Unex­pect­ed and won­der­ful things can hap­pen when you stick your neck out, as I have done over Aus­trali­a’s pri­vate debt bub­ble. The “tall pop­py” syn­drome can still cut you down, but you also find that peo­ple are will­ing to assist in ways that you’d nev­er think of your­self.

One of those has just occurred with respect to the Keen Walk to Kosciuszko, where out of the blue Noel Almei­da has pre­pared a com­mem­o­ra­tive envelope–the sales of which will raise mon­ey for Swags for Home­less. Here is a sam­ple:

Noel has made a mere 23 for sale, and he describes the prod­uct in the fol­low­ing way:

Jere­my Grantham pricked, if not the hous­ing bub­ble itself, then at least the bub­ble that prop­er­ty mar­ket spruik­ers live in, with the quip that:

“Bub­bles have quite a few things in com­mon but hous­ing bub­bles have a spec­tac­u­lar thing in com­mon, and that is every one of them is con­sid­ered unique and dif­fer­ent.” (Hous­ing mar­ket a ‘time bomb’, says invest­ment leg­end: The Aus­tralian June 16, 2010)

Preliminary Remarks

As not­ed in Debt­watch No. 44, I have stopped writ­ing the month­ly Debt­watch Report to focus on my more long term research. I’m still post­ing occa­sion­al blog posts when I feel the need—like the two recent­ly on Aus­trali­a’s new resources tax—but gen­er­al­ly I’ll be work­ing on more tech­ni­cal mat­ters, and post­ing entries based on those here in lieu of the more top­i­cal Debt­watch. This post is a halfway post between the two: it’s a paper that I have just sub­mit­ted to the 2010 Aus­tralian Con­fer­ence of Econ­o­mists, which will be held in Syd­ney in Sep­tem­ber. I have writ­ten it large­ly as a brief­ing paper for main­stream econ­o­mists who would not have come across the analy­sis that I present here before, let alone the vast vol­ume of lit­er­a­ture in Post Key­ne­sian and Aus­tri­an eco­nom­ics.

As I explained in my last post, the cost curve in the Trea­sury’s mod­el of the RSPT is based on a fan­ta­sy. The sit­u­a­tion is even worse when we turn to the oth­er side of the mod­el, the demand curve: it is based not mere­ly on a fan­ta­sy, but an out­right fal­la­cy.

Legions of econ­o­mists believe that the demand curve for a com­pet­i­tive firm is hor­i­zon­tal, but their belief is based on the most fun­da­men­tal of math­e­mat­i­cal errors: con­fus­ing a very small amount (an infin­i­tes­i­mal) with zero. The Trea­sury repeats this fallacy—without know­ing it is one—in its expla­na­tion of why a roy­al­ty reduces out­put lev­els but the RSPT won’t.

I sup­port the idea that min­ing com­pa­nies should pay a tax that dis­trib­utes some of the prof­its from min­ing to the wider Aus­tralian com­mu­ni­ty, and that this tax should be based on prices, rather than mere­ly on vol­umes sold. The min­ers have clear­ly made wind­fall prof­its in the last few years as prices for min­er­als have sky­rock­et­ed, and those prof­its should be shared with the wider com­mu­ni­ty since it, and not the min­ers, is the ulti­mate own­er of Aus­trali­a’s min­er­al resources.

How­ev­er I can’t go along with the Resource Super Prof­its Tax (RSPT) as it has been designed, and pre­cise­ly for the rea­son giv­en by Ross Git­tins in the SMH:

Mar­ket econ­o­mists have spent the past few months search­ing each major data release for con­fir­ma­tion of their hope that the econ­o­my is return­ing to growth and that a ‘sus­tain­able recov­ery’ is under­way.

Most cur­rent­ly argue that the fun­da­men­tals in Aus­tralia are good – low unem­ploy­ment, a strong recov­ery in equi­ty mar­kets (notwith­stand­ing the 14 per cent sell-off in the past month), a sig­nif­i­cant num­ber of com­pa­nies’ results beat­ing expec­ta­tions and so on.

A month ago some extra­or­di­nary head­lines appeared in the Fair­fax new­pa­pers. The Syd­ney Morn­ing Her­ald ran with: “House prices to plateau as buy­ers flee in droves”.

Alan Kohler wrote at the time in Busi­ness Spec­ta­tor that ‘flee’ was too strong a word for what was hap­pen­ing – hous­ing lend­ing was con­tin­u­ing to fall in both num­ber and val­ue terms, but investors were con­tin­u­ing to bor­row strong­ly and prop up the mar­ket. How­ev­er, he did sug­gest that a price plateau in hous­ing looked like­ly.

As we head towards the fed­er­al elec­tion, the term ‘hous­ing short­age’ will be trot­ted out again and again by politi­cians. Their rhetoric will rely on the deeply ingrained received wis­dom that Aus­tralia has a ‘hous­ing short­age’, and no politi­cian will want to do the hard work of dif­fer­en­ti­at­ing between a gen­uine short­age in hous­ing stock (which we don’t have) and a short­age of ‘afford­able hous­ing’ which we do have.

And why won’t they acknowl­edge this dis­tinc­tion? Sim­ply, because admit­ting that it is only the prices of hous­es that are dys­func­tion­al, and not sim­ply the sup­ply, would be too much even for their loy­al vot­ers.

Debt­Watch No. 44 April 2010

House Prices Are Not Nor­mal

“I think it is a mis­take to assume that a risk­less, easy, guar­an­teed way to pros­per­i­ty is to be lever­aged into prop­er­ty. It isn’t going to be that easy.” (RBA Gov­er­nor Glenn Stevens, Sun­rise Pro­gram March 29 2010)

I gave the fol­low­ing pre­sen­ta­tion at the 4th Dijon Mon­ey con­fer­ence (Decem­ber 10–12 2009):

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