Labor retreats on protectionism

From the Australian Financial Review.

Mark Latham, 27th February 2014

In his 1998 memoir "As It Happened", the Hawke government's industry minister, John Button, recalled a telling exchange between Paul Keating and the automotive industry. In the government's first term, a delegation of car markers and unionists came to Canberra pleading for additional assistance. One of the business executives complained that, "if imports continue like this we'll soon all be driving Daimler Benz", to which Keating replied: "If that happens, we'll all be much better off."

We now know motorists agreed with the then treasurer. Last year, 9 out of 10 new cars purchased in Australia were from overseas. In effect, consumers have decided they don't need car manufacturing in this country. They prefer Daimler Benz and a range of other international roadsters. The industry's imminent closure was not a decision of government: it was a decision of the Australian people.

Button continued his account of the car meeting, with a harried union official emphasizing how "people were getting pretty worried on the shop floor". Then Keating, "his eyes smiling, speaking softly", intervened. "You've got to remember", he said, "that the shoe is designed to pinch". Circa 1984, this was a new and unexpected interpretation of industry policy.

Later that afternoon, Button accompanied the delegation to the front door of Parliament House. The trade unionist seemed "slightly dazed". "Shit", he exclaimed. "Would you believe that? Did you hear what that bloke said? He said, 'The shoe is designed to pinch.'"

The Labor Party has come a long way in the 30 years since this meeting - a long way backwards. Far from a pinching shoe, opposition industry spokesman Kim Carr wants to fit Australian manufacturing into a big, sloppy Ugg boot. He has repudiated the Keating-Button legacy with the retro-economics of corporate welfare.

Carr tries to give the illusion of a sophisticated strategy, using fancy terms such as "co-investment" and "industry policy settings". In fact, he believes in a crude, Third-World-type tactic: throwing government funds at multinationals. We know the Australian people don't support this approach because they have been unwilling to throw their own money at locally produced cars. As taxpayers, why would they want to do something they have refused to do as consumers?

If the show doesn't pinch, companies become complacent and inward-looking. They grow accustomed to living off state welfare, instead of investing in new design technologies and productivity. Under Ugg-boot economics, the private sector is pampered by the regular arrival of government cheques.

The wonder of Australian car manufacturing is not that it's closing down; it's that governments wasted so much public money on unsustainable jobs in an unsustainable industry. In the past decade, no Australian-based car company has recorded an operating profit.

The industry's demise is a tipping point in Australia's political economy. It's a victory for consumers over the ineffectiveness of subsidization. It's a sign that after 23 years of continuous economic growth and wealth creation, the consumption side of the economy has become more powerful than the production side. Cashed-up shoppers are exercising greater purchasing muscle than the feeble industry plans of union hand-maidens like Carr. Consumerism has finally beaten interventionism.

The political class does not want to hear this, but we have entered an era of marginalized government. Each day, the big news in the Australian economy is the strength of millions of consumer decisions, but this is essentially unreported in the electronic media. Where's the headline or controversy in people shopping? If politicians focused on the importance of consumer decision-making, how could they blame each other for economic uncertainty and unemployment?

In Canberra, it's business as usual. The opposition has latched onto a fear campaign, holding out false hope for "jobs plans". The media have a new round of conflict-based stories to report, interviewing workers and managers from ailing industries. No one's told them the war is over. Consumers have won.

Mark Latham is a former federal Labor leader.

Carrots And Sticks

It never fails to amaze me that in the three pillars of policy - housing, education and health - Singapore has achieved what even the US cannot.

How did we accomplish this? Our carrots are accompanied by sticks.

Take housing for example. Under both Clinton and Bush, the US Executive forced lenders to relax their lending standards to accommodate low-income minorities. The resulting NINJA loans, catalyzed by securitization, helped cause the largest financial crisis the world has ever known.

Back home, the Singapore Government basically guarantees every Singaporean access to mortgage finance at subsidized rates. The carrot.

I don't know how to underscore the sheer generosity of this. Anyone who has ever purchased knows that the first port of call is not your agent, but your broker. No loan, no deal.

Suffice to say that a few years ago, the typical Australian was paying more in mortgage interest than the typical Singaporean earns annually. Young Singaporean couples can house-hunt with confidence, knowing their deposit will not be jeopardized by financing issues.

The price of all this? The government garnishes your wages, eliminating the risk of default. The stick.

The beauty of the Singapore system lies in its simplicity. Carrots, balanced by sticks.

Mortgage Offsets And The CPF OA

Disclaimer: Not financial advice, just an idea.

A few years ago I was very upset that 100% offsets weren't available in Singapore.

This idea stemmed from observing many Singaporeans engage in unnecessary consumption because they have excess income, but few viable investment options. For example, the median household income is 5K/month, but one currently only needs about 3K/month (including housing) to live frugally.

In my experience, only a few commercial banks even offer bastardized versions of offsets. DBS has an FX-linked offering while HSBC features one with a separate interest rate. In my opinion both are unusable. The term "offset" remains only as a marketing gimmick, with the underlying mechanics modified to the bank's benefit.

However, I have belatedly realized that since the HDB mortgage rate is deliberately pegged to the CPF Ordinary rate (+0.1%), interest returned on your OA balance offsets that paid on your loan.

If you had a mortgage of 100K and 10K in your CPF OA, you would be effectively paying interest on only 90K of the loan. Of course with amortization the actual monthly payment would be larger as it would include part of the principal. You would have to top up your OA to replace this.

The main advantages of saving excess funds in an offset is that you reduce the interest payable on your current mortgage, while retaining (in this case, partial) liquidity. Without redraw facilities, additional funds paid into a loan account are locked up.

The obvious downside here - OA funds are less liquid than cash. Most people partially get around CPF restrictions by investing their OA funds in various assets. Still, certain regulations still apply - for example, the original sum withdrawn from CPF must be paid back from any investment profits, and half the CPF Minimum Sum must be set aside before you can use OA funds to purchase a second property. Not to mention the risk that these regulations may change in the future.

Of course, no one is suggesting you permanently park funds in the OA over the long term, where it will be decimated by inflation. But a medium-term strategy of saving excess income in the OA can be a useful low-risk stepping stone for upgraders or those planning future investments.

In short, this might be a viable strategy if:

1) You have a substantial interest bill. This could be because your current HDB mortgage is relatively large (think resale flats), or if the mortgage rate increases in the future. For smaller BTOs (less than 150K), the risk and trouble of locking up your cash in CPF is probably not worth it.

2) You have plenty of excess income but are not financially savvy, or have a low appetite for risk. Otherwise you would already be parking your cash in higher-yield investments.

It's amazing how Singapore provides all the tools and opportunities one needs to succeed.