Supply - not Demand 2

To continue the discussion of "Supply - not Demand" (see original post here)...


The New Norm

As economic expansion becomes its own problem and the difficulties facing an economy with almost full employment become the new norm... more and more issues arise that ask the question:

"how do we increase supply, and not demand"

I was listening to Radio National this morning (details and podcast here). Professor Deborah Brennan was talking about the Rudd Government's new Child Care policies and the ways in which increasing the Child Care benefits will simply increase demand and not help the supply problem.

I agree with her - and I am sad to think that the Rudd Government has come up with policies as cynical and pointless as the "first home-owners grant".

It makes people feel better. It makes them feel as if the government is doing something... but in the end it simply increases demand, drives up prices, creates more "burn" in the tax benefit system and does nothing to actually make anyone's life easier.


Housing and R&D

It did set me to thinking, however, about how one might manage to improve the supply situation without increasing demand.

The answer, in a way, is simpler for houses. We have a whole industry based around the supply of houses - the construction industry, housing developers... there are people to whom we can give direct tax credits, simply for doing their job, in order to increase the supply of houses being built in the economy (more about this idea).

There is no equivalent for Child Care. There is no Child Care Centre construction industry.

But the concept of tax incentives based on particular activity within an industry is not a new one. Think of the generous tax incentives for R&D that have been implemented in some countries.

Yes, admittedly, there is always the problem of "what is R&D"... but that is for the tax department to work out. You know when you're doing it... and if you've got any queries, don't depend on the tax rebate until the department has made a ruling... it's simple really, and it's been done before, many times.


Finding the Answer

What we need is a 150% (or at least something 100%+) tax rebate on all the costs involved in the first year's set-up and running of a "new" child-care centre.

Yes, the tax department will need to define "new". Yes, it will need to clarify what can be included in the list of expenses. But the basic list is easy to come up with - the details can, as always, be worked out in the fullness of time.

The list includes, but is not limited to, the costs of:

• building new premises intended for the purpose of housing a new Child Care centre, which is then used to house said Child Care centre for at least 12 months. (If premises has other purposes, as well, then a pro-rata calculation can be made)
  
• Renting premises intended for the purpose of housing a new Child Care centre, which is then used to house said Child Care centre for at least 12 months.
• All wages for staff involved in supporting and running a new child-care centre.
• All office expenses, new materials etc. involved in supporting and running a new child-care centre.

Facing the Problems

There is then the problem of Child Care centres not being viable after the initial 12 month period. But the problem is a small one.

The point is, there is a lot of unmet demand out there. There are more children than places. If that isn't the case, we don't have a problem. Once a Child Care centre is up and running - it is unlikely to be torn down and replaced with something else, unless someone has made a very stupid business calculation and is now running a Centre where the prospect is truly unsustainable.

If this is the case, then the problem is with the business case, not the incentive scheme - and the Centre deserves to shut down, as per the laws of Supply and Demand that we are trying to utilise.


Questions:

Would it be expensive?
Yes

Would it cost more than the current rebate extensions?
Possibly, depending on tax rebate levels

Would it help supply without increasing demand?
Yes

Can we afford it?
Yes

Would it help "working families" more than the current rebate, in the long run?
Most certianly, YES!

Let's stop just making people feel better, and help the whole economy.


The Reasons

Access to Child Care is an equality issue.

Increasing access helps new parents back into the workforce. It increases levels of participation. It helps single parents. It increases overall output and productivity.

It simply IS a good idea.

This isn't some "anti-market" strategy. It's a market shaping strategy... and a good one... one that works. Only the absolute free-market purists could argue against it... and, well, really... arguing against a purist of any persuasion is a bit pointless.

Questions, comments, further ideas and foreseen problems welcome. Let's work out the details and get this implemented.

I love Nelson as a leader... for the Coalition

Actually, I'm starting to suspect Dr Nelson never really changed his politics after all. Maybe he's still actually working for the Labor Party.


The Challenge

I wish to offer you, dear reader, a challenge.

1. Make sure you have nothing around you to entertain distract you
2. Watch the video below. Pay close attention and focus only on the video.
3. Try to make it past the 2:00 mark without feeling the desperate desire to watch something else or turn it off entirely.

Please respond with your own personal reactions below.



What Brendan Nelson has learned

So apparently, Brendan Nelson has discovered that there are people in this country who can only afford $30 a week for petrol, and people who can only put $5 worth of petrol in their car at a time.

Wow. It's obviously been a big week for the man. I wonder if his coalition buddies will believe him.

"No" they will say, "that just can't be! How can people live like that. You must be mistaken. Obviously this is all the fault of the Labor Party and their mismanagement of the economy. This kind of thing never happened under Howard. No one will put up with those kind of living standards for long."

Well I guess if he learns only this one small thing then he has at least listened to someone and learned something.

It's a start, anyway.

But honestly, if that's a revelation to Brendan Nelson - no wonder he doesn't get what 2020 is all about. If he honestly needed to talk first hand to poorer Australians in order to work out they exist - or in order to work out that not everyone can afford to fill their tank with petrol whenever they want to... why should we ever expect him to understand an issue like Global Warming, or the importance of education to social equality.


What Brendan Nelson just doesn't get

And in further news - Brendan Nelson wants us to feel sorry for the banks.

Brendan Nelson: life hard for banks
Nelson wants you to encourage banks to make a profit
Banks are people too: Nelson

Yes that's right. Dr Nelson wants us to realise that "Banks are people too"...

Um... no, actually...

They're not...

They're banks... you know - Companies...

They may be, by strict legal definition, for tax purposes, "entities" much like a person. But the day we start taking our definition of "people" from the tax department, I think we've really lost the battle against pseudoscience in our education system.

But wait, hold on, isn't he saying we should feel sorry for the individuals who have to foreclose on people's mortgages - I hear you say.

Well, in this day an age, I'm sure that an individual employee's experience of foreclosing on customers, compared to times in the past, is about as close as fighting a field battle is to launching an international missile strike. Someone sits in a room somewhere and hits a button that causes the printing of a thousand letters. They get folded and packed by machine and posted to a thousand customers. Some of them contain offers of more credit, new loans and investment opportunities. Some of them contain foreclosure notices.

Along with his lack of understanding about how many Australians live their lives with respect to money, Brendan Nelson also seems to have very little idea about how large offices work in the modern society.

Banks, these days, run by rules and regulations. Certain levels of risk imply certain behavior and certain levels of underpayment require foreclosure. No individual favours or punishments. No human interactions. No guilt. Just transactions, payments and foreclosures. The way it should be.

Dr Nelson said people should stop criticising banks and they should be encouraged to make profits. Isn't he just encouraging us to support banks making a profit?, you respond.

Well, yes he is. And in general, we can all support banks making a profit. It's good for the economy. Any company making a profit, in general, is good for the economy. No argument here.

But to encourage the pursuit of profit, blindly, with no other considerations would lead to many horrible outcomes. Imagine a world in which car manufacturers chased profits with no fear of the repercussions of bad safety standards and no adherence to pollution level guidelines. Imagine if we were encouraged to support housing developers profits in the face of buildings that fell down within a few years of being built.


The Solution?

Maybe the people who can no longer afford to pay their mortgages should never have been loaned money in the first place (they might be better off now if they hadn't). And maybe, just maybe, the banks should have to take some responsibility for the (bad) decision to lend them money when they did. Perhaps we could find a way of minimally fining, or otherwise disadvantaging banks for foreclosing on loans. Maybe then we wouldn't have as many foreclosures as less risky loans were avoided.

Maybe then we wouldn't have so many sad banks to be sympathetic for.

Maybe then less people would only be able to put petrol in their car in $5 increments.

Hey - maybe Brendan Nelson's got a point after all.

Then again... maybe not.

The French and the US - social security vs. efficiency?

Due to the political makeup of my extended family, the fact that many of them are French or live in France and our collective passion for politics, I often find myself debating the positives (or otherwise) of the American and European styles of social security.

Long before Michael Moore's famous comparison between the French health care system and the American - the French welfare system was the whipping boy of pro-American style economies. After all, the Americans love to hate the French, so they have to find a way of diminishing their, otherwise apparent, achievements.

Basic claims, from defenders of the American welfare system, range from "But everyone knows the Europeans can't afford their welfare system" to "but you know the French are going broke don't you". I was on the lookout, recently, for statistics and/or information from reputable sources that would refute such assumptions, without simply saying "go on, prove it".

So, I was very happy to hear this quote, today on Radio National, from Princeton Professor of Economics, Paul Krugman:

"So we say, Well, American equality is essential to our productivity, and then you compare it with France, which has much less and is much more generous a social welfare state, and it turns out that the French problem is they screwed up their retirement policy. It's not something cosmic , it's not a basic fundamental flaw of trying to have a more equal society. And they have health care, that is as good as or better than ours, and it covers everybody at 65% of the cost of the US system. In many ways they do better, but of course everybody knows that we're at the cutting edge of technology. So just look at the future, except it ain't true. Turns out that broadband is now more widely available and faster in France than it is in the United States. We're actually losing that edge too. So the whole notion that the US have done so wonderfully and that justifies all of the brutality of our society, is just based on ignorance.

I think a lot of political rhetoric in the United States depends on the notion that Americans have no idea what life is actually like in other countries."

Well! What else can I say? There it is, from a Princeton Professor of Economics none-the-less.

He has a lot of other very interesting points to make about the death of the middle class since the 1970s. The only point I disagree with him on is - he says the phenomenon is "unique to the United States" and that "the closest thing you can see this unequalisation that's taken place in the United States is in Britain during the Thatcher years". I would like to invite professor Krugman to investigate the progress of wealth distribution across Australia, over the last decade, and ask him if he can see the same process here as well.

Before I let this one go, there's one other quote from him that I would like to point out:

"... prime age working years in France, 25-54; 80% of French adults between the age of 25 and 54 are working, which is exactly the same as the United States. So if your vision is that there are huge numbers of unemployed French people, with no employment for middle-aged French people and with no job prospects, it's just not true. They're exactly as likely to be working as we are."

For a full transcript of his whole talk on how the New Deal society has been dismantled in America, and the reasons for it, see here - or for the full audio, see here.

Don't believe the hype.