Nick Coleman: economics

Australia's Fiscal and Monetary Policies: How They Work

Nick — Sat, 19 May 2012 10:21:00 -0700

The Sydney Morning Herald's Ross Gittins has a good article on how monetary policy and fiscal policy as implemented by Australia's Reserve Bank and the Dept of Treasury interact over both short and medium terms to produce low inflation and good economic growth.

Australia has seen both for a few decades, much of it built on the foundations of Treasurer Paul Keating in the 1980s.

The article, which is pretty much a summary of key points made by Secretary of Treasury Dr Martin Parkinson in his annual post-Budget speech, gives a good overall view and is worth a read for a layman's summary of how it all works.

In a nutshell, Australia's fiscal policy includes automatic stabilisers that offset periods of low or high growth, and monetary policy includes the ability to change things in the immediate short term with adjustments that can be small or large if needed.

Both of these things combined have provided stability and continued growth with low inflation.

The key point to understanding what we want is that, "while keeping inflation low may be the target [Ed: and is what the press so often focusses on], the goal is non-inflationary growth—growth that should keep unemployment low."

The result is a sustained period, over 20 years, of low inflationary growth that is the envy of the rest of the world. We have avoided the worst of the busts and have (relatively) few negatives from the booms. This is why you so often see Australia's Treasurer at the time voted as world's best treasurer by Euromoney magazine and others.

A robust Treasury and an independent central bank have played important key roles, but we should also give credit to both sides of politics for keeping to the game plan in their successive budgets.

We Should Use Debt to Pay For Floods

Nick — Sat, 22 Jan 2011 11:59:00 -0700

Now that the mop-up is taking place after the overwhelming Queensland and Victorian floods, we are starting to talk about how to fund the rebuilding.

Prime Minister Gillard won't give an unequivocal answer, but has floated the idea of a one-off tax levy and some tight budget constraints on government spending elsewhere.

My first reaction is to ask why nobody is mentioning the dreaded "debt" word.

It is a failure of Australian politics, both at the State and Federal levels, that debt has become a complete pariah. It is a hangover from the 1980s and 1990s when Labor State governments were fiscally irresponsible and had to be brought to account. But the pendulum has swung too far when the very mention of the word sends politicians running away.

There is nothing wrong per-se with government debt. It is the cheapest funding available. It is the right way to fund projects that have huge capital costs and where the benefits to the nation from those projects are realised over decades. There is no reason why current generations should pay the full cost of benefits that they and future generations will receive.

This is standard economics and completely uncontroversial.¹

However, a one-off tax levy would mean that the current generations would pay the full cost of all benefits, both present and future. There is no reason for that.

There is also no reason why current generations should bear the full brunt of reduced government services, which is what would happen with budget constraints.

The sensible, fair thing would be to issue new government debt with a range of medium and long term maturities. This way, current generations would pay a share and so would future generations.

[Later] I notice that other people are starting to say the same thing. Michael Gordon at The Age has a good article questioning the need to maintain a budget surplus now.

[1] One of the reasons it doesn't get much play any more is because governments believe that private partnerships bring better results. One of those results is to move the debt off the governments balance sheet on to private corporations. Of course, the interest cost is then higher and it ends up costing the general public more. Governments claim other efficiencies make up for that, plus they get to have a debt-free balance sheet. ↑

Retailers Don't Get It

Nick — Sat, 08 Jan 2011 11:24:00 -0700

There's been some kerfuffle in the last week when retailers mounted a campaign to lower the duty-free tax threshold. They claim they are unfairly losing business to on-line offshore sellers because buyers don't have to pay GST on imports less than $1,000. The argument is summarised in The Age here. According to that, the retailers have been stunned by the backlash against them.

The retailers just don't get it, and it shows in the major tactical blunder they made. They argued that their prices were disadvantaged because local shoppers had to pay GST, whereas on-line shoppers going offshore did not.

Their blunder was that on-line shoppers, by definition, are internet savvy and quite used to doing price comparisons on the web. These shoppers know that on-line prices are not cheaper by the 10% or 15% of the GST, but by 30% or 50% or even 75%.

Shoppers immediately called foul and filled newspapers comments. Soon the retailers' push was swamped by a counter-avalanche of complaints of unnecessarily high prices here in Australia.

Back in the days of the cultural-cringe, we were used to paying more and we sort of accepted it. We accepted the arguments of high transport costs due to distance, high wholesale costs due to low domestic market size, and so on. But when you have been to America and seen how cheap are Nike shoes, or a polo shirt, or a suit, in comparison to here, and you know you could import them yourself with full transport costs and still come out ahead, something is wrong. We've known this for years, but, before the internet, lacked the ability to do anything about it.

The groundswell built and it looks like we are willing no longer to put up with it. Those retailers who don't recognise the pent-up backlash are the ones who are surprised by its volubility. They are stuck in old-retail thinking and, unless they adjust, risk being seriously marginalised. Retail now is two things and two things only: service and price. You can survive with higher prices if you provide a superior service that customers are willing to pay for. Everything else is price.

Bad News (or Good News) For Partygoers

Nick — Fri, 20 Aug 2010 15:42:00 -0700

New Scientist is reporting that we are running out of helium.

The good news is that it is incredibly cheap compared to its long-term economic worth due to an artificial U.S. government supply.

The bad news is that it will become incredibly expensive after 2015.

Read the article for more details, but the short of it is that the U.S. government is force-selling half its strategic reserves, to be completed by 2015. But it has changed how I see helium. I might even start to feel a little guilty when I waste it doing Donald Duck voice impressions. Or not. It will take me a while to use up a billion cubic metres.

[I was surprised at how hard and expensive it is to manufacture. After all, it's the second most abundant element after hydrogen. After thinking about it a little more, it makes sense. Helium is the second most abundant element in the universe, but it's not the second most abundant element on Earth for the following reasons. It's the 2nd lightest element, so the gas will simply rise up into the upper atmosphere where it can be blown out of Earth's gravity well relatively easily by the solar wind. It's also chemically inert, which means it doesn't combine with anything much, which means it isn't found very often in chemical compounds in nature. All up, it isn't commonly found on Earth.]

China World's Second Biggest Economy

Nick — Mon, 16 Aug 2010 15:21:00 -0700

The New York Times is reporting that China has surpassed Japan and is now the world's second biggest economy after the United States.

I guess that's not surprising in itself. Anyone who has bought anything in the consumer goods or electronics area, for example, knows that China has an extraordinary large manufacturing base.

The interesting thing for me is just how big and how dominant is the U.S. where the GDP is twice that of China's.

It is projected to exceed the U.S. by 2030.

Pricing Added Value on Milk

Nick — Fri, 16 Apr 2010 10:31:00 -0700

Shouldn't pricing reflect added value? It's a standard economic principle that, all else equal, you will earn a higher price if you add value to a commodity.

Adding value can mean lots of things, from processing base commodities such as iron ore into steel, or taking a gizmo and painting it a nicer colour so consumers desire it more and you can charge a higher price, and so on.

So to milk. I've used powdered milk for several years now. Originally it was a cost-cutting measure (huh? keep reading...) and now it is for convenience. It's quick and simple to mix up a fresh batch and it means I've always got milk available even if I forgot to go to the shops.

As an aside, they seem to have improved the processing so if your memory of powdered milk is that it tastes funny, that's no longer the case. I can't taste the difference with fresh milk.

Fresh milk has little added-value. They pasteurise it, which they have to by law here, so no competitive advantage there. Then they transport it to the supermarket. The only added value is that we can go to the supermarket instead of having to travel out to a dairy.

Powdered milk on the other hand obviously has a lot more processing to get it into the powdered state. I don't know exactly what it involves, but it has to involve freeze drying and powdering, then packaging. No matter, whatever it is, it is adding value to a base commodity.

So how come fresh milk costs about $2 a litre and powdered milk costs about $0.60 a litre? There is something clearly wrong here. Given the extra processing of powdered, you would expect the reverse. So what is going on here?

My guess is that it reflects the oligopoly of supermarkets here in Australia. The top two, Coles and Woolworths, share about 85% of the market, with the next tier of secondary supermarkets like IGA and a few others sharing the rest.

These two have huge buying power, such that they are able to squeeze suppliers to the extent of forcing them to pay for shelf space.

I think that milk is such a basic commodity in high demand that the supermarkets are really screwing both ends of the supply chain, the supplier and the consumer, resulting in huge margins. I would love to know what that margin is.

Powdered milk, on the other hand, acts more like a standard commodity. It doesn't have huge demand, so the supermarket is forced to price it more like its true cost plus margin.

No matter, whatever the reason, basic economics says there is a disparity between the price of fresh milk and powdered milk. Whenever that happens, either the market is out of kilter, or someone is getting screwed.

You could give powdered milk a try. It's a lot cheaper, and you might be surprised that it tastes just like fresh milk.