The Economic Society of Australia recently polled a number of senior economists on its National Economic Panel, posing the following question:
“As interest rates are at low levels by historical standards, federal and state governments, despite their public debt levels, should be borrowing more than they currently are to invest in infrastructure”.
Just over 70% of respondents either agree or strongly agree, and on a confidence-weighted basis, 75% agree or strongly agree. This is a rare consensus.
It is worth reading the individual responses. This strong consensus is backed by a requirement for solid cost-benefit analysis, case-by-case consideration of projects and a recognition that any infrastructure spending is not automatically a ‘good thing’.
Do you think we should increase public debt now to invest in infrastructure?
Clear thinking is a prerequisite for good economics. This leads to improved decision making, and that creates better outcomes.
The next time someone claims to be making an economic decision or proposes an economic course of action; dissect their claim or assertion. You do not need to be an economist to do that. There are five simple signs for good economic decision making:
- Decision to be made is articulated
- Available choices are considered
- Measurable objectives are described
- Input variables are identified
- Relationship between variables is determined
Without these famous five, the risk is the economic decision may be dead on arrival.
Lytton Advisory was at the Economic Society 2017 Business Lunch in Brisbane yesterday. RBA Governor, Philip Lowe, gave a very lucid presentation on Australian household debt and house prices.
Over 25% of mortgagees have a buffer of three or more years on their home loans. The top two household quintiles by income are carrying the largest debt burdens.
Recent regulatory changes imposed on banks by the Australian Prudential Regulatory Authority will tighten up lending to property investors. This may create some short-term breathing room to address fundamental supply-demand imbalances in some of the Australian property markets. It may also take a bit of the speculative heat out of the Sydney and Melbourne property markets.
The RBA Governor touched on a number of other issues as well. Details can be found at:
Red tape is embodied in regulations created by governments. Best practice in regulation is encouraged through Regulatory Impact Assessment (RIA). In Queensland and across the world, governments use RIA to understand the consequences of changing regulations. RIA’s help decision makers do more good than harm. Cost-benefit analysis is an essential part of that framework.
Different jurisdictions have procedural manuals for how to do RIAs. This provides guidance to analysts. But when a RIA presents you with a lot of technical data, how can you as the decision maker be sure the recommended course of action is the best one?
Thankfully a diverse group of experts convened by the George Washington University Regulatory Studies Center has developed some tips to steer you through the RIA issues.
Next time you change some regulations, ask your regulatory analysts these questions:
- Does the RIA identify the core problem (compelling public need) the regulation is intended to address?
- What role do markets play when assessing regulatory policies?
- When are market forces inadequate?
- Are a lot of anecdotal or unrealistic justifications being supplied?
- Is there an objective, policy-neutral evaluation of the relative merits of reasonable alternatives?
- Does the RIA present a reasonable “counterfactual” against which benefits and costs are measured?
- Do totals and averages obscure relevant distinctions and trade-offs?
- Recognize that all estimates involve uncertainty and ask what effect fundamental assumptions, data, and models have on estimates?
- Is there sufficient transparency and objectivity of analytical inputs
- How do projected benefits relate to stated objectives?
- What is the evidence for and against a causal relationship?
- Does the analysis accurately characterize indirect benefits and costs?
- How does the law of diminishing returns affect the analysis?
- What “costs” are actually being considered?
- When are compliance costs an insufficient proxy for opportunity cost?
- Are estimated marginal costs increasing?
- How are benefits and costs being distributed?
- Are the benefits and costs are presented symmetrically?
Lytton Advisory provides cost-benefit analysis services to support regulatory impact assessment processes that address many of these questions. Contact us today to find out more.
I am currently on assignment Kuwait, one of the oil drenched Gulf states. The economic incentives at play here are unlike anything I have ever seen. At university years ago we spent a couple of hours in undergraduate economics talking about rent seeking – looking for an economic gain without a reciprocal return to society through wealth creation.
Laid out before me is a whole economy resting on this premise and driven by the distribution of oil rents. Kuwait has been pumping around 3 million barrels of oil a day and is targeting 4 million with some urgency now oil prices have collapsed. Currently this earns them an oil rent (after costs of production and depending on the price) around US$60 million a day. When oil prices were over US$100 a barrel they were getting US$300 million a day. Kuwait has one of the highest dependencies on oil – some 93% of its revenues come from oil rents.
Some indicative figures provide context. The population of Kuwait is about 3 1/2 million people. Around one third of residents are Kuwaiti citizens, the vast majority of the remainder are guest workers. Guest workers remit around A$25 billion a year to their home countries. This is equivalent to 55% of the Kuwait national budget. Nine in ten Kuwaiti citizens are employed by the government. The country rests on a cash reserve of around US$600 billion.
All businesses, with a few limited exceptions, are required to be 51% owned by Kuwaitis. So there are a range of business partnerships that are not strictly commercial but compliance-based. At any stage, the dominant partner can take control of the business.
This creates some very peculiar incentives. Lack of permanency for guest workers provides little incentive to save, spend or invest in Kuwait. So Kuwait misses out on retaining a significant proportion of their remittances.
With significant reserves in the ground – over 75 years – there is little incentive to move away from this rent-seeking model and the inherent imbalances it introduces. However in the long term that transition will be necessary.
It will be fascinating to see how this plays out over time.
Red tape reduction remains on the Government’s agenda in Queensland. Significant work has been done on a social and human services blueprint by the Department of Communities, Child Safety and Disability Services. See:
I am pleased to have played a small part in this. See: