Economy

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Saturday’s good reading and listening for the weekend

Published by Anonymous (not verified) on Sat, 17/04/2021 - 3:00am in

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Economy, Politics

What people in other forums are saying about public policy

The pandemic’s progress

Australia – Morrison cannot restore trust in government when his party has spent four decades destroying it

If we all understood probability and were rational about risk, we wouldn’t build houses on floodplains, there would be no poker machines or casinos in the country, insurers would offer products more in line with people’s needs, and most of us would be guided by calculations of benefit and harm as presented by bodies such as Cambridge University’s Winton Centre for Risk and Evidence Communication. Their graphic shows that, even for those with low risk of exposure to Covid-19, anyone older than 30 bears a higher risk of ICU admission resulting from catching Covid-19 than from harm due to the AstraZeneca vaccine. For people over 60 the benefit-risk ratio is at least 70:1. Yet we are hearing of older Australians cancelling their vaccination appointments out of fear of blood clots. As Jane Frawley of University of Technology Sydney points out in The Conversation, it doesn’t take much news of adverse side effects to damage public confidence, In this regard the mainstream media has shown little responsibility to a community already liable to vastly over-estimate the risk of side effects of vaccination.

Behavioural scientists have long known that an irrational approach to risk is almost hard-wired into the human brain. But if we have sufficient trust in experts – aviation safety regulators, and public health authorities – we overcome our fears and trust them, perhaps when we see their advice confirmed over the years.

There is no reason not to trust our public health experts, but over forty years political parties on the right, starting with Ronald Reagan (“government is the problem”) and copied by his disciples in other lands, have systematically worked to undermine trust in anything government does or recommends.

Norman Swan, on Coronacast, maps out a feasible way we could still come close to our original vaccination program without much slippage. It involves being careful with our allocation of Pfizer vaccine (why is it still being given to people in nursing homes when there is plenty of AstraZeneca?), using inoculation centres rather than GPs to roll out at least a first dose of AstraZeneca to the 8 million people over 50, and dispensing other vaccines (not only Pfizer) to the 12 million Australians between 15 and 50 when supply becomes available. It’s not a firm plan, but it’s more informative than anything the government has come up with since it abandoned its over-confident promises about vaccination by October, and it seems to be where the re-convened “national cabinet” is heading in its “recalibration”.

As Mark Kenny says, writing in The Conversation, Morrison, the master of spin and false assurance, has panicked: “2021 has been a whole new ball game, and one for which a prime minister not accustomed to pressure, has proved far less equipped”.

As at Thursday, just over 5 per cent of Australia’s population has been vaccinated.  Smaller states and territories seem to be performing better than New South Wales and Victoria. The Guardian reports that Australia ranks as a world laggard in vaccination (somewhere between 81st and 100th place), while pointing out what we can learn from those countries advanced in vaccination.

How and when can we open up?

Our approach of keeping Australia Covid-19 free through tough border controls cannot last forever. There should come a time when, as a result of vaccination and established hygiene habits, we will get the virus’s reproduction rate (“R”) a long way below I.0. Once we achieve this any Covid-19 that comes into the country will be quickly traced and extinguished. That’s essentially what has happened with tuberculosis, which is still coming into the country. We still have a long way to go before we can open up.

There will be increasing pressure for early lifting of travel restrictions, however. Morrison is reported to have discussed the possibility of Australians getting used “to dealing with 1000 cases a week or more”  if we go for easier conditions for returning travellers, such as home quarantine, while acknowledging that we would not welcome another round of closures.

Until we get that “R” number way down there is no realistic scenario that would see a stable case load of 1000 or so a week. Once we reach that sort of number it’s going to grow exponentially, unless it is stopped with very costly action as was done in Victoria. Those who think a steady flow of infections is possible should go back to their early high school mathematics books. If they cannot dig them up they should think about how rabbits reproduce and bushfires spread, and how disastrous it was when the UK tried to manage with a tolerable flow of infections.

The rest of the world

Earlier this year the pandemic seemed to be easing, but in the last two months it has re-surged, and its world-wide incidence will probably exceed the January record of 740 000 daily cases.

Just five countries, all very different – India, USA, Brazil, Turkey and France – accounted for 53 per cent of last week’s cases. Within Europe five countries – Cyprus, Sweden, France, Poland and Hungary – are recording more than 500 new cases per day per million population. At the other end of the European spectrum is the UK, now down to 25 daily cases per million. But even the UK has some way to go: at 25 daily cases per million it has only just come down to Japan’s daily rate, which is the highest among developed countries in our region.

Among countries with significant vaccination levels are Israel – 62 per cent first dose 57 per cent fully vaccinated, the UK (48, 11) and the USA (37, 22).

Sources

See our separate web page of hyperlinks to generally reliable information and analysis about Covid-19. Among other links The Economist reports that Bhutan vaccinated almost all adults in a week, while the Harvard Gazette reports on research showing that pregnant women show a robust immune response to Covid-19 and that they pass antibodies to their newborns.

Foreign affairs

Myanmar – it’s complicated

No-one outside Myanmar loves the Tatmadaw – the name by which the country’s military is known – very much. The ANU’s Jonathan Liljeblad, writes in The Conversation that we know how to cut off the financial valve to Myanmar’s military. The world just needs the resolve to act. He lists a number of sanctions, mainly financial, that global and Asian bodies could effectively apply.

Writing in Foreign Affairs – The dangerous impasse in Myanmar –  former Secretary of Singapore’s Ministry of Foreign Affairs Bilahari Kausikan acknowledges that the Tatmadaw vastly under-estimated the amount of support the democratically-elected government had enjoyed, but neither moral suasion or sanctions will see it relinquish power. It was and is the best-functioning institution in the country. For ASEAN and the West, no matter how morally repulsed they may be by the Tatmadaw’s brutality, there are no good options: these countries must be patient and move cautiously.

On the ABC’s Rear Vision  Annabel Quince interviews a number of experts about the antecedents to the country’s present situation, which has roots in its difficult history during the decolonization period. In 1948 Britain left the country with weak institutions and an army cobbled together from British-trained and Japanese-trained soldiers, and with two parties – Karen insurgents and communists – vying for power and influence. Ne Win’s military coup in 1962 brought order, but also isolationism and poverty as other Asian countries grew in prosperity.  From then the army grew from a traditional defence force to a state-within-a-state, with strong economic power, a professional officer corps and a culture of absolute obedience and extreme brutality. The country’s transition to democracy was never complete; de facto the National League for Democracy governed only with the military’s permission, but the outside world mistook the situation for genuine democratisation.

Ireland’s slow path to reunification

The British occupation and division of Ireland has a long and troubled history. A peace settlement – the US-brokered “Good Friday Agreement” – negotiated in 1998, giving the Northern Ireland Parliament more authority, was followed by more than twenty years of calm. As the Northern Irish come to understand the implications of Boris Johnson’s Brexit agreement, discontent has broken out again.

Writing in The ConversationNorthern Ireland, born of strife 100 years ago, again erupts in political violence – James Walker of Keene State College, New Hampshire, puts the re-emerging troubles into that historical context. The people of Northern Ireland, although predominately Christian, are strongly divided between “Catholics” and “Protestants” (a division that probably has more to do with tribal identities than with fine points of theological difference). The Protestants are already fearful of a future that must surely lead to re-unification, and because Brexit imposes a hard trade border between Northern Ireland and the rest of the UK, they feel cut off – classified more as Irish than as British.

Engaging with China

President Biden will be more diplomatic in dealing with China than Trump, but he is still bound by “a rock-solid consensus among the Washington DC establishment that the US must, in one way or another, stop China’s rise”. There is also a belief in Washington that Europe should align itself with the US in this contest.

So writes Kishore Mahbubani – Europe’s dilemma: head or heart?  Europe’s heart, conditioned by history, will remain with the United States, but geopolitics and geography will turn its head to Africa.

Europe faces the prospect of being overrun by desperate African immigrants fleeing violence and poverty. It should therefore take an opportunity to partner with China to help lift Africa out of poverty. The US will oppose such a development, but it should see past its immediate obsession with a two-power conflict. “We should abandon the zero-sum mentality of 19th century geopolitical games and come together as common humanity to deal with the pressing and common 21st century global challenges. An EU-China partnership in Africa will be a step in the right direction” writes Mahbubani.

Also writing on America’s relationship with China on global issues are Andrew Erikson and Gabriel Collins who urge the US to pressure China to cut its carbon emissions: Competition with China can save the planet,published in Foreign Affairs. China has run a strong public relations campaign centred on its 2060 target for carbon neutrality, but the reality is that it is still expanding its use of coal-fired plants and is building new ones. They write that “Washington should build a coalition of like-minded partners” to pressure China into sourcing its energy supplies more sustainability and agree on a carbon tax (including taxing Scope 2 emissions incurred downstream and upstream).

We note that in that list of like-minded partners they see Australia as one of the “key players”.  That may be where Australian public opinion lies, and it may be the view of independent Australian economists, but it’s a long way from the position of a government captured by the fossil fuel industry.

Women in the pandemic

Since the outbreak of Covid-19 all types of violence against women and girls, particularly domestic violence, has intensified. This has been happening worldwide, manifest in different ways in different countries, rich and poor. Drawing attention to this development the United Nations has launched its “Shadow Pandemic campaign”.

On the campaign’s website The Shadow Pandemic: Violence against women during COVID-19  you can hear an Australian voice – Nicole Kidman in her role as UN Women’s Goodwill Ambassador – urging action. We can do our part.

Our inflating housing bubble

At last the Reserve Bank notices that house prices are rising

In the Reserve Bank’s latest Financial Stability Review, it drops the gentlest of hints that rising house prices may threaten the economy. In its short At a glance document it writes that “cyclically low interest rates and rising asset prices create a risk of excessive borrowing”.  It acknowledges that asset price inflation reduces the risk of borrowers defaulting on their loans, but it adds the qualification:

Risks from rising asset prices and debt could build, particularly if lending standards are weakened. Persistent increases in asset prices could lead to expectations rises will continue and so increase risk taking and borrowing, especially given low interest rates. This could push asset prices above their fundamental values which could lead to a correction in asset prices, which if borrowers’ income fell could expose lenders to large losses on higher debt.

Is the housing market getting wobbly?

Its substantial analysis – Household and business finances in Australia – is more upbeat, but it notes that there are regional differences in housing markets. In non-metropolitan regions (confusingly called “regional areas”), and in outer suburban regions, house prices have been rising strongly, but in inner-city regions in Sydney and Melbourne there is evidence of over-supply and falling rental yields, particularly on apartments.

That same document also reveals, unsurprisingly, that many renters are having to rely on once-off assistance, such as withdrawal of superannuation and hardship concessions for utility bills.  The Bank also draws attention to problems in commercial property – retail and office – that seem to be attributable to long-term structural issues rather than simply to Covid-19 consequences.

Its main analysis is about housing, but it also remarks that equity prices are high, as indicated by elevated price-equity ratios. It notes that such high prices are in line with low real interest rates. (Is it not possible that they are two aspects of the same risk?)

Note that this regular review is mainly about risks to the stability of the whole financial system: it is less concerned about risks faced by particular sectors, regions or demographic groups, just so long as they don’t contribute to a general GFC-style catastrophe.

What’s inflating the bubble – irrational expectations

Asset bubbles have three stages. In the first stage some investors go for what looks like a good deal. Falling interest rates and tax breaks have made housing look like a sound proposition, kicking off a rise in prices. In the second stage naïve investors, aware that prices are rising, are attracted to the market by what they see as an inevitable momentum, generating a strong cycle of positive feedback. In the third stage what we may call “strategic investors” come into the market. They know the market is overpriced, but they pile their money in believing that they can get out before the positive feedback cycle collapses.

Peter Martin, writing in The Conversation, believes the housing market is now in that third stage – Home prices are climbing alright, but not for the reason you might think.

Where to channel our savings – superannuation or housing?

Apart from those with their own businesses, most people have only two channels for investment. They can buy real-estate – static assets that may experience intermittent periods of increased demand – or they can invest in equities and if their portfolios are adequately diversified they can share the benefits of the nation’s economic growth. For most Australians the opportunity to invest in equities is through superannuation.

But there are powerful interests in the finance sector seeking to privilege real-estate as a channel for investment. They have succeeded in having the Coalition retain tax incentives for those buying “investment properties” and in expanding financial assistance for first home-buyers. These are demand-side incentives, the net effects of which are to make housing less affordable and to encourage naïve investors to fuel a speculative bubble with borrowed funds.

Liberal Party MP Tim Wilson, Chair of the House Economics Committee, is campaigning to throw more financial fuel on to the property boom by allowing people to use superannuation to invest in property.  As Jennifer Duke reports in the Sydney Morning Herald, the superannuation industry sees Wilson’s personal campaign to allow people to withdraw money from their superannuation funds to invest in housing as a clear conflict of interest.

Writing in Eureka Street, David James reminds us of the public virtue of Prime Minister Keating’s superannuation incentives:

It is an exemplification of a strain of political thinking, neither strictly left wing nor right wing, that was devised by the great writer GK Chesterton: distributism, the idea that productive assets should be widely owned rather than concentrated. Superannuation has made big steps towards such distributed ownership, unlike the Australian housing market, where there is unfortunately a massive generational divide because of reckless bank lending.

Other economics

(Almost) everything you need to know about macroeconomics in twenty minutes

On Late Night Live, Phillip Adams interviews Satyajit Das, author of A Banquet of Consequences: Reloaded, this time about macroeconomic policy.

The discussion is mainly about debt. Australians carry rather a lot of debt, but it’s not the amount of government debt we should be most concerned about: it’s household debt, where we’re really in the big league of borrowers. The problem with our government debt is that it has been used to finance consumption rather than investment to strengthen our economy. We don’t have much to show for it.

The interview moves into what is known as “modern monetary theory”, which leads to the idea of a universal basic income, an idea that has been around for some time, at least since Thomas More wrote Utopia in 1516.

The Liberal Party struggles to understand capitalism

Henry Ford and Karl Marx didn’t have much in common, but they both understood that when most workers are underpaid, capitalism will eventually unravel because capitalism relies on workers’ wages circulating through the economy. Marx’s solution was communism – a less than outstanding success. Ford’s solution was to double wages so that American workers could afford to buy his cars.

Writing in The Conversation, Jim Stanford of the Centre for Future Work describes how the Morrison Government and so-called “employer groups”, in opposing increases in the minimum wage, still haven’t grasped the basic circularity of capitalism: Resistance to raising the minimum wage reflects obsolete economic thinking.  “Obsolete” is too soft a word – it’s a pre-capitalist medieval Weltanschauung  that cannot accommodate the idea of well-paid workers as essential for the working of a sustainable economy.

Putting health care back into aged care

One flaw in our health care arrangements is an imbalance between primary care and hospital care. Better-organized primary care could keep many people out of hospitals, with benefits of health outcomes and financial savings.

The Australian Medical Association has published a report “Putting health care back into aged care”, calling for better financial incentives for GPs to provide primary care in nursing homes. They point out that every year there are more than 27 000 transfers of older people from nursing homes to hospitals that are potentially preventable if there were continuity of care through GPs.

The AMA’s estimates of saving are in a press release: AMA identifies savings of $21.2 billion in aged care hospital admissions. A separate press release details its specific recommendations. Both have links to the full report.

Yellen’s corporate tax plan – dealing with criticism

We have already given links to the Biden Administration’s ambitious infrastructure plan. It is accompanied by US Treasury Secretary Janet Yellen’s plan to raise corporate taxes while avoiding the destructive reaction of countries engaging in tax competition. She has written the plan as an op-ed in the Wall Street Journal available through the US Treasury website.

Writing in Inside StoryEnding a thirty-year race to the bottom – Adam Triggs anticipates and dismisses the usual objections to Yellen’s plan. These objections state that low corporate taxes promote investment and growth and they keep governments accountable, and that even if high corporate taxes look good on paper they cannot work. The virtue of Yellen’s plan, however, is that it is practical because it is a package involving cooperation between major economies.

Unemployment and labour force shortages

On Thursday the ABS released March labour force data. All the key figures – the unemployment rate, the underemployment rate, and the participation rate – are pointing in the right direction. The April release will show the effect, if discernible, of the end of “Jobkeeper” payments.

There remains the problem that the labour utilisation rate (unemployment plus underemployment), at 13.5 per cent, is still high, and at the same time in many industries there are shortages of skilled labour: job advertisements aren’t getting many responses. The ABC business reporter David Taylor points to an absence of the usual flow of skilled migrants as one reason for the shortages. Our vulnerability to a temporary shortage of skilled migrants points to weaknesses in our economy.

The existence of high labour underutilisation at the same time as skills shortages is what economists call “structural unemployment”. It won’t be solved with financial incentives, or cuts in unemployment benefits. It reveals weaknesses in our education and training systems, that will not be rectified so long as we skimp on public spending on education.

Our fragile democracy

The Liberal Party’s path to a one-party state

There is a fair bit of news about Republican politicians in Georgia, Texas and other states using measures to discourage Democrat supporters from voting and to take power away from local election officials. Here, in Australia, the Liberal Party is considering ways to weaken our preferential voting system, to allow for optional preferential voting.  Under optional preferential voting the voter would have to do no more than allocate a “1” to his or her first choice: further allocation of preferences – 2, 3, 4 and so on – would be optional.

Writing in The Conversation Benjamin Reilly of the University of Western Australia points out that, based on present voting patterns, optional preferential voting would devastate Labor in federal elections. It would also make it hard for minor parties and independents to win representation.

One would reasonably assume that the Centre Alliance and One Nation would oppose such a move, but Reilly points out that both parties support optional preferential voting. (Presumably One Nation judges the Liberal Party would welcome far-right populists into its fold.)

Reilly sees the move in terms of cementing the Liberals’ hold on power. He also points out that under optional preferential voting in recent federal elections Labor would have won seats from other progressive candidates.

The broader problem we see is that it could entrench the dysfunctional two-party adversarial “Westminster” system, which in recent elections has been slowly giving way to a more representative system of democracy.

Christine Holgate’s dismissal: it’s about far more than bullying and gender

The mainstream media has given plenty of coverage to Morrison’s foul-tempered outburst in Parliament House when he screamed “she can go”, to her dignified interview with Laura Tingle on the ABC’s 730 program, and to the pathetic performance of the chairman of Australia Post, Lucio Di Bartolomeo, appearing before the Senate committee convened to consider the circumstances surrounding Holgate’s departure as CEO.  John Hewson, writing in the Canberra Times, is less than impressed with Di Bartolomeo’s behaviour.

This coverage, important as it is in providing insight into Morrison’s character, has tended to overshadow other aspects of Holgate’s dismissal.  Writing in The Guardian Katharine Murphy makes it clear that Morrison’s petulant outburst was a public manifestation of his already-held view that she should go – a view that pre-dated the revelation about Cartier watches.

Matt Couglan, writing in the Canberra Times, draws our attention to Holgate’s opposition to a “business strategy review” (to use the Boston Consulting Group’s Orwellian language) proposing the privatization of Australia Post’s parcel delivery service and the closure of 190 post offices. Holgate’s offence seems to be that she demonstrated that a well-managed government business enterprise can successfully modernise and transform itself – a violation of the Liberal Party’s faith in the incompetence of the public sector.

The Australian Citizens’ Party goes into more detail about the privatization issue: Getting in the way—how Christine Holgate upset a $75 trillion privatisation agenda targeting Australia Post.  Holgate’s predecessor, Ahmed Fahour, was highly in favour of privatization, particularly of the very successful parcel delivery service, while downgrading other services including letter delivery. So too was Di Bartolomeo in favour of privatization. In what the Citizens’ Party calls “Holgate’s inconvenient success”, she derailed this process by saving and strengthening the network of licensed post offices (LPOs) – the small businesses we see in most suburbs and country towns providing post services, stationery and, most important, basic banking services. Holgate’s success was to ensure that the banks paid proper commissions for these services, thus putting these businesses on a secure financial footing and saving post offices in country towns from closure.

The media has focussed on gender and Morrison’s duplicitous behaviour, but the issue is also about the way the Liberal Party sees government business enterprises – not as organisations intended to provide vital services to the public, but as bounty to reward party cronies through privatisation. To add injury to insult, Holgate ensured that some of the banks’ easily-generated profits were diverted to small businesses providing services in the real economy: she shouldn’t have done that to the Liberal Party’s strongest supporters.

We might ask why the Labor Party has been quiet on this issue. Perhaps it’s because of its own record on privatisation, which has not served the public purpose, and perhaps it’s because Albanese initially joined in criticising Holgate.

The long history of political corruption in New South Wales

No doubt many Pearls and Irritations readers have followed the three-part ABC TV series Exposed: the ghost train fire, in which former New South Wales police officers openly claim that gangster Abe Saffron was behind the 1979 blaze that killed six children and one adult, and that he was protected by corrupt police and politicians. One of their allegations was that “Saffron conspired with High Court judge Lionel Murphy and NSW premier Neville Wran to win the Luna Park lease after the fire”.  As a result pf these claims the state coroner has officially called on the police to review all evidence relating to the event.

Anyone who believes the ABC has a pro-Labor bias should remember that Murphy and Wran were both prominent in the Labor Party.

But it isn’t just about Labor. Wran was premier from 1976 to 1986. He was preceded by Liberal Party Robert Askin, premier from 1965 to 1975 (with two short-lived and easily-forgotten Liberal premiers over a chaotic 16-month period between Askin and Wran).

Quite separately from the Luna Park inquiries, veteran journalist Mike Steketee asks Was Askin corrupt? in a review article in Inside Story. Steketee reviews two works that claim to leave no doubt about Askin’s corruption and a later work asserting that these two  earlier accounts were based on unreliable evidence. Steketee is inclined to believe that Askin was corrupt – that he received regular income from gambling industry bagmen, that he sold honours for cash, and that when he died his estate was very much larger than could possibly be explained by his income from legitimate sources. He concludes, however, that “corruption was not confined to the Askin years”.  Was corruption in the New South Wales law-enforcement and political circles all due to Askin, or was he simply contributing his part to a tradition established in 1788 and passed on to his Labor successor? And in light of recent ICAC investigations involving Premier Berejiklian, what is the situation in New South Wales now?

How dominant is the Murdoch media in Australia?

Kevin Rudd has called Rupert Murdoch’s media empire, with its unwavering support for the Coalition and misrepresentation of Labor policies, “a cancer on democracy”. Rudd’s petition to establish a “royal” commission into media diversity in Australia, supported by Malcolm Turnbull, has led to a Senate inquiry into media diversity.

The RMIT ABC Fact Check team has tried to assess the role of the Murdoch empire in Australia’s media. In what would have been a truly worrying figure in 1970 or 1980, it finds that Murdoch holds about two thirds of print media circulation, and has a print media monopoly in Brisbane, Adelaide, Hobart and Darwin. But unsurprisingly the team found that the online news scene is much more competitive, where ABC News and Murdoch’s news.com.au are level-pegging for top place, and many non-Murdoch media have substantial following. (For instance Guardian Australia easily outranks The Australian for online readership.)

They devote particular attention to Sky News (probably the most toxic of Murdoch’s offerings).  It seems to have half a million viewers per week in capital cities and perhaps another half-million followers of Sky News on Win in other regions. By contrast the ABC News channel reaches 3.9 million Australians per week.

The team does not come up with a consolidated figure asserting that Murdoch’s share is X per cent: too many assumptions would be involved. Whatever it is, X may not be as high as some people think it is, except perhaps among particular demographic groups who are still wedded to print papers.  But X may not be the way to measure influence: plausible lies, rumours, conspiracy theories and other unverifiable mistruths have a lot of persuasive power.

Polls and surveys

Essential – the case for disenfranchising men

The latest Essential poll has the usual questions on approval of Morrison and Albanese and on preferred prime minister.  Although the gap is narrowing, both Morrison and Albanese are down on approval.

On preferred prime minister, the gap is closing but even more slowly.

There are significant differences between men’s and women’s preferences: 61 per cent of men but only 46 per cent of women approve of the job Morrison is doing as prime minister. Similarly 53 per cent of men but only 42 per cent of women prefer Morrison as prime minister. Men’s views on these questions have changed little over the last few months, while women have turned sharply against Morrison, but not necessarily to Albanese.

Voters still feel positive about the federal government’s response to Covid-19 (62 per cent “good”, 17 per cent “poor”) but are generally more satisfied with their state government’s responses.

There is an odd question “If a Labor government under Anthony Albanese had been in power, how confident are you that they would have done a good job at dealing with the Covid-19 pandemic?”. Labor shows up well: 44 per cent “confident”, 37 per cent “not confident”, but it is hard to impute much meaning into such a question.

There are three questions on the speed of the vaccine rollout.  By a long margin (52 per cent to 20 per cent) people believe the rollout is too slow rather than too fast. Older people, in particular, would like it to be faster (60 per cent to 16 per cent).  People are in no doubt who is responsible for the slow rollout: 42 per cent blame the federal government, 7 per cent blame the states, and 42 per cent blame supply chains and manufacturers. Overall, people are unimpressed with the federal government’s performance.

Note that the poll was conducted between April 7 and April 12. Very few respondents would have known about the Commonwealth’s changed advice on AstraZeneca.

There is a set of questions about the withdrawal of “Jobkeeper” payments. As is the case so often with questions about fiscal matters there are some inconsistencies – more people think it should be extended rather than terminated, but a similar proportion believe that the scheme is far too expensive to be continued.

The statement with strongest support (66 per cent) was “Big companies that have made a profit and paid dividends and bonuses should be forced to repay JobKeeper payments they received.”  There was no discernible partisan difference in responses on this question, and older people were very strongly in agreement. (Is it really a surprise that Australians don’t approve of Morrison’s crony capitalism?)

The above questions and responses are about people’s political attitudes. Essential asked another pair of questions about people’s intended behaviour. The questions and responses were:

As the Brisbane lockdown shows, there’s not much point in the federal government encouraging people to travel to other parts of Australia until the vaccine program has been completed.

Agree 57 per cent, disagree 18 per cent

I would be nervous about booking a trip to another state because it’s impossible to predict if the trip will suddenly be cancelled because of a Covid-19 outbreak.

Agree 69 per cent, disagree 14 per cent

These answers confirm that all the governments’ exhortations and incentives to support the tourist industry count for little when aren’t sure that governments can maintain controls on the virus being introduced from overseas. These responses are understandable when governments (apart from Western Australia’s) are unable to assure the public that all quarantine workers and their families have been properly vaccinated.

Jesuits

The Jesuit who dared

Who are the Jesuits? Some people see the Jesuits as a dark underground movement plotting to take over the world – a Catholic version of QAnon. Even within the Catholic Church they are subject to suspicion. There are Catholics in America and Australia who have so successfully shaken off the “bog Irish” image of Catholicism that Catholics have become part of the “white”, male establishment: they see the Jesuits, including Pope Francis, as a threat to their hard-won elevation to social respect in a world that values power and material riches.

One Jesuit well-known to Pearls and Irritations readers is Michael Kelly. Earlier this month, well before it became the topic of mainstream media, Kelly wrote about Morrison’s disgraceful assault on Christine Holgate, in the context of the way women in public life are treated in this country. Kelly’s defence of Holgate should not be seen in a partisan context: he was no less outraged by Bob Hawke’s treatment of his friend Susan Ryan (another strong contributor to Pearls and Irritations before her death in September last year).

On the ABC’s Compass program he is in conversation with Geraldine Doogue. On one level it’s a personal story covering his work with refugees in Thailand and his recent trauma involving the amputation of his left leg. It’s also a story that de-mystifies the spiritual and worldly life of a Jesuit: The Jesuit who dared. (30 minutes.)

Wholesome dancing for the military

Perhaps the dance performance for commissioning the Navy’s Supply was a little beyond a “G” rating: it certainly upset Peter Dutton’s delicate sensitivities. One of our Asian neighbours demonstrates how good, clean, wholesome dancing, suitable for the whole family, can be accommodated in military events.

See Michael West Media for more analysis of these and other economic and political issues, and watch out for Peter Sainsbury’s Sunday environment round up.

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Housing affordability is a problem. Here’s why super-for-housing isn’t a solution

Published by Anonymous (not verified) on Wed, 14/04/2021 - 4:46am in

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Economy

The idea that young Australians should be able to dip into their super to help buy their first home keeps going round and round. The most recent iteration put forward by the Coalition’s Tim Wilson and a clutch of other backbenchers has the catchy slogan Home First, Super Second.

Wilson and co. are right in their diagnosis: Australia has a housing affordability problem. But they are wrong in their prescription: their proposal could actually make housing less affordable.

There are several much-better ways to revive the great Australian dream for young Australians.

Home ownership is plummeting

Home ownership rates are falling fast, especially among the young and poor.

In Australia today, fewer than half of 25-34 year-olds own their home.

Home ownership among the poorest fifth of that age group has fallen from 63% in 1981 to 23% today.

Today’s younger Australians are tomorrow’s retirees.

These trends suggest that by 2056 just two-thirds of retirees will own their homes, down from nearly 80% today.

The government’s Retirement Income Review showed most homeowners on track for a comfortable retirement. But Australians who rent are facing an increasingly bleak future.

Senior Australians who rent in the private market are much more likely to suffer financial stress than homeowners or renters in public housing.

Nearly one half of all retired renters are in poverty — with incomes below half the median — when housing costs are taken into account. Their numbers will only grow as fewer retirees in future own their homes.

Super can’t much help

Saving for a deposit is the biggest hurdle to home ownership. In the early 1990s it took six years to save a 20% deposit on an average home. Today it takes 10 years.

That’s why the Home First Super Second campaign is superficially attractive. It seems obvious that compulsory superannuation – forcing workers to save almost 10% of their wages for retirement – stops many from buying a home, especially poorer younger Australians without access to the Bank of Mum and Dad.

And it’s true that allowing people to dip into their super to help buy a house would certainly not leave Australians impoverished in retirement.

Grattan Institute research finds that most Australians would have a comfortable retirement even if they withdrew $20,000 early – because whatever they lost in super would largely be made up by a greater entitlement to the age pension.

But the problem for the Home First Super Second campaign is that allowing Australians to use their super to buy a home would do little if anything to increase home ownership rates.

The younger, poorer Australians who are increasingly being priced out of home ownership don’t have much in the way of superannuation.

The poorest 20% of households headed by a 35-44 year old – precisely the group for whom home ownership is falling fast – typically have no superannuation.

The next poorest 20% typically have only $15,000 in super.

It means allowing Australians to use their super for housing would mainly help wealthier people buy more expensive homes.

And there’s another problem: the more people you allow to use money from their super to buy a home, the more demand there is for housing.

Higher demand means higher prices, meaning the biggest winners would be the people who own homes already.

What can help is more homes

If Tim Wilson and the Morrison government really want to make housing affordable, they need to get more houses built.

Recent Grattan Institute research finds that relaxing planning rules to allow more homes to be built near the centres of Australia’s major cities would help.

The federal government has no direct control over planning rules, but it can provide incentives for state and local governments to relax planning rules, similar to those put forward by President Joe Biden in the United States.

As hard as it is, increasing the supply of housing — rather than pumping money from super into an already rising market — is the smartest way to make housing more affordable. Maybe Tim Wilson could start a campaign.

This article has been republished from The Conversation under a Creative Commons licence.

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Are there lessons for the rest of the world in Australia’s management of covid-19 and the “corona-recession”?

Published by Anonymous (not verified) on Tue, 13/04/2021 - 4:46am in

Tags 

Economy

One could question whether Australia is ‘leading the pack’ in recovering from the ‘corona-recession’.

Of the now 83 countries which have reported GDP figures for the final quarter of last year (and 30 of which are shown in Chart 1), there are eleven in which Q4 real GDP was higher than the pre-pandemic level, and we’re not one of them; there are also nine other countries who, though yet to regain their pre-pandemic levels of economic activity, are nonetheless closer to it than we were (one of those is of course New Zealand).

Chart 1- Saul Eslake

Nonetheless we are doing better than most of our traditional ‘peer group’ (Chart 2): and that is, in simple terms, because we’ve done better than most of them at keeping the virus at bay, and because we’ve done relatively more than most of them by way of fiscal stimulus.

Some of our success in keeping the virus at bay is due to ‘good luck’ – that is, being so far away from almost everywhere else and being an island and hence it being much easier to keep the virus out to begin with. But, in addition to those (one might say, especially at this time of year, ‘God-given’) advantages, our governments – unlike those of many other countries, most obviously the US (until 20th January this year) and the UK – have, to their credit, listened to, been guided by and have acted upon scientific advice, and our population have been highly compliant with what they’ve been asked to do (or not to do).

Chart 2- Saul Eslake

However the reputation our governments have established for competence in managing the pandemic is now being challenged by the shortcomings, to date, in ‘rolling out’ vaccines (not all of which, to be fair, are the fault of governments – or, at least, not Australian federal or state governments – but some of them are): it’s almost the opposite of the UK, whose government was one of the worst in the world at managing the virus, but has been one of the best at administering vaccines.

So to the economics of all this.

While I wouldn’t contest the Treasury’s estimates of 100-150,000 job losses arising from the termination of JobKeeper – which would add 0.7-1.0 pc pts to the unemployment rate if all of them fail to find other jobs, and none of them drop out of the labour force (neither of which I expect to be the case in practice) – I think that any rise in unemployment will prove temporary, and that there’s a good chance that the unemployment rate will be back down to where it was before the pandemic (ie about 5¼%), if not lower, before year-end.
News last week of another rise in the number of job vacancies, to a record high in February – such that there are now ‘only’ 2.8 unemployed people for every job vacancy, the lowest number since before the global financial crisis (Chart3) – underscores expectations that while not all of those who lose their jobs as a result of the termination of JobKeeper will be readily able to find others, a reasonable proportion of them should be able to.

Chart 3 - Saul Eslake

An important but under-appreciated reason for the so-far surprisingly rapid decline in unemployment, from its lower-than-expected peak of 7.5% last July, is the absence of any immigration: which means that the civilian working age population is now growing at (on average over the past two quarters) only 8,300 per month, cf. an average of 27,700 per month over the three years to March 2020.

And that in turn means that, with an unchanged participation rate (given that it is already at a record high), employment only needs to grow at around one-third of its pre-pandemic rate in order to prevent the unemployment rate from rising.

Or, to put it another way, if the working age population continues growing over the remainder of the year at the (much slower) rate at which it has been over the past six months, employment growth of just 17,000 (or 0.13%) per month on average would be sufficient to push the unemployment rate down to just below 5% by the end of this year (with an unchanged workforce participation rate): whereas if the working-age population were to have continued growing at its pre-pandemic rate, it would require employment growth to average 29,000 (0.22%) per month in order to get the unemployment rate down to just below 5% by December.

True, immigration also creates demand which in turn feeds into jobs growth. But even without that impetus, demand is currently (and seems likely to continue) growing more strongly than it did pre-pandemic – thanks not only to fiscal stimulus (some of which is going to continue notwithstanding the termination of JobKeeper and the tapering of JobSeeker), but also (as shown in Chart 4) to the roughly $55bn per annum which Australians used to spend overseas each year but now can’t (because of the fatwa on Australians leaving the country), a large part of which Australians are instead spending at home (and on their homes).

Chart 4 - Saul Eslake

This offsets by more than $22bn per annum (or about 1¼% of GDP) the drop in spending within Australia by foreign visitors and international students). And then there’s the very large increase (of over $125bn or 12¾%) in ‘spendable’ savings which households have accumulated in bank deposits since the onset of the pandemic.

So it is quite plausible that the RBA’s stipulation for a labour market that’s sufficiently tight to generate the sort of wage inflation that it thinks is in turn required to push ‘underlying’ CPI inflation sustainably back into its 2-3% target range – ie, of ‘4 point something’ or lower – could be reached well before its ‘guidance’ of ‘2024 at the earliest’. At the very least, the probability of that happening is more than zero, even if it’s still less than 50%.

And I’m therefore surprised that the RBA hasn’t left some ‘wriggle room’ to allow for that possibility, by talking in terms of ‘patience and time’ being required before it starts raising rates, rather than pinning itself down to a point on the calendar – something that no other central bank I’m aware of, other than the Bank of Canada, has done.

In this context the clear signal a couple of weeks ago by Norges Bank – which was, along with the RBA, one of the first ‘advanced economy’ central banks to raise rates after the GFC (and one of the few who raised rates at all between the GFC and the pandemic) – that it expects to start raising rates in the second half of this year – might be seen as, at the very least, food for thought.

Personally, I would like to see the Government give the RBA a bit of leeway to raise rates by ‘holding back’ from beginning the task of ‘budget repair’ until the unemployment rate is ‘comfortably below 5%’ – a more ambitious goal than the ‘comfortably below 6%’ stipulated by the Treasurer in September last year when he first foreshadowed the ‘re-calibration’ of the Government’s fiscal strategy ahead of the 2020-21 Budget.

His original threshold wasn’t unreasonable given that, at the time, it was widely expected that the unemployment rate would peak well above 10% and take much longer to come down from that peak than it has. But now that things look very different, some ‘re-calibration’ of that target would seem appropriate.

The Government and the RBA could ‘defend’ this as being necessary (or sensible, or both) in order to allow Australia to “rebuild its monetary policy ‘buffers’ ahead of the next cyclical downturn”, in much the same way as both the Coalition, and before it, the Rudd-Gillard Governments, defended returning to surplus after the GFC as being necessary to rebuild the nation’s “fiscal buffers” in preparation for the next cyclical downturn.

Indeed, a reasonable case can be made that it is more important to rebuild some leeway for monetary policy to respond to the next downturn than it is to rebuild leeway for fiscal policy, given that interest rates are effectively at the ‘lower bound’, whereas Australia’s public finances are (despite the knock they’ve taken during the pandemic) in much better shape than those of most other ‘advanced’ economies.

That’s particularly so given that – contrary to all the widely held expectations in the aftermath of the pandemic’s onset – house prices are now rising rapidly again, notwithstanding the absence of demand from recently-arrived migrants and still subdued demand from investors (although the February housing finance data released this week suggests that investor demand may be re-awakening from its long slumber).

I don’t agree with APRA’s Chairman that there is ‘no evidence’ of a deterioration in lending standards’. True, interest-only loans remain a small proportion of new lending: but over 40% of new loans in the second half of last year were at LVRs of above 80% cf. less than 20% in the first half of 2018 (Chart 5).

Chart 5 - Saul Eslake

That may well owe something to the increased proportion of loans being made to first time buyers, who do typically have to borrow at higher LVRs than those ‘trading up’: but first-time buyers still account for ‘only’ 25% of all new loans, so that can’t be the sole explanation.

The deterioration in lending standards is clearly nowhere near as marked as it has been in New Zealand – although the fact that most of the NZ banks are subsidiaries of Australian banks should alert our authorities to the possibility that the same thing could happen here should there be sufficient demand from borrowers.

I’m not advocating that Australia should copy what the NZ Government has done – ie, denying interest payments as a deduction for tax purposes against the rental income, and taxing capital gains on properties held for less than 10 years at full marginal rates without any allowance for inflation – and with an arguably retrospective element to it as well.

I’d settle for not allowing interest payments as a deduction against non-investment income, and a reduction in the CGT discount, as I’ve advocated for 33 and 21 years, respectively; and as proposed by Labor at the past two elections.

I’d also ask why hasn’t the Government terminated its stepped up program of cash grants to first-time buyers, now that conditions in the housing market have changed so much, in the same way and for the same reason that they’ve terminated JobKeeper (although to be fair I acknowledge that they have at least tapered it).

I’m not sure that there are any obvious new lessons from Australia’s experience for other countries. The most important lessons are surely (1) to listen to and act upon scientific advice in order to minimize the spread of the virus, so that extended lock-downs can be avoided as much as possible (which we did, for the most part, and lots of other countries didn’t); and (2) to err on the side of ‘doing too much’ rather than ‘too little’ by way of economic stimulus – which we did during the GFC and have done again this time, but a lot of countries made the ‘wrong’ mistake during or after the GFC, and seem to have avoided that this time.

Indeed, maybe there is a lesson for us in what the US Administration seems to be doing: ie, ‘taking advantage’ of the prospect of an extended period of low interest rates to undertake a significant program of (hopefully) productivity-enhancing public investment, and also to use the opportunity to unwind tax cuts that can’t be justified, are unsustainable and should be reversed.

Another version of this article was published in the AFR.

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Superannuation is much more than one man’s legacy

Published by Anonymous (not verified) on Mon, 12/04/2021 - 4:52am in

Tags 

Economy

No one is as quick to defend Australia’s superannuation system, and the legislated plan to increase compulsory superannuation to 12 per cent of wages by 2025, as its architect, former Prime Minister Paul Keating. But as is often the case when fundamental assumptions are questioned and legacies are at stake, the rhetoric has become more heated and the analysis less careful.

Take Mr Keating’s starring performance on ABC TV’s 7.30 last week, in its four-part series on the future of retirement, where he repeatedly claimed that Australia’s ageing population will make the current pension system unsustainable without increases in compulsory super.

These claims are contradicted by Treasury modelling for the Federal Government’s Retirement Income Review, as well as by actuarial firm Rice Warner. The Review shows that government spending on the pension — stable over the past 20 years — is likely to fall a little, as a share of the economy, over the next 40 years, even as the population ages. In 2001, the Age Pension cost 2.2 per cent of GDP. It’s now about 2.5 per cent, and the review contends it will fall to 2.3 per cent by 2060. And that’s despite the Review projecting that the number of working-age Australians for every person of pension age will fall from just over four currently to approximately three by 2060.

The Retirement Income Review also concludes that the legislated increase in compulsory super from today’s 9.5 per cent of wages to 12 per cent will exacerbate rather than alleviate the budgetary costs of an ageing population, making the Age Pension less sustainable in future. Treasury projects that increasing compulsory super will cost taxpayers more in super tax breaks than it would save from spending on the Age Pension through until 2055. And even then, 35 years of accumulated debt — more than 2 per cent of GDP — would need to be paid back before taxpayers ended up ahead.

These findings on the long-term budgetary cost of higher compulsory superannuation have been remarkably consistent over time. They match Treasury modelling published by the Gillard Government in 2013.

Or how about Mr Keating’s assertion that workers who took $20,000 out of their super during the COVID crisis will have $500,000 less in super when they retire? The available research, including from super industry groups, actually suggests a hit to super of no more than one-fifth to one-tenth that size.

Super Consumers Australia, an independent outlet of Choice, estimated a 30-year-old who withdrew $20,000 from their super would have $50,000 less in super at retirement. Lobby group Industry Super Australia predicted a $102,000 hit to the super balance at retirement for a 25-year-old who withdrew $20,000.

Mr Keating further claims that increasing compulsory superannuation won’t affect wages growth. He seems to suggest that firms which have not volunteered larger pay rises to their employees in recent years will suddenly do so because they’re sending the money to workers’ super accounts rather than their bank accounts.

Yet the research on this issue shows that if compulsory superannuation is increased, workers’ wages will grow even more slowly.

Grattan Institute findings show that 80 per cent of the cost of super comes from lower wages within 2-to-3 years, and probably more in the long term. ANU researchers Bob Breunig and Kristen Sobeck found that between 70 per cent and more than 100 per cent of the cost of super increases are offset by lower wage growth.

These findings shouldn’t come as a surprise. International studies of similar schemes typically come to the same findings. This is why past federal governments, including Mr Keating’s, concluded that compulsory super is paid out of workers’ wages, rather than by employers.

Mr Keating also claims that raising compulsory super from 9.5 per cent to 12 per cent of wages will ‘barely cut it’. Such a bleak assessment might come as a surprise to today’s retirees who – despite having saved much less than 12 per cent in super – typically have enough money to fund a lifestyle in retirement as good as or better than they had when working.

It’s also news to the Government’s Retirement Income Review, which found that even if compulsory super stays at 9.5 per cent, the typical younger worker will retire with a post-tax income of 83 per cent of what they enjoyed while working – well above the benchmark of 65-to-75 per cent of pre-retirement earnings set by the Review for a comfortable retirement.

Superannuation policy is far too important to be beholden to one man’s legacy. A high-quality debate grounded in the facts – that’s the superannuation debate Australia has to have.

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Australia’s household wealth surged by the end of 2020 — but property owners have taken the lion’s share

Published by Anonymous (not verified) on Sun, 11/04/2021 - 3:45am in

Tags 

Economy

The recession was great for some Australians. Despite the pain of the lockdowns, and nearly a million jobs disappearing, by the end of 2020 Australia’s household wealth was surging.

According to the Australian Bureau of Statistics (ABS), household wealth skyrocketed by $501 billion in the last three months of last year, which was the strongest quarterly growth since December 2009.

Wealth per person hit $467,709, and total household wealth hit $12 trillion — both records.

How could that be?

Rental increases outstripping income growth

Two men stand behind a wire gate in front of a house.

Faced with the prospect of his weekly rent increasing by 18 per cent, Paul Richardson has spent almost a year searching for an affordable rental property. But with housing demand outstripping supply, he hasn’t had any success.

More than 900,000 people were still officially unemployed in December, and the unemployment rate was still 6.6 per cent, so how could household wealth have been hitting record levels?

It’s because “wealth” and “income” are very different things.

It may have consequences for inequality in this country.

The definition of ‘wealth’

When the ABS compiles its data on wealth and income, it uses an internationally agreed set of standard concepts, definitions and classifications.

“Wealth” refers to the economic resources held by members of a household after all of their debts are theoretically paid off.

Wealth is made up of:

  • Residential property (family home)
  • Superannuation savings
  • Shares and other financial assets (like bank deposits)
  • Other non-financial assets (cars, furniture, artwork)
  • Investments in other real estate (investment properties)

A household’s wealth can increase in different ways.

It can increase when the estimated sale price of their home goes up, relative to the size of the principal outstanding on their mortgage.

It can increase when their super account grows. It can increase when their savings account grows.

As you can see, wealth is a “stock” concept — it refers to the value of a household’s assets (minus the household’s liabilities) at a given point in time.

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WATCH

Duration: 2 minutes 21 seconds2m 21s

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Women more likely to face financial insecurity due to COVID-19 pandemic

Wealth is very different from “income.”

Household income refers to all current payments received by a household that are intended to support, or are available for, current consumption.

For most Australian households, income comes from a few main sources:

  • Wages and salaries
  • Income from investments (like superannuation, or dividends from shares, or royalties)
  • Government pensions and allowances (like the age pension and JobSeeker)

Less typical income sources include inheritances, lump-sum retirement benefits, and life insurance claims.

Why did household wealth soar recently?

When a country’s household wealth is surging, it means the value of assets held by households is rising.

But if you don’t own any assets, you’re not benefiting.

According to the ABS, the surge in wealth in the December quarter was driven by two main things: property price rises and growing superannuation savings.

Property prices grew strongly towards the end of 2020.

The value of Australia’s residential property (land and dwellings) jumped by $207 billion in the September quarter, and $247 billion in the December quarter.

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WATCH

Duration: 4 minutes 8 seconds4m 8s

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Tree changers driving up regional property prices

ABS officials said the Reserve Bank’s expansionary monetary policy (particularly its historically low cash rate target of 0.1 per cent) and government support for the housing sector drove the surge in wealth for property owners late in the year.

“The December quarter growth in household wealth was driven by rising residential property prices, reflecting record low interest rates, support through government programs such as the First Home Buyer and the HomeBuilder schemes, and pent up demand from buyers,” said Katherine Keenan, the head of Finance and Wealth at the ABS.

The recovery in stock markets also saw superannuation reserves increase by $166 billion in the December quarter.

It means Australians’ super accounts have now fully recovered from the losses experienced in the March quarter of 2020.

Household wealth is likely to keep rising

If you didn’t withdraw your super savings last year (and extinguish them all) under the Federal Government’s controversial early super release scheme, there’s a chance your “superannuation wealth” will increase this year.

If you own property, your “property wealth” may have already increased, because property prices have been rising since December.

Selling up in Sydney and moving north — Qld a hotspot for interstate migration

Two men in red Hawaiian shirts standing in a Christmas shop

The Sunshine State has become a hotspot for interstate migration. Could this be why Queensland’s house prices are going up amid a global pandemic, recession, and high unemployment rates?

Property prices returned to record highs in January, exceeding the peak reached in 2017.

In February, house prices posted their sharpest monthly increase since August 2003.

Last week, ANZ economists released new forecasts tipping national house prices to rise by 17 per cent this year.

But what does it mean for people who don’t own a property?

Wealth inequality is worse than income inequality

In December, the Australian Council of Social Service (ACOSS) released a report called Inequality in Australia 2020: Part 2, Who is Affected and Why.

The report was based on the latest available data from the ABS (for 2017-18), presenting a snapshot of income and wealth inequality in Australia in 2018.

Therefore, it provided a baseline of data against which to assess the impact that COVID-19 (and Australia’s economic policy settings in 2020-21) will have on inequality in coming years.

As the report points out, wealth inequality is a far bigger problem in Australia than income inequality.

“Even before the COVID recession, the highest 20 per cent of households, with average after-tax incomes of $4,166 per week, had almost six times the income of the lowest 20 per cent, with $753 per week,” said Professor Carla Treloar, director of the Social Policy Research Centre, UNSW Sydney, when the report was released.

“When it comes to wealth, inequality is even more stark: the highest 20 per cent, with average wealth of $3.3 million, have 90 times the wealth of the lowest 20 per cent, with just $36,000 on average.”

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WATCH

Duration: 1 minute 24 seconds1m 24s

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House prices rise at the fastest rate since 2003

The average wealth of the highest 5 per cent wealth group was $6,795,000.

Things get more stark when you look closer at the data in the report.

In 2018 in Australia, the highest 10 per cent of households by wealth owned almost half (46 per cent) of all household wealth.

The lowest 60 per cent of households, who were younger and poorer, owned just 16 per cent of the wealth.

Australia had the fifth-highest number in the world of people with ultra-high wealth (defined as holding more than US$500 million [$654 million] in wealth).

Why are house prices so important?

Think back to the main components of wealth.

According to the ACOSS report, the average wealth per household in Australia in 2018 was made up of:

  • Main home (39 per cent)
  • Superannuation (20 per cent)
  • Shares and other financial assets (19 per cent)
  • Investments in other real estate (12 per cent)
  • Other non-financial assets (10 per cent)

Ownership of some types of wealth was very concentrated.

According to the report, the highest 20 per cent wealth group owns more than 80 per cent of all wealth in investment properties and shares, over 70 per cent of all superannuation assets, and 54 per cent of all wealth in main homes.

However, high levels of home ownership among retired people on relatively low incomes helps to make wealth holdings across income groups more evenly distributed.

By business reporter Gareth Hutchens. This article has been republished from the ABC.

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Don’t Dismiss Mitch McConnell’s ‘Warning’ to Corporations

Published by Anonymous (not verified) on Thu, 08/04/2021 - 6:39am in

Photo Credit: Christopher Halloran/Shutterstock.com _____ As you know, the Republican Party is the party of business. It has been that...

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Is Australia’s retirement income system delivering on its potential?

Published by Anonymous (not verified) on Thu, 08/04/2021 - 4:49am in

Tags 

Economy, Politics

‘The Australian retirement income system is effective, sound and its costs are broadly sustainable’ according to the Retirement Income Review chaired by Mike Callaghan.

While not disputing this conclusion, a recent roundtable hosted by the Academy of Social Sciences in Australia and the ANU’s Tax and Transfer Policy Institute noted the importance of the Parliament confirming the system’s objective and addressing outstanding issues so our maturing system actually delivers on its potential.

The system’s objective

The Review suggests the system’s objective be “to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way”.

Based on this objective, as the Report makes clear, it is high time to settle the pensions phase. People need to understand how they can convert their accumulated resources into products that “deliver adequate standards of living in retirement”. For too long the public debate has focused only on the accumulation phase, in particular the Superannuation Guarantee (SG).

Much of that debate has been ill-informed, not properly linked to the system’s objective. On the left, there are those who pretend the SG can be increased without any cost to wages, and on the right, there are those who pretend to increase the SG is all cost and no benefit. But “adequate standard of living” means for most maintaining their pre-retirement living standard: the system is therefore all about spreading lifetime earnings. The challenge is to set the cost during working life commensurate with the benefits of maintaining living standards in retirement.

There is a legitimate debate about the appropriate level of the SG but the precise level now required – 9.5%, 10% or 12% – depends on what retirement income products should be on offer and on exactly how the means test should operate. Unfortunately, Callaghan does not provide much useful guidance on either of these key issues.

Retirement income products

The proposed new retirement covenant for fund trustees, while delayed to July 2022, offers better guidance than Callaghan on appropriate retirement income products.

According to the Government’s 2018 Position Paper, the covenant will require funds to offer retirees up to three ‘flagship products’. For example, those likely to be eligible for full-rate pensions will already have protection from outliving their savings so their ‘flagship product’ is unlikely to include a significant life annuity. Those unlikely to be eligible for any age pension, on the other hand, should be encouraged to direct a significant proportion of their savings into a life annuity to maintain their standard of living; those in-between should consider devoting some lesser amount towards a life annuity.

It is evident that too many people are unaware that trying to manage on their own the risk of not knowing when they will die is highly inefficient: a life annuity represents far better value for money. It can also give them confidence when choosing how to allocate the rest of their saving, for example between an allocated pension and a capital reserve whether for discretionary spending, a contingency against other uncertainties or a planned estate.

Roundtable participants endorsed Callaghan’s view that funds regularly advise members about the incomes their savings are likely to be able to deliver in retirement – a requirement under the proposed covenant.

Age pension means test

Callaghan rightly identifies ‘cohesion’ as a central element of the system’s objective. Current trends suggest that around 60% of retirees will be eligible for some age pension when the system matures, around half being eligible for a part pension, so most retirees will rely on a mix of superannuation and pension.

The central cohesion challenge, therefore, is to have a means test people can plan around with a degree of certainty and one which, while concentrating assistance on those most in need, retains effective incentives.

Australia is alone in operating separate income and assets tests, the two are not consistent and, as demonstrated in 2017, they may change for short-term political purposes.

The post-2017 assets test taper may allow, as Callaghan suggests, some marginal increase in retirement income from a marginal increase in savings, but only if the savings are drawn down at very high rates; even then the marginal increase in retirement income is not commensurate with the savings involved. Where the extra savings are compulsory SG contributions, the taper effectively turns the SG into a form of taxation.

A simpler, more equitable and more stable means test could be introduced. My own preference is:

  • A merged income and assets test, as in the 1960s, by converting assessable assets to the income that they could provide and applying the income test on total income;
  • A conversion rate based on the life annuity the assets could purchase, including the drawdown of capital;
  • Retaining the income test taper (currently 50%) and indexing the free areas with wages (e.g. setting them at 25% of the pension).

In the 1960s the conversion rate was 10%: a lower rate would be appropriate today given increased life expectancy. A rate slightly above the indexed annuity a retiree could purchase, say 8%, would encourage the purchase of annuities. With the 50% income test taper, this would have a similar impact to the 3.9% assets test taper that existed prior to 2017. To limit costs, the assets thresholds should be reduced; if necessary, the income test taper could also be slightly increased.

Support for the vulnerable

The other priority concern for the pensions phase is the inadequate support for those in private rental accommodation and those forced to retire early.

Increasing rental assistance would be by far the best use of taxpayer dollars in terms of alleviating poverty, despite Callaghan’s confusing comments.

Newstart also needs a more substantial increase than the Government has proposed, and should be indexed by wage movements as the pension is. If this is too hard, then at least make the improvements for recipients over 50.

Taxation arrangements

While there was no consensus at the roundtable about tax arrangements, most rejected Callaghan’s use of a comprehensive income tax as the benchmark for identifying superannuation ‘tax concessions’. Taxing superannuation that way would impose a huge penalty on long-term savings.

Like farmers’ income averaging arrangements, superannuation tax arrangements take into account how superannuation spreads incomes (over lifetimes). The post-Turnbull tax regime for superannuation is complex but about right in my view and does not unduly favour the rich (the exception being the use of SMSF’s for tax avoidance purposes).

Housing

Not surprisingly, the roundtable of experts preferred to see housing assets treated like other assets for tax and means test purposes. That is probably a bridge too far but what could be done now is to make it easier for people to draw on those assets if they wish, including through the pensioner loans scheme.

Conclusion

A package of reforms is still needed for the pensions phase of the retirement income system – the retirement covenant and the products funds offer, a merged means test and improved rent assistance. Get these right, and perhaps the SG does not need to increase to as high as 12%.

POSTSCRIPT

The current debate about the appropriate rate of the SG is not helped by those with ideological blinkers or vested interests.

A more disinterested perspective is to consider, first, estimates of the contribution rates required if there were no age pension. Vince Fitzgerald estimated the rate at 18% for a CPI-indexed annuity from age pension age (then 65) with a net income replacement rate of around 70%. That is broadly consistent with the contribution rates in those OECD countries with social insurance schemes (average around 20%). It is also broadly consistent with Commonwealth public sector schemes (15.4% plus employee contributions, typically 5%), designed for people unlikely to be eligible for age pensions.

The next step is to consider how much income the age pension might provide. That depends critically on the means test. At median incomes, even with the current assets test taper, some age pension will almost certainly be payable. A full single-rate age pension would provide around half the benchmark replacement rate for a full-time male worker on median earnings, suggesting he would need superannuation based on around 9-10% contributions (or less given the age pension is indexed to wages rather than prices). If only a half-rate pension was payable, then the benchmark income replacement rate would require superannuation based on 13-15% contributions (or, again, less given the age pension entitlement would increase over time).

Another factor to consider is whether the suggested contribution rate should be compulsory or whether some flexibility should be allowed, particularly to reduce contributions when people face significant financial challenges in their working lives. There is a strong case for some compulsion given evidence of myopia amongst younger workers and the social benefits (and intergenerational equity) of thrift, but whether that should mean mandating the full contribution required at median earnings to deliver the benchmark replacement rate is arguable.

My own judgment is that an SG of between 10 and 12% is probably appropriate, the precise rate depending on the means test. I would be willing to forgo increasing the SG beyond 10% if there was a commitment to a merged means test and a sizeable increase in rent assistance.

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To Halt ’30-Year Race to the Bottom,’ Yellen Calls for Global Minimum Tax on Corporations

Published by Anonymous (not verified) on Wed, 07/04/2021 - 4:41am in

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Economy, Politics

“A high global minimum tax can change the face of globalization—by making its main winners (multinational companies) pay more in taxes, instead of them paying less and less.”

In an effort to end what she called the “30-year race to the bottom on corporate tax rates,” U.S. Treasury Secretary Janet Yellen on Monday urged her counterparts around the world to join her in embracing a global minimum tax aimed at preventing companies from shifting profits offshore to slash their bills.

The proliferation of so-called “tax havens” around the world in recent years contributed to the sharp decline in the average global corporate tax rate—which has fallen from around 40% in 1980 to 24% today—as countries adjusted their rates downward to either attract multinationals or prevent companies from seeking to stash their profits elsewhere.

Yellen argued in a speech to The Chicago Council on Global Affairs Monday that the “pressures of tax competition” are eroding corporate tax bases across the world, undermining nations’ efforts to establish “stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises.”

As the Washington Post‘s Jeff Stein reported last month, “From 2000 to 2018, 76 countries cut their corporate tax rates, according to the OECD. Over that same period, 12 countries maintained their corporate tax level, and only six increased them. In 2000, more than 55 countries had corporate tax rates above 30 percent. Now, fewer than 20 do.”

In her address, Yellen vowed to work with G20 nations to “agree to a global minimum corporate tax rate that can stop the race to the bottom.”

“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity,” she added.

Gabriel Zucman, an associate professor of economics at the University of California, Berkeley, applauded Yellen’s push for a global minimum tax, a proposal he has long supported as a way to eliminate incentives for offshoring.

“A high global minimum tax can change the face of globalization—by making its main winners (multinational companies) pay more in taxes, instead of them paying less and less,” Zucman said following Yellen’s remarks Monday.

While Yellen didn’t specify a preferred rate for the proposed global minimum tax, U.S. President Joe Biden’s recently released infrastructure proposal calls for hiking the minimum tax on U.S. multinational corporations to 21 percent—up from the current 10.5% level set by the GOP’s 2017 tax law—and calculating the rate “on a country-by-country basis so it hits profits in tax havens.”

In a paper (pdf) published earlier this year, Zucman and two of his colleagues offered an example of how Biden’s minimum corporate tax proposal would likely work:

In its simplest form, collecting the tax deficit of multinationals involves taxing the foreign earnings of U.S. multinationals at some minimum rate (21% in the case of Biden’s proposal), with credits given to offset foreign taxes paid. For example, imagine that Apple books $10 billion in profits in Ireland—taxed in Ireland at 5%—and $3 billion in Jersey—taxed in Jersey at 0%. The United States would tax Apple’s Irish income at 16% and Apple’s Jersey income at 21%.

More broadly, the United States would impose country-by-country taxes such that Apple’s effective tax rate, in each of the countries where it operates, equals at least 21%. In other words, the United States would, for its own multinationals, play the role of tax collector of last resort: it would collect the taxes that foreign countries chose not to collect.

This policy does not violate any international treaty. It does not require the cooperation of tax havens. It doesn’t even require new data: the necessary information exists.

Commentators in Ireland are already fretting about what the Biden administration’s push for a global minimum tax could mean for the country’s status as one of the world’s most welcoming tax havens. Cliff Taylor of The Irish Times warned last week that “the Republic’s 12.5% corporate tax rate is facing a new threat, with the United States signaling its support… for a global minimum corporate tax rate.”

“It remains to be seen what is passed by the U.S. Congress,” Taylor wrote, referring to Biden’s infrastructure plan, “but the implication is that if the bulk of this is passed, Ireland’s 12.5% rate may no longer be a significant attraction for U.S. companies looking for where to invest.”

In a report released Monday, experts at the Center on Budget and Policy Priorities argued that “reforming U.S. taxes on the foreign profits of U.S. multinationals would position the United States as a global leader in international taxation, which is especially important this year as OECD countries work toward a once-in-a-century global tax deal.” More than 140 countries are taking part in the OECD talks, which began in 2017.

“Yellen has expressed a desire to engage ‘robustly’ in these negotiations, and Congress should support that effort,” the report notes. “Moreover, reforming the international tax system would raise significant revenue to invest in infrastructure and workers, which is a far better way to strengthen the economy and support innovation than continuing to permit large-scale tax avoidance by multinationals that drain U.S. revenues and encourage multinationals to locate profits and investment offshore.”

This article has been republished under a Creative Commons Attribution-Share Alike 3.0 License from Common Dreams.

Author: Jake Johnson is a staff writer for Common Dreams. Follow him on Twitter: @johnsonjakep

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Cartoon: Big Bezos is watching

Published by Anonymous (not verified) on Tue, 06/04/2021 - 9:50pm in

If you haven't heard about Amazon's delivery driver surveillance cameras, this Thomson Reuters article is a good place to start. Amazon has a long history of inflexible micromanaging of the motions of warehouse workers, so they're just extending that to the trucks now.

If you are able, please consider joining the Sorensen Subscription Service!

Follow me on Twitter at @JenSorensen

What is the risk of a housing price bubble?

Published by Anonymous (not verified) on Tue, 06/04/2021 - 4:56am in

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Economy

Home ownership is a cornerstone of the Australian way of life. But it is becoming less affordable. This article discusses the risks of a housing price bubble and what can be done.

Most Australians know that home ownership is a lot less affordable than it used to be.

As a consequence, the proportion of households who own their own home has fallen from 70 per cent in 1997-98 to 66 per cent in 2017-18 (the latest year for which official data are available). Furthermore, over this twenty-year period the proportion of households who owned their home without a mortgage fell by as much as 10 percentage points from 40 per cent to 30 per cent.

The relatively rapid increase in house prices

The obvious reason for this drop in home ownership and the increasing reliance on mortgage finance has been the relatively rapid increase in house prices relative to incomes.

Under the Howard Government the median house price for Australia increased from 6 times the median annual income in the mid-1990s to 10 times in the mid-2000s. This ratio then stabilised for a few years but took off again around 2012 to reach a new peak in 2017 when the median house price in Australia was 12 times the median annual income.

In other words, over the two decades ending in 2017 the cost of a home doubled in Australia in real terms, with the purchaser having to work twice as many years to pay it off.

In Sydney, recognised as having the third most costly dwelling prices in the world, the median house price was as much as 18 times the median annual income in 2017, and Melbourne was not far behind with a ratio of 16 times the median annual income.

Between 2017 and the outbreak of the Covid pandemic there was little change in housing affordability, with the rate of wage increase marginally exceeding the increase in house prices.

Then at the beginning of the pandemic, most forecasters were predicting a fall in house prices, possibly by as much as 10 per cent. However, that proved to be an exaggeration, and house prices have now taken off again.

Last month Corelogic reported the biggest monthly jump in the median price of dwellings sold at auction in more than thirty years. Sydney’s median house price has increased so far this year by $100,000 and some forecasts are suggesting that the increase in Australian property prices could be as high as 15 per cent this year.

The role of interest rates

Modelling reported by the Reserve Bank suggests that the key to understanding these recent changes in housing affordability has been a fall in long-term real interest rates, which in turn reflects falls in global rates, caused by a global glut in savings, and expectations that the decline in short rates will be persistent.

The Reserve Bank’s model finds that a one percentage point reduction in the real interest rate, which is believed to be permanent, will lead to a 30 percent increase in housing prices over the following seven years.

Accordingly, the Reserve Bank estimates that the reduction in real interest rates accounts for most of the boom in dwelling prices since 2012, and also for the rise in dwelling prices relative to household incomes.

Compared to the mid-1990s, the increase in dwelling prices relative to income now means that the size of the housing loan has also increased commensurately relative to most people’s income. But as we can see in Chart 1 below, the ratio of interest payments to income is now back to where it was in the mid-1990s because the nominal interest rate on a typical housing loan is now as much as 6 percentage points lower, and this is enough to offset the increased size of the loan relative to income.

Chart 1

Source: Saul Eslake Chart Pack

So far so good, but can we realistically expect these low interest rates to continue, and what will happen when interest rates rise again, as must eventually be expected as the economy recovers.

Future risks

The immediate concern are the borrowers who may find that they are over-committed and have difficulty servicing their housing loans when interest rates rise.

True, borrowing rates for housing are currently a couple of percentage points lower than they were back in 2017. However, assuming the Reserve Bank achieves its inflation target again, then we must expect that mortgage interest rates will be at least a couple of points higher than now.

Furthermore, as shown in Chart 2 below, in the last few years there has been a significant rise in the proportion of housing loans that have a high LVR ratio (size of loan relative to the value of the property). These are the loans that are most at risk of falling into default when the burden of debt servicing increases, and as we saw in America during the global financial crisis, that can lead to forced sales and a collapse in property prices.

Chart 2

Source: Saul Eslake Chart Pack

Source: Saul Eslake Chart Pack

In order to reduce the chances of such a situation arising in Australia, the IMF recently called on the Australian Prudential Regulatory Authority “to expand and improve the readiness of the macroprudential tool kit … for potential use in the event of a rapid housing credit upswing,” including “introducing LVR and debt to income limits”.

But one wonders if the Government will accept this advice from the IMF. In its enthusiasm for deregulation and its desire to promote economic recovery, the Government is presently relaxing the financial controls recommended by the Hayne Royal Commission which had the same purpose of reducing the riskiness of high household debt.

In the longer run, however, economic recovery will not be helped by loan foreclosures and forced property sales. The risks of this are too high, and it would be prudent to accept that macroprudential controls may well need to be tightened, especially if interest rates are to be held down for some time.

Equally, in the long run, we cannot continue to rely on very low interest rates to support housing affordability. Instead, reforms to increase the supply of houses, located where people want to live, will be critical to restoring housing affordability.

For example, less than a quarter (23%) of the dwelling purchased were new in 2017-19 (the most recent year for which ABS data are available). This was substantially less than the proportion of sales to first home buyers (35%), indicating that there is real resistance to locating further out with longer commuting times and less access to services.

Thus, if we want to improve housing affordability, land use planning and zoning will need to be changed to allow for increased density in the inner and middle suburbs of our major cities to meet the demand for housing that is accessible to the jobs and services.

In addition, the infrastructure connecting regional centres with the state capitals may also need to be upgraded if post-Covid, workers find that they can continue working from home, using the internet, and commuting less often. Already this is increasing the demand for housing in these regional centres, and that will help improve future housing affordability.

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