Friday, 3 June 2016

3 Things Australian Politics is Mistakenly Obsessed About

Every country has its own particular political disputes, big or small. Often they’re not even important, but have been caught in massive political polemics for a long time, which means that everyone believes that they are important - especially heated debates during election times, naturally.

Few things are that important. A quote from one of my favourite historians, John Vincent Nye, illustrates the topic very well. In talking about historians of the industrial revolution, he says:
"For the thousandth time, it seems, scholars […] have confused what was politically important with what was economically significant.” (p. 40)
Same thing goes with current Australian politics. It is election season, so what would you expect but an absolute outpour of economic illiteracy?

Here are 3 examples of where the political indignation left and right is mostly irrelevant: 

1) Negative Gearing
Negative gearing is this particular Australian (occurs also in NZ and Japan) unrestricted tax-deduction for losses on rental income, which, if done properly, offsets income earned elsewhere (be they through labour or other investments), to lower your overall tax burden. It also comes with a discount in capital gains tax whenever the investor sells the property in the future, subject to certain restrictions.

The dispute in Australian political life is predominantly about two things: a) it is an unfair regressive tax benefit, because most of the deductions end up in wealthier households, and b) it contributes to a speculative housing boom, and so is to blame for the incredibly high housing prices seen in capital cities around the country. 

For the first charge (a), numbers between $3bn and $13bn are thrown around as "losses for the Treasury", and seems to be largely a welfare to the rich. The issue is slightly more complex, and research seems to show that changes proposed to negative gearing might not actually impact high-income earners very much, but only middle-/low-income earners that are taking advantage of the tax treatment of properties. That is, in the absence of negative gearing investors would presumably do something else with their assets, and so the case is not as clear as the abolitionists want to make out. Besides, as Michael Potter has shown, they seem to come down on the wrong side of relative/absolute numbers in this regard. 

As for the second charge (b), it is mostly anti-speculation and anti-investment sentiments fuelled by far-lefty hatred of non-labour income. Negative gearing is emphatically not what has been driving housing prices, regardless of how ill one views "speculation" narrowly defined. Nigel Stapledon of UNSW Business School said the following in a report in April 2016:
“In the Sydney and Melbourne markets the decline in rent-price ratios (as prices rose) almost exactly matched the decline in real interest rates, i.e. it is an interest rate story.”
Most other research seem to show the same thing. Not to mention that high housing prices are prevalent in places such as London, Vancouver or California - places where Australian-style negative gearing are not in place.

Besides, I want to recall that Stapledon during his guest lecture at USYD in October last year dismissed claims about negative gearing fuelling housing booms by arguing that its ability to explain changes in house price amounts to trivial single-digit percentage points.

Negative gearing is a red herring.

2) Balanced Budget

Most debates about the public finances revolve around whether the fiscal budget is in balance or is projected to be in balance, how big the deficit is, or how large the debt-to-GDP ratio is. In many places around the world, such as crisis-ridden southern Europe or Japan or the United States, the debt-to-GDP discussions are relevant, with numbers ranging from 100% to 250% of GDP - those number normally don't take unfunded liabilities (future pension expenditure or unfunded benefits) into account, which means the actual debt is much much larger.

Australia is emphatically not in that position. Its pension system is largely privatised and, apart from some public sector superannuation debts of $130bn, is almost entirely funded. Which means that even the worst of worst numbers about Australian public debt (those that include both states and local government debt and public sector unfunded supers) don't even amount to 65% of GDP. More common figures that don't include these extra debts and only count outstanding Treasury bonds (some $450bn) means the ratio is something like 28% of GDP (=450/1629 = 0,276). If you wanna add public assets and measure Net Public Debt like my macro professor does (or many left-leaning organisations do), the ratio is a laughable 10% of GDP.
Even so, according to my lecturer in political economy, there aren't even enough outstanding Treasury bills for Australian banks to hold in order to comply with Basel III banking regulation.

Having that in mind (Australian public debt really doesn't matter), it is absurd that most commentators are so up in arms over a $39bn deficit in the budget that they believe the question will dominate the election. The $39bn deficit amounts to something like 2.4% of GDP - in an economy that grows some 3%! To spell it out more clearly: If your economy grows faster than you are adding to the debt, the debt-ratio necessarily falls. That is, the fact that the deficit is not 0 is largely irrelevant - especially when the public debt is so low in the first place.

3) Inequality is a Growing Problem

I'm so sick of this inequality garbage. It's all over the place. And it seems to be the left's only credible charge against markets, since obviously immiseration of the workers didn't happen. The Australian elections do get their fair share of such disputes, but truth or relevance are not even on the agenda.

But most claims could use a substantial fact check. Check the ABS statistics over income inequality for instance, that I wrote about a few weeks back (accessible via RBA website):

I'm sorry, dear Guardian Readers, neoliberalism, for whatever that means, hasn't meaningfully changed income inequality over the last decade or so - however measured. And income mobility seems alive and well, as Sowell told us last year - as did Horwitz (2015).

And inequality measured by Gini in the U.K., one of the central fortresses of neoliberalism, was the same last year as in 1990. Probably not a massive crisis, probably not a relevant topic for election times. Get over yourself, already. No, Piketty didn't meaningfully change anyone's beliefs but deluded leftists. No, the poor aren't getting poorer. And no, inequality is not a thing in Australia either.

In summary, Australia is not freed from economic illiteracy, even if it does score incredibly high on economic freedom indexes. Especially three very irrelevant things keep dominating the political scene: Negative Gearing, Balanced Budgets and Income Inequality. None of them really matters, none of them deserves the disproportionate attention they get.

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