting the bureau’s budget.</p><img src="https://counter.theconversation.com/content/106150/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Hardly anyone believes that prices are really increasing by only 1.9% per year. The fault lies with us, and also the way the Bureau of Statistics adjusts prices for ‘quality’.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1055232018-10-25T19:19:23Z2018-10-25T19:19:23ZVital Signs: Australia’s 5% jobless rate is not full employment; pushing up interest rates would be wrong<figure><img src="https://images.theconversation.com/files/242275/original/file-20181025-71014-i3uzd9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's unemployment rate is at what would once been regarded as full employment. But that doesn't mean it can't fall further.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>According to <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">ABS figures released last week</a>, the unemployment rate in Australia has fallen to 5%. This isn’t as low as the 3.7% level in the United States, but by historical standards it is low for us.</p>
<p>We need to go back a decade, to just before the financial crisis of 2008, to see levels much lower than this, when the unemployment rate briefly touched 4%.</p>
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<p>This raises the important question of what level of unemployment constitutes “full employment”? </p>
<p>Economists often used to say it was 5%. That’s because even if the jobs market was so tight that employers couldn’t get workers, there would always be some unemployment. Some completely unsuitable people wouldn’t get jobs and some people would be counted as unemployed even when they were moving from one job to another. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/the-problem-with-official-statistics-and-three-ways-to-make-them-better-103448">The problem with official statistics – and three ways to make them better</a>
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<p>Attempts to stimulate the economy or cut interest rates to get the unemployment rate below 5% was therefore seen as pointless, because it would merely stoke inflation. Which is why the 5% rate has been referred to by the ungainly acronym of NAIRU - the non-accelerating inflation rate of unemployment.</p>
<p>How low can our unemployment rate fall before it genuinely reaches NAIRU and can fall no further, and what are the barriers to getting there?</p>
<p>The short answer is we have no idea, but we should find out by setting policy levers to push unemployment as low as we can.</p>
<h2>Do we measure unemployment correctly?</h2>
<p>First to the question of whether we measure the unemployment rate correctly. The Australian Bureau of Statistics <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/6102.0.55.001%7EFeb%202018%7EMain%20Features%7EUnemployment%7E6">defines unemployment</a> this way:</p>
<blockquote>
<p>Unemployed persons are defined as all persons aged 15 years and over who were not employed during the reference week, and
(i) had actively looked for full-time or part-time work at any time in the four weeks up to the end of the reference week, and were available for work in the reference week, or
(ii) were waiting to start a new job within four weeks from the end of the reference week, and could have started in the reference week if the job had been available then.“</p>
</blockquote>
<p>Critics often point out that this does not capture "underemployment” – where people do work but not as much as they want to – very well at all.</p>
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Read more:
<a href="https://theconversation.com/how-the-unemployed-disappear-and-why-it-matters-35850">How the unemployed 'disappear' and why it matters</a>
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<p>They are almost surely correct, but there’s nothing new in that, meaning we can be confident comparing the unemployment statistics now to those five years or a decade ago.</p>
<h2>Unemployment can’t be zero</h2>
<p>The 2010 Nobel Prize for <a href="https://www.nobelprize.org/prizes/economic-sciences/2010/summary/">Economic Sciences</a> was won by Peter Diamond, Dale Mortensen and Christopher Passarides for their analysis of how “search frictions” can affect markets. Chief among these frictions is looking for a job. Employers need to advertise. Employees need to find these ads. A good match must be made. These things take time.</p>
<p>Indeed, Peter Diamond’s <a href="https://www.nobelprize.org/prizes/economic-sciences/2010/diamond/lecture/">seminal contribution</a> was to show that even small frictions can have a very large effect on things like the level of unemployment. LinkedIn and online job ads are great, but they make neither search frictions nor unemployment go away.</p>
<h2>How low can unemployment go?</h2>
<p>The idea of NAIRU is still routinely <a href="https://www.smh.com.au/business/the-economy/interest-rate-rises-only-a-matter-of-time-despite-property-gloom-20181019-p50an0.html">spouted in generic commentary</a> about why a drop in unemployment means we should immediately brace for an interest-rate rise.</p>
<p>But there are a couple of problems with it – which is why modern economics has largely eschewed it.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-unemployment-rate-will-never-get-to-zero-percent-but-it-could-still-go-a-lot-lower-103665">Why the unemployment rate will never get to zero percent – but it could still go a lot lower</a>
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<p>First, NAIRU may not even exist. It is premised on the notion of a “Phillips Curve” – a stable negative relationship between the the rate of unemployment and wage rise that hasn’t been found in the data for at least 25 years.</p>
<p>Second, even if the NAIRU does exists, <a href="https://www.nber.org/chapters/c8885.pdf">we have known</a> for more than 20 years that its level is super-hard to estimate. Is it 5%, or 4% or 3.5%? Hard to say.</p>
<p>Even an architect of the theory, Nobel-prize winning Ned Phelps, has argued that structural change <a href="https://economia.icaew.com/en/opinion/november-2017/nothing-natural-about-the-natural-rate-of-unemployment">might change it over time.</a>.</p>
<h2>Testing the waters</h2>
<p>All this means that for the Reserve Bank to raise interest rates because unemployment has fallen to 5% would be a missed opportunity at best, and dangerously silly at worst. </p>
<p>With inflation still subdued, room to move downward on interest rates, and wages growth stagnant, we should test what full employment really means in Australia in 2018.</p>
<p>Having fully 5% of Australians looking for work who can’t find it – plus potentially many more underemployed – is a huge waste of economic, and much more importantly, human resources.</p>
<p>We shouldn’t let out-of-date acronyms and failed theories suggest otherwise.</p><img src="https://counter.theconversation.com/content/105523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We should ignore out-of-date and failed theories and test what full employment really means in 2018.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1051372018-10-18T19:12:52Z2018-10-18T19:12:52ZVital Signs: the housing market might deflate, but it might pop. Here’s how<figure><img src="https://images.theconversation.com/files/241191/original/file-20181018-41138-clktnk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Air could come rushing out of the housing market all at once.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There are two things that can happen to an asset price bubble. It can burst dramatically, or deflate slowly.</p>
<p>Which brings us to the Australian housing market. </p>
<p>Prices in Sydney and Melbourne continue to decline at a modest rate. The <a href="https://www.corelogic.com.au/research/monthly-indices">CoreLogic index</a> has Sydney prices down 6.1% for the last 12 months, and Melbourne down 3.4%. </p>
<p>This barely dents the huge increases in previous years and is consistent with “deflate slowly” scenario.</p>
<p>What could cause a pop? </p>
<h2>Interest-only loans could do it</h2>
<p>As I have <a href="https://theconversation.com/vital-signs-if-it-looks-like-a-bubble-and-sounds-like-a-bubble-75050">said here before</a>, one of the worries is interest-only loans. </p>
<p>Around A$360 billion of these loans are due to be rolled over over the next three years. If they are not, they will convert to principal-and-interest loans, which are much more expensive to maintain. </p>
<p>Given that only about 15% of loans currently issued are interest-only, down from 40% in recent times, that means a lot of people are starting to pay the more expensive principal and interest. For some, the jump in repayments will be as high as 40%.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518">Vital Signs: Interest only loans are an economic debacle that could bust the property market</a>
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<p>That’s scary enough. But <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-10-02.html">this week’s minutes of the October Reserve Bank board</a> meeting point to another concerning possibility – an old-fashioned credit crunch.</p>
<p>The bank put it this way: </p>
<blockquote>
<p>Members discussed the release of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry… Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the Commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report. Members noted that it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported.</p>
</blockquote>
<p>Translation: the banks have stopped lending as much, and might lend even less; this could be bad for the economy.</p>
<p>Could it blow up the housing market? </p>
<p>Well, possibly. Here’s how.</p>
<h2>Here’s how it would happen</h2>
<p>If the amount of housing credit available is significantly reduced, it is hard for people to buy properties. </p>
<p>That means it becomes hard for people to sell – or even move from one property to another. A market with fewer buyers and sellers in it (what economists call a “thin market”) means more volatile prices.</p>
<p>This turns the price someone gets from selling a property into more of a lottery. There’s a decent chance the seller gets much less than she thought. </p>
<p>Worse still, most people are highly leveraged in residential property – often putting down a deposit of just 10% to 20%. </p>
<h2>Owners would get hit rather than their banks</h2>
<p>All the drop in the selling price hits the owner, because the bank gets paid back no matter what.</p>
<p>So a 10% drop in price can wipe out all the seller’s equity in the property. </p>
<p>Even if the owner has paid down, say, half the loan, that’s a big hit.</p>
<p>It’s the prospect of this that causes people not to want to sell. If an owner can hold on, they will. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">Vital Signs: the spooky mortgage risk signs our bankers are ignoring</a>
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<p>So which properties end up on the market? Precisely those of the people who really need to sell. </p>
<h2>They would sell because they had to</h2>
<p>Knowing this, and without much competition, buyers turn the screws, pushing down prices still further and exacerbating the problem.</p>
<p>Of course, for that to happen people need to sell. </p>
<p>Why might that be? There are are number of reasons. Their repayments could rise because of rates rising. Even without an official rise in the cash rate by the RBA, banks can, and recently have, raised rates because of their funding costs in money markets. </p>
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Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
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<p>A borrower might need to change cities because of their job, or might lose their job and be unable to meet repayments. Or a borrower might have an unexpected expense, perhaps relating to health care. The list goes on.</p>
<h2>We can’t be sure it won’t happen</h2>
<p>It is hard to predict whether any of those things will happen to people in sufficient numbers to cause a meltdown. </p>
<p>But that’s the whole point – it is hard to be confident that it won’t happen. </p>
<p>And if it does occur then the consequences could be huge.</p>
<h2>Game theory suggests it might</h2>
<p>It might seem perverse that the big four banks could voluntarily cut back on lending and cause a collapse in prices that craters their own loan books. Yet that’s exactly the lesson from the work of <a href="https://www.nobelprize.org/prizes/economic-sciences/1994/press-release/">John Nash</a>, who won the 1994 Nobel Prize in economics for his work on game theory. In a strategic setting, what is best for the individual might not be best for the group. </p>
<p>If individual banks don’t cut back their lending but others do, they will get stuck with the worst loans. </p>
<p>Avoiding that fate might mean creating market conditions that hurt all existing loans.</p>
<p>It’s the paradox at the heart of game theory.</p>
<h2>But I’m hoping for the best</h2>
<p>I’m still betting on the residential property market deflating slowly, rather than popping. </p>
<p>But unfortunately you don’t need to get too creative to imagine scenarios that involve a very loud pop – for property owners, the banks and the economy more generally.</p><img src="https://counter.theconversation.com/content/105137/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank is worried that a further tightening of lending standards could take the air out of the housing bubble quickly. Here’s how.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1030952018-09-13T20:34:07Z2018-09-13T20:34:07ZVital Signs: when cutting interest rates might not help<figure><img src="https://images.theconversation.com/files/236156/original/file-20180913-133898-12ud7gg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Whether there is a floor beneath which cuts in interest rate are ineffective depends in part on house prices.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/">Shutterstock</a></span></figcaption></figure><p>There’s a meme around official interest rates since the financial crisis, and it goes like this. Central banks have already cut them to nearly zero (or actually zero) but advanced economies are still languishing. Therefore cutting them further won’t achieve much.</p>
<p>There are a number of problems with it. One is that it’s a nice illustration of the <em>post hoc ergo propter hoc</em> fallacy – “after this therefore because of this”. It ignores the counterfactual. Maybe we would have spent a decade in severe recession had it not been for the interest rate cuts.</p>
<p>But there might also be a grain of truth to the idea that cuts don’t do what they once did. It has led to a whole cottage industry exploring the “channels” through which cutting interest rates is meant to work.</p>
<h2>Mortgage refinancing matters</h2>
<p>One potentially important channel is through refinancing of mortgages. When interest rates drop it can be attractive for mortgage holders to refinance, take out some equity and spend it. This was a particularly big deal in the United States in both the run-up to, and the aftermath of, the financial crisis.</p>
<p>It has also been a big deal here, where refinancing is easy and for the last few decades many borrowers have had mortgage offset accounts.</p>
<p><a href="https://economics.harvard.edu/files/economics/files/ms27993.pdf">A recent paper</a>, now forthcoming at the Quarterly Journal of Economics (the highest-ranked journal among all the social sciences), examines the channel using data from across the United States.</p>
<p>The authors, from the University of Chicago, MIT and the Swiss National Bank, begin with the following fact. During the financial crisis there was a big drop in US house prices, but the drops were especially severe in places like Las Vegas and Phoenix. By contrast, in the previous (2001) recession house prices continued to grow across the country with little regional variation. </p>
<p>This means there were regional variations in embedded equity in one recession but not in the other.</p>
<h2>Which means house prices matter</h2>
<p>So far that’s just a mundane fact of US financial history. But the authors observe that to refinance a loan lenders typically insist on a minimum level of equity – a loan-to-value ratio – which gets recalculated. </p>
<p>That means they weren’t surprised to find that the sharp interest rate cuts in 2008 had the smallest effects in the most economically depressed parts of the country. Put another way, they had the smallest effects where they were needed the most.</p>
<p>Australia doesn’t have much negative equity, yet. But in one city (Sydney) prices are falling faster than elsewhere.</p>
<h2>And negative gearing matters</h2>
<p>A complication is that Australia allows “negative gearing”, the practice of renting out properties for a tax-effective loss and then selling them in an appreciating property market for a lightly taxed capital gain.</p>
<p>Rather than refinance for consumption, plenty of Australians have been refinancing to buy and negatively gear investment properties.</p>
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Read more:
<a href="https://theconversation.com/policycheck-negative-gearing-reform-58404">PolicyCheck: Negative gearing reform</a>
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<p>But when prices fall that strategy no longer makes financial sense, pushing the buying of investment properties for negative gearing to a grinding halt. </p>
<p>This amplifies the fall in prices. In essence, negative gearing acts as a multiplier in the property market on the way up and on the way down. Right now, we are seeing the “down” in certain parts of Australia.</p>
<h2>Which means it matters where you live</h2>
<p>You’ve got to feel for central bankers, at least a little bit. Not only do they have to worry about employment, economic growth, the exchange rate and housing prices, they now also have to worry about how their interest rate decisions are affected by regional variations in the history of house prices.</p>
<p>Still, understanding the precise channels through which changes in interest rates affect real economic activity is crucial to determining good policy – and predicting what the Reserve Bank will do next.</p><img src="https://counter.theconversation.com/content/103095/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is thought that it doesn’t help much to cut official interest rates toward or beyond zero, and maybe it doesn’t, but new research suggests the answer has a lot to do with the housing market.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1023382018-08-30T18:53:51Z2018-08-30T18:53:51ZVital Signs: online retailing is changing our lives, whether we use it or not<figure><img src="https://images.theconversation.com/files/234210/original/file-20180830-195301-1k0pqu3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Online prices drive offline prices.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/">Shutterstock</a></span></figcaption></figure><p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>Last week, the Federal Reserve Bank of Kansas City held its much anticipated annual central banking conference in Jackson Hole. This year’s topic “<a href="https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2018">Changing Market Structures and Implications for Monetary Policy</a>” garnered even more attention than usual.</p>
<p>This was in no small part because it highlighted that macroeconomists and central bankers now care a lot about what used to be the province of other fields of economics – what firms are doing. As a result, part of the mystery of why advanced economies have had a decade of low inflation and low wage growth is being unlocked.</p>
<p><a href="https://www.kansascityfed.org/%7E/media/files/publicat/sympos/2018/papersandhandouts/825180810cavallopaper.pdf?la=en">One of the most interesting papers</a> went right to this issue. Alberto Cavallo of Harvard Business School examined how online retailing – involving easily discoverable prices that are often determined by algorithms – can change the pricing behaviour of more traditional retailers and, it turn, impact inflation overall.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-jobs-may-be-increasing-but-the-real-test-is-whether-we-get-a-pay-rise-this-year-90110">Vital Signs: jobs may be increasing but the real test is whether we get a pay rise this year</a>
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<p>Could it be that the new economy has fundamentally changed how prices are set across the economy, thereby changing inflation dynamics and what our Reserve Bank is prepared to permit? If so it could have a significant effect on the so-called “real economy”.</p>
<p>The short answer is – quite possibly. But the details are both fascinating and important.</p>
<p>Cavallo makes use of data from the <a href="http://www.thebillionpricesproject.com">Billion Prices Project</a>, which he co-founded with Roberto Rigobon, which scrapes price data from the internet. It contains more than 15 million daily prices, from 1000 retailers, across 60 countries, since 2008 (disclosure: Rigobon and I were colleagues at MIT). Cavallo adds country of origin data from Walmart products and product descriptions from Amazon to construct a proxy for online competition of each good. His data go down to the zip-code level so he can look at how prices vary within the US.</p>
<p>Cavallo shows that price changes have been happening more frequently. Multi-channel retailers – who sell both online and in “bricks-and-mortar” stores – have gone from changing prices once every 6.7 months in 2008–2010 to every 3.7 months in 2014–2017. Often these changes are cuts. This “rapid change effect” is strongest in categories like electronics and household goods, where online retailers have high market share.</p>
<p>The clear conclusion is that online competition is intense due to the easy availability of information about competitors’ pricing, and the ability to change prices cheaply, quickly, and often even algorithmically. Added to this is that charging different prices in different locations seems, from the data, to be harder than before because consumers can find out.</p>
<p>As one might expect, this also facilitates the rapid passthrough of shocks to prices that come from movements in exchange rates or fuel prices. </p>
<p>All of this means that there is more of a lid on prices than in the past – so lower average inflation – this is the “Amazon effect”. This would help explain why the US has 3.9% unemployment but no sign yet of runaway inflation.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-its-time-to-discuss-a-new-framework-for-central-banking-101978">Vital Signs: it's time to discuss a new framework for central banking</a>
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<p>The other implication is that retail prices are less insulated from macroeconomic shocks than in the past. This makes it harder to central banks to glean how the economy is travelling. In essence, prices contain more noise and less signal.</p>
<p>For Australia and the Reserve Bank the implications are similar, if a little more muted than in the US. Online retailing is not yet as widespread. But in many ways it doesn’t need to be widespread to discipline prices. The mere possibility that goods can be purchased online is enough to discipline traditional retailers. </p>
<p>As game theorists like to say, “out-of-equilibrium threats matter”. This could be a leading explanation for why inflation is low in Australia <a href="https://theconversation.com/vital-signs-its-time-to-discuss-a-new-framework-for-central-banking-101978">despite low interest rates and relatively low unemployment</a>. </p>
<p>Because the Australian dollar is fairly volatile and we do import goods worth about 20% of GDP the “noise-to-signal” effect could be particularly strong in Australia – making things harder for the Reserve Bank.</p>
<p>The new economy has changed the overall economy in a host of ways from casualisation and the gig-economy to lower prices and new products. It will probably lead to a new era of monetary policy, but we don’t know what. As Reserve governor Phil Lowe is fond of saying: “time will tell”.</p><img src="https://counter.theconversation.com/content/102338/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The mere possibility of online competition is restraining prices offline.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1015962018-08-16T20:17:38Z2018-08-16T20:17:38ZVital Signs: Turkey shows the economic pain of global democratic backsliding<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>As American baseball legend Yogi Berra once supposedly quipped, “It’s déjà vu all over again.” Three years ago the <a href="https://theconversation.com/living-through-the-greek-crisis-an-anthropologist-reports-from-thessaly-73091">crisis was in Greece</a>, now it’s <a href="http://www.abc.net.au/news/2018-08-16/wall-street-europe-drop-us-turkey-trade-row-intensifies/10125952?section=business">Turkey</a>. Another European summer and another European economic crisis.</p>
<p>It’s tempting to say that being in Europe is all the two situations have in common. Greece’s population is a little over 10 million; Turkey’s is nearly 80 million. Greece’s troubles were triggered by <a href="https://tradingeconomics.com/greece/government-debt-to-gdp">out-of-control government debt</a>; <a href="https://tradingeconomics.com/turkey/government-debt-to-gdp">Turkey’s government debt-to-GDP ratio is quite low</a>. The Greek government was on the loopy left; Turkey’s ruling Justice and Development Party is on the conservative right.</p>
<p>But the similarities between the Greek and Turkish crises are deeper than the differences. </p>
<p>Both were brought about by decades of ignorant, populist economics. When crisis hit, both countries had leaders who instantly made things worse. And in both cases the world’s global capital capital markets have proved to be an unforgiving judge.</p>
<h2>Erdogan’s voodoo economics</h2>
<p>Turkey finds itself in crisis not because of massive government debt – although it has been <a href="https://tradingeconomics.com/turkey/government-debt">rising pretty rapidly of late</a> and private-sector debt is <a href="https://tradingeconomics.com/turkey/private-debt-to-gdp">a real issue</a> – but because of a large <a href="https://www.investopedia.com/terms/c/currentaccount.asp">current account</a> deficit.</p>
<p>The current account deficit – roughly the difference between the value of what it imports and what it exports – <a href="https://tradingeconomics.com/turkey/current-account">is running at more than US$60 billion at an annualised rate</a>. </p>
<p>This means Turkey is a large net borrower from the rest of the world.</p>
<p>President Recep Tayyip Erdogan has goosed GDP through cheap foreign credit and low real interest rates. But unlike tinpot strongmen who worry mainly about holding onto power tomorrow, global markets look far into the future.</p>
<p>And this year markets decided that Turkey’s economic future looked pretty bleak. </p>
<h2>A plummeting lira</h2>
<p>The Turkish currency, the lira, has fallen by more than 40% against the US dollar this year. Since <a href="https://www.cnbc.com/2018/08/13/what-happens-in-turkey-wont-stay-in-turkey-why-this-debt-crisis-co.html">more than half of Turkey’s foreign debt (government plus private) is denominated in foreign currencies</a>, this is a big problem. </p>
<p>It is <a href="https://www.bloomberg.com/news/articles/2018-08-13/think-turkey-argentine-sovereign-debt-is-bad-look-at-companies">estimated</a> that there is more than US$200 billion of dollar-denominated Turkish corporate debt. When the lira falls, foreign-denominated debt rises, making it hard to service, let alone repay.</p>
<p>At the same time, the inflationary spiral this sets off does huge damage to the domestic economy. It is estimated that Turkey’s annual inflation rate is running at more than 100%.</p>
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<p>Erdogan doesn’t want interest rates to rise – and he has bullied the central bank into doing so later and less than the bank otherwise might have. He is <a href="https://www.businessinsider.com.au/turkish-lira-crisis-erdogan-interest-rates-2018-8?r=US&IR=T">on record</a> as saying that higher interest rates <em>increase</em> inflation, rather than the opposite, as every first-year economics student knows. </p>
<p>To Erdogan, black is white, night is day, up is down.</p>
<p>US President Donald Trump announced last week that “Aluminum will now be 20% and steel 50%. Our relations with Turkey are not good at this time!” Erdogan’s response has been to <a href="https://www.washingtonpost.com/world/erdogan-calls-for-turkish-boycott-of-us-made-electronics-singling-out-apples-iphone/2018/08/14/465d3fe6-9fac-11e8-b562-1db4209bd992_story.html?utm_term=.15e70f26847d">call for a boycott of iPhones and enact retaliatory tariffs</a> of as much as 140% on a range of US goods.</p>
<p>Erdogan did secure US$15 billion in foreign investment from Qatar, after meeting Emir Sheikh Tamim Bin Hamad Bin Al Thani in Ankara on Wednesday. That might stop some of the bleeding for now, but this gives Qatar tremendous leverage. </p>
<p>The real cost of this support won’t be measured in basis points.</p>
<h2>Global contagion?</h2>
<p>The big risk here is that the foreign holders of all this dollar-denominated Turkish debt get into trouble as Turkey struggles to repay or defaults. Even the Bank of International Settlements doesn’t easily know who all these debt holders are, <a href="https://www.theguardian.com/world/2018/aug/13/how-serious-is-turkeys-lira-crisis-and-what-are-the-implications">but banks in Spain and France appear to be significantly exposed</a> – especially Spain.</p>
<p>A run on the Turkish currency could turn into damage to balance sheets of banks across Europe, triggering a potential debt crisis in countries like Spain. </p>
<p>That’s some distance off for now. But it looms.</p>
<p>All this will likely end in some kind of International Monetary Fund assistance package – but that’s going to come with conditions. Folks who like to use the term “neoliberal” will dub such conditions as brutal austerity. </p>
<p>Others will consider the conditions the cost of stabilising an economy pushed to the brink by a financially illiterate megalomaniac.</p>
<h2>Economics in a world of democratic backsliding</h2>
<p>Turkey may be at the centre of the crisis du jour, but Erdogan is but one of a cast of nasty, illiberal characters. Although they occupy varying positions on the ideological spectrum, from Poland to Hungary to Latin America, there has been significant democratic backsliding in recent years.</p>
<p>These strongmen do violence to principles of liberal democracy – often literally. They also damage their economies and, as a consequence, their people.</p>
<p>Institutions like the International Monetary Fund will probably handle the problem in Turkey, although it would be a lot simpler if Erdogan just allowed interest rates to increase and solve the problem directly.</p>
<p>But sadly we can expect more illiberal and nonsensical economics from these illiberal strongmen. It is contagious populist ideology more than financial contagion that should scare us right now.</p><img src="https://counter.theconversation.com/content/101596/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is contagious populist ideology more than financial contagion that should scare us right now.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1012532018-08-09T20:09:58Z2018-08-09T20:09:58ZVital Signs: is the economy getting stronger? The RBA says ‘time will tell’<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>Together with the <a href="https://www.rba.gov.au/speeches/2018/pdf/sp-gov-2018-08-08.pdf">speech to the Anika Foundation about demographics and monetary policy</a> by RBA governor Philip Lowe, the latest <a href="https://www.rba.gov.au/media-releases/2018/mr-18-17.html">monetary policy statement</a> give some useful clues about how Lowe and the institution he leads are thinking about the state of the Australian economy and the future path of monetary policy.</p>
<p>The headline after Tuesday’s meeting of the Reserve Bank of Australia was, of course, that it <a href="https://www.rba.gov.au/media-releases/2018/mr-18-17.html">left the cash rate at 1.50%</a>. Again.</p>
<p>The RBA’s <a href="https://www.rba.gov.au/media-releases/2018/mr-18-17.html">monetary policy statement</a> was striking for how much most of it resembled the <a href="https://www.rba.gov.au/media-releases/2018/mr-18-16.html">last such statement</a>, and the <a href="https://www.rba.gov.au/media-releases/2018/mr-18-14.html">one before that</a>, and the <a href="https://www.rba.gov.au/media-releases/2018/mr-18-11.html">one before that</a>, and … I honestly thought I might have been looking at a cached version <a href="https://www.rba.gov.au/media-releases/2016/">from 2016</a> when I read it. </p>
<p>But after hitting refresh on my browser a few times and triple-checking the date I realised that, sadly, it was the current statement.</p>
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Read more:
<a href="https://theconversation.com/when-monetary-policy-reaches-its-limits-what-of-fiscal-policy-43392">When monetary policy reaches its limits, what of fiscal policy?</a>
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<p>It’s easy to summarise. Variable (insert your macroeconomic indicator of choice: unemployment, GDP growth, wage growth, inflation, etc.) is at a level we don’t like too much, but we forecast it will get better soon. For example:</p>
<blockquote>
<p>The Bank’s central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 per cent in 2018 and 2019.</p>
<p>… The outlook for the labour market remains positive. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. </p>
<p>… A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time.</p>
<p>… Household income has been growing slowly and debt levels are high.</p>
</blockquote>
<p>The problem is, of course, that the RBA has been <a href="https://theconversation.com/vital-signs-rba-rates-decision-stuck-between-jobs-growth-and-household-debt-82580/">saying all this for some time now</a>.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-rba-rates-decision-stuck-between-jobs-growth-and-household-debt-82580">Vital Signs: RBA rates decision stuck between jobs growth and household debt</a>
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<p>Lowe switched gears in <a href="https://www.rba.gov.au/speeches/2018/pdf/sp-gov-2018-08-08.pdf">his speech on Wednesday</a> to talk about the long-run issue of Australia’s demography and how it connects to the short-run issue of monetary policy.</p>
<p>He began by noting a fact that has been largely overlooked – Australia’s population has been growing at an annual rate of about 1.5% for many years, significantly faster than almost all other advanced economies, as the following chart shows. It shows 2014 growth rates, but the same story has played out for the last decade.</p>
<iframe src="https://data.oecd.org/chart/5fSC" width="100%" height="645" style="border: 0" mozallowfullscreen="true" webkitallowfullscreen="true" allowfullscreen="true"><a href="https://data.oecd.org/chart/5fSC" target="_blank">OECD Chart: Population, Total, Annual growth rate (%), Annual, 2014</a></iframe>
<p>Lowe noted that the lion’s share of this has been driven by immigration, and that: “People living in Australia who were born overseas are more likely than the average Australian to have a post-secondary school qualification.”</p>
<p>Not only do immigrants tend to be more educated, they tend to be relatively young. The median age of Australians is 37, and in 2002 it was forecast by the ABS to be 45+ in 2040. The latest ABS estimate for the 2040 median age is now 40. That’s a big change, and it is due to immigration.</p>
<p>Lowe then went into some detail about how labour force participation of those over 55 has grown rapidly over the past 20 years. In the 1990s about 10% of the labour force was over 55. That now stands at about 20%. </p>
<p>Putting all of these factors together with life expectancy implies that while many other advanced economies are suffering from fiscally crippling dependency ratios – with simply too few workers paying taxes to properly fund retirees – Australia is in a much stronger position. </p>
<p>As macroeconomics goes, this is fascinating stuff.</p>
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Read more:
<a href="https://theconversation.com/does-the-economy-need-some-quantitative-doping-15847">Does the economy need some “quantitative doping”?</a>
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<p>Then Lowe pivoted to the implications for monetary policy. And just like a prisoner in a foreign country holding up a copy of today’s newspaper and professing in staccato that his captors were treating him well, Lowe trotted out all the greatest hits from the monetary policy statement of the day before. </p>
<p>For example:</p>
<blockquote>
<p>In terms of inflation, the latest data were in line with our expectations. Over the year to June, headline inflation was 2.1 per cent and, in underlying terms, inflation was close to 2 per cent … Over the forecast period, we expect inflation to increase further to be close to 2 1⁄2 per cent in 2020. In the short term, though, we would not be surprised if headline inflation dipped a little… </p>
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<p>and</p>
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<p>The labour market is gradually tightening and it is reasonable to expect that this will lead to a lift in both wages growth and inflation … Over time, we expect that this will become a more general story, although this is going to take some time.</p>
</blockquote>
<p>He even said: “Time will tell.”</p>
<p>Will the Australian economy actually start growing at a robust rate per capita? Will stagnant wages finally start growing in real terms? Will we avoid a deflationary trap? Will there be enough monetary and fiscal ammunition to respond to another recession or crisis? Will Governor Lowe get away with repeatedly saying things will get better but just not right now?</p>
<p>Time will tell.</p><img src="https://counter.theconversation.com/content/101253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new RBA monetary statement is just like the old one.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1008902018-08-02T20:24:00Z2018-08-02T20:24:00ZVital Signs: the stellar US GDP figures aren’t here to stay<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>The US economy grew at a <a href="https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">startling 4.1%</a> in the second quarter, the first time in four years it has hit the 4% mark.</p>
<p>It was not surprising that President Donald Trump was both delighted and vocal about the figures. “Once again, we are the economic envy of the entire world,” he <a href="https://www.nytimes.com/aponline/2018/07/27/us/politics/ap-us-trump-economy.html">said</a>, and “<a href="https://edition.cnn.com/2018/07/27/politics/trump-economy/index.html">these numbers are very, very sustainable</a>”.</p>
<p>I’m not so sure about that last part.</p>
<p>For starters, <a href="https://www.cbsnews.com/news/u-s-second-quarter-gdp-growth-expected-to-top-4-percent/">economists had predicted</a> the economy would grow by 4.4% in the second quarter. In some ways 4.1% growth was a bit of a disappointment. </p>
<p>Further, this sort impressive growth in one quarter is not unprecedented. US GDP growth <a href="https://www.statista.com/statistics/188185/percent-chance-from-preceding-period-in-real-gdp-in-the-us/">hit 5.2%</a> in the third quarter of 2014. That did not herald a strong uptick in annual growth – it has remained at an <a href="https://tradingeconomics.com/united-states/gdp-growth">annual rate of around 2% for the last five years</a>.</p>
<p>More than that, there are a bunch of good reasons to believe that this particular 4.1% growth number was due to transitory factors.</p>
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Read more:
<a href="https://theconversation.com/theres-more-to-good-policy-than-increasing-gdp-7867">There's more to good policy than increasing GDP</a>
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<p>The Trump <a href="https://theconversation.com/gop-tax-law-snubs-us-expats-and-accidental-americans-91710">tax cuts</a> were both massive and hit at just the right time. First-quarter tax payments were due in mid-April and the new tax rates led to an instant boost in post-tax profits. </p>
<p>Recall also that <a href="https://www.cnbc.com/2018/01/26/us-companies-that-have-announced-bonuses-investments-after-tax-cut.html">many US firms gave one-off bonuses to workers</a> – largely as a marketing device to shift attention away from the massive boost owners of capital were getting at the expense of future budget deficits. These bonuses mainly hit in March. It is not surprising, then, that consumer spending was strong in the second quarter. </p>
<p>Finally, there was even a boost to trade in the quarter, ahead of the increased tariffs from Trump’s trade war.</p>
<p>All of this should make clear that there was a remarkable confluence of events that made the second quarter very special. </p>
<h2>The effects won’t last</h2>
<p>The Trump tax cuts will blow up the government deficit, cause a rise in interest rates and make consumers and firms realise that taxes down the track will have to be raised to pay for them. </p>
<p>The worker bonuses were one-off and don’t address the <a href="https://fred.stlouisfed.org/series/LES1252881600Q">stagnant real wage growth</a> for average workers that have been a sad but consistent part of the US economy for the last three decades. </p>
<p>Finally, the trade war is now in full swing and the strong GDP figure likely represents firms getting in before the tariffs took hold. </p>
<p>Just this week the Trump administration <a href="https://www.wsj.com/articles/u-s-expected-to-unveil-25-tariffs-on-proposed-200-billion-in-chinese-imports-1533147299">threatened</a> 25% tariffs on another US$200 billion worth of Chinese goods. This will, with absolute certainty, depress economic growth relative to what it would have been otherwise. </p>
<p>Just listen to any <a href="http://www.abc.net.au/news/rural/2018-07-25/trumps-aid-package-will-hurt-australian-farmers-says-nff/10034662">American farmer</a> describe what has happened to them since the trade war began.</p>
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Read more:
<a href="https://theconversation.com/why-trade-wars-can-be-perilous-5-essential-reads-99725">Why trade wars can be perilous: 5 essential reads</a>
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<p>The politics of all of this is, believe it or not, more interesting than the economics. </p>
<p>Trump was always going to tout GDP as evidence of his economics policies working in a big way, and lending further support to the notion that he is one of history’s great geniuses. But with the midterm elections on the horizon, will congressional Republicans hitch their campaign wagons to it?</p>
<p>It is worth watching for public remarks over the coming three months before the third-quarter figures are released. Republicans will have to make a call about whether to associate themselves with the numbers. </p>
<p>The risk, of course, is that third-quarter numbers are disappointing, or even outright bad, and that they look like idiots right before the first Tuesday in November.</p>
<p>Trump has an easy out. He can just go to page one paragraph one of his playbook and either lie, blame someone else (China, Hillary Clinton, Big Bird) or pivot to another topic concerning an enemy (Iran, North Korea, Bob Mueller).</p>
<p>Congressional Republicans can’t do that.</p>
<p>But Trump might do it for them. If he shouts loudly enough – and he has a pretty big microphone at his disposal to do so – he can forcibly associate congressional Republicans with GDP growth numbers against their will. If they won’t repudiate him about patting neo-Nazis on the back or taking Russian President Vladimir Putin’s side over the entire US intelligence apparatus, they are unlikely to discover a spine over GDP growth figures.</p>
<p>It would be deliciously ironic if Trump’s lack of economic literacy, which is truly profound, helped hand Democrats a majority in Congress.</p><img src="https://counter.theconversation.com/content/100890/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>US quarterly GDP is at its highest point since 2014, but it’s unlikely to last for a number of reasons.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1005142018-07-26T19:56:59Z2018-07-26T19:56:59ZVital Signs: inflation misses again, so where does the RBA go next?<p><em>Vital Signs is a regular economic wrap from UNSW economics professor Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>The disturbing trend of persistently low inflation continues, as <a href="http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/3CC57E983B1CF9BFCA2582D400151C6A/$File/64010_jun%202018.pdf">Wednesday’s data release</a> shows.</p>
<p>Headline inflation was 2.1% for the last 12 months. But the more relevant “underlying” rate came in at 1.9%. This is even below the 2.0% the RBA <a href="https://www.rba.gov.au/publications/smp/2018/may/economic-outlook.html">forecast in May</a>.</p>
<p>Given that the RBA’s <a href="https://www.rba.gov.au/inflation/inflation-target.html">target band</a> for inflation is 2-3%, and that inflation has barely touched the bottom of that band over a protracted period, there are implications for monetary policy. </p>
<p>But, before we get to that, the obvious question to ask is: why is inflation so low?</p>
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Read more:
<a href="https://theconversation.com/vital-signs-booming-jobs-numbers-but-dig-deeper-and-its-not-all-rosy-100159">Vital Signs: booming jobs numbers, but dig deeper and it's not all rosy</a>
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<p>One strand of thinking involves the “<a href="https://www.investopedia.com/terms/p/phillipscurve.asp">Philips Curve</a>”. This basically says that low unemployment pushes up wages growth and hence inflation. </p>
<p>We could get into a long discussion of whether the current <a href="https://theconversation.com/vital-signs-booming-jobs-numbers-but-dig-deeper-and-its-not-all-rosy-100159">5.4% unemployment rate</a> is “low”. And whether the effective rate really is 5.4% given anecdotal evidence about “underemployment”, the impact of recent decisions on penalty rates and minimum wage rises, and the robot revolution as a backdrop to the whole labour market.</p>
<p>But we don’t need to go there. There is barely any evidence of the Philips Curve in the data over the past quarter century, so let’s just reject that theory and move on.</p>
<h2>Plausible factors keeping a lid on inflation</h2>
<ol>
<li><p><strong>Technology</strong>. The information technology and internet revolution has made lots of things much cheaper. Take music. Gone are the days of paying A$20-plus for a CD with maybe 16 songs on it. Streaming services like Apple Music and Spotify give access to literally millions of songs for a small monthly fee.</p></li>
<li><p><strong>China</strong>. The rise of Chinese manufacturing has led to everything from kids’ toys to cell phones being produced vastly more cheaply than if those things were manufactured with higher-cost labour.</p></li>
<li><p><strong>Globalisation and trade</strong>. The world has become radically more connected, and so have company supply chains. This not only allows access to lower-cost manufacturing but also leads to better specialisation through the principle of comparative advantage. This means that high-labour-cost countries like Australia can specialise in other components of goods and services, get better at producing those components, and reduce overall costs further.</p></li>
<li><p><strong>Wages</strong>. Wage growth has been subdued for a long time now. Since labour costs are an important component of many goods and services, this has served to tame inflation. One potential reason for low wage growth is that automation sits as a background threat to human labour. If labour costs get too high then processes get automated, which serves to keep wages in check.</p></li>
<li><p><strong>Leverage and consumer spending</strong>. A final factor is that given how heavily indebted Australian households are –largely through mortgage debt – they simply don’t have a lot of discretionary income. This limits consumer spending and makes price rises in the retail sector less likely.</p></li>
</ol>
<p>These factors don’t look likely to change any time soon – with the possible exception of trade due to the Trump trade war. But even if that escalates dramatically it will shrink economic activity, further depressing prices.</p>
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Read more:
<a href="https://theconversation.com/explainer-why-some-economists-think-the-rba-should-drop-its-inflation-target-64265">Explainer: why some economists think the RBA should drop its inflation target</a>
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<p>So we have long-run, persistently low inflation. Is that a problem?</p>
<p>The major concern is that it could turn into <a href="https://www.investopedia.com/terms/d/deflation.asp">deflation</a>, although that doesn’t look terribly likely right now. </p>
<p>If, however, there was another significant economic downturn then deflation is a very real prospect. That would raise the spectre of Japan’s <a href="https://tradingeconomics.com/japan/inflation-cpi">experience of the 1990s</a> where deflation caused people to hoard money, severely contracting economic activity.</p>
<p>But for now the real impact of low inflation is on the RBA. </p>
<p>Faced with inflation below its target band for an extended period, the standard response would be to cut interest rates. The RBA is clearly worried about doing this. </p>
<p>One reason is housing prices – <a href="https://theconversation.com/vital-signs-we-are-witnessing-a-slowly-deflating-property-bubble-for-now-98624">the RBA is worried</a> about further fuelling the bubble. </p>
<p>With housing prices easing, this may become less of a concern, although household debt levels remain extremely high. Not encouraging households to become further indebted seems like a reasonable concern.</p>
<p>A second reason the RBA may be nervous about cutting rates is that it doesn’t have very far to go with the cash rate at 1.50%. If there is another major economic downturn then the RBA wants to have some firepower left to respond. </p>
<p>If short-term rates were already near zero then the only tools available to the central bank would be non-standard measures such as quantitative easing. That would be uncharted territory for the RBA, which seems reticent to explore that territory.</p>
<p>So, as with economic growth and wage rises, the RBA response seems to involve crossing as many fingers and toes as possible and to publicly proclaim that things are looking good, but may take a while.</p>
<p>We will get a better look into how that strategy is going when wage price index figures are released mid-August.</p><img src="https://counter.theconversation.com/content/100514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As with economic growth and wages, the RBA’s response seems to involve crossing as many fingers and toes as possible and publicly proclaiming that things are looking good.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1001592018-07-19T18:51:00Z2018-07-19T18:51:00ZVital Signs: booming jobs numbers, but dig deeper and it’s not all rosy<p><em>Vital Signs is a regular economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>The <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">latest labour market data</a> from the Australian Bureau of Statistics provide an instructive lens into the problems facing the federal government, the RBA, and the economy itself.</p>
<p>The number of people employed rose 50,900 from May to June in seasonally adjusted terms, which was well ahead of forecasts of around 16,500. And that wasn’t just a lot of new part-time jobs. Full-time employment rose by 41,200.</p>
<p>On a year-on-year basis that represents an increase in employment of 2.8%.</p>
<p>No doubt Treasurer Scott Morrison will tout these figures as evidence of the government’s focus on “jobs and growth”. Don’t get me wrong: it’s good that employment is going up.</p>
<p>But dig a little deeper and the story is not so rosy.</p>
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Read more:
<a href="https://theconversation.com/how-rising-inequality-is-stalling-economies-by-crippling-demand-99075">How rising inequality is stalling economies by crippling demand</a>
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<p>One might think that robust increases in the number of people employed reduce the unemployment rate a lot. Not so. The number of people unemployed fell from 715,200 in May to 714,100 in June. </p>
<p>That, of course, is explained by the so-called participation rate – the proportion of people participating or trying to participate in the paid labour market.</p>
<p>The participation rate rose from 65.5% in May to 65.7% in June, leaving the unemployment rate unchanged at 5.4%. </p>
<p>The Australian labour force participation rate is actually pretty high. A useful comparison is the United States – probably the world’s most robust labour market – where the <a href="https://tradingeconomics.com/united-states/labor-force-participation-rate">current rate</a> is 62.9%.</p>
<p>The key point is that if more people are going to come into the labour market when it looks better – as they have been consistently – then a continued reduction in the unemployment rate is going to require creating a whole lot more jobs.</p>
<p>So when the prime minister and treasurer point out what a large number of jobs are being created – <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Dec%202017?OpenDocument">400,000 in 2017</a> – they are both right and wrong. Yes, 400,000 is a demonstrably large number. But it’s just not enough to get unemployment down. </p>
<h2>What about wages?</h2>
<p>What the data released Thursday did not reveal was anything about what people are paid. Perhaps the most concerning thing about the Australian labour market is that wages are <a href="https://theconversation.com/vital-signs-poor-wage-growth-means-interest-rates-could-be-low-for-a-long-time-98240">not growing at anywhere near historic-average levels</a> and this has been going on for several years. </p>
<p>Private-sector wages <a href="http://www.abs.gov.au/ausstats/abs@.nsf/latestProducts/6345.0Media%20Release1Mar%202018?OpenDocument">grew over the last year by 1.9%</a> – the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">same rate as consumer prices</a> (inflation). </p>
<p>In other words, real wage growth is zero.</p>
<p>Unemployment that seems stuck at around 5.4% <em>and</em> real wages growth that is zero. What to do?</p>
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Read more:
<a href="https://theconversation.com/vital-signs-poor-wage-growth-means-interest-rates-could-be-low-for-a-long-time-98240">Vital Signs: poor wage growth means interest rates could be low for a long time</a>
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<p>The traditional approach would be for the RBA to cut interest rates – and some commentators still advocate this. There are at least three problems with this approach, however.</p>
<p>First, with the <a href="https://www.rba.gov.au/statistics/cash-rate/">official cash rate at 1.5%</a> there is not a lot of wiggle room. Although it is fair to point out that there is precisely 1.5% of wiggle room. </p>
<p>That bring us to problem two, which is that a further cut in interest rates is likely to fuel property prices and, perhaps more importantly, household debt. The RBA has <a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518">repeatedly shown concern</a> about this, and with good reason.</p>
<p>Third, and this is more subtle, if the RBA does cut rates much further then they will have nowhere to go in the case of a major economic downturn. That would force them to respond to a major downturn with unconventional measures such as <a href="https://www.investopedia.com/terms/q/quantitative-easing.asp">quantitative easing</a>.</p>
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Read more:
<a href="https://theconversation.com/more-money-more-problems-the-quantitative-easing-quandary-9758">More money, more problems? The quantitative easing quandary</a>
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<p>Another approach would be for the government to run large deficits – also known as <a href="https://www.investopedia.com/terms/f/fiscalpolicy.asp">fiscal policy</a>. But here, too, there are significant problems. </p>
<p>We have been running pretty large deficits for some time, which has put our credit rating in jeopardy. True, Australia’s <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/DebtPosition">net debt-to-GDP</a> ratio of around 18.9% is low by international standards, but there seems little appetite on either side of politics to run that up further.</p>
<p>The final approach is to reform labour market institutions and make them more flexible – sometimes called “<a href="http://cf.fbe.unimelb.edu.au/staff/jib/documents/micref.pdf">microeconomic reform</a>”. It is plausible that this would have a decent chance of lowering unemployment. </p>
<p>But it would also push Australia closer to a United States-style labour model.</p>
<p>None of these options are without real downsides. And none of them seem likely to appeal to the voting public. That’s why the unemployment rate in Australia is a particularly challenging problem.</p><img src="https://counter.theconversation.com/content/100159/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A big increase in employment but the unemployment is flat. Addressing this will be a challenge as all our options have downsides.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/986242018-06-21T18:48:38Z2018-06-21T18:48:38ZVital Signs: we are witnessing a slowly deflating property bubble, for now<figure><img src="https://images.theconversation.com/files/224161/original/file-20180621-137714-1uhm4wl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The air may fizzle out of the Australian balloon, or it may burst violently.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>Vital Signs is a regular economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
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<p>In a week that was fairly light on data releases, let’s return to Australia’s perennial favourite topic – house prices. Painful though it may be for existing property owners who are selling, we are witnessing what a bubble slowly deflating back to reality looks like.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">Data released Tuesday</a> showed that across Australia’s eight capital cities prices fell 0.7% in the first quarter of 2017. Sydney was hardest hit, with prices down 1.2%. Melbourne and Brisbane experienced 0.6% declines and Perth prices were down 0.9%.</p>
<p>Price declines were more subdued over the previous 12 months, or were even still up over the period. Sydney prices were down 0.5% on the year, but Melbourne prices were still up strongly (6.2%) and Brisbane showed 1.6% annual growth. Perth, where prices have been under pressure for some time, registered a 1.5% fall over the last year.</p>
<p>This downward price pressure is consistent with a reduction in <a href="https://www.corelogic.com.au/auction-results">auction clearance rates documented by CoreLogic</a>. Last week, clearance rates averaged 56.9% across the country and just 55.8% in Sydney and 58.7% in Melbourne. Compare this to a year ago when the capital city average was 66.7%, Sydney was at 68.0% and Melbourne at 71.0%. And this doesn’t even factor in that auction volumes have dropped this year.</p>
<p>So here’s the deal. Fewer people are trying to sell their residential properties. Those that try are having less success in doing so. Those that do succeed are getting lower prices.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">Vital Signs: the spooky mortgage risk signs our bankers are ignoring</a>
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<p>Yet it pays to take a longer-term view. As <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-06-05.html">the minutes of the last RBA board meeting noted</a>:</p>
<blockquote>
<p>… housing prices were still 40% higher in Sydney and Melbourne than at the beginning of 2014, while housing prices in Perth had fallen by around 10% over the same period.</p>
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<p>The big question is whether the housing market will continue to deflate slowly, or whether there is going to be an abrupt “pop”.</p>
<p>A big correction to property prices would require a major trigger. The most likely candidate for that trigger is interest-only loans. </p>
<p><a href="http://www.abc.net.au/7.30/concerns-as-interest-only-loans-roll-over-to/9887938">More and more attention is finally being paid</a> to dangers caused by Australia’s profligate use of such loans. <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">As I wrote last year</a>, at the peak a staggering 40% of residential mortgages in Australia were interest only.</p>
<p>The Australian Prudential Regulation Authority (APRA) <a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518">stepped in</a> last year, capping new interest-only loans at 30% of new loans. That, along with a tightening of underwriting standards by banks, has led to a sharp drop in such loans. </p>
<p>The latest figures put the proportion of interest-only loans at <a href="https://www.businessinsider.com.au/australia-interest-only-mortgage-restrictions-apra-rba-2018-3">15.2% of new issuances</a>.</p>
<p>The RBA has been <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">pushing an upbeat story</a> about how this shakes out. As they tell it, the A$120 billion a year of interest-only loans coming due will be smoothly transitioned to principal-and-interest loans for most people.</p>
<p>Well, perhaps. I certainly hope so. </p>
<p>But for many people this transition will involve increases in monthly repayments of 30-40%. At a time when wages growth has been persistently sluggish, many people don’t have much wiggle room.</p>
<p>Interest-only loans typically have a five-year term and then need to be refinanced or become principal-and-interest loans. For a whole lot of folks, an interest-only rollover ain’t going to happen. Worse, the largest volumes of interest-only loans were written in 2013-2016. </p>
<p>So we are about to see a three-year wave of shifts to principal-and-interest loans. </p>
<p>Worse still, the loans originated in those years were heavily mediated by mortgage brokers whose incentives were all about moving volume, not quality. <a href="http://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030">Widely cited research</a> from investment bank UBS about the prevalence of so-called “liar loans” gives one every reason to be really worried about the ability of these borrowers to make a mortgage payment that has increased by a third or more per month.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-poor-wage-growth-means-interest-rates-could-be-low-for-a-long-time-98240">Vital Signs: poor wage growth means interest rates could be low for a long time</a>
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<p>And the rosy scenario the RBA keeps pushing involves look at the <em>average</em> buffer and embedded equity that households have. But that misses the economics 101 point that it is the marginal borrower that determines equilibrium prices, not the average. </p>
<p>If I’m selling hot dogs I don’t care what the average person is willing to pay for a hot dog, I care what the last person I might sell to is willing to pay, for she determines the price.</p>
<p>And, in a moment of gaping honesty eight weeks ago, the RBA’s Chris Kent <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">highlighted the difference between the average and marginal borrower</a>, saying:</p>
<blockquote>
<p>… about half of owner-occupier loans have prepayment balances of more than six months of scheduled payments. While that leaves half with only modest balances, some of those borrowers have relatively new loans.</p>
</blockquote>
<p>It doesn’t matter than some of them are new borrowers – other than that they bought at the height of the bubble, making them more susceptible to financial stress than other borrowers. The fact is that a whole bunch of folks are on the wire. If their payments go up they are going to struggle to make them. And if a lot need to sell at once then, as they say at NASA, “Houston, we have a problem.”</p>
<p>The air may fizzle out of the Australian balloon, or it may burst violently. Either way we should be asking hard questions about why APRA waited so late to act on interest-only loans, liar loans and underwriting standards in general. Very hard, very public questions.</p><img src="https://counter.theconversation.com/content/98624/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A whole bunch of folks are on the wire, and if their housing payments go up they are going to struggle.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.