Category: Economics

Who should receive university economic rents?

~ Andrew Norton ~ 22 Comments

In the Higher Education Supplement this morning, Griffith University economist Ross Guest considers what should be done with ‘economic rents’ that prestigious universities can extract by charging high fees. Rather than imposing price control as the Bradley committee suggests, Guest says that:

The efficient way of dealing with economic rents is to tax them; this is how we deal with resource rents earned by mining companies, for example. So why not tax any excessive economic rents earned by institutions and use the tax revenue to offer means-tested subsidies to students?

I think it is pretty clear that some universities charge fees for full-fee students that are well in excess of the cost of delivering the course. In my submission to the Bradley review (table 6) I showed that sandstone universities charge international students $6,000 to $10,000 a year more than Dawkins universities for similar courses. Some of that is probably genuine quality differences – better academics and facilities. But I think we can assume that there is some ‘economic rent’ here.

There seem to be three broad options:
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A good rule-of-thumb on deficits

~ Andrew Norton ~ 11 Comments

Earlier in the year, there were signs that the general public had picked up the then orthodoxy that what we needed was a contractionary fiscal policy, to the point of not wanting their tax cuts in cash (there was support for diverting them to superannuation).

But it seems that the flipside orthodoxy – that we need deficits in the downside of the economic cycle – has not (or not yet) entrenched itself. A Newspoll published today found that 56% of voters would be concerned about the budget going into deficit next year.

As Club Troppo readers would have predicted, Fred Argy isn’t impressed.

Regardless of the purely economic arguments on this subject (few economists think that temporary deficits are of major concern), I think this is quite a good result. On the assumption that few voters will ever acquire sophisticated economic knowledge or understanding, and that they will use rules-of-thumb instead, an anti-deficit rule of thumb is the one to have.

In other countries with weaker anti-deficit cultures, borrowing is used to finance normal recurrent expenditures and avoid budgetary discipline. Australia is in a much better long-term position than most other countries for having taken its anti-deficit attitudes beyond what economic theory would recommend.

Is HECS a tax?

~ Andrew Norton ~ 20 Comments

Commenter Charles objects to HECS as

an exotic tax aimed at passing education costs to the next generation

Though until 2004 I thought that HECS could reasonably be classified as a tax, that analysis would have been disputed by the courts. Under the Constitution, there is a distinction between taxes and fees for services, and arguably HECS was a fee for service, in that the person who paid it became entitled to a specific service in return.

However, HECS had other attributes of a tax: it was set by the government, it went to the government, and was mostly collected by the Australian Taxation Office (up-front payments went direct to universities, but as money owed to the Commonwealth, with an adjustment to the government income of universities as a result). It made the Australian tax-welfare system mildly more progressive than it would otherwise have been.

But since the student contribution amount system came into force in 2005, I do not think ‘tax’ is the best description of this payment.
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Should companies impose fuel surcharges?

~ Andrew Norton ~ 3 Comments

Four years ago I puzzled in a Catallaxy post as to why airlines had started imposing fuel surcharges. Why didn’t they just add it to the fare? That mystery has now been cleared up. They add the surcharge to flights redeemed on frequent flyer points and only pay travel agents commissions on the base fare. Particular characteristics of the airline industry make surcharges more lucrative for airlines than fare increases of an equivalent amount.

But now The Age reports that the practice is spreading to other industries:

From construction material suppliers and trucking companies to florists, businesses are considering imposing a special levy to offset fuel prices.

There are less aribtrary ways of imposing surcharges than the way airlines do it. FedEx, for example, has a scheme based on monthly movements in actual fuel prices, rather than the flat dollar amounts imposed by airlines without any direct link to fuel costs. With the FedEx scheme, falls in fuel costs are passed back to customers.

But overall I think this is a bad practice. The claim by Shane Oliver in The Age that businesses were ‘adopting fuel levies because they offered greater price transparency’ seems doubful to me. The only transparency I am interested in is how much, in total, I have to pay – I don’t want to have to think about industry cost structures when deciding whether or not I can afford to make a purchase. One of the annoying things about daily life in North America is that you have to do extra mental arithmetic in adding taxes and tips before making purchase decisions.

I doubt surcharges are really good for business either. When booking airline tickets I always getting the feeling I am being conned with the surcharge, despite not feeling the same way about the wide price differences between the same seats on the same flight, but with slightly different terms and conditions.

Are the politics of climate change easier or harder than the politics of economic reform?

~ Andrew Norton ~ 20 Comments

On the Sunday programme yesterday (about 6 minutes in), Laurie Oakes asked Ross Garnaut whether it was politically possible to implement the radical reforms needed to reduce carbon emissions.

In his reply Garnaut drew an analogy with trade liberalisation – a reform in which he played a distinguished part during the Hawke government. Public opinion has been consistently protectionist, Garnaut noted, yet politicians successfully implemented Australia’s transition from a highly protected to a largely open economy. They did so without major electoral consequences.

Garnaut argues that, politically speaking, we are starting well ahead of where we were with trade reform, since large majorities accept the need for change. Garnaut acknowledges the difficulties in moving from this generalised support for action to specific measures, but thinks it can be done.

The two issue starting points are, contrary to what Garnaut suggests, quite similar. The basic goal of the economic reform process – essentially to restore Australia’s economic prosperity – was a point of near-consensus, just as the need to do something about climate change is now. It was the means of getting there that generated controversy. Protection was a means, not an end, and we should not compare opinion on that with views on the goal of slowing or stopping climate change. In each reform case, we have a popular aim, but no easy way of getting there.
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Gambling with issue strengths

~ Andrew Norton ~ 22 Comments

As various opinion pieces have pointed out this week, the Liberals are playing high-stakes politics with their budget strategy.

They are going against the conventional wisdom that spending cuts are necessary to avoid future interest rate increases, and instead saying that there is a danger the economy could slow too much. Intellectually, I think this is a defensible position. The budget is a very clunky mechanism for macroeconomic fine-tuning, with its measures unlikely to have any significant effects for months and hard to change if they prove to be misjudgments.

Politically, however, the argument is too complex and risks further undermining the historic issue strengths of the Liberals.

The recently released results from the 2007 Australian Election Survey (a mail-out survey, which closed in March 2008) shows that while more respondents prefer the Liberals than Labor on interest rates, the margin has narrowed significantly since 2004. The 29 percentage point lead the Liberals had after the 2004 election had shrunk to 6 percentage points after the 2007 election. By not being seen to be strong on the interest rate question this is put further at risk.
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Why taxi fares are high and taxi driver wages low

~ Andrew Norton ~ 21 Comments

I don’t often agree with The Age‘s campaigning journalism, but I thought they picked the right cause – if not quite the right argument – in their advocacy this morning on behalf of taxi drivers. The paper led this morning with the heading:


Assault
Abuse
Fair evasion
12 hour shifts
Poor security
All this for $8 an hour

For the benefit of interstate readers, on Tuesday night a taxi driver, like many of them an Indian student, was stabbed by a passenger (who thanks to the cameras installed in cabs was arrested by police within 24 hours). At last report, the driver was still in a serious condition in hospital.

Drivers responded by blocking a major city intersection, eventually forcing the state government to agree to security screens and pre-paid fares late at night.

Though an analysis piece and an editorial did refer to the licence system in the industry, they did not draw the obvious conclusion that it is to blame for the miserable earnings of taxi drivers, despite the seemingly high fares paid by passengers.

The CIS has a long history – though one unfortunately without policy success – of criticising taxi regulation. One of its earliest publications, by Peter Swan in 1979, was a critique of regulation of the Canberra taxi industry. This was followed by articles by commenters on this blog, Jason Soon in 1999, and Christian Seibert in 2006.
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Should workers support using fiscal policy against inflation?

~ Andrew Norton ~ 8 Comments

The Australian Workers’ Union commissioned Roy Morgan Research to conduct a poll on the idea that half Labor’s promised tax cuts should be diverted to superannuation.

As in the Galaxy poll of Queenslanders a couple of weeks earlier, a bit over a third of voters wanted the tax cuts in full. In the Galaxy poll, 55% wanted all the tax cuts to be put into superannuation. In the Morgan Poll, 50% wanted the money to be split half each between tax cuts and superannuation.

According to AWU National Secretary Paul Howes:

The poll shows voters are economically literate, and politically sophisticated enough to understand that in the fight against inflation and rising interest rates the option of increased superannuation rather than tax dollars in the pocket is smart stuff.

But should workers really be so keen on establishing the idea that budgetary policy should be used to combat inflation? As RBA Governor Glenn Stevens pointed out in a recent speech:
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Is education really Australia’s biggest services export?

~ Andrew Norton ~ 4 Comments

According to reports in this morning’s papers, drawing on Monday’s ABS international trade figures, education is now Australia’s biggest services export, overtaking tourism by nearly $1 billion for 2007 ($12.5 billion vs $11.5 billion).

But as the ABS doesn’t follow tourists or students around counting how much they spend, both these figures are estimates of their expenditure while in Australia. The tourism figures are based on the International Visitor Survey, which asks departing international travellers various questions, including about their spending. It is an on-going survey.

The student data, by contrast, is updated much less regularly. It is based on the Survey of International Students Spending (pdf), last conducted in 2004-5, and updated according to the CPI.
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Will Labor pin inflation blame on the Coalition?

~ Andrew Norton ~ 54 Comments

Wayne Swan has been working hard over the last few days to blame inflation on the previous government. But will the public believe him?

In the Newspoll series of questions on which party is better to handle various issues, inflation has been one of the Coalition’s strengths. Of the 43 times Newspoll has asked about inflation since 1990, the Coalition has been rated as better 41 times, with an average lead of a huge 17.7%. One of the exceptions was the Downer leadership meltdown in late 1994 which affected all Liberal issue ratings, the other was a smaller wide dip in July 1992 (can anyone remember what was happening that month?).

If both Labor victories in Newspoll were because of self-inflicted Coalition political wounds, it means that Labor could not win the inflation issue on its merits despite having inflation below 2% for a couple of years in the early 1990s.

Though the Liberal winning margin seems sensitive to inflation performance – for example, it dipped when inflation spiked after the GST was introduced – this seems to be an issue that the Liberals ‘own’. They still had a big lead despite the GST effect.
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