Category: Economics
It is less than 5 per cent
Posted by – 12 August, 2011
What is (70/1560)*100? 4.5 per cent. That is the decline in government expenditure over the forward estimates being proposed by the Coalition. Not much, but it would be enough to offer $8 billion in income tax cuts and would see the abolition of the mining and Co2 taxes. However, the government’s chief economist has a problem with it:
GREENS leader Bob Brown has warned a Coalition government could tip Australia into recession through massive spending cuts to fund its election commitments.
Lower taxes lead to stronger economic growth and tax revenue. A small example from the USA, via the WSJ:
In 1987 the capital gains tax rate was raised to 28% from 20%. Capital gains realizations as a percent of GDP fell to 3% in 1987 from about 8% of GDP in 1986 and continued to fall to below 2% over the next several years. Conversely, the capital gains tax rate was cut in 1997, to 20% from 28% and, at the time, the forecasts were for lower revenues over the ensuing two years.
In fact, tax revenues were about $84 billion above forecast and above the level collected at the higher and earlier rate. Similarly, the capital gains tax rate was cut in 2003 to 15% from 20%. The lower rate produced a higher level of revenue than in 2002 and twice the forecasted revenue in 2005.
BB wants higher taxes, so he needs to tell us what level taxes should be before they become too high. Just name a figure…… My answer: taxes are always too high.
There is only one word: ‘monstered’
Posted by – 19 July, 2011
Monckton’s addresss to the National Press Club pretty much destroyed his opponent, former Greens advisor Richard Denniss.
Denniss clearly did not know or have any factual details or evidence at his disposal, beyond repeating ad nauseum that the CSIRO backed the climate ‘science’. Using the CSIRO as the yard stick for climate science would be like asking the Chinese Communist Party if their political ideas were working. It is not credible. The CSIRO has become a hot bed for left radicalism. How do you think Greenpeace was recently able to learn and gain access to destory the CSIRO’s genetically modified wheat crop? Inside job, that’s how.
Monckton threw fact, reference, details and evidence at Denniss and the Canberra press gallery and he only got snide remarks about the Coalition’s climate change policies in return – policies which Monckton does not support anyway. So what was Denniss hoping to achieve? His little strawman trick was pitifully weak.
Channel 7 were there of course and they launched a predictable ad hominem attack on Monckton, Mark Riley style. Along with the pro-Al Gore Sunrise morning programme it is pretty clear which bandwagon Channel 7 are on: big government and small freedom.
Gillard’s Co2 tax media apologist
Posted by – 16 July, 2011
…Ross Gittins.
The carbon tax is neither as good as Gillard claims nor as bad as Abbott claims. Funny, that.
Classic left-wing tactic: everyone is as bad as each other so stick with the government. And more:
once the tax starts we will get used to it very quickly
Again
The one thing humans are meant to care about above all is the survival of their young. Yet people with the highest standard of living in history are whingeing that they couldn’t possibly afford to pay a bit more for their electricity.
How much is enough? And has there ever been a tax that Gittins has not liked?
Back to the trenches
Posted by – 10 June, 2011
The Productivity Commission has released a report on all things Co2. The ‘independents’, ABC and ALP have been quick to use the report to back up their claims for a carbon tax. But not so fast. The report only analysed what the EU and a couple of Asian countries are doing to reduce emissions, not our major competitors like Canada, Russia, Brazil, etc…. They’re doing nothing. Alan Moran has the story the ABC won’t tell:
And the PC was not asked to examine the carbon taxes imposed by governments of countries that compete with us. In fact, Canada, South Africa. Brazil, Indonesia, India and Middle East suppliers of fuel and raw materials have negligible abatement measures in place. Unlike those countries Australia’s exports face punitive carbon abatement costs.
Any report that holds the EU up as a gold standard can be automatically ignored and discounted. The EU is a declining trading block with record unemployment, low economic growth, de-industrialisation, massive social disharmony and a region facing catastrophic fiscal problems. Then there is the EU’s democracy deficit. With the amount of times the EU has ignored legal votes by its own people, and the fact that elected representatives cannot even propose legislation, the EU is barely a functional democracy. It is no benchmark for success and prosperity.Nevertheless our current Co2 abatement policies as a share of GDp are only outstripped by Germany and the UK. We are doing ‘our bit!’
“In terms of cost as a share of GDP, Australia spends more than China Japan, the US and South Korea. Of the countries examined only Germany and the UK are more extravagant.
“Meanwhile relative to our size, Australia’s policies bring about abatement levels three times China’s, five times Japan’s, and seven times Korea’s. Australia’s relative abatement is also 50 per cent above the US level.
The Carbon (Dioxide) Tax
Posted by – 9 June, 2011
http://www.accessmymind.info/?p=23
Introduction
On the 24th of February, Julia Gillard announced that the government planned to introduce a Carbon tax on July 1st, 2012 (Bolt, 2011). To date, a detailed plan has not been revealed, however the fiscal objectives appear to be:
- Transforming Australia into a low carbon economy (Drape, 2011).
- Avoiding economic decay (Drape, 2011)
- Development of a green industry (Scott S. , 2011)
- A ‘boom’ in highly skilled green job growth (Scott S. , 2011)
- Compensate households that are adversely affected by price rises (ABC, 2011)
Carbon tax implementation
How will the carbon tax be implemented? So far a detailed policy framework has not been outlined, however, anecdotal evidence gathered from various media sources suggests that the policy framework will include:
- A price on carbon – A carbon tax will be charged to all carbon emitting companies and industries. The exact figure has not been disclosed but various proposals in the recent past have suggested that the government will probably cost emissions at around $23/t to $26/t (Bolt, 2011) (Murray, 2011).
- Household compensation – Households will be compensated for any increases in prices (for expenses like electricity bills). As stated by Climate Change minister Greg Combet ‘Every dollar raised by the payment of the carbon price will be used to assist people, households, industries most affected and to help assist with other climate change programs’ (ABC, 2011). However, the government will not go into any specifics as to how the compensation will be divided up. As stated by Combet, ‘it’s far too early to be speculating about any particular price impacts, what may be in, what may be out and how it will be treated’ (ABC, 2011). Overall, current estimates suggest that the average power bill will increase by about $300 per year (Murray, 2011).
- Industry compensation – Some industries will be compensated for their emissions. As stated by Drape, ‘Prof Garnaut.. recommended that emissions intensive, trade-exposed industries receive [compensation], the same assistance as originally proposed under Labor’s doomed carbon pollution reduction scheme until 2015′ (Drape, 2011). However, it appears that the division of compensation may pick ‘winners’ and ‘losers’ in the new economy. For example, ‘The coal industry says mines will close and jobs will be lost if it does not get appropriate government assistance under a carbon tax’ (ABC, 2011). However, the greens have previously pushed for the coal industry to be excluded from any government compensation scheme (ABC, 2011).
- Foreign aid – Some of the money raised from the Carbon tax will be channeled overseas as part of Australia’s foreign aid packages. As stated by Murray, ‘[the carbon tax] will be used to allow Australia to meet its share of a $100 billion a year United Nations fund.. to help undeveloped nations adapt to global warming’ (Murray, 2011). Furthermore, ‘The Gillard Government is party to a UN agreement.. [entered into] at a meeting in Cancun, Mexico, under which about 10 per cent of carbon taxes in developed nations will go into a Green Climate Fund’ (Murray, 2011).
- Wealth redistribution – Some of the money raised from the Carbon tax will be utilised in international wealth distribution programmes. As stated by Murray, ‘[the carbon tax] will be used.. to transfer wealth from rich countries to help undeveloped nations’ (Murray, 2011). Furthermore, a report released by a high level United Nations group on international development assistance for climate change financing ‘makes clear the role of carbon taxes in transferring wealth from developed counties’ (Murray, 2011).
The effect of the Carbon Tax on the Australian economy
In the short run, government fiscal policy delivered in concert with the carbon tax will offset in part some of the taxes more detrimental effects. Compensation will sustain aggregate demand higher than it otherwise would have been, and compensation for high polluting industries will ensure aggregate supply is great than it otherwise would have been. However, the impacts will not be uniform across all sectors as the tax, by its very nature, targets and discriminates against high carbon emission industries. However, the net impact is that all supply will be reduced as the electricity generation industry will be one of the most severely impacted (due to the higher impacts on coal fired power plants that are the primary source of Australia’s electricity generation). Consequently, all prices will rise. As stated by Scott, ‘It will hit everything because petrol, power, transport and electricity are fed into every price in the economy’ (Scott, 2011). Consequently, there will be flow on effects as company profitability will fall, unemployment will rise, and the effective wage rates will be reduced. This is illustrated in Figures 3 and 4 below:
Figure 3 – Economic impact of carbon tax
Figure 4 – Economic impact of carbon tax in the short run
The below diagram illustrates the impact of the carbon tax in the short run. Across the entire economy production costs will rise simultaneously as effective wages are decreased. This will shift both aggregate demand and aggregate supply to the left. Because of government compensation in the short run, the shift in aggregate demand will be less than the shift in aggregate supply. As a result, equilibrium will shift from point A to point B as GDP falls and the price level increases.
In the long run, it can be reasonably expected that the government will reduce compensation to the higher carbon emission sectors as the government seeks to further reconstruct Australia into a low carbon economy. Accordingly, short term fiscal policy of industry compensation buoys up supply as the government dismantles piece by piece the high carbon emission components of the economy. This process will gradually remove capital stock from the economy, so in the short run, economic equilibrium will be higher than potential real GDP. However, in the long run, there will be a deadweight loss in the economy, GDP will fall substantially, and the price level will rise dramatically. This is illustrated in Figure 5 below:
Figure 5 – Economic impact of carbon tax in the long run
Due to the dead weight loss in the proposed foreign aid and wealth redistribution elements of the carbon tax, as well as the reduction in capital stock as certain productive yet high emission industries are dismantled, the long run average supply will be reduced. This adaptation will substantially reduce real GDP and substantially increase the price level in the economy as equilibrium moves from point B to point C.
Evaluation of the carbon tax and economic objectives
The Carbon Tax in its current form may achieve some of its objectives. However, the negative impacts on the economy appear to have been understated (Ergas, 2011) (Bolt, 2011) (ABC, 2011) (Lomborg, 2011) (Murray, 2011) (Packham, 2011).
A Carbon Tax has the potential to radically remodel the Australian economy. As stated by Packham ‘tackling climate change would involve the biggest structural change to the economy in a generation’ (Packham, 2011). But depending on the compensation model pursued it will only do so at considerable losses in other areas of the economy (Ergas, 2011) (Bolt, 2011). In particular, it will stimulate inflation, reduce the effective wage rate, remove capital stock through dismantling the most productive yet high emission segments of the economy, and erode Australia’s comparative advantages in the global economy (due to the strength of it’s resource sector and in particular the coal industry), increase unemployment, and reduce overall GDP (Bolt, 2011) (Lomborg, 2011) (Ergas, 2011). There does not appear to be a lot to boast about, and frankly, these are undertakings that should only be pursued if one was to accept the premise that ‘tackling climate change’ is ‘the greatest moral challenge of our age’ (Rudd, 2007).
The negative impact on the economy will be widespread. But particularly severe will be the impacts on effective wages and the labor market in general. As stated by Ergas:
Such a [carbon] tax increases production costs, as firms incur outlays both in actually reducing emissions and in paying for however much carbon they continue to emit. Those cost increases raise prices and cut real wages, which discourages labour supply.
But because labour is already taxed, labour supply is already lower than it ideally would be. Moreover, the economic loss from discouraging labour supply rises rapidly as the effective tax rate on labour rises. As the carbon tax increases that effective tax rate, its costs are therefore greater than an assessment that viewed it in isolation would suggest. (Ergas, 2011)
Prime Minister Julia Gillard and Green’s leader Bob Brown have both argued that a Carbon Tax can create thousands of new jobs. However, this is not supported by economic modeling or the experiences in implementing carbon reduction schemes in other countries. Lomborg warns that creating green jobs with massive subsidies simply kills off jobs in other segments of the private sector:
The companies calling for political intervention to create green jobs tend to be those that stand to gain from subsidies and tariffs. But, because these policies increase the cost of fuel and electricity, they imply layoffs elsewhere, across many different economic sectors. Once these effects are taken into account, the purported increase in jobs is typically wiped out (Lomborg, 2011).
Furthermore, the promised new jobs will only come off the back of substantial government subsidies as demonstrated in the environmental and economic policies pursued in Spain, Denmark and Germany. See Figure 5 below:
Not only are the above subsidies grossly expensive, but some commentators warn of the potential for corruption and exploitation of the carbon tax as a ‘central planners dream’ (Bolt, 2011). Bolt continues, ‘This is going to be a disaster, and the greatest scrabble for handouts ever seen in this country’ (Bolt, 2011).
Ergas is equally cynical ‘You don’t need to be a professor to know that any policy sells better if it is linked to tax cuts.. So the issue is whether the tax changes flagged in Garnaut’s recent report on carbon pricing and the ones the Prime Minister has hinted at since, would yield a better tax system and as stronger economy. The answer is they would not’ (Ergas, 2011).
To date, the primary stated reason the government is proposing a carbon tax is to tackle climate change. With that as the official stated objective, Bolt suggests two pertinent questions:
- By how many degrees Celsius will the Carbon Tax reduce global warming?
- How much will the Carbon tax actually cost? (Bolt, 2011)
Andrew Bolt made such enquiries of Jill Duggan in an interview on the 12th March, 2011. Duggan is the European Commission’s National Expert on Carbon Markets and a key architect of the carbon reduction schemes currently in effect in Europe. An excerpt from that interview is as follows:
AB: Your target is to cut Europe’s emissions by 20 per cent by 2020?
JD: Yes.
AB: Can you tell me how much – to the nearest billions – is that going to cost Europe, do you think?
JD: No, I can’t tell you but I do know that the modelling shows that it’s cheaper to start earlier rather than later.
AB: Right. You wouldn’t quarrel with Professor Richard Tol – who’s not a climate sceptic but is professor at the Economic and Social Research Institute in Dublin? He values it at about $250 billion. You wouldn’t quarrel with that?
JD: I probably would actually. I mean, I don’t know. It’s very, very difficult to quantify.
AB: Right. Well, you don’t know but you think it isn’t $250 billion . . . What sort of temperature reduction do you imagine (you’ll get) from that kind of investment?
JD: Well, what we do know is that to have an even chance of keeping temperature increases globally to 2 degrees … you’ve got to reduce emissions globally by 50 per cent by 2050.
AB: But from the $250 billion—or whatever you think the figure is—what do you think Europe can achieve with this 20 per cent reduction in terms of cutting the world’s temperature?
JD: Well, obviously, Europe accounts for 14 per cent of global emissions. It’s 500 or 550 million people. On its own it cannot do that. That is absolutely clear.
AB: Have you got a figure in your mind? You don’t know the cost. Do you know the result?
JD: I don’t have a cost figure in my mind. One thing I do know, obviously, is that Europe acting alone will not solve this problem alone.
AB: So if I put a figure to you – I find it odd that you don’t know the cost and you don’t know the outcome – would you quarrel with this assessment: that by 2100, if you go your way and if you’re successful, the world’s temperatures will fall by 0.05 degrees? Would you agree with that?
JD: Well, I think the climate science would not be that precise. Would it?
AB: Ah, no, actually it is, Jill. You see, this is what I’m curious about; that you’re in charge of a massive program to re-jig an economy. You don’t know what it costs. And you don’t know what it’ll achieve. (Bolt, 2011)
Similar criticisms can be leveled at the current government’s policy. We don’t know exactly how much it will cost, but by all accounts it is grossly expensive. Furthermore, we do not know with any certainty what it will achieve. The current mantra by certain politicians and many in the Australian mainstream media is that there is a scientific consensus that man is the primary cause of climate change, and that skeptics are extremists (Bolt, 2011). To date, no highly visible and balanced debate on the cause of climate change has taken place in Australia. However, an objective assessment would suggest that the climate systems are not fully understood and that the science is mixed (Lomborg, 2011)(Bolt A. , 2011).
Regardless, even if the Australian economy was shut down tomorrow, Australia’s carbon footprint of today would be surpassed by China in only 6 months. Because, as reported by the Institute for Energy Research, China is currently constructing a new coal fired power plant ‘each and every week’
However, if the hypothesis is accepted that man is the primary cause of climate change, what is an effective solution? Lomborg argues that it is ultimately investment in energy technology:
‘Everybody talks about cutting carbon emissions, and how much they need to reduce in the next five or 10 years. Whereas the real solution has to be about making sure we get new, breakthrough technologies in the next 20 to 40 years.
I helped organise something called the Copenhagen Consensus on Climate where we asked some of the world’s top climate economists including three Nobel laureates to find what are the smartest ways to deal with climate change. They essentially said ‘invest dramatically more in research and development.’
They recommended we spend 0.2 per cent of GDP on research and development in demonstration of non-carbon emitting energy technologies.
This is about $100 billion per year. It would be about $1.6 billion a year for Australia’ (Lomborg, 2011).
Conclusion
Overall, the evidence suggests that a carbon tax will not stop global warming (Pilmer, 2010)(Bolt, 2011) (Lomborg, 2011). It will however increase unemployment, reduce real GDP, cause effective wage rates to fall, and drastically increase prices while reducing aggregate demand (Ergas, 2011) (Lomborg, 2011). The compensatory side of the fiscal policy could be effective in stimulating research and development into new energy solutions and remodel the economy (Lomborg, 2011), but there certainly will be a substantial dead weight loss and no economic gain in the immediate future (Pilmer, 2010) (Lomborg, 2011).
Gillard’s Kamikaze economics: no retreat!
Posted by – 21 May, 2011
Gillard is trying to inspire the troops:
In a strongly worded address, Ms Gillard told Victorian ALP conference delegates that she would not surrender her push for a carbon tax, which she said would be bedded down in time for the next federal election.
That’s kind of scary. We have a PM that blatantly lied to gain power and now is completely ignoring the voters post-election. Who is to blame for the community outcry? Well, according to Gillard:
….the climate change debate was being hijacked by US-style, hard Right politics, accusing Tony Abbott of mounting an hysterical fear campaign…
So the USA and Tony Abbott – apparently voters must like being lied to.
The Australian Dollar: the world’s new ‘old gold standard’
Posted by – 26 April, 2011
A few thoughts.
A fiat currency is any currency that is backed by government law and guarantee, the government’s money. Virtually every currency in the world is now a fiat currency as opposed to a commodity backed currency. Australia of course is a fiat currency, but it has become much more than that since the onset of the financial crisis, the fiscal implosion in the USA and accelerating growth rates in the developing world and their demand for raw materials. The Australian dollar seems now to occupy a place in between an official fiat currency which is backed by the government but whose value and security is determined more by the value of commodities: a defacto commodity backed currency or representative money. As I considered this I found an article from the UK Telegraph which says much the same thing:
Today, no currency in the world is on the gold standard – all money is “fiat” money.
However, Australia has significant resources of gold, uranium, iron ore, coal and many other important and valuable commodities. They are in the ground, not in a central bank, but this is the nearest thing the world has to the old gold standard. That’s why the Australian currency is so strong.
I really can’t see the dollar declining any time soon. Obama does not seem to realise what a mess the Federal government is in, not to mention the US economy. Beyond a certain point in economic development, electricity becomes price inelastic so, even if growth in China and India slows, the demand for coal, gas and uranium will still continue, and the EU debt crisis is not going away because the solutions are too unthinkable for the European Council to consider–like kicking countries out of the euro zone. So, combined with strong demand and higher financial uncertainty, the Australian dollar will stay high.
If the Chinese ever float their currency, then the strength of the Australian dollar might change as investors look to speculate on the Yuan. While Gillard is doing her best to destroy the Federal budget, it will take a while to reach the armageddon proprtions we have seen in the EU and USA.
Treasury fails stats 101
Posted by – 20 April, 2011
This month’s Agenda from the ANU economics department has rounded upon the Rudd stimulus package. The journal’s authors conclude that the stimulus really didn’t work. The most revealing article is from RMIT professor, Sinclair Davidson, directed at Treasury. Essentially Treasury twice attempted to show that the Rudd 2008/09 stimulus worked by using a single regression model to prove it. On both occasions, Treasury was found to have failed miserably by cherry-picking a data sample to get the result they were looking for and not running statistical significance tests to validate the result.
It is not unreasonable, however, to expect that Treasury could correctly estimate a 19-observation regression — something first-year students used to do with a hand calculator in the 1980s. Nor is it unreasonable that Treasury should advise government that a single regression cannot resolve a long-standing controversy in economics.
One must wonder who the heck was running Treasury at the time. Oh yeah, it was that ALP yes-man and wombat-welfare officer, Ken Henry. The mistakes were pretty basic – bread and butter stuff that you’d think Treasury would be able to manage. If Treasury can’t even put together a simple single regression properly, then no wonder all their forecasts have been so widely off for so many years. The article does not exactly inspire confidence in Treasury and their mastery of macroeconomics. It is damning of the people that work there.
Larry Summers strikes again for incompetence
Posted by – 20 April, 2011
Larry Summers–the economic darling of the political left in the USA, the guy that tried to bankrupt Indonesia during the Asian financial crisis, and probably the only American Federal figure who is loathed by both sides of Australian politics for his intransigence and general lack of economic expertise–can now add another policy failure to his hat:
Larry Summers, the architect of President Obama’s economic policy, was at his most grandly condescending earlier this month when he caricatured George Osborne’s deficit-reduction strategy as “expansionary fiscal contraction – every bit as oxymoronic as it sounds”. He doubted whether better “fiscal hygiene” would help the economic recovery. Yesterday, Mr Summers’s own recipe for growth – in essence, borrowing even more to stimulate activity – finally received its comeuppance as Standard & Poor’s, the credit rating agency, downgraded the outlook for US government debt from stable to negative.
Even a week ago Summers was advocating more government spending to get the US out of trouble. His evidence?
Comparing the U.S. to Japan in the midst of its 1990s lost decade, Larry Summers argued at this weekend’s INET conference at Bretton Woods that the government needs to maintain domestic demand through further spending.
Gee…it’s been a long time since anyone advocated following Japan’s lead on economic policy. The country has been stagnate for going on twenty years now.