Catallaxy Files

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.

Eugene Fama has written an autobiographical account of his contributions to financial economics. Without doubt the man is a giant in his field. This is what he says about the EMH.

At the end of my second year at Chicago, it came time to write a thesis, and I went to Miller with five topics. Mert always had uncanny insight about research ideas likely to succeed. He gently stomped on four of my topics, but was excited by the fifth. From my work for Harry Ernst at Tufts, I had daily data on the 30 Dow-Jones Industrial Stocks. I proposed to produce detailed evidence on (1) Mandelbrot’s hypothesis that stock returns conform to non-normal (fat-tailed) stable distributions and (2) the time-series properties of returns. There was existing work on both topics, but I promised a unifying perspective and a leap in the range of data brought to bear.

Vindicating Mandelbrot, my thesis (Fama 1965a) shows (in nauseating detail) that distributions of stock returns are fat-tailed: there are far more outliers than would be expected from normal distributions – a fact reconfirmed in subsequent market episodes, including the most recent. Given the accusations of ignorance on this score recently thrown our way in the popular media, it is worth emphasizing that academics in finance have been aware of the fat tails phenomenon in asset returns for about 50 years.

My thesis and the earlier work of others on the time-series properties of returns falls under what came to be called tests of market efficiency. I coined the terms “market efficiency” and “efficient markets,” but they do not appear in my thesis. They first appear in “Random Walks in Stock Market Prices,” paper number 16 in the series of Selected Papers of the Graduate School of Business, University of Chicago, reprinted in the Financial Analysts Journal (Fama 1965b).

From the inception of research on the time-series properties of stock returns, economists speculated about how prices and returns behave if markets work, that is, if prices fully reflect all available information. The initial theory was the random walk model. In two important papers, Samuelson (1965) and Mandelbrot (1966) show that the random walk prediction (price changes are iid) is too strong. The proposition that prices fully reflect available information implies only that prices are sub-martingales. Formally, the deviations of price changes or returns from the values required to compensate investors for time and risk-bearing have expected value equal to zero conditional on past information.

During the early years, in addition to my thesis, I wrote several papers on market efficiency (Fama 1963, 1965c, Fama and Blume 1966), now mostly forgotten. My main contribution to the theory of efficient markets is the 1970 review (Fama 1970). The paper emphasizes the joint hypothesis problem hidden in the sub-martingales of Mandelbrot (1966) and Samuelson (1965). Specifically, market efficiency can only be tested in the context of an asset pricing model that specifies equilibrium expected returns. In other words, to test whether prices fully reflect available information, we must specify how the market is trying to compensate investors when it sets prices. My cleanest statement of the theory of efficient markets is in chapter 5 of Fama (1976b), reiterated in my second review “Efficient Markets II” (Fama 1991a).

The joint hypothesis problem is obvious, but only on hindsight. For example, much of the early work on market efficiency focuses on the autocorrelations of stock returns. It was not recognized that market efficiency implies zero autocorrelation only if the expected returns that investors require to hold stocks are constant through time or at least serially uncorrelated, and both conditions are unlikely.

The joint hypothesis problem is generally acknowledged in work on market efficiency after Fama (1970), and it is understood that, as a result, market efficiency per se is not testable. The flip side of the joint hypothesis problem is less often acknowledged. Specifically, almost all asset pricing models assume asset markets are efficient, so tests of these models are joint tests of the models and market efficiency. Asset pricing and market efficiency are forever joined at the hip.

I also enjoyed this bit from the foreword.

Finance is the most successful branch of economics in terms of theory and empirical work, the interplay between the two, and the penetration of financial research into other areas of economics and real-world applications.

Henry Ergas provides an FAQ on the Rudd health policy in the Australian. Read the whole thing – I especially loved this bit.

True, the states may not have the tax base to easily fund rising health costs. But if you believe the recently released Intergenerational Report, neither does the commonwealth.

Henry then provides some analysis of the money being stripped out of the State budgets.

The 2009-10 Intergenerational Report projects that GST revenue will average about 3.5 per cent of gross domestic product during the next 40 years. One-third of GST revenue would therefore be 1.15 per cent of GDP. The report also projects that commonwealth spending on hospitals amounts to 1 per cent of GDP in 2009-10, increasing to 1.1 per cent of GDP in 2019-20.

In other words, the GST revenue the government intends to take back from the states is roughly equal to the entire amount the commonwealth was already projected to spend on hospitals. Since the commonwealth’s share of spending is only set to rise as a result of the plan by about 0.20 per cent of GDP, this looks like a huge windfall for the commonwealth, while stripping the states of more than $140 billion (in present value) during the next 10 years.

Claims that the plan is a way of strengthening the states’ finances seem bizarre. But even if that were the objective, the way to address it would be to fix the states’ tax base, rather than slashing their funding.

Last September the Prime Minister announced that he wanted to turn the Australian Public Service into the best in the world. He commissioned his departmental secretary – Terry Moran – to head an advisory group to develop options for public service reform.

Read the rest of this entry »

Michael Foot, former UK Labour Party leader, has passed away aged 96. In her autobiography Mrs Thatcher described him as being a gentleman.

as an AGW policy sceptic, I would very much welcome serious debate and commentary that seeks the truth w.r.t the existence of AGW and, then, what if anything to do about it.

Tom N

Last year I was asked to speak at a conference on the CPRS and prepared some slides. The conference got cancelled at the last minute so I never got around to writing the paper. I suppose I should at some point, but the heat has gone out of the debate. Anyway in response to Tom’s point I’m posting a decision tree and some talking points that I had relating to the tree. It might be a bit wonkish for some tastes.
Read the rest of this entry »

Looks like we will be waiting a while for any meaningful or coherent tax reform

KEVIN Rudd has put the Henry tax review firmly on the backburner, confirming today that his $50 billion public health takeover plan is his top priority.

The Prime Minister said this morning he had not decided on a specific timetable for the release of the review, which was delivered to the Rudd government by Treasury secretary Ken Henry in December.

“I believe what Australian people wanted me to do is to get on with the business of delivering health and hospitals reform. Number one priority,” he told ABC radio.

“Each thing in its season, we’ve got to do one thing at a time.

“But in terms of specific timetables for doing it, no, I don’t have anything particular in mind.”(The Australian 04/03/2010)

My guess is the Henry report is going to suggest a range of necessary, but unpopular,  changes. Rather than fight that battle now,  Rudd will presumably go to the election with health reform his major focus and deal with tax reform later.

As Andrew Norton is fond of pointing out – health and education are ALP owned issues so making health reform (and perhaps MySchool) the focus of the next election  seems like a good strategy for the ALP.

Kevin Rudd November 14, 2007

I stand before you today as a candidate for the Prime Ministership of Australia. I am proud of the plan we have put forward for Australia’s future. And I am proud of the team that I lead – the team that will work with me implementing this plan.
The nation now needs new leadership for the future. The nation now wants new leadership for the future. And today, I stand before you ready to deliver that new leadership for Australia’s future.

Kevin Rudd February 28, 2010

So we need to lift our game – I need to lift my game – in terms of delivering on these undertakings. That’s fair criticism. The reason that we’ve had problems with this is we didn’t … we didn’t properly, I think, estimate the complexity of what we are embarking on.

I have an op-ed in The Australian today talking about the Rudd health policy. Like Samuel J I am underwhelmed by the proposal and believe it to be fundamentally flawed.

Do we really want some Canberra bureaucrat (note the “no net increase in bureaucrats” promise) determining how much should be spent on our health? Do we really want to have health spending allocated on the same basis that the Commonwealth Grants Commission divvies up the GST?

This policy is to be financed by one-third of the GST revenue. People may think that to be sensible, but hang on to your wallets. Rudd promised further ostensible reform. He identified that the gap between expected GST revenue and demands on the health system is expected to increase.

That’s code for a future increase in the GST rate. No doubt, through time the commonwealth will find that it needs to spend more and more on health. “GST up” will become the new perennial budget headline.

The Commonwealth doesn’t need a constitutional amendment to change the GST formula, but probably does need one to implement its health policy if the States don’t cooperate. Bypassing the States to finance ‘regions’ is probably unconstitutional.

The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

Rudd has promised a referedum on this issue before or at the next election. That means no early double dissolution. It also means that the biggest health reform in Australian history is coming to be planned, negotiated and debated and explained and a constitutional amendment organised in less than nine months or so. Unless Rudd now plans to hang on beyond the end of this year.

What I said.

Rudd points to Australia’s high vertical fiscal imbalance as being part of the problem in health care. It is true that the healthcare costs are expected to grow rapidly in future and that the states have poor fiscal bases to meet those costs. It is not clear that greater centralisation is the solution to this problem. It is especially unclear whether Canberra is up to the challenge. The home insulation program was a locally managed, centrally funded program and that just didn’t go well.

The solution to high vertical fiscal imbalance is not stripping authority and funding from the states but ensuring that the states have a sound fiscal basis for service delivery. That means the commonwealth needs to collect less revenue and the states more revenue. It looks like the Henry tax review won’t be making that recommendation.

Effective service delivery requires that decision-making and funding be localised as much as possible. That means greater powers to the states and less to the commonwealth.

Rudd also spoke of directly funding regional areas and bypassing the states. That is a recipe for a huge boondoggle. He will also need a constitutional amendment to do so. Hopefully the states will refuse to co-operate and force a referendum.

This will be the largest healthcare reform in Australian history. The electorate deserves an opportunity to express an opinion of this reform separately and over and above considerations that come bundled up at elections. This policy isn’t only about health; it is about taxation and about the nature of our federation.