Regardless of cause, it has arrived. The great political realignment is here. The left parties of Australia (Labor), UK (Labour), US (Democrats) and Canada (Liberals) no longer represent the people that they were originally formed to represent, that is, the wage earners. Instead, the wage earners now support the right of centre parties. There was a hint of this during the premiership of John Howard in Australia over a decade ago – Howard’s battlers were the trades workers in particular. This realignment has emerged in spectacular fashion with the election of Donald Trump, Scott Morrison, Boris Johnson and the recent chastisement of Justin Trudeau, all in the space of three short years. Add to that the allied cause of Brexit and it has been a magnificent three years. Jacinda Ardern in New Zealand should heed the warning signs, but I doubt that she will.Continue reading
Are investment returns becoming more elusive? In nominal terms, yes. But in real terms, maybe not so much. Possibly the single largest consequence of the Australian grand social experiment that is compulsory superannuation is that nearly everyone now has to decide how to invest financial assets over a very long term. What was previously the domain of a few is now a national occupation. In the current investment environment, it is an occupation that has lost a lot of its charm.Continue reading
There is a difference between the prevailing rates of interest in the money and credit markets and what can be loosely called the natural rate of interest. When the rates diverge, problems emerge.
The central bank in Australia (the RBA) conducts the management of monetary policy, independently of the Government of the day but to a stated aim of constraining inflation between 2% – 3%pa. It has just manipulated down market interest rates twice in two months. Prior to that, the official cash rate (the benchmark the RBA uses to influence all other rates) was held ‘at emergency low levels’ for 3 years. If the old rates were at emergency levels, then what are they now being lower still? The official cash rate is now 1%pa.Continue reading
Investors want yield. Many will take on quite a degree of risk to earn it. But yield has become difficult to find over the last five to eight years and there is every prospect that it will remain elusive for the foreseeable future. Are we mired in a never-ending low yield out-look?
To a large extent, the low yield environment has been deliberately generated by central bank policy in most countries. Faced with the prospect of a recession after the the sub-prime financial crisis, including the collapse of some banks, US and UK central bank policy engineered a reduction in interest rates by creating cheap easy money (in effect, printing banknotes) as a matter of priority. On top of that, fiscal expenditure programmes were instituted in haste, a course of action followed in Australia to the ludicrous extent of the Government mailing $900 cheques to citizens (including dead ones, of course). The end result has been budget deterioration, increased public debt and, crucially, a distortion in the structure of interest rates in the market and the delay in cleaning out bad investment projects.Continue reading
The intent and the outcome often differ, especially when it comes to legislation aimed at correcting perceived injustices. Today’s example comes via the Chief Executive of the Women in Super group in Australia. According to Investment Magazine, Sandra Buckley believes increasing the Superannuation Guarantee minimum contribution rate, possibly to 19% of earnings, is essential for women to catch up on their super after time out of the workforce for raising families.
Would that be in the interests of women? The short answer is no. It would disadvantage the very group that Sandra wants to help.
To understand why, Sandra should ask herself where would the extra money come from to make those higher contributions? It does not come from the taxpayer, nor from the employer. It comes from the individual herself. It is a forced wage deferral. There is nothing stopping women, or anyone for that matter, from voluntarily increasing their contributions now. They can do so and defer their income, the result of which would be a larger retirement savings pot. If they can do so now but don’t, that must mean they value take-home pay more highly than an increased superannuation contribution. There are plenty of reasons why that could be the case.
Why does the Women in Super CEO argue that such choice should be removed from women?
Helping Australians build adequate retirement savings is an important objective for policy makers, advocates and practitioners. Attempting to do so by calling for higher compulsory contributions is a lazy option, devoid of imagination and ultimately counterproductive.
“Certainly not; but if you observe, people always live for ever when there is an annuity to be paid them; and she is very stout and healthy, and hardly forty. An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it. […] I have known a great deal of the trouble of annuities; for my mother was clogged with the payment of three to old superannuated servants by my father’s will, and it is amazing how disagreeable she found it. […] My mother was quite sick of it. Her income was not her own, she said, with such perpetual claims on it; and it was the more unkind in my father, because, otherwise, the money would have been entirely at my mother’s disposal, without any restriction whatever. It has given me such an abhorrence of annuities, that I am sure I would not pin myself down to the payment of one for all the world.”
From Sense and Sensibility, by Jane Austen (1775-1817)
As countries get wealthier, the citizenry has more time to forget how economic well-being and rising living standards are actually created. Prosperity is not a natural human condition. In fact, the reverse is true. But when too many people think wealth is a natural state, they believe exercising their political imperatives, for example agitating for entitlements, benefits, hand-outs, redistribution to favoured interests and cronies, constraints on the freedoms of others, has no opportunity cost. When business leaders indulge publicly in such idealism, it becomes even more dangerous. In many businesses today, we observe social responsibility objectives affecting business decisions. What is deemed to be socially responsible, of course, varies by political persuasion. These actions are not costless.
Milton Friedman explained the social responsibility of business in an article published in 1970 by the New York Times Magazine. It is worth every minute of reading time. It should be read and re-read by captains of industry and students alike. I re-print it here in its entirety:
The Social Responsibility of Business is to Increase its Profits
by Milton Friedman
The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.
When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom. Continue reading
The topic of the month is the rate of corporate tax in Australia. When it comes to discussing the rate, two points are worth concentrating on. Firstly, the rate of tax does not reflect the tax burden on the economy. The true tax burden is measured by Government expenditure. Tax rates determine how the incidence of that tax is shared around and over what time periods. Reducing the tax rate will not reduce the tax burden. Secondly, the rate of tax is very important to potential overseas investors who weigh up the marginal costs of a project against the marginal gains. If tax rates are reducing in other countries, then Australia will attract less foreign investment, and that is bad for the economy, bad for people and our living standards will fall.
So it is important than both the rate of tax is reduced and Government expenditure is reduced. Both are necessary.
This is getting serious.
Is it just me or have others noticed a plethora of voices claiming that superannuation is unfair? ‘We must make super fair’ is the typical tone of the claim. Usually, this is followed by some ideas for more regulation, compulsion, tax, affirmative action and so on. To date, I have not observed people complaining about lack of fairness coming to the obvious conclusion and easiest way of fixing a system they believe is broken: remove the compulsion to participate.