ReadWrite-grogsgamut

My Drum piece this week looked at the exchange rate and how it really is a bugger of a thing to predict – especially when you try and apply economic principles to it.

Given it has only got 64 comments, I’m guessing the exchange rate is not the most fiery of issues to debate. Ahh well. When I was studying economics at uni back during the 1990s recession one of my favourite subjects was “International Trade and Finance”, mostly I think because the textbook we used had a chapter titled “Offshore Banking and International Money Laundering”. Who says you don’t learn anything practical at uni? Perhaps I should have written about that…

Anyhoo the dollar does bizarre things. Since the float of the dollar the average value has been US$0.7554, but during this century other than the 12 months of 2005 it has either been well below it (great for exporters) or since 2007 for the most part well above it (great for people who like buying imported things) and significantly above it since the end of 2010.

And going back to the start of the float the picture is this:

But of course we don’t only trade with the US, so we can look at the Trade Weighted Index. Since the float it had average 60.9, and currently it sits at 74.9.But if we go back before the float and look at the TWI since 1970 a different picture emerges:

The average back to 1970 is 71.8.

During 1973-74 the Aussie dollar was actually worth US$1.4875. Such a rate now would pretty much kill the economy (and certainly didn’t help it back then).

But while the TWI is one version of an effective exchange rate, the Bank of International Settlements does it's own version, and it goes back to 1964. On its measure, the Australian dollar is almost as high as it has ever been:

Anyway, at this level it starts getting a bit academic. The general consensus is the dollar is too high, but it’ll probably take the rest of the world to get back in shape before it starts going down – and even then, it depends how the rest of the world goes about doing it. If opther coutnires follow the “Abenomics” line of Japan we’ll stay high for a while:

And the updated graph of 2012 versus 2013 shows the spooky similarity still occurs. We wait for Ben Bernanke to give us his tea leaves tonight…

My Drum post today looks at some of the pretty misleading graphs being used on political parties websites.

I suggest that when you start seeing these graphs you really need to put on your sceptical hat because there’s often a fair bit of trickery going on.

Rather surprisingly, over on Catallaxy, Sinclair Davidson has had a very little crack at me for finding fault with this graph by the Libs:

He thinks it “does a good job at dispelling the lie that the government has less money coming in”.

Which would be fine except that graph does not really just do that. By showing only one year of the LNP govt and then extending out to the end of the forward estimates the graph is clearly attempting to suggest there has been a boom in tax under the ALP.

And just to show how dodgy the graph use is, the Libs have come up with a new version today:

Wow see that exponential upswing! And there’s an even added new bit of joy to discover! According to this graph tax revenue was actually lower (see that downward blue arrow) in 2007-08 than it was in 2008-09. Astonishingly $294.9 billion is now LESS than $292.6 billion!! Gotta love budget finance done the Liberal Party way.

I have no problems with someone stating that nominal revenue (or even real revenue) has gone up under the ALP – hell I wrote a Drum post about it last week! But let’s not be so gullible as to think the Liberal Party (or ALP) are pitching their graphs on Facebook to economics professors. They’re pitching it to people who would be utterly bored with economics and anything to do with the budget. But when they see a graph like those above they are lulled into thinking – geez the ALP has gone off on a taxing hike after the low taxing Liberal Party lost office.

Sinclair I think is being far, far too generous about the Liberal Party’s intentions. A bit like a teacher who knows a student has got something wrong, but because he likes the student he marks the essay on the basis of what he believes they were really trying to say, rather than what they did.

Personally I’m not so easily accepting of such a story, especially when you look at the increase in real revenue since 2000-01

 

As I noted in my Drum piece last week when I looked at revenue I used % of GDP. But I didn’t suggest a graph like this was the way to do it (which is my version of the Lib’s Facebook graph):

Instead I used this graph:

I think my graph is a pretty honest view of how things are. And I even posted this graph as well just to show I’m not locked in on only % of GDP terms:

I called out Julia Gillard for suggesting revenue has fallen, but I’ll also call out the Libs for suggesting revenue is zooming faster than what it has in the past.

The political party’s are engaged in spin. I don’t think it helps the debate much if we give them a free ride and even a pat on the back for doing so.

My Drum piece this week was looking at suggestions the progressive income taxation is a bad thing, and that Australia has an overly progressive tax regime.

Among the graphs I used was the average tax wedge form the OECD data. One other lot of tax wedge data they released was "marginal tax wedge” which essentially looks at the rate of tax you pay for working say an extra hour – essentially what impact the income related taxes have on the incentives to work more.

Clearly Australia's rate is no less of a disincentive to work more than is the case in America, and we are a long, long, long way from the stereotypical high progressive taxing countries of Scandinavia.

And if we look at what the tax wedge is for your typical family with 2 kids, one parent at 100% of the average wage and the other at 33% (ie a part time worker), then again we see that Australia’s tax system is hardly a factor in people deciding whether they want to work more hours.

Now over at Catallaxy Files Sinclair Davidson has rather oddly accused me of “slight of hand” with my graphs on average tax rates of the flat rate because I chose a rate of 35%.

This rather surprised me because I chose it not for any nefarious means, but because that was the rate recommended by the Henry Tax Review as I noted in my blog post on the topic a week ago. The difference of course is the Henry Tax Review kept in place the 47% threshold for those earning over $180,000.

The Henry Tax Review Version looks like this compared to the current one:

And in terms of difference in tax paid as a percentage of income it would be this:

So I just kept the 35% rate but knocked off the 47% higher rate.

My point was that those in favour of a flat tax do so because it will lead to less taxation being raised and thus smaller government outlays – ie smaller government overall, and that it also favours the rich because they are the ones who currently pay the highest tax rate. As my final sentence states:

“When [the flat tax debate comes], remember what the fight is really about - the wealthiest paying a lot less tax, and a lot fewer services for everyone else.”

I guess I could have looked for guidance from Sinclair’s IPA 75 big ideas where they call for a flat tax. But oddly they’re not too desirous to put a number to it. But hey, I’ll play along.

Let’s compare the difference if the rate was 25%

Certainly everyone now is paying less tax. Let’s see how much less according to income: [UPDATE – My original graph was wrong, I’ve corrected. Not sure if anyone noticed, but anyway, thought I’d get in before anyone did!)

A big drop that just keep getting bigger. And once again – as I wrote in my article – that is always going to be the case when either moving to flat tax or just making your tax less progressive – the more you earn the bigger your tax cut.

Someone on the current median taxable income of $46,000 gets a tax cut of 2%, someone on $180,000 gets an 8% cut. Someone earning $548,000 (which is the average taxable income of those in the top 1% of incomes) would get a 16% cut.

I guess they just need it more.

But the bigger point is not that this is less-progressive, it is that it will bring in a shirtload less tax revenue. Now flat taxers no doubt like that. There may be a few deluded ones among them who think our current marginal tax rates are to the right of the Laffer Curve, but let’s stay in the realms of reality and assume (oddly) that if you tax people less, less tax is raised.

Well that’s fine. But when you’re looking at around an average 16% reduction in tax for those in the top 1% of the population, that would see the top 1% going from paying on average 41% of their $49.9 billion in collated taxable income to just around 23% which would see a drop of about $9 billion less in revenue just from the drop in tax paid by that 1%. And that’s each year. And remember the top 1% might pay a skewed amount of tax, but it is still only 9% of total tax. And remember as well income and withholding tax accounts for around 50% of all tax revenue, so we’re talking a massive smash to the budget.

And now you see why the IPA and those at Catallaxy love the flat tax. Less revenue means less government. Now that’s fine, but let’s not pretend that the above graph is just the only picture. Less tax revenue means less government services, be they education, health, social security, etc. Now they would of course argue that there won’t be so much of a need for government assistance or services because due to the income tax cut everyone will be doing so much better and will be able to pay for private health, education and other services that are currently provided through taxation.

Sure they will.

My Drum piece this week makes use of the census data released by the ABS a couple weeks ago that makes use of the Indices of Relative Advantage and Disadvantage. I’ve actually been quite surprised that these haven’t received broader coverage. The data is brilliant and given you can break it down to suburb level – or even small if you want, I would have though they’d be great for news sites to put on their pages so people could play around with them.

While the graph you can construct are quite fun, the maps via Google Earth are fascinating.

Remember the darker the blue the more advantaged the area is (and this is SA1 level – about 400 persons) , the darker the red the more disadvantaged.

First Sydney:

Some pretty stark pockets of deep red, well away from the wash of blue north of the harbour and around Bondi and the inner suburbs.

Melbourne:

It certainly isn’t a case of the rich and poor living cheek by jowl.  The red is in three very distinct areas.

Brisbane:

The map is kind of disturbed by the big blog of red for the airport area, but it’s clear Ipswich way and to a lesser extent up around Redcliffe things are less advantageous

Perth

I really don’t know Perth at all, but I’m thinking if you want to buy some cheap real estate, don’t bother anywhere within walking distance of the Swan River.

Adelaide:

What strikes me about Adelaide is how much red there is compared to the other cities. Here the blue has spread to the outskirts – mostly the hills area to the south east.

The great thing about the date being at SA1 level is we can go in for a close up – say of Kate Ellis’s electorate of Adelaide:

This isn’t all her electorate – there’s a few bits around the top and bottom right that are Chris Pyne’s electorate of Sturt and some of the top left is Hindmarsh, but broadly this is the area she represents.

The little island of North Adelaide is very well heeled to say the least. Though some of the bluest parts would include university college residences and a lot of doctors surgeries and the like. Here electorate office is in Nailsworth which is just above and to the right of Prospect.

Hobart:

Darwin:

And finally the (let’s be honest) pretty advantaged Canberra:

And for those who are interested here are the top 20 most advantaged suburbs in Australia. You need to be a little bit careful, because obviously a smaller suburb is going to be less likely to have a distribution of numerous levels, but all the same:

State Suburb Name	Usual Resident Population	Score
North Coogee	582	1196
Pullenvale	3177	1195
The Ponds	2932	1191
Brookwater	1462	1189
Northwood (NSW)	915	1189
Linley Point	396	1188
Longueville	2097	1188
Forde	2320	1186
Forrest (ACT)	1464	1179
Dalkeith	4256	1179
Burns Beach	1608	1178
O'Malley	870	1175
Clontarf (NSW)	1693	1175
St Ives Chase	3082	1173
North Wahroonga	1884	1172
Balgowlah Heights	3266	1172
Castlecrag	2965	1172
East Lindfield	3625	1171
South Wharf	63	1171
Riverview (Lane Cove - NSW)	3161	1171

Here’s North Coogee, which is in Melissa Parke’s electorate of Fremantle:

As you can see, even though her electorate takes in the most advantageous suburb, she’d do well not to just focus on it. Indeed here’s her electorate compared to the average of Australia:

It certainly is not a poor electorate – certainly above average, but still containing a significant number of who are pretty much within the norm of lower to median advantage.

Which is why in my Drum piece I looked at the spread of deciles to come up with Mitchell as the most advantaged electorate. It’s distribution looks like this:

At the other end we have the 20 least advantaged suburbs:

State Suburb Name	Usual Resident Population	Score
Binjari	240	298
Greys Plain	194	433
Daguragu	192	462
Wilora	112	465
Wami Kata	174	468
Thamarrurr	190	475
Amoonguna	276	488
Cabbage Tree Island (Ballina - NSW)	99	494
Murrin Bridge	98	503
Wutunugurra	206	511
Point Pearce	118	521
Gapuwiyak	875	522
East Arnhem	1455	522
Muli Muli	166	524
Ampilatwatja	364	529
Purfleet	157	532
Mossman Gorge	99	535
Beswick	510	537
Willare	128	537
Wilton (NT)	100	540

Predominantly Northern Territory, outback WA, SA and NSW.

Binjari is in the electorate of Lingiari held by  Warren Snowden, here’s it’s distribution:

Which rather starkly shows the disadvantage levels of many indigenous areas in Northern Territory.

***

UPDATE

As a commentor has pointed out I have incorrectly referred in my Drum piece to percentiles instead of deciles. Percentiles of course are hundredths and deciles are tenths. Last week in my piece on middle incomes I was working in 10 percentile lots ie the 90th percentile, the 80th, 5t0h etc. And thus this week when I was doing the graphs etc and using declies, in my head for some reason I was still using that same thought process of 10th percentile breakdowns. Which is why I referred to top 3 percentiles instead of top 3 deciles even though I was meaning decile. While the graphs are not changed at all, the meaning of them of course is – there’s rather a big difference between top 3% and top 30%.

My only defence is that the logic of my argument isn’t changed ie with repsect to advantage/disadvantage etc (because as I say I was thinking in 10 percentile lots, so when I wrote top 3 percentiles I always meant top 3 deciles, but had a brain flub and wrote percentiles). But still. No excuse. Deeply embarrassing.  

So here are the graphs as they should be (ie looking just the same but with the headings correctly labelled so they now are accurate):

My Drum piece today looked at a few things about our economy and how it is going compared to the rest of the world, and also how we seem to be getting just a bit more confident.

This of course doesn’t mean we’re never had it so good or any such guff, but that given the high dollar and the continuing crapstorm happening in Europe and America;s sluggishness, we seem to be holding up ok.

Last week I showed a few graphs about our GDP growth compared to the USA, and someone asked how it has gone since we last were in a recession, so because I can’t turn down a request to do a graph here it is:

It serves to reinforce the message that avoiding the slump of the GFC was a big deal. Sure our mining boom increased our lead over the yanks, but what really put us in front was them falling off the GFC cliff, and even earlier their stumble during the Dotcom bubble bursting in 2000. You can see from 2003-2007 we do grow slightly more than does the USA, but the big difference occurs 2008-09.

Or to show that graphically, here’s the difference between our cumulative GDP growth since 1991 and the USA’s:

The boom (and their stumble from 2000 to 2007 did gives us a lead. But nothing improves your relative performance like  the other nation falling head first into a big pile of economic poo.

But hey that’s 20 years. How about 30 years? Let’s go back and see what the picture looks like if we include the big boom of the 1980s and our 1990s recession:

We both were hit by the early 1980s recessions, and again in the 1990s we were in the same boat. What you can also see in the 1990s recession while both nations slid a bit it was more about staying flat for a period than going right backwards. The GFC is a different fish altogether.

And again the spread:

OK look, I’m boring you here with all this short time stuff. Let’s go back to 1972. 40 years worth of context:

Now we’re really starting to se the big picture. Up till 2000 we were in lock step with the USA. They were hit by the Dotcom recession, we narrowly avoided it (because Costello sensibly let the budget go into deficit (though he kept it quiet when he did it), and then our mining boom began. Now by the end of 2007 we were looking pretty damn good. Our boom had put us nicely ahead – 10 percentage points – in effect it took from 2000 to the end of 2007 to put us 10 percentage points ahead of the USA in cumulative growth terms. But look where we are now. 

So all in all I think we can say, however it happened, and for whatever reason we did, we shouldn’t be bitching about missing out on the GFC. We should smile and get on with it.

One final thing. A lot is made of the “great moderation” that has occurred post the 1990 recession, and how we have avoided a recession. But we’re also avoided big booms of GDP growth as well. For example in the 1980s we had 8 quarters in a row where Australia's economy was growing by more than 4.5% per annum – and at one point it reached annual growth of 8.1%.

So is it better to have booms and busts or a long moderation?

Well here’s a comparison of the cumulative GDP growth in the 86 quarters since our last recession and the 86 quarter prior to that:

Steady as she goes, beats boom and bust all the way.

UPDATE:

And just because I’m a graph junky, here’s the same graph but looking at GDP per capita. Unfortunately the ABS only goes back to 1973 for GDP per capita so I’ve got the cumulative growth from then till 1994 to ensure we have 86 quarters each:

The moderation isn’t as stark – we’ve had a few more bumps since 1`991 on the per capita measure than we have on the total GDP growth. But still. At least we missed those God awful downward hits that we had in the twenty years from 1973.

My Drum post looks at talk about how the IR legislation is now too pro-union.

It’s an old issue. One that crops up every 2-3 months whenever any data is released that can somehow be shoehorned into conforming to the narrative. Mostly it involves things like suggesting strikes by state public service workers not covered by the Fair Work Act are signs that the Fair Work Act isn’t working.

Last week we had business groups suggesting Labor’s IR policies are too pro-business. John Howard even chipped in to say as much (yeah I know, I’ll give you a moment to let you pick your jaw up from off the floor). It is worth remembering that back in 2007 these type of business groups were among those funding adverts under the “National Business Action Fund”. You remember – those calm, fact-based adverts such as:

So let’s not pretend that these groups are some middle of the sphere, no bias-detected groups who only care about the economy of Australia. They’re unions for businesses and as such they advocate their policies as do labour unions. Oddly however, The Oz and the AFR seem to report the two types of unions differently. I would almost think it has something to do with their readership. But that would be wrong given newspapers just report facts and betray no bias at all.

The entire reason IR is considered a big issue is because of productivity. The problem is most commentary on productivity is bollocks. And we gets things like was reported today:

Companies do more with less: survey

Now before we go further I’ll just let you know that the survey being reported was done by Robert Half, a recruitment services company. OK. let’s continue:

Many companies are improving productivity by making greater demands on workers without providing additional resources, a survey has found.
…

A third of the 300 who participated said hiring additional temporary staff had improved productivity.

"In the current financial climate, driving existing employees to be more productive is a cost-effective solution," Robert Half Australia director Andrew Brushfield said on Tuesday.

Well that’s nice. But hiring new staff won’t improve productivity, unless those new staff are more productive than the current staff. Nor will getting your staff to work longer improve productivity – unless they are more productive in those extra hours than they are in normal hours.

Output is not productivity. The only way increased hours could lead to increased productivity is if you don’t count those extra hours when you are working out your level of productivity (something which Matt Cowgill reminded me is what John Quiggin thinks might have occurred during the 1990s and thus led to Australia’s increase productivity levels) .

Anyhoo here’s the picture of why people are concerned about productivity:

I’ve used a rolling 5 year average because the annual rate jumps up and down a fair bit and this gives a much smoother picture – without distorting the issue.

Now something happened around 2002 that sent productivity downwards. One reason (in my opinion) is that the mining boom led to more unproductive mines being worked which due to the increase in minerals prices were now profitable.

You only need to look at the “multi-factor productivity” (which looks at both labour and capital productivity together) in the mining sector to see why I might think this:

If the mining boom helped spark our GDP growth it also certainly helped drive our decline in productivity growth.

Anyhoo the talk last week about IR rather oddly ignored the latest Wages Price Index data that was also released last week. I wrote about that here so you can go there to find all the graphs. But I’ll show a couple graphs that I didn’t have room for in my Drum piece.

Firstly in my Drum piece I quoted Terry McCrann saying:

The June-quarter numbers showed private sector wages rose a tick under 4 per cent over the year.

While previously that number would not have sparked concern, it now does. The reason is low productivity. If productivity is around 1 per cent, 4 per cent wages growth threatens the 3 per cent inflation ceiling.

Now that’s a good point, but it was odd that McCrann didn’t point out that for the last 5 years of the Howard Govt productivity was running at around 1% and yet wages growth was above what it is now, which suggests that when he is saying “previously that number would not have sparked concern” he is referring to a time he seems somewhat disinclined to actually state.

I thought it worth looking at the spread between the WPI annual growth and the 5 years productivity growth, to see if wages growth now are running higher above productivity growth than they were previously. I decided to also look at the 3 year average productivity growth just to ensure the current level isn’t getting too much benefit from levels seen under the Howard Govt:

So you can see once the mining boom took hold the spread of wages growth over productivity growth increased sharply (this is accentuated with the 3 year average).

You can see why when you look at both the WPI and Productivity on the same graph. From 2002- 2005 wages growth increased, while productivity growth decreased:

After 2005 productivity growth continued to decrease but wages growth stayed flat. So by 2006-2007 (depending on which average you use) the gap was greater that 3 percentage points – Terry McCrann’s danger zone.

But what has happened since then? Well as you can see the gap has decreased and is now around 2.5 percentage points on the 3 year average, and around 2.7 percentage points on the more laggy 5 year average.

Not counting the GFC – which killed wages growth, the spread between wages growth and the 3 year average is now smaller than any time since 2004.

Hardly a sign of IR legislation that isn’t working.

One other aspect is Real Unit Labour Costs. These have been rising of late and have been used to demonstrate that the IR picture is horrible. in my Drum piece I noted the abnormally low GDP deflator number of late that have caused the RULC to increase.

For example here are the past 5 quarterly growth in RULC starting from the June 2011 quarter: –0.2%; 0.1%; 0.3%; 1.4%; 0.2%. Clearly the 1.4% is a massive outlier and one that will affect the annual growth in RULC for another two quarters.

But one other aspect about the recent increase in the RULC is that it really is just a correction post-GFC. As you can see from above, the GFC wreaked havoc with wages growth. It also led to a big decline in RULC. Heck in the June 2009 quarter nominal unit labour costs fell 2.3%, the biggest fall since 1985. But the impact on real unit costs had hit even before then.

In the September 2008 quarter the year on year growth was minus 4.0%. There hadn’t been a quarter showing a year on year RULC growth decline of over 3% for 20 years. So it was certainly out of the ordinary. As you can see however if you look at RULC from the past decade, the current level is only just above the trend that was being exhibited between 2002-2008:

Now yes, we don’t want to see it continuing to rise. But the belief that real unit labour costs can infinitely decline is absurd, and is especially so when coming from the CEO of companies who certainly don’t show ever increasing profit rates year on year.

My Drum piece this week has a look at the idiocy of chasing a good credit rating, even if it puts your economic growth at risk. We’re seeing Queensland right in the midst of such a play at the moment, when given the low bond yields (record lows) worrying about what a credit rating agency thinks at the moment is pretty low on the list of things governments should worry about.

That S&P is putting WA on a negative watch says all you need to know about their worth. To recap – here was the employment growth in WA over the past 12 months:

I also had a look at UK growth versus Australia’s growth this century, to show just how horrific things are over there – and why going for austerity might not be the most wise policy of David Campbell right now:

Here’s also a look at Australia versus European Union’s GDP growth:

And the USA:

Or to give it real context, let’s look at growth since the start of the GFC:

(The reason Australia's graph is shortest is because we entered the GFC later than both USA and UK).

Also interesting is that since reaching the bottom of the GFC, Australia and USA recovered at about the same pace – but the USA has been recently falling behind.

The UK on the other hand was only able to keep pace with the recovery for about a year and then flattened out. The UK has only grown 3.4% in the whole 13 quarters – over 4 years) since it began “recovering” from the GFC. To give that context, in the 4 quarters from June 2011 to July 2012 Australia grew by 3.7%