The Peoples Bank of Australia

Back in April, 2009, I posted a blog suggesting that a government owned and operated bank may be the solution to a more competitive banking sector in Australia (see Banks and Interest Rates). This was in response to the banks not passing on in full the 25 basis point cut in interest rates at the time. More recently several of the banks have passed on more than the rise in interest rates by the Reserve Bank of Australia, as the economy moves into an upswing. This suggests that the system is not as competitive as it should be, or is oligopolistic at best.

On July 8, 2009, less than 3 months after I posted the blog, six "prominent" Australian economists in an open letter to the government, called for a systematic review of the financial system, with a recommendation that an Australian peoples bank should be established by the government to compete with the big four banks, which currently control 80% to 85% of the market in Australia. These six "prominent" economists are reportedly from both sides of the political spectrum, and include Rismarck International CEO Christopher Joye, Professor Stephen King of Monash University and former government advisor Dr. Nicholas Gruen.

They recommend establishing a bank modeled on the "Kiwi Bank", an arm of New Zealand Post. There are of course precedents in Australia and in other countries where highly successful government banks have been established and operated, including the Commonwealth Bank of Australia, which was later privatized, the Kiwi Bank, and the Alberta Treasury Branch, a provincial government owned bank that has been operating successfully in Alberta, Canada for many years. It competes very effectively with Canada's major banks.

Christopher Joye has recently suggested that the appointment of Ahmed Fahour, the former head of Australia National Bank, as the new Chief Executive of Australia Post, sets in place the infrastructure to establish a bank as well as a government owned fixed-income superannuation investment plan to compete with retail superannuation. The post office has a network of more than 4,300 outlets, which is more than the number of branches owned by the combined four banks.

The idea of a government owned bank as a competitive force, which I suggested in my blog of April 2009, appears to have support in the economic community. The question now is,will it become a reality, pending the forthcoming election?

The Trials of Khalid Sheik Mohammed, Nidal Makik Hasan and other Terrorists

The trials of Khalid Sheik Mohammed and other terrorists in New York, and the trial of Nidal Makik Hasan for the terrorist killings at Fort Hood, Texas army base is finally setting the United States back on the constitutional course which it's founding fathers intended it to be on. The United States appears to have been diverted from this path in response to terrorist acts over the past decade.

The United States now must deal with the 911 and Fort Hood terrorists, and those held at Guantanamo Bay, as it's constitution says it should, through the judicial process. Lynch mobs, as media outlets such as Fox appear to be fanning, went out with the wild west. No doubt the 911 and Fort Hood attacks were undertaken by terrorists who have perverted their religion, but starting a religious war with Muslims, a sentiment which some on Fox also appear to be inflaming, plays into the hands of terrorists, will cause a lot more deaths, and is frankly stupid.

These terrorists need to be put through the judicial process and judged as the United States legal system dictates, as was Tim McVeigh, as was the Washington sniper, as the religiously motivated terrorists who plotted to attack an army base in Sydney were convicted through the Australian legal process, and as the Bali bombers were convicted and executed through the Indonesian legal process, a country with the world's largest Muslim population. 

Let the cold, hard hand of the justice system take care of the terrorists, and show potential terrorists that their acts are futile.

Consumption Tax: Coming to the USA

One of the key problems facing the United States economy is a massive fiscal budget deficit. The federal deficit is now estimated to be more than 11% of GDP, the highest since the second world war. Spending on the wars in Iraq and Afghanistan, and a propensity to cut income taxes by the previous administration are key causes of the blowout in the deficit. A wide range of government expenditure programs, including government stimulus programs, and bailouts to combat the financial crisis, have resulted in significant additional expenditure, and proposed new programs such as health care will require further expenditure. This will only add to the federal deficit, unless new forms of revenue are found.

The only solution is to increase taxes. Unfortunately many Americans, particularly those on the right of the political spectrum, resist tax increases. However, a tax levied on consumption rather than income would likely be more palatable to those opposing tax increases. A tax on expenditure rather than income encourages savings, and leaves the tax payer with the option of reducing tax by reducing expenditure.

A tax on all consumption  without exemptions, such as the goods and services (GST) tax in Australia is the best option. All expenditure is taxed, and existing taxes  on consumption (such as sales tax on fuel), which distort consumer behavior can be eliminated, and rolled into the expenditure tax system. The downside of this tax is that it is regressive, and tends to tax lower income earners at a higher proportion of their income. However, targeted expenditure programs and income tax exemptions at the lower end, combined with increased marginal income taxes at the upper end, can offset the regressive nature of the tax.

Consumption taxes are used very effectively to raise revenue in Australia, Canada, Europe, and Japan and would likely be a very appropriate tax given the size of the current federal deficit in the United States. There is no reason that some of the states such as California with significant budget deficits could not also institute a consumption tax to reduce the deficit.

Watch this one, a consumption tax is coming to the USA.

The Politics of "Hell No", Patriotism and Partisanship

The United States, with a new "centrist" administration eager to work across party lines and with a wide range of interests across the globe has a golden opportunity to get it's house in order on the domestic policy front, as well as on the international policy front. The economy, health care, and public finances are key domestic issues that can easily be solved across party lines, as can issues such as poverty, global warming, nuclear disarmament, terrorism, and the ongoing wars in Iraq and Afghanistan.

Unfortunately the extreme right of the Republican Party, which claims to represent the conservative movement in the United States, seems more interested in playing partisan politics, than solving the major problems facing their country and the world.  The focus is on dishonestly using the "communist" and "socialist" bogey to try to discredit a new administration that is centrist and by international standards  "conservative", in order to preserve entrenched interests, rather than to propose solutions to very serious problems. One observer of the recent "tea party" in Washington proudly pointed to his favorite sign which boasted "I'm not with the party of no, I'm with the party of "hell no". Another claimed to be delighted to be with so many American patriots. Others claimed "they" want "their" country back. Some wondered why the press was not covering this momentous event, Fox excepted.

Unfortunately many supporters of the Republican party who claim to be conservative in the United States are not conservative at all. They are right wing extremists, divisive, and destructive. They claim to be patriots, but are partisan. They claim to want freedom and individualism, and to protect their country from terrorists, but in fact their "hell no" attitude creates anarchy and a breeding ground for the Timothy McVeagh's of this world, just as the extreme right wing Taliban in Afghanistan creates a breeding ground for Al Qaeda.

If the conservative movement in the United States wants to again be a powerful political movement, it will need to engage with the serious issues facing their country and the world. It will need to propose solutions, work with, and debate with the current administration, rather than resort to partisanship while claiming to be patriotic, sponsor tea parties that divide, and display signs that glorify their "hell no" attitude. To claim that "they" want "their" country back is a euphemism for claiming "they" want "their" entrenched privileges back, and "to hell" with those who don't have those privileges. They should know that the American people have already taken their country back through the democratic process.

Republican conservatives need to have a "hell yes we can too" attitude, move to the center and propose solutions to serious issues or they will remain at the margin as far as the people, the press and the world community are concerned.

Australia: On top of the Economic World

Australians take great pride in their sporting achievements, and have punched well above their weight in a wide range of sports beyond their inherent world dominance of cricket and rugby. Less noticed is the outstanding "world best" economic performance over the past seventeen (yes 17) years. Since 1992 Australia has not had a recession, even as Asia was gripped by the Asian financial crisis in 1998 and as North America, Europe and most of the industrialized world teetered on the edge of collapse as the United States generated financial crisis hit the world in late 2008.

It is a remarkable achievement, which as the Australian Financial Review points out, has it's genesis in luck and good economic management by both labour (left of centre) and liberal (right of centre) governments. With significant forsight, the labour Hawke-Keating governments reformed the banking sector, liberalized trade and the labour market, and established a compulsory superannuation system in the 1980's. These reforms, as well as very effective countercyclical fiscal and monetary economic management provided the structural basis for withstanding the negative effects of the Asian financial crisis in 1998, and the United States generated world financial and economic crisis that followed a decade later in 2008.

The Howard liberal government in the late 1990's  until the mid 2000's under Treasurer Peter Costello managed to gradually build a huge budget surplus, despite a significant level of spending, thanks in part to minerals trade with China. The surplus was critical to implementing the massive fiscal stimulus program that prevented the economy from sliding into recession in late 2008, when the rest of the world was hit by the United States generated financial and economic crisis. The Rudd labour government acted swiftly with a massive fiscal stimulus program in late 2008, to fight the global crisis, and was instrumental in encouraging China and other countries to follow suite with coordinated fiscal stimulus programs. It worked. Australia avoided a recession, thanks to the quick action of a newly elected liberal democratic government.

Australia is now in the enviable position of having a sound financial and economic basis for continuing it's record of uninterupted economic growth for the foreseeable future. China is Australia's largest trading partner,will likely become the dominant economy in the world in a decade, and will rely on Australia's rich resources to underwrite it's growth.

Luck or good economic management. It doesn't matter. Australia in economics, as in sport, is punching well above it's weight. 

Housing Forecasts: Australia, Canada, United States

There has been much discussion about the differences between the housing markets in North America and Australia. Australia is said to be undersupplied, and North America oversupplied, and therefore the corrections that are coming as a result of the financial and economic crisis are likely to be very different in Australia, with prices not likely to decline in the manner they have in North America.

A quick overview of the stage of the housing cycles in Australia and Canada, with markets similar in size, and the United States, with a significantly larger market than both, suggests that this is likely the case, as there is some variation in the timing of the housing cycle in the three countries.

Australia

In Australia, the housing cycle entered the downturn in early 2005, declining by 13% in the three years to 2007, and finally growing by 4% in 2008, before the upturn was cut short by the global financial and economic crisis. Until 2008, there was very little building in an undersupplied market. Building has been well below underlying demand of around 170,000. A further decline of 17% is likely in 2009, even though there is undersupply. The downturn in construction is a result of the global economic downturn.

Canada

In Canada, building was at historically high levels for the three years to 2008, and the market finally turned down in 2008. It was oversupplied, with building over the three years well above underlying demand of around 175,000. A further decline of 33% is likely in 2009, driven by the global economic downturn and the inherent oversupply. This will be followed by a slow upturn in 2010, and more rapid growth in the three years to 2013. 

United States

In the United States, housing construction declined sharply for a three year period, declining by 65%, a massive decline caused by an oversupply, which in turn contributed to the global financial crisis. There has been significant underbuilding over the past three years, well below underlying demand of around 1.5 to 1.8 million houses annually. A further decline of 27% is likely for 2009, prior to a correction beginning in 2010.


               Housing starts, Australia, North America 2004–2013

	Australia	Canada	United States
Actual:	million units
2004	0.175	0.233	1.956
2005	0.160	0.225	2.068
2006	0.152	0.227	1.801
2007	0.152	0.228	1.355
2008	0.159	0.212	0.983
Forecasts:
2009	0.132	0.142	0.651
2010	0.160	0.150	1.073
2011	0.175	0.174	1.431
2012	0.185	0.195	1.696
2013	0.196	0.214	1.755
Actual:	Annual per cent change
2004	2	7	6
2005	-8	-3	6
2006	-5	1	-13
2007	0	0	-25
2008	4	-7	-27
Forecasts:
2009	-17	-33	-34
2010	21	6	65
2011	9	16	33
2012	6	12	19
2013	6	10	3

Forecasts

It appears that a significant surge is coming in housing construction in the United States, in the three years to 2012, with the market catching up following four years of considerable underbuilding. In Australia, there is also likely to be a sharp upturn as a result of underbuilding, and a cycle that was cut short. In Canada, where the cycle was about to enter a natural downturn, it appears that the upturn will be more subdued, with housing construction rebounding slowly in 2010 and 2011, and strengthening later than in Australia and the United States. All three countries however, are due for an upturn in 2010, and stronger growth over the four years to 2013.

As a leading indicator, housing construction will drive the upturn, which bodes well for strongly growing economies in all three countries from 2010. If housing construction in other major markets such as Europe and Japan moves into the upward phase of the cycle with similar timing to the North American and Australian markets, brace for a strong synchronized global upturn in economic activity over at least four years, starting in 2010.