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Greg Hunt is the unsung architect behind Labor’s climate plans

Published by Anonymous (not verified) on Wed, 08/12/2021 - 5:07pm in

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The architect of the ingenious mechanism at the heart of Labor’s plan to sharply cut carbon emissions is about to leave the parliament.

Throughout the pandemic, Greg Hunt has been best known as Australia’s health minister. But before that, when the Coalition was swept to office in 2013, he became Tony Abbott’s environment minister, charged with destroying Labor’s carbon tax.

(I’m calling it a “carbon tax” here to distinguish it from the mechanism Greg Hunt quietly slipped in to replace it, and also because the Bureau of Statistics decided it was a tax when it recorded it as a tax in the national accounts.)

Labor’s scheme taxed (or “charged” if you must) each big emitter in the industries covered A$23 for each tonne of carbon dioxide or equivalent they pumped into the atmosphere.

There were all sorts of problems with Labor’s scheme, problems Hunt was keenly aware of, having co-authored a prize-winning research paper on carbon taxes at university and having been immersed in the topic when Labor was last in power, as the Coalition’s environment spokesman under leaders Nelson, Turnbull and Abbott.

One big problem was that Australian exporters (of products such as steel and aluminum) would be placed at a disadvantage by having to pay the tax, while their overseas competitors did not.

Steel and aluminium would still be sold to the eventual customers but from a country other than Australia that didn’t charge the tax, a phenomenon known as carbon leakage.

Labor’s carbon tax had problems

And not only exporters. Australian producers of products for local consumption stood to suffer in the same way, losing sales to foreign suppliers who weren’t charged the tax, a problem the European Union is trying to fix at the moment by imposing a so-called Carbon Border Adjustment Mechanism, or “carbon tariff”.

Labor’s solution was to grant firms in “emissions-intensive trade-exposed” sectors free permits to the tune of 94.5% of industry average carbon costs in the first year (and less exposed firms free permits to cover 66% of costs), a gift that would be wound back 1.3% each year.

Another solution, being pursued by Hunt as he took soundings while in opposition, was to limit Australian facilities to emitting no more than they are now.

Over time the entitlement could be wound back.

But the problem was it would stop firms expanding.

BHP, for instance, might get a big contract that required it to double its output of steel but be unable to fulfil it without halving its emissions intensity – the amount it emitted per unit of steel produced.

Hitting on a baseline winner

Hunt’s solution, the one he and independent senator Nick Xenophon slipped into legislation being drawn up to replace the carbon tax with direct grants, was to set up “baselines” for each large emitter.

To be determined by the Clean Energy Regulator in accordance with rules set by the minister and disallowable by parliament, the baselines set the maximum amount each big plant can emit without being in breach and paying penalties.

Importantly, the baselines were to be calculated on the basis of previous emissions. Facilities were to be allowed to emit what they had, but no more.

More importantly, plants could have their baselines calculated on the basis of emissions intensity – the amount emitted per unit of production, which would mean they would be able to expand so long as they didn’t emit more per unit.

More importantly still, the Clean Energy Regulator is in the process of converting almost all baselines to emissions intensity baselines.

All Labor has to do, and what intends to do, is to make use of the mechanism Hunt and Xenophon put in place.

Business is backing baselines

Each facility that emits more than 100,000 tonnes of carbon dioxide equivalent per year – 215 of them – is subject to a baseline.

What Labor has pledged to do, and it is backed by the Business Council, is to get the Clean Energy Regulator to wind down those baselines “predictably and gradually over time” to support the transition to net zero.

Businesses that are already reducing their emissions want this, because they want other firms to be made to do the same.

The beauty of the mechanism set up on Abbott’s watch is that each facility, each “gas well, aluminium smelter and coal line” as Labor’s Chris Bowen puts it, will have its tightened baseline calculated individually.

Each will be asked to do no more than what is needed after considering what it can cope with.

Within minutes of Friday’s announcement, Energy Minister Angus Taylor labelled it “a sneaky new carbon tax on agriculture, mining and transport”, but it is better described as a system of guidelines and penalties, one legislated by Taylor’s side of politics.

Quite a lot will be needed. Labor’s modelling, released on Friday, didn’t spell out what would be needed to get emissions to net-zero by 2050, but the Coalition’s modelling, released in November, did.

No matter what reasonable assumptions the model included, including “global technology trends”, it couldn’t get all the way to net-zero by 2050.

So the Coalition’s modellers added in something fanciful which they named “further technology breakthroughs” to get the remaining 15%.

Greg Hunt retires as health minister and retires from parliament at the next election. He has set us on the path to getting where we will need to be.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

GDP is like a heart rate monitor: it tells us about life, but not our lives

Published by Anonymous (not verified) on Wed, 01/12/2021 - 5:01pm in

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How much cash would you need to be paid to agree to live without a smartphone for a year?

If you are like the typical American, the answer is US$10,000 – which is far, far more than what we are actually charged for having and using smartphones.

How much would you need to be paid to live without a computer?

According to the same research, just published by Stanford University’s Hoover Institution, a typical American would want US$25,000 to live computer-free for a year.

For the GPS system that lets us map where we are on all our devices, the answer is US$3,000; for streaming services such as Netflix the answer is another US$3,000.

For refrigeration the answer is US$10,000; for air conditioning, another US$10,000; and for running water US$50,000.

The point of this study, by economist Tim Kane, is that if we add up the worth to us of everything the economy produces each year, we get much, much more than the gross domestic product – even though GDP is meant to be a summation of the prices paid each year.

Not a day goes by when we don’t get astounding value for money: on Kane’s estimate, about 20 times what we pay.

GDP monitors changes, not our lives

It’s a useful perspective to bear in mind ahead of the latest Australian gross domestic product figures, being released on Wednesday.

Those figures will show Australia spent less, earned less and produced less in the lockdown-affected September quarter months of July, August and September than in the three months before – about 3% less on private estimates.

It won’t be a “recession” because in Australia that’s generally taken to mean two consecutive quarters of those things going backwards. And we already know spending, earning and production all started climbing as soon as the lockdowns ended at the beginning of the quarter we are in now.

The GDP has the same relationship to life as a heart rate monitor has to health.

There’s more to GDP than you might think

Behind the headline figure you hear about are actually three different measures.

GDP(P) is a measure of everything that’s produced in the quarter. The Bureau of Statistics has the unenviable job of adding up most things that are produced at market prices (and having a stab at trying to infer market prices where they are not apparent) in industries as diverse as mining, financial services and education.

It tries to count each thing only once, which is difficult because some things are used as inputs to others. Its work is made harder by relying partly on surveys and partly on complete sets of data from organisations such as the Tax Office.

Ask whether it uses guess work, you will be told it uses “informed judgement”.

GDP(E) is a totalling of government and household expenditure to buy those products. After adjusting for imports and exports it ought to equal GDP(P), but imperfections in measurement mean it usually doesn’t.

Then there’s GDP(I), which is a measure of the income households and businesses get from working and selling those products. Again, it ought to equal the other two, but it usually doesn’t.

After trying to get the three measures nearer each other (perhaps there was something somebody missed) the technicians in the bureau simply average the three, producing GDP(A). That’s what goes up on the ABS website at 11:30am AEDT Wednesday, followed by a Treasurer’s press conference and loads of analysis.

It needn’t indicate an underlying condition

Just as a heart rate monitor needn’t tell us much about health, because even in healthy people hearts beat slower while sleeping and faster while awake, GDP needn’t tell us that much about the condition of our lives.

A lot of the economy went to sleep during this year’s and last year’s lockdowns and is now waking up. The GDP will show that, but at least on Wednesday it won’t tell us more than that.

As it happens, economic growth has been weakening over time. Annual GDP growth is no longer the 3-4% it typically was between the early 1990s recession and the 2008 financial crisis. In the decade leading up to COVID it has been much lower, rarely touching 3%.

Annual financial year GDP growth

Financial year on financial year growth, 2002-03 to 2018-19. ABS

Put starkly, for little-understood reasons unrelated to quarterly fluctuations or COVID, we are getting better off more slowly than we were.

There are always people who say this doesn’t matter, we should be happy with what we had (and as I noted, much of what we’ve had isn’t counted in the GDP).

There is an underlying condition nonetheless

But it matters a good deal, because ever since economic growth took off in the 1870s we’ve grown used to things continually getting better, and have come to expect it.

US economic historian Brad Delong uses an 1880s science fiction book to illustrate how much we’ve come to regard improving living standards as a birthright.

In Looking Backward, Edward Bellamy purports to look back from the year 2000.

At one point a hostess asks if he would like to hear some music. Instead of playing the piano, she merely touched one or two screws and “immediately the room was filled with the music of a grand organ”, one of four she could dial up by landline.

It appeared to him that

if we could have devised an arrangement for providing everybody with music in their homes, perfect in quality, unlimited in quantity, suited to every mood, and beginning and ceasing at will, we should have considered the limit of human felicity already attained, and ceased to strive for further improvements.

He got it wrong.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

‘Can-do capitalism’ is delivering less than it used to: 3 reasons why

Published by Anonymous (not verified) on Wed, 24/11/2021 - 4:57pm in

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The good news is supposed to be that when the government gets out of the way “can-do capitalism” will have us roaring back to where we were before.

That’s the prime minister’s newest slogan, and we had better hope for more.

The unpleasant truth is that before the pandemic Australia’s economy was disturbingly and unusually weak. Can-do capitalism wasn’t doing what it should.

Reserve Bank chief economist Luci Ellis put it this way a few days after Morrison talked about freeing the engines of the economy to do their work.

In the decade or so leading up to the pandemic, there was a nagging sense that these engines of prosperity were running out of steam – investment was low, productivity growth was lagging, and many of the behaviours we associate with business dynamism were on the decline.

Outside of mining, business investment had been shrinking as a share of the economy for more than a decade.

Private non-mining business investment, share of nominal GDP

Net of second-hand asset transfers. ABS, RBA

Outside of the ride-share industry, fewer businesses were being created and fewer businesses destroyed.

“For all the talk of disruption, the overall sense one gets from the data is of a bit less dynamism or inclination to shake things up,” Ellis said.

And we were in the middle of a “great resignation” of a different kind to the departures from jobs being seen in the United States.

Australians were increasingly resigned to staying in the jobs they had. Job switching had sunk to all-time lows.

Proportion of employed Australians who switched jobs during the year

Australian Bureau of Statistics

In short, despite technological revolutions, despite a government saying it was getting out of the way, and despite record low interest rates that made it cheap to invest and expand, in the lead-up to COVID-19 businesses weren’t doing that. By the time the pandemic arrived, annual economic growth had slid to 2.1%.

Government hasn’t been holding business back

One thing Ellis says can’t explain the pre-pandemic reluctance of businesses to invest is government regulation pushing up costs. She says if costs had been rising, inflation wouldn’t have fallen to near record lows.

And if labour costs had been rising, wage growth wouldn’t have fallen to unprecedented lows, and firms would have been investing more in machines to replace workers.

Businesses themselves have been unusually cautious

There’s evidence to suggest that in the decade since the global financial crisis Australian (and other) firms have become more risk-averse.

Instead of falling with the falling cost of borrowing, the “hurdle” rates of return that businesses tell the Reserve Bank they require in order to justify investments have remained stubbornly high.

It’s a “won’t do” rather than a “can do” mindset, and Ellis says it might be because Australian managers don’t want to be associated with projects that fail, or because their firms have only limited management capacities and don’t want to commit to projects in case better ones come along.

Except for some firms

Her most intriguing suggestion is that some firms are market leaders at installing new technologies (especially those driven by artificial intelligence) – so much so that their competitors can’t catch up.

Tip Top Bakeries produces more than one million loaves of bread a day and delivers to more than 18,000 locations Australia-wide.

It used to send out its trucks in hub-and-spoke patterns using schedules drawn up by humans.

Since it began using artificial intelligence and machine learning to route trucks in configurations no human would have thought of, it has cut its distribution costs 14% and lifted its gross profit after distribution 7%.

Ellis makes the point that earlier technological innovations such as laptops and spreadsheets were easy to use.

Artificial intelligence and machine learning might be the first new technologies to be actually harder to use and require a rarer set of skills than those they replace.

The few “superstar” firms that adopt these new technologies (such as Woolworths with its fully automated distribution centre) are becoming able to do things their smaller competitors cannot, locking those lesser firms into a “low-wage, low-investment groove”.

Ellis cites evidence that the spread of technological knowledge has slowed, leading to a “winner-takes-all world” of increasing industry concentration.

It might still be possible to convince a lender you’ll be Australia’s next big thing in an industry with a market leader, but it’s getting harder.

‘Can-do capitalism’ needs help

The third possible explanation advanced by Ellis for the growth of the “think carefully before attempting” mindset over the past decade is in sharp contrast to Morrison’s distinction between “can-do capitalism” and “don’t-do governments”.

It’s to do with long-term cycles.

When conditions are weak, Ellis says, firms focus on defending what they’ve got instead of pursuing new opportunities.

We’ve been in that cycle for a decade, possibly made worse by governments withdrawing support in order to get nearer to balancing their budgets.

Now that governments are spending big and abandoning caution to fight the pandemic there’s a chance the cycle will turn.

It would be great if she turns out to be right.

If she is, it won’t be because the prime minister was right. It’ll be because business needed a leg-up.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

The embarrassingly easy way to cut the cost of electric cars

Published by Anonymous (not verified) on Wed, 17/11/2021 - 4:52pm in

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Prime Minister Scott Morrison says he wants to keep prices down.

Without his party in power, “you’re going to see petrol prices go up, you’re going to see electricity prices go up”.

There’s something practical he can do straight away to stop prices from rising.

Apart from a home, a car is the most important purchase most Australians make.

We typically hold on to our cars for six years, and most last many years longer.

This means that when we buy a car we have to have an eye on the future, on what it will make sense to drive half a decade down the track.

Electric cars are cheaper overseas

In almost every way, certainly when it comes to running and maintenance costs, electric vehicles are the best option.

And yet their price is set to come down far faster overseas than in Australia.

Here’s why.

Europe has imposed what it calls CO₂ emission performance standards.

They don’t relate to particular cars, as the term “performance standards” suggests, but to an average of what’s sold over each company’s entire range.

From 2020 each manufacturer’s cars are limited to an average emissions of 95 grams of carbon dioxide emitted per kilometre, and vans to an average of 147 grams emitted per kilometre.

It’s up to the companies how they achieve this. They could do it by selling more low-emission and fewer higher emission conventionally-powered cars, or they could do it by selling more electric cars.

If they haven’t sold enough electric cars to get under their brand’s emissions ceiling, they have to discount them to sell more in order to get average emissions down.

In Europe, electric sales are valuable

In the first year of the new European standard, average emissions from new passenger cars registered in Europe fell 12%. The share of electric cars tripled.

In 2025 the standard will become tougher again, requiring a further 15% cut in average emissions, and then from 2030 (for cars) a further 35%.

The big car manufacturers are finding it hard. It’ll make every electric car they sell valuable for them, valuable enough to sell cheaply, but only in Europe (and Canada, China, India, Japan, Korea, Mexico and the United States, which have similar standards, sometimes called fuel economy standards).

The International Energy Agency says four in five of the cars sold worldwide are subject to such standards.

In places where they are not (such as Australia) there is no particular reason for an international manufacturer to go all out to sell an electric car. It won’t help them meet a standard.

Australia has standards, sort-of

Not that Australia doesn’t have standards, of a sort. Since 2008 all new cars sold in Australia have had to display a sticker quoting fuel economy and emissions per kilometre.

The standards for actual CO₂ emissions are voluntary. The Grattan Institute kindly says they are “lacking in ambition and have often not been met”.

Faced with one of the few big markets in the world in which there is no particular imperative to sell electric cars, international manufacturers direct them elsewhere and sell higher emission cars here.

Their local arms want to sell better cars here, but are overruled.

The local head of Nissan puts it this way:

clear and consistent direction from governments is a critical signal to car makers to prioritise the importation of the latest low and zero-emissions vehicles

The local head of Volkswagen is more blunt.

Every six months we do an update with a board meeting on the electric vehicle environment in Australia. They are sitting in waiting for something to change, you know, but nothing ever changes. I guess the way I would put it is that it is embarrassing

It isn’t just that there is no particular incentive to discount an electric car sold in Australia. It is that there’s an incentive to charge more.

Without standards, we are an unattractive market

It harms a manufacturer’s profits to sell an electric car here that could be used to lower its average emissions profile in (say) Europe. It makes sense to do as much as is needed to keep it out of Australia.

Fixing the anomaly would be easy and would actually bring prices down, as well as increasing the limited range on offer. And it would help buyers of conventional vehicles worried about the price of petrol. New cars would use less.

Australians able to buy electric cars because of the change would find they used no petrol at all.

Introducing international-grade standards would not require a tax and would not require a tax concession. It would merely require regulations of the kind in place elsewhere.

Business won’t object. The Business Council asked for the change four years ago. Australian car makers won’t object. We no longer have any.

Petrol refiners won’t object. They are finding it hard to reduce the sulphur and other pollutants that kill hundreds of Australians each year. The government has advanced them up to A$250 million to help.

But carbon dioxide is different. We don’t need good quality fuel to reduce it, merely good quality cars. We are able to put them in the hands of more Australians near-costlessly.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

2022 looks like an ideal time for a government to land re-election

Published by Anonymous (not verified) on Wed, 10/11/2021 - 4:41pm in

At the risk of being political – and politics is important, it will determine how we are governed for the next three years – economic conditions could scarcely be better for a government seeking re-election.

The economic things that matter most to most people are, in my view:

  • jobs – if employment is climbing rather than falling, most people are not at much risk of losing their job

  • economic growth and wages growth – if things are getting better rather than worse, even in small ways, people feel better about the future

  • the ability to buy a home – if it is getting hard, even for other people or for their children, they are concerned about what the future will become

  • mortgage rates – as long as rates stay low they know their own personal budget won’t go out of whack

Other things are said to matter, but I am less than convinced; among them are the state of the federal budget (whether it is “back in the black”), tax cuts (once granted they are forgotten – Julia Gillard gave back more than the carbon tax and wasn’t thanked for it) and esoteric concepts such as government debt.

Jobs aplenty

Earlier this year, just before the eastern states went into lockdown, more of Australia’s population was employed than ever before, more hours were worked than ever before and more jobs were on offer than ever before.

Total hours worked fell during the lockdown months. But in those states without long lockdowns (those other than NSW, Victoria and the ACT) hours worked kept climbing to still-higher all-time highs. It’s an indication of what’s likely in NSW and Victoria now their lockdowns are over, something the Reserve Bank says it can already see happening in NSW.

The proportion of those working who say they’re underemployed (working fewer hours than they want) dived to an eight-year low before the mid-year lockdowns.

I haven’t mentioned the unemployment rate (officially 4.6%) because at the moment the rate can’t be taken seriously.

It is that low mainly because to be counted as unemployed you need to be actively looking for work, and many workers stood down during the lockdowns and available to work were not searching, and also because of an oddity in the way the Bureau of Statistics counts non-resident workers.

Regardless, absent any lockdowns, in practical terms it is set to be easier to keep and find a job than it has been for a long time going into an election.

Wage growth climbing

Last year’s recession brought with it a collapse in wage growth as employers froze or cut wages, something that’s now being unwound as the economy picks up, albeit, as the Reserve Bank notes with apparent disapproval, “weighed down by more muted public sector wages growth”.

The bank’s latest forecasts, released on Friday, have wage growth climbing from 1.7% to almost 3% over the next two years, which will be the fastest growth in a decade.

Actual and forecast wages growth

Annual growth in ABS wage price index, excluding bonuses and commissions. RBA, ABS

Three per cent is still lower than the wage growth we had come to expect before it fell off a cliff with the end of the 2010s resources boom, and it’s still lower than the Reserve Bank needs to sustainably meet its inflation target.

But it holds out the prospect of an improvement at a time when private sector wages are already improving, which is what matters for the way people feel.

Forecasts have consequences

Economic growth – the catch-all measure for what’s happening in the economy – is set to climb out of the lockdown slump and accelerate throughout next year before settling back to the 2-3% that was common before the recession.

It also won’t be good enough, but it will be moving in the right direction, and accelerating strongly next May, at the time we are likely to be asked to vote.

These forecasts matter because similar ones (prepared by the Treasury instead of the Reserve Bank) will underpin the economic statement or budget released before the election and the Pre-election Economic and Fiscal Outlook released by departmental secretaries without political input during the campaign.

They will become the accepted narrative.

Easier home price growth

After soaring a frightening 21% in the past year to barely affordable highs, there’s every chance home prices will ease off. On Melbourne Cup Tuesday, the Reserve Bank withdrew its support for the near-zero three year bond rate that banks had been using to fund ultra-cheap fixed rate mortgages.

It’s no longer possible to get a three-year fixed rate mortgage for less than 2%.

A few weeks earlier the Australian Prudential Regulation Authority instructed lenders to refuse mortgages to borrowers who couldn’t withstand an increase in mortgage rates of three percentage points (such as an increase from 3% to 6%).

APRA expects the instruction to cut the maximum that can be borrowed by 5%. By election day price rises might have slowed or stopped.

And low rates for some time yet

Higher variable mortgage rates would unsettle Australians (even though many are finding it easier to make their payments than they have in years).

The good news is that on Friday the Reserve Bank nominated 2024 as the year it expects to begin to lift the record-low cash rate that sets the price of variable rate mortgages.

2024 is half a political cycle away.

Even if the first hike comes sooner (and financial markets expect it to come sooner) it won’t be imminent at the time we will be asked to vote.

All sorts of things determine election outcomes.

The economy is only one. But right now, next year’s economy is looking good.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

Australia is about to be hit by a carbon tax whether the prime minister likes it or not, except the proceeds will go overseas

Published by Anonymous (not verified) on Wed, 03/11/2021 - 4:38pm in

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Ten years ago, in the lead-up to Australia’s short-lived carbon price or “carbon tax” (either description is valid), the deepest fear on the part of businesses was that they would lose out to untaxed firms overseas.

Instead of buying Australian carbon-taxed products, Australian and export customers would buy untaxed (possibly dirtier) products from somewhere else.

It would give late-movers (countries that hadn’t yet adopted a carbon tax) a “free kick” in industries from coal and steel to aluminium to liquefied natural gas to cement, to wine, to meat and dairy products, even to copy paper.

It’s why the Gillard government handed out free permits to so-called trade-exposed industries, so they wouldn’t face unfair competition.

As a band-aid, it sort of worked. The firms with the most to lose were bought off.

But it was hardly a solution. What if every country had done it? Then, wherever there was a carbon tax (and wherever there wasn’t), trade-exposed industries would be exempt. The tax wouldn’t do enough to bring down emissions.

We are about to face carbon tariffs

The European Union has cottoned on to the imperfect workarounds introduced by countries such as Australia, and is about to tackle things from the other direction.

Instead of treating foreign and local producers the same by letting them both off the hook, it’s going to place both on the hook.

It’s about to make sure producers in higher-emitting countries such as China (and Australia) can’t undercut producers who pay carbon prices.

Australia Institute

Unless foreign producers pay a carbon price like the one in Europe, the EU will impose a carbon price on their goods as they come in — a so-called Carbon Border Adjustment Mechanism, or “carbon tariff”.

Australia’s Energy Minister Angus Taylor says he is “dead against” carbon tariffs, a stance that isn’t likely to carry much weight in France or any of the other 26 EU nations.

Australia is familiar with the arguments for them

From 2026, Europe will apply the tariff to direct emissions from imported iron, steel, cement, fertiliser, aluminium and electricity, with other products (and possibly indirect emissions) to be added later.

That is, unless they come from a country with a carbon price.

Canada is also exploring the idea, as part of “levelling the playing field”. So is US President Joe Biden, who wants to stop polluting countries “undermining our workers and manufacturers”.

Their arguments line up with those heard in Australia in the lead-up to our carbon price: that unless there’s some sort of adjustment, a local carbon tax will push local employers towards “pollution havens” where emissions are untaxed.

In practice, there’s little Australia can do to stop Europe and others imposing carbon tariffs.

As Australia discovered when China blocked its exports of wine and barley, there’s little a free trade agreement, or even the World Trade Organisation, can do. The WTO was neutered when former US President Donald Trump blocked every appointment to its appellate body, leaving it unstaffed, a stance Biden hasn’t reversed.

Even so, the EU believes such action would be allowed under trade rules, pointing to a precedent established by Australia, among other countries.

Legality isn’t the point

When Australia introduced the Goods and Services Tax in 2000, it passed laws allowing it to tax imports in the same way as locally produced products, a move it has recently extended to small parcels and services purchased online.

Trade expert and Nobel Prizewinning economist Paul Krugman says he is prepared to argue the toss with politicians such as Australia’s trade minister about what’s legal and whether carbon tariffs would be “protectionist”.

But he says that’s beside the point:

Yes, protectionism has costs, but these costs are often exaggerated, and they’re trivial compared with the risks of runaway climate change. I mean, the Pacific Northwest — the Pacific Northwest! — has been baking under triple-digit temperatures, and we’re going to worry about the interpretation of Article III of the General Agreement on Tariffs and Trade?

And some form of international sanctions against countries that don’t take steps to limit emissions is essential if we’re going to do anything about an existential environmental threat.

Victoria University calculations suggest Europe’s carbon tariffs will push up the price of imported Australian iron, steel and grains by about 9%, and drive up the price of every other Australian import by less, apart from coal whose imported price would soar by 53%.

The tariffs would be collected by Europe rather than Australia. They could be escaped if Australian makers of iron, steel and other products can find ways to cut emissions.

Increase in price of exports to EU under carbon border adjustment mechanism

Assumes an EU carbon price of 60 euro per tonne, which is roughly today’s price; assumes the CBAM covers CO2 emissions including fugitive emissions involved in production other than direct combustion emissions that are priced already by the EU Emissions Trading Scheme.

The tariffs could also be avoided if Australia were to introduce a carbon price or something similar, and collected the money itself.

This makes a compelling case for another look at an Australian carbon price. If Australian emissions are on the way down anyway, as Prime Minister Scott Morrison contends, it needn’t be set particularly high. If he is wrong, it would need to be set higher.

One thing the sad story of Australia’s on-again, off-again, now on-again (through carbon tariffs) history of carbon pricing has shown is that politicians aren’t the best people to set the rates.

In 2011, Prime Minister Julia Gillard set up an independent, Reserve Bank-like Climate Change Authority to advise on the carbon price and emissions targets, initially chaired by a former governor of the Reserve Bank.

Astoundingly, despite attempts to abolish it, it still exists. It might yet have work to do.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

Now it’s Liberals telling us we are going to have to cut the capital gains tax concession if we want to get Australians into homes

Published by Anonymous (not verified) on Wed, 27/10/2021 - 4:35pm in

NSW is doing what Labor’s Bill Shorten could not – explaining why Australia’s capital gains tax concession is knocking first home buyers out of homes.

Shorten went to the 2016 and 2019 elections with a plan – Labor would halve the capital gains tax concession used by landlords who buy and sell properties.

In much the same way as he was unable to sell his (now modest by international standards) plan to make half of all new car sales electric by 2030, he was pilloried by Morrision and before him Malcolm Turnbull for a policy they said would smash house prices.

All Shorten was proposing was to wind back the capital gains tax exemption (which exempts from tax half of each profit made from buying and sell real estate and other assets) for future transactions only. The exemption would stay in place for everything already bought.

In the face of an overblown debate about whether or not it would smash house prices (Morrison’s department had quietly warned such claims were “not consistent with our advice”) the Labor leader found himself defending modelling about prices rather than outlining what his policy would actually do.

And he lost, twice.

Now, as we prepare for yet another election, the NSW Coalition government has done what Australia’s Labor opposition could not – make a cogent argument for winding back the capital gains tax concession, saying it “pushes first home buyers out of the market”.

Elbowing first home buyers aside

In a submission placed quietly on the federal government’s housing inquiry website late last week the NSW government argued that if the concession was cut, housing would be used “more for accommodation needs than investment needs”.

Here’s the line of thinking it set out, the line Shorten was never able to get across.

The income made from capital gains – from buying something, holding it, then selling it at a profit – is taxed differently from the income made from work or running a business. Only half of it is taxed.

Prime Minister John Howard and his treasurer Peter Costello were responsible for the change, introduced in 1999 in the leadup to the introduction of the goods and services tax in 2000, but with less fanfare.

Before then capital gains were taxed in the same way as other income (what they are subject to is income tax, there is no such thing as a separate capital gains tax).

But before then only the portion of each gain over and above the rate of inflation was taxed, so that people weren’t taxed on a profit that would have no real value.

The change, introduced after an inquiry that found it would “encourage a greater level of investment, particularly in innovative, high-growth companies” was to instead tax only half of each capital gain.

It was sold as a small change. A few years earlier, inflation had been big, around 8% per year, meaning that after five or so years only half of each profit would have been taxed in any event.

But inflation had since dived to a barely-noticeable 2%, where it has stayed for most of the past 20 years, making a guaranteed exemption from tax of half of each capital gain made trading property way over the odds.

It was, as economist Rory Robertson told his clients at the time, “almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages”.

Instead of pouring into high-growth companies, as Howard’s inquiry said it expected, the money flooded into housing, which was easier to borrow for.

Rushing into real estate rather than shares

As Reserve Bank assistant governor Luci Ellis told a parliamentary inquiry, it was “more profitable to negatively gear property, because you can gear it more”.

To buy properties quickly, real estate investors needed to buy properties that would have otherwise been bought to live in.

It pushed up prices, but that wasn’t all it did.

As the NSW submission to the current housing inquiry says, the most significant impact was “the displacement of owner occupiers (including first home buyers) from home ownership by tax-advantaged investors, predominantly those already on higher incomes”.

In its words

by encouraging investors to buy and hold property, the 50% capital gains discount increases investor demand for housing and pushes first home buyers out of the market

Before capital gains tax was halved and Australians dived into becoming landlords, more than 70% of Australian households owned the home in which they lived and one quarter rented.

At the latest count (itself four years old) only two thirds owned the place in which they lived and one third rented.

Labor has new friends

And properties are less well used. Because income from rent is no longer the chief motivation for holding property (these days most rental properties make a rental loss whereas before the capital gains tax change most made a profit) the NSW government believes more are remaining empty.

Now, when the capital gains from holding properties can be measured in hundreds of dollars per day, it would be an ideal time to wind back the capital gains tax discount. Its absence wouldn’t much hurt.

And it’s easy to forget that wasn’t what Labor was proposing. Shorten (twice) put forward something far more modest – leaving the tax discount for existing investments untouched and halving the discount for future investments.

It’s no longer Labor policy, but it was backed by the head of the Coalition’s Commission of Audit and the head of its financial system inquiry.

And it was of interest to the Business Council of Australia which pointed out that the discount “can distort investor behaviour, particularly at a time of rapid capital gains, such as in a housing or equity boom”.

Morrison’s opposition to it was hard to justify at the time. It’s harder now.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

The easy way to rein in Facebook: stop it eating competitors

Published by Anonymous (not verified) on Wed, 20/10/2021 - 11:58am in

Tags 

column, Facebook

Few of us who have survived the last year aren’t grateful for technology.

Zoom, email, connected workplaces and solid internet connections at home have made it possible to work, shop, study and carry on our lives in a way that wouldn’t have been possible had the pandemic hit, say, 20 years earlier.

But parts of big tech — the parts that track us and drive us to think dangerous and antisocial things just so we keep clicking — are doing us enormous damage.

Although it might seem like we can’t have the best of both worlds — the connectivity without the damage — I reckon we can. But we are going to have to change the way we think about big tech.

The first thing is to recognise that big tech is intrinsically weak. Yes, weak. The second is that it has only become strong each time we have let it.

By “big tech” I mean Facebook and Google and related companies such as Instagram and YouTube (owned by Facebook and Google respectively).

The firms that came before them were indeed weak in the sense that they didn’t have a guaranteed future. Think back to Netscape, Myspace, MSN and all those other montholiths we were told at the time would become natural monopolies.

Terrified of losing its edge

Much of the behaviour revealed by Facebook whistle-blower Frances Haugen this past month is that of a market leader terrified it is losing its edge.

It switched what it showed away from news towards posts that inflamed and enraged people in 2018, with “unhealthy side effects on important slices of public content” in part because users had begun to interact less with it.

Extract from internal Facebook report. Wall Street Journal, US Senate Commerce Committee

Facebook knew that “we make body image issues worse,” in the words of one of its memos, but did little to change the way Instagram worked. In part this was because teens spent 50% more time on Instagram than Facebook. Instagram looked like the future.

When engagement on Instagram started flagging, Facebook developed plans for Instagram Kids, seeing pre-teens as “a valuable but untapped audience”.

These don’t sound like the actions of a company confident of staying on top.

And nor does its initial purchase of Instagram in 2012 when it could have started its own photo-sharing service on mobiles, leveraging all that it had.

Facebook also bought WhatsApp in 2014 because its own messaging platform, Messenger, was losing ground.

It couldn’t grow anything like as big by itself, because when firms grow beyond a certain size they turn sluggish, bureaucratic.

Google got bigger by buying DoubleClick (the platform it uses to sell the advertisements that drive its income) and all manner of emerging platforms including Android, YouTube, Waze and Quickoffice.

They are the actions of a hungry company, but not one supremely confident of staying at the top.

Australian academic Stephen King, a former member of Australia’s Competition and Consumer Commission and a current commissioner with its Productivity Commission, says we need to apply special tougher rules to takeovers by companies such as Google and Facebook.

Big tech grows bigger by takeovers

Usually we only block takeovers where the target is big. Instagram and WhatsApp were small. Instagram reportedly had 13 full-time employees at the time of its takeover, WhatsApp reportedly had 55. Yet Facebook paid billions for them.

In the US and the UK both takeovers were waived through.

Big tech companies can do things with tiny takeover targets others can’t. Takeovers can give them access to vast networks of existing users and their data.

As King puts it, Instagram is big because it was acquired by Facebook, not because Instagram was necessarily the best target.

In Europe the authorities were on to this possibility and approved the takeover of WhatsApp only after Facebook informed them it would be “unable to establish reliable automated matching between Facebook users’ accounts and WhatsApp users’ accounts”.

This statement was incorrect, Facebook has done it, and paid the European Commission €110 million for providing incorrect or misleading information.

Had Australia been tougher, had the US, the UK and the European Commission been tougher, Facebook and Google would be nothing like the behemoths they have become today. They might have peaked and be losing market share.

We are able to say no

Their future is largely in our hands. For big tech companies able to use the weight of their networks (and only for those companies) we could “just say no” to takeovers. It’s hard to think of a reason for one to proceed.

If needed, we could change the law to make “no” the default.

This wouldn’t shrink the companies in a hurry. Most of the users of Facebook, YouTube, Twitter and the like are locked in, because that’s where their friends are.

But where the friends are changes every generation.

Facebook and Google know this, which is why they are so keen to take over upstart competitors and emerging platforms in fields they haven’t thought of.

If we stopped them, we wouldn’t stop them growing straight away, but we would make it hard for them to fight the natural order in which the new and fashionable displace the old and predictable. It’s their deepest fear.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

As home prices soar beyond reach, we have a government inquiry almost designed not to tell us why

Published by Anonymous (not verified) on Wed, 13/10/2021 - 11:42am in

Never has an inquiry into the skyrocketing price of homes been more urgent.

Rarely has one been as insultingly ill-suited as the one under way right now.

Midway through last year in the midst of COVID, the average forecast of the 22 leading economists who took part in The Conversation mid-year survey was for no increase in home prices whatsoever in the year ahead (actually for slight falls).

At that time the typical (median) Sydney house price was A$1 million, where it stayed until the end of the year.

Then it took off. In the ten months to the start of this month the typical Sydney house price soared $300,000 to $1.3 million – a breathtaking increase (and an awfully big penalty for delaying buying) of $1,000 each day.

For apartments, the increase isn’t as big, although still extraordinary. The cost of delaying buying a typical Sydney apartment has been $334 each day.

The cost of delaying buying a typical Melbourne house has been close to $600 per day, the cost of delaying buying a typical Melbourne apartment $150 per day.

In that time, in the year in which the typical Australian home price climbed 20.3%, the typical Australian wage climbed just 1.7%

What people stretched to the limit or now locked out of the housing market are desperate to know is

  • why it is happening

  • when it is likely to stop

  • what (if anything) we can do about it.

Instead, we have been given an inquiry into affordability in name only. Seriously. The parliamentary inquiry commissioned by the treasurer in July and chaired by backbencher Jason Falinski is called an inquiry into affordability and supply, but the word “affordability” appears in none of its three terms of reference.

It’s an inquiry into ‘supply’

Instead, the terms of reference refer to the impact of taxes, charges and other things settings on “housing supply”.

I guess the idea is that it is obvious that supply is the key to affordability, but it rather negates the idea of holding an inquiry, and it sits oddly with the explosion in prices we have seen in a year in which building approvals have surged by a near-record 224,000 and our population has as good as stayed still.

In its submission to the inquiry the Reserve Bank includes a graph showing the supply of housing (the stock of houses and apartments) outpacing population growth for the best part of the decade leading up to the latest price explosion.

Supply has been holding up

But in a sense (and stay with me here) whoever drafted the restricted terms of reference is right. Housing affordability is linked to the supply of housing.

And housing affordability has been doing okay.

In evidence to the inquiry last month Treasury assistant secretary John Swieringa drew a distinction between housing affordability (best measured by the cost of renting housing) and the cost of buying a house, which was partly an investment.

When you are a purchaser of a house you are partly investing in an asset and partly buying dwelling services; whereas when you are renting it’s probably a cleaner read on what cost dwelling services is.

That clean read – rent as a proportion of income – hasn’t much changed in 20 years. For middle earners it has remained comfortably between 20% and 25% of household disposable income.

The Reserve Bank says advertised rents for units in Sydney and Melbourne have drifted down by $30 to $50 per week over the past five years while rents in other places have mostly drifted higher.

As it happens, it says another measure of housing affordability is improving.

The cost of home loan payments as a proportion of income has been falling since the onset of COVID. Dramatically lower interest rates mean payments take up less household disposable income than they did five years ago, even with the much higher prices.

The problem is accessibility

What has worsened is what the Reserve Bank calls “housing accessibility”, to distinguish it from housing affordability.

Accessibility is the ability of a first time owner or renter to get into the market at all by finding the deposit or bond.

Astounding price growth and five years of weak income growth have pushed up the cost of an average first home deposit from 70% of income to more than 80%.

On average it now takes a 24-35 year old nine years of tucking away one fifth of their income each year to save for a typical Sydney deposit, up from five to six years a decade ago.

Average First Home Buyer Deposit

Owner-occupier; estimated as a share of average annual household disposable income using average first home buyer commitment size and assuming 20 per cent deposit. Seasonally adjusted and break-adjusted. RBA, ABS

It’s okay if you have a parent who can get their hands on money, almost impossible if you don’t. In the words of former Reserve Bank official Peter Tulip, it’s making home ownership hereditary.

He’s not the first person to have noticed.

Liberal backbencher John Alexander chaired the Coalition’s 2015 inquiry into home ownership. He said then we were “on track to becoming a Kingdom where the Lords own all the land and the biggest Lord will be King and the enslaved serf tenant is paying rent to the Lord to become wealthier”.

Ownership is becoming hereditary

Prime Minister Turnbull and Treasurer Scott Morrison used the 2016 election (in which they attacked Labor’s plan to limit tax breaks for landlords) to shut down Alexander’s inquiry, and only agreed to restart it with someone else as chair. It had considered 30 hours of evidence.

The chair of this current (limited) inquiry seems unperturbed.

He opened September’s hearings saying no question was off-limits, no idea too stupid, all forms of inquiry were worthwhile. It’d be great if that was true.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

Delta is tempting us to trade lives for freedoms — a choice it had looked like we wouldn’t have to make

Published by Anonymous (not verified) on Wed, 15/09/2021 - 3:43pm in

Tags 

column

Last year COVID-19 seemed simple. It was horrific, but the arguments about what to do were fairly straightforward.

On one side were people rightly horrified by its rapid spread who wanted us to stay at home and stay away from school and work and socialising in order to save lives.

On the other side were people concerned about the costs of those measures — to jobs, to education, to freedom, to mental health, and to other lives (because if we used too much of our health system fighting COVID-19, other lives might fall through the cracks).

And through it all came a kind of consensus.

The concern about non-COVID deaths turned out to be overblown. Last year Australia recorded fewer than normal doctor-certified deaths, in part because the COVID restrictions stopped deaths from influenza, and in part because they snuffed out COVID-19 early, ensuring hospitals weren’t overwhelmed.

Last year, we didn’t have to choose

Concern about jobs also turned out to be overblown. By locking down hard and early, and paying employers to keep on staff (through JobKeeper) we ensured the lockdowns would be short-lived, with light at the end of the tunnel.

In none of the states for which there is data was there an increase in suicides.

The insurance company ClearView told a parliamentary committee this June its research found things were better than expected in part because of the universal nature of the pandemic. Everyone knew “everyone was in this together”.

Another reason was telehealth. It was easier to get help than before.

Read more: 7 lessons for Australia's health system from the coronavirus upheaval

And students returned to school sooner than they would have had the lockdowns had been weaker or started later, leaving much of their education intact.

The consensus was that by locking down hard and early we got the best of both worlds — near-elimination of COVID-19 and a quick return to normal life. Anyone who remembers Christmas last year remembers how normal it felt.

Economics is called the dismal science in part because it is about hard choices — situations where we can’t have our cake and eat it too. Last year it seemed as if COVID wasn’t one of them. Starving the virus early gave us both one of the world’s lowest death tolls and one of its shortest recessions.

Hard choices are back in sight

And then came Delta.

Far more contagious than the original, and with fewer immediate symptoms (making it harder to trace) the Delta variant became almost impossible to get on top of in the two big states where it took hold.

And without very high vaccination rates — in the view of the Grattan Institute significantly higher than either the NSW, Victorian or Commonwealth governments are targeting — it became all but impossible to reopen without condemning Australians to COVID deaths.

The new reality is plunging us back toward the territory economists call their own — the world of hard choices.

If the lockdowns don’t end (and there is no sign they can end any time soon without costing lives) education and mental health and jobs will indeed suffer.

There’s only so long businesses can hang on without pulling the pin.

We are getting closer to having to trade off lives against freedoms; getting closer to having to decide how many COVID deaths and how much COVID illness we are prepared to live with in order to return to something more like normal living.

Last week’s NSW “roadmap to freedom” implicitly made those tradeoffs.

Calculations prepared by the Treasury and the Grattan Institute make them more explicit.

There are few important things to note.

One is that we might yet be able to get the best of both worlds. We might yet be able to effectively eliminate the delta strand, restoring both health and freedoms (as we did with the earlier strand).

It won’t happen if we ease restrictions before transmission has stopped, as some states are planning to.

Lockdowns without end are unsustainable

Another is that unending lockdowns are untenable. While last year’s lockdowns didn’t do the psychological and health and educational damage that was feared, lockdowns without end would.

One type of damage clearly evident in the comprehensive report on last year’s lockdowns from the Australian Institute of Health and Welfare is family and domestic violence. The longer lockdowns continue, the longer elevated violence is likely to continue.

And another thing to note is that in a world where we have to make tradeoffs there are no particularly good options. Allowing the disease to spread in order to restore freedom of movement would itself curtail freedom of movement.

Read more: Economists back social distancing 34-9 in new poll

An analysis across US states suggests 90% of last year’s collapse in face-to-face shopping was due to fear of COVID rather than formal COVID restrictions. That fear will grow if we lift restrictions and COVID spreads.

The Grattan Institute would lift lockdowns only when 80% of the entire population has been double vaccinated (not 70-80% of people aged 16+ as the NSW and national plans envisage, which amounts to 56-64% of the population).

Grattan believes its plan would cost 2,000-3,000 lives per year; a cost it believes the public would accept because it is similar to the normal toll from flu.

The NSW and national plans (Victoria’s isn’t spelled out) would cost much more.

No option is particularly good

The Commonwealth Treasury finds, perhaps counter-intuitively, that an aggressive lockdown strategy that saved more lives would impose lower economic costs (about A$1 billion per week lower) in part because it would end up producing fewer lockdowns.

They are the sort of calculations we hoped never to have to make.

There’s still a chance we might not. With a Herculean effort NSW and Victoria could yet join Taiwan, New Zealand and every other Australian state in being effectively COVID-free. But they are running out of time.

Read more: NSW risks a second larger COVID peak by Christmas if it eases restrictions too quickly

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Peter Martin is economics correspondent for The Age and the Sydney Morning Herald.

He blogs at petermartin.com.au and tweets at @1petermartin.

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