Corruption Not Harmful?

A Singaporean friend of mine who had just been on a month-long holiday to his home country, chatted with me a few days ago about what he perceives to be a high level of corruption in Singapore whereby the ruling party in that country silences opposition parties by passing through legislation that punishes those who publish opposing views. This came as a surprise to me because the highly regarded corruption perceptions index (CPI) by Transparency International declares Singapore to the least corrupt country in the world.

According to Transparency International, Singapore is not a corrupt country, but according to many Singaporeans I actually talk to, Singapore is a highly corrupt country.

From what I hear, the corruption perceptions index merely gives surveys out to people and asks them about their perceptions on how corrupt a country is. This is hardly a rigourous measure of corruption. Some have suggested that a measure of the amount of bribes you need to pay is a better measure, but the problem with this is that I don't think corruption can be measured by bribe payments alone. We first have to look at the definition of corruption. Most academics define it as follows: "The use of government power for private gain."

It is my opinion that most of the time people's perceptions of corruption is itself corrupted by snobbery. That is, most people believe that rich countries are not corrupt while poor countries are corrupt because rich people have integrity and are honest whereas poor people are dishonest and have no integrity.

Based on this definition of corruption (corruption is "the use of government power for private gain."), let's face it, virtually all politicians and public servants are corrupt, even politicians and public servants in rich countries. Most politicians and bureaucrats use their position as a career, and large companies make non-transparent political donations to parties to effectively bribe them. Even in developed democracies politicians are driven by private gain, trying as hard as possible to stay in power, whether it is by accepting political donations from large interest groups and lobbies but also by pandering to voters' demands. A politician giving to voter demand is, by the definition of corruption we agreed to above, is corrupt.

It is clear that in all countries government responds to the demand of whoever is most powerful. The only difference between a democracy and a dictatorship is that power is not concentrated. In most healthy democracies, the country is still ruled by an elite but a little bit of power is given up to the people as a compromise.

My point is that perhaps we should not worry too much about corruption. There are numerous stories about corruption in China and India, yet these two countries are growing rapidly, more rapidly than the growth of Western economies when they were developing.

A particular public official in a developing country may not approve of some development unless he receives a bribe from a company. This public official may hold out for the highest bribe so he can make the most money possible. Companies offer him cash in briefcases under the table and the public official accept a particular company. This may occur in many developing countries, but it also occurs in developed countries. It is no different to the government allowing projects based on auctions.

If a dispute occurs in a developing country between two parties, the richer party will pay off the public official. This is no different to developed countries whereby disputes between two parties are settled in courts whereby the richer party hires better lawyers and drags the case on for long periods to bankrupt the other party.

Corruption in the form of bribes is merely the replacement of "might makes right" with "wealth makes right." It provides a non-violent means of conflict resolution.

GFC2's Impact on Australia

GFC2 is here. The US and Europe are piling on more and more debt and many investors are skeptical about whether they can pay it off. Here in Australia, many seems to be optimistic. In The Melbourne Age, this piece Forget US Woes, China Keeps Our Economy Strong claims that the Australian economy does not rely on the US economy anymore and that the Chinese demand for our resources will keep our economy strong. According to the article, "40 per cent of China's exports went to the US in 2001. Now that figure is down about 20 per cent and falling..." This means that even if US consumers were to become too poor to afford Chinese imports, China has other countries it can export to.

But one area that bothers me is how much US debt China holds: US$1.2 trillion worth (source: NPR, China Blasts US over Credit Rating Downgrade). If the US is unable to pay off this massive debt and defaults, the US$5 trillion Chinese economy will have a substantial amount of its wealth wiped out. This would have an enormous impact on the demand for Australian resources and hence the Australian economy. Even if the US were to avoid default by printing money, the outcome would be similar. The Americans would print money and hand these dollars to the Chinese. The printing of money will cause massive inflation thereby causing the American dollar to drop in value. Even though the Chinese hold US$1.2 trillion worth of US debt, if the US dollar is worthless then that will drop demand for Australian resources.

Many newspaper economists are going on about how China is now Australia's master and not the US. Be that as it may, these newspaper economists do not seem to give much description of the linkages between the US economy and the Chinese economy.

Just Default Already!

I'm not exactly sure why the US would default if the debt ceiling were not increased. If the debt ceiling were not increased, the US would not legally be able to borrow but could still pay off interest with revenue from existing taxation. I am assuming of course that the US is not just borrowing money to pay off the interest on money they borrowed earlier.

Regardless, it is clear that the Americans need to both increase taxes and cut spending, especially on useless expenditure. That Republicans are not willing to allow increases in taxes is outrageous. In my opinion, the Democrats should just allow a default to occur and let the American people see just how horrible it will be. Th government can cut spending and not built roads, abandon hospitals, stop paying pensioners, and let banks gouge homeowners and businesses with high interest rates. The Democrats can then blame the Republicans for destroying the economy and in the next election should comfortably win.

APN AREIT Fund Yields 9%

As of 16 July 2011, the APN AREIT Fund gives a distribution yield of 9.12 per cent, paid monthly. I have been invested in the APN AREIT Fund for a little over half a year now, and I am very happy with not only the high distribution yield but also the monthly income as well as the stability of the investment income. The payout from the APN AREIT Fund is so stable and predictable that I can make plans for various spending and can reasonably rely on future APN payouts to pay off the liabilities (e.g. if I use a credit card). This predictability, high performance, and stability created by what is seemingly highly compentent active management makes me question the value of unpreditable index funds that pay quarterly distributions that are highly variable.

My hope is that as the income from my APN fund increases, I can devote more of my salary income to investments and rely on the income produced by APN to fund all my living expenses. This means that ultimately I will be able to live without working, which for me is very appealing!

Vanguard Bond Fund Yields 15% for 2010-11

According to Vanguard's website, the Vanguard Index Diversified Bond Fund paid distributions of 15.52 cents per unit in 2010-11. Given that the price of a unit now is $1.01, this equates to an annual distribution yield of around 15 per cent. This is significantly higher than the 5% distribution yield that I am used to, so I began to wonder why bonds did so well last financial year. I am not one to reinvest managed fund distributions and instead have spent the money on buying new running shoes (I will write a post about my shoes later).

It turns out that I am not the only person who noticed this massive distribution on the bond fund. Over at the Bogleheads forums, there is a forum post about the bond fund's massive distribution payout, as well as an associated massive drop in unit prices. The Bloomberg chart below shows the extent of this fall in unit prices.

A Bogleheads member named Tonens gives the following explanation for the anomoly, saying that the large distribution was the product of the strong Aussie dollar.

... [T]he Vanguard Diversified Bond fund is 60% International Bonds, with that proportion hedged to the Australian dollar. The hedging gains as the Aussie dollar appreciated over the last year rather than interest earned likely accounted for the majority of that large distribution.


The total distribution for the fund over the last 12 months its close to 16c (ie about 16%). If the currency goes the other way, it'll contract accordingly.

 
Another member named Asset Chaos explains why the unit price colapsed:

I think you'll find that the price of a unit of diversified bond is not constant. It fluctuates daily in line with the market prices of the bonds held in the fund. The reason that the unit price drops after a distribution is the fund gets paid some interest on its bonds on many days in between the dates on which the fund distributes this income to the unit holders. That accumulating interest is an asset of the fund and so is reflected in the unit price, which is just the total value of the fund divided by the total number of units outstanding. When the fund distributes the interest income, that money is no longer in the fund, so the fund's value drops suddenly on the distribution date. But you as a unit holder still have the same value: you've got a unit's worth of value still in the fund plus the value of the distribution, which you have in the form of cash in hand or in the form of additional units.

It worries me when an investment pays out large distributions accompanied by a fall in unit prices. This is because the fund may be paying for the distributions by eating up capital. However, the explanation that the massive distribution payout is the product of the strong Aussie dollar makes sense.

Carbon Tax Increases Income Tax Rates?

Something doesn't add up with the carbon tax compensation scheme. Take this except from the West Australian article titled Tax cuts to compensate for higher living costs:

To deliver the tax cuts, the tax-free threshold will triple from $6000 to $18,200 when the carbon tax begins on July 1 next year.

A second round of tax cuts will occur in 2015, when the carbon tax switches to an emissions trading scheme, with the threshold lifted to $19,400.

Most taxpayers will enjoy a tax cut of at least $300.

The first an second points are easy to understand. But the third point about most taxpayers will get a tax cut of at least $300 doesn't make sense. The way the income tax system works currently is that you pay nothing for any income you earn up to $6000. Then from $6000 to $37000 you pay 15 per cent. If the tax-free threshold were to increase from $6000 to $18200 then this means that if you earn at least $18200 per year you will save (18200-6000)*0.15 = $1830, and everyone earning over $18200 per year will get this.

But news article talk about most people getting tax cuts of only $300 and that people earning below $80,000 will not benefit!

This makes no sense. Perhaps the government is trying to obfuscate what looks like a tax rise for people in higher tax brackets. My guess is that although the tax-free threshold will increase, to compensate for this the government will increase income taxes in other areas. For example, for every dollar you earn between $18200 to $37000 you may be required to pay 30 per cent rather than 15 per cent.

I wish the government were clearer on this. It does not look good when the government tries to hide detail. If anything it makes me suspicious.

Update 16 July 2011: I have finally worked it out! It's disappointing that the increase in income tax rates was not clearly highlighted in the mainstream media, but the changes are as follows:

• Tax-free threshold will increase from $6000 to $18200
• The 15% income tax rate will be lifted to 19%
• The 30% income tax rate will be lifted to 32.5% in 2012 and then 33% at 2015.

The low income tax threshold will decrease, which, now that I think about it, makes sense because a change in the income tax rates is much more transparent. All in all, I think these tax rate changes comfort with the general principle of carbon tax compensation, which is to target poor people and not rich people. The increases in the income tax rates at the higher end will help make sure that the benefits of the carbon tax compensation only go to those who need it.

I have complained about the carbon tax because there are many problems with it. It doesn't address the problem of jobs moving overseas and it exempts petrol. Furthermore, carbon tax compensation doesn't all go to poor people. Much of it goes to industries. Nevertheless, I completely understand that the job of politician entails compromise. It is no point letting best get in the way of better, as the Greens would have found out when they opposed the CPRS. With a Parliament made up of independents and the Labor party being heavily influenced by trade unions and voters who struggle with rising petrol costs, it makes sense that Gillard make these compromises to ensure that at least something gets through Parliament. All in all, this is a step in the right direction. Taxing big business for their carbon emissions is a much better idea than paying big business to reduce emissions, which is what Tony Abbott plans to do. If Abbott had his way, the money necessary to pay off big business to reduce emissions would need to come from somewhere, and chances are he would introduce some form of carbon tax e.g. by increasing income taxes. Simply increasing income taxes would not punish people who use more electricity, it only punishes people who earn more. By increasing carbon tax you are punishing those people who commit the sin of emitting more carbon and with the proceeds of the carbon tax you can reduce income tax, which encourages single mothers and students to work.

Carbon Tax Released

Finally the full details of Julia Gillard's carbon tax has been released, but as soon as I checked the Commonwealth Treasury website and was diverted to an Australian government website about the new policy, I became annoyed because it was just not clear how much I was going to get. Like the Budget that Labor introduced that cut little bits of spending on a thousand different things, thereby spreading out the pain, it seems as if the carbon tax follows the same philosophy whereby the compensation is spread out over a large number of people, not just low-income people but also pensioners, people with children, people with certain welfare cards, and so forth. It was really confusing.

One of the main features of the compensation is that the tax-free threshold would increase from $6000 to $18000. For someone earning over $18000 per year this is an extra $1800 per year in your pocket ((18000-6000)*0.15=$1800). In my opinion, this is not ideal because this $1800 would go to everyone earning over $18000 a year, including those who earn millions of dollars per year. I have stated in another blog post that I would have preferred to see an increase in the low income tax offset so that millionaires are not compensated.

In addition to this increase in the tax free threshold, there will also be, according to this Herald Sun article on the carbon tax, additional compensation that presumably will come from tax cuts that will be paid to singles earning below $50000: "Individuals will get all extra costs compensated up to an income of $50,000. The compensation means an individual now on $50,000 a year will get $303 in assistance, to cover a $304 rise in their cost of living."

This carbon tax compensation system is far too complicated. I have no idea how much I will get and when I will get it, and I suspect many other Australians will not bother to figure out what they will get because it seems to be dribs and drabs from all sorts of places. The government seems to have divided the benefits into a million different categories.

Furthermore, as I feared, the tax will be levied on only 500 emitters and will only apply if the material is burned. This I fear will mean that companies can dodge the tax by exporting it to countries that have lax environmental laws. What would have been better is a mining tax based on the energy content of what is dug out of the ground. Given that Labor caved in to the big miners and the mining tax discussion is now dead, we must live with what we have, which is the carbon tax and the future transition into an ETS. The system will also be linked in to the international carbon price, and this will hopefully coordinate carbon emission reduction objectives all around the world and hopefully cut off the loophole whereby companies export resources to other countries to dodge the carbon tax.