From carbon taxation to fiscal policy, Warwick Mckibbin (Brookings, ANU, former RBA etc) often seems to be proposing innovatory policy advice without considering the underlying problem his proposals address or the practicality of their implementation.
In this piece in the AFR (paywalled) he posits the following
Australia is a prosperous economy in a region of great potential, but there are serious risks globally that should not be ignored. Although the US economy is recovering (sic) and will be a source of global growth in coming years, there are too many countries that have been growing based on excess liquidity and distorting monetary and fiscal policies.
Then he comes out with this piece of mumbo-jumbo
Given global uncertainty, the approach Australia should take is to be smarter in the design of spending and tax policies. In particular, the funding of spending initiatives should be robust to uncertain future outcomes in the global economy.
Just when is this not the case?
But having said it he embarks on an exciting new fiscal adventure. He wants to define some deficit spending as investment, citing paid parental leave as an example. Doubtless the PM will be relieved to hear from an eminent economist that a policy he holds in considerable regard can be made immune from the normal fiscal laws.
Arguing that paid parental leave brings productivity gains over time, Mckibbin suggests that parents be provided with a loan that they repay along the lines of HECS once their income surpasses a particular level. One problem is that benefits from the productivity gain from HECS accrue to the student but any such gains from paid parental leave do not go to the parent. Are parents therefore garnish their children’s incomes to recoup the loan?
More significantly, he is arguing for a different budget formulation, one in which the good spending does not count as spending and therefore is not really part of the deficit. The good spending is that which adds to future productivity. But is that not what firms from motor to miner always claim about the “investment” government makes in their future? And is not any competent advocate for the less fortunate within the community able to argue for similar future payoffs? Mckibbin’s brave new budgetary world would lead us a merry dance.
Then, Mckibbin addresses the carbon tax, a variation of which he has long proposed. He now says Gillard was incorrect in her assumptions that all the world would follow carbon restraining policy, something that wiser heads (yes, that includes all of us writing on the Cat) always realized.
He advocates creating a new carbon market involving vesting all persons and businesses with carbon credits that they can buy and sell, including overseas. Administratively this runs into similar problems as the carbon tax. Who is to be given the credits – if firms and individuals how do we account for double counting?
If individuals sell overseas (and McKibbin envisages this) how is this different from Australia simply creating a new supply of money (or constricting the existing supply by raising interest rates) and making a donation to foreigners?
What happens even if the credits are only tradeable locally? If the price falls to the very low levels that would currently prevail, can a government credibly say years later to those who sold that, in the event of the high carbon price Mckibbin previously expected, they would pay a premium price for their carbon incorporated goods and services, while others would be shielded by the credits they retained?
In a variation of this, Mckibbin is arguing that the Government’s Direct Action approach should assign emission levels to each firm, charging those that exceed their quota and compensating those who fall below it. Akin to carbon trading, this would entail the creation of a vast new Taxation department and a code that would rival that of the Tax Code in length and complexity.
Economists are wedded to markets based on property rights as efficiency providers. But so few recognize that markets evolve for this purpose rather than are created by governments which have the foresight to see a looming scarcity and vest rights to the scarce product in advance. And then there’s the administrative cost of these synthetic markets.