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Economics: Wicked Games; Wicked Problems And Negative Gearing!

“What a wicked game you play to make me feel this way.
What a wicked thing to do, to let me dream of you.
What a wicked thing to say, you never felt this way.
What a wicked thing to do, to make me dream of you”

Wicked Game, Chris Izaak

Some of you no doubt have heard the term “wicked problem”. Simply, a wicked problem is one where the attempts to impose a solution may change the dynamics and create a new problem – the invasion of Iraq and the toppling of Saddam Hussein, for example.

Wikipedia (well, if it’s good enough for “The Best Minister In The World”) suggests that wicked problems have the following characteristics:

  1. The solution depends on how the problem is framed and vice versa (i.e., the problem definition depends on the solution)
  2. Stakeholders have radically different world views and different frames for understanding the problem.
  3. The constraints that the problem is subject to and the resources needed to solve it change over time.
  4. The problem is never solved definitively.

When governments start trying to manage the macroeconomics, there seems a refusal to acknowledge that they’re dealing with a “wicked” problem. As I’m fond of pointing out, when it comes to macroeconomics there’s never totally good news (nor totally bad news), economically speaking. An improvement in growth rates may lead to labour shortages and inflation. A disaster, such as a flood or bushfire may lead to greater work for builders and retail sales may be given a boost.

So the big problem that the current government have is that they’ve tried to present the solutions as simple, as though it’s just like physics where such laws as Newton’s first law of motion# apply. As David Graeber says in Debt: The First Five Thousand Years

“Recall here what Smith was trying to do when he wrote The Wealth of Nations . Above all, the book was an attempt to establish the newfound discipline of economics as a science. This meant that not only did economics have its own peculiar domain of study—what we now call “the economy,” though the idea that there even was something called an “economy” was very new in Smith’s day—but that this economy operated according to laws of much the same sort as Sir Isaac Newton had so recently identified as governing the physical world.”

 

While there are some that think that economics is simply a matter of graphs and mathematics, there are others who are beginning to think differently. Just as Einstein suggested that Newton may not have been right about everything, Tversky and Kahneman, among others, have introduced the idea of behavioural economics, which suggests that people don’t always work in their own best interests when it comes to matters economics. I mean, we all know that we should be taking more of an interest in our superannuation, but, well, it’s just so boring and besides, we’ve got more important things to spend our money on.

At its simplest, while to the economist, $40 is $40, behavioural economics understands that while you may drive ten kilometres to get a $80 for $40, but very few people would drive the same distance for $40 off their new car and say that it’s not worth it.

Which brings us to Malcolm Turnbull’s assertion that we should all be afraid that Shorten’s plan with negative gearing will drive house prices down.

As politics goes, it’s a pretty crude scare campaign. However, as economics goes, there are only two possibilties: Turnbull is lying (unparliamentary, I know, I know) or else he has no idea about how difficult it would be to actually predict what would happen under the Labor Party’s proposal.

For a start, the plan is being “grandfathered”. In other words, while it could reduce the number of future buyers, those who already hold negatively geared properties have no urgent need to sell them – even if they are the “mums and dads” (what no childless people?) we hear so much about – which could arguably cause an oversupply leading to a sudden drop in prices.

Secondly, there are many keen to buy a property who aren’t investors, but who are currently priced out of the market. A small drop in price would likely lead to an increase in home ownership.

Thirdly, the suggestion that rents would go through the roof doesn’t line up with the idea that property prices would drop, because – obviously – if property prices dropped too much while rents were rising, there are two likely outcomes: 1. People would buy their own home, because it’s cheaper than renting and/or 2. People would buy up rental property as a positively geared investment, where they actually make money.

So unless Turnbull is suggesting that house prices would fall because Shorten’s proposal of only allowing negative gearing on new housing would lead to an increase in supply dramatic enough to bring prices down to reasonable levels, then there’s no reason to think that the change would have anything other than the most incidental effect on the housing market.

But like I said, economics isn’t a science and Turnbull might be better shifting his attention to protecting the Safe Schools Program, because apparently it aims to make same sex attracted youth feel safe and certain forces within the Liberal Party are concerned about that it just encourages them to think of themselves as ok, and well, just like not torturing asylum seekers may make them undertake a difficult journey, so too, they’re arguing that unless we make same sex attracted youth uncomfortable they won’t see anything wrong with what they’re doing. Malcolm needs to stand up to these people and say that gay people have rights too, and he’s prepared to…

Oh, he’s launching an investigation into the Safe Schools Program?

Yeah, Safe Schools. I guess that does go against Liberal Party policy.

# An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.

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16 comments

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  1. Florence nee Fedup

    “Thirdly, the suggestion that rents would go through the roof doesn’t line up with the idea that property prices would drop, because – obviously – if property prices dropped too much while rents were rising, there are two likely outcomes: 1”

    He is not saying that, He is saying taking them out establish housing will lead to fall in value houses/ Is saying they won’t turn to new housing because there won/t be enough new houses. He says regulations stop them from being built.

    He is saying the bottom will fall out of the market, leading to one not being able to use the house to raise money to invest in new businesses.

    He has not mentioned 1st home buyers or creating affordable housing. Doesn’t seem to be in his vision.

    Truth is, PM has been uttering Tommy rot that makes no sense.

  2. Rossleigh

    There have been many asserting that abolishing negative gearing will lead to a rise in rents, while Turnbull asserts that it will lead to a drop in prices.
    My point is that it’s hard to see them both happening simultaneously!

  3. susan

    Turnbull is exposing more and more of his real self every time he gets into a tricky situation. He is supposed to be highly intelligent but I’ve never seen it because somewhere along the line he learnt that in arguments, he could get away with just bluster. His reaction to Labor’s plan was just angry waffle and totally absurd.

  4. MichaelW

    Chris Izzak, what a legend, seen him in concert a few times. The guy has a stunning voice, sounds more like Roy Orbison than
    Roy Orbison did…. This guy had me crying at one of his concerts, his voice is incredible…
    Forgot what I was going to talk about now…. I’m gonna go and put one of his albums on, and forget about politics for a while… Starting to do my head in anyway…

  5. gangey1959

    @ MichaelW. What would Chris Isaak’s version of Alice Cooper’s song ‘Poison’ sound like, do you think ?
    It would kind of put a soundtrack behind everything that turdbullshitartist is coming out with these days.
    I still can’t believe how quickly he shut down question time and sprinted out of Parliament on Monday. Weak maggot that he is.
    If my rent goes up again, and house prices come down, I’m gonna buy a chunk of cheap dirt somewhere, and build a really cool house out of all the cast-off stuff that people chuck out these days. I’ve already got a dryer, 3 ironing boards, and a dart board.

  6. Barry Thompson

    The PM asserts that the value of your home will decrease with Labour’s negative gearing policy. If so,it will only impact on the home owner if they sell. Even then,the buyer’s market will also be cheaper so what’s the problem?.
    Surely a cheaper market for first home buyer’s is a desirable thing.

  7. Kyran

    The Safe Schools Program costs approximately $2mil and the ‘gender’ component is merely one of the components attempting to address an overarching issue of bullying. Other than the Australian Christian Lobby, I haven’t heard too many people suggesting it’s an advocacy program. Most commentators seem to agree it’s an education program.

    Last I heard, the Chaplaincy Program costs about $60mil. Oddly enough, I haven’t heard too many people suggest it’s an education program. Many commentators have suggested it’s proselytizing is blatant advocacy.

    If the ACL has this much disproportionate influence under the current rules, imagine how much more vitriolic the speech would be if we relaxed the anti-discrimination provisions.

    ‘Wicked problems’ indeed. Both issues are being treated in the governments usual style, hysterical screaming and fear mongering. Thank you Mr Brisbane. Take care

  8. Florence nee Fedup

    Kelly now saying housing costs will go up. Is she or is PM correct.

  9. astra5

    Rossleigh
    A great piece. Thank you for tackling ‘wicked problems’.

    The Coalition is all at sea over Labor’s negative gearing proposal. On ABC 774 radio this morning, in an interview with Jon Faine, Sarah Henderson, Liberal Federal Member for Corangamite, asserted that with Labor’s plan house prices would go UP, making housing more unaffordable, and DOWN, thereby smashing housing prices for those with a home. And this was said in the one interview! Faine pointed out the discordance between these two points of view, but that didn’t faze Henderson at all. Managing such contradictions in rhetoric is a learned attribute, essential for all Liberals!

  10. Florence nee Fedup

    Labor Opposition is strongly united and behind their leader than they have been for many decades.

    What chance has Turnbull got, holding his mob together until elections, whether short or long campaigns.

    Albanese was loud yesterday i daring PM to bring elections on.

    Time is on Labor’s side, not the government,

  11. Florence nee Fedup

    Sarah Henderson went one better, they will go up and down.

  12. Rossleigh

    Assistant Treasurer, Kelly O’Dwyer, clarified her statement. When she said that house prices would go up under Labor’s negative gearing plan, she wasn’t contradicting Malcolm “selfie” Turnbull’s assertion that they’d go down. Apparently, new houses will go up in price while old houses will go down.
    Perhaps they’d be better trying to run the line that prices will go up for buyers but down for vendors, with Eric Abetz arguing that it will enable married gay people to live in them and Cory Bernardi adding that the only people who’ll be able to afford houses are those involved in same sex polygamy with animals.

  13. JeffJL

    Let me start by saying that I really liked the Neil character in The Young Ones so the following question is not intended in anyway to be derogatory to Ms O’Dwyer. I can be derogatory by saying that I believe that Ms O’Dwyer is one of the most politically based politicians. Going on national TV and claiming that the LNP had reduced the debt.

    Who else thinks that Ms O’Dwyer’s picture above looks like Neil from The Young Ones?

  14. Florence nee Fedup

    One shouldn’t trust any politician. One should closely scrutinize everything they say, promise and do.

  15. Florence nee Fedup

    I think PM prove today, those on high incomes benefit more from negative gearing than those on low incomes. wipes out his claims that low income earners will lose out.

    How can one save much, if one pays little tax in the first place.

  16. David (other)

    @Saddened in an earlier post mentioned lies by the Torys, something we are now so accustomed to they are dished up for every meal of the day. Another platter of deceit they try to convince us to swallow as an attempted cover up is the refusal to release information on anything they believe will reveal the truth of Turnbull’s rabble complete incompetence.

    Today the media tell us the disaster that will not go away is the puppet PM Turnbull’s total failure with that dogs breakfast called the Tory version of an NBN.

    I wont use the link as it goes to Murdoch’s Australian but I paste the story as it continues the damning evidence of concealment of the truth behind the cost blowout of the Govts Broadband Non Network.

    Eventually there will be no place to hide it.

    AAP
    February 25, 2016 1:58PM

    Govt shuts down request for NBN docs

    The coalition has used its numbers to knock back a Senate amendment that would have required the government to hand over financial information about the national broadband network.

    The Labor amendment to an uncontroversial bill calling for NBN Co’s financial and deployment forecasts out to 2022 passed the Senate with support of the Greens.

    But when the bill was returned to the lower house for approval on Thursday, the government said the amendment was inconsistent with the communications legislation to which it was attached.

    Government frontbencher Paul Fletcher said NBN Co was required to report in a similar way to publicly listed companies, and provided regular briefings.

    “NBN operates in a transparent fashion,” he told parliament.

    But Labor’s communications spokesman Jason Clare said the bill was designed to relieve NBN of releasing “basic, simple” information that it used to release.

    “The government) has doubled the cost of this project,” he told parliament.

    The only reason the government had been refusing to hand over financial documents was it didn’t want to reveal information about the mess of the project, he said.

    The bill now heads back to the Senate where the chamber can choose to insist on its amendment.

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