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Professor of Economics, Monash Business School, Monash University

Co-Director, Business Policy Forum, Monash Business School, Monash University

Dean, Faculty of Business and Economics, Monash Business School, Monash University (2009-2011)

Commissioner, ACCC (2004-2009)

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Australian Federal Budget 2017 - Outsourcing Economic Forecasting - May 2017

“Given the Commonwealth Treasury’s ongoing difficulty in making accurate forecasts of some of the key economic variables underpinning the Budget – in particular nominal GDP growth – the Government should ‘outsource’ the economic forecasts used in framing the Budget to an independent agency (such as the Parliamentary Budget Office), as now happens in the United Kingdom.”

ResponseConfidenceComment
Strongly disagree9The only reason to out source the Budget forecasts is if Treasury is unable to do them as well as an external agency. Why could this be the case? There is no reason to believe that an external agency would be more competent at making the forecasts than the Treasury. So the only reason to outsource is if Treasury faces another barrier to producing accurate forecasts. If there is another (say political) barrier, then this should be fixed. The problem is not solved by outsourcing.

Energy shortages - reserving Australian gas - Apr 2017

"In response to energy shortages around Australia, government policies requiring gas producers to reserve some production for domestic consumption are a good way to ensure that Australian consumers have access to sufficient gas supplies while still allowing for gas exports."

ResponseConfidenceComment
Strongly disagree10There is a short term problem with gas supply in Australia as we adjust from a domestic market insulated from the world market, to a market where price is set by the export price. The transition is involving significant pain for some businesses. However, a gas reservation policy (like that in place in WA) makes no sense as a solution.
First, unless the government was going to make the policy retrospective, it would only apply to future gas developments. These will not occur until the current problem is history. If the federal government did make the policy retrospective then it will be an expost imposition on the gas field developers. The amount of gas reserved for domestic use has to be sufficient to set the domestic price below export parity if the reservation policy is to have any effect in the longer term. So it will lower the price of the gas sold domestically compared to the export parity price.
Gas sellers will have to bear the loss - a great example of sovereign risk. Second, even if there was a long term problem, a reservation policy is a poor policy to help ensure the long term viability of businesses that have high demands for carbon intensive fuels like gas. If the government really wants to assist these manufacturers in the long term then it should use a direct, transparent subsidy - not a hidden fuel subsidy. Of course, why the government would actually want to subsidise these high carbon polluting industries is another question.

Housing affordability - capital gains on residential investment - Mar 2017

"Capital gains tax deductions for housing investment should be removed because they overstimulate the housing market, contributing to rising house prices."

ResponseConfidenceComment
Disagree7The deductions (negative gearing) cannot be considered in isolation. The problem is that the current tax mix (capital gains tax discount of 50% and 'negative gearing') allows wealthier individuals to move highly taxed income to lower taxed capital gains using housing as a vehicle. A better solution might be to remove the capital gains tax discount on housing (or more generally) to stop housing being used as a vehicle to reduce tax at low risk. It is far from clear that this will reduce housing prices in the long term, but it will close a tax loophole used by wealthier Australians.

Economics teaching - micro before macro - Feb 2017

Main question: "It is more effective to teach an introductory course in micro-economics first before an introductory course in macro-economics"
Response Confidence Comment
Strongly agree 10 To understand intro macro students need to understand the basis of trade and where prices come from - basic microeconomics.
Additional question: "On balance, I consider myself: a) more of a microeconomist than a macroeconomist b) more of a macroeconomist than a microeconomist"
Response Comment
a) more of a microeconomist than a macroeconomist

Social costs of gambling - Dec 2016

"The social costs of gambling exceed the benefits (including consumer surplus from recreational gambling and tax revenue for governments)."

ResponseConfidenceComment
Disagree7I interpret the question as whether the TOTAL economic welfare from gambling is negative. While this is an empirical question, the likelihood that the total economic welfare from gambling at the level we see in Australia (which is altered by taxes) is negative seems rather unlikely. A more interesting question would be whether at the MARGIN gambling creates positive or negative economic welfare (i.e. should there be a marginal change in gambling in Australia). But that is not what is asked.

2016 US Election - Nov 2016

'Hillary Clinton is likely to be the superior US presidential candidate for the Australian economy and for Australia.'

ResponseConfidenceComment
Agree6I only agree because the alternative is so awful. If the Republicans had put up a half decent candidate then they would be a shoe-in by now. Will Clinton be 'good' for Australia? Probably not given her campaign rhetoric. Will she be better than Trump? That is a low bar to hurdle!

Immigration - Oct 2016

'The total benefit of current levels* of migration to Australia will outweigh the total costs to Australia's economy'.

* Based on Australian Bureau of Statistics data, net overseas migration to Australia was 168,000 people in 2014-15. The data can be found at http://www.abs.gov.au/ ausstats/abs@.nsf/mf/

ResponseConfidenceComment
Strongly agree9

Behavioural Economics - Sep 2016

Question - Part 1: 'Behavioural economics provides new and useful insights into individual behaviour.'

ResponseConfidenceComment
Agree8The name 'behavioural economics' is new - the rest isn't. It is part of a strong stream in microeconomics that goes back at least 50 years (and arguably a lot longer). It is important - because understanding the limitations of our models of decision making, where they apply and when, and adapting these models or developing alternative approaches, is important. The use of laboratory testing is more recent, but the development of alternative theoretical approaches to address issues in decision making (bounded rationality as per Simon and Leibenstein, decision making under uncertainty as per Allais and Savage, etc) has long been part of a good graduate education in microeconomics. And the claims that 'new' discoveries in behavioural economics somehow undermine theory can only be made by those who have not studied microeconomic theory in any depth.

Question - Part 2: 'It is unethical for governments to use behavioural economics to "nudge" citizens.'

ResponseConfidenceComment
Strongly disagree9Of course, this is a moral question, so my view and confidence reflects my moral views. 'Nudging' (or 'soft paternalism' or 'libertarian paternalism') policies would have no effect for 'rational' individuals who face no costs of decision making. But for the rest of us, a nudge (such as changing the default on organ transplants) can significantly change behaviour for those who don't care 'enough'. So we get improved social outcomes while people who really care can still make the same decision regardless of the policy.

RBA economic growth targets - Aug 2016

The Reserve Bank of Australia should be tasked with targeting nominal economic growth rather than inflation.

ResponseConfidenceComment
Uncertain (neither agree nor disagree)8

The Brexit - impact on UK citizens - Jul 2016

Assuming it is implemented, Brexit will deliver net economic benefits, on average, to UK citizens within its first 5 years.

ResponseConfidenceComment
Strongly disagree10A variety of economic analysis leading up to the vote showed the negative economic effects of Brexit on UK citizens. The alternative analysis by 'leave' economists could only model an economic gain on unrealistic assumptions (eg. The UK leaves the EU and implements free trade agreements with a wide range of other countries outside Europe). Further the least costly Brexit alternative (the EFTA alternative as per Norway) would require free movement of people which is unlikely to be acceptable to the 'leave' voters in the UK.

Spend on education or business tax cut - June 2016

Australia will receive a bigger economic growth dividend in the long-run by spending on education than offering an equivalent amount of money on a tax cut to business.

Response Confidence Comment
Disagree 9 Unfortunately, this question is simply too vague to answer with a firm view.

What would the education spending be on? We know that smaller class sizes are not well related to educational outcomes. So money spent further lowering class sizes is probably money wasted. But funding more one-on-one help for students who are falling behind (particularly at early school and pre-school levels) could be money well spent.

What about a business tax cut? Well, what businesses? Are we talking small businesses (under $10m turnover per year) or large businesses with significant foreign shareholdings? Or are we talking all businesses? And is it a cut in income taxes or some of the inefficient state taxes that affect businesses? So depending on the exact policy details, either option could be better for growth.

Hence I am very sure that this question has no unambiguous answer because the question just does not have enough detail!

Budget 2016-17 - Returning to surplus - May 2016

The recently released 2016-17 Commonwealth Budget projects that the Australian Government's underlying cash balance will return to surplus by 2020‑21*. Australian politicians should rebalance the budget with greater urgency.

[*Budget Paper No. 1, Statement 3 - Fiscal Strategy and Outlook http://www.budget.gov.au/2016-17/content/bp1/html/bp1_bs3.htm]

Government investments in major sporting events - Mar 2016

Government investments in major sporting events usually generate net benefits for the city or region where the investment is made.

ResponseConfidenceComment
Strongly disagree10Major sporting events that are 'sold' around the world (Olympic games, Grand Prix races, Soccer world cups) are very unlikely to generate net economic benefits for the economy. Why? Suppose there were such gains. Then competition to host the event would mean that the gains are transferred to the sporting body that holds the rights to the event - either as explicit fees such as for the Grand Prix or as illegal fees (payments to certain FIFA officials come to mind). So at best competition for such events would lead to no (or very small) net gains. However, politicians, from Roman emperors to today, get electoral benefit out of the events. So they are likely to use public funds to bid more than the economic gains to get hold of these events. So basic economics tells us that when politicians bid for sporting events then the economy is likely to be losing.

Efficiency of tax incentives - Feb 2016

New tax incentives for investments in technology and innovation businesses and start-ups are likely to be inefficient.

ResponseConfidenceComment
Uncertain (neither agree nor disagree)5This is difficult to evaluate without a lot more investigation. The package has targeted tax offsets and a capital gain tax exemption on relatively small investments in start ups, as well as offsets for (much larger) venture capital investments. There is also a change to the 'same business test' for carry forward losses.

The economic question is: where is the market failure? It could be argued that individual investors are too risk averse from a social perspective and that socially it is desirable to have a greater level of individual risk taking (e.g. individuals can do 'one draw' on a risky investment but society as a whole gets lots of 'draws'). If so, it might be desirable to have well targeted incentives for risky investment. However, are these changes well targeted? And do they address the key problem (e.g. is it bankruptcy laws that are the problem rather than access to capital?) So I will sit on the fence!

Bah Humbug Australia - Dec 2015

Giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash.

ResponseConfidenceComment
Strongly disagree9There are at least two reasons why giving gifts is efficient (in Anglo cultures). The first is because they are given by another and thus guilt free to the recipient. Guilt stops me spending $30 for the four pack of Trappist Beer. If you gave me $30 I would not buy the beer because of the guilt at such an indulgent purchase. But my guilt-free value exceeds $30. So if someone gives it to me (while I give them a gift of about the same value) then I get guilt-free value. And great beer.

Second, giving is also about the giver. If I give my wife $500 ear rings for Christmas I will get a loving response. The response will be a bit different if I gave $500 cash! My act of spending time and choosing the ear rings is a signal from me to my wife that is not conveyed by money.
That said - be careful about culture. In some cultures giving money is not merely acceptable - it is expected.

Penalty Rates Reform - Nov 2015

Aligning Sunday penalty rates for hospitality, entertainment and retailing industries with the current levels for Saturday, as proposed in the Productivity Commission's draft report, will lead to more employment and greater availability of services in these industries on Sundays.

ResponseConfidenceComment
Strongly agree9The employment and service effects are likely to be modest (but the statement "will lead to more" is fairly weak). As the PC notes, the real winners will be the consumers with some increase in available services and a reduction in 'Sunday surcharges'. The higher Sunday penalty rates seem a left over from last century. If workers need protection from being required to work too many days in a row then the wage system should directly address this - not by picking 'Sunday' as the day to either have off or be paid significantly more.