Catallaxy Files

Tony Abbott’s paid parental leave proposal is very unpopular. Unpopular with big business and the government. Big business shouldn’t like the proposal because it undermines an existing comparative advantage. Many large corporations already have paid maternity schemes and they use these schemes as a drawcard when hiring labour. Any uniform national scheme becomes a subsidy for small business. The government doesn’t like it because they have been outflanked on the left.

We should remember that Australia already had a paid scheme – the baby bonus – that got means tested by the current government, so Rudd and friends only have themselves to blame. Similarly big business haven’t been paying the Coalition enough attention and, while I’m sympathetic to their position, they too have themselves to blame. This is especially the case for AIG and BCA.

One of the sillier arguments was published this morning in the Australian – either by Michael Stutchbury or David Uren. The basic argument is that a parental levy will raise Australia’s corporate tax rate to the fifth highest in the OECD. The Uren article has a nice graphic showing this.

This argument is misleading. It is true that another levy will add to the overall tax burden. But this analysis makes two assumptions that are incorrect. First it assumes that businesses only pay corporate tax and no other taxes or levies. But that isn’t true, comparing the Australian headline corporate tax rate plus parental levy to OECD headline corporate tax rates is not comparing like with like. Second, it ignores all the other taxes and levies that business already pays. A couple of years ago I worked on the IPA State Business Tax Calculator (the 2009 version online here). This project consisted of analysing the taxes paid by a standardised business in different Australian States. The bottom line is that the business tax burden is greater than the headline rate suggests.

This represents about 18 per cent of the amount of Commonwealth corporate income tax (CIT) paid (i.e. in addition to the reference business paying company tax levied by the federal government, the business pays the state government tax imposed upon it which equals approximately 18 per cent of what is paid to the federal government).

There is an excellent argument for lowering taxes on business – they are far too high. But the argument that the parental levy will push us far up the tax ladder is not correct – we are already high up on the ladder. The parental levy will add to an already high tax burden, not create that tax burden.

I have an op-ed at The Drum today, basically a longer version of the piece here on Monday. I was able to track down some public hospital data that shows increased spending in public hospitals over the Howard era.

It is understandable that the current government wants to differentiate itself from its predecessor. It is not clear that it should do so by out-spending the Howard government. Ironically Howard has a reputation of being somewhat hard-hearted; yet the empirical record is very different. Andrew Norton of the Centre for Independent Studies has shown that Howard government spending on issues such as Health and Education rose faster than under the previous Keating government. He has labelled Howard a conservative social democrat.

All governments like to think that increasing the amount of money thrown at problems will solve that problem. But, as we now know from the Rudd government stimulus package, the quality of spend can be more important than the quantity of spending. So too with health – my IPA colleague Julie Novak has shown that the number of back-office bureaucrats has been increasing, while the number of hospital beds per 1000 population has declined. In the spending we have had over the past fifteen years, the bang for buck has declined.

A German aristocrat of my acquaintance has figured out that the price he will be paid for the output of a solar panel is so high compared with the price he will pay for his input of normal electricity, that he is thinking of rigging up powerful arc lamps to shine on solar panels on his extensive roof.

(HT: Bishop Hill)

Yesterday on Insiders Chris Uhlmann suggested that the Howard government had cut hospital spending. Joe Hockey denied that allegation saying that the States had increased spending over and above the Commonwealth spend, leaving Uhlmann mumbling something about spending share.

Today Paul Sheehan has this comment.

The big lie, repeated again and again, is that the Howard government stripped a billion dollars out of the health system. This claim cannot withstand scrutiny. Any government minister who repeats this mantra is lying.

Them’s fighting words. So I had a look at some ABS data I collected last year on government spending and pulled out the Health spend data.

Overall the Commonwealth spent more on Health than did the States. What about acute care institutions (I assume these are hospitals)?

It looks like the States massively increased spending on hospitals after the GST came in – the same GST that the Commonwealth now proposes to cut.

(I haven’t updated my spreadsheet to take into account the latest year of data to become available (2007-08). It is very unlikely that the result would change if I did include that year. In any event most of that year would be the first year of the Rudd government.)

Update: I was wondering where Uhlmann got his stats from. It looks like he was quoting from the Australian Institute of Health and Welfare.

John Quiggin makes an interesting argument in a recent post.

if you can’t get basic stats right, you can’t get economics right either

I’d like to think that’s right, but I know it isn’t. First specialisation and the division of labour suggests that it would/should be possible to get economics right and not stats. Second, Deirdre McCloskey and Stephen Ziliak have tested that hypothesis. From the introduction of their 2003 Journal of Socio-Economics article.

Eight years ago, in “The Standard Error of Regressions,” we showed how significance testing was used during the 1980s in the leading general interest journal of the economics profession, the American Economic Review (McCloskey and Ziliak, 1996). The paper reported results from a 19-item “questionnaire” applied to all of the full-length papers using regression analysis. Of the 182 papers 70% did not distinguish statistical significance from policy or scientific significance—that is, from what we call “economic significance” (Question 16, Table 1, p. 105). And fully 96% misused a statistical test in some (shall we say) significant way or another. Of the 70% that flatly mistook statistical significance for economic significance, further, again about 70% failed to report even the magnitudes of influence between the economic variables they investigated (1996, p. 106). In other words, during the 1980s about one-half of the empirical papers published in the AER did not establish their claims as economically significant.
…
We are very willing to believe that our colleagues have since the 1980s stopped making an elementary error. But like them we are empirical scientists. And so we applied the same 19-item questionnaire of our 1996 paper to all the full-length empirical papers of the next decade of the AER, just finished, the 1990s. Significance testing violating the common sense of first-year statistics and the refined common sense of advanced decision theory, we find here, is not in fact getting better.
…
It is getting worse. Of the 137 relevant papers in the 1990s, 82% mistook statistically significant coefficients for economically significant coefficients (as against70%in the earlier decade). In the 1980s, 53% had relied exclusively on statistical significance as a criterion of importance at its first use; in the 1990s 64% did.

In their conclusion, this sentence sums it up.

The situation is strange: economic scientists, for example those who submit to and publish papers in the AER, or serve on hiring committees, routinely violate elementary standards of statistical cogency.

Does this make the AER authors bad economists? Not according to McCloskey and Ziliak.

The American Economic Review is filled with examples of superb economic science (in our opinion most of the papers can be described this way—even though most them, we have seen, make elementary mistakes in the use of statistical significance; in other words, we do not accept the opinion of one eminent econometrician we consulted, who dismissed our case by remarking cynically that after all such idiocy is to be expected in the AER).

Ziliak and McCloskey discuss this issue in book length too.

The Wall Street Journal (subscription required) reminds us of the folly of minimum wages.

A higher minimum wage has the biggest impact on those with the least experience or the fewest skills. That means in particular those looking for entry-level jobs, especially teenagers. And sure enough, as nearly all economic models predict, the higher minimum has wreaked havoc with teenage job seekers, well beyond what you would expect even in a recession.

They provide a graph to illustrate their argument, but this graph from MJ Perry is even better.

Peter Martin, “economics correspondent for Australia’s two leading newspapers”, has the Henry Review in his possession. Well he either has the Henry Review, or he has pretended to have the Henry Review.

The final report of the Henry Review, with the government since December, is 10 centremetres thick printed on A-4 paper. It’ll look neater when it is bound and printed.

The question is ‘What are the terms of the embargo?’. Clearly the government is not going to release it anytime soon. Is the embargo indefinite? If not, I would expect “Australia’s two leading newspapers” to publish the Henry Review in total. It is a matter of national interest, and paid for by the taxpayer.

The Lowy Institute have put up a post asking whether there is a libertarian view on foreign policy.

what do libertarians believe to be the proper role of government when it comes to international affairs? Libertarians like their government small and out of the way, but they presumably agree that there are some things government ought to be good at, like defending the country and protecting its interests.

So to get the discussion going, I thought some quotes from Ludwig von Mises would be in order. From Liberalism

For the liberal, there is no opposition between domestic policy and foreign policy, and the question so often raised and exhaustively discussed, whether considerations of foreign policy take precedence over those of domestic policy or vice versa, is, in his eyes, an idle one. For liberalism is, from the very outset, a world-embracing political concept, and the same ideas that it seeks to realize within a limited area it holds to be valid also for the larger sphere of world politics. If the liberal makes a distinction between domestic and foreign policy, he does so solely for purposes of convenience and classification, to subdivide the vast domain of political problems into major types, and not because he is of the opinion that different principles are valid for each.
The goal of the domestic policy of liberalism is the same as that of its foreign policy: peace. It aims at peaceful cooperation just as much between nations as within each nation. The starting point of liberal thought is the recognition of the value and importance of human cooperation, and the whole policy and program of liberalism is designed to serve the purpose of maintaining the existing state of mutual cooperation among the members of the human race and of extending it still further. The ultimate ideal envisioned by liberalism is the perfect cooperation of all mankind, taking place peacefully and without friction. Liberal thinking always has the whole of humanity in view and not just parts. It does not stop at limited groups; it does not end at the border of the village, of the province, of the nation, or of the continent. Its thinking is cosmopolitan and ecumenical: it takes in all men and the whole world. Liberalism is, in this sense, humanism; and the liberal, a citizen of the world, a cosmopolite.

On this point Andrew Norton has a discussion going on whether Australia is an arbitrary nation-state.

Mises on war from Human Action.

What distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the division of labor. Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action. The emergence of the international division of labor requires the total abolition of war. Such is the essence of the laissez-faire philosophy of Manchester. This philosophy is, of course, incompatible with statolatry. In its context the state, the social apparatus of violent oppression, is entrusted with the protection of the smooth operation of the market economy against the onslaughts of antisocial individuals and gangs. Its function is indispensable and beneficial, but it is an ancillary function only. There is no reason to idolize the police power and ascribe to it omnipotence and omniscience. There are things which it can certainly not accomplish. It cannot conjure away the scarcity of the factors of production, it cannot make people more prosperous, it cannot raise the productivity of labor. All it can achieve is to prevent gangsters from frustrating the efforts of those people who are intent upon promoting material well-being.