Abbott's company tax cut is disingenous

First, let me make this clear, I am in favour of the lowest appropriate taxes for individuals and businesses. BUT, Tony Abbott's decision to cut company taxes in Australia by 1.5% is simply bad policy and worse, it wrongly appropriates the Henry Tax Review to justify it.

Why Abbott's use of the Henry Tax Review is wrong

The first of the key directions read:

Maintain the company income tax rate towards the lower end of the small to medium OECD economy average, with a reduction to 25 per cent over the medium term. This aims particularly to increase the level of business investment in Australia across all sectors, including foreign direct investment; promote more entrepreneurial activity; and reduce incentives for profit-shifting offshore.


So this would seem to support Tony Abbott...but wait, there's more.

Ken Henry also recommends sweeping changes to the tax system, including a land tax (and resources tax) and many other sweeping changes. So, Abbott's plan is to remove the resources tax, not add a land tax and cut the company tax rate.  That just doesn't stack up.

Abbott-nomics, Reaganomics and the Laffer curve

While he explicitly named the Henry review to support this cut, I'm more concerned about the implied throwback to the 1980s and Ronald Reagan's economic policies described by the great catchphrase "a rising tide lifts all boats". It didn't.

One of the big theories that Reagan used to support his policy was the Laffer curve.  This theory suggested that in some circumstances that a cut in tax rates would result in increased government revenues. Legend has it that one of his economics advisors, Arthur Laffer sketched this curve on a restaurant napkin.

Laffer Curve: suggests that revenue increases if high tax rates are cut

However, Laffer also pointed out that spending discipline is required in the short term, to increase government tax revenue in the long term.
The Laffer curve has been discredited for a long time. There are many papers that have been written to debunk the Reagan and Bush supply-side policies...yet Abbott thinks he can roll out the same discredited theories.

Spending cuts will be required

So, even if we put aside all of our misgivings about the Laffer curve, supply-side economics and Abbott's plan, there is one thing that can't be denied.

Spending cuts will be required. Even Arthur Laffer said so.

Tony Abbott. Be accurate. Treat us like adults. If you are going to cut revenue through company tax cuts, tell us what other revenue you will raise, or what spending you will cut. Reagan or Bush would.

Let me know what you think.

Mark S

The end of get-rich-quick schemes (for now)

The last 20 years has been pretty unusual.  There has been a lot of opportunities to get rich quick (or get poor if you messed up). There was the Internet boom and bust, a few stock market booms, rising house prices, rising commodities prices, low unemployment, a housing boom and huge wages for mining workers.

Source: Reserve Bank of Australia

So, whether you were white collar or blue collar, there have been plenty of ways to get rich if you took a few risks.

It's over!

Back to the old days - do things that people want

What is going to happen now is simple. If you offer products or services that people want, they will be bought, at a fair price. If you are a healthcare worker, there is a lot of demand for your services - you will be able to get work and charge a fair price for it. If you are a manufacturing worker in Australia, there is less demand for your services.  You will need to be one of the best manufacturing workers, or reskill, or do something different.

More importantly, as a society, we need to think about what people want, and create those products and services.  Before mobile phones, few people thought that having a mobile phone would be a necessity. They were a luxury item.  In hindsight, we can see how useful they are, and mobile phone companies have done very well.

Before the washing machine, the idea of having a mechanical way to do laundry wasn't obvious. But once the washing machine was invented, every washing person (mainly, women) wanted one. (Watch Hans Rosling's great talk for more on this). And increasingly, we are happy to pay for the services of others to do other cleaning for us.

What happens next?

Now, it is up to us, to identify what the next washing machine is.

Ask yourself, what do I want? What does my neighbour want?

Ask yourself, how can I do what I already do better, faster, more effectively?

Ask yourself, how can I "sell" my great services better.  I know that what I offer to my firm, or my customers is valuable.  I need to communicate that value better.

Every transaction has to offer value to both sides.

Ask yourself, am I doing something that nobody wants or needs any more? If you are handwashing clothes, while everyone else is using a washing machine, sooner or later, your customers will politely stop paying for your services.  Make sure that you keep up with the times.

We will get wealthier as we continue to be more productive

By doing all of these "normal" things, we will get a little more effective every day.  Our incomes will grow a little every day, and our standard of living will grow a little every day.  It won't be a get-rich-quick scheme.  The improvements will often be so small that you won't notice it - much like healthy eating - one day you look back and realise that you have taken off weight.

So, in 2013, let's all get rich moderately quickly.  Let's all try to do just a little bit better in what we do, or change what we do and choose something different. When we all do that, we all benefit.

In 2013, let's be innovative, productive, and creative.  By the end of the year, you will notice the difference.

Let me know what you think

Mark S

Why can't we see that life is still very good?

We don't know how good we have it.

We Australians have a very good life.

The fundamentals of the Australian economy are very good.  Most people have a job.  Businesses are still profitable. Health care is the best it has ever been.  The quality of our food is high.  So why is there a pall of gloom hanging over us?

We compare ourselves to what we had 

Rightly or wrongly, humans evaluate our state in terms of gains and losses. Rather than looking at how wealthy we are or how much food we have, we instinctively assess whether we have gained or lost.  During the mid 2000s boom, most people had more money (even if a lot was on credit), jobs were very easy to get, asset prices were booming and confidence was high. 

Now, everyone feels like they have lost (unless you are one of the small number who work in mining).  We are all a little behind what we were at the peak.  Oddly, although our logical brain knows that Australia is in a strong position, and much better than the rest of the world, our emotions win the day. We feel the losses. It is those feelings that dominate. 

Unfortunately, our emotions then have a big say in our decisions. Our logical brain says "everything is fine - we have plenty of money, just not as much as 2008".  Our emotions say "look at how much money we have LOST. Let's batten down the hatches."

Sentiment then feeds off itself 

Once the emotions win the battle, the negative feedback turns into reality. People stop spending. Businesses start failing. People lose jobs.

Job hunters queuing for 50 jobs at London Zoo

We can override these emotions. We need a different frame of reference. Rather than comparing to the past, we can compare to other benchmarks. We can compare ourselves to the British or the Americans. These are western nations that we can relate to. 

We need stories comparing the average Briton, or American to the average Australian. We need to see our current state as a WIN not as a LOSS. 

If we don't do something quickly to defeat our emotions, they will make our very fears a reality. 

Let me know what you think

Mark S

Joe Hockey lies on Sunrise

Joe Hockey: you didn't tell the truth on Sunrise

This morning Joe Hockey blamed the increased cost of electricity on Labor's carbon tax. This is an outright lie.

He said to Tony Burke that people are "concerned about rising electricity costs, and it's because of your carbon tax"

The facts about electricity price increases

Here are the key facts about the electricity price increases:

• Electricity prices began rising from 2005, when the Liberal government was in power
• Electricity prices have risen 30% over the past four years
• The largest factor in price increases is the need to replace and upgrade the ageing poles and wires of the national electricity grid, some of which have been in service for more than 40 years.
• Increases in demand have increased wholesale prices and transmission and distribution prices
• Renewable energy certificates (RETs) must be purchased by energy retailers (nothing to do with the carbon tax) which have increased costs
• State and federal governments regulate the price of electricity through the National Electricity Market (except WA which has a separate regulator). They consider the cost increases incurred to set the prices.

References:

Clean Energy Australia
Reserve Bank of Australia
Roger Dargaville, Uni of Melb


Joe Hockey knows the facts

These facts about electricity pricing are well known to Joe Hockey, he just chose to ignore them when he made his claim this morning. He must be brought to account.

Politicians and other public figures cannot be allowed to make statements that are blatant lies

Let me know what you think.

Mark S

Why Gen Y are holding us back

I don't really want to believe this, but the evidence is building.  Gen Ys might be responsible for the economic slowdown in Australia's non-mining States.  Let me explain.

Mortgage rates are low but mortgagees are worried

Over the last month some interesting data was released.  First, the Westpac/Melbourne Institute consumer confidence figures showed that mortgage holders are much less confident than they were. At the same time, the ANZ published some stats showing that housing affordability was its best for a few years.

This doesn't make much sense really.  Interest rates are low by long term standards.  Even though the banks put their rates up last year, and ANZ put theirs up a smidgem recently, the Reserve Bank cuts mean that home loan rates are lower now than they've been for a long while.  This isn't the sort of situation that should make home owners less confident.

House prices are down - maybe that's it

The best reason I can find for this loss of confidence is that house prices are down.  Hmm, that would make sense if they fell in 2012, but they didn't. House prices fell last year, and confidence is down this year.

I can't believe that everyone was blind to the falls in prices in 2011.  Every newspaper was talking about it - we all knew our house prices were sliding.

So what have Gen Ys got to do with falling confidence then?

My daughters are Gen Y, so like any parent I don't want to believe anything bad about these perfect angels, but then again, they've had it rather good!  Seeing the world from their point of view, over the last decade, they've had jobs, had a place to sleep, someone to bail them out and a booming economy.  Of course, they haven't always used those parental safety valves - but they've appreciated them being there.

Now, rather than the economy being a 10 out of 10, it's only an 8 out of 10.  For those of us old enough to remember 4 out of 10 economies, 2012 is pretty good.  yes, unemployment is pushing into the high 5s, but most people still have jobs, and even with issues in Europe, the world isn't falling apart.

For Gen Ys though, any whiff of a problem is scary.  Euro debt problems - aargh! China is slowing - Nooo! Tony Abbott says prices will go up because of the carbon tax - Yikes! If there is one thing that Gen Ys want it is certainty, and even though the fundamentals in Australia are strong, these are uncertain times.

You have shown a link to mortgagees

Gosh, you are right.  So let's get to that.  First of all, a lot of these Gen Ys are the ones who have bought the new houses in the 'burbs over the last few years.  They are loved up, and taken out their first mortgage, and suddenly have responsibilities.  You mean the bank wants me to pay this money EVERY MONTH?? So, it's perfectly understandable if the little dears are a bit worried about everything.

No wonder Gen Y parents look worried!

What about all those young renters, they aren't mortgagees? Well, no, but their parents are, and that's where the parental safety net kicks in.  The kids are getting worried, and what do you think they are going to do - that's right - put their hands out for free rent.  Not my kids of course, it's your kids. And that must make you worried, surely.

There we have it, because the world isn't perfect anymore and Gen Ys have to stand on their own two feet, its their parents who cop it.  Thanks kids!

Let me know what you think

Mark S

Paul Howes - somebody IS benefiting from the higher dollar

Today Paul Howes has come out criticising the Reserve Bank's charter, and claiming that "One of the real issues that our country has to come to terms with is that a high Australian dollar is good for nobody."

Sorry, but that's just plain wrong.  Here is some proof that the Australian dollar is good for somebody.

Overseas travellers have benefited

Since the appreciation of the Australian dollar, overseas travel has boomed.  There are nearly an extra 200,000 people a month travelling overseas now compared to 2008.

ABS: Short term resident departures

People buying televisions and computers have benefited

According to the latest ABS data, Audio, visual and computing equipment is down 18.8% in the last year (to Dec 2011).  That means major savings for anyone who wants to purchase these products.  It means that equipment that may have been too expensive for some people, has fallen into an affordable range.  It means that the rise in the Australian dollar has been good for somebody.

Australians buying property overseas

With the higher Australian dollar, that means that Australians can buy property overseas at a much lower price than previously.  It is now in the realm of the middle class income earner, with properties in Europe now attainable for $100,000. Property buyers lured to foreign affairs

Whether it is a lifestyle choice, or an investment, this means that Australians are owning real assets in other countries.  This means that the higher dollar is benefiting those buyers.  Those people are somebody.

Paul Howes - are the Unions as economically inept as Katter

The calls from Paul Howes to review the charter of the Reserve Bank are echoes of Bob Katter's crazy claims to sack the RBA board.  The well managed Australian economy through the Hawke/Keating, Howard/Costello and Rudd/Gillard/Swan years has been nothing short of stellar.  And the independence of the Reserve Bank with its charter and formal agreement with the Treasurer to maintain underlying inflation in a target range of 2-3% PLUS achieve full employment has been a critically stable influence throughout.

Whenever radical statements are made by any side of politics, people listen and get confused between the nonsense and the sensible.  We must remain economically rational.

Let me know what you think

Mark S

A little economic pain now is the perfect medicine

Deputy Reserve Bank Governor Philip Lowe gave a valuable speech to the Australian Industry Group yesterday.  You can read the detail at the RBA site here.

The implication of the speech is that the structural changes to the Australia economy are necessary, and will benefit us in the long run. Of course, he is absolutely right.

The recession ... I mean ... structural change we had to have

Just as Paul Keating honestly told us in 1990 that we were in the "recession we had to have", Philip Lowe is making it clear that the RBA sees this as the structural change we have to have.

Despite many comments by the Reserve Bank, and others, Australia's productivity is getting worse not better.

And what isn't so apparent to non economists is that the only way for Australia to sustain our improvements in our standard of living is to improve our productivity.

Productivity won't improve without significant change

At a business conference I was on some years ago, we were placed in groups on an oval, around a roped area with numbered squares scattered inside of it.  We had to find the fastest way to touch every square in order with each person only touching one square each time they entered the roped area.  We started by running into the area, touching a square and running out as quickly as we could.  This was pretty slow.  There had to be another way.  We had to be more productive.

Eventually, by looking at the other teams, we all figured it out - "straight line running".  Each person could run straight through the roped off area and touch their foot on one square.  This was much faster, and much more productive.  It was a very different approach.  It took significant change, and fast runners.  Yet, people who were agile but slow runners became less productive than they were when we all ran in and turned quickly to get out of the area. 

There were winners and losers, and everyone adapted as best we could to achieve a much better result.

Australia is going to have winners and losers too

Today, the most recent labour force data showed a small increase in unemployment.  This brought about a howl of concern from Joe Hockey and calls for lower interest rates from Bill Evans to stimulate the economy.  I had to shake my head.

Phillip Lowe explained that there would be winners and losers during this period of structural change.  To lower interest rates now would be to encourage people to keep running into the area and turning around inefficiently, rather than figuring out the equivalent of "straight line running". 

There actually has to be some pain, so change will happen.  There actually have to be some losers, so that they (and we) can all become winners.

Politically, it's a tough time to hold your ground

It's one thing for Phil Lowe to deliver the somewhat bitter pill to the country, and another for Wayne Swan is holding his ground on needing to deliver a surplus, or for Julia Gillard to resist the temptation to provide subsidies to those parts of the economy that are struggling through these changes. 

It's especially hard when the loss of 7 jobs, yes - 7, at Westpac's collection centre makes headline news (ok, so it was combined with 119 IT jobs going offshore, but the 7 jobs still made it into the headlines). The human story of even 1 person losing their job is so much easier and immediate for the average person to grasp that the much more important story that we will benefit from the structural change.

If you are reading this, or read Phil Lowe's speech, please evangelise.  More people need to understand that just a little medicine now will make us very strong in the future.

Let me know what you think

Mark S

Terry McCrann - retail is changing, it's not dying

Dear Terry

I've read your article "Bleakest of views from the shopfronts" in the Sunday Herald Sun, and you make some valid points.  I also understand how your readers like you to sensationalize economic stories for a bit of cheap titillation, but they also expect you to get your facts right.

Retail is not the largest employer

First off, let's set the record straight.  You said that "Shops are also the biggest employers". Well, that was right until two years ago before health care passed retail as the biggest employer in the country and it has continued to grow.

So, sure, retail is a large employer - but it is in fact the second largest employer, not the biggest. And in the most recently reported quarter, the number of retail jobs didn't even fall, so when you state that "jobs are being slashed" I doth think you protest too much.

Retail is changing, not dying

Next, let's look at your implication that retail is dying in Australia - "in trouble like it's never been before". That's simply mischievous.

Australian retail is changing for sure, but it is still strong. The best retailers are innovating and tired retailers are struggling or fading away.

For the customers of a store like Fletcher Jones, or Angus & Robertson, it's a shame when the chain folds, but it's not the first or last retailer to close up.  And as you point out yourself, Woolworths weaker results were still underpinned by increased sales in groceries and liquor, so it's not all doom and gloom - they are just admitting Dick Smith has underperformed.

So rather than focus on the challenges of Woolworths, and to claim that "this story is repeated ...across all retail" why not look at a success story like Super Retail Group, who are growing sales in existing stores and opening new ones as a result. Their like for like sales were up between 3.5% to 9.9% across their three divisions, and earnings per share were up 20%.  That doesn't sound like "sales are struggling, profits are plunging" now, does it?

Terry, let's make a deal

OK, I don't want to criticize without being constructive, so how about this. If you point out a weakness in our economy, balance it up with the positive.

Point out the benefits to our productivity as a result of this retail shake up, or give credit to our big shopping centres for continuing to improve what they offer to the community.  Remind everyone of the great food and beverage precinct at Westfield Sydney, the continuous upgrades that keep shoppers flocking to Chadstone, or the recently reported like-for-like increase in retail profits from shopping centre owner, GPT.

We should applaud the changes in retail. We are moving forward towards the 22nd century, not backwards to the 20th

Let me know what you think

Mark S

It affects me - that's why I must support the private health insurance means test

I want Australia to be more productive, more creative, more fair and economically successful.  Some of these goals require change - change that impacts on real people.

So, when the Gillard government proposed the private health insurance means test, I had to ask myself, does this fit the criteria? Will it make us more productive, or economically successful.  The answer is probably yes.  We need to afford a health system, we need a public dental care system, and for individuals earning over $83,000 or families over $166,000 it seems fair to reduce the rebate they are receiving for purchasing health insurance in return for a $2.4 billion saving over just 3 years.

And it affects me - so I can't very well argue for some changes that don't impact me directly if I won't support changes that do affect me.

Productivity changes affect real people - that's why we need them

If productivity changes didn't impact on anyone, then they are probably not doing anything.  At the moment, Australia is in a once in a century mining boom.  Yes, it's impacting on many industries.  Yes, a lot of people can't see that this is doing them any good.  But, the impacts are real, and they have the potential to transform Australia for the better.

If we want to preserve old manufacturing industries, who is going to pay for it? All of us.

If we want to protect old fashioned retailers, who is going to be affected? All of us.

If we want to continue to drive our economy with polluting, carbon-intensive fuels, who is going to be affected? All of us.

So, we need to embrace the changes that are needed and take advantage of the one in a century opportunity that we are being handed.

I might have to pay and we all might have to change

At the moment, my job isn't impacted by the changes to the economy.  It wasn't always that way - I've been made redundant when the Marketing industry went through change.  So, if you are a manufacturing worker at the Toyota plant, or a retail worker whose shifts are being cut, it would be natural to be concerned. 

For most workers, there are other opportunities.  95% of people who want a job currently are employed.  For the retail worker, you have sales skills - there are currently over 2,000 sales jobs being offered in Melbourne alone.  For the manufacturing worker, there are over 1,500 jobs in Manufacturing, Transport & Logistics in Melbourne.  Change can seem scary, but it's what we have to do as society changes.

For me, I have to pay more for my private health insurance.  I can't ask you to adapt if I won't.  We all have to share the journey.

Tony Abbott's position makes no sense

Given that I will have to pay more for my private health cover, I don't understand why Tony Abbott wants to give me a hand out. Here is his statement on radio...

"Private health insurance is in our DNA. It is our raison d'etre, that is why we exist as a political movement, to give more support and encourage for people who want to get ahead. So, look, private health insurance is an article of faith for us. We will restore the rebate in government as soon as we can.''

So, is he saying that if you are wealthy, we will give you more money to make you more wealthy? Huh?? Honestly, that makes no sense.

Or is he saying he wants to do away with Medicare, and just have private health insurance? That would make even less sense, and be even less equitable.

I'm really trying to understand his perspective, but frankly, I can't see it at all.  Then again, I can't see why Prime Minister Gillard insists on bailing out foreign car companies either ... but that's a discussion for another day.

Times are changing, and we all have to step up to the plate.

Let me know what you think

Mark S

Why does Bill Evans want Australia to have a recession?

Bill Evans, Westpac

Glenn Stevens, RBA

Back in July, Westpac's chief economist Bill Evans forecast the European economic problems would slow growth and result in a decrease in official interest rates by 100 basis points.  Nobody else was predicting that, and yes, he got it right when the Reserve Bank dropped rates by 25 basis points in November. But why does he insist on interpreting every statistic through the lens of their own prediction?

By sticking to the prediction that rates will decrease by a further 75bps, Bill Evans is forecasting the cash rate to fall to 3.75%.  That is well below a neutral level, so the only reason we will get a rate that low is if Australia falls into recession. The Reserve Bank is forecasting Australia's growth to continue at trend rate of 3-3.5%, so why does Westpac continue to talk up their prediction and talk down the economy?

Stick to your guns, but be fair

I respect Bill Evans for having a view, but recent economic data is indicating that the Australian economy is turning upwards.  As new data has arrived, it seems that Westpac are only looking for evidence to support their "rates down by 75bps" view, rather than taking an objective look at the figures.

Sure, if they believe that Europe is going to hell in a handbasket, then there is a case that Australia will fall into recession.  But you can't just dismiss positive data because it doesn't fit your theory.

My call is for stable rates

For what it's worth, I think rates will stay where they are now for some time. I don't see any change in December, and the green shoots of growth give me cause to think that by February our consumer economy will be looking OK.  Combined with the very strong mining sector, and my thought that the next inflation numbers won't be quite as low as the October figures, I'm tipping no change in February as well.

Of course, if Europe really does disintegrate, then that's a different story, but unlike Bill Evans, I'd be prepared to change my view if the data do change. (Oh, and I am putting my money where my mouth is!)

Whatever your view might be, you still have a responsibility to interpret new data objectively.  I don't believe that Westpac are doing that at the moment 

Let me know what you think

Mark S

Greece and Italy set to gain proper governments from the wreckage

No more bunga bunga capitalists. No more crazy socialists.

While Greece and Italy have been forced into dramatic political change, for the first time in many years, they are set to be led by men who will govern the country with less interest into popularity.  Lucas Papademos in Greece and Italy's most likely PM Mario Monti are "technocrats".  That's political speech for "they'll get on with managing the economy".

It takes a crisis to find a leader


Not every crisis produces leaders of quality.  But serious crises do create an urgent need for change, even more urgent than an election.  The paradigm changes.

The paradigms in Greece and Italy (and a number of other European countries) has been to continue to do the  same that's always been done, just because it's always been the way.  There's even been acknowledgment that things could be better, but there's been no political will to change.

Finally, like a company in crisis who calls in the administrators, the new managers will be expected to fix the mess.  They won't expected to be popular, they won't even be expected to consult widely.  They will be expected to get the job done.

Frankly, we need more focus from our world leaders on getting the job done, and less focus on 10 second voice grabs.

Lucas and Mario - please stick to your guns and fix the mess.  The people will respect you for it.

Let me know what you think

Mark S

Why do Christians get a special seat at the tax table?

The Federal government is holding a tax  forum on Tuesday 4 October and Wednesday 5 October to discuss priorities and directions for further tax reform.  After all the reviews we've had, let's hope any reforms are good for Australia.

What concerns me is who is getting a seat at the table - particularly the special treatment for Christian groups.


There have been 20 invited participants representing the community. 6 of these are representing Christian charities. There are peak groups such as ACOSS and others representing housing needs, but there aren't any non Christian charities who have been invited.


Tax exempt status for religious organizations

This skew in attendees matters a lot.

First, in any fearless review of Australia's tax system we must look at the tax exempt status of religious groups. Why they receive this special privilege is beyond me. And with 6 invited Christians on the forum the government is sending a clear message - "you are important and we won't be touching your tax exemption"

Next, these groups all have the same worldview due to their Christian beliefs. Sure, there are lots of business leaders at the forum to present a business viewpoint, but among community leaders there are vast differences. So, why invite 6 groups representing the same ideals and broadly the same people?

Apply to be an attendee

There is one thing you can do. There are still 12 places available for community participants. Expressions of interest close this Friday 12 August. So apply.

The 6 Christian charities invited to the tax forum all do good work for the community. But Australia is all for a fair go - not for making one religious group more important than the rest of us. 

Let me know what you think

Mark S

Greek crisis reminds us to keep a steady ship

The crisis confronting Greece at present is a salient reminder that our country's central bank and government must do whatever is necessary to keep the economy on an even keel, over each economic cycle.

Last week, the governor of the Reserve Bank, Glenn Stevens, gave a speech to the Economic Society of Australia in Brisbane.  He made the important point that - although some parts of the economy had some slack, overall, the Australian economy is very strong.  As a result, monetary policy will be set to meet the needs of the whole economy.

Strong economic decisions allow us to succeed

This will always mean that there are some winners and some losers.  The alternative is to satisfy only the needs of a few small groups within the economy.  This failure to take appropriate decisions when they need to be taken is what leads to economic disasters such as those in Greece, Ireland, Iceland, and to some extent even in the United States.

When good economic decisions are taken such as movements in interest rates, careful government spending, or introduction of sensible policies like a carbon tax or mineral rent tax, these create an environment in which businesses and workers can be confident.

Ironically, the failure of the Greek economy may slow down Australia's enough to avoid an increase in interest rates until later this year.

Sensible decisions from the Reserve Bank, sensible taxes such as carbon tax and mineral resources rent tax, all assist in making Australia the world's leading western economy. 

Let me know what you think

Mark S

Bob Katternomics - you make me rofl

Bob Katter - in power???

Bob, Bob, Bob. You really are hilarious. Your suggestion yesterday to reduce our interest rates to the same level as the US! Hahahahahahaha. Sorry, that's the best belly laugh I've had all year.

OK, let's have some fun with this idea, shall we?

Bob Katter, hero of the rural man, and the old economy manufacturer, miraculously wins power. So then he claims a mandate to implement his policy of "simply lowering the interest rates to that of Europe or the United States.". What happens next? (After the markets stop rolling around on the floor of course)

Bob fires the Reserve Bank Governor and Board

Pauline on the RBA!! lol

First of all, there's no way an independent Reserve Bank Governor will implement Katternomics.  Oh no, Bob's first task is to reissue a new "Statement on the Conduct of Monetary Policy" overriding 18 years of stability.  There's no way a sensible Governor like Glenn Stevens will serve under the new principles of Katternomics, so he'll need to find a new guy to rubber stamp the brave new world.  But there's still the thorny matter of those other Board members.  No problem - Bob has a hand picked bunch of pro-tariff experts including Pauline Hanson.

The new Governor cuts the cash rate from 4.75% to 0.5%

What a great media story?

Average mortgage falls by $750 per month.

Well, the reality doesn't quite work that way.  Rather than slashing rates by 4.25%, the banks only cut by 3.5%.  Outrage! Why are the banks profiteering - Bob, you have to do something about it.

Borrow, borrow, bubble, bubble

After two years of consumers relearning how to save money, the Katternomics inspired new super-low home loan rates cause a frenzy.  The banks try as hard as they can to stop people borrowing money, what with their recent credit downgrades, but they can't help themselves and the new sport on the street is lending money for houses to people who may or may not be able to afford it.  But there aren't enough houses to buy, so house prices skyrocket.

The developers try their best, but they just can't build the houses fast enough.  Capital city house prices increase by 20% in a year.  Housing affordability is a thing of the past, and the natives are getting restless.  Fights break out at auctions, and by the end of the year, desperate wanna-be home owners are protesting in the streets.

Nobody wants to be a miner

With so much money to be made in building houses, the developers increase wages to keep workers in the building trade.  And so do the suppliers, and before you know it, Australia's inflation rate hits 7%.  It's the highest rate since 1990.

And now the mining companies can't get workers because they are all back in the east building houses.  So, the miners go to Bob and ask for an increase in migration.  But Bob wants jobs for Australians, so he knocks them back.  The miners can't deliver on their contracts to China, and now there's an international incident brewing.  What's more, Australia's mining revenue is below budget because of the wages issue, and the budget deficit is spiralling out of control.

Sure, the dollar is falling - because the economy is disintegrating

International investors aren't too keen on Katternomics, so money starts to flow out rather than in, and the dollar falls to 80c.  Bob's mates are thrilled - they are selling their wares overseas and making a killing.  The manufacturers don't do quite so well.  Even though they can compete a bit better on price, they haven't kept up with their competitors and can't break back into the overseas markets.

Now consumers all over the country are screaming.  Everything imported is going up in price, and unless you are a builder you aren't getting paid more than what you were before.  The budget surplus means that Bob has to reduce government spending so public servant numbers are being reduced.  The economy is starting to slow down as a result, and so we've got rising unemployment and inflation. You can't afford your housing and all you see on the TV is a big hat and a few happy farmers.

A Grimm Fairy Tale

Thankfully, the chance of Bob Katter ever having control of Australia's monetary policy is about the same chance of Pauline Hanson being elected Prime Minister.  And frankly, who knows what would actually happen under such a bizarre scenario - the picture I've painted might actually be an understatement of the debacle.  The only thing it really shows is how insane it would be to revert to a pre-1993 economic policy, or worse.

Thank you Bob Katter for giving me a great laugh.  For that is what you are - truly a laughing stock!

Let me know what you think (reaction buttons below)

Mark S

Positive Psychology initiatives must be funded by the new mental health budget

Tonight's Budget announcement to increase funding for mental health by $2bn shines a spotlight on an important issue. However, it is important that these funds are spent to improve mental health and not just to increase spending on treatments.

There are two separate elements to be addressed in mental health funding:

1. Mental illnesses

2. Mental health

These are different and require different approaches.

BMRI delivers on the medical model treating mental illness

The head of Sydney University's Brain and Mental Research Institute (BMRI), Prof Ian Hickie, is a psychiatrist, who is expert in the mental illness field. He is a key adviser to the government.

This Institute is proud to house some of Australia's most eminent brain scientists. These scientists are working on cures for debilitating mental conditions such as Parkinson's disease, schizophrenia and Multiple Sclerosis.

Australia should be proud of this work, and it should receive substantial public funding.

Mental health is also about enhancing well being - the mental illness model is simply not appropriate

For over 20 years, the study of mental health has recognized that the mental illness model doesn't help in many cases. The mental illness model assumes that some form of treatment is the solution. It is codified by the DSM (diagnostic and statistical manual of mental disorders).

It discounts the Positive Psychology work pioneered by Dr Martin Seligman from the University of Pennsylvania, supported by others such as Prof Mihaly Csikszentmihalyi and Prof Christopher Peterson from the University of Michigan.

Seligman and Peterson have authored an alternative to the DSM called CSV (Character Strengths and Virtues) which focuses on increasing the positive psychological traits of human beings instead of only reducing the negatives.

In Australia, the only course in positive psychology is the Executive Certificate in Positive Psychology Coaching run by Dr Tim Sharp from the UTS. Despite the expansion of courses at prestigious institutions such as Harvard and Stanford, this lack of courses and research in Australia needs to be addressed.

Tonight, the Treasurer announced that funding would be provided for prevention. Positive Psychology provides the best scientific basis for prevention of mental health issues. It needs to be included in the funding mix.

The Treasurer is right - prevention is important, and instead of funding for mental health only being directed to the medical sciences, substantial funding is required for positive psychology, via our outstanding academic institutions and reputable organisations such as the Australian Positive Psychology Association.

I call for the new National Mental Health Commission to allocate substantial funding from the $2bn budget to positive psychology initiatives.

Let me know what you think

Mark S

A budget preview - a patchwork economy means not everyone's a winner

Tomorrow night, Australia's Treasurer Wayne Swan will announce the Federal Budget. It will show that Australia's economy is the envy of the developed world.

Overall, the economy is doing very well because of China and India's huge need for our coal and iron ore.

But a key theme will be the "patchwork" nature of the economy. This is Swan's preferred phrase to explain that whole the resources sector is in a once-in-a-lifetime boom, manufacturing and tourism are suffering.

So, how should Treasury respond to a patchwork economy?

Free marketeers would say the economy will take care of itself. If that was allowed to happen, everyone who has suffered from the floods would be left to rot. Surely that's not an economically rational approach, as these people who could return to being productive would take much longer than if they were given a helping hand.

On the other hand, protectionists would want the old, struggling manufacturing industries to be supported. They would add tariffs to imports in the name of protecting jobs. All that would do is produce an environment of complacency. Rather than encouraging product innovation and increased efficiency, it would create a culture of laziness. No, that is not an option either.

Instead, the budget will seek to strike a balance between these two extremes. And as the Treasurer said in his most recent economic note, "you often have to choose between what’s right and what’s popular".

Australia has been blessed with a series of excellent Treasurers on both sides of politics for many years. Striking the continuing balance to achieve a stable economy allows each of us as individuals to strive to achieve our economic potential.

Let me know what you think

Mark S

Why financial systems need regulation - and the economic Libertarians are wrong

In yesterday's column I explained the importance of incentives to our economic system. But humans are not like rats in a laboratory responding to simple incentives like food pellets. Rather, we are complex and we relate to incentives in a subjective way.


As a result, humans are capable of misunderstanding what will happen as a result of their behavior.  A person may think:

• "if I do A then I will get B" 

but the reality might be that 

• "As long as C or D don't happen and if I do A then I will get B"

These sorts of complexities are very common, and very difficult to understand for even the most knowledgeable person. 


In the perfect world of the theoretical economist, everyone would have perfect knowledge of the system and all of the current information. If that is not hard enough, it's also assumed that everyone will make completely rational decisions.  The economist even named this perfectly rational person "homo economicus" (the economic man). Nobody has ever met him!


So, back in the real world. There is far too much data for any person to understand. There are far too many interactions for any person to grasp. And to make matters worse, some humans cheat, corrupt, steal or are simply unskilled at their jobs.


And this is why financial systems need effective regulation - our markets just are not transparent enough. It's simply impossible. 


The free market libertarians reading this are jumping up and down right now in outrage. They want an unfettered system where the market will regulate itself. I'm sorry, but it is just a bad idea. 


To support my case, take a look at the Australian and US financial regulation systems.  In Australia, the system is regulated by the "three peaks" - ASIC, APRA and the Reserve Bank, in concert with the Treasury.  In the US, the system is regulated by a disconnected collection of state and federal bodies.  As a result, all of the Australian financial system is effectively regulated.  That includes banks, other mortgage providers, public companies, property markets, insurance companies... Whereas in the US, the regulations are looser, with many gaps.

If regulation is unimportant, and the market can self regulate, then it shouldn't matter.  But it does. Take a look at how the sub-prime housing market was able to get out of control in the US, compared with Australia. Over 14% of mortgages in the US were sub-prime at the peak in 2006, whereas Australia had around 1%.

And then, what happened next? The loans went very bad in the US, and kick started the global financial crisis. As there weren't so many of them, they didn't go nearly so bad in Australia.

Unfortunately, around the world there are many more examples of financial systems suffering due to poor regulation.  Another great example has been the failures in the Irish system, resulting in frauds, overcharging of consumers and bank bailouts by the public.


So, what's this got to do with ordinary people, incentives and the free market?

Well, "If I am confident that C or D won't happen, I will try to do A so I can get B".

But if I can't trust the system, because nobody understands the rules or plays by the rules, it will provide me with an incentive to abandon the system, and do something else, outside the legal, free market.

Effective regulations in our financial system are good for everyone. Letting the free market run wild is not.

Let me know what you think

Mark S

If you want to read some more, try these links:
ASIC: The integration of financial regulatory authorities – the Australian experience
Reserve Bank: A Comparison of the US and Australian Housing Markets, May 2008
APRA - www.apra.gov.au
US Govt Accountability Office: Financial Regulation...
Financial and Energy Exchange Group

The free market does more good than harm - for proof, see China

After writing a couple of items about the socially liberal half of the blog's title, today's column focuses on the economic rational side.

So, let's start with my main premise - the free market does more good than harm.
And ... The main benefit of the free market is INCENTIVES.

Source: Wikipedia

A quick aside. My academic training is in Psychology. That means I have a good understanding of what makes people behave the way they do. One of the main drivers of behavior is the expectation of a personal reward - we call it positive reinforcement. Positive reinforcement works for people, rats, and every animal in between. If we receive something that we want, in return for doing something, then we will respond, and do it. In most cases, positive reinforcement is more effective than punishment - offering an incentive is more powerful than issuing a threat.

These reinforcements, or incentives, are at the heart of the free market system - it allows personal rewards to be offered to individuals in return for certain behaviors that are valued by others. The incentives inspire action. If I do something that the market wants, I'll get something I value in return. This simple process unlocks many powerful forces - creativity, innovation, design, production, technology, and more.

The free market is often criticised, particularly by those on the economic left of the spectrum. They would favor a system that focuses on the collective rather than the individual. That is, a socialist system. From a social perspective, this is underpinned by the ideal of treating everyone equally within a society. However laudable that goal is, from an economic standpoint, it just doesn't work.

So, to make this point clear, let's look at the most compelling chart that shows the benefit to economic systems that have moved from socialist to free market.

Chart source: Wikipedia

The big one of course is China, and the statistics are compelling. China is now the world's second largest economy - and all of the growth has occurred since the shift to a market economy.

Incentives drive economic activity. By and large, this is a very good thing.


Let me know what you think.


Mark S

Social policies and economics must work hand in hand - we don't want to turn into Zimbabwe

Why do social policies matter?
Isn't it just all about the economy?
If a country has a weak economy, won't it just be in poverty and make all of the social policies irrelevant?

I understand the logic behind this line of thinking - but it is really a convenient excuse for some countries to ignore the well-being of their citizens, and ultimately it is flawed logic.

To explain, let me quote from the "Commission on the Measurement of Economic Performance and Social Progress" set up by French President Sarkozy in 2008. This body is better known as Stiglitz-Sen-Fitoussi, who are the Commissioners, and it is assisted by a "Who's Who" of the world's economic and social policy experts..


It should be obvious that no single number can summarize anything as complex and variegated as “society”. But, inevitably,  certain numbers – in particular GDP – have taken center stage ... such a number may be misleading if it were applied to all purposes, and especially as a broader measure of societal performance. 


Measurement of “present” economic performance also includes an assessment of “quality of life”. Quality of life includes the full range of factors that make life worth living, including those that are not traded in markets and not captured by monetary measures. While many of our measures are directed at ascertaining short-run movements in the level of market activity ... the time has come to make a clear move from measuring production to measuring welfare, to try to close the gap between our measures of economic performance and widespread perceptions of well-being.

So here we have some of the world's leading economists explaining that it's not just all about economic measures.  Quality of life measures do matter, and quoting Stiglitz et. al. once more "...what we measure shapes what we collectively strive to pursue - and what we pursue determines what we measure."

For a stark piece of evidence, take a look at this chart of Zimbabwe's Human Development Index.  When Mugabe's land policies were implemented in the late 1990s, in combination with his human rights abuses, it hurt everyone.  The economy declined rapidly and the country's performance on social measures was easily the worst in the world. The social policies were a major factor in what hurt the economy.

Social policies impact on the economy and the economy impacts on society and quality of life. They both matter.


Let me know what you think.

Mark S

What's this whole socially liberal and economic rational thing?

Over the long weekend I've spent some time talking about the position I have on social and economic issues over several glasses of wine and whisky.  So, I thought, why not start writing about what I talk to people about.  And given that I've titled this blog SocialLiberalEconomicRational, that seems like a fair place to start.

A good place to begin is to briefly explain what it all means.  In the media, you hear a lot about the left of politics and the right of politics.  Those terms really refer to economic positions.  The far left are the socialist approaches to economics - they are not in favor of free trade, and strongly favor social welfare.  The far right are in favor of the free market, in everything including social welfare.  Those who call themselves 'libertarians" (especially in the US, like the Tea Party) are economic libertarians on the far right.

But what gets left out of these conversations is attitudes to social issues.  I'm an extreme social libertarian, not an economic libertarian.  A good way to find out where you are is to take one of these little political tests.  The world's smallest political quiz is pretty good, even if it is sponsored by the economic libertarians.  The red dot shows where I sit on that spectrum. It's ironic that this labels me as a Liberal, given that in Australia of course the Liberals are not liberal at all.

Another good test is the political compass.  This is a bit longer, and has the economic left-right and social up-down axes.  You can see that I sit in the same spot on this test as on the first one - so that gives some credibility to both measurements.





What's interesting about this test is that they have mapped some world political leaders on the grid as well, so you can see where you sit. Kevin Rudd and Gordon Brown are still on the chart - but you get the general picture!  I'm closest to the Dalai Lama and Nelson Mandela. There are a lot of people who are like me, but look at where all of the politicans are - they are nowhere near us.

What's also important is the shift over the past few decades.  The major parties have all shifted towards being more socially conservative and economically right.  If you want to read more about the patterns, based on UK data click here.

So, this is the heart of my blog.  Socially liberal, and economically rational people like myself and the Dalai Lama are not represented in our current democratic system.

Let me know what you think.

Mark S