John Quiggin

I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents

The standard minimum wage for workers aged 21 and over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.

More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:

* “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
* For workers employed on a regular basis, protection against unfair dismissal.

The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.

Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.

* Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.

Over the fold, an extract from my book-in-very slow-progress, Economics in Two Lessons. I’m getting closer to a complete draft, and I plan, Real Soon Now, to post the material so far in a more accessible form. But for the moment, I’ll toss up an extract which is, I hope, largely self-sufficient. Encouragement is welcome, constructive criticism even more so.

The book is aimed at a US audience (if it goes well, an Australian edition will follow, as with Zombie Economics). So, there are US-specific institutional points, but the general argument is applicable more broadly.

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Jan Libich of La Trobe University has a new book out called Real-World Economic Policy: Insights from Leading Australian Economists. Each chapter has a fairly accessible introduction to an economic policy issue, along with an interview with an Australian economist: examples include Bob Gregory, Andrew Leigh and Warwick McKibbin. It’s useful both as an intro text and to get a bit of insight into how some of our leading economists think about the issues facing Australia.

The (presumably) forthcoming double dissolution will raise many issues. But most of them can be summed up as the defence of Australian institutions that have been under attack by radical extremists. I’m referring to such institutions as the ABC, CSIRO, the weekend, public education, the union movement, the fair go and our natural environment. Mention of any of these is enough to raise a derisive sneer from the radical rightwing apparatus that dominates much of Australian politics, most obviously the supporters of Tony Abbott who (ludicrously) call themselves “conservatives”. Turnbull promised something better but he is campaigning against all the institutions I’ve mentioned. It’s time to tell those who want to undermine our way of life in the name of free market ideology and rightwing tribalism where they should get off.

101 years on from the first landings at Gallipoli, Australian troops are still at war over the remains of the Ottoman Empire. Hardly anyone is fully aware of the history, which is one of the reasons we keep on repeating it. So, while we remember those who answered our country’s call, and particularly those who never returned, we should take the time to understand why they were there, and the futility of the wars in which we have engaged in the Middle East.

The struggle over the declining Ottoman Empire began well before the Great War itself, and was the proximate cause of the War (Sarejevo, where the Archduke Franz Ferdinand was assassinated was a former part of the Ottoman Empire, taken by Austria Hungary in 1878 and formally annexed in 1908). For much of this time, Britain was allied with Turkey, trying to check the expansion of the Czarist Russian Empire. But, as it happened, when the Great War broke out, Britain and France were part of the Triple Entente with Russia, and the Turkish government decided that its best hope for survival lay with Germany. So, Australia was at war with Turkey.

The object of the Gallipoli campaign was to force a passage through the Dardanelles, allowing the Western allies to provide aid to Russia and, if possible, knock Turkey out of the war. The ultimate war aim, formalized in the Sykes-Picot agreement was to partition the Middle East between Britain and France, with Britain getting what is now Iraq and France getting Syria and Lebanon*.

British control over Iraq continued until the mid-1950s, when the US moved in with the Baghdad Pact, later CENTO, one of the network of Cold War alliances modelled on NATO. But Iraq pulled out, and partially the Anglo-American oil holdings, setting the stage for two decades of conflict as the Americans sought to maintain the Middle Eastern sphere of influence they had inherited from Britain.

That culminated in Saddam Hussein’s seizure of power in 1979, and his decision to launch a war with Iran, in which he received extensive support from the US. The rest is recent enough history not to need repeating. The present chaos is the outcome of a century of Western involvement, colliding with the many and varied aspirations of people in the region.

Perhaps one day, Australian armed forces will leave the Middle East, and return home for good. That would be the best possible way to celebrate Anzac Day. In the meantime, Lest We Forget.

* A variety of contradictory promises were also made to the Russians (seeking more territory), the Arabs (seeking independence) and the Zionists (seeking a Jewish homeland). But, with minor variations, it was the Sykes-Picot deal that was implemented in practice.

I’ll be talking tomorrow (Tuesday) at the Queensland Jobs Growth Summit organized by the University of Queensland School of Economics and The Australia Institute.

The core point of my presentation is that the resilience of the Queensland economy, despite the end of the coal boom reflects the transition to a knowledge based economy, symbolized by the Beattie government’s “Smart State” strategy and the opposite of the nostalgic and reactionary Four Pillars (agriculture, mining, construction and tourism) strategy pushed by the LNP.

Something went wrong with the “I, for one” post, so I’m attempting to open a comments thread for it here.

Test

This para, presented matter-of-factly in the middle of a New York Times piece about the Repub convention bringing older strategists out of retirement, surprised more than, perhaps, it should

Paul Manafort, 67, all but disappeared from American politics in recent decades to advise international leaders, including strongmen like Ferdinand E. Marcos, the former dictator of the Philippines, and Viktor F. Yanukovych, the deposed former president of Ukraine. Now, though, Mr. Manafort, who worked for the Ford campaign 40 years ago, is the lead convention strategist for Donald J. Trump

Combined with the link back to Joe McCarthy, I feel a bit as if we have moved on to some alternative reality timeline (I remember a great one, where Nixon won in 1960, and an author is trying to pitch the actual history of the 60s as an alternate reality story – CT commenters advises that it’s Divergence, by Barry Malzberg).

In political terms, it’s hard to fault Labor’s call for a Royal Commission into the banking system. It’s a neat riposte to the government’s Double Dissolution trigger, the ABCC bill derived from the Royal Commission into trade union corruption, which spent $100 million to announce that it had discovered a handful of cases of petty corruption*, claimed to be “the tip of the iceberg”. (That was one of a string of Royal Commissions set up as political vendettas by the Abbott government, none of which found anything useful.) The hypocrisy of this effort, when we are daily bombarded with evidence of corruption in business, finance and the LNP itself is obvious, and the proposed Commission provides a convenient political hook. And doubtless there will be plenty of evidence of individual wrongdoing, real or alleged.

However, I don’t think this proposed Commission will be any more useful, in practice, than Abbott’s. The problem with the banks is not so much breaches of the rules but the rules themselves. What we need is another inquiry which, unlike the Campbell, Wallis and Murray inquiries is not run by advocates of financial deregulation.

The Royal Commission we should really have is one into Abbott’s Royal Commissions, taking the same nakedly political approach as those Commissions did. The Commissioners, the counsel assisting and the government ministers who called the Commissions should be questioned on the political understandings with which they approached the job, the waste of public money involved. With luck, that would deter any future use of Royal Commissions as partisan vendettas, and leave them to inquire into real issues of public concern, where the powers of Royal Commissions really are necessary.

Finally an observation and a question: Having been critical of the TU Royal Commission, I’ve tried to be consistent in the prediction that this one will be similarly ineffectual. Did any of those now arguing that we don’t need a Royal Commission into banking make the same observation about TURC?

* As far as I know, no union offical has yet been convicted of a corruption offence as a result of the Commission’s work, while at least four prosecutions have failed or been dropped. My guess is that the total number of convictions will end up below 10, and the total amount of money involved not much more than a million dollars. That’s a pretty appalling return for $100 million of public funds that could have been used to protect the community against armed robbers and burglars, not to mention white collar criminals.

A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

As well as posting here, I have a couple of articles in the Conversation about the end of the coal era (I’ll give links in a subsequent post, if I get time). In all cases, I’m getting lots of people saying that the reduction in coal use in is entirely/overwhelmingly due to low gas prices caused by the rise of shale gas. So, I thought it was time for a post on the subject. I want to make three points

(1) This claim is presented in global terms, but it’s really specific to the US. There is no global market for gas, and the expansion of fracking is not global (it’s big in the US and in Queensland, but not many other places).

(2) The claim is out of date as applied to the US. New electricity generation capacity there is now dominated by renewables (still true even after capacity factors are taken into account, I think)

(3) The continuing low price of gas (like that for coal and oil) is being drive, in large measure, by competition from renewables

I also want to talk about different views on the role of gas in the decarbonization process, but I’ll leave that for another time.

Rather inconveniently for the government, it had no sooner dismissed calls for more tax revenue from the usual lefty suspects (including me), when Moody’s came out with a warning that the much-loved AAA credit rating couldn’t be saved with expenditure cuts alone*.

Scott Morrison came back with a line that must have sounded like a good idea at the time. On the one hand “of course there will be revenue measures in the budget”. But, unlike Labor “additional revenue would be applied to reducing the tax burden in other parts of the economy”

That sounds good if you say it quickly enough. But let’s put some specifics in there. It seems clear that “revenue measures” means higher tobacco taxes. and “reducing the tax burden in other parts of the economy” means cuts in the company tax rate and the budget repair levy. So, Morrison’s budget message is

we’re going to tax smokers to fund cuts in company tax and tax relief for top income earners.

Good luck with that.

Of course, Labor is also planning higher tobacco taxes. But they will be able to say that they are using the revenue to fund better health services. And, of course, Labor has been consistent while the tobacco hike will be another backflip for the LNP (unless they get cold feet and do a double backflip, as seems entirely possible).

I’ve given up betting on elections after being unable to collect my winnings when Intrade collapsed a few years back. But for those so inclined, I’d recommend a look at Sportsbet, who are still offering 3.5 to 1 against Labor supplying the next PM (minor aside: most scenarios for so-called “hung” parliaments would lead to this outcome)

* I’m not a believer in ratings agencies, as I’ve said many times, and I don’t think a AAA rating is particularly meaningful. However, the core input to the rating is an estimate of future budget balance, so it’s not all that surprising that Moody’s, looking at the same data, have reached the same conclusion as I did.

A couple of days ago, I was one of fifty signatories to a letter opposing the proposed cut in company tax rate and rejecting the general idea that Australia needs lower taxes. We got excellent coverage from the ABC, Fairfax papers and so on. But by far the most extensive was from The Australian. I counted at least four stories all with a prominent run on the website

* A straight new story, though of course replete with phrases like “the left wing establishment”
* The IPA attacking the signatories as the “fatuous fifty”
* Shorten also attacking the company tax cut as a recipe for “mayhem”
* A front page piece saying a tax increase is a lazy way of solving our problems

Not so long ago, the Oz would have ignored a statement like this (or stuck it in a short story on the inside pages) with the plausible justification that it’s just a bunch of lefties saying what lefties usually say. The fact that they felt the need to reply over and over is revealing, in two ways.

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Looking back, the G20 meeting in Brisbane marked a historic turning point in global climate policy. Before G20, the big problem had been the unwillingness of any of the big emitters (US, China and India) to make the first move. The joint statement by Obama and Xi Jinping broke the logjam, with the result that India moved away from its longstanding position that poor countries should have the opportunity to repeat the mistakes of the past before dealing with the problems of the future. This shift was reflected in the successful outcome in Paris, and with the arrival of Peak Coal in both the US and China. India is still expanding its use of coal, but renewables are growing much faster, and imports are already declining.

With all the big players on board, the immediate problem in climate change policy is what might be called the awkward squad – a group of second- and third-rank countries that are, for one reason or another, trying to push ahead with fossil fuels. These include Poland, Saudi Arabia, Turkey, Vietnam and, of course, Australia. Until the recent election, the Harper government in Canada was part of the awkward squad and a comfortable ally for Abbott and the LNP denialists. But Harper’s defeat appears to have provoked a broader rethinking with even the Conservatives moving to a pro-planet position.

As the awkward squad shrinks (Vietnam is already showing signs of rethinking) the remaining members are going to find their position in the international community less and less comfortable. That is, of course, unless the Republicans win the US Presidential election. In that case, the whole world will have a lot to worry about.

Until quite recently, any discussion of income inequality in Australia was met by howls of “class war” from the political right. Particularly under Abbott, the right wanted to fight on culture war issues, while treating economic policy as a matter of competent management, in which the conservative parties were assumed, by default, to be superior.

Suddenly, however, it appears we are going to have a class war election, largely because of the choices made by the Turnbull government.
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With the ebbing of Turnbull triumphalism, it’s become evident that the forthcoming election may produce, as in 2010, a House of Represenatives in which neither Labor nor the LNP has an absolute majority. Such an outcome has been common at the state level for some time, and is the norm in upper house elections based on some form of proportional representation. It has proved entirely consistent with stable governments, productive legislation and full-term Parliaments.

Yet commentators persist in calling this a “hung Parliament”, at least when it appears in the lower house. By analogy with a “hung jury” we might suppose a “hung Parliament” is one that proves incapable of reaching a verdict on who should form a government or what legislation should be passed. We have plenty of experience to show that this is not the case.

If we take the jury analogy seriously, it’s worth extending it to the case where the Parliament contains a majority committed to obeying whatever order it receives from the Prime Minister of the day (or, perhaps, the Cabinet). We have plenty of terms for juries and courts that work in this way, none of them complimentary: ‘packed jury’, ‘kangaroo court’, ‘frame up’ and so on.

Those are unduly harsh metaphors when applied to majority governments. But the experience of Queensland, the only Australian jurisdiction without an (invariably ‘hung’) upper house, suggests to me that the cause of good government is greatly enhanced when Premiers cannot rely on a pliant majority to push through whatever laws they like. Admittedly, we’ve had some really good independents, most notably Peter Wellington. But even independents I would never want in government have proved useful as a check on the overweening power of the executives.

So, in the cause of linguistic improvement, I offer the term ‘deliberative Parliament’ for a legislature that actually considers legislation rather than casting votes as ordered by the leader of the day.

Press coverage massive leak of papers from hitherto unheard of (by me, at any rate) Panama law firm Mossack Fonseca has, unsurprisingly, focused on the world leaders, celebrities and fixers whose financial affairs have been revealed in an unflattering light. As regards the financial system as a whole, the New York Times draws a fairly typical conclusion

Above all, the Panama Papers reveal an industry that flourishes in the gaps and holes of international finance.

Really? This description suggests that those involved are obscure minor players in the system, of the sort who might be expected to deal with dodgy law firms in tax havens. The real business of global finance is undertaking by upstanding financial institutions with transparent practices.

But writing this down is enough to see that it is silly. As usual in such cases, we find familiar names: HSBC, UBS, Credit Suisse,and RBS and so on. And of course this is just one firm in one tax haven. The absence of major American banks reflects, in large measure, the fact that they prefer tax havens other than Panama, where there is a high degree of US state countrol.

Again as usual, the line is that this is all in the past, and that the banks have cleaned up their act. But the criminal charges keep on coming. This is scarcely surprising when no major bank has been shut down, even for the most egregious wrongdoing, and where only a handful of bank employees have faced jail time over frauds that total well into the hundreds of billions.

As I’ve argued in the past, activities like tax avoidance/evasion and regulatory arbitrage aren’t peripheral flaws in a financial system primarily concerned with the efficient global allocation of capital. They are the core business, without which the profits of the global financial sector would be a tiny fraction of the $1 trillion or so now reaped annually. The burden of supporting this financial sector is a major factor in the secular stagnation now evident in most developed economies.[^1]

The financial globalization that began in the 1970s has not produced an efficient global financial market with a few gaps and holes. The gaps and holes are the market.

[^1]:Since it’s bound to be raised, the costs of financial globalisation to the developed world can’t be offset by considering rapid growth in China and India. These countries have, until recently, maintained tightly regulated financial systems, and have had plenty of criticism for it. Of course, that has resulted in plenty of corruption and misallocation of capital, but the sector simply hasn’t been enough to produce a large drag on growth. That’s clearly changed, in China at least, so it will be interesting to watch the consequences.

Watching the flailing of the Abbott-Hockey-Turnbull-Morrison government on budget policy has been grimly amusing, for those who enjoy politics as theatre. But it has also provided a nice lesson in the policy process, related to an apocryphal[1] story about (IIRC) Thomas Edison. After a thousand or so failed attempts to design a workable filament and design for a lightbulb, Edison was supposedly reproached with discovering nothing, and answered “On the contrary, I’ve discovered 1000 ways that don’t work”.

The AHTM government came to power with the twin slogans “axe the tax” and “fix the debt”, along with a commitment not to cut any public spending that people cared about, and to spend even more on the military than before. That created an obvious problem: how can we bring the budget back into something like balance, given that we have taken on substantial expenditure commitments, and that we can’t rely on bracket creep. To give them credit, they’ve tried just about every answer but one

* First, they tried the standard LNP approach of setting up a Commission of Audit, discovering a budget emergency and breaking promises on spending. That produced the disastrous 2014 Budget, which ended the careers of Abbott and Hockey in due course. Thanks to the backloading of the big cuts, it’s now destroying Turnbull and Morrison. Turnbull has backed off a little way on health, and is still stalling on education. But his disastrous floating of the idea of completely endingFederal funding for state schools means he’ll be in a politically untenable position when he tries to sell smaller cuts, while claiming not to want to kill the sector.

* Second, having killed the carbon and mining taxes, thereby making the deficit even worse, Abbott realised that it would be impossible to claw back the compensating tax cuts given to low income earners.

* Next Abbott called for a tax debate, but ruled out just about everything in advance. Turnbull and Morrison went one better, putting everything on the table, and then killing off each possible option as it ran into trouble. That included the GST, superannuation concessions, the tangle of negative gearing and concessional capital gains taxes, changes to dividend imputation and so on.

* Finally, long after the “all options” discussion was over, Turnbull popped up with the idea of giving income tax back to the states, which lasted all of two days. He is now trying the ludicrous spin that, having rejected his half-baked idea, the states are on their own financially.

So, the government has succeeded in finding lots of approaches that don’t work. The only one left is higher income tax for those who can afford to pay it. The first step would be to maintain the Temporary Budget Repair Levy until the budget is actually repaired. But the real answer is to recognise that the big gainers from the changes in the economy over the past decade or more have been high income earners, and this is the group who need to pay more.

I’m planning to do some proper calculations on this, when I get a little free time.

fn1. Retailing apocryphal stories is anachronistic, now that they can be falsified (or occasionally verified) with a quick Google search. But it’s habitual for old academics, and I regard it as a kind of performance art, like doing a high wire act without a net. In any case, Google is getting less and less useful for anything except selling stuff, so we may have to rely on old skills like memory again.

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

Adani Mining has just received the final approval from the Queensland government for the Carmichael mine in the Galilee Basin. According to this report from February, citing a “top Adani Group executive”, operations should start in August 2016, which would be a disaster for the global environment.

But wait! Now it seems yet more “secondary approvals” are needed (it appears this refers to a bond for cleaning up the mess afterwards), and “we hope that construction would start any time in 2017”.

There’s more interesting stuff in the report.

He said the price of coal was not the main issue in determining the viability of the project, but rather the cost at which the coal could be mined as the company already had a price agreement with the Indian government.Adani Mining CEO Jeyakumar Janakaraj claims there’s no need to worry about the price of the coal they produce “We are an integrated player. We have sold electricity in India on a long-term price.

‘‘It is not about the price point of coal, it is about the cost point, at what cost can we produce coal so that we will always be able to make a profit with the electricity price that we have already sold,”

The reference to the Indian government is pretty cheeky, given the government policy of eliminating coal imports over the next few years, which looks to be on track to succeed. (it’s currently a little behind its targets for increased production, but that’s because of weak demand).

More importantly, Janakaraj’s claim that “We are an integrated player” suggests he does not know much about his own business. Adani was an integrated enterprise when the project began. But the restructuring of the Adani Group in 2015 separated Adani Power (the electricity producer with a diversified portfolio of coal-fired power and renewables) from Adani Mining, which holds the stranded assets like Carmichael. This analysis from IEEFA spells it all out. Adani Power would be breaching its fiduciary obligations to shareholders if it paid an above market price for coal from Adani Mining.

I found a response from Adani, which illustrates one of my favorite points. When you have no answer to a damning report, say that it is “flawed“. That’s true of just about anything, and saves you the trouble of an actual response.

Although China has been moving away from coal-fired power for some time, provincial governments didn’t get the memo. They’ve been approving new plants at a cracking pace, with as many as 250 on the books, through a combination of inertia and desire to keep construction going. Now the national government has started pulling them into line, banning new coal plants in 15 provinces.

As this report shows there’s a similar tendency in many developing countries, with a long-standing push for coal running into the reality that it’s economically and environmentally disastrous. The result is a potential trillion dollars in stranded assets.

Still, progress in reducing carbon emissions has been much greater than seemed possible even five years ago. The problem is that the news from the scientists keeps getting worse. I haven’t had time to digest the discussion around the Hansen et al paper on sea level rise, but it’s certainly alarming. Closer to home and undoubted is the disastrous coral bleaching in the Great Barrier Reef.

And of course, while the world is moving to cut emissions, Australia is going backwards under the Abbott government (now notionally led by Malcolm Turnbull). The defeat of this government would be an important step towards saving the planet.

I’ve been on a very pleasant family holiday, so I haven’t posted for quite a while. I’ll take a little while to get back up to speed. In the meantime, I’m reviving an old regular. It’s time for another weekend reflections, which makes space for longer than usual comments on any topic. Side discussions to sandpits, please. Absolutely no personal criticism of other commenters.