Sunday, May 15, 2016
Australia used to be a nation that made stuff. Lots of stuff. That’s changing
Transitioning from farming and manufacturing are marks of transition to a mature economy
AUSTRALIA, say goodbye to being a country that makes things. Our houses are already full of stuff and we don’t want more. The few things we do want are made cheaply in China.
Making things is officially over. We are now a country whose economy is about doing things and helping people.
Kevin Rudd famously said he wants to live in a country that makes things. If that is true might I suggest he would be happiest living in China? The average wage and GDP per person there are a tiny fraction of ours, but manufacturing is almost a third of the economy.
Australia has a similar share of manufacturing in its economy to Luxembourg and Norway. Meanwhile the three countries that rely most on manufacturing are Puerto Rico, Swaziland and Korea — we are better off than all of them.
Yes, the manufacturing industries of the 1950s and 1960s were great employers of the middle class. But they are never coming back. The world economy is different now. Any residual love for making things belongs to an age where China was a communist backwater. The jobs of the future are in helping and doing, not in making.
Services are likely to be insulated from automation for longer. Of course, some kinds of services can be done by robots — think about self check-outs — but we still prefer them done by people. In manufacturing you wouldn’t even know if a person was involved in making your item.
The future of manufacturing is a hot issue this election campaign because Australia’s car industry is closing down. People are losing their minds over the idea that the next generation might have to work in services instead.
There is nothing special about manufacturing. So why does services have such a bad rap?
People talk about Australia becoming “a nation of burger-flippers” But they are just cherrypicking the lowest status service job. A nation of engineers and scientists doesn’t sound nearly so bad.
Is it really worse to be a helper than a maker? There is no shame in working in services. Heroes come from Australia’s service industry and they always have, throughout history.
Take the Man from Snowy River, who bravely rides his horse through the bush after an escaped colt. The owners of the colt that got away could have simply bought another one; the Man from Snowy River could have stayed at work, perhaps in a cobblers shop making boots. But that wouldn’t be much of a story.
Services are at the heart of our nation, whether it is a fictional story, or a true one. Like the tale of a doctor named Flynn flying round the outback saving lives. His legacy is the Royal Flying Doctor Service.
Services is where we find the people who help: firemen, nurses, doctors, cleaners, truck drivers and teachers. It’s also where we find the people who make a lot of money, like lawyers and financiers. These are all good jobs.
And these days we can more easily base a whole economy on services, because we can provide them across the seas.
In the last few years, services exports have really taken off. A lot of this is tourism, and a lot is education. But we can also sell financial services and business services worldwide now, because of the internet.
The glory days of the manufacturing industry is over, and while old people will still remember them fondly, you can’t go back in time.
We’re now a nation of doers and helpers. That is something we should be proud of.
South Australia is now coal-free -- so it imports coal-powered electricity from a neighboring state
Empty Greenie boasting
South Australia’s last coal-fired power station closed on Monday this week, leaving the state with only gas and wind power generators.
The Northern Power Station, in Port Augusta on the northern end of the Spencer Gulf, has joined Playford B – the state’s other coal-fired power station which has already been retired.
The coal mine at Leigh Creek that supplied brown coal to the power stations also closed earlier this year, so there is no easy option for re-opening the power stations.
The immediate impact of the closure was a brief wobble in wholesale electricity prices, with more energy brought in from Victoria’s brown coal power stations (adding to carbon emissions).
But how could it affect the state in the long term?
Could South Australia run out of power?
Average electricity demand in South Australia is 1.4 gigawatts, and the state record for peak demand of 3.4 gigawatts was set in January 2011. In the past two years the highest demand was 2.9 gigawatts.
Rollout of rooftop solar panels is one of the reasons demand from the grid has been going down. The impact on the peak demand – the time of day when most people are using appliances – is less clear, because if the peak occurs after sunset, solar panels will not reduce it.
With the closure of the 520 megawatt Northern Power Station, South Australia is left with 2,800 MW of capacity in its gas-fired generators, which can be fired up when needed, and 1,500 MW of wind farms, which of course produce energy only when the wind blows. Most gas generation capacity comes from the Torrens Island A (480 MW) and B (800 MW) installations, built in the 1960s and 1970s, respectively.
There have been discussions about retiring Torrens Island A (it was mothballed for a period in 2014), but the departure of Northern appears to have delayed those plans.
The state also has a total of about 600 MW of rooftop solar, but, as noted above, this technically counts as reducing demand rather than adding to supply.
South Australia is also connected to Victoria via two transmission lines, one at Heywood (recently upgraded to 650 MW) and one at Murray Link (220 MW). This gives the state access to a potential 870 MW of Victorian power.
If South Australia gets close to record demand, the state clearly outstrips the capacity of the local gas generators. If the wind isn’t blowing, then the state will depend on the interconnectors.
But there is an unfortunate factor that transmission lines tend to fail under very high temperatures, which correspond to the times of highest demand.
It may sound unlikely, but South Australia is at risk of failing to meet demand.
Company taxes do harm wages
Where is the evidence of the benefits of a company tax cut for workers? Clearly non-existent, according to some commentators , with one even arguing there was NO evidence from ANYWHERE IN THE WORLD that company tax cuts help wages [commentator's emphasis, not mine].
But it is incredibly easy to find this evidence -- even studies showing that workers bear a greater burden of company tax than shareholders. Here is a sample.
One 2012 study found that about half of the burden of European company taxes was borne by workers. A 2013 paper found every €1 increase in German company tax yields a €0.77 decline in wages, while other German studies found workers bear 40% of the burden and another 28 to 46%. The UK Treasury in 2013 estimated that 40% of the benefit of a company tax cut was provided to workers.
A 2013 paper argued that every $1 increase in US company tax leads to a $0.60 decline in wages. A 2009 paper found that wages bore 52% of the burden of US State company taxes in the most recent years studied (1992 to 2005), while another 2009 study found that the burden was 54% for unionised workers. A 2014 study found workers bore 30-35% of the burden of US company tax, while the US Congressional Budget Office in 2010 suggested about 40% of the burden in the US is borne by workers.
Note that the estimates from larger economies such as the US and Germany would underestimate the burden on Australian workers. This is broadly because Australia is more dependent on foreign investment which is more sensitive to tax rates.
And all this evidence is in addition to the many Australian experts (including numerous Treasury officials) arguing that company taxes harm workers generally more than the adverse effect on shareholders.
So perhaps those commentators claiming company tax has no impact on wages need to learn how to use internet search engines.
Negative gearing debate off track
The Reserve Bank is a cautious organisation and averse to fuelling speculation. So it is ironic that they have unintentionally ramped up speculation about negative gearing after releasing — under FOI laws — a 2014 internal memo mentioning that winding back negative gearing “may be a good thing” for financial stability.
However, the negative gearing abolitionists now trumpeting that the RBA is supporting a change would do well to look at it more closely.
The (heavily redacted) internal briefing note does not indicate the impact of a change on the tax system, the housing market or the overall economy. So we should view it narrowly — restricting negative gearing might make the financial system more stable; but at what cost to the rest of the economy? And the issue of stability is already being addressed with a recent tightening of prudential requirements for investor loans.
This leaves only the RBA’s stated downsides of changes to negative gearing: fire sales of negatively geared properties (which the ALP tries to address with grandfathering) and — more importantly for low income earners — the increases in rents. Clearly if rents are hiked, this will hit low income households harder, as they spend proportionally more on rent.
A range of other impacts are not addressed in the RBA memo: the most obvious being the impact on house prices and affordability. However, we can’t be confident that the ALP’s policy will result in a moderation of house prices, surely a goal of a policy to improve housing affordability.
For example, increased rents may encourage some renters to buy properties, increasing prices; similarly the ALP’s policy restricting negative gearing to new properties may increase the price of new dwellings. It isn’t clear that these prices increases will be offset by any reduction in the price of old properties.
The impact on investors is also important. The facile debate so far has been driven by the abolitionists carping about which income groups get the greatest share of the total benefits from gearing. But these discussions are a furphy. Almost all tax provisions provide a greater dollar benefit to the rich, including the GST exemptions for food, education and health.
The GST exemption for food provides a benefit to the top 10% of $631 per year and a benefit to the poorest 10% of $365. Yet no one is using this data to argue for the abolition of the GST exemption for food, because measuring dollar benefits to different income groups is the wrong approach.
Instead it is better to measure the benefits as a proportion of income: which is the way many other organisations (including our Parliamentary Budget Office and the US Congressional Budget Office) analyse the benefit of tax provisions. On this basis, the proportional benefits of the GST exemption are greater for low income groups, as we all expect.
Applying this same approach to negative gearing, we find that the largest percentage benefits of negative gearing actually go to the lowest decile of income earners in the tax system. This result can’t be dismissed as being tax avoidance by high income households: if a low income spouse is negatively gearing, then the household is actually paying more tax than if the higher income partner negatively geared.
Based on this data, the removal of negative gearing may hit lower income earners harder: renting is concentrated at lower income levels, as well as negative gearing itself. But these distributional issues should not be determinative. If the focus is always on distributional effects we wouldn’t ever make any policy changes if anyone rich — or foreign — benefited, regardless of the broader economic benefits. For example, the Treasury argues that company tax cuts will increase wages, employment, investment and GDP, but a central argument used against these cuts are that they benefit foreign investors.
So if decisions about negative gearing should not hinge on financial stability and distributional impacts, what should the emphasis be on? A greater focus should be on how a change would affect the tax system; and on this basis, caution should abound.
Playing with negative gearing would (further) interfere with a fundamental part of the tax system: costs should be deductible against income. There are already some tweaks to this rule; and the more tweaks that are made, the more complex the system will become and the greater the incentives for tax avoidance.
But more importantly, the tax system will become further biased against risk taking. If you can’t deduct losses, then the incentives to invest in riskier assets and enterprises will be reduced — a poor result for what should be an innovative economy.
Negatively gearing is closely tied to capital gains tax (CGT), a point noted in the RBA memo. Negative gearing has always been around, but greatly increased after the 1999 changes to CGT. So instead of playing with the fundamental principle of deductibility of losses, a better option would be to return to the CGT system before 1999 (which involved indexation and an averaging provision that avoided overtaxation of one-off large capital gains), with an additional discount.
This discount should be set so that the tax burden on capital remains lower than the burden on other income, in alignment with the views of many tax experts.
This would be a much better approach than the proposals to slash the CGT discount and not reintroduce indexation, which will result in most capital gains being slapped with a higher tax rate than other income — the opposite of the tax rate that should apply to capital.
It is unfortunate that the negative gearing debate has gone far off this track. There have been proposals for a supertax being applied to capital, when most experts agree this tax rate should be lower. We are debating the impact on financial stability, when this issue has already been largely addressed. We are using the wrong measures of distributional impact, and we are basing policy discussions over who wins and loses rather than the overall economic impact. Policy discussion deserves better.
Posted by John J. Ray (M.A.; Ph.D.). For a daily critique of Leftist activities, see DISSECTING LEFTISM. To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup of pro-environment but anti-Greenie news and commentary at GREENIE WATCH . Email me here