Tag: The Conversation

An original Republican tax plan offers Trump a radical tool for corporate tax reform

From The Conversation.

Major US companies have long been known to specialise in profit shifting to tax havens to reduce their tax bill. This erosion of the corporate tax base is thought to lead to rising inequality and deprives countries of important revenues to spend on public services.

So what can be done? Donald Trump is being encouraged by leading House Republicans – led by Kevin Brady, chairman of Washington’s tax-writing Ways & Means committee, and speaker Paul Ryan – to introduce a Destination-Based Cash Flow Tax, or DBCFT. This tax plan has been pushed forward by leading Berkeley economist Alan Auerbach and scholars at the Oxford Centre for Business Taxation.

It sounds complicated – and has an awful acronym – but there is something in this plan that offers an alternative.

The DBCFT doesn’t go after a firm’s profits in the normal sense, as the current corporate tax regime does. Instead of taxing corporate income (revenue minus costs) it taxes sales at their point of destination or consumption.

Another key part of the new tax is that monetary flows across a multinational corporation’s international network of subsidiaries (that would include tax haven locations) are border-adjusted. This means that export sales, for example Ford selling cars overseas, would be excluded from a firm’s tax base, but imports, such as the purchase of raw materials from abroad, would be included. What this boils down to is that the tax looks like an export subsidy, and at the same time, an import tax. In many ways therefore it looks like a backdoor attempt to improve the US’ large current account deficit – which formed a major part of Trump’s presidential campaign.

Trump on the campaign trail. EPA/LARRY W. SMITH

Radical Change

The House Republicans highlight several key attractions of this new and radical tax.

They argue that it would allow the US to reduce its federal corporate tax rate to around 15-25% – from 35% currently – which would bring it in line with China and much closer to the UK. The hope is also that it will deter firms from stashing profits in tax havens, and minimise the role of aggressive transfer pricing manipulation – the practice of buying and selling goods between divisions of the same multinational as a means to reduce the corporate tax bill. It should also deter firms from relocating their legal domicile to countries like Ireland and Bermuda – so called corporate inversions.

Current tax arrangements offer companies an advantage if they raise money through debt. However the DBCFT would have the effect of removing that incentive by eliminating deductions for interest payments. This means in theory that firms would be more likely to favour stock markets when raising capital. There is a potential twin advantage here: lower debt ratios would make the US economy more resilient in the face of external shocks, while equity markets are given a further boost.

Bullish for Wall Street? Numenor1965/Flickr, CC BY-NC-SA

The theory seems appealing, but the truth is, nobody really knows if it will work. It might not even be compliant with the World Trade Organisation (WTO). This is a step in to the unknown; there could be multiple unintended consequences. Not since the early 20th century, when bilateral tax treaties between countries were introduced, has there been such sweeping reform to international taxation as this policy change would initiate.

Progressive?

There is an argument that the new tax could have a progressive outcome. Because payroll costs could also be deducted from its calculation, this should shift the tax burden more firmly on to shareholders, and away from workers. Concerns with the existing system are that workers end up paying a fair chunk of the corporate tax bill, through lower wages and benefits.

However, consumers might not get off lightly. The DBCFT may well have the effect of increasing consumer prices on imported goods, leading to higher energy and food prices. This would disproportionately hurt the poor, meaning the tax’s progressive credentials might not bear scrutiny.

In order for the tax to work, proponents argue that the dollar will have to appreciate in value to offset the effects of the border-adjustment. This is because exports are tax free but imports incur tax. Hence US exports will appear more attractive to foreign consumers and imports will appear more expensive to US consumers. But whether exchange rates will move is an open question, as ever.

Consumer power? EPA/ANDREW GOMBERT

This really is a highly contentious and ambitious proposal for tax reform. The US’ international competitors – and of course tax haven locations – may see it as a hostile move. It will encourage firms from abroad to locate their production in the US. On the other hand, proponents argue that the policy is “incentive compatible” – in simpler terms, it will force other countries to adopt a similar policy. This would, in effect, dismantle the standard tax haven business model and send shockwaves throughout an industry that specialises in tax avoidance.

That is an intriguing prospect, but interest groups such as the Tax Justice Network in the UK would argue that the key to a better functioning corporate tax regime is for countries to be more open with one another in terms of information exchange for tax purposes. This would include multinational companies reporting their financial statements on a country by country basis instead of consolidating them. Countries would then be able to clearly define their corporate tax base and decide themselves what tax rate to levy.

The EU is currently discussing the introduction of a Common Consolidated Corporate Tax Base to partially achieve this. This would not eliminate the tax havens, but it may go a long way towards enhancing transparency, leading to greater scrutiny of the world’s biggest multinational enterprises and changing their behaviour in terms of profit shifting.

In some ways this is the longer, harder road. The appeal of the Republican proposal would be to force the issue, but it is desperately hard to predict, or manage, the consequences if this tax is enacted.

Author: Chris Jones, Senior Lecturer in Economics, Aston University

A housing affordability crisis in regional Australia? Yes, and here’s why

From The Conversation.

The newly released annual Demographia report on housing affordability has found – once again – that Australia has some of the least affordable housing markets in the world. Sydney was ranked as the second-least-affordable housing market behind Hong Kong.

This news came just a day after incoming NSW Premier Gladys Berejiklian announced that improving housing affordability would be a priority for her government.

What was more surprising was that Australia had the dubious distinction of having four of the ten least-affordable housing markets covered by the survey. Melbourne was ranked the tenth-most-unaffordable housing market. Wingecarribee and Tweed Heads came in at seventh and eighth respectively.

This is sobering news given the report covers major world centres such as London and New York. And for many commentators this outcome came as a shock: how could regional Australia – which is perceived as less dynamic than the capital cities and with ample space for housing – be so unaffordable?

But the result has been signalled previously. In 2012, Port Macquarie on the New South Wales mid-north coast was named among the five least affordable housing markets globally. It was the most unaffordable housing market in Australia – beating even Sydney.

Indeed, housing researchers have been discussing the housing crisis outside our capitals since the early 1990s.

Cashed-up newcomers have an impact

What are the factors that have given rise to this outcome? And why are some regional communities so badly affected?

First, and perhaps most importantly, the housing affordability crisis in communities such as Wingecarribee and Tweed Heads reflects change in where and how Australians live. Wingecarribee in the southern highlands of NSW and Tweed Heads on the Queensland-NSW border are attractive destinations for retirement and leisure living.

Baby Boomers and cashed-up Gen Xers move to these communities for lifestyle reasons. In the process, they push up the price of housing. Often these wealthy city buyers are buying a property they will occupy for only two or three weeks in the year, but the impact on the housing market is long-term and cumulative.

An influx of cashed-up newcomers to regional communities for lifestyle reasons is one factor pushing up property prices. Sandy Horne, Author provided

Second, the common perception that country Australia is less prosperous – and less frenetic – than our major cities has an element of truth. Average incomes are lower in country towns and along our coastal seaboard when compared with the cities.

But this means households need to spend a higher percentage of their earnings to pay the rent or meet their mortgage. That task becomes more difficult when they have to compete with city residents looking for holiday homes or rental investments.

Challenges in building new housing is a third factor affecting affordability across the regions. While housing construction costs are slightly higher outside the capitals, the biggest barrier to the construction of affordable housing is land cost.

Preservation comes at a price

In some communities, planning restrictions meant to protect valuable and productive agricultural land, in combination with measures placing buffers around water courses and laws protecting native vegetation, mean there is simply no land available for urban development. In numerous small towns across Australia it is near impossible to build a home.

The self-interest of existing home owners – the Not In My Back Yard (NIMBY) phenomenon – has contributed to the affordability crisis in many rural and fringe metropolitan communities. New arrivals from the cities as well as long-term residents have lobbied governments to impose restrictive conditions that preserve the quality of life of existing home owners.

This resistance to change has locked out new entrants, especially if they are seeking affordable housing. In some parts of Australia it has meant those raised in a community are forced to move to less attractive places to find accommodation they can afford.

Finally, we need to acknowledge the sale of public housing by state governments has had an impact on city and regional housing markets alike. Many governments have shed both their employee and public housing stock in rural and regional communities. This has resulted in a reduced supply of affordable homes and increased competition in both rental and home-buying markets.

In some townships the withdrawal of government investment and ownership has also led to a noticeable deterioration of dwellings. This is because low-income buyers have been unable to afford the maintenance of properties purchased at low prices.

The housing affordability crisis in regional Australia is not news to long-term observers of Australia’s housing markets. The challenge we face as a nation is that solving this problem of housing affordability is likely to be more difficult in our regional centres – because of their differing circumstances, their geographic spread, the large number of governments involved – than in the capitals.

However, solutions are needed if our country towns, coastal communities and regional cities are to remain vibrant and productive places.

Author: Andrew Beer , Dean, Research and Innovation, University of South Australia

Senior female bankers don’t conform to stereotypes and are just as ready to take risks

From The Conversation.

There’s a popular theory called the “Lehman Sisters Hypothesis” that says well known bank failures (like the Lehman Brothers collapse) wouldn’t have happened if there were more female staff in management. Our research suggests that increasing female staff is, on its own, unlikely to change the way risk is managed in banks.

The Lehman Sisters Hypothesis relies on the research-proven fact that women are, on average, more risk averse than men. It implies that bringing more women into banks will lead to better risk management and reduce the possibility of bank failure or scandal.

While female staff may be more risk averse on average, our research shows many of them are just as risk tolerant as their male counterparts. These are the women who tend to make it to the management roles where risk management decisions are made.

It’s important to note that women already comprise more than half the workforce in the banks we analysed, but they are under-represented at senior levels and in institutional banking. This is the arm of banking that offers complex financial advice and services to large institutions.

From July 2014 to August 2016 we collected survey responses from 36,223 employees from ten banking institutions headquartered in Australia, Canada and the United Kingdom. Our unique data set encompasses a cross-section of staff in all business lines and levels of seniority.

Using survey methods, we asked bank employees to self-report their risk management behaviour. For example, we asked about compliance with risk policy, speaking up about practices that may be inappropriate and reporting risk events. People will often not admit non-compliance, even in an anonymous survey so we took great care with the wording to illicit a truthful response. For example, one of our questions read:

Sometimes I need to bend the rules in order to get my work done (Agree/Disagree).

Using similar survey methods we also assessed the extent to which each staff member was risk-loving or risk averse – in other words, their individual risk tolerance. We found people who are more risk loving are generally less likely to display good risk management behaviour.

Once we accounted for differences in risk tolerance, women are no more likely than men to behave well.

We found older workers are more likely to exhibit good risk management behaviour, even after accounting for the tendency for older people to be more risk averse. For example they are more likely to question business practices that may create poor outcomes down the track, such as making risky loans or selling products to customers who don’t fully understand them. Perhaps older workers, having lived through so many economic cycles and scandals, simply “get” risk management more than the young.

We also studied the risk culture in more than 300 different units within the banks. Risk culture is the perception among employees that risk management is genuinely valued and practised. So it’s not just a glossy statement on a website to satisfy regulators but the “way we do things around here”.

Our results show there isn’t any relationship between the gender mix of the units and the risk culture. We also didn’t find any association with the gender of the leaders of business units and risk culture.

The problem with the ‘Lehman Sisters Hypothesis’

The hypothesis assumes all women are risk averse, yet women themselves are a diverse bunch. We found that risk tolerance varies between men and women when they are at junior levels but these differences disappear as you climb the corporate ladder. At senior levels the women are just like the men in terms of risk tolerance, so the way they manage risk is also similar. More women who behave like men does not change anything.

Risk tolerance by seniority in banks. Author provided, Author provided

In order to prosper in a stereotypically masculine culture female staff may need to have stereotypically masculine attributes, or they may need to adapt to the culture around them.

Essentially it all comes down to gender stereotypes. Risk-taking is a stereotypically masculine attribute, not a feminine one, but these days women are increasingly not conforming to this stereotype. This may help explain our findings regarding women in management positions in banks.

In a study published in 2011, researchers Renee Adams and Patricia Funk examined a sample of directors, finding that female directors are significantly more risk loving than their male counterparts. In other words, the women who make it to the very top don’t conform to gender stereotypes. Not surprising when you think about it.

The research literature on organisational culture suggests that cultures form in response to the business environment – as a way of ensuring success in that environment. To suggest that bringing in a few more women is going to change things is naïve to say the least.

In fact it’s far more likely that the reverse will happen. New workers are unlikely to succeed if they do not share the values of the existing culture. Indeed the process of selection will make it hard for “different” staff to even enter the organisation.

Creating a culture that values risk management is a huge task for banks all over the world. The global crisis that began in 2007 was a wake-up call that the focus on short-term profits had gone too far. Subsequent reforms to risk management practices and regulations have been radical and far-reaching.

I would like to think that women have earned their place in the modern banking workforce and we need to continue efforts to ensure they reach the senior roles they richly deserve. Women should be welcomed on their own terms, regardless of whether they conform to traditional feminine stereotypes, whether they wear skirts or trousers. But let’s not expect women, by themselves, to change the culture of banks.

Author: Elizabeth Sheedy , Associate Professor – Financial Risk Management, Macquarie University

How globalisation brought the brutality of markets to Western shores

From The Conversation.

The story of contemporary globalisation is, at its heart, the story of how we created a vast and impoverished working class. It is abundantly clear that the dynamics behind this have now hit home. First Brexit, then Donald Trump. We have been told that these votes were a primal scream from those forgotten parts of society.

Both campaigns identified immigration as a core cause of worker impoverishment and social exclusion. Both argued that limiting immigration would reverse these disempowering trends. It is true that poverty remains high and has even been expanding in the UKand the US, but the cause, and the solution, lie far deeper.

According to the charity Oxfam, one in five of the UK population live below the official poverty line, meaning that they experience life as a daily struggle. In the US, the richest country in world history, one in five children live in poverty. In the UK, austerity has played a role but is not the only cause. According to a Poverty and Social Exclusion project published early in George Osborne’s first wave of austerity, the proportion of households that fell below society’s minimum standards had already doubled since 1983.

Poverty pay and working conditions are proliferating across the UK. A recent study of the clothing manufacturing sector around the city of Leicester found that employers often consider welfare benefits as a “wage component”, forcing workers to supplement sub-minimum wage pay with welfare benefits. In this sector 75-90% of workers earn an average wage of £3 an hour. Companies get round the law by paying cash-in-hand and by grossly under-recording the hours worked.

Worker rights no longer set in stone. Martyn Jandula/Shutterstock

Recent news about working conditions at Sports Direct, Hermes, Amazon, and others show that far from being an isolated case, the Leicester example is part of an increasingly common trend towards low-wage, exploitative practices, greatly facilitated by a state-directed reduction in trade union power.

Income attacks

Mainstream portrayals of globalisation present it as a relatively benign market expansion and deepening. But this misses out the bedrock upon which such growth occurs: the labour of new working classes.

Following the end of the Cold War, the global incorporation of the Chinese, Indian and Russian economies served to double the world’s labour supply. De-peasantisation and the establishment of export processing zones across much of Latin America, Africa and Asia has enlarged it even further. The International Monetary Fund calculates that number of workers in export-orientated industries quadrupled between 1980 and 2003.

This global working class subsists upon poverty wages. Forget the problems in the clothing sector around Leicester, The Clean Clothes Campaign found that textile workers’ minimum wages across Asia equate to as little as 19% of their basic living requirements. To survive they must work many hours overtime, purchase low quality food and clothing, and forego many basic goods and services.

Cut from the same cloth? Workers in Asia. Asian Development Bank/Flickr, CC BY-NC-ND

A core element of globalisation has been the outsourcing of production from relatively high-wage northern economies to these poverty-wage southern economies. This enables firms to pay workers on the other side of the world 20 to 30 times less than former, “native” workers. They can then pocket the very significant cost difference in profits. For example, Apple’s profits for the iPhone in 2010 constituted over 58% of the device’s final sale price, while Chinese workers’ share was only 1.8%.

Outsourcing is celebrated by proponents of globalisation because, they argue, rather than produce goods expensively, they can be imported much more cheaply. This is true for many economic sectors in the global north, of course, but the downside is that wages and working conditions in remaining jobs are subject to colossal downward pressure.

Not working

What can be done? Limiting immigration will have no effect on these global dynamics, and may exacerbate them. You see, if wages are pushed up by labour shortages after any block on immigration, then the pressure and the incentive for firms to further outsource production, or to relocate, will increase. The anti-immigrant rhetoric and the mooted solutions of Donald Trump, UKIP, and much of the UK Conservative party will not help native workers one bit. Nor are they intended to. Rather, they represent a divisive political strategy designed to keep at bay any criticism of a decades-long assault on workers’ organisations.

Trump’s solutions don’t solve the problem. EPA/MIKE NELSON

For a problem brought about by globalisation it should shock no one that the progressive solution to poverty wages at home and abroad must be a global one. One thing that could work is the establishment of living wages across global supply chains. This would increase the price of labour in the global south, which in turn would limit some of the downward pressures that poverty wages here exert upon global north workers’ pay and conditions.

Doubling the wages of Mexican sweatshop workers would increase the cost of clothes sold in the US by only 1.8%. Increasing them ten-fold would raise costs by 18%. That cost increase can either be borne by northern consumers, who are themselves increasingly suffering from the wage-depressing dynamics of globalisation, or by reducing, only slightly, outsourcing firms’ profits. The outcome depends on politics and an understanding from voters that the dynamics that pushed towards Brexit and Trump are rooted in the systemic dynamics of corporate-driven globalisation. Contrary to its supporters claims, this mode of human development is based upon the degradation of labour worldwide.

The key question here is whether companies can be convinced to raise, significantly, their workers’ wages? Given capitalism’s cut-throat competitive dynamics, probably not right now. But there are many workers’ organisations toiling to achieve such objectives across the globe. Recognising that success in these struggles would contribute to improving the conditions for workers in the global north is a small, but necessary, first step towards realising these goals.

Author: Benjamin Selwyn , Professor of International Relations and International Develpoment and Director of the Centre for Global Political Economy, University of Sussex

If you’re serious about affordable Sydney housing, Premier, here’s a must-do list

From The Conversation.

So “fixing housing affordability” in Sydney is one of three top priorities for the new premier of New South Wales, Gladys Berejiklian. It’s good that the state’s new leader recognises this as an intensifying problem that can’t be ignored.

Berejiklian will appreciate the electoral importance of this issue. It’s an especially sensitive topic in western Sydney, which no longer provides Sydney with the large reserve of less-expensive property that it once did. Unless they can draw on family wealth, even middle-income first-home-buyers are now locked out of huge swathes of Sydney – including areas far from the inner city.

But given she came to the top job from the Treasury portfolio, Berejiklian would also be expected to have a clear understanding that the lack of well-located affordable housing is an economic productivity concern as well as a social problem.

One aspect of this, as shown by our recent research, is that central Sydney’s booming hospitality sector is facing growing pressure to find and retain suitable employees. This is because of workers’ limited ability to find affordable housing within a reasonable distance. To work in the inner city they must weigh up other compromises – such as living in shared housing, or paying a very high proportion of income in rent.

Relying on backpacker labour supply isn’t an ideal business strategy. And, as inner Sydney housing affordability deteriorates further, there’s every possibility other CBD industries will see their lower-income labour market thinning out.

The broader issue is the growing stress caused by the continuing focus of employment creation in inner-city areas. This applies especially to the so-called “global arc” stretching from the airport in the south to Macquarie Park in the north.

The mismatch between where affordable housing and jobs are available is a key cause of traffic congestion. Dan Himbrechts/AAP

In the last few years annual job growth here has been running at more than 2%, but only 0.5% in western Sydney. At the same time, housing market pressures mean more and more people needed to fill these new jobs are having to live in outer western Sydney. The resulting traffic congestion is damaging Sydney’s economy.

Nationally, the cost of congestion in 2015 was A$16.5 billion – up by 30% on 2010. Anyone who commutes by car in Sydney will know it is a major part of this problem. Ultimately, some companies may choose to relocate to places where these problems are less severe.

Housing supply is only part of the solution

On the other hand, it must be hoped that Berejiklian will leave behind at Treasury the flawed analysis that fixing Sydney’s housing problems is simply a matter of increasing housing supply.

No-one disputes that, with continued population growth, maximising new house-building must be part of the policy mix. But the idea that this can provide any kind of silver bullet for housing unaffordability is shot dead by the experience of the past few years. Record construction rates have co-existed with unprecedented and ongoing property price hikes.

As premier, Berejiklian should therefore lend support to her ministerial colleague, Rob Stokes, who called it right by arguing recently that Sydney’s housing problems partly result from a market pumped up by excessive tax concessions for landlord investors.

These powers are held at the federal level, not with the states. So Berejiklian can do little more than lobby for such reform.

Adopt the best policies from others

And yet the premier does have important powers of her own that can make a difference.

Recognising that even a moderation of property prices isn’t going to provide relief for tens of thousands of hard-pressed renters, the NSW government must take a leaf out of the book of cities like London and New York by using its planning muscle to ensure the inclusion of affordable rental housing in all major new housing developments.

Under the former premier, Mike Baird, a promising initiative in this arena was the recent proposal by the Greater Sydney Commission to introduce a scheme of this kind. Private housing developments on sites “upzoned” under the planning system should include 5-10% affordable rental housing.

If she is serious about this issue, Berejiklian should back the commission’s move. She can prove her commitment to finding solutions by setting a much higher affordable rental housing target for development on government-owned land. This would ensure that a significant affordable component is locked in for flagship projects such as the Central to Eveleigh and Bays Precinct urban renewal schemes. This is a one-off opportunity that must not be squandered.

The new premier should also recommit to the innovative Social and Affordable Housing Fund (SAHF) created under her predecessor, following his 2015 commitment to a “billion-dollar fund” for affordable housing.

An announcement on the promised second phase of the SAHF has been long-awaited. Perhaps Berejiklian can pledge to underwrite this by dipping into the huge stamp-duty bonanza the government has reaped in recent years.

Above all, NSW needs an overarching housing strategy that encompasses much more than just the social end of the spectrum. Recognising the urgency of the problem, Berejiklian should pledge that her officials will get to work on this right away.

Author: Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW Australia

China steps up as US steps back from global leadership

From The Conversation.

Chinese President Xi Jinping’s appearance at last week’s World Economic Forum shows global leadership is shifting, not drifting, toward Beijing. The most vigorous defense of globalization and multilateral cooperation was mounted not by an American statesman, but by the president of the People’s Republic of China.

“The problems troubling the world are not caused by globalization,” Xi declared. “Countries should view their own interest in the broader context and refrain from pursuing their own interests at the expense of others.”

Speculation is mounting that the United States, with Donald Trump cast in the role of president, will ignore international challenges, renounce global responsibilities and abandon friends and allies.

As Washington greets a new administration disinclined to play a worldwide role, Beijing increasingly accepts opportunities to lead. Xi and his colleagues understand that their country’s domestic development and global ascendance require steady engagement and honest efforts abroad.

Yes, China has “done the right thing” before. It has restricted antibiotics in food-animal agriculture, created a new infrastructure-development bank for Asia, aided previously exploited African countries and promised to end its internal ivory trade.

But never before has China so forthrightly stepped up when the United States appears to be stepping away. As scholars of Chinese strategy and the intersection of science and politics, we see how Beijing’s ambitions and interests will affect its engagement on a range of important international issues.

The case of climate change

Climate change policy is one good example of this trend. Commentators warn that Trump’s pledge to withdraw the U.S. from the Paris climate agreement would let China “off the hook” for curbing carbon emissions. In fact, China put itself “on the hook” in Paris for reasons having little to do with the United States.

China’s most urgent atmospheric problem is not carbon dioxide. It’s combustion toxicity from burning coal, oil and biomass. The Chinese these days don’t look through their air; they look at it. And what they see, they breathe.

Combustion toxicity has degraded China’s air quality so much, by Chinese assessments, as to destroy 10 percent of GDP annually since the late 1980s and cause hundreds of thousands of premature deaths every year. And air pollution has become China’s single greatest cause of social unrest.

In response, China is closing its old coal-fired power plants, and the new ones it’s building are much farther away from its prosperous and politically influential eastern cities. Other fossil-fueled industries are being put farther away, too. China has also contracted with Russia to buy huge amounts of natural gas, whose combustion emits lots of CO2 but not a lot of toxic air pollutants.

These moves will expose fewer people, especially prosperous urban dwellers, to toxic air pollution. On their own, though, these moves will not do much to meet carbon targets and restrain warming.

In an even better bet to clear its air, China is moving to add more nuclear, hydroelectric, solar and wind turbine generating capacity. Greenpeace estimates that during every hour of every day in 2015, China on average installed more than one new wind turbine, and enough solar panels to cover a soccer field.

Solar panels in Jiangsu Province, China. REUTERS

China is already the world’s leading producer of renewable energy technologies. More remarkably, it is also the leading consumer. And in January, it announced plans to invest an additional US$360 billion in renewable power between now and 2020. That’s $120 billion a year.

These renewable power measures are being taken to fight China’s number one problem – air pollution – but they will also automatically cut China’s carbon emissions. If it can manage political rivalries among local power companies and upgrade its electrical grid to handle all that solar and wind capacity, then China is likely to meet its Paris commitments earlier than currently required.

Defecting from Paris would not help China address its air pollution problem. Defection would, however, reinforce the presumption that U.S. leadership is indispensable – a presumption Beijing is loath to perpetuate.

A savvier and more probable move is for China to assert – for the first time on a major global issue – moral authority. Chinese diplomats are already reassuring the world that China will keep and even expand its climate commitments. This message conveys Beijing’s resolve not to let to let multilateral greenhouse gas mitigation collapse, and show the way out of a crisis whose agreed solution is threatened by others’ malfeasance.

National interest in global leadership

If sustained, such action will mark a critical inflection point in China’s global role. It will become less a challenger to an established order, and more a champion of a common cause. The United States will risk being regarded as aloof and unreliable and, following its 2016 election, even politically unstable.

Likewise, Beijing is asserting greater leadership in other areas once led by Washington. With the demise of the Trans-Pacific Partnership, which Washington negotiated with 11 Asian countries excluding China, Beijing is promoting its own Pacific trade-and-investment framework excluding the United States.

Even more grandly, Xi is articulating an alternativevision for global economic growth. The model focuses on physical investment, especially in transportation and IT infrastructure. In this, it is linked to the new Silk Road project, through which China is expanding linkages across Eurasia by integrating railways, ports and information networks into transnational corridors. The Chinese approach also does not rely on portfolio investment and central banks exertions to drive growth – a sharp contrast to Western policies.

Ceding global moral authority to China would be a high price for America to pay for the pleasures of political posturing. Yet a China leading by example would have a greater stake in its own reputation, and the greater that stake becomes the more engaged China becomes. Such a China, we believe, could profoundly benefit the world.

 

Authors: Flynt L. Leverett, Professor of International Affairs and Asian Studies, Pennsylvania State University; RH Sprinkle, Associate Professor, University of Maryland

 

Three theories for what’s causing the global productivity slowdown

From The Conversation.

There is a wide recognition by economists and policy-makers that “the large differences in income per capita observed across countries mostly reflect differences in labour productivity”.

Further, “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital”.

This is what makes Australia’s productivity slowdown since the 1990s so concerning, as it coincides with a period of massive technological change and innovation. Nor is Australia the only country to experience this phenomenon, or to be puzzled by it.

A productivity puzzle

Productivity is not an easy concept to define. Essentially, it is a measure of the efficiency with which we can turn inputs into outputs, based on new technologies and business models, a capable and educated workforce and effective management of firms and organisations.

During the mining boom, the deterioration of Australia’s productivity performance was masked by the boost to our terms of trade from higher commodity prices. With the end of the boom, it has become apparent that new sources of growth must be identified, re-positioning Australia as a more complex and diverse economy, embedded in global value chains.

Given the significance of this challenge, the Federal Government called in the Productivity Commission. Its discussion paper highlights the “justified global anxiety” that “growth in productivity — and the growth in national income that is inextricably linked to it over the longer term — has slowed or stopped. Across the OECD, growth in GDP per hour worked was lower in the decade to 2016 than in any decade from 1950”.

The most problematic feature of this challenge is that we lack a clear understanding of why productivity growth has slowed or stopped in Australia and around the world, despite a considerable amount of analysis and debate.

Three possibilities

Broadly, three reasons for the productivity slowdown have been advanced.

First, there is the claim by Robert Gordon that today’s innovations do not compare in scale or impact with the breakthroughs of the 1990s let alone the wave of earlier transformations bringing urban sanitation, electricity, the telephone, television and commercial flight: “so it’s the lack of really profound economy-wide impacting innovation in the past few years that’s been the problem.”

Against this view, Erik Brynjolfsson maintains that technological disruption is at least on the scale of earlier periods but has yet to demonstrate its full impact, which will require “a host of complementary innovations, just as it did in the industrial revolution: investments in education, reorganization of work, new policies…”

In particular, he anticipates “the core technology of artificial intelligence, machine learning, and combining it with knowledge in lots of different areas [will] create new products and services”. Others agree that “the new digital economy is still in its ‘installation phase’ and productivity effects may occur only once the technology enters the ‘deployment phase’”.

Second, evidence suggests that productivity growth is still very strong, possibly stronger than ever, but confined to “frontier firms”. These tend to be younger, more innovative and profitable. They also vastly outperform the laggards, whose poor performance brings down the average. Here the productivity slowdown is thought to be due not to lack of innovation, but rather to a lack of diffusion from the frontier to the rest of the economy.

This stems partly from the growth of monopolies and oligopolies in many industries. They encourage the “financialisation” of corporate activity at the expense of productive investment, particularly in R&D. Another factor is the uneven quality of management, which can inhibit enterprise “absorptive capacity”, or the take-up of new ideas and business practices, even in a competitive environment.

Finally, there is the view that whether or not there has been a transformation of productivity performance as a result of technological change, it may not be reflected in the statistics due to measurement shortcomings. For example, the role of the internet in changing the way we communicate, assemble data and deliver services is simply not captured by traditional measures.

Most economists accept that “what we measure affects what we do; and if our measurements are flawed, decisions may be distorted”. But some go further, arguing that “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being. And measures of well-being should be put in a context of sustainability”.

We need reform

Whatever measurement tools are adopted, productivity-enhancing reform will be a key driver of long-term growth and jobs. It will enable us to compete globally not just on cost, which promotes a self-defeating “race to the bottom”, but on quality, design and innovation as the framework conditions of a high wage, high productivity economy.

US Federal Reserve Chair Janet Yellen understood this well in a speech last year on the role of productivity in restoring global growth:

Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.

In Australia, the Chief Economist reports that “innovation-active” businesses are 40% more likely to increase profitability, twice as likely to export and two-to-three times more likely to demonstrate higher productivity and employment.

Yet innovation has been getting bad press, just like productivity in the past. It was not so long ago that productivity was viewed suspiciously as a ruse to make people work harder, when the real benefit was in working smarter. Now innovation is resisted on the grounds that it destroys jobs altogether. While this may be true in specific cases, it also creates jobs, and has done so historically.

The problem is that most newly created jobs will not be the same or in the same places as the jobs that are gone. It has been estimated that up to half the existing jobs in advanced economies will disappear or be changed beyond recognition in the next 10 years. This implies a much bigger emphasis on education and training to prepare for the future.

To be credible, a new productivity agenda will have to ensure that the gains from innovation are shared systematically across the workforce and society, rather than accumulating in a few hands. This is the lesson of populist revolts over centuries, including the current examples occupying the world’s attention. A new agenda will require a new social contract.

 

Authors: Roy Green, Dean of UTS Business School, University of Technology Sydney; Renu Agarwal,Senior Lecturer, Innovation and Service Operations Management, University of Technology Sydney.

 

Printing more money isn’t the answer to all economic ills

From The Conversation.

Economists did not predict the financial crisis of 2007, nor did we predict that advent of secular stagnation that has followed. Those events have shaken the economic and political world. Our theories need work. Maybe a lot of work.

But those events, and the failings of economists, have given a bunch of cranks the chutzpah to claim that they do know the answers – and that they knew them all along.

These folks sometimes refer to themselves as “heterodox economists”, “neo-chartalists”, or proponents of “modern monetary theory”.

Support has even made it to the UK Labour Party, with Jeremy Corbyn’s proposal for “people’s quantitative easing”. This would see the Bank of England simply “print” the money that would be used “to invest in new large-scale housing, energy, transport and digital projects”.

But, alas, some supporters are peddling falsehoods that warrant a blanket response.

Modern monetary theory, a term coined by Australian economist Bill Mitchell, says the following: (1) Countries that control their own currency cannot default on sovereign obligations because they can always print more money. (2) Thus, said countries can provide unlimited resources, pay for whatever they want, and create full employment. Nirvana, here we come!

There are many ways to critique this notion. For starters, it is not formal, it is made in prose and is subject to all the pitfalls that come with attempts to make precise statements with imprecise tools.

But it also begs an obvious question: if it is so easy to fix a nation’s economic ills – just run the printing presses round the clock – then why doesn’t everyone do it?

The modern monetary theory crowd argues economists have misunderstood how the government interacts with the economy. The rest of us just don’t get it! It’s all a big conspiracy, it would seem.

But here’s the essential substantive problem. Suppose a government wants to pay for some “stuff”. If the government prints money and doesn’t back that by issuing bonds then there is inflation. That inflation leads to the government needing to print more money to pay for the stuff. Which leads to more inflation. And pretty soon that leads to wheelbarrows of cash being pushed around, hyperinflation, the destruction of all savings in the economy, and (in some notable cases) world war.

Just think about it. If you expect there to be inflation do you want to hold cash, or spend it. Hint: spend it. You can wait until tomorrow and have something much less valuable, or spend it today. But that spending drives up prices, which drives up the desire for everyone to spend today, and on and on…

For a recent example, just take Zimbabwe: in late July 2008 a Zimbabwean (second, or “ZWN”) dollar was worth 688 trillion times less than it was in August 2006.

When one issues bonds to back a deficit one has to convince investors that, at some point, revenues will be raised or spending will be cut. Otherwise investors won’t buy the bonds at the prevailing price. And a higher price means that less deficit spending can be financed.

It is the discipline of market expectations. And it is a fact.

I won’t go through the math here, but the problem with modern monetary theory is that, in short, there is only a finite amount of real economic resources that can be extracted through seigniorage (the difference between the face value of physical money and its production costs). Or, to quote the late, great Zvi Griliches: “one can only get so much lemon juice out of a lemon.”

So here’s my challenge to the modern monetary theory crowd. Please state a formal, precise, economic model in which a monetary authority can extract an infinite amount of real resources through seigniorage. Or be quiet.

I understand that “mainstream” economists have some work to do. That’s how science moves forward. Einstein didn’t say Newton was a knucklehead, he came up with a better theory.

What modern economics has going for it is that it is a formal, falsifiable theory. People can understand exactly the assumptions, the chain of logic, and the predictions.

One can’t say that about modern monetary theory. Or is it “neo-chartalism”? Perhaps it’s really just neo-charlatanism

Professor of Economics and PLuS Alliance Fellow, UNSW Australia

Brexit, Trump and the TPP mean Australia should pursue more bilateral trade agreements

From The Conversation.

Brexit, Trump’s protectionist agenda and the debacle of getting everyone to ratify the unpopular Trans-Pacific Partnership (TPP) are all a global trend towards bilateral trade agreements.

This is good news for Australia. With its manifold set of strong free trade agreements, Australia is geared up to reap the early gains of this new trend.

The domestic squabble between Prime Minister Malcolm Turnbull and Opposition Leader Bill Shorten on whether the “the TPP is dead in the water” meant that Turnbull’s ongoing support for the Regional Comprehensive Economic Partnership (RCEP) went unnoticed. This signals that, unlike the TPP, the Chinese-led trade deal RCEP is alive and well, and that both sides of Australian politics support it.

Considering the existing spaghetti bowl of international economic partnerships, Australia is already in the fast lane of bilateral trade agreements with the US and China. In fact, Australia is the second largest economy and trading partner of the only six countries that have in place free trade agreements with both the US and China. The group includes South Korea, Singapore, Chile, Peru’ and Costa Rica.

If Australia quickly wraps free trade agreements with Canada, the European Union and the United Kingdom, Australia will be the only major trading link among these countries, with evident growth opportunities on favourable terms.

When it comes to trade deals already in force, Australia’s trade portfolio includes many bilateral agreements, but only one regional trade agreement (with the Association of Southeast Asian Nations).

Department of Foreign Affairs and Trade/The Conversation, CC BY-ND

Trade deals with multiple countries are dead

Promoting international trade has always been important to Australia’s economy, to encourage growth, attract investment and support business. For the past two decades Australia has been expanding its trade policy agenda with multilateral, regional and bilateral trade agreements.

There are only two multilateral trade agreements under negotiation which involve Australia. One is under the World Trade Organisation (WTO) umbrella (the Environmental Goods Negotiations) and the other is in competition with the WTO system (the Trade in Services Agreement – TiSA).

The tumultuous political events of 2016 in the US and Europe confirm Kevin Rudd’s remark that “the West has turned inward”, while the Asia Pacific region is emerging as the torchbearer for free trade and economic integration.

For the past few years there’s been disagreement on which type of agreement is best for Australia’s trade policy: multilateral, regional or bilateral.

The failure of the WTO’s Doha round of trade negotiations has undermined the credibility of the multilateral trading system. With the US and Japan denying China the market economy status sanctioned by its WTO accession, multilateralism is further out of question.

When a country grants China market economy status, it can no longer impose punitive anti-dumping tariffs on Chinese-made goods. More than ten years ago, Australia was fast to recognise China’s full market economy status as a precondition of the China-Australia Free Trade Agreement (ChAFTA), which entered into force on 20 December 2015.

If multilateralism is dead, regional trade agreements are also not looking so good outside of Asia. With the rise of Trump and anti-EU sentiment, the Transatlantic Trade and Investment Partnership (TTIP) is lost at sea, and so is the EU-Canada Comprehensive Economic and Trade Agreement (CETA).

The benefits of bilateralism

Australia has a once-in-a-generation economic opportunity to exploit the cracks opened in the international trading system by the stark return to bilateral agreements. Australia is already poised to negotiate two such agreements with Canada and the EU.

Brexit is creating further ripples in the economic diplomacy waters. For example, in Canberra there are loud voices calling for “absolutely free” trade between Australia and the UK. According to some, a full-blown China-US trade war fought on currency manipulation is the single biggest economic threat to Australia. A falling Chinese currency in combination with US protectionist measures would dampen the Chinese economy by way of reduced volumes of exports and higher interest rates spreading across the Asia Pacific and pushing down the price of commodities.

However, it’s highly unlikely that monetary dynamics alone will damage Australia’s “rocks and crops” economy. The growing productivity of the agricultural and mining sectors is strong enough to rise above global tensions and falling commodity prices. Australia’s export volumes in key markets are poised to further rise in a situation where trading partners will already be warring for the best market and investment opportunities.

A protectionist western economy across the Atlantic will further swing the global pendulum of economic growth to Asia. It will also amplify the positive effects of further economic integration in that region for Australia.

When the RCEP comes into force, Australia will have privileged access to China’s One Belt One Road (OBOR) initiative, the so called new Silk Road. This development will lead to massive infrastructure investment and trade opportunities for Australia, even more so as it has the comparative advantage of being a highly developed economy with privileged access to Western know-how.

As cynical as it may sound, at present Australia’s economic fortunes depend on juggling free trade with both a commanding Asian region and a disunited west. Essentially, if Australia manages to keep a trade policy that is geopolitically neutral, its economy will thrive on unsavoury developments.

Some of these include the success of Trump’s protectionist agenda, which may deteriorate the US relations with NATO and the EU, to the point of fuelling European nationalism and disintegration.

Another questionable development, yet positive for Australia, is Japan’s re-militarisation to contain China’s rise. The preservation of the postwar institutional framework that guarantees economic openness and the prospect of economic and political security in the the Asia Pacific region may soon require tough choices for Australia and Japan.

With Japan standing in for the US security role in East Asia, Australia would take a sweet deal to become the neutral and peace-monger Switzerland of Asia.

Author: Giovanni Di Lieto, Lecturer, Bachelor of International Business, Monash Business School, Monash University

ASIC needs a win in 2017, but it’s not likely to come from the banks

From The Conversation.

In a pre-Christmas interview, Greg Medcraft, Chairman of the Australian Securities and Investments Commission (ASIC), looked forward to 2017 and talked tough:

What we want for people to appreciate is that there is nowhere to hide (when it comes to corporate crime).

With new(ish) money from the government, ASIC plans to hire loads of new people and spend big on “data analytics”. [Has no one told ASIC about the problems Centrelink is having with “big data”?

Medcraft was fairly happy with ASIC’s track record in 2016,

In the 12 months to the end of June we undertook 1400 high-intensity surveillances, finished 175 investigations, convicted 22 criminals, jailed 13 people, removed 136 people from the financial services industry.

Sounds impressive until one realises that most of those prosecuted were small fry (dodgy car dealers and the like) and the big end of town has barely been touched. At best it received a tiny tap on the wrist.

2016 was not a good year for ASIC.

In February, the long running scandal of manipulation of the key BBSW base rate burst into the open thanks to investigative journalist Adele Ferguson, and in March, ASIC took ANZ to the federal court. The action against ANZ was repeated later in the year with similar civil proceedings against Westpac and later against NAB. ASIC has not denied that CBA remains in its sights in the BBSW case.

The civil actions over BBSW have been a disaster for ASIC.

First, having to take regulated banks to court is considered in regulatory circles to be a failure. If a resolution for misbehaviour cannot be imposed, it really should be negotiated as it has been in other base rate manipulation cases overseas, with more than US$10 billion of fines and remediation being imposed on international banks for manipulation of LIBOR.

Second the major banks have ASIC over a barrel, admittedly a barrel they chose to lie over themselves. Banks have much more money than regulators to employ legal heavy hitters to drag proceedings out, and have chosen to do so rather than risk a banking royal commission.

In March, another disaster befell ASIC when Adele Ferguson unearthed the CommInsure scandal in which the insurance subsidiary of CBA was found to have dudded policy holders out of insurance compensation that they were entitled to.

As regards CommInsure, ASIC not only should have been searching for the rampant misconduct that was unearthed by the media, it should have taken action over serious misconduct. However, ASIC did what ASIC does best – start a multi-year investigation, which at the end of 2016 has not gone very far.

In April, it got worse. In a “capability review”, the government found that ASIC was a dysfunctional, overworked and under-resourced organisation. With an election on the horizon, Kelly O’Dwyer, the minster responsible, kicked the can down the road, and, hanging Medcraft out to dry, renewed his contract for only 18 months, rather than the usual three years. However, O’Dwyer did reverse the ASIC budget cuts put in place by her predecessor.

In May, ASIC was involved in yet another example of financial misconduct involving major banks being blindsided by dodgy mortgage providers. To its credit, ASIC had initiated the case against the dodgy brokers in 2015, but utterly failed to address the due diligence problems that were unearthed at the major banks. Again, the small fry got fried and the big fish swam away.

The middle of the year was busy for ASIC, mainly keeping its head down during the federal election and ignoring calls for a banking royal commission to address, problems most of which ASIC should have been tackling anyway.

After the election, a new problem hit the headlines. The big four banks were found to have sold products to some customers through their adviser network, with a fee for ongoing advice, but the advice had never been given.

ASIC blamed the problems on “cultural factors”, a topic that Medcraft had been banging on about for some time but obviously has been able to do little about. The latest culprits are so-called “subcultures”, or basically staff who don’t listen to management. ASIC would have been aware of such problems if its staff had read the groundbreaking research on risk culture by Professors Elizabeth Sheedy and Barbara Griffin.

For ASIC, 2016 ended in embarrassment, with ANZ and Macquarie banks being held to account for manipulating base rates. It was the Australian Competition and Consumer Commission (ACCC), not ASIC, which punished the culprits. In his end of year interview, Medcraft said “fining ‘bad apples’ is OK but you have to deal with the tree”, but so far ASIC has given no clue as to what it is going to do about the trees in this particular instance of gross misconduct.

ASIC’s final act of 2016 was farcical. Just before Christmas, the regulator announced that it had accepted an “enforceable undertaking” from the CBA and NAB in relation to the banks’ manipulation of wholesale spot foreign exchange (FX) rates. Overseas, regulators have extracted more than US$10 billion of fines from multiple banks for the so-called Forex fraud and indicted traders, but ASIC could manage fines of only A$2.5 million for each bank to shut down the case, with no one held to account.

It puts in context Medcraft’s comment to the Australian that “If you think about enforcement, you have to have penalties which actually hurt. They can’t be a feather”. Feathery fines of a few million dollars will hardly cause the big banks to “hurt”, unless it’s from laughing.

In his first interview of 2017, Medcraft hinted that he was prepared to roll over and run up the white flag on BBSW. He signalled to the banks that the climb down over Forex showed he was “pragmatic” and that

we’re always open to a settlement … but any settlement has to be credible.

Unfortunately, ASIC has lost what little was left of its credibility in 2016. The regulator could do worse than listen to its own advice to banks:

It gets back to individual accountability. We have to make sure that, where it’s needed, you have a whole-of-management accountability, which is critical.

But if no one else pays attention to ASIC, why should it listen to its own advice?

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University