Category: Economics

How much does the public know about interest rates?

~ Andrew Norton ~ 23 Comments

Much election-year political point-scoring assumes that public knowledge of economics is minimal. In 2004, the Coalition encouraged us to believe that the double-digit interest rates experienced during the last Labor government might return with a new Labor government. This year, Labor is suggesting, with all the fine-print qualifications the Coalition attached to interest rates last time, that it might be able to do something about grocery and petrol prices.

How easily fooled is the public on these things? On interest rates, answers to questions in the 2005 Australian Survey of Social Attitudes suggested a public without the level of policy understanding needed to evaluate the government’s claims. Respondents were asked how much knowledge they had of the role of the Reserve Bank. 6.5% said they had ‘a lot’ of knowledge, and another 31% said that they had ‘some’ knowledge. The rest admitted little or no knowledge.

Yet even these numbers may be overstating the public’s formal understanding. Another question asked how much knowledge the respondent had of how monetary policy is determined. Given that the Reserve Bank determines monetary policy all 37.5% with some or a lot of knowledge of its role ought to have also been knowledgeable about monetary policy. But instead 5% claimed ‘a lot’ of knowledge of how monetary policy is determined and 25% ‘some’ knowledge’. Some of those who think they know about the RBA need to visit its website.
Continue reading “How much does the public know about interest rates?” →

Are people taking economic growth for granted?

~ Andrew Norton ~ 63 Comments

As commenter Richard notes, Oznomics author Andrew Charlton has an op-ed in today’s SMH arguing that:

The most popular misconception in economics and politics is that if the economy is humming along, the government must be doing a good job – it must be a capable economic manager and its policies must be working. … The truth, however, is that politicians have much less control over the economy than they would have us believe.

But what does the public actually believe? Increasingly, it seems, they have become sceptical of claims that the government deserves credit for a strong economy. At each of the last six elections, the Australian Election Survey has asked:

[compared with 12 months ago], what effect do you think they [the government] have had on the general economic situation in Australia as a whole?

At each election, the proportion saying ‘not much difference’ has increased, starting at 39% in 1990 and reaching 57% in 2004. In the same time, Continue reading “Are people taking economic growth for granted?” →

Oznomics

~ Andrew Norton ~ 8 Comments

If publisher Random House’s poorly-maintained website is a guide, Andrew Charlton‘s book Oznomics: Inside the myth of Australia’s economic superheroes, was going to be more humorously titled Does My Boom Look Big In This?: The truth behind Oznomics. But with the precedent of the best-selling Freakonomics and the local Gittinomics Random House must have thought another nomics neologism was more likely to sell books.

Oznomics is a textbook-polemic hybrid. It’s part of a welcome trend of books trying to simplify and popularise economics, taking us through some fairly orthodox micro and macro-economic ideas in the Australian context. But it mixes this with more partisan goals and and a more aggressive tone than the other pop economics books of the last few years.

So along with explanations of why protectionism is bad, we get the protectionists continually referred to as ‘sandbaggers’, because when the ‘tidal wave’ of competition arrives, their first instinct is to ‘stack sandbags on the beach to protect their territory’. The metaphor doesn’t really work as it relies too much on us remembering his original tidal wave metaphor (and how often do Australians sandbag beaches?), and ends up looking like a shot that is a cheap as the Chinese goods that the protectionists are trying to keep out. I’m as against protectionism as Charlton, but the insult was irritating me, and I expect it would be more off-putting for others less used to free trade ideas than I am. People need to be taken gently through counter-intuitive ideas.

And anyone who has ever dreamt of voting Liberal – and there are plenty of protectionists among that group who need to hear Charlton’s message – Continue reading “Oznomics” →

How ’stressed’ are households with mortgages?

~ Andrew Norton ~ 23 Comments

The Age this morning led with a story about record mortgage and rental ‘stress’:

THE number of Australians under financial stress from housing costs has soared to a historic high, with more than a million households now spending at least 30 per cent of their income on loan repayments or rent.

Adding fuel to a potentially explosive election issue, census figures show that the number of households officially declared under “mortgage stress” has almost doubled in five years — to 547,054. At the same time, the number of households above the “rental stress” threshold — spending more than 30 per cent of their income in rent — has climbed to 520,598. (emphasis added)

According to an ALP press release (seemingly the source of this story) that’s equivalent to 27% of households with mortgages.

It is of course unsuprising that high property prices are flowing through to people spending more of their income on housing. But ‘stress’ in this context is a subjective rather than objective indicator, so it is not clear that we can really say that spending 30% of income on mortgage or rent payments is an ‘official’ indicator of financial stress.

Other measures of financial stress, for example, come up with lower estimates of financial problems among households with mortgages. The 2006 General Social Survey found that 16.5% of households with mortgages had experienced a cash flow problem in the previous 12 months (defined as not being able to pay a bill on time), which was slightly lower than the national average.

So where does the 30% of income figure come from? Continue reading “How ’stressed’ are households with mortgages?” →

The folly of higher education price control, part #3

~ Andrew Norton ~ 12 Comments

The Group of Eight’s higher education reform proposal (pdf) proposes a relaxation, but not abolition, of price control.

Instead of the current more-or-less picked out of the air maximum student charges, they propose a Productivity Commission study of the ‘actual and relative teaching costs by broad field of education’. Based on the ‘indicative cost’ determined by the Productivity Commission, universities could set fees up to a maximum of 25% more than that number. The only rationale given is to ‘avoid exploitative pricing’.

This is a rather curious admission. In Australia, the only universities for whom an even remotely plausible argument could be made that they have the power to price in an ‘exploitative’ way are, er, the members of the Group of Eight. Are they saying that they cannot be trusted not to exploit students, and must be constrained by regulation? There aren’t many interest groups that will own up to that.

I would have thought that with the portable scholarship (aka voucher) proposal in the Group of Eight package they already had two systems of price control, ie a market to keep sticker prices down and subsidies to further reduce the effective cost to students – though arguably the subsidies will push up fees as students will know they won’t have to pay the full amount.
Continue reading “The folly of higher education price control, part #3” →

The folly of higher education price control, part #2

~ Andrew Norton ~ Leave a comment

The people Bruce Chapman thinks should be allowed to set prices for full-fee students put their latest effort into the Government Gazette today.

Today’s announcement – not unexpected, given the Budget numbers last week – was that the price universities will take for Commonwealth-supported students, which includes the Commonwealth and the student contributions, will be indexed by 2%. This comes a couple of days after the ABS labour price index showed public sector education labour costs increased by 4.3% in the year to March 2007. Labour costs are well over half of the total expenses of universities.

2% is also below the general inflation rate. How many people know that the Coalition actually cuts higher education charges to students in real terms most years? Cuts in 1996, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2006, 2007 and for 2008, increases in 1997 and 2005 (yes, students are paying more, but not as much more in real terms as they may think).

Only the 2005 increase was actually passed on to universities, but all the cuts were (via the operating grant) so overall universities are worse off and still going backwards. This is the reality of higher education price control – not protecting students from being ripped off, but preventing them from being able to buy better facilities and teachers.

Who should set prices for full-fee students?

~ Andrew Norton ~ 6 Comments

HECS architect Bruce Chapman has consistently opposed universities being free to set their own fees. An article published in this morning’s Australian Financial Review, co-authored by Chapman and ex-bureaucrat and now-consultant David Phillips, suggested that

there is a case to question whether publicly funded universities should be free to set whatever price they choose for this one group [ie full-fee] of Australian undergraduates.

They noted that it seemed to be ‘highly inequitable’ that full-fee and Commonwealth-supported students pay very different prices for the same course.

Chapman and Phillips go on:

As well, some universities have strong reputations as a result of over 100 years of public sector subsidies, and they don’t pay rent, both factors implying that allowing an uncapped [a reference to the proposed abolition of the 35% limit on Australian full-fee payers] number of full-fee paying students will deliver disproportionate benefits to a minority of universities with no corresponding implications for increased competition.

Chapman has been saying similar things for years. In this 2004 radio interview he remarked:

The basic problems are that the universities don’t pay rent so we don’t have a level playing field to begin with and also some institutions have had 150 years of public sector subsidies for their reputation. We are not starting here in a vacuum. … You basically are allowing, under this particular scheme, universities price discretion or the capacity to charge whatever they like, which has got very little to do with competition. The number of places is still restricted so there won’t be great competition coming from this. What there will be is the delivery of very large profits to some institutions from minority students.

In an article published in the Australian Economic Review in 2001 he elaborated slightly on his objection to ‘unfettered price setting’, noting that as well as not paying rent some universities have prime inner city real estate and that ‘playing field is not level’.

Unfortunately, Chapman has never explained at any length the logic of his position – not even in his recent book, which at US$145 certainly shows that there is no price control in the publishing industry. But let’s try to unpack the various points he seems to be making.
Continue reading “Who should set prices for full-fee students?” →

The anti-economic rationalist genre

~ Andrew Norton ~ 92 Comments

Some years ago, in reviewing Lindy Edwards’ book How to Argue with an Economist, I suggested that it was part of a genre of anti-economic rationalist writing. I think ‘genre’ is a good way of describing critiques of economic rationalism, because it picks up connotations of a common style as well as of shared subject matter and perspective.

There was another example of this in an article by Martin Feil in today’s Age, run under the title ‘We killed manufacturing’. It’s a vigorous polemic against economic rationalism and free-market economics, but as is usual in this genre it does not cite any actual economic rationalist or free market advocate and shows the standard lack of interest in facts.

Admittedly, indifference to evidence does have its liberating effects, allowing creativity closed to those who drearily stick to what can be substantiated. Take this claim, for example:

According to the free-market adherents, productivity improvements occur only when there is no government intrusion in the marketplace. Businesses are left to compete and only the most efficient survive. They then altruistically give their efficiency gains to consumers to grow the market. (emphasis added)

I’ve been reading anti-economic rationalist tracts for 20 years, and have read countless denunciations of free-market theories putting self-interest at their centre, but I think this is the first time I’ve seen the theory criticised for putting too much faith in altruism. Of course many people are altruistic, but it would indeed be a foolish theory that assumed business would give productivity gains away out of generosity. If it happens, it’s because business want to increase the amount they sell by lowering prices – as free market theory would predict.
Continue reading “The anti-economic rationalist genre” →

Gittinomics

~ Andrew Norton ~ 7 Comments

I’ve long been in two minds about SMH economics columnist Ross Gittins. A couple of years ago I suggested that there were two Ross Gittins, the Saturday Ross Gittins whose column in the paper’s business section is often an easily-understood explanation of economic ideas and behaviour, and the Wednesday Ross Gittins whose column on the opinion page is regularly a Clive Hamiltonesque critique of modern society – we’d be better off working less, having fewer material goods, facing less confusing choice etc.

I think we need more writers like the Saturday Ross Gittins, demystifying economics and correcting mistaken ‘common sense’ economic reasoning. The boom in science writing for a general audience has not been matched by a boom in similarly-pitched economics writing, though books like Tim Harford’s The Undercover Economist and Steve Levitt’s Freakonomics have sold well (though the latter is not really about the economy as usually understood).

Whether we need more writers like the Wednesday Ross Gittins is another matter. As with the Saturday Ross Gittins, the Wednesday Ross Gittins is mainly a recycler of other people’s research, but usually of non-economists. But for some reason – perhaps because he is supposed to be an economics columnist, or maybe because many writers enjoy the pose of ‘dissent’ – the Wednesday Ross Gittins contrasts the view he is presenting with those of ‘conventional economics’, ‘economic rationalists’ or businesspeople. But, as is common in the anti-economics literature, these are never named economists or businesspeople. The smell of straw men burning comes from these arguments.

Both Ross Gittins are on display in his new book Gittinomics (extract here), which joins quackonomics as a play on Levitt’s Freakonomics. While there is not much conventional micro or macro economics to be found, there is interesting information to be found about what he calls ‘home economics’ – work, education, family, housing, health etc.
Continue reading “Gittinomics” →