Category Archives: Economics

Libs against user-pays?

In rejecting the “user-pays” principle in relation to means-testing of aged care, Tony Abbott may seem to have forgotten which party he leads (“People will have to pay more, Abbott says”, The Australian, 21/4). But the Liberals’ record of opposing means tests and defending subsidies for the wealthy makes it clear that their policy of winding back welfare only applies to those who actually need it.

A million Laffs

In her haste to protect the super-rich from the inconvenience of paying tax, The Australian’s Janet Albrechtsen misapplies the so-called “Laffer curve”, which hypothesises an optimum tax rate which maximises revenue and beyond which revenues fall due to decreased economic activity (“Let champagne socialists pay more tax voluntarily”,12/10).

She gives us a couple of anecdotes of increased revenue at lower tax rates – as a percentage of GDP. But Laffer’s theory is that decreased tax rates result in greater tax revenue through increased economic activity so, by normalising to GDP, she is not saying anything about the Laffer curve, only that those who can will simply move their money around to where it is taxed least.

For example, any higher revenues from capital gains which occur when the rate is lowered only prove that people hang on to assets until this occurs, providing only a one-off tax windfall.

As far as income tax goes, most quantitative studies of the Laffer effect put the optimum rate at about 70%. I’d like to see that.

Of the top 1% of income-earners, Albrechsen says: “When you tax people more, their incentive to work more and earn more income drops off”. News flash: that’s not how the super-rich make their money.

More poison is the antidote

In defence of free-market capitalism, The Australian contends that European social democracies are slow to recover from the GFC because they have “interventionist” governments, unlike the US, “where open markets have assisted stability”. (“Capitalism to save social democrats from debt trap”, 25/9). This conveniently glosses over the fact that these very US markets triggered the crisis in the first place. The related suggestion that Australia survived not because of, but in spite of an “ill-considered” and “over-egged” stimulus, defies the opinions of most economists.

To maintain the view that economic problems are solved by doing nothing – in the face of massive, sustained evidence to the contrary – The Australian makes the mystical “invisible hand” into an irrefutable hypothesis: the market unerringly seeks efficiency, where efficiency is defined as whatever the market seeks, and can only fail because of interference, where interference is defined as whatever causes the market to fail.

This recursive logic leads to the prescription of more poison as the antidote.

Mystic market

Brad Orgill counts the real costs of thirty years of “an uncritical belief in free markets” and their “self-regulating nature”: social inequality, overcrowded prisons, crumbling infrastructure and environmental destruction (“Economic challenges should not polarise our egalitarian society”, The Australian, 26/8).

It is time we recognised that the “invisible hand” is the right-wing version of the Gaia hypothesis – a mystical, untestable notion which asserts that a complex system will arrive at some equilibrium, but with no guarantee that such a state will be of any benefit to human beings. As such, it is mere ideology.

Shop till you drop

Regarding the recent whining from retailers about having to pay their staff: retail is driven by demand, which is driven by wages. Every business wants low-paid workers, but high-paid customers – as long as they’re paid by someone else. Every worker you pay less will buy less at someone else’s shop, every worker they pay less will buy less at yours. It’s a downward spiral you don’t want to start.

Rudd’s pets

I share Kevin Rudd’s appreciation of what’s good about Western culture (“Don’t believe rumours of the West’s death”, The Australian, 1/8), but he can’t resist slipping a couple of his pet projects into the mix.

Democracy is a definitive Western ideal, but the “flexibility of free markets” is an economic implementation detail, just as likely to be found outside the West. Insofar as the people decide to regulate for social good, that is their will.

The power of the “inquiring mind” is undoubted, but why must it be “individually driven”? Western science has always been a collective enterprise, as is the open-source development model of very Western companies like Google and IBM.

Democracy, by definition, is collective decision-making. There is no guarantee it will favour individualist, free-market ideologies.

Invisible hand shoots itself in the foot

Tim Soutphommasane’s “True liberals are at liberty to disagree over what it means to be free” (The Australian, 25/6) is welcomed as an antidote to the simplistic polarities of much media politics and as a recognition that liberty is complex.

As Soutphommasane notes, few today outside of the extreme old Right actually oppose the ideal of liberty, although conservative liberals have trouble explaining how they otherwise intend to enforce tradition.

But in the real world, we must apply values to choose between conflicting liberties. Does the freedom to own a gun have a higher value than the freedom to walk the streets without fear? If not, we need gun control. Does the freedom of an entrepreneur to reap the benefit of their effort override that of a property owner to charge whatever rent the market will bear? If so, we need rent control. Does free trade imply the free movement of labour? If so, we must relax our borders.

Despite what naive market libertarians tell us, there is no stark choice between liberty and government control, but a considered weighing of liberties against eachother. If we don’t make such decisions, the market’s “invisible hand” shoots itself in the foot.

I’ve never been broke, so why keep working?

Matt Ridley’s advice that, as pessimistic predictions rarely eventuate, we should simply relax and let the free market automatically perfect the world (“Why rational optimism beats ephemeral happiness”, The Australian, 22/6) ignores the most plausible possibility: that some disasters never occur precisely because people are so worried about them, and thus take action to avert them. It’s a bit like saying, “I’ve never been broke, so why keep working?”.

Flexible code

The Australian opines that “It is not tenable that Australian retailers trading after 6pm should pay almost three times the hourly rate…in the US” (“Retailers put strong case for workplace reforms”, 20/6). As the U.S. minimum wage is currently $6.86 per hour, I would say it is not only tenable, but necessary.

Unions have offered to trade penalties for higher base rates, but employers decline because variable rates give them scope to control costs. It is thus clear that “flexibility” is simply code for lower wages.

Straightforward

In the absence of any attempt by News Ltd media to explain the straightforward market mechanism of the carbon price, allow me:

1) Businesses pay a price for the carbon they produce making carbon-intensive products more expensive. Consumers are compensated using the money collected.

2) Businesses now have an incentive to make low-carbon products, as these will be cheaper and thus chosen by consumers over more expensive high-carbon ones.

3) Eventually this market mechanism will minimise carbon production, the price paid and also the compensation paid.

Not so hard to understand, was it? Now, why did we need a GST again?