Stimulus for a recession that never was

*I am now posting as a regular contributor at Macrobusiness under the alias Rumplestatskin.  I will be posting copies of posts at both websites for the coming weeks.

 

Hands up who knew that Australia avoided a technical recession in the aftermath of the GFC? Kevin Rudd certainly got some miles out of it, noting in his farewell speech how proud he was of that fact and the role his government played.  But as usual all is not what it seems.  The Keynesians shouldn’t be celebrating just yet, as Professor Tony Makin explains:

In the aftermath of the GFC in September 2008, Australia’s nominal GDP, real GDP measured on an income basis and on a production basis, as well as real GDP per person, all fell over two successive quarters, as did various other national income measures that account for the slump in export commodity prices (or terms of trade) at the time.

Of the many national accounts series the Australian Bureau of Statistics publish, the only one indicating there wasn’t a recession was the real, or price level adjusted, national expenditure series.

In the US, a recession dating committee of the National Bureau of Economic Research uses a battery of macro-economic measures, not just the somewhat arbitrary two successive quarters of negative real GDP.

If the behaviour of Australia’s business cycle in the aftermath of the GFC had been assessed by an independent committee of economists with reference to a broader range of macroeconomic indicators in this way, a recession, albeit mild, would most likely have been declared for 2008-09.

In his more technical analysis of the impact of fiscal stimulus, Professor Makin kindly summarises some of the other key measures in the National Accounts (in the below table), and notes the following:

Though routinely ignored in economic commentary, the real gross and net domestic and national income series are especially important measures of Australia’s international macroeconomic performance because they reflect the impact of the terms of trade (or ratio of prices received for exports to prices paid for imports) on the economy.Other notable recession features included declining total hours worked (for 5 straight quarters in the market sector), falling compensation to employees and increased unemployment.

But what is most interesting from the good professor’s analysis is the delay he observes between the recession and the appearance of fiscal stimulus in the data.  He finds that:

Federal public investment actually contributed negatively to total expenditure over the critical December 2008 and March 2009 quarters, being -0.2 and -0.1 respectively, as did public investment by State and Local governments. As a result of administrative delays in implementing infrastructure spending, total public spending did increase by the end of 2009, but only after the worst of the GFC had passed, and then arguably crowded out private investment spending at the time.

Now there are obviously administrative delays to get $40billion spent on school halls and home insulation (not so much with cash handouts), but this very practical aspect of such Keynesian intervention must be addressed – how can governments time economic stimulus measures appropriately unless they have perfect foresight?

Professor Makin argues that the drop in the value of the Aussie dollar, and interest rate adjustments, are what ‘saved’ us from a technical recession, and not the delayed fiscal spending. Not only that, but government spending ramped up just as the private sector was itself recovering from the downturn, arguably crowding out private investment (although I personally wouldn’t suggest this is a major factor).

While no doubt Australia’s economic performance of the past two years has been exceptional by any global measure, our combined monetary, exchange rate and fiscal stimulus, with their various time lags, were also exceptional over this period and arguably excessive.  Now that these measures have run their course perhaps our economy will have a second chance to adjust to a more stable level, with higher savings and lower spending.  Today’s National Accounts numbers will provide further insights into key sectors of the economy now that the fiscal stimulus measures have fully ceased.

The Rolex economy

*I am now posting as a regular contributor at Macrobusiness under the alias Rumplestatskin.  I will be posting copies of posts at both websites for the coming weeks.

I was recently in touch with a Swiss friend of mine who casually mentioned that the Swiss government was taken action to help their economy adjust to the undesirable strength of the Franc (CHF), shown in the charts below.  Given that the Australian government and the RBA have been silent about the disruptive impact of the high dollar on manufacturing, tourism and education, it makes for an interesting comparison.

On the financial battleground, it appears that not only has the Swiss government lowered interest rates to zero and intervened to increase liquidity and help weaken the currency, they are also talking about deposit fees to make their currency less attractive to the tsunami of financial speculation surging around the globe.

(Also bizarre is that this high currency nation perched in the Alps has a GDP which is comprised of 50% exports, with net exports at 12% of GDP.  Indeed Switzerland has been a net exporter of goods and services every quarter since 1981.  Meanwhile our exports are just 21% of GDP and we have been a net importer in annual terms for decades.)

In addition to directly targeting the currency, the Swiss are taking on the challenge by trying to boost productivity to ‘make room’ for a higher currency.  The Swiss Commission for Technology and Innovation (CTI) has boosted efforts to commercialise new technologies to offset currency impacts on Swiss manufacturers by doubling the value of grants accessible in the next twelve months, and broadening the qualifying criteria. After all, innovation in production techniques is the key to improving productivity and economic growth.

No doubt such investment is driven by Johann Schneider-Ammann, Head of the Federal Department of Economic Affairs, who appears to understand and promote the role of productivity as the driver of growth.  In a recent speech entitled Strengthening Switzerland as a manufacturing location, made at the opening of a new Nestle production centre, he made the following comments (my emphasis).

• We must continue to invest in training, research and innovation. It is essential for personnel at all levels to be well trained. Thanks to our dual-track system of vocational and professional education and training, we have programmes with a strong practical focus. Education, research and innovation must be given top priority. Switzerland should continue to produce talent of the highest calibre. Only in this way can we maintain our leading innovative position and continue to be competitive.
• Market liberalisation and the removal of trade barriers are essential for Switzerland, and especially for a multinational company such as Nestlé. We are familiar with the problems and challenges which the global product trade faces on a daily basis. I therefore aim to ensure that we have access to the important growth markets and remove unnecessary trade barriers within Switzerland and abroad. I am in favour of extending our network of preferential agreements with major dynamic economies such as China, India and Russia.
• I am aware of the agricultural policy framework under which food companies such as Nestlé produce in Switzerland. These are currently compounded by the strong Swiss franc. This is weakening our export competitiveness considerably. I assure you that I will do everything I can to maintain or improve current conditions for Swiss companies which export abroad including the food industry.
• The labour market in Switzerland is flexible, and should remain so. The freedom of movement between Switzerland and the EU is to our overall economic advantage. Nonetheless, we still require accompanying measures to ensure that this advantage is not weakened. I also believe in the importance of nurturing a healthy relationship between social partners.

One could argue that if Australia did not have mineral and energy wealth to fall back on, we would be doing similar things and would have our leaders making similar speeches out of necessity.  Perhaps that’s true.  But choosing the short term lazy option of quarry Australia, which has been promoted by the RBA and others, is not a recipe for a stable and prosperous economy.  As I have said before:

My main concern is that frighteningly, the RBA, and probably much of the government, sees Australia’s future as a single bet on mining, and is willing to sacrifice much of the remaining economy for this to happen. Unfortunately this is a lose-lose proposition for most of the country.

All other sectors of the economy lose while the mining investment booms. When it crashes, we all lose because there is nothing else left in the economy to absorb capacity in a relatively short period. Remember, the minerals will be in the ground if we don’t mine them now, but the decades of production chains elsewhere in the economy are easily destroyed and slow to rebuild.

I acknowledge that the RBA has a single tool in its toolbox, but surely the message we should be hearing is that a strong and stable economy is a diverse economy. Quarry Australia is a very volatile and risky place to want to be.

We could learn some lessons from Swiss economic policy.

Improving the house price and income debate

While the RBA has warned of the risks of leveraging into the housing market on national television, they, and other analysts, have also presented a stable picture of the housing market, by estimating a house price to household income ratio of about 4x, and accompanying such analysis with statements like the ratio of housing prices to income has been reasonably flat for a number of years. 

Or, when he is at his best, Glenn Stevens can calm the nerves of recent home buyers with comments like this -

The other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio it about 4 ½ and it hasn’t moved much either way for 10 years.

I think I can safely say that most of Australia would disagree with this assessment of stability in the housing market or support from economic 'fundamentals'. Indeed even the RBA's own representations seem a little schizophrenic on the subject, with a recent report noting that the price-to-income ratio actually increased by 50% between 2001 and 2004.

Dwelling price growth significantly outpaced growth in household disposable income, with the nationwide dwelling price-to-income ratio rising from around 2½ in the mid 1990s to a little over 3 by 2001 and then to 4½ at its peak in early 2004.

Which is it Glenn? Did the ratio increase by 50% in that period, or hasn't it moved much either way for ten years?

One reason for the clash between public views on housing and the 'stability stance' we see out of the RBA is that the RBA grossly overestimates household incomes.

I have examined the data used by the RBA and other analysts from the National Accounts (Table 14), and tried to replicate their method and reconcile the differences with ABS household survey data, which more accurately reflects household income available for current consumption. It is possible, and I have shown my results in shown in the table below.

ABS household survey data shows that at the beginning of 2010, the average household income was $88,113 before tax and $74,360 after tax. This closely reconciles with my own household income estimates from the National Accounts data in 2010 (within 1.3%). Unfortunately due to the need to estimate the total number of households between census years, this method has quite a large margin for error.

Given the average national dwelling price at that time was $447,994 and the median about $415,000, we are definitely in an uncomfortable range of price-to-income ratios, with 5.0x in average terms using before tax income data, and around 6.0x in after tax terms. In terms of median incomes and dwelling prices, the ratio is probably closer to 5.6x before tax, and 6.8x in after tax income (as recently estimated by fellow blogger Leith van Onselen).

This happens to match the data produced by Rismark (here), after they revised their average price-to-income ratio up after noting the discrepancies in the unadjusted National Accounts data.

While I don’t believe household income and house price comparisons are the best indicator of the state of the housing market (preferring comparisons of rents to incomes and yields to other rates of return in the economy), it does seem that we can use the national accounts data to give a decent regular estimate of household incomes for those who wish to use them for analysis.  Maybe the RBA should try it sometime.

Also important to note when comparing incomes to prices is that the debt service ratio, measured as interest payment against incomes, can be misleading.  Since this measure is also published by the RBA, I assume they rely upon it in some way. 

Below is the household finances graph from the RBA chart pack (available here). We can see that, following the declines in interest rates at the end of 2008, household interest payments have settled at around 12% of disposable income. Note again that the RBA disposable income measure is probably overestimated (there is no specific note about the treatment of imputed rents), meaning the both measures are probably underestimated. But in any case the trends over time still hold.

What we need to consider here is that the interest paid graph shows what might be called a 'debt-service' ratio (although not in the true sense which would cover principle repayments). In regard to the surging household debt the RBA notes that the ...structural decline in interest rates has facilitated the increase in household debt ratios because it reduced debt-servicing costs.

That is true, but would only explain an increase in debt that accompanied flat interest payments as a proportion of income, not increasing interest payments (as I have explain in detail here).

What is also overlooked is that at lower interest rates the difference between the payment of just the interest on debt, and the repayment of interest and principle (to actually reduce the loan balance over a fixed period), greatly increases. For the same interest payment, a high debt balance with a low interest rate is more difficult to repay than a low debt balance with a high interest rate.

The table below shows the amount of debt that a household with an income of $75,000 could service with 20% of their income ($15,000pa) at different interest rates. While a halving of interest rates means the household could double the loan amount and pay the same interest payment, the loan they could actually repay over 30 years increases by far less (as shown in the right hand column).

It is also important to understand this relationship when comparing our household debt burden internationally. The RBA usually makes such comparisons without noting the importance that interest rates make to the burden of this debt on households. Given that mortgage rates vary between 7.5% in Australia to 2.5% in Switzerland and 3% in Germany and much of the EU (and noting the tax deductibility of mortgage interest in Netherlands), these differences are important. 

I will finish this analysis by presenting three graphs. 

First is a graph of the household occupancy rate. The reason to include this is that while household incomes may be still growing nicely, the number of people per dwelling has been increasing since late 2005, so in per capita terms incomes are not looking as good.

The second graph shows the contributions of insurance premiums and claims to household income (which I removed in my income estimation method). When this number is positive it means that household insurance claims were more that the premiums paid in that period. That’s why we see a massive spike in February 2011 from the claims relating to floods and cyclone Yasi (and amongst other things, the Black Saturday Bushfires in early 2009 – note the data is very cyclical with a summer peak). It seems odd to have either the insurance premiums or claims in estimates of household income (although makes up just a fraction of a percent of the total).

The third and final graph compares the growth in household incomes using each method with the ABS capital city price index. Of course, I have chosen an arbitrary baseline at June 2001, but I do note that mortgage interest rates then were the same then as they are now (indeed mortgage rates were about the same as now back in 1997 - see here), so the deviation observed could easily be interpreted as an overvaluation of housing.

What the graph mostly tells us is that there is a pretty solid reason so many people believe that house prices are historically high and are more likely to fall than rise in the near future, being supported only be our willingness to incur debt, and not our incomes. 

Using quarantine as a barrier to trade

I have been meaning to write about using quarantine as a barrier to trade since Queensland’s banana crop was destroyed by cyclone Yasi last summer and prices at the supermarket shelf hit $14/kilo and more. It seems that leading economist Saul Eslake, and economist turned politician Andrew Leigh, have done the job of deciphering genuine concerns over importing disease, and rent seeking by protected producers.

Let us start with what Andrew had to say.

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Andrew makes the solid points that quarantine and consumer protection is ‘back-door’ protectionism, and gives a good overview of the international legal framework around trade.

Saul Eslake takes different approach by discussing the price impacts on domestic consumers from this type of protection. He also highlighted that in the wake of cyclone Yasi, high banana prices were only helping banana growers whose crops weren’t destroyed, not those who actually lost their crops from the cyclone.

On the matter of importing diseases, he makes a point I have argued to many people in the past. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk? In Eslake’s words-

If bananas and other fruit or vegetables are imported into southern ports, such as Melbourne, Adelaide or Sydney, and are subject upon arrival to appropriate inspections, they are no more likely to spread diseases damaging to Australia's banana industry than the importation of cooked and packaged Canadian salmon has done to Tasmania's salmon industry (another example of protectionism masquerading as ''biosecurity'' where, unusually, commonsense and the interests of consumers ultimately prevailed).

To me the irony of the situation is that most of the crops now requiring protection from foreign pests are imported themselves, and could arguably be classified by an environmentalist as a foreign pest.

The other irony is that the countries that do have these diseases are also exporters and can produce the crop much cheaper than us.

The logical person would ask whether the potential costs from the pest or disease are greater than the benefits derived by consumers from cheaper food? If yes, then we should keep the quarantine restrictions. If no, we should drop them.

I am not trying to say here that all quarantine rules necessarily have greater benefits than there costs. But we have lost 3 out of ten cases brought against us by other WTO member, so if 30% of the quarantine rules can be dropped because their costs outweigh the benefits, that would be good for everyone in the long run.

Property industry propaganda knows no bounds (+market update)

The above video is from Bernard Salt's presentation at the 2011 Property Council of Australia's 'Geared for Growth' Congress recently held in Darwin. In the presentation he calls for the construction, property and banking sectors to combine forces to fund a lobby group to infiltrate social media, and blogs in particular, to counter the negative sentiment that is leading property markets into the doldrums.

Astonishing. As fellow blogger Tony Harris notes in his detailed analysis of the video -

Who are you really chatting with, when you post on that property forum or blog? A regular person like yourself, or a paid spruiker, funded by the real estate industry?

Around the 8 minute mark Salt discusses the hostile reception to an article he published online spruiking the virtues of growth (population growth I assume). He had this to say about the reader comments -

Not one person in 230 put a reasoned, balanced, measured counter-response. I want to see someone actually in there. Every time you don't respond, negative sentiment extends just that bit further across middle Australia. 

After pointing the finger at 'negative sentiment' as the cause of the current economic slowdown he goes on to suggest his solution (screenshot below quote) 

I want to see someone, somebody, some group of people, counter the negativism in all theatres, social media, twitter, the blogosphere, seek out and, not destroy, seek out and balance every extreme view - take the fight to them. Sitting back is not an option. I do understand that individuals cannot do this, but surely there is a way to fund a group to do it on your behalf. This it not a pitch for me, but I am surely happy to advise on how to set it up. 

What is ironic, to me, is that the property and construction industry lobby groups might actually go for Salt's big idea, as if a few blog comments and Facebook pokes can stop Australia following the rest of the world to its economic destiny.

Salt suggests perhaps they need an (another) 'independent' pro-growth, pro-development sentiment-generating lobby group which could be funded by the BCA, the Property Council of Australian and of all things, the Australian Bankers Association.

The banks would probably join because of the negative sentiment towards them at the moment. Salt comments -

The idea that banks should not get a fair return on their investment is bizarre. We've got this disconnect in Australia between the way we want to live, our superannuation, and our objection to every development, to anyone making a profit.

I for one can understand the concern over bank profits. After all, bank executives and shareholders seem happy to take the profits while taxpayers insure the losses. All the while they have played a key role in the property bubble with their declining lending standards.

Face it Bernard, you can't stop the realities of economics and finance by tweeting 140 characters or less.

And speaking of the realities of economics and finance, that national house price slide accelerated in July according to Rismark.  Note that in Perth and Brisbane prices have been falling for more than 12 months, so the falls from peak are much higher than these figures show.  From my reading of old data I could guess that Brisbane prices are down about 11% over 15months.

Coinciding with their press release was the most bizarre property analysis yet from Rismark data guru Chris Joye. Joye's analysis of late has been squarely aimed at providing evidence that current house prices are supported by 'economic fundamentals', including the once-off adjustment in interest rates, higher household incomes, and so on. 

This time he mightily proclaims to- 

... show that by indexing up median Australian dwelling prices by per capita disposable incomes and changes in borrowing capacity (as determined by mortgage rates) one can account for around 90 per cent of the rise in Australian housing costs over the last two and a half decades

Which I guess is a roundabout way of saying prices are 10% overvalued at most. Joye presents the following graph to demonstrate his result, but I can't help wondering why he chose 1986 as a start date. Had he chosen 1990 as the start date he could have shown that houses are undervalued according to his fundamentals, but had he chosen 1998 as his start date, his fundamentals would have only explained about 50% of the house price. Most bizarre.

As I have said before, yes lower interest rates and higher incomes do explain some of the growth, but only about 70% of today's prices.  There is also always the risk that incomes will fall as house prices fall, but always the chance that mortgage interest rates will drop to slow any accelerated price declines.  The downside risks are far greater than any upside potential in the housing market at the moment, and I do wonder why Chris seems so keen to give the impression that this is not the case.

In other housing news today, Leith van Onselen from the Macrobears superblog [just kidding guys ;-)] has explained in detail in this SMH article why the RBA appears to underplay the risks, and underestimate the size of, the bubble in the Australian housing market. Simply, they use a measure of average household income about 33% higher than actual household incomes. Who would have guessed that the average household disposable income was actually $74,360, and the median just $60,580 - not the $100,000+ used in the RBA's analysis? Not the RBA it seems. Oops.

Finally, I stumbled across this article (somewhat belatedly) arguing essentially that housing supply is driven by housing turnover, and is completely unrelated to price. This might come as a shock to the 'elastify the supply side' believers.  It is also odd that mostly valuers and honest property developers seem to be the few groups who argue this concept.

Let me give a few practical examples – First, imagine the construction of a residential unit block – the developer, because of cash flow or financier requirements, needs to sell a large proportion of the development “off-the-plan”.

Simply, until pre-completion sales are locked away nothing gets built. 

Second example - for house and land packages in new estates, buyers purchase the block of land first and arrange the construction afterwards. In either case there is no “build it and they will come”. It is the demand that sets the pace.

Which is what I have tried to say for some time, and said back in April like this -

The rate of land and housing supply is determined by the rate of sales of new stock (known as the absorption rate). It has nothing to do with the rate of development approvals or even the price level.

Tobin tax for Australia?

But I see offhand no other way to prevent financial transactions disguised as trade

In 1972, after the collapse of the Bretton Woods system (where currencies where pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the conversion of currencies. As he says - 

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets. (here)

A 1978 article where Tobin reflects on global monetary reform is here, and well worth a read. The relevance to Australia in 2011 is quite clear when he says -

National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exhcanges, without real hardship and without significant sacrifice of the objective of national economic policy with respect to employment, output and inflation.

While Tobin originally suggested that all countries cooperate to implement a standard tax rate, with revenues raised pooled centrally, the idea is equally valid for a single currency-issuing nation to tax conversions of its own currency.

The logic behind the tax is quite sound. An influx of foreign funds only provides domestic benefits when it backs real investment in productive enterprise. And investing in a real business takes time. As Canadian economist Rodney Schmidt noted in 1994

In two-thirds of all the outright forward and [currency] swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year

A currency exchange tax reduces the gains from short term currency trades, and for a single country, allows them to reduce distortionary taxes elsewhere in the economy leading to productivity benefits. It also means there is a strong incentive for national savings to be invested locally, and a cost to banks seeking offshore funding to support their capital requirements. It also provides local governments some degree of control over their economy, rather than being at the mercy of global conditions. These are all good things.

Of course, like any tax, the risk is that governments simply spend this extra revenue unproductively and do not reduce distortionary taxes elsewhere in the economy, which greatly reduces its potential benefits.

In 2009 Brazil implemented a similar financial transaction tax regime that applies to foreign investment in stocks and fixed-income securities at a rate of 2%. And it seemed to work -

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

But only for a while. The chart below shows the Real regained its strength fairly quickly. 

(This is not to be confused with Brazil's former Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira, or CPMF, which was a transaction tax levied at 0.038% on all bank transactions from 1993 till the end of 2007) 

Of course the empirical macroeconomic problem arises once again here - would the Real have been even stronger if not for the tax? Who knows? My gut feeling is that because economic agents adapt very quickly to new taxes, their offsetting behaviour can greatly reduce the intended effect. 

Since that time, the global battle to devalue domestic currency has resulted in many calls to implement Tobin taxes, from the British Prime Minister to the French President, with all political leaders seeking input from the IMF. The IMF is now coming around to the idea (recently releasing this working paper), and with DSK's likely replacement Christine Lagarde being a fan (here), chances have improved that this tax will be supported globally.

There is even strong support from the economics profession, with1000 economists writing a letter in support of the idea earlier this year. A good summary of the breadth of support (and not) for such a tax is here. Even economists at the Australian Treasury are talking about it. 

The cynic in me says that such a tax is unlikely because those who benefit from fast and cheap currency exchange are those with the most money, while those who bear the burden of a high domestic currency are usually the workers in marginally competitive industries.

For Australia I see only upsides to this tax. A lower Australian dollar and reduced foreign investment will help to slowly rebalance our economy to become more diversified and stable again. While the Henry Tax Review overlooked this type of tax, at least we have a backdrop of tax reform to accompany a Tobin tax.

The outcome of this political battle with the global financial elite is anyone's guess.

Anthropologist's view on debt and money

Over at Naked Capitalism is a fantastic interview with David Graeber, author of Debt: The First 5,000 years. The most intersting point for me is that economists just assumed that since money is currently primarily used to estimate exchange value, that this is the historical reason for the existence of money. While this view of money is often a workable assumption, the deeper social issues surrounding money become easily overlooked when you perceive money primarily as a means of exchange, and ignore the role of debt anf conflict as the tru origins of money.

An excerpt is below, and the full interview is worth reading, especially for those curious about Chartalism, Biblical debt jubilees and so on.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Not so random links, comments and quotes

 

Law of demand holds
Bust fares go up, patronage goes down. A lesson for policy makers about defining their outcomes better – do they want cost recovery for transport (higher fares, lower usage), or are they willing to subsidise public transport to save costs of maintaining the road system?

Algorithms rule our lives
The algorithms of Wall Street may be the cyber-equivalent of the 80s yuppie...
The question for the economist is not whether there are downsides to this infiltration, but whether the costs outweigh the benefits. I am pretty sure that is not the case yet – after all, algorithms are written by humans, redesigned by humans, and often ignored by humans.

Culture -
The Misconception:  You celebrate diversity and respect others’ points of view.
The Truth: You are driven to create and form groups and then believe others are wrong just because they are others.

If patents over software are a bad idea, why not all patents?
This article argues that companies find it more attractive to make money suing each other for infringement than actually making things.

The question for society is whether innovations would occur at close to the same level without patents? My personal view is that they would, and that a possible first mover advantage would be reward enough. A short, but very useful, free online textbook on the economics of patents and copyright is here.

Apple iPad patent fiasco

Free trade in apples, finally?
As I said before with food import restrictions, if prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.

Essentially, by protecting our producers from import competition we are paying HIGHER prices for Australian food than foreigners are paying for Australian food.

Of course apple growers will whinge, but they will adjust over time, and in reality, their incomes have been protected for a long time anyway.

Warren Buffet supporters in France - the rich want to be taxed more

Quotes -  
Graveyard market - buyers don't want in, sellers can't get out (ht: doomsday_trader)

After all, statistics are like bikinis. What they reveal is interesting, but what they conceal is more important (ht: John Booth)

If an Axe is being ground, cluelessness will follow naturally. I used to be an ideologue and as I think back on my unreflective self, I remember that I just chose to devote all my mental energy to what I wanted to believe and none to what I didn't want to believe and the result was I appeared clueless, sometimes intentionally clueless (ht: anon)

The lesson of Alaska is never give away land, even when it is seemingly worthless (ht: M)

Gay marriage - questions

The gay marriage debate is extremely interesting. I have a few issues that never seem to be resolved, and are often bypassed in discussion on the matter.

1. Marriage is a religious institution essentially designed to encourage conformity to a norm of one sexual partner, and for specialisation of labour in raising children. Why do so many gay people want to acknowledge this ancient religious anti-gay institution at all? In Australia there are almost no external benefits (in the form of tax treatment, visas, welfare etc) for marriage over de facto relationships. Why not just promise each other you'll be faithful till death do you part? In fact, why do straight people continue to be married (I am, and have my reasons, but I'll keep them for another time).

2. If people want 'marriage equality' why can't I marry my sister? Or my mother? Surely to be equal ALL marriage between consenting adults must be allowed? After all, the main social problems of genetic abnormalities from inbreeding can be solved by IVF - the same way gay couples are having children. In fact, two gay men who happen to be brothers should also be able to marry, no? It is love between two adults, so what's wrong with it? I can't believe anyone could argue for gay marriage and not for sibling marriage, especially between gay siblings, since the arguments are all the same.

3. Any study showing the 'superior' outcomes of children from gay couples (of which there are a few - here's a starting point for some academic research) must control for incomes and other social factors. I have a hard time believing that the 'gay couples with children' sample of society has a similar income distribution to 'heterosexual couples with children' and we know this is a huge factor in child development.

4. Is the desire to have children not in any way related to the desire to mate with the opposite sex? I would have thought that the two are somehow related, which makes me feel like there is more of a 'conforming to social identity' issue at play over the desire to be a progressive gay couple with children.

5. Are children raised by gay parents more or less likely to be gay themselves? It seems intuitive that they would be far more likely, both because one parent would be a biological parent, and the nurturing and exposure to 'gay' behaviour. Is this good or bad? Are children really getting a choice? Will marriage legitimise being gay as normal? Is that a problem?

6. Should gay couples be allowed to adopt children? Why not? Should IVF treatment for lesbian couples be subsidised by Medicare? Surely not.  It isn't a medical condition. If they want to pay the full cost for privately provided IVF from a voluntary donor, so be it.  If they want to meet a guy at a bar and do it the old-fashioned way, that is fine too.  But what about gay male couples? What about married gay brothers? Will recognition of marriage be a stepping stone to more subsidies for gay families?

7. What legal rights exist for the biological parent of the child who is not part of the 'parent couple'? If the relationship breaks down, will the courts decide in favour of the biological gay parent, or the surrogate biological parent?  Will marriage affect this decision?

8. If two children from gay family each have one of the parents as biological, and the other parent a different surrogate (so they are not 'blood relations'), can they be married?  What about if these two children are gay?

In any case, I always wonder why people don't just say why they feel gay marriage is unacceptable instead of beating around the bush about 'equality'. And those who so strongly support gay marriage should think about the flow-on implications to the role of government, the courts, the rights of parents and health care.

If you can't tell, I see no good reasons in favour of gay marriage, and plenty of unresolved issues surrounding rights of married gay couples, particularly regarding children.  Of course, I have no problem with two adults choosing to have a relationship with each other, regardless of their gender.

Econompic - negative real interest rates encourage savings

The basic premise behind stimulatory monetary policy is that lower interest rates reduce the cost of debt, and decrease the returns to savings, encouraging present spending and maintaining asset values. But recent experience (particularly in the US) has shown that in a low (or negative) real interest rate environment, savings rates are climbing.

Jake over at Econompic has put forward a reason this might be the case. He argues that if an individual needs to save a certain amount for future consumption, for example someone who wishes to fund their retirement, a low interest rate means they need to SAVE MORE NOW to reach that point.

What surprises me is that Jake’s hypothesis is fairly consistent with Milton Friedman’s permanent income hypothesis, which asserts that people will try and smooth out their earnings over their lifetime (through savings decisions) to maintain a relatively constant level of expenditure. In Friedman’s model, a transitory income, like prize money, would not be spent all at once, but mostly saved and spent over the rest of one’s lifetime. While the reduced debt burden from low interest rates may been seen as temporary by some people and not greatly affect their spending, the reduced return on savings DEFINITELY means that smoothing out income for retirement requires greater levels of saving.

For example, if interest rates are 5%, someone might want to save $1million in order to earn $50,000 per year in returns on which to live during retirement. But if interest rates are 1%, that person needs to save $5million in order to earn $50,000 in returns to fund their retirement.

One might suggest that low interest rates mean that people who need to save will save more, and people who don’t, will save less. This might translate to quite a variation in saving patterns by age, with the soon to retire boomers increasing savings, with the young workers saving less.

The low interest rates and high savings rate correlation probably also has a lot to do with household repairing their balance sheets following massive losses on equities and housing (particularly in the US and the UK).

Over to Jake for the details (original post here).