Category: Economics

The cost of FEE-HELP

~ Andrew Norton ~ 50 Comments

Providing me with my second page one dial-a-quote this week, the SMH this morning leads with a story titled ‘Student debts out of control’. Drawing on an article by Bruce Chapman in this week’s Campus Review, it says:

GRADUATES from private colleges and universities are costing taxpayers more than those from public universities, and new ministers of religion present one of the greatest burdens.

Though for reasons I will explain this is not correct, Chapman’s original article does make a valid point. This is that under the FEE-HELP loan scheme for full-fee students there are implicit subsidies because student debt is only indexed to inflation, meaning that the taxpayer bears most of the real cost of lending students money to pay their tuition fees. (Aspects of this issue were discussed on this blog last October.)

Undergraduate FEE-HELP students do pay some real rate of interest, because they have to pay a 20% surcharge on any amount they borrow (eg, if they borrow a tuition fee of $10,000, they will owe the government $12,000). If these students repay quickly, that could work out at quite a high real rate of interest. But if they borrow a large sum that takes many years to pay back then their real rate of interest will be low, and they will effectively receive a subsidy from taxpayers.
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How long will ‘economic conservatism’ last?

~ Andrew Norton ~ 32 Comments

Kevin Rudd may be reluctant to call Labor left-wing, but he’s happy to cloak himself in conservatism. It started last year when he invoked – albeit inaccurately – British conservative philosopher Michael Oakeshott in his criticism of market forces. After becoming leader, he endorsed – albeit inaccurately again – Australia’s most successful conservative leader, Robert Menzies, as preferable to Howard.

And more recently Rudd has been calling himself an ‘economic conservative’, which Josh Gordon wrote about in The Age on Saturday. As Gordon says, not so long ago this would have been a negative term, but such is the general agreement that has built up around the main component parts of ‘economic conservatism’ – Reserve Bank independence and a balanced if not surplus Budget – that ‘conservatism’ on these matters is uncontroversial.

Even Labor’ s once-true believers are getting in on the consensus. If Howard being cheered by CFMEU members was the most bizarre aspect of the 2004 campaign, for me the most bizarre aspect of the 2007 campaign was the enthusiastic applause from the party faithful at Labor’s launch when Rudd said:
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Interest rates and the vote

~ Andrew Norton ~ 2 Comments

Those commenters stressing that interest rates could be a signifcant factor in the election, even if most people don’t think the government is to blame for them, get a boost from polling reported in this morning’s Sunday Age.

In a Taverner Poll of Victoria and NSW, 21% of those polled blamed the government for the increases in interest rates. That’s a lot more than the 12% blaming John Howard in a Galaxy Poll earlier this month. Is that because there has been an increase since, opinion is different in NSW and Victoria, or the question wording affected the result? Unfortunately, The Sunday Age has kept up with its very poor opinion poll practices, and published nothing about question wording or sample size.

But some evidence for the vote-changing case:

The latest Sunday Age/Taverner Research poll shows that 57% of the key mortgage-holder demographic will be voting for Labor, compared with only 43% for the Coalition.

This is a complete reversal of the 2004 campaign, when a Taverner poll conducted then showed the Coalition enjoying an 8-point margin over Labor among mortgage holders.

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Who is to blame for interest rate increases?

~ Andrew Norton ~ 33 Comments

Evidence this morning adding to what we already have that the economy is neither the electoral asset nor the electoral liability it once was, and that interest rates are not a major political issue.

A Galaxy Poll reported in the News Ltd tabloids asked

If interest rates rise again in the near future, which of the following do you believe is mainly to blame?

The political answer, John Howard, received blame from only 12% of respondents – 17% of Labor voters and 3% of Coalition voters. The other responses were ‘international factors’ (37%), the Australian economy (30%), and the Reserve Bank (14%).

Are interest rates a vote changer?

~ Andrew Norton ~ 6 Comments

Labor and the commentariat are very excited about interest rates – what with a broken promise to keep them low and the possibility of rates going up during a campaign. But as with household finances generally, do the voters have a sense of perspective that the political class lacks?

Back in August, Andrew Leigh wrote an op-ed suggesting that interest rates did not affect the 2004 election in the way conventional wisdom presumes. Today’s Newspoll suggests that the 2007 election may be similar.

In a question asking whether the respondent would be less likely to vote for the Coalition if interest rates went up, only 9% said it would. That was largely driven by people who had already said they were going to vote Labor. Only 2% of those indicating support for the Liberals said that they would be less likely to vote Liberal if rates went up. But 4% of Coalition supporters said that they would be more likely to vote for the Coalition, as did 2% of Labor voters.
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The imaginary ghost of Menzies

~ Andrew Norton ~ 5 Comments

The ghost of Robert Menzies has yet again been sent to haunt to the modern Liberal Party, this time by Canberra Times economics editor Peter Martin. The target is usually John Howard, but this time it is Peter Costello. In response to the Treasurer’s efforts this last week to heavy the banks into not raising interest rates, Martin writes:

John Howard’s hero, the founder of the Liberal Party and Australia’s longest serving Prime Minister, Sir Robert Menzies fought the Labor Party’s attempt to nationalise Australia’s private banks with every fibre of his being….

The man who would like to become the next leader of the Liberal Party, Australia’s Treasurer Peter Costello is acting as if Menzies had never won…

The fact is the banks can move their rates wherever they like (so long as they don’t collude). Menzies made sure of it.

Like others who have taken up the Menzies-is-more liberal-than-Howard meme, Martin has his history wrong. As economist blogger Stephen Kirchner explained to me:

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The economy as a depreciating political asset

~ Andrew Norton ~ 22 Comments

In late September, Newspoll asked its respondents: ‘John Howard or Kevin Rudd – who do you think is more capable of handling Australia’s economy?’. 48% thought the Prime Minister was more capable, while 33% thought the Opposition Leader.

The ACNielsen poll reported in yesterday’s Fairfax broadsheets used a different question to probe the same issue. They included an option saying ‘it makes very little difference which party is in power, economic performance would be the same’, and it was the most popular choice on 43%, with the Coalition regarded as the better manager by 40% of voters, and Labor by 12%.

That’s consistent with the increasing belief, as seen in the Australian Election Survey, that the government makes ‘not much difference’ to either general or household economic situations (I blogged on this in July; the full AES time series has been published here, but unfortunately in a generally very useful publication the ‘bad effect’ and ‘not much difference’ numbers have been transposed).

Though the Coalition is still well ahead of Labor on this indicator, it is not as strong as Newspoll would suggest. As more people come to believe that the economy is going well on autopilot, and Labor won’t try any Whitlam or Keating crash landings, the more the Coalition loses one of its clear policy strengths and the more likely people are to take a chance on Labor. It’s probably one factor explaining why, despite the best set of economic indicators in a generation, the Coalition faces the kind of wipeout normally reserved for goverments that have presided over serious economic downturns.

Testing the waters on uni fees

~ Andrew Norton ~ 15 Comments

Basic economics tells us that students won’t just pay any price for a university degree. If market prices become too high, a case can be made, in theory at least, for public policy action to lower the cost to students, to ensure that the labour market has sufficient graduates or to target particular groups of people.

But how do we tell when we have reached such a point? Professor Simon Marginson seems to think that the theory above is sufficient for us to know. An article in this morning’s Age reports that the proportion of university students from a low socioeconomic background hasn’t changed in 15 years, despite two significant price hikes, but Marginson says:

there is a problem with extrapolating the results — if you keep lifting costs, there is likely to be a lag factor before you see evidence that parts of the community are being excluded. “It’s a pretty clumsy way to test the waters.”

In my view, theory can only take us so far in answering what is essentially an empirical question: at what prices will student (or prospective student) behaviour start changing in ways that are, from a public policy perspective, undesirable? We can be confident that we are not there yet. Total applications have dropped since their most recent peak in 2003, but demand still exceeds supply, and by very large margins in some courses at some universities. Demand would not exceed supply if prices were too high.
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The public’s mixed views on free trade

~ Andrew Norton ~ 69 Comments

The latest Lowy Institute poll on Australia and the world shows some now familiar patterns of belief on free trade. As I argued in Policy some years ago, while the Australian public remains protectionist, this does not mean they fail completely to understand the arguments for free trade.

For example, 72% of respondents to Lowy’s poll agreed that freer trade ‘leads to lower prices and more product choices for consumers’. 67% agreed that freer trade ‘helps to increase prosperity, both in Australia and other parts of the world’. 84% agree that it ‘enables Australian business to open new markets for Australian products’. On all these propositions, public and expert opinion is close. There is even majority support for the social and political benefits of free trade, with 64% agreeing that it ‘makes the world more stable by putting people from different countries in contact with each other’.

Yet when it comes to a specific question on a free trade agreement with China, only 38% say that on balance such an agreement would be good. Why? The answers to some of the other questions on free trade give us some clues. 68% of Lowy’s respondents believe that freer trade ‘puts Australia at a disadvantage because of our high labour and environmental standards’. 50% agree that freer trade ‘costs more Australian jobs than it creates’ and that it ‘leads to more economic and social inequality’. 42% think that freer trade ‘leads to lower quality jobs in Australia’.

People are more in favour (47%) of a free trade agreement with Japan than China. I think this parallels initial reasonably strong support for a US-Australia FTA – that Japan, like the US, is not seen a low-cost manufacturing competitor (these days ‘Made in Japan’ is a mark of quality; it used to mean what ‘Made in China’ means today, ie cheap). Support for FTAs, though short of majorities, is always well above questions that assume unilateral tariff cuts – the idea that Australia is getting something in return helps increase public support – which is probably why the largest favourable response in the Lowy survey is on opening markets for Australian business.

Many economists think that even unilateral tariff cuts are better than maintaining protection. But to carry public opinon, reducing protection through international agreements is the way to go.

Interest rates past and future

~ Andrew Norton ~ 5 Comments

Last week ACNielsen reported on the public’s retrospective view of interest rates, finding that 49% of its respondents thought interest rates would have been the same had Labor won, 31% thought rates would have been higher, 7% lower, and 13% couldn’t say. Today’s Newspoll results report on a prospective question:

John Howard or Kevin Rudd – who do you think is most capable of keeping interest rates lower?

The wording is a bit odd, lower than what? But again the biggest single group are those who can’t or won’t choose, 39% (22% neither + 17% uncommitted), followed by Howard on 34% and Rudd on 27%. Clearly Rudd’s 27% is a big improvement for Labor on the 7% who couldn’t imagine Mark Latham keeping interest rates down, but notably less than half of people (48%) intending to vote Labor were prepared to back Rudd on this issue. There is no significant Ruddmania here; with interest rates lower than they are now Kim Beazley scored 23% in a Newspoll in June 2006 (though the question was different; asking which party would better handle interest rates). It looks like most of the people who previously backed the Coalition in Newspoll surveys are heading to the undecided column rather than to Labor.

Noting the bad results on the interest rate survey, a slip in Coalition support on the which party is better to handle the economy question, and a decline in the PM’s satisfaction levels, Dennis Shanahan concluded that ‘the latest interest rate rise appears to have dented the Coalition’s economic credentials’.
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