Australia’s top economists oppose the next increases in compulsory super: new poll



Wes Mountain/The Conversation, CC BY-ND

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

The five consecutive hikes in compulsory super contributions due to start next July should be deferred or abandoned in the view of the overwhelming majority of the leading Australian economists surveyed by the Economic Society of Australia and The Conversation.

Two thirds – 29 of the 44 surveyed – want the increases deferred or abandoned. Only 13 think they should proceed as planned.

An even larger majority, including some economists who want the increases to proceed, believe they will hit wage growth. Several are concerned they will hit employment.

Compulsory superannuation contributions are paid by employers.

But ahead of the most recent increase in compulsory super, from 9% of salaries to 9.5% in 2013 and 2014, the then Labor superannuation minister Bill Shorten said the increase would cost employers nothing because it would be taken from wage rises.


Source: Australian Tax Office

“A portion of what would have been employees’ increases will go into compulsory savings,” he said.

That conventional wisdom has since been challenged in work funded by the superannuation industry and has been examined extensively in the retirement income review at present with the government.

The two most recent increases in compulsory superannuation in 2013 and 2014 were small by design – 0.25% of salary each.

The next five increases, originally due to due to begin in 2015 but postponed to start in July 2021, are much bigger – 0.5% of salary each – at a time when wage growth is much smaller.

In 2012 Shorten was expecting wage increases of 3-4% and “assuming that a quarter of a per cent of that 3% to 4% may well go into your compulsory savings”.

Wage growth has since slipped to 1.8%, the lowest on record. If the best part of 0.5% is taken out of that each year for the next five years it is unlikely to climb.


Wage growth has slipped to 1.8%

Wage Price Index annual growth, public and private, all industries, seasonally adjusted.
ABS 6345.0

The 44 members of the Economic Society’s 57-member panel who responded include Australia’s preeminent experts in the fields of microeconomics, macroeconomics economic modelling, labour markets and public policy.

Among them are former and current government advisers and a former head of the Australian Fair Pay Commission and member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.




Read more:
5 questions about superannuation the government’s new inquiry will need to ask


Each was asked whether the legislated increases in compulsory super contributions should proceed as planned, be deferred or be abandoned.

Only 13 of the 44 thought the increases should proceed as planned. 29 thought they should be deferred or abandoned, nine of them preferring they be abandoned altogether.


Charts showing that of 44 economists asked

Economists Society of Australia/The Conversation, CC BY-ND

Those who thought they should be deferred argued that now is “not a time to encourage saving”. In the current circumstances we should be “far more worried about spending power today than in the golden years of present-day workers”.

Economist Saul Eslake said he had changed his mind. The latest evidence (which will be updated in the retirement income review) suggests that the current 9.5% so-called super guarantee will be enough to provide most people with an adequate income in retirement .

“In saying that I acknowledge that there is still a significant problem with regard to the adequacy of superannuation savings for women relative to men, but I don’t see how raising the super rate for everyone to 12% solves that problem,” he said.

“Not a time to encourage saving”

Economic modeller Janine Dixon said it was not clear that the optimal contribution was 12% rather than 9.5%. The increase would force some households into greater debt. While this would pose a risk to economic stability at any time, Australia could “not afford to let the household sector weaken further at present”.

Economist Geoffrey Kingston said anyone who felt 9.5% was not enough remained “free to make voluntary contributions”.

Among those believing the increases should proceed as planned were two former politicians, Labor’s Craig Emerson and former Liberal leader John Hewson.

Emerson said 9.5% was “considered inadequate by the burgeoning retiree population”. Without an increase, that population “would successfully demand increased pension levels from the Commonwealth”.

Opponents more confident

Hewson said compulsory super had become a fundamental part of an effective retirement incomes strategy and, COVID and economic collapse notwithstanding, we should “finish the job”.

Sue Richardson, a former member of the Fair Work Commission’s wage panel, believed any deferral might lead to another deferral and be “hard to recoup”.

The economists were asked to rate their confidence in their responses on a scale of 1 to 10.

Unweighted for confidence, 20.5% of those surveyed wanted to abandon the increases altogether. When weighted for confidence, that proportion climbed to 21.6%. The proportion that wanted the increases either deferred or abandoned climbed to 67.1%


Weighted responses to the question,

Economists Society of Australia/The Conversation, CC BY-ND

Asked whether the increases were likely to be largely paid for via slower wage growth than otherwise, 30 of the 44 economists agreed. Only eight disagreed.

Economist Nigel Stapledon said this “should not be controversial”.

Private sector economist Michael Knox said: “unless one lives in an unreal world, increases in superannuation guarantees are funded by employers out of the total wage the worker might otherwise receive”.

Super and wages come from the same pool

Several enterprise bargains explicitly make a trade-off between wages and superannuation, providing for wage increases that will be 0.5 points higher should compulsory super contributions not climb by 0.5 points.

Economist Alison Booth said if employers weren’t able to trim wage rises to pay for the scheduled increases in super contributions, they might “attempt to adjust on other margins”.

In a recession, when workers lack bargaining strength, “employers could coerce them to accept other adjustments to their contracts”.


Responses from 44 economists to the proposition:

Economists Society of Australia/The Conversation, CC BY-ND

Two of the eight economists who disagreed with the proposition that the increases in compulsory super would come at the expense of wages thought that employers wouldn’t grant wage rises anyway. Increases in super contributions might be one way for employees to get something.

A concern among both those who agreed and disagreed was that if the increase didn’t come at the expense of wages, it would push up the cost of hiring and come at the expense of jobs.

“Inflation is very likely to be very, very low and wages to be sticky,” said government advisor Matthew Butlin.

A drag on jobs if not wages

“Higher superannuation payments in an environment where wages are unlikely to rise and cannot fall will raise real labour costs and reduce the incentive to employ.”

Economic modeller Janine Dixon said that while over time the increase in contributions would probably come from wages, the immediate impact would be to increase the cost of hiring, “which is an unacceptably large risk in the present climate”.

When adjusted for confidence, the proportion of those surveyed expecting the increases to largely paid for via slower wage growth climbed from 68.2% to 71%. The proportion disagreeing fell from 18.2% to 17.8%.


Weighted responses to the proposition:

Economists Society of Australia/The Conversation, CC BY-ND

Individual responses

The Conversation

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

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

Economists back wage freeze 21-19 in new Economic Society-Conversation survey



Wes Mountain/The Conversation, CC BY-ND

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

Australian economists narrowly back a wage freeze in the minimum wage case now before the Fair Work Commission, a freeze that could flow through to millions of Australians on awards and affect the wages of millions more through the enterprise bargaining process.

The annual case is in its final stages after having begun before the coronavirus crisis and been extended to take account of its implications.

In its submission, the Australian government called for a “cautious approach”, prioritising the need to keep Australians in jobs and maintain the viability of businesses.

The minimum wage was last frozen in 2009 amid concern about unemployment during the global financial crisis.




Read more:
Economists back social distancing 34-9 in new Economic Society-Conversation survey


The Economic Society of Australia and The Conversation polled 42 of Australia’s leading economists in the fields of microeconomics, macroeconomics, economic modelling and public policy.

Among them were former and current government advisers, a former and current member of the Reserve Bank board, and a former head of the Australian Fair Pay Commission.

Each was asked whether they agreed, disagreed, or strongly agreed or strongly disagreed with this proposition:

A freeze in the minimum wage will support Australia’s economic recovery

Each was asked to rate the confidence they had in their opinion, and to provide reasons, which are published in full in The Conversation.

Half of those surveyed – 21 out of 42 – backed the proposition, seven of them “strongly”.

Nineteen disagreed, seven strongly. Two were undecided.


The Conversation, CC BY-ND

The minimum adult wage is A$19.49 per hour.

There was agreement among most of those surveyed that, in normal times, normal increases in the minimum wage have little impact on employment – a view backed by Australian and international research.

But several of those surveyed pointed out that these are not normal times.

Bad times for employers…

Gigi Foster said many businesses were operating closer to the margin of profitability than ever before, and were likely to stay that way for many months.

Rana Roy quoted one the pioneers of modern economics, Joan Robinson, as observing in 1962 that the misery of being exploited by capitalists was “nothing compared to the misery of not being exploited at all”.

John Freebairn argued that a freeze of labour costs, together with very low expected inflation, could provide a key element of certainty in the uncertain world facing households, businesses and governments.

Robert Breunig and Tony Makin suggested that with prices stable or possibly falling, a freeze in the minimum wage might cost workers little or nothing in terms of purchasing power.

Guay Lim and several others said if the government wanted the economic stimulus that would come from an increase in the minimum wage, it had other ways of bringing it about without making conditions more difficult for employers.

…and bad times for workers

Those supporting an increase saw it as a way to bolster consumer confidence and redress unusually weak worker bargaining power.

Wage growth before the coronavirus hit was historically low at close to 2%, an outcome so weak for so long that in 2018 and 2019 the Commission awarded much bigger increases in the minimum wage, arguing employers could afford them.

James Morley was concerned that a freeze in the minimum wage would “mostly just lock in” inflation expectations that were already too low.

Peter Abelson said labour productivity rose with respect for workers and fell with disrespect. A wage freeze would disrespect workers.

Saul Eslake proposed a middle way, deferring a decision rather than granting no increase. He said the increase that was eventually granted should do no more than keep pace with inflation.




Read more:
Why the coronavirus shouldn’t stand in the way of the next wage increase


The economists were asked to rate their confidence in their responses on a scale of 1 to 10.

Unweighted for confidence, 45.3% of those surveyed opposed a wage freeze. When weighted for (relatively weak) confidence, opposition fell to 43.5%.


The Conversation, CC BY-ND

Unweighted for confidence, half of those surveyed supported the proposition that a freeze in the minimum wage would assist Australia’s economic recovery.

Weighted for confidence, support grew to 51.6%

The Fair Work Commission is required to complete its review by the end of this month.


Individual responses

The Conversation

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

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

Economists back social distancing 34-9 in new Economic Society-Conversation survey



Wes Mountain/The Conversation, CC BY-ND

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

Australian economists overwhelmingly back social distancing measures that slow the spread of coronavirus over the alternative of easing restrictions and allowing the spread of the disease to pick up.

But a significant minority, 9 of the 47 leading economists polled in the first of a series of monthly surveys, say they would support an easing of restrictions even if it did allow the spread to accelerate.

The Economic Society of Australia-Conversation monthly poll will build on national polls conducted by the Economic Society, initially in conjunction with Monash University, since 2015.

The economists chosen to take part are Australia’s leaders in fields including microeconomics, macroeconomics, economic modelling and public policy. Among them are former and current government advisers and a former and current member of the Reserve Bank board.

Their responses are given weight by statements explaining their views published in full on The Conversation website and by a requirement that they rank the confidence they have in their responses on a scale of 1 to 10.

What matters is R

R, which is also referred to as R0, R₀, and Rt is the reproduction number of the virus. It a measure of the average number of other people that any person with it will directly infect.



The Conversation, CC BY-ND

An R of 2 means that on average each person with the virus will directly infect two other people in a process that will escalate increasingly quickly until after four sets of contacts 16 people have it, and after 20 sets of contacts more than one million people have it.

This snowballing effect is a property of any R above 1.

At an R below 1 the spread decelerates until very few people have it.

In the early days of the outbreaks, Australia’s value of R was well above 1.

The lockdowns and other restrictions have helped push it down to about 1.

The 47 leading Australian economists selected by the Economic Society of Australia were asked whether they agreed, disagreed, or strongly agreed or strongly disagreed with this proposition:

The benefits to Australian society of maintaining social distancing measures sufficient to keep R less than 1 for COVID-19 are likely to exceed the costs.

The proposition suggests that in the present context it is likely to be worthwhile to continue to maintain the restrictions that are needed to push R below 1 and keep it there.

Almost three quarters of the economists surveyed – 34 out of 47 – backed the proposition, 23 of them “strongly”.

Only nine disagreed, and only one strongly.



The Conversation, CC BY-ND

The arguments put for the worth of maintaining social distancing measures sufficient to keep R below 1 include avoiding “tens or hundreds of thousands of avoidable deaths” (John Quiggin) and allowing the economy to return to normal sooner than otherwise by escaping the need for “repeated lockdowns” that might be needed if the disease got out of control again (Ian Harper).

Chris Edmond uses the analogy of the Phillips Curve that is meant to show the the tradeoff between levels of inflation and unemployment.

Although it shows a tradeoff in the short term (more inflation results in lower unemployment) in the longer term it finds no such tradeoff. More inflation simply leads to higher prices with unemployment being no lower.




Read more:
Eradicating the COVID-19 coronavirus is also the best economic strategy


“In a similar way, there is no long-run trade off between public health and the health of the economy in responding to the COVID-19 crisis,” he says.

Lifting restrictions “risks the worst of all worlds, compromising our public health goals and at the same time not getting a proper economic recovery”.

Stefanie Schurer quotes a German proverb: better a painful ending than an endless pain.

Lifting restrictions “worst of all worlds”

She says a short and medium term failure to eliminate, or at least slow down, the spread of COVID-19 would entail significant longer-run political, economic and social costs.

Renee Fry-McKibbin points out that that even if the deaths from reopening economic activity turn out not to be high, we have no idea yet of the long term health consequences of exposing more people to COVID-19.

“Will people suffer from respiratory issues going forward requiring ongoing medical attention?” she asks. “We have incomplete information on the actual costs and benefits.”

Saul Eslake, who can see the worth of continued restrictions that keep R below 1, cautions that the longer they remain in place, the more the case for reopening will grow.

Yet the costs of restrictions are growing

Craig Emerson says keeping R below 1 should be merely a “guiding principle” rather than a binding constraint.

“The longer the restrictions are in place, the greater will be the likelihood of links being broken – leading to severe economic hardship, business failures, mortgage defaults, domestic violence, mental health problems, suicide and long-term unemployment, particularly for the young,” he says.

Gigi Foster says, in retrospect, the best thing for Australia to have done would have been to have never had an enforced lockdown, but to have encouraged people to continue to behave as normally as possible while taking precautions, as in Sweden, allowing young and healthy people to acquire immunity in order to protect more vulnerable people, in this and in future waves of the virus.

She suspects the costs of continued restrictions that keep R below 1 outweigh the benefits, including benefits measured in quality-adjusted life years saved.




Read more:
COVID lockdowns have human costs as well as benefits. It’s time to consider both


Hugh Sibley says that by making progress towards eliminating the virus we have eliminated the option of acquiring the mass immunity that would make it easier to live with it.

“We have, in effect, dug ourselves into a hole,” he says. “And we are now congratulating ourselves how deep that hole is. Too few people are asking how we get out.”

Supporters more certain than opponents

When responses to the survey are weighted by the confidence respondents have in them, opposition to restrictions weakens.

Unweighted for confidence, 19% of respondents oppose the proposition that restrictions that keep R below 1 are likely to be value for money.

Weighted for (lack of) confidence, opposition falls to 15.4%.



The Conversation, CC BY-ND

Unweighted for confidence, 72.3% support the proposition that restrictions that keep R below 1 are likely to be value for money.

Weighted for confidence, that support grows to 77.1%

The proportion strongly agreeing with the proposition grows from 48.9% to 54.8%

Put another way, when weighted for confidence, a clear majority of the economists surveyed strongly support the proposition that the benefits to society from maintaining social distancing measures sufficient to keep R less than 1 are likely to exceed the costs.


Individual responses

The Conversation


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

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

Open letter from 222 Australian economists: don’t sacrifice health for ‘the economy’


Steven Hamilton, Crawford School of Public Policy, Australian National University; Bruce Preston, University of Melbourne; Chris Edmond, University of Melbourne, and Richard Holden, UNSW

In recent weeks a growing chorus of Australian commentators has called for social distancing measures to be eased or radically curtailed.

Some have claimed the lives saved by the lockdowns are not worth the damage they are causing to the economy.

Others have claimed the case for easing is strengthened by the fact many of the hardest hit by COVID-19 are elderly or suffering from other conditions.

Some might expect economists, of all people, to endorse this calculus.

But as economists we categorically reject these views, and we believe they do not represent the majority of our profession.

We believe a callous indifference to life is morally objectionable, and that it would be a mistake to expect a premature loosening of restrictions to be beneficial to the economy and jobs, given the rapid rate of contagion.

Sign up to The Conversation

It is wishful thinking to believe we face a choice between a buoyant economy without social distancing and a deep recession with social distancing.

In a world with COVID-19, there are no good choices.

The best we can do is limit the spread of COVID-19 as much as practicable and rely on the strength of the government’s balance sheet to cushion the impact on the workers and businesses hardest hit.

Our success to date is a direct result of the measures taken, but we cannot afford to be complacent.

We recognise there are trade-offs on some margins, but we urge the government to work closely with public health experts to carefully determine at what time, in what ways, and in which sectors, to begin lifting restrictions.

There should be no doubt the cost of getting this wrong is very high.

Open Letter from Australian Economists

19 April, 2020

Dear Prime Minister and Members of the National Cabinet,

The undersigned economists have witnessed and participated in the public debate about when to relax social-distancing measures in Australia. Some commentators have expressed the view there is a trade-off between the public health and economic aspects of the crisis. We, as economists, believe this is a false distinction.

We cannot have a functioning economy unless we first comprehensively address the public health crisis. The measures put in place in Australia, at the border and within the states and territories, have reduced the number of new infections. This has put Australia in an enviable position compared to other countries, and we must not squander that success.

We recognise the measures taken to date have come at a cost to economic activity and jobs, but believe these are far outweighed by the lives saved and the avoided economic damage due to an unmitigated contagion. We believe strong fiscal measures are a much better way to offset these economic costs than prematurely loosening restrictions.

As has been foreshadowed in your public remarks, our borders will need to remain under tight control for an extended period. It is vital to keep social-distancing measures in place until the number of infections is very low, our testing capacity is expanded well beyond its already comparatively high level, and widespread contact tracing is available.

A second-wave outbreak would be extremely damaging to the economy, in addition to involving tragic and unnecessary loss of life.

Sincerely,

Professor Alison Booth, Australian National University

Professor Jeff Borland, University of Melbourne

Professorial Research Fellow Lisa Cameron, Melbourne Institute, University of Melbourne

Professor Efrem Castelnuovo, University of Melbourne

Professor Deborah Cobb-Clark, University of Sydney

Assistant Professor Ashley Craig, University of Michigan

Professor Chris Edmond, University of Melbourne

Professor Nisvan Erkal, University of Melbourne

Professor John Freebairn, University of Melbourne

Professor Renée Fry-McKibbin, Australian National University

Professor Joshua Gans, University of Toronto

Professor Jacob Goeree, UNSW Business School

Professor Quentin Grafton, Australian National University

Professor Simon Grant, Australian National University

Professor Pauline Grosjean, UNSW Business School

Distinguished Professor Jane Hall, University of Technology Sydney

Assistant Professor Steven Hamilton, George Washington University

Professor Ian Harper, Melbourne Business School

Professor Richard Holden, UNSW Business School

Professor David Johnston, Monash University

Professor Flavio Menezes, University of Queensland

Professor Warwick McKibbin, Australian National University

Assistant Professor Simon Mongey, University of Chicago

Professor James Morley, University of Sydney

Professor Joseph Mullins, University of Minnesota

Professor Abigail Payne, Melbourne Institute, University of Melbourne

Professor Bruce Preston, University of Melbourne

Emeritus Professor Sue Richardson, Flinders University

Professor Stefanie Schurer, University of Sydney

Professor Kalvinder Shields, University of Melbourne

Professor John Quiggin, University of Queensland

Associate Professor Simon Quinn, Oxford University

Economic Advisor James Vickery, Federal Reserve Bank of Philadelphia

Professor Tom Wilkening, University of Melbourne

Professor Justin Wolfers, University of Michigan

Professor Yves Zenou, Monash University


Full list of signatories available on the economists open letter website.The Conversation

Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University; Bruce Preston, Professor of Economics, University of Melbourne; Chris Edmond, Professor of Economics, University of Melbourne, and Richard Holden, Professor of Economics, UNSW

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

We asked 13 economists how to fix things. All back the RBA governor over the treasurer


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

Thirteen leading economists have declared their hands in the stand off between the government and the Governor of the Reserve Bank over the best way to boost the economy.

All 13 back Reserve Bank Governor Philip Lowe.

They say that, by itself, the Reserve Bank cannot be expected to do everything extra that will be needed to boost the economy.

All think that extra stimulus will be needed, and all think it’ll have to come from Treasurer Josh Frydenberg, as well as the bank.

All but two say the treasurer should be prepared to sacrifice his goal of an immediate budget surplus in order to provide it.

The 13 are members of the 20-person economic forecasting panel assembled by The Conversation at the start of this year.

All but one have been surprised by the extent of the economic slowdown.




Read more:
No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election


The 13 represent ten universities in five states.

Among them are macroeconomists, economic modellers, former Treasury, IMF, OECD and Reserve Bank officials and a former government minister.

The Bank needs help

At issue is the government’s contention, spelled out by Frydenberg’s treasury secretary Steven Kennedy in evidence to the Senate last month, that there is usually little role for government spending and tax (“fiscal”) measures in stimulating the economy in the event of a downturn.

Absent a crisis, economic weakness was “best responded to by monetary policy”.

Monetary policy – the adjustment of interest rates by the Reserve Bank – is nearing the end of its effectiveness in its present form. The bank has already cut its cash rate to close to zero (0.75%) and will consider another cut on Tuesday.

It is preparing to consider so-called “unconventional” measures, including buying bonds in order to force longer-term interest rates down toward zero.




Read more:
If you want to boost the economy, big infrastructure projects won’t cut it: new Treasury boss


Governor Lowe has made the case for “fiscal support, including through spending on infrastructure” saying there are limits to what monetary policy can achieve.

The 13 economists unanimously back the Governor.

Seven of the 13 say what is needed most is fiscal stimulus (including extra government spending on infrastructure), three say both fiscal and monetary measures are needed, and three want government “structural reform”, including measures to help the economy deal with climate change and remove red tape.

None say the Reserve Bank should be left to fight the downturn by itself without further help from the government.

There is plenty of room for fiscal stimulus, particularly infrastructure spending – Mark Crosby, Monash University

I agree with the emerging consensus that monetary policy is no longer effective when interest rates are so low – Ross Guest, Griffith University

It is time for coordinated monetary and fiscal policies to boost domestic demand – Guay Lim, Melbourne Institute

The surplus can wait

Eleven of the 13 believe the government should abandon its determination to deliver a budget surplus in 2019-20.

Renee Fry-McKibbin. Ease surplus at all costs.
ANU

Economic modeller Renee Fry-McKibbin says the government should “ease its position of a surplus at all costs”.

Former Commonwealth Treasury and ANZ economist Warren Hogan says achieving a surplus in the current environment would have “zero value”.

Former OECD director Adrian Blundell-Wignall says that rather than aiming for an overall budget surplus, the government should aim instead for an “net operating balance”, a proposal that was put forward by Scott Morrison as treasurer in 2017.

The approach would move worthwhile infrastructure spending and borrowing onto a separate balance sheet that would not need to balance.

Political debate would focus instead on whether the annual operating budget was balanced or in deficit.

Former treasury and IMF economist Tony Makin is one of only two economists surveyed who backs the government’s continued pursuit of a surplus, saying annual interest payments on government debt have reached A$14 billion, “four times the foreign aid budget and almost twice as much as federal spending on higher education”.

Tony Makin. Surplus needed for budget repair.
Griffith University

Further deterioration of the balance via “facile fiscal stimulus” would risk Australia’s creditworthiness.

However Makin doesn’t think the government should leave everything to the Reserve Bank.

He has put forward a program of extra spending on infrastructure projects that meet rigorous criteria, along with company tax cuts or investment allowances paid for by government spending cuts.

Former trade minister Craig Emerson also wants an investment allowance, suggesting businesses should be able to immediately deduct 20% of eligible spending.

It’s an idea put forward by Labor during the 2019 election campaign. Treasurer Josh Frydenberg has indicated something like it is being considered for the 2020 budget.

Emerson says it should be possible to deliver both the investment allowance and a budget surplus.

Quantitative easing would be a worry

Five of the 13 economists are concerned about the Reserve Bank adopting so-called “unconvential” measures such as buying government and private sector bonds in order to push long-term interest rates down toward zero, a practice known as quantitative easing.

Jeffrey Sheen and Renee Fry-McKibbin say it should be kept in reserve for emergencies.

Adrian Blundell-Wignall and Mark Crosby say it hasn’t worked in the countries that have tried it.

A quantitative easing avalanche policy by the European central bank larger than the entire UK economy has left inflation below target and growth fading. Quantitative easing destroys the interbank market, under-prices risk, and encourages leverage and asset speculation – Adrian Blundell-Wignall

Steve Keen says in both Europe and the United States quantitative easing enriched banks and drove up asset prices but did little to boost consumer spending, “because the rich don’t consume much of the wealth”.

The treasurer should step up

Taken together, the responses of the 13 economists suggest it is ultimately the government’s responsibility to ensure the economy doesn’t weaken any further, and that it would be especially unwise to palm it off on to the Reserve Bank at a time when the bank’s cash rate is close to zero and the effectiveness of the unconventional measures it might adopt is in doubt.

Measures the government could adopt include increasing the rate of the Newstart unemployment benefit, boosting funding for schools and skills training, borrowing for well-chosen infrastructure projects with a social rate of return greater than the cost of borrowing, further tax cuts that double as tax reform (including further tax breaks for business investment) and spending more on programs aimed at avoiding the worst of climate change and adapting to it.

The economists are backing the governor in his plea for help. They think he needs it.


The 13 economists surveyed




Read more:
Buckle up. 2019-20 survey finds the economy weak and heading down, and that’s ahead of surprises


The Conversation


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

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

It’s unanimous: Economists’ poll says we can fix the banks. But that doesn’t mean we will



File 20190213 90494 1is8dm8.jpg?ixlib=rb 1.1
Most of the economists polled think better regulation can make banks put customers first. The rest think it will need more.
Shutterstock

Gigi Foster, UNSW and Paul Frijters, London School of Economics and Political Science

After three years and 35 polls, the Economic Society of Australia has received its first-ever unanimous response to a survey question.

It asked just over 50 of Australia’s leading economists to respond to this statement:

There is no way to significantly increase the degree to which Australian retail banks act in the interests of consumers.

Twenty did. All rejected the proposition that nothing could be done. But there was widespread disagreement about what should be done.

Most thought that regulations should be tightened and better enforced.

Mathew Butlin’s comments typify this “more regulation” approach:

The incentive structures for bank staff, from the top down, play a key role in shaping behaviour. A more complete set of performance measures linked to remuneration that strongly penalises behaviour not in the consumer interest would provide stronger incentives for better behaviour, especially when linked with reliable information on non-compliance going to management and ultimately the bank board and a requirement for both to take action.

A smaller group openly doubted that better regulations would
help, because they were not confident that the current crop of regulators or politicians would be able to devise and properly enforce them.

Allan Fels gave the most damning response (with the highest word count) saying what was needed – among other things – was a
“radical improvement in the performance” of the two main regulators, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

In particular they need a change of culture. This will prove to be harder to do than it sounds. People have been talking for over twenty years about the ASIC and APRA culture needing improvement.

Geoffrey Kingston called for mandatory minimum sentences
for financial crimes, arguing that the courts were complicit in the maintenance of financial crimes by being reluctant to jail white-collar criminals.

Kingston and Joaquin Vespignani pointed to the monopoly power of the big four banks before then raising the hope that the “big data” revolution would democratise banking and re-empower consumers, an idea at the heart of the government’s Consumer Data Right initiative.

Also targeting market concentration, Allan Fels, James Morley, and
John Quiggin called for the separation of bank functions (with marketing separate from advice) or the breakup of banks themselves as happened in the United States under the Glass-Steagall Act of 1933 which separated investment banks from deposit-taking banks.

Gigi Foster called for foreign countries to send competent regulators to sort out Australian’s banking system, suggesting that Australian regulators were compromised.

John Quiggin called for a stand-alone “no frills” public bank modelled on New Zealand’s Kiwibank, something he hoped would rein in the expansion of the financial sector that began in the 1970s. But he added:

These proposals may be beyond the realm of political feasibility, which is why I have expressed only modest confidence in my view.

Quiggin and a substantial minority of those polled acknowledged that – uncomfortably for economists – many of the barriers to getting banks to behave better lay outside the realm of economics. Like well-meaning doctors, economists have been dispensing prescriptions that “should work”, while the patient continues to die.

But standard prescriptions have their place – among them removing commissions, imposing salary caps, imposing fee caps, revoking licences and setting minimum jail terms, all of which would change the balance of risks and rewards and help put money back into the pcokets of ordinary Australians.

Of course, even applying traditional economic prescriptions require political will.

Perhaps surprisingly for a group of “dismal scientists”, 20 of Australia’s leading economists believe that change is possible. It isn’t the economics that is dismal, it’s the dearth of political courage to do what’s needed.


This is an edited version of a review for the Economic Society of Australia, available here.The Conversation



Gigi Foster, Professor, School of Economics, UNSW and Paul Frijters, Co-Director, Wellbeing Program, London School of Economics and Political Science

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