New site

I have a new site at WordPress:

http://www.harryrclarke.com/

Readers please adjust your browser settings.

It is goodbye Blogger for at least a while. I have got to express my sincere thanks to Goggle.com for making the incredible Blogger software available free. It is amazingly simple and powerful software. My reasons for making the change? I want to try something new and want to play around and learn about WordPress.

Bleg: I tried to export my earlier Blogger posts to this new Wordpress site but the WordPress instructions for the export (somewhat ominously) did not work. The problem with the export tool in WordPress is well-understood and analysed in their discussion groups. The usual suggested work-around is to first copy files to a WordPress.com hosted account and then copy them across to the Wordpress.org self-hosted account. That did not work for me as my Blogger archives are far, far too big.

If anyone knows some way to effect the export I'd appreciate any help/advice. I will pay to have the files successfully transferred.

Update: On 15/8/2009 I did copy most of the files across successfully without drama.

What the Welsh do at night

This is power shepherding.  Literally brilliant.

Thanks Bernd

Joel Fitzgibbon

Defence Minister Joel Fitzgibbon's friendship links with a Chinese national seem to have gone well beyond the point of occasional, friendly personal encounters. Free trips to China and gifts from someone also making hefty financial contributions to the ALP seem completely over the top. Particularly when Fitzgibbon lies about the gifts until they are revealled to be facts and particularly given that he is the nation's defence Minister.

Can he be so naive as to assume other countries do not seek to influence and compromise ministers in pursuit of their national interest? How could a person in this position put himself in a position of appearing to be compromised?

Several major Australia-China issues are currently on the Australian political agenda. China seeks a substantial stake in the Australian resource sector.

Joel Fitzgibbon should resign or be sacked.

Accident-prone Liberals

This pessimistic - though I think accurate - piece from conservative columnist/journalist Doug Conway appeared in today's Manly Daily:

ANNA Bligh's historic win in Queensland extends to 25 the number of consecutive state and territory elections where conservative parties have either lost to Labor or won fewer seats.

The only aberration came last year in WA, where Colin Barnett's Liberals managed to form a minority coalition government with the independents.

In NSW the Coalition has not won in its own right since 1988, when Nick Greiner defeated Barrie Unsworth in a landslide.

By the time Nathan Rees goes to the polls in 2011, Labor will have held power in NSW for 16 years.

Anna Bligh's feat in becoming Australia's first directly elected female premier has delivered a fifth straight term to Queensland Labor, which has ruled for 18 of the past 20 years.

Bligh has given hope to other long-standing state Labor governments which must face the polls in the next two years: Victoria, SA and Tasmania as well as NSW.

State Liberals around the nation have consistently failed to unseat Labor governments despite a string of scandals and some clear cases of ineptitude.

Labor was returned to power in NSW two years ago with just a loss of a couple of seats. Yet Morris Iemma's government had been running one of the most sluggish economies in the country, failing to deliver on health, education and transport.

Labor governments, which at times seem to do everything in their power to get beaten, have proved unbeatable, often thanks to Liberal blunders.

An inquiry into vote-rigging in 2001 forced the resignation of senior Labor figures in Queensland but even that made no difference.

John Brogden resigned as NSW Liberal leader in 2005 after making racist jokes at the expense of premier Bob Carr's wife, and later attempted suicide.

Former South Australian Liberal premier John Olsen quit in 2001 after an independent report found he acted dishonestly in trying to attract telecom company Motorola to Adelaide.

Victorian Liberals have never recovered from the unforeseen uprising that tossed the autocratic Jeff Kennett out of office in 1999.

Labor's extraordinary run at state level is not because voters have always been satisfied with ALP government.

As one commentator remarked, it's because they have had insufficient faith in any alternative.

H.E. Seyed Mohammad Khatami

I heard this remarkable man - ex president of Iran 1997-2005 - speak at La Trobe University this evening.  Mr Khatami is a Muslim cleric whose main interest is political philosophy.  I found his prepared speech, which ran for half an hour, academic and rather dry.  For another 2 hours however he took good-natured, though often pointed questions from his audience with grace, animation and (most of all) an erudite humor that had even the stern-faced security guards in stiches of laughter.  It was the largest public meeting I have attended at LTU with about 1300 in attendance - the audience filled 3 lecture theatres to capacity. 

A most enjoyable evening which touched on the conservatives in Iran, fanatical Muslims, fanatical neocons, Iranian nuclear power, Palestine, Barack Obama.

Khatami's public presence did not support the Jewish Community Council of Victoria's image of him as a Jew-hating supporter of terrorism.  In his public statements tonight he expressed religious solidarity with the Jews - in terms of a common religious heritage - but opposition to their occupation of Palestine, total opposition to religious fundamentalism and absolute opposition to terrorism.  He saw Obama as a positive force that was nevertheless likely to be thwarted by US pressure groups.  He skillfully promoted the Iranian national image - no mean feat given the press it receives.

The JCCV condemned LTU for inviting him but in my view we should listen. In human terms I've got to say that I feel some bond with people such as Khatami. I probably would not agree with some of his specific religious views but to be honest, if I was organising a barbie, I'd like him to come.  Maybe I am gullible and falling for a skilled propagandist! Maybe not.

World trade collapse

The value of world trade will fall 9% in 2009 compared to growth of a miserable 2% (not 4.5% as forecast) in 2008 the WTO said on Monday.  World production will fall by 1-2% in 2009, the first fall since the 1930s.  Further falls in trade can be anticipated as the recession intensifies - the unavailability of trade finance is proving a constraint for developing countrie and declines in exports have strong multiplierr effects on all trading economies.

The economic crisis that has descended on the globe will not end quickly. A move toward protectionism would naturally worsen things.

Visualising the financial crisis

Jonathon Jarvis provides this exceedingly clear view of the global financial crisis.  One of the best I have seen.

Stuff white people like

This is a fun blog that has been operating for a bit more than a year.  I'll add it to the blogroll.

Moleskine notebooks - expensive without additional functionality.
Coffee - particularly fair trade coffee - that $2 makes a difference.
Asian girls - they don't have mid-life crises and produce attractive hybrids.
Funny or ironic tattoos - these tattoos you don't tire of short-term.

Thanks RH

US vs. China on climate change

Given that the US has been so slow to come to the party to even think of seriously addressing climate change it seems almost hypocritical of it to threaten retaliatory tariffs on Chinese carbon intensive exports if China does not adequately price carbon.   Europe had already threatened to do the same to the US when Europe alone was pricing its carbon emissions. The move might force China to comply - I have written a paper analysing such outcomes in a  cut-and-dried game theory setting. The motivation is that by pricing carbon China then gets to collect the duties not the US.  Factors working against such an outcome are the abysmally low levels of energy consumption in a country plagued by extremes of climate and a country which is still distant from middle income status.

I prefer the Garnaut approach - tell China to cut its emissions growth to one half its GDP growth rate - not difficult at present - and then target rates of carbon emissions that converge to global uniformity by 2050.  Seems fairer given China's situation and more likely to be something China accepts.  China is already screaming 'protectionism' in relation to the US and vaguely suggesting a challenge at the WTO.  They are suggesting that destination accounting should prevail (customers not producers pay carbon taxes) with US consumers of Chinese carbon intensive goods being held to account. That is, of course, exactly what the US sees itself doing.

What is really to be feared is that attempts to clean up greenhouse gas emissions will become lost in beggar-thy-neighbour protectionism and a world trade war.

In praise of economics

Both of my university-age kids are studying economics.  When intelligent young people ask for advice on what to study at university I often advise them to study economics.  This often raises a wry smile given that people often know that all I have done all my life is work in economics.  But I try to discount the 'blinkering' effects of my vocational choice when offering advise. I believe what I am saying - indeed even though I sometimes (not often) complain about life in the universities I have never come close to losing my fascination with economics*.

I notice that in my own university which is experiencing a few enrollment pressures - that no such pressures are occurring in the economics area.  A third-year international trade course we teach has over 300 students enrolled this semester! Ten years ago  doomstayers were predicting the end of economics and its replacement with amorphous, non-analytical, 'smorgasboard' courses in 'business' and 'marketing' (NB I regard finance as part of economics and commerce/accounting as a useful discipline that should draw on economics).  I never believed pessimistic claims regarding the future of economics because, in the long-run, the market for quality will assert itself.

For the life of me I cannot understand how marketing can be taught without a solid background in microeconomics. How business students generally can function without knowing what the Reserve Bank and Treasury do.  I really don't see how you can sensibly discuss corporate strategy without knowing basic game theory or understand industrial relations issues without studying labour economics.  Students apparently agree with my perspective and are voting with their feet.

There is some slight advantage to students with poor analytical and maths skills in studying vocational disciplines but in the business area these disciplines don't have the intellectual rigour and intellectual fascination of economics.  Too often, too, they are dominated by verbiage, psycho-babble and non-rigorous reasoning. Moreover, business skills need to be taught partly on the job - not in universities.  The students from such programs too often emerge without a great deal of value-added from their studies.  They come to me with a thesis proposal and I can't help them - they have no quantitative skills and just don't know much.

Economics is the ideal liberal arts university major for students with curiousity and intelligence.

I owe the link to Gregory Mankiw

* I have a few regrets in the economics area. One is that I didn't do a systematic program in economic history and secondly that I did not pursue an early interest in the history of economic thinking. Both of these activities I now pursue as recreation.

More nostalgia - Fairport Convention

Fairport Convention is one of my all-time favourite bands. They still perform although their early album with Sandy Denny Liege and Lief remains my favourite. Denny died tragically in 1978 after skipping through a number of groups. Liege and Lief is monumental folk-rock music:

'To rouse the spirit of the earth and move the rolling sky'.

Try: Come All Ye. The Deserter. Reynardine. Matty Groves. Tam Lin...... fantastic performances.

A beautiful later piece by Denny and this and this. Same incredible voice.

The rhythms of Tam Lin move me 40 years back through time - acrid, smoke-filled rooms, cheap, red wine and earnest discussions about the Vietnam War and conscription. But enjoying FC now in real time with a 1988 Balgownie Estate - Cabernet Savignon - made by the legendary vigneron Stuart Anderson. Great old wine with great music!

Labor to be returned in Queensland

7.59pm: Despite some good swings to the new LNP I believe Labor will be returned with a much-reduced majority.  In the old Parliament Labor had a huge majority of 37 seats - LNP 23 seats, Labor 63. It was a huge ask for the new LNP to win.  My prediction is based on the ABC's extrapolation of trends given 19% of the vote counted. The LNP needed about an 8% swing to form government - I cannot see them getting that.

Update: By 9-30pm it was all over. The LNP only got a swing of 3.1% and the Labor Party are returned. The number of LDP seats will go up to around 32 which still leaves Labor with a big majority.  The result a disappointment for conservative politics in Australia. The economy is not yet driving voters from Labor.

Long pictures

I enjoyed this oldie from BoingBoing.

Einfeld goes to jail

Former head of Human Rights Commission and perennial liar Marcus Einfeld has gone to jail for at least two years.  The left loved him as a personality judge. But he lied about a $77 fine (he had lied about traffic convictions several times before), lied about his academic qualifications (he bought degrees) and his past directorships and plagiarised past legal judgements.  Einfeld made a career as a well-paid, blow-hard moraliser. Aborigines, refugees, Cornelia Rau ...Einfeld was a great defender of humanity.  I can't help wondering whether his claims in this regard were lies too or, as I often sensed when I heard him speak, just pompous insincerity.

No-one should dance with joy to see Einfeld cop his due.  There is tragedy here - he is 69 and his health is poor.  But for once the legal system worked reasonably well * and extenuating circumstances were not evoked for a favoured son.

* The qualification reasonably because his sentence was reduced because of the pain he has suffered on account of the press coverage received.   But the press didn't persecute him - they only identified his lies.

Nostalgia - Norman Gunston & Frank Zappa

I had forgotten how good both of them were. Here goes Zappa on the Illinois Enema Bandit. And a totally disgusting version (with Captain Beefheart) of Willie the Pimp.  We miss you Frankie.

Tiger Woods to come to Oz

Tiger Woods will play in the Australian Open this year in Victoria.  He will be paid $4.5 million for his 3 day effort half of which will be subscribed by the Australian taxpaper.  This is his appearance fee and ignores possible winnings. The event will be held at Kingston Heath and I am already waitlisted for tickets in November.  If I am to be consistent with my judgement on the use of public funds to promote sporting events - I recently attacked Victoria's $47 million payment to a certain dwarfish Grand Prix operator - I should condemn the $2.25 million the public is coffing up for Woods.  I do condemn it - though weakly.  The reasons for my weaker condemnation of the Woods subsidy are that (i) $2-25 million is a lot less than $47 million and (ii) it might indeed be a good deal for Victoria - though the promised $19 million benefit that the Labor Party suggests will eventuate is out there in fairyland.  The benefit will be less than that.  Woods is absolutely numero uno in the world of modern golf and this is the major participant sport on earth.  He is not some racing-car-driving bogan but a gentleman who plays excellent golf.

I assume the PGA are coffing up the other half of the appearance fee. That's a big ask. I hope they do not get seriously into the red on this one.

Woods is a freak. He is the greatest golfer of his generation and, as I have suggested before on this blog, a wonderful person.  A guy with soul and feeling who can play golf with demonaic precision.  I can hardly wait!

Victoria is again seen as the sporting centre of Australia with NSW a distant second. Indeed Woods will not play in the Australian Open held in NSW shortly after the Masters - his appearance at the Masters will drain resources and crowds from the now much less interesting NSW event.  NSW do have Brian Eno to lead the 3 week music festival in Sydney and this should help the no-hopers running that state secure a few Mardi Gras votes. Prejudiced? No, not me.

Martin Feldstein & AIG (& Mankiw)

The famous Harvard-based economist Professor Martin Feldstein is on the board of the American insurer AIG that received $200 billion in handouts from the US government and which has just paid over $160 million in bonuses mainly to those managers responsible for its massive financial failure.  The bonuses were 'justified' by AIG as retention bonuses designed to retain staff although 11 executives paid the bonuses quit AIG anyway. 

Feldstein is a conservative Reagan-backer who is now a member of Obama's 'economic recovery team'. Gulp.  A great man - Feldstein has won all sorts of awards and is still prospering.

(Feldstein's Harvard colleague Greg Mankiw argues that Americans shouldn't worry about the bonuses to AIG - they are only 0.001% of annual GDP anyway.  On this basis every criminal in the US justice system should be released from jail.  Disagree with you Greg and more than just emphatically.  Like Feldstein, Mankiw is one of those nominally skilled economists in the US universities who has no sense of the deep dilemmas that confront the US.  Mankiw has learned a little but his intelligence here does not roam beyond the glib and the cute. His views on this issue illustrate the poverty of academic sensibilities in US universities).

1992 St Hubert's Cabernet

Last year I reviewed one of the best wines I drank that year, a 1991 St Hubert's Cabernet.  I thought I had exhausted my stock of these great old wines when I found, this evening, a 1992 St Hubert's Cabernet-Merlot nestled away, the sweet thing that it is, in a sinful back alley of my diminuitive cellar where it had the nape of its neck buried deep between magnums of Froggie plonk I had bought for a special occasion but forgotten about. 

This St Huberts is a gentle old wine with rich cabernet perfumes but with a gorgeous sweet-muted cabernet palate that still has a steely backbone and plenty of cleansing acid.  I remember when I bought this wine thinking it was a bit over-oaked.  Not at all - now the oak is obviously there but seamlessly integrated with mature fruit.  A great wine is so sweet and drinkable that it doesn't challenge.  Just a good drop and a reminder that the Yarra Valley can produce red wines which age well as well as good pinots and chardonnay for the bourgeois wine-drinking spoilers.

It will drink well for another 4-5 years but has probably reached its peak by now.

Executive remuneration

Here are the Terms of Reference for the Productivity Commission inquiry into executive remuneration in Australia.  It is a sensible inquiry because remuneration practices are part responsible for the excessive risk-taking and greed that has led to the current financial mess. 

My kneejerk reaction - the type of reaction that this inquiry hopes to forestall - is that remuneration decisions should be approved by the owners of a firm - its shareholders.  If these shareholders are too penny-pinching the firm's fortunes will suffer. 

But at least we won't have the old boy's club plotting organised theft of shareholder funds under the business-school-driven myth that huge payments are essential to 'allign' the interests of third-rate business thieves with those of those who employ them, their shareholders.  Whatever happened to old-fashioned morality and the desire to maintain a decent reputation?  I assume the business schools see such issues as irrelevant if you can devise a clever enough incentive contract.

Shareholders should call the shots and bear the consequences of doing so.

I'll follow the PC deliberations and change my views if they provide effective counterarguments. I'd be interested if readers could think of sensible counterarguments.

Papal bull

The Pope has reiterated his opposition to the use of condoms in AIDs ravaged Africa. The inhumanity of the Pope's position is self-evident. My basic comment - how can anyone take anything this man says seriously?

22 million people in Africa have HIV. In three Southern African countries the prevalence of AIDs exceeds 20% of the population. The Pope advocates abstinence as a God-driven policy stance. As is well known telling randy men and women not to have sex won't work and this failure (in the absence of condom use) can kill. The God-driven abstinence policy will inflict a horrible death on millions when the use of condoms is a cheap and effective way of avoiding this problem. 2 million people died in 2005 - 6000 people per day.

The difficulty is accentuated by the growth of Catholicism in Africa - numbers have trebled since 1978 to nearly 150 million in 2004. This is about 17% of the total population. Worldwide over this period Catholicism has its fraction of total population falling but voodoo still apparently sells in Africa.

The Pope's reason for sprouting this nonsense? Apart from his obvious expertise in matters of sex and human relationships I assume that this is because God told him what to do on his personal hotline. It is a 'deficit of morals' issue you see. Sex is something intrinsically evil unless you seek to breed and this should only occur between a heterosexual couple who remain monogamous forever. Break this law and you deserve to die. It is God's retribution for being randy and not listening to the Pope's bull.

Words can't express my contempt for these damaging, stupid views. Tolerance for callous stupidity has its limits and hopefully recognition of the stupidity here will have general equilibrium effects of denting this man's powerbase among the gullible in Africa and, indeed, around the world.

Update: The Pope's representative in the blogosophere is a cretin CL who posts anonymously under the distinguished label Currency Lad. In the past he inferred I had questionable sexual preferences because I defended some photos of Bill Hensen. I thought of suing this toad but he is anonymous and most people treat him as a joke. His comments are over at the sewerage blog LP.  The more bigotted and stupid the Pope gets the more his nitwit supporters see him as defending principle.

Jokes

A former boss of mine (now deceased)* collected jokes. He wrote them down and filed them and, on having enjoyed a few drinks, could recite joke after joke until the bar shut down.  I envied him intensely as although I love good jokes - particularly vulgar ones - I can never remember them.  I laugh like mad when they are first told but the next day I cannot recall them. Now I know why.  Its the unpredictability of their outcomes that does it:

"Really great jokes....punch the lights out of do re mi. They work not by conforming to pattern recognition routines but by subverting them. “Jokes work because they deal with the unexpected, starting in one direction and then veering off into another,” said Robert Provine, a professor of psychology at the University of Maryland, Baltimore County, and the author of “Laughter: A Scientific Investigation.” “What makes a joke successful are the same properties that can make it difficult to remember.” ''

This is neurology and memory research hard at work.

* Many years after I saw him last Bob B. published several books including two outstanding efforts in recreational, applied mathematics Towing Icebergs, Falling Dominoes, and Other Adventures in Applied Mathematics and Slicing Pizzas, Racing Turtles, and Further Adventures in Applied Mathematics.

Chinese debt worries

China is 'worried about' its $1trillion holding of US Treasury Bills.  The Chinese Prime Minister, Mr Wen, complains that the US has spent too much and saved too little - without mentioning that the consumption boom was funded in large part by Chinese lending.  Mr Wen can't sell the debt - its price would collapse - and is presumably fearful that the world's public borrowing binge will eventually drive up interest rates and again inflict huge capital losses on the Chinese holding.  Indeed Mr Wen must continue to lend to the US in order to prevent this happening. I assume the possibility of a collapse in the US dollar, fostered in part by debt concerns and the US option to inflate it away, would also have crossed Mr Wen's mind.

This is interesting. Mr C wants to sell lots of gunk to Mr A. Mr A has a demand for the gunk and buys it by issuing Mr C IOUs at low interest rates. The IOUs are backed up by Mr A's reputation alone but Mr A finds himself in a bind and needs to borrow so much more that the value of the IOUs is called into place because interest rates might now need to be raised.  Even if Mr A defaulted on the IOUs (or more realistically forced their value down) he would not lose a lot. Eventually Mr C would find it in his interest to forgive Mr A and to resume selling gunk again.  Mr A, despite bewilderingly complex current problems, remains well and truly in the box seat.

Afterthought: This situation of the weak exploiting the strong has parallels but is not equivalent to the US Government bailout of firms like A.I.G..  The US bailed out A.I.G. with $170 billion because the firm was 'too big to fail' and threatened the failure of the international financial system.  The bargaining strength in this difficult situation lies with A.I.G. which is probably the reason they felt they could get away with applying hundreds of millions of the bailout in bonuses to the parts of AIG that created the problem.  And this strength infuriates the bailout-er. Larence Summers says “There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous.” Ben Bernanke says similarly “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.” But the bailout must proceed!

Bushfire damage

I drove along the Hume Highway going to and from Albury over the past two days following a teaching assignment there. The fire damage along the highway runs for nearly 20 km north from about the 50 km point north of Melbourne. It is striking that, for 12 km, the fire followed the centre nature strip along the highway - in places it seemed (I couldn't be sure) that this strip helped spread the fire*. The fire obviously raced along gullies and tree-lined ridges.

Pine plantations and areas of native forest are completely destroyed over large areas. I also noticed that, even in large paddocks with only a few very isolated trees, the fire destroyed all vegetation. Sparseness of trees didn't help stem the ferocity of this monster.

Coming back into Melbourne I detoured via Whittlesea to the area west of the fire centre at Kinglake. I admit feeling ambivalent about what some might describe as a ghoulish interest but the truth is I was interested in seeing what had happened - among other things to valued bushwalking and birdwatching sites in Kinglake NP. I got about 4 km from Kinglake - I didn't get to the Park - when I was turned back by police. Entry into Kinglake will be for locals only for the next 2 weeks at least.

The scene in the area west of Kinglake is nightmarish although words can't express what is there. The whole area looks as if it has been intensely 'baked' and 'burnt'. There is still a smell of ash in the air. It is more than a fire - its a severe 'scorching'. There is not a blade of grass or any understory in much of the burnt out areas. Blackened tree trunks grow from blackened soils and stand starkly in landscapes that stretch out for miles over the Yarra Ranges. The fire was clearly very hot but also very extensive. Destroyed houses - one tragically that I saw just got caught by the extreme southern end of the fire - look like bomb sites. I have read exactly this description in the media but didn't intuit the reality. Chimney stakes stand but the houses themselves have been blasted to pieces. Farm sheds have been warped and scorched in the heat.

Again I was struck by the way the fire front charged across largely cleared farmland areas burning everything in its path. There were no simple escapes.

Driving through these areas is an emotional experience. You can sense - at least to some degree - the horror and fear that those living in these communities must have felt.

* A dark side to wildlife corridors. Not only do they spread unwanted 'weed' species rapidly they promote the spread of forest fires. Yet maintaining corridors provides insurance against climate change shocks and limits island biogeographic extinctions.

Commercial-in-confidence

For the right to operate the Australian Grand Prix in two weeks time the Victorian Government will pay Bernie Ecclestone $47 million.  In a civilised society politicians who abuse public trust in this way should be sacked and then jailed.  It is a totally disgraceful waste of public monies.

The $47m figure has only just been revealed.  Apparently Ecclestone threatened to take the Grand Prix away from any Government which reveals his fee. State Premier Brumby when asked of the fee claimed it is 'commercial-in-confidence'.  I wonder.  I suppose I have a nasty, suspicious mind but could it be that political leaders from Kennett to Brumby have paid these bribes to Ecclestone to secure a handful of petrol head votes from among the morons who go in for this 'sport'.  It would spoil the pollie fun to have to tell the adult population of Victoria - most of whom have zero interest in this retarded activity - that they are paying for it.

The Auditor General of Victoria claims that benefits from the Grand Prix had been overstated by $100 million.   There is no demonstrated net economic benefit to the state from it. Let's end this nonsense foreover - no more attempts to buy a few lousy votes for an environmentally-unsound, pointless activity.  If moron petrol heads want to watch this sort of activity let them pay for it entirely and include in that the cost of the externalities (reduced amenity values, emissions, noise and increased traffic congestion around the venue).

Newspaper futures

A lot of printer's ink has been spilt on the issue of the future of newspapers.  I buy three each day (The AFR, The Australian and (on a discount offer) The Age), My wife likes the Herald-Sun.  Our families' purchases are a ridiculous exception to the standard view that newspaper demands are collapsing.  This NYT article claims - in relation to the US:

For more than two centuries, newspapers have been the indispensable source of public information and a check on the abuses of government and other powerful interests. And they still reach a vast and growing audience. Daily print circulation has dropped from a peak of 62 million two decades ago to around 49 million, and online readership has risen faster, to almost 75 million Americans and 3.7 billion page views in January, according to Nielsen Online.

This is a remarkable decline in print and surge in online patronage.  What is happening? One of the difficulties is that a lot of advertising is going online.  Another is that 'entrepreneurial' newspaper bosses have laden newspapers with a stack of debt from their purchasing binges around 2005-07 when news media prices were at peak levels.  The Fairfax family has problems in this regard in Australia and Murdoch has massive debt everywhere.

On the consumer side attitudes are changing too.  I read the main articles in the NYT almost every night online. This has the effect of reducing my interest in the Australian media. It is also time-consuming - I have less time to read newspapers.  My newspaper arrives around 6-00am and if I am up earlier I go online to see what they are saying.  This represents my gradual shift away from the printed media - its a shift that I think is likely to be widespread.

And newspapers are expensive - the online reads are free - even if they are not provided you can get the title of the article you are ofter - this is normally available - you can Google that and dig up the article somewhere.  (The exception to this is the AFR - it is expensive and I must buy it to gain the very selective information I want from it).

I have no objection to a pure online service but I don't see how the economics will pan out. Charging is difficult since there is so much free competition.  The online providers deliver a lot of social value but I don't see how that will yield a buck for them.

Interesting futures here.....

Rejected submission on lemons

In my youthful past when I sent an article to an academic journal and it was rejected my reaction was often one of fury.  This was often amplified by the fact that many referee reports are dismissive and careless*.  These days I still occasionally get angry but I have also become more philosophical as a product of what must be hundreds of interactions with editors and referees.

George Akerlof's paper on 'lemons' is one of the beautiful contributions I have come across in microeconomics. It shows depth of vision.  It changed the way we do microeconomics and the role we advocate for markets.

Akerlof considers a car vendor selling second-hand cars that may either be 'quality vehicles' or 'lemons'. It is a standard market situation except for one thing - the vendor has better information about the quality of the cars sold than potential purchasers. This is asymmetrical information. Potential customers will drop their bid for a car below the price of a 'quality car' because they will suspect there is some probability the car might be a 'lemon'. On the supply side fewer people will wish to trade in their 'quality' vehicles if bidders offer a reduced price.  Thus iterating again the thought process of the buyer there will be an increased probability that any car is a lemon.  Again this will influence the decision to sell a 'quality' used car and so on...... 

The upshot might be that the market for second hand quality cars disappears completely - or is greatly dinminished - as a consequence of the knowledge advantage of the car vendor.  It is a brilliant insight with a host of applications in real markets - in health, education and in various professional services for example.

Akerlof made many valuable contributions in economics apart from the 'lemons' problem. Indeed I referred to his interesting work on behavioural macroeconomics on this blog.  He was awarded the Nobel Prize in economics.  In this interesting note Akerlof discusses the process of writing and submitting the 'lemons' paper. It was repeatedly rejected by leading journals in economics as 'trivial' but was anything but that.

* This carelessness doesn't always prevent publication. I have submitted one paper that I am now convinced was wrongly accepted. I am not saying where this is.

Capitalism beyond the crisis

An elegant and incisive attempt to put the current financial crisis in perspective is provided by Amartya Sen.  How should 'capitalism' evolve and what are the implications for economics? A related piece by Sen concentrating on the misinterpretation of Adam Smith's views is here.  No-one who has read Theory of Moral Sentiments by Smith could ever believe was a simple-minded supporter of laissez-faire.  Human beings are too complicated for that.

Asymmetric libidos & the right to say no

I am interested in - though rather late in responding to - Bettina Arndt's view that a few year's after having children 'most' women don't particularly enjoy sex but that most men do.  Indeed the claim is that once a woman has a secure relationship her sex drive ebbs quickly. It is one of these 'most' statements that you would want to be careful with - Arndt cites some evidence. If Arndt's analysis is correct it has strong implications not only for marital life - I'll also begin to laugh less frequently at the jokes men tell - after they have had a few beers - about 'not getting enough'. It clearly isn't a joking matter!

Arndt's prescription for what she sees as an epidemic of mismatched libidos on gender lines? Well, ladies, although she sees the right to say 'no' as an important advance in the 'rights of women', Arndt believes that women should be more careful about exercising that right because of the destructive impacts on men.  Indeed, The Age makes the astoundingly perceptive observation on the basis of the Arndt analysis that a happy marriage requires sex! Who could ever of thought such a thing!

Some ugly feminist responses to the Arndt argument are presented here along with a selection of blog links that I didn't care for.  The gist seems to be that Bettina is advocating 'rape in marriage' and that men faced with a reluctant spouse should accept a monastic lifestyle or find other means of 'relief'. I guess they weren't thinking at all about alternative 'trade in' or 'update' options but I assume that more than a few men would. This would often turn out to be a regretted outcome for all involved.

Rudd Government - a bad joke

The Rudd Government was elected in November 2007 with a me-tooist approach to policy. Policies were replications of those of John Howard. There were two exceptions - climate change policy and industrial relations.

• By 2007 John Howard had designed an ETS but Rudd promised to get 'really' serious on climate change. After 15 months we have signed the irrelevant Kyoto Protocol and committed to a policy which seeks a maximum GGE emission cutback of a miserably low 15% to 2020. Would John Howard have done less than this?
• On industrial relations Rudd promised to end the tyranny of the Coalition's WorkChoices Policy which delivered some flexibility in the workplace by allowing individual contracts between worker and employer. The policy helped deliver high wage growth and the lowest unemployment in 34 years. Moreover, this is one policy Rudd will deliver on. In the worst recession the world has faced in 80 years Rudd/Gillard will reregulate labor markets and reintroduce the executive authority of trade unions.

History may come to judge this government as one of Australia's worst. Sad for us all.

Labor's job destruction package

Julia Gillard's moves to reregulate Australian labour markets should be rejected by the Senate. The proposed moves helps trade unions but will destroy jobs in vulnerable industries such as hospitality where huge wage increases are about to occur. Regulating huge increases in holiday rates for restaurant staff has a simple and immediate effect as a restaurant-owner told me recently - we will shut the restaurant on holidays.

In the current economic situation Australia urgently needs the upmost wage restraint and the maximum labour market flexibility. Fiscal expansions will not cut labour costs and yet that is what is urgently needed if labour demands are to be sustained in industries facing reduced demand for outputs.

Think payroll tax cuts, superannuation levy subsidies - anything to keep the pressure off labour costs. But reregulating the labour market to enforce a union-driven demand for an enhanced role is utterly daft policy.

The Liberal Party should not duck the heat on labour market reform. The Howard Government generated strong wage growth and the lowest unemployment rates in Australia in 34 years. This is something to trumpet not deny.

Climate change policy pessimism & policy

Its only a small sample but 78% of Australians still have climate change concerns despite the economic crisis - only 35% want action deferred because of the crisis.  However at the current conference in Copenhagen prominent scientists from the Tyndall Centre for Change Research believe that an effective cooperative global agreement to restrict emissions at the UN meetings in Copenhagen in November is unlikely - they believe geoengineering solutions (mirrors in space, encouraging growth of plankton in the oceans) have more potential that what looks like becoming the 'weak daughter of Kyoto'.  These types of backstop policies should be taken seriously if agreement cannot be reached though the safest course is to seek agreement.

Moreover although President Obama clearly wants mild GGE controls - at 14% reductions by 2020 his stance parallels weak Rudd-driven Australian targets - but the financial crisis suggests Congress might not go along with even this restricted target.

The Four Corners show on the ABC tonight (Heat on the Hill) provided an excellent guide to the current staste of play with respect to climate policy in Australia. Rudd has set a maximum cutback by 2020 of 15% which is pathetic and cannot help the November UN negotiations.  Very impressed with Ross Garnaut's remarks - one senses the deep disappoint he feels at Labor Party political cowardice in the face of interest group pressures. 

A central issue in the show was the distribution of free permits.  The principle is simple in my view. Provide exemptions from quotas for all exports of carbon-based goods at some base level and subject to the need to purchase a quota all imports of goods from countries which do not impose adequate controls on carbon emissions*.   The idea - effectively tax all local carbon consumption in accord with the principles of destination accounting. Thereafter provide no exemptions at all to the local consumers of carbon fuels - subject them all from 2010 to a $20 per tonne CO2E tax in a two-year transition to a full-fledged carbon trading scheme.

Of course doing this provides heightened reasons for other countries to switch to some form of carbon charging. They then collect the duties not the countries they seek to export to.

The ANU's Frank Jotzo made the claim during the show that it was fine to wipe out the Australian alumina industry because it was coal-based while alumina industries overseas relied on hydropower.  That seems unreasonable to me since the CO2 is consumed elsewhere. Moreover, in other industries where coal is the basic energy input in Australia and in a competitor country such as China - the result would be a carbon leakage that would shift activity to China but do nothing to limit global emissions.

A second central issue was that of long-term carbon control objectives.  The issues are serious enough to put a 350 ppm target for 2050 on the table and to seriously negotiate around that.  Harvard's Daniel Gilbert gets it right - the difficulty with climate change is that it is proceeding too slowly.  Dramatic shifts might invoke specific action but a gradual drift upwards in temperature over decades gives politicians like Kevin Rudd the chance to endlessly procrastinate.  The difficulty is that once dramatic shifts have occurred it may be too late.  The image of the frog gradually being boiled is the ultimate source of the Garnaut view that thiws is indeed a 'diabolical problem'.

The 100% exemption policy is consistent with the views of the Liberal Party which I support. I definitely do not support the Liberal Party's move to delay introduction of the scheme. It is now way past the time for action.

* If there were WTO objections to this under Article 1 of the GATT then appeal the decision and fight it.  The WTO does not have the right to imperil the world's economic future.

Earthquake in Melbourne

I'd got back from Canberra last night about 8-30pm.  It had been a long day and I was wearily sitting in my office at home in the north of Melbourne when, at around 9-00pm, I heard what sounded like a motor outside the window - weird enough for me to stop and think 'What is that?'. Then the window frame itself started shuddering for 10 seconds or so.  It was an earthquake of magnitude 4.6 - the second I can recall experiencing in Melbourne.

Gloom in the markets

The extraordinary massacre on US equity markets continued Thursday with a 4% decline to levels not seen for 11 years. The Aussi market (above) declined 1.4% today. It is still inaccurate to call the current dip in the US the worst recession since the Great Depression - 1982 was worse - but the adjusted unemployment rate suggests things are getting close to that.  The actual unemploment rate in the US is 8.1% with 651,000 Americans loosing their jobs in February.

Your faithful scribe got hammered (ignoring his own advice to others) over the last week or so with some premature stock market punts - his foolish bet that things could not get worse has gone south. The market is close to the levels of a decade ago and has halved since its peak in late 2007. There is no question it can go lower. Note the relatively gradual rise and the subsequent - near vertical-fall.

I must - cut back on the Bollinger. Bin 65 Chardonnay is underrated!

Cricket & terrorism

The attacks on the Sri Lankan cricket team in Lahore cannot be condemned too forcefully.  Very plausibly it is Islamic terrorists who have killed 8 innocents (civilians and police officers) whose committed no crime at all.  A number of prominent cricketers were injured.  What a tragedy - cricket is much more than a game - it is a way to promote international understanding.

I am trying to figure out the motive for this terrible attack. Imran Khan last year criticised Australian cricketers for not playing in Pakistan since 1998. He argued that cricketers would never be attacked because cricketers were so uniformly popular throughout Pakistan.  A reasonable sounding hypothesis that turns out to be tragically wrong.

Speaking to Pakistani students this morning I was reminded of the fact that there is a war being waged inside Pakistan by terrorists and that thousands of innocents are being killed each year.  Many of these killings are carried out to instill terror among civilian populations but they do not get much publicity. It might be that the present attack is an attempt to instill widespread terror through an attack the terrorists know will be widely publicised.  In short, an attempt to effectively terrify local Pakistanis by attempting to kill foreign cricketers.

It is the only rationale I can come up with for this senseless attack which otherwise seems not only to be an utterly immoral action but something that will harm the objectives of the terrorists themselves.

Update: Pakistan's Daily Times assumes that Al Qaeda was the aggressor and makes sensible points:

International cricket is no longer possible in Pakistan; therefore we should stop accusing foreign teams of discriminating against Pakistan vis-à-vis India. The question here is of the survival of Pakistan, not of cricket. The country is split down the middle, its two mainstream parties getting ready to face each other in the streets amid rising violence. The politicians and other civil society organisations protesting against the government have so far enjoyed the “exemption” from terrorism allowed by Al Qaeda. Unfortunately, it seems they are not going to give up confrontation to unite against Al Qaeda.


Al Qaeda is hardly interested in the restoration of the deposed judges or the correct observance of democratic rules in Pakistan. It wants Pakistan as its own state, armed with nuclear weapons and an economy that can sustain global terrorism. It would be a pity if Pakistan responds, like an ex-ISI boss who has already done so, by accusing India’s RAW or Israel’s Mossad for this attack, as some commentators did in reference to the Marriott blast when an Indo-Pak media war was sparked by the Mumbai attacks. (my bold)

Mitigation contagion

An issue I have addressed in some of my recent research is whether having an additional country commit to mitigating their carbon emissions increases the pressure on or improves the net rewards to other countries if they mitigate.  Is the incentive to mitigate contagious? In the game theory models I have been working with there are mixed messages. On the one hand if a large country mitigates the possibility of global carbon leakages* diminishes since footloose carbon intensive industries are unlikely to move to that country but, on the other hand, holding out by not mitigating has appeal - if it holds out and does not mitigate a country gets all the carbon leakage benefits from those who do mitigate. 

From this sort of perspective the only contagion induced by a small country like Australia committing to mitigate is limited to moral effects - countries might not like to be identified with an increasingingly small group of bad guys who do not mitigate.  These moral effects - described in behavioural game theory - might be a non-negligible force - people and nations will often cooperate and behave as good citizens if they see others doing so and wish to share in a sense of doing the right thing.

A decisive event that many of us have long looked for is a specific decision to move to a low carbon economy in the US.  Most researchers see the decision of the US to mitigate as a necessary though not sufficient condition for other countries to enter into a comprehensive global carbon agreement. That seems to be happening thanks to the role of President Barack Obama.  This, according to the NYT, has created a wave of interest globally in pursuing mitigation.

The current economic difficulties provide a stress but overall the prospects for reaching a global agreement in Copehagen this year seem to have improved a smidgeon. Good.

* Loosely these refer to costs to a mitigating country and gains to a non-mitigating country that arise from the costs of GGE control. These might make vthe exports of the non-mitigating country more competitive and create a case for industry location shifts toward the non-mitigating country.

Gillard's use of our tax dollars to promote the ALP

I've praised Julia Gillard's abilities in the past but, at core, she is just a politician. In fact a politician who seeks to use our taxpaper dollars ($14.7 billion!) to promote her own political party. This is what recipients of Education Revolution packages must do for Ms. Napoleon in order to get their tax-payer funded dough:

"To receive funding under BER, there is a requirement to recognise and acknowledge the Commonwealth’s contribution. As a minimum, schools must adhere to the procedures and requirements set out in these Guidelines.

Recognition ceremonies: Schools receiving funding under the Primary Schools for the 21st Century and the Science and Language Centres for 21st Century Secondary Schools elements of BER must hold recognition ceremonies as part of their conditions of funding:

The Deputy Prime Minister (Ms. Napoleon) must be invited to

1. All opening ceremonies;

2. A convenient date for the ceremony for all parties should be chosen. Schools are required to choose three dates to allow greater flexibility for the Deputy Prime Minister (Ms. Naploeon) or representative to attend;

3. Ceremonies should not be scheduled on Parliamentary sitting days;

4. For assistance with organising an official opening, schools must contact DEEWR to arrange an Official Recognition ceremony through the BER website.

5. Provide the Deputy Prime Minister (Ms. Napoleon) with at least two months notice of any openings and public events relating to the projects;

6. Hold an official opening or ceremony within three months of the completion of the project, unless otherwise agreed by the Deputy Prime Minister (Ms. Napoleon); and

7. Make provision in the official proceedings for the Deputy Prime Minister (Ms. Napoleon) or representative to speak.

Once it is established that the Deputy Prime Minister (Ms. Napoleon) or representative is to open a facility, this arrangement cannot be changed without the Commonwealth’s agreement.

Publicity: Schools should acknowledge the Commonwealth’s assistance in publicity issued by the school regarding its BER funded project such as newsletters, web sites, articles in the local media, school outdoor signs and any other form of advertising available to the school.

Plaques: Schools will be required to affix a plaque, to be supplied by the Commonwealth, to all completed projects. This includes, but is not limited to, new buildings and substantially refurbished buildings. Where a plaque cannot be attached to a project because of the nature of the project, then a plaque must be placed in an appropriate location in the school, such as the front foyer or administration area.

Roadside signs: Schools will be required to affix a roadside sign, to be supplied by the Commonwealth, in front of the school for projects being funded under the Primary Schools for the 21st Century..."

Publicly bow and scrape scumbags! Honour the great Ms. Napoleon!

HT Andrew Bolt who questions the cost of these implementing these porcine transfers.

Creeping socialism in America?

I don't agree with the gist of the message here - the US need a more inclusive healthcare system, probably need more public spending on education and the globe certainly needs US GGE controls to bring about an effective international agreement. But I enjoyed this cartoon that sums up the conservative view of Obamaism.  The right's paranoia is aired more explicitly here. again I disagree with the central message - it seems to me if you do wish to stimulate the economy do so in ways that provide a broad range of much needed social payoffs. You get a potential stimulus benefit plus a potential social payoff bonus.

Thanks JS for the story & Slate for the cartoon.

World economic growth

(Correctly measured, quarter-to-quarter) Chinese economic growth in final quarter 2008 was zero or negative.  The US economy shrunk at an annual rate of 6.2%. The Japanese economy is shrinking at 12.7% annually with exports falling 45% on a year ago.   European data suggests a more severe contraction there than in the US - although that claim was made before recent downward revisions in final quarter US growth.  Italy and Britain are two of the worst performing countries though Germany - the world's biggest exporter - is taking a hammering though the contraction in world trade.

The Australian quarterly figures will be released March 4 - there is some optimism that positive growth will be sustained.  Difficult to believe but good news if it proves so.

The 'wobbliest' emerging economies in terms of their potential exposure to financial contagion are claimed by The Economist to be South Africa, Pakistan and Poland. The Asian countries - apart from South Korea - look reasonably safe as does China but the smaller European countries are exposed.

Carcinogen sales remain strong

Despite the global financial crisis sales of carcinogens remain strong with BAT profits growing 20% in  the year to December 31.  BAT is the world's second largest producer of carcininogens. Quote, The Financial Times:

"Although tobacco consumption is declining worldwide, tobacco companies have continued to grow profits during the past decade.

In the US and Europe, where public health programmes have reduced smoking rates, the fall in volume has been offset by price increases. Emerging markets, where tobacco use is still growing also countered the decline in developed countries.

The World Health Organisation estimates that the number of smokers will grow from 1.3bn in 2006 to 1.7bn by 2025, with the bulk of new smokers coming from Asia and eastern Europe".

The world's largest carginogen producer, Altria, is ranked as a strong buy its share price falling from a peak of $75 to its current $15 over the past year.  US cigarette taxes are due to increase from 39 cents per pack to $1 but Altria is well placed to shrug this off.  Its earnings per share grew at 10% in 2008 as it initiates a move into ethyl alcohol sales.

I'll keep a watch on both BAT and Altria.  BAT is making a huge effort to increase sales of smokeless tobaccos and to improve the public image of this less carcinogenic product.  Altria bought the smokeless tobacco company UST (formerly the US Tobacco Company) for $10 billion last year.  Smokeless tobacco sales have been growing at 7% in the US as cigarette sales fall.

Limits of redistribution

Barack Obama has an enormously expansionary fiscal program to get demand moving but promises to halve the budget deficit by the end of his (first) term.  This is a tricky promise to deliver on since he has also guaranteed not to tax US households earning less than $250,000US an extra cent.  3.8 million Americans earn more than $200,000 (the $250,000 point is not configured) and paid $522 billion in tax in 2006.  The top marginal rate is 35% and Obama is proposing to raise it only a little to $39.6%. One can see that this would yield something less than about another $68 billion* which is more than a fair bit short of the $1.5 trillion deficit that many expect will prevail over the coming year.

To pull off the halving of the deficit the tax hikes would either need to be draconian (the WSJ argues that even 100% taxes on the top 2% of income earners would not do the trick)  or otherwise taxes will have to be increased on people earning much lower incomes as well.  Nor will unwinding the war in Iraq do the trick though it will help.

Don't forget either that Obama has some fairly large spending plans in health, alternative energy and infrastructure.

I don't think that the good President Obama's economic policies are internally consistent.  I think this guy has the potential to be a great President but he should level with the American people.  They will need to pay much higher taxes to fund the current expansionary moves.

* This is optimistic since many will experience income losses as a consequence of the recession.

Update: Paul Krugman takes a slightly more optimistic view. He notes that the budget will benefit from $645 billion (over the next decade?) and from the sale of emission quotas - a very promising sign. He also notes with approval $634 billion devoted to health reform.But Krugman also notes"And even if fundamental health care reform brings costs under control, I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class. Whatever politicians may say now, there’s probably a value-added tax in our future".

Barack Obama's speech to Congress

I heard the economist Professor Ed Leamer's rapturous appreciation of the Obama speech (& here, here, here, here) (on the 7-30 Report) before I saw the speech myself.  But this is an inspiring speech on a par with anything by J.F. Kennedy.  Obama sees the need for a stimulus and the need for offsetting the debt implications of the stimulus. I don't know if he can do this but the framework is right and the speech is a skilled effort that will help pull America out of a pessimistic hole.  In fact, however, Wall Street headed lower after the speech but this trend was - as in recent days - driven by frustration with the inability of investors to see a way out for the US banks.

BTW, Leamer was the first major forecaster to warn of the US housing bubble.  I couldn't find a transcript of his remarks tonight but he was surprisingly optimistic.  Leamer sees the tough times now as storing up a lot of latent demand for cars and housing.  Indeed he sees the US economy rebounding strongly in a couple of quarters with even the housing sector recovering strongly.  I find this difficult to understand given the pervasive rottenness of US credit markets.  It is not only an issue of a short-term downturn in demand. Ben Bernanke sees the problem - the US can return to growth this year provided that the financial system is put in order.  Its a monumentally big proviso given that the debt binge lasted for more than a decade.

Sri Lanka & the defeat of the LTT?

My colleague Prof Sisira Jayasuriya made some sensible and balanced remarks on the current disasterous situation facing the Tamils in Sri Lanka in this YouTube. The LTT currently face a significant defeat but, according to Sisira, will stage a recovery - the civil war will not end. In the meantime hundreds of civilians have died and hundreds of thousands from both sides are the 'meat in the sandwich' of this ongoing conflict.

Sisira is Sinhalese but recognises systematic discrimination against the Tamils who have responded with random acts of terror.

BTW the response to this YouTube here in Melbourne has been a daily outpouring of hateful, unbalanced emails and mail directed at Sisira and sent to his university colleagues - myself included. It is an extraordinary stream of bile that does not convey much information but which does show the depths of feeling that drive this conflict and hence its intractability.

Scrapping private health insurance rebates a poor proposal

The Age reports this morning that the Government has been urged to scrap the 30% private health insurance rebate and to, instead, spend the money on public hospitals.  One can argue about the scale of this rebate but the subsidy makes sense in terms of standard economic theory.

Health markets in Australia are distorted by the existence of a public health scheme that provides health cover at low cost and without the need for health insurance.  If this public scheme is taken as a given - to be clear I definitely support it - then this will lead to a less than socially optimal level of private health insurance and private medical care. A standard 'second-best' argument is that a subsidy should be provided to encourage private health insurance and use of private health services.

Eliminating this distortion by means of subsidies promotes the social advantage by providing consumers with more health care choices. More importantly than that it takes pressure off the public health care system thereby enabling more resources to be spent per patient in that system.

(This is the same argument as for providing subsidies to private schools given free public education.  We don't want to live in a totalitarian society where the government entirely manages the education of our children. But, more importantly than that, encouraging people to join the private system by subsidies lower than those paid per student to public schools reduces the pressure on public schools).

The contrary argument by opponents of the health insurance subsidy that the money would be better spent on the public system seems wrong.  The increased supply of public hospitals will be swamped by increased numbers of formerly privately insured patients who will ship towards them.

Instrument instability & the global economic crisis

Robert Holbrook in 1972 drew attention to the issue of policy instrument instability.  Essentially an economic policy can become infeasible if policy needs to adjust more intensively to offset past effects of policy - the policy itself becomes an unstable process.  This type of instability is particularly likely if we try to pursue stabilisation of the economy too completely. An example arose when money supplies needed to grow at ever faster rates to try to keep unemployment down. As Jeff Sachs suggests (HT Greg Mankiw) in relation to the current batch of US economic policies:

"Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment. Deficit spending in a recession makes sense, but the deficits should remain limited (less than 5% of GNP) and our interest rates should be kept far enough above zero to avoid wild future swings.


We should also avoid further gutting the government’s revenues with more rounds of tax cuts. Tax revenues are already too low to cover the government’s bills, especially when we take into account the unmet and growing needs for outlays on health, education, state and local government, clean energy and infrastructure. We will in fact need a trajectory of rising tax revenues to balance the budget within a few years".

The source of the current crisis is that US citizens have borrowed too much and saved too little over the past decade partly because interest rates and taxes have been excessively low.  Private citizens have not produced enough goods and services to achieve the lifestyle (and to fund their wars and tax cuts) they wanted, they have not exported enough and instead have financed their consumption binge mainly by borrowing against the value of their real estate whose prices were inflated by a debt-funded real estate bubble.  Equilibrium will be established once debts have been reduced and savings rates increased and once the value of real estate falls back into line with consumer incomes*.  Adding extra government debt (and equivalently, cutting taxes) as well as setting close to zero interest rates might provide a short-term palliative but - whatever else it might do - does not at all resolve the underlying problems.  The danger is apocalyptic - continued borrowing can lead to a US public sector bankruptcy, a consequent (or precedent) collapse of the US dollar that would then destroy large segments of the world economy and a global depression that will make current events look seem like a Sunday school picnic.

A number of policy theorists have described current policy as a 'paradox' - incurring a bit more debt to resolve America's debt-induced problems.  I think it is just dangerous policy and a potential instance of instrument instability. Barack Obama must see something of the same difficulty - he is committed to reducing the US fiscal deficit by half during his first term.  I think he is an able man but this is a very tough objective. 

We are due for a recession and a severe economic downturn. This is inevitable and the attempt to eliominate its consequences too completetely can be futile and induce worse future economic problems.
* The same is true to a less extent for Australia.  Eventually house prices must fall very substantially.  Australian real estate remains some of the most expensive on earth even though we have a small population and abundant land.  That is true even if we live in a 'highly urbanised' country (one of the standard reasons advanced for our high prices). .

Wong not wrong on case for an ETS

Generally I found Penny Wong's support for an Emissions Trading Scheme (ETS) based on 'cap and trade' to achieve a specific level of emissions reduction over an equivalent tax persuasive.  If we knew exactly how the world operated then it wouldn't matter at all.  One could set a quota to hit a certain desired emissions cutback or set the tax on emissions (the tax) to hit exactly this same level of cutback.  But with uncertainty in the world about costs of mitigation in firms and in the damages that emissions cause things are not so neat. Setting a quota will then yield a variable price in the ETS (and hence a variable cost of compliance) whereas setting a fixed tax will mean that the level of emission reductions will be variable. 

As Wong points out the ability to trade emissions quotas internationally is an attractive consequence of an ETS.

Some have ridiculed the European emissions trading market on the grounds that carbon prices have drifted close to low levels recently because of the recession. As John Quiggin points out, if you like taxes that act counter-cyclically to stabilise the economy - so called automatic stabilisers - this is not at all a bad outcome. The economy gets a carbon price reduction when it faces hard times and a boosted price when it can best afford it. 

Other arguments for ETSs include the possible critical sensitivity of the environment to GGE variation and hence to catastrophic threshold effects. Maybe we wish to ensure that certain cuts in emmissions will be made.  Transferable quotas based on an ETS also allow the use of markets to hedge risk. To quote Chichilnisky/Heal:



"Hedging could occur via the trading of derivatives such as futures or options on TEQs (transferable emissions quotas), a possibility mentioned in previous sections. To elaborate, if a utility anticipates a sharp increase in the costs of CO2 emission, it will choose the energy source that is least intensive in CO2 emissions. This exposes it to the risk that scientific research will reveal CO2 accumulation in the atmosphere to be less threatening than previously believed, with a consequent increase in the number of TEQs issued by regulators and a drop in their price. To offset the risk of being "wrong footed" in this way, the utility would either sell TEQs forward, or buy put options on them. In either event it would profit from a drop in quota prices, and this profit would in some degree offset the costs incurred unnecessarily by the selection of the least CO2—intensive technology".

My non-economic preference for supporting an ETS scheme over a carbon tax is that it has been agreed on by various enquiries under both the Howard government and the Rudd government's Garnaut review. Time to get on with it.

Update: There is literature supporting a tax rather than 'cap-and-trade'.  This paper emphasises the revenue yielded by a tax and the ease (in the US) of introducing such a policy.  I'll collect some material and post a response when I get time.

Auckland & its traffic

I am visiting Auckland New Zealand for the 27th Economic Theory Workshop at Massey University. The weather is humid and warm and the coastal scenery is attractive - after the dry year in Melbourne I even enjoyed walking around in light rain. I am surprised to find that Auckland has almost the same latitude as Sydney - only slightly further south.  The motel I am staying at grows tropical rhododendrons - vireya - that have problems surviving in Melbourne although they grow much more easily north of Sydney on the coast.

The traffic congestion in Auckland is appalling - the locals estimate it costs the city about $1 billion per year although they probably are not measuring these correctly as deadweight losses. The taxi service here is deregulated (drivers generally own their own cabs and entry to the industry is relatively easy) but different mixes of flag fall and variable rate fares make summary calculations of fares and comparison shopping difficult. In conjunction with the severe congestion issues - the fares still turn out to be very expensive - a trip from the airport to Takapuna on the north shore was over $100NZ*.

The Conference surprised me. The quality of the presentations was high and a lot of the theorists were applying abstract theory to very specific practical medical and other problems. These theorists are clever, no doubt and their work has value. But it is really not my scene - my interests are even more applied - I like theory but also want a bit of policy applicability or, as one of my colleagues puts it, a bit of 'meat'. Back in Melbourne tomorrow.

* Interesting outcome given the widespread claims that deregulation will lead to lower fares.

Costello is right on Rio

Despite some silly protestations over at Catallaxy I think Peter Costello is quite right to oppose the deal by Chinalco to purchase key Rio Tinto assets.  BHP-Billiton, for a time, valued Rio Tinto shares at somewhere north of 3.4 times the value of BHP-Billiton script.  They are now trading at about 1.6 times a BHP-Billiton share.  There are two observations consistent with these findings. First, that BHP-Billiton vastly overvalued RioTinto stock because it ignored the boom-inflated valuation placed on Rio's disasterous move into Alcan - so much so that, on this basis at least, the whole BHP-Billiton board should be sacked.  (The Rio board should unequivocally be sacked for rejecting the BHP-Billiton offer!). If Rio had accepted the BHP-Billiton offer the latter would have lost about $100 billion in market value by now.  Second - and this is only a partially contrary view - is that, while things were good, BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consummate a marriage with Rio and that this alone was worth a vast premium.  Both views have an element of sense.

Australia will be a major resource supplier to China for the indefinite future. The assets Rio is seeking to flog to the Chinese provide a sale in Rio's interest but not in the interests of Australians since this sale will reduce Australian price-setting power in these markets.  The counterargument that Australian interests have incentives to bid a premium for Rio is logically correct (the existence of a global deadweight loss means the Chinese consumers lose more than Australians gain) but is misleading given the liquidity-constrained Australian capital market environment and the existence of bottom feeding Chinese carnivores supported by their state funding.  Furthermore assets are not trading currently at their value.

Look at Futuris which yesterday sold 19.9% of the Australian Agricultural Company for $1-70 a share when the asset backing of AAC is more like $2-74.  Futuris needed the dough presumably to remain solvent.  It is a bottom-feeding bonanza out there.  Sometimes one cannot prevent national interest losses - othertimes one can.

Keep crucial Australian assets that have the potential to yield excess returns for 100 years out of the hands of those who will consume these assets.  This isn't protectionism as some in the blogosphere contend. It arises because a country with monopoly power in trading certain resources does not wish to sell the assets giving rise to these resources for a song at an all time trough in the business cycle to those whose interest it is to destroy Australian price-setting power.  Stop the sale.

Thoughts of depression fade to long white clouds

I haven't been posting as trying to prepare for my teaching year - research and golf had high priorities this summer and the procrastination finally caught up with me. Also I am heading off to New Zealand tomorrow for a few days for the annual Economic Theory Workshop at Massey University in Auckland. 

To two things that stood out economically this week for me were (i) the apparent disasterous decline in the Japanese economy - it is entering a depression* and (ii) the worsening economic/financial situation in the UK with growth likely to fall to its lowest level since 1931.   It is interesting that the worst economic responses are being experienced outside the US. In Europe investors fear a Zimbabwean response to economic problems - inflate them away via comnpetitive devaluations - and are dring gold prices to record highs.  It is  frightening.

I am fearful of Australia's economic future particularly irrespective of who is in power.  Desparate times can lead to panicky, foolish policies that reduce long-term living standards without helping those who will cop it in the neck (in the main those already disadvantaged) short-term.  Eventually the tide will turn,both economically and politically, but my feeling is that this recessed state will take several years at least to correct itself.

* As The Australian points out it is Japan not China which has been the major source of Australian export growth in recent years.

Bushfire insurance

I was intrigued to learn from a current affairs show that those insured in the bush-fire crisis paid about 40% of their property insurance premiums to government to fund the CFA. Those uninsured - there were many - paid nothing to the CFA but, of course, received the assistance of the CFA during the crisis.  Ken Parish at Troppo* points out that so far each of those made homeless has reason to expect $15,000 in community-provided charitable reflief as well as government assistance and insurance payouts.

The moral hazard implication here is to underprovide adequate fire protection and to enjoy the experience of tree-changing without paying the real economic costs of doing so. It is deeply troubling and has disastrous social implications.  Unqualified sympathies go out to those who have died and are injured or have lost property - this is unequivocal.  I am not criticising these people at all. This is a shocking disaster that rightly touches the soul of our nation. But these unfortunate people are suffering - some have died - partly because society is sending out the wrong cost signals for lifestyle decisions.

The sorts of negative externalities that arise here must be internalised. Those living in high fire risk areas must pay for the expected costs of choosing to live there - not for reasons of distributive justice which are irrelevant and trifling here - but in order to induce the appropriate degree of risk aversion.   The monetary subsidies are irrelevant in the scheme of things - nothing compares to loss of life or the hell of loosing your home - but the current policies induce inappropriate risk-taking.

They also induce excessive risk-taking by local government and the green movement and excessive encroachment on green areas by those seeking environments with low population density. I am unsure that local councils should revise rules on tree-clearing. The appropriate resolution may be to deny humans the right to live in these areas entirely - or to charge appropriately large prices - rather than to force human settlements to extensively tree clear in order to protect themselves. An issue remains to protect the environment - it is not only about the rights of people.

It is amazing to me that people in the fire zones plant trees that even touch their homes - they are inviting disaster and I wonder why they do this.  Is it due, again, in part to the wrong signals being sent out on the consequences of catastrophic fire?

Of course insurance premiums can and will rise. They should too.  Forget Rudd's populist attacks on the insurance companies - higher insurance premiums here will send out a valid social message. All residents of such areas should pay insurance costs for CFA protection by (for example) their rates not via an optional payment to property insurance.

A starting point for reform is to fully internalise the costs faced by households in setting up in disaster-prone areas.

* I would have made this comment at Troppo had their inept comments regime functioned. I tire of trying to comment at Troppo.

Suntech's Shi Zhengrong

From being the son of a dirt-poor Chinese peasant, Shi has built one of the world's biggest solar power companies, Suntech. He learnt his stuff at the University of NSW. Suntech is threatened somewhat by the global financial crisis and by entry from competitors but still a great force.  This Fortune article is a fascinating story and a good illustration of how the market can help to tackle climate change issues.

Shi was (and perhaps still is) China's richest man. He holds an Aussi passport but lives in China - its a pity we could not hold him more firml;y here. However he is making financial contributions to Australia's underfunded solar program and initiating developments of solar power in Australia.

5 new bird species for H

In my 5 days in Cairns during the last week I observed 6 bird species that were new to me.

Laughing gull - a resident of north and south America that is a very rare vagrant to Australia.  It may have taken a wrong turn across the Pacific or followed a ship here.  Here is a good YouTube of an adult laughing.   The bird I saw on The Esplanade Cairns was an immature without the black head.   It was a smudged, greyish gull with conspicuous white eyelips. (I would only have seen this because I had prior notification it was there!)

Terek sandpiper - a migrant from Finland and Northern Siberia with a distinctive up-turned bill.  Seen on occasion at various parts of Australian coastline and even inland but one I have always missed.  Fairly scarce worldwide - here is a YouTube from Hungary.  Again spotted on The Esplanade mudflats.

Lesser crested tern - is probably sedentary to Australia though elsewhere is nomadic. Very orange bill. Here is a YouTube of it with other species.   A bit scarce onshore - I saw this on a sandspit near a crocodile-infested estuary near Mossman with Silver gulls, Pied oystercatchers and a few Godwits.

White-throated honeyeater -  I'll bet I've seen this before but confused it with White-naped which has the slightest black chin and, in eastern Australia, a red-eye crescent.  I saw several instances of this in woodlands a bit inland from Mount Molloy with at least 5 other species of honeyeater and with both a male and female Cicadabird. I had not seen a female Cicadabird before.

Buff-breasted paradise kingfisher (yes, it is at Jennifer Marohasy's site).  On a dirt road heading south about 5 to 6 klm east of Julaten I saw at least 20 observations of adults and juveniles.  One of Australia's most beautiful birds. Not rare but I have often missed it on previous treks to Cairns because I was there wrong season. Migrates from New Guinea.  Nests in termite mounds - I saw many with one having been subject to goanna attack. This gorgeous YouTube is a good still study.  You are not a fully-fledged Aussie until you have seen this beautiful bird! Orgasmic.

Lesser (Mongolian) sandplover - a migrant from Asia/Mongolia/Siberia.  Not rare in Australia - regularly in the low thousands at certain locations - but often just a few birds and small/difficult to distinguish from Greater sandplover unless alongside them.  Here is a YouTube. Again I spotted several examples of this bird on The Esplanade.

These all get added to my lifelist.

Pointless fiscal expansions that swamp us with debt but don't reduce unemployment

I liked this article by Henry Ergas on the likely ineffectiveness of the $42 billion fiscal package introduced by the Rudd Government as it accords with my own macroeconomic priors. For a small open economy like Australia fiscal actions make sense in a standard Mundell-Fleming macroeconomic context if the exchange rate is fixed.  Monetary policy then does not work in this setting since, with international capital mobility, a monetary expansion to drive down interest rates is simply offset by an outflow of capital seeking higher international interest rates abroad.  This was one reason for seeking exchange rate flexibility - to give local monetary policy more bite. Monetary policy effects were then 'bottled up' in an economy and had a real impact.

With flexible exchange rates however, while monetary policy has bite, fiscal actions do not. The only effect of fiscal expansion is to drive up local interest rates attracting capital from abroad and hence appreciating the exchange rate.  This reduces our exports and nullifies the effects of the fiscal expansion.  The standard theory result is that fiscal actions have zero effect if exchange rates care flexible.  Monetary policy is a preferred means of expanding an economy.

As Ergas states:

"Australia is a small, open economy with a flexible exchange rate. There is consequently a real possibility that any increase in demand caused by fiscal easing will merely raise interest rates, induce capital inflow from abroad, appreciate the currency and reduce net exports.

With growth in China and Japan slowing significantly, why implement measures that could exacerbate Australia's expected export downturn?

 In the Keynesian framework, monetary policy, on the other hand, is actually more effective in an open economy. A monetary policy-induced reduction in interest rates boosts aggregate demand and induces capital outflow, leading to a depreciation of the exchange rate and a reduction imports.

As a result, even if we take the Keynesian approach seriously, fiscal stimulus may not only be ineffective, but by impeding or slowing further reductions in interest rates may stand in the way of a more effective response. As Treasury concluded in 2002, "higher budget deficits (or lower surpluses) can have a significant effect on interest rates in Australia", with the result that the "automatic stabilisers are likely to be relatively more effective than discretionary changes in policy". The federal Government must explain why those findings no longer apply".

Of course the Mundell-Fleming approach is only a simplified model - macroeconomists have a range of Ripley-Believe-It-or-Not macroeconomic models that justify any sort of policy action - but I would like to know why the effects the MF model stresses are not appropriate here. The argument that we might be in a liquidity trap where monetary policy is ineffective does not improve the case for expansionary fiscal actions. IMoreover if monetary expansions are taken to keep the exchange rate low then it is these expansions not the debt-incurring fiscal actions that are providing the stimulus. If the fiscal actions are funded using debt as they will be then although huge debts will be imposed on future generations there will be no immediate stimulus now as would be the case were they money-financed.

The standard objection to the Mundell-Fleming model that it is designed for settings where inflation and inflationary expectations don't have a role is not relevant. We have close to zero inflation.  Another objection might be that capital mobility is low because of the financial crisis itself.  That might be true right now but not so if and when the international economy recovers - and the effects of these fiscal measures will operate with long lags.

Those on the left seem to me to support the Rudd fiscal expansion because they support Rudd not because they understanding Keynesian macroeconomics in an open economy. I wish to know why expenditures of $42 billion by Rudd and his mates - which look likely to leave Australia with a huge eventual debt - were so self-evidently correct. Debate itself - and even quibbling about the size of the package - was portrayed by Rudd as something unpatriotic and unreasonable.  Was it that the $42 billion package was primarily designed to threatrically demonstrate that the government was 'doing something'? Indeed to save one job - Kevin Rudd's? The handouts of course appealed to those who simply like handouts.

We will live with the consequences of ineffective fiscal actions which raise debt, but which do not stimulate economic activity, for decades. If the current measures fail there will be inevitable calls by the Keynesian slobs for more and more and our debts will mount.  I am pessimistic.

Cost efficient terrorism control

The Chinese show how to deal with a terrorist blackmail threat.

Thanks Sir Henry

Baggage handlers strike

45 baggage handlers struck at Melbourne airport today. Thousands of commuters who pay the salaries of these irresponsible shirkers were maximally inconvenienced by this immoral wildcat strike. Passengers were told that:

Passengers were told the bag handlers stopped work because they wanted more money for breathing in smoke from the state's bushfires that blanketed Melbourne this morning. 

Qantas denied this saying that the strikers just wanted more money.  I don't know the exact reason for the strike but these terrorists should be made to pay the fiinancial and inconvenience costs they inflict on the community for their illegal, unprincipled strike - they should be heavily fined.  Then implement the Ronald Reagan solution - sack them and deny them unemployment benefits. 

But this is dreaming. The Labor Party will doubtless see them as struggling 'working families', turn a blind eye and, indeed,  give them a handout.

I am fed up with the terrible air services operating in eastern Australia. My flight back from Cairns encountered the strike - it took me 3.5 hours to fly from Cairns to Melbourne and 2 hours to get out of Melbourne airport with one item of luggage still missing.  Flights to Sydney are invariably delayed, onflight service border on all the routes is non-existent and the whole ordeal costs a packet.

Not happy Qantas and, really, striking baggage handlers, burn in hell where you will really get to inhale a bit of smoke.

Bushfire tragedy hits home

La Trobe University academic Dr Richard Zann - an internationally reknown ornithologist - his wife Eileen and their daughter Eva all perished in the bushfires in their Kinglake home. RIP.

Five La Trobe staff have seen their homes destroyed and nine students have been left with no housing.

Meanwhile police believe arson was responsible for the death of 100 people at Marysville.  A fire was deliberately lit this afternoon in my home suburb of Ivanhoe.

This nightmare will stick around for quite a while.

Satellite images of the Victorian bushfies

Here. An update on the continuing, raging fires is here - the confirmed death toll is 181 but this is expected to increase.

Cairns in the wet & birding

I flew to Cairns this morning - I love this place but its the first time I have visited it in the 'big wet'.

Without ado I headed that afternoon down to the Esplanade mudflats which were 0.5 km from my hotel. Met a Swedish birder there and then the legendary John Crowhurst as well as super experienced John Searle - these guys know the birds of Cairns as well as anyone. As I learned the time to go to the Esplanade is high not low tide - the migratory waders then feed closer to the shore.

I knew that a Laughing gull had been spotted in north Queensland the previous few weeks (from birding websites I follow) and that it had been spotted on the Esplanade mud flats. Within a few hours I had seen it myself - certainly the biggest addition to my Australian list for several years. The bird has been recorded in Australia about 4 times. It is a vagrant from North America that seldom reaches our shores. It was this young bird between one and two years old that was changing into winter plumage. I was thrilled to see it.

Further down the Esplanade I saw Terek sandpipers and Lesser sandplovers both of which were new to me. During the afternoon I also saw Osprey, Peregrine falcon, Braminy kite, White-bellied seaeagle, Sharp tailed sandpiper, Curlew sandpiper, Common greenshank, Red necked stint, Bar-tailed godwit, Eastern curlew, Great knot, Whimbrel, Reef egret, Cattle egret, Great egret, Grey-tailed tattler, Eastern reef heron, Royal spoonbill as well as the more common birds you expect in this location plus assorted terns. The distinctive calls of Varied honeyeater kept us entertained for most of the afternoon and, when I wandered back into town - after a great seafood meal - I went to the Cairns Casino where, as in my recent past, I found a Bush stone curlew prancing around the gardens. I did a little jig I was so overjoyed. No foxes in the far north mean that remarkable biodiversity can survive.

It was a wonderful afternoon. If you have an interest in nature Cairns is a paradise.

Update: Tuesday morning I went birding between Port Douglas - Mossman - Julatten - Mount Malloy. I have been here many times but never in the wet season so there were some seasonal opportunities. Most importantly I wanted the Buff-breasted paradise kingfisher which indeed we discovered in comparative abundance. This is it.

Apart from that 80 species seen including Osprey, Black kite, Jacana, Lesser crested tern, Black bittern, Cicada bird, Brown cuckoo dove, Emerald dove, Imperial pigeon, Blue-winged kookaburra, Forest kingfisher, Sacred kingfisher, White-bellied cuckoo shrike, Lemon-bellied flycatcher, Little shrike thrush, Black-faced monarch, Spectaculed monarch, Red-backed fairy wren, Little friarbird, Brown-backed honeyeater (new for me), Yellow honeyeater, Yellow-faced honeyeater, Yellow spotted honeyeater, Macleay's honeyeater, Graceful honeyeater, White-throated honeyeater, Brown honeyeater, Dusky honeyeater, Yellow-bellied sunbird, Double-barred finch, Chestnut-breasted mannikin, Nutmeg mannikan, Metallic starling, Victoria's riflebird, Yellow oriole, Figbird, Spangled drongo, Great bowerbird, White breasted woodswallow, Black butcherbird and absolutely stunning views of male Red-winged parrots.

We dipped on Red-rumped swallows and Barn swallows which have been seen over the past fortnight but excellent views of Fork-tailed swifts and White-throated needletails.

After going to the Australian Agricultural and Resource Economics opening sessions I decided to reward myself for a good day's work with a 1.2 kgm mud crab which I devoured with a reasonable chardonnay.

Fires in Victoria & floods in Queensland

The fire scene in Victoria has become both tragic and dramatic over the past day. These are the worst fires in Australian history. As it stands at least 66 people have died and 700 families have lost their home. It is a tragedy beyond belief for those concerned - many people are under extreme stress because those close to them are still missing.  Many have lost everything in terms of homes and property.

Most - not all - of the fires are close to Melbourne.  Some are focused around my favoured nature reserves around Melbourne (Kinglake, Bunyip Forest) have suffered huge damages.  Some of the small townships in these areas now no longer exist.  Kinglake looks as if it has been bombed. Communities have been devastated - in every sense it is a disaster. 

The fires follow a dry 12 months, an extremely dry January which ended in a 4 day heatwave and temperatures on Saturday which were the highest in 155 years.  It was a scorcher but it was associated too with high winds which regrettably changed direction.  It was a terrible coincidence of circumstances. Things were not helped by arsonists who are thought to have started several blazes.

My heartfelt sympathies to those families who are affected and my praise to the outstanding efforts of the CFA many of whom have been fighting fires for a week or more.  An amazing and praiseworthy effort.

As chance would have it I am flying to North Queensland tomorrow where there have been severe floods.  I am going to Cairns where there has been flash flooding over recent hours.

What a bizarre and tragic meteorological equilibrium!

Climate change - who caused the damage?

This paper by David Weisbach provides a provisional answer. It depends both on how you measure emissions and how you allocate responsibility. The presumption that rich countries caused most damage is generally unsupportable.

Abstract:  This paper examines the data on responsibility for climate change due to past emissions. It addresses two aspects of responsibility. First it shows that the data present a mixed picture. By some measures, developed or wealthy countries are responsible for most past emissions while on other means, responsibility is spread widely with poor countries responsible for a majority of emissions. The differences in the measurements are due two factors: whether the data uses a comprehensive measure of emissions and the extent to which the data is aggregated into regions. The more comprehensive the measure and the less aggregation, the more that poor countries are responsible for past emissions. Second, it examines how theories of responsibility apply to the data. The most well developed theories of responsibility that impose an obligation on injurer to make a payment to victims are the theories underlying tort law. The paper shows that standard fault-based tort theories cannot be used to support climate change obligations. Instead, the theory would have to rely on strict liability, give up on the normally required connection between injurer and victim, and accept undesirable distributive consequences. Moreover, it would not be a basis for ongoing obligations to reduce emissions because relative emissions of nations will change over time. Instead, were such a theory of obligation to be sustainable, it could only be used to support a one-time payment for harm.

David Cross cracks me up every time

Ronnie and Kayla's date song - a daggy, vulgar piece that entertains. David Cross is a funny man. Here he is on religion.

HT to Coreopsis.

High temperature

Melbourne is overcast and windy today with an amazing record-breaking* temperature now of 45.7 46.4oC or 114.26115.52oF for those of us still used to gauging temperatures in the old F scale where 'bloody hot' described temperatures above 100. The wind is coming from the west at 18 kph with gusts up to 45 kph. My backyard is a wind-driven oven. Plants are dead or dying everywhere. A cool change is forecast for tonight with some light rain tomorrow.

It is the hottest temperature I have ever experienced beating the 45.1oC temperature achieved at the end of January just a bit more than a week ago.

* As far As I can see it is the highest temperature (by 0.10.8oC) recorded in Melbourne since records began being kept in 1855. The highest temperature was on Black Friday 1939.

Update: It would be remiss of mine not to mention that many have experienced much more than discomfit from this heat. The high winds and ultra hot temperatures have destroyed homes and property in a number of areas around Victoria - there are six major fires. There has been a major fire in Gembrook forest too - one of my favouite nature reserves in Melbourne. In good news a volunteer firefighter has been charged with deliberately lighting fires over the past 8 months. He is entitled to the presumption of innocence but if he is found guilty should face a very lengthy jail sentence.

Update: The press on Sunday morning showed that my earlier Update did not capture the depth of the bushfire horror. Police fear 40 dead - 6 from a single family in the Kinglake area and hundreds of homes destroyed. the worst bushfire crisis in Victoria for 25 years. The picture:

Taxes vs. expenditure stimuli - on the one hand & on the other...

Paul Krugman slams the moves for tax cuts arguing that the US economy is about to fall into an abyss*.  The question really is the size of the cuts - if big enough they can provide as much stimulation as a fiscal expansion.  At times Krugman allows his Republican hatreds to override his reason.

Greg Mankiw on the other hand argues that the US should utilise a revenue neutral payroll tax cut coupled with a gradually increasing tax on gasoline.  One conspicuous advantage is that tax cuts have an immediate impact whereas well-planned fiscal investments have significant implementation lags.

The Mankiw move has its attractions.  It replaces a stupid tax on jobs which damages employment with an environmentally sensitive tax that (however imperfectly) helps reduce congestion, pollution and of course greenhouse gas emissions.  We could think about similar sorts of moves in Australia where rates of payroll tax are comparable to those paid in the US.

* That is not an exaggerated claim. 598,000 jobs were lost in the US in January 2009 with unemployment up to 7.6% of the workforce compared to 4.9% in January 2008.

The Treasury critique of Turnbull

The Treasury isn't adding much by saying that it supports Kevin Rudd's package and rejects that of Malcolm Turnbull. It would have designed the Rudd package and so, in essence, is saying that it stands by its design. In essence this means supporting a large package rather than a smaller one. The claim by Ken Henry that a dollar spent directly by government has bigger stimulatory power than a dollar in tax cuts given to households is correct - it reflects the balanced budget multiplier idea - because households will save some of the dollar. But this only again relates to a defence of a larger package - tax cuts will just have a smaller expansionary effect.

Ken Henry's claim that the smaller package runs the risk that the economy might fall into recession is also correct. But it is also the case that, since the Australian economy is operating in unchartered waters with an especially uncertain international economic environment, that the larger stimulus will have its own risks. It will certainly add more to debt and it will reduce the ability of policy makers to make further expansionary moves in the future if this crisis is prolonged. Fiscal actions are available options now basically because public debt was reduced under the Howard Government. Deficits and debt are difficult to control particularly when a populist social democratic party holds the reins of power and when a gaping public deficit adds to the constraints imposed on an economy by an already weak current account. The AFR this morning has it right:

"Right now the government's financing task looks manageable. But if the worst comes to the worst, it wikll be years before the deficit is brought under control, adding to the burden. If foreign demand for Australian goverrnment debt remains scarce, the government will have to pay higher yields or face a currency depreciation. It - and we - need everything to go right from here".

Moreover, I am completely unclear on how Henry derives the case for his $42 billion package. Econometric modelling will be useless in the current environment because the economy has deviated significantly from its past sample path. That the Labor Party were hedging a month ago on the issue of whether Australia would run a budget deficit and still hedges on the issue of whether a recession is imminent - views that would be motivated by background briefings from Treasury - suggests policy-maker uncertainty is huge.

Under these circumstances the case for moderation and for avoiding a strident policy defense is clear. Certainly the Turnbull proposals should be put on the table and debated intelligently. The hysterics of Kevin Rudd and his inept Treasurer Swan over the past couple of days have been a disgrace. Rudd's earlier talk about the case for greater civility in public life is revealled to be hypocrisy given his insistence on uncritical support for this massive package and for the unreasonable dishonest abuse about ripping up school programs and denying handouts to millions with which he has effectively threatened the Coalition without meeting its points.

Shutting down Detroit

John Rich on Shutting Down Detroit. Its a great YouTube - the music is at about 2'50".  The Anthem of the US Recession is discussed and the lyrics to the song provided..

Bird photography - Black Grouse

The winning images of the International Wildbird Photographer 2008 Award were announced this week. They include gentoo penguins, a graceful whooper swan in midflight, and the inside of the huge bill of a dalmatian pelican. The above is a Black Grouse - it won the bird behaviour section. The photo was taken by a Norwegian, Tom Schandy. This is a male doing a gig!

The collection of all past winning photos 2003-2008 is here.

Turnbull opposes Labor $42 billion package

I am sympathetic to Malcolm Turnbull's rejection of the Rudd stimulus package and to his proposed more modest alternative of bringing tax cuts forward. I think the recession does have a long way to go and that disposing of all available fiscal ammunition immediately is unwise - a conservative package of something less than half Labor's proposal makes more sense. Indeed Labor's moves show all the signs of panic as well as a simple-minded socialist justification for increasing the role of the state in the economy. Sound extreme? Rudd this afternoon was attacking Turnbull for not rebuilding schools. Rudd is a hypocrite and a liar. This was never the justification for the spending.

I don't want a repeat of the previous Labor Government's record $96 billion public debt that took 10 years to wind down. The Coalition's proposed job subsidies - by subsidising the superannuation costs of small firms for 2 years - makes sense. They are direct policies and directly address the excess supply of Labor.

The employment effects of Labor's package are, on the other hand, derisively small (70,000) and incredibly expensive (nearly $500,000 per saved job). The implied addition to debt is, however, huge. Is it foolish to be risk-averse in relation to this package. The debt will definitely arrive.

Rudd's immediate and insulting rejection of Turnbull's counter-package shows Australia what type of man Rudd is. His populism is obscene. Why no counterarguments Kevin? What not a willingness to discuss the issues? A $42 billion package without intellectual or other justification beyond 'let'd do something and let's make it big' and Rudd demands immediate acceptance without debate of a dubious package.

I am pleased too that Turnbull is displaying political courage despite the short-term flack his move is bound to have. The Coalition should have stuck to its guns in suppporting WorkChoices in the face of the job-destroying policies of Labor. It is inevitable that the Australian economy is in for a difficult few years - hundreds of thousands will have their lives damaged as they lose their jobs. We will all face much higher taxes to repay Labor's debt which, at current rates of growth, will amount to $200 billion or $9,500 per person within a few years.

Even if Turnbull cannot attract the votes of minor parties in the Senate to force a change it makes sense for Turnbull to stick to conservative principles as the ensuing recession and failed policy responses bury the Labor Party. Turnbull is doing his job as an opposition leader and a fiscal expansion of the type proposed by Rudd deserves scrutiny. He can't demand uncritical acceptance on the grounds of 'obviousness' or of 'crisis'.

The moronic left at LP debunk Turnbull not because of any perceived deficiency in his package but because voters will hammer him for not awarding them another handout. I don't think voters are as stupid as this lot - some will realise that they are paying for the handout now and in the future.

Update: Mark Crosby - level-headed macroeconomist newly arrived at CoreEcon - supports my skepticism toward the Rudd package. He also shares the Turnbull concern with the massive emerging debt that we know will stem from the Rudd package.

Iraq elections

Ex-president George Bush's Iraq surge seems to have been a success.  Free elections in Iraq where Sunni arabs participated in force and where there was widespread participation - was one of the positive outcomes that can be attributed to the surge.  Contrary to popular opinion Iran is weakened by a strengthened Iraq and the rational basis for the intervention in Iraq is confirmed.  As John Bolton remarks concerning the Iraqi elections:

"...the elections could make a deep impression on the citizens of Iran and its vassal, Syria. Young, educated, sophisticated Iranians, dissatisfied with their country’s religious orthodoxy and economic failures since the 1979 revolution, will draw their own conclusions from Iraq’s peaceful democratic process."

President Obama argues that the successful, peaceful elections provide support for his policy of US withdrawal. That is probably true but it is evidence too that the surge has been far more successful than its detractors would admit.  Let us hope that Obama takes wise and flexible counsel on the Iraq War.  I believe that history will be kinder to George Bush than to his leftist rabble critics.

Rudd's big package

It is $42,000,000,000 distributed among 21,580, 428 people or around $1,900 per capita.  It will not create but it will 'save' 90,000 jobs which is something short of $500,000 per job. Can we celebrate?

Well the budget will be $22 billion in deficit this year and $35 billion next year.  That's $55 billion of extra debt.  Australia will soon have the debt that Labor left after the Keating years and Labor will have an excuse for having created it.  On the other hand John Howard's Government - which eliminated the previous debt and drove unemployment and inflation to record lows - will be portrayed as neoliberal destroyers who forced Labor to borrow.

Update: George Megalogenis has sensible remarks about the packing. Modest employment outcomes expected - it also assumes that the international economy is on the mend.  Peter Costello describes Kevin Rudd as a closet Whitlamite.

Australian economy & Labor

Australia is a small open economy that takes economically what is dished out by the world economy.  We don't significantly affect world events.  The world has dished us out a really bad serve. The terms of trade we face have moved against us -despite a recent tick upturn - so we will export less and the value of many of our local productive assets have fallen.  The crisis we face is primarily an external economic shock.

We therefore face the prospects of a fairly sustained decline in economic activity. Longer-term we cannot offset this decline through monetary and fiscal actions seeking to expand the local economy since it is externally induced. If we assume the crisis will only last for a year or so the best we can do is to smoothe our consumption standards by borrowing a lot - running huge* public deficits - and by so doing seeking to build an economy that will be ready to take on the world when things recover when we then have to repay the debts we have incurred.  If we are pessimistic and assume that the world decline will last for at least several years - I am in this camp - then the alternative appropriate policy response is to be more moderate and to accept that our living standards will fall and to then get on with our lives by learning to live with the inevitably reduced living standards and lower growth rates. To fritter public resources away in this latter case is just to leave a weakened economy with reduced public resources and lower capacity to adapt as well as a much bigger than necessary long-term public debt.

The banal arguments about the precise way of creating a domestic boom to offset the externally induced recession draw attention away from from this fact.

The obstacles to accepting gracefully a fall in living standards include monopolistic trade unions which enforce downward wage rigidity when things get tougher. The mining sector layoffs are a direct function of the absurdly high wages the unions have 'gained' for the soon to be unemployed in this sector. Other obstacles include the uncritical belief that undirected government spending programs and attempts to underpin inflated asset prices can offset adverse world economic circumstances.

Not all unpleasant economic facts of life can be dissolved by policy.

Kevin Rudd's claim that he will 'do what he can' to reverse the effects of a negative terms of trade shock might do for university campus meetings of enthusiasts but the claims are, for the more balanced, just hopeless words.  The attempt to throw money at anything - e.g. the pre-Xmas handouts or providing insulation for housing - without regard for economics or for considerations of rebuilding the economy in anticipation of better times is a foolish political response - 'we are acting' - to a real crisis.

We will all suffer from waste induced from these attempts but, of course, those who are poor and disadvantaged will suffer most once public resources evaporate.  They might take solace in the fact that they at least had a decisive say in electing the 'leadership' who will now plausibly add to their miseries.

* The deficits will be $15 billion or so over the next few years without accounting for wasteful public expenditure programs.

Sunday night & medical cannibalism

Western civilised countries routinely used human body parts in pharmaceutical preparations up to the end of the 18th century.  The practise was widespread. Blood, meat the lot was tried with varying success. The potions didn't always work:

"In 1492, when Pope Innocent VIII was on his deathbed, his doctors bled three boys and had the pope drink their blood. The boys died, and so did the pope".

Not quite the flesh and blood of Jesus but I guess it was tasty enough.

Pity about those boys though. The pope was a slave trader, an adultera and a strong supporter of the Spanish Inquisition.  On the basis of that last sin the world was a better place with him dead.

HT John S.

Rudd banalities & handout disease

Rudd’s critique of neo-liberalism of course goes too far. His plan is probably to convert the global crisis into a historic failure of Liberal Party philosophy and its allegedly pro-market ideas. That’s a useful output for Rudd from a few hastily drawn-together conclusions that are vague enough to be reversed tomorrow and, even if this seems a bit dishonest, Rudd is a banal politician at heart, who confuses verbiage for honesty. But more importantly his half-baked theories on the failures of capitalism do not in themselves imply what should be done in terms of current policy in relation to the financial crisis. My fear is that that the theory he believes underlies his views will be used as a jargon-driven excuse for a big, mindless ‘Labor Party spend’.

LOL: The Labor Party will fix the economy! Car dealers, the car industry, child care, commercial property, banks have all received bailouts and now the dairy industry wants one. The Labor Party is heavily infected with the bailout disease as well as its inevitably confused social romanticism.

Rudd’s view of ‘government to the rescue’ is already producing dreadful outcomes. Rudd’s $30 billion package - $2 billion from government, $26 billion in government loans and $2 billion from the banks - supporting the property sector seems to have been rushed through following tearful representations from National Australia Bank*. Two days before Rudd made his January 24 statement Lindsay Tanner told the 7-30 Report that the government was only considering options. Two days later Rudd had decided on his course of action without apparently involving the RBA. Recall that Rudd disregarded the RBA in providing the unlimited guarantee for bank deposits - a case study in unintended consequences.

Rudd reminds me of one of my former bosses who arrived in his new job reading a book on how to make decisions in two minutes. I thought he was joking at the time in endorsing this treatise but this excuse for an educated human being made everyone's life a nightmare because he believed his own two minute judgements and invariably got it wrong.

Rudd claims the property move will save the jobs of 50,000 tradespeople. But with this ‘plucked-out-of-the-air’ figure that’s a hefty $600,000 per job as Brian Toohey points out in the Weekend AFR (firewall protected). Moreover, it is not clear that it will save any jobs – as Malcolm Turnbull has pointed out these jobs hardly depend on who has borrowed to buy the real estate that the loans finance. It is the use of that real estate not who owns it that will determine the complementary employment. The move by Rudd is about protecting the assets of banks and transferring valuation risk onto Joe Citizen. Government – particularly Labor - constantly needs to be reminded that it produces no wealth and only transfers privately created wealth to its coffers through taxes and charges.

Falling property prices are to be expected in the current situation and the last thing anyone should want is a government-induced expansion of this sector. The property sector should contract and the shareholders of the big banks deserve a kick in the guts not non-shareholders for backing boards who got it wrong.

Recall too that Rudd crumpled completely in the face of whining from Woodside concerning the exclusion of natural gas from compensation under the emissions trading scheme. Woodside won 100% and nothing was left to fund low emission technologies.

Toohey crisply sums up the Rudd problem:

“There’s a legitimate role for argy-bargy in public policy formation. But when a prime minister is a complete pushover, cabinet should supply constant adult supervision’.

I’d go further than this but I have decided to conceal my bitterness that we have elected poultry for a PM. His existence is like the capital bailout – we all pay the costs.

*It of course helps that property developers are major Labor Party funders.

Olivier Blanchard on uncertainty & the financial crisis

Blanchard's solution: commit to expansionary policies now and, if necessary, in the future so that people will no longer believe that a financial apocalypse is around the next corner.  In addition, recycle the proceeds of government security sales into riskier assets and get the government to spend more on retail as well as encouraging the public to spend now (temporary subsidies and tax cuts?) rather than to 'wait and see'.

"And, within a year or less, we can be on the path to recovery".

That's hopeful and based on obvious policy optimism! The general policy prescription is the conventional wisdom but, in my view, there must be a certain amount of inevitable pain in deleveraging overextended economies.  My question is how far to go in promoting expansion through further debt funded government spending. Hopefully not so far that we are left with an impoverished public and private sector.  Partly this depends on Blanchard's assumption that things will be on the way to being hunky dory in a 'year or less'.

Apart from some inventory adjustment shenagins the US economy contracted by 5% in the December quarter. It will do worse than that in the March quarter.  Given close to zero interest rates the key policy options do reduce to public expenditure and tax cut measures.

Wrong Wong

The miserably hot conditions in southern Australia (it got to 45.1oC* at 4-30 pm in Melbourne as I write) over the past few days have attacked the brain of Climate Change Minister Penny Wong.  She claims the conditions confirm the warnings given by scientists about climate change.  They do no such thing.  As I have pointed out before meteorologists claim that 50 years temperature data is necessary to confirm temperature changes not 4 days.

* That is 113.18oF. This does seem to be a Victorian record high temperature. (Update: Wrong Harry, it got to 47.2oC in Mildura in 1939. The highest temperature in Australia ever was in Oodnadatta in 1960 when it got to a frigid 50.1oC).

Uncertainty & irreversibility of climate change

Most commentators on climate change issues recognise the uncertainty attached to specific climatic forecasts. A few denialists even question the AGW hypothesis itself. Fewer scientists have commented on the irreversibility issues associated with AGW. In today's press there are reports on this latter issue - this one interestingly from FOX. Even if the smokesacks stop emitting GGEs the damages in terms of enhanced warming will persist for 1,000 years. The complete report by NOAA scientist Susan Soloman is here.

Economists have done much work analysing policy problems where there is high uncertainty as well as irreversibility. They can be modelled as optimal stopping problems.

Here one could calculate expected damages from climate change and the expected economic costs of dealing with these problems via mitigation and adaptation measures. Then, unless you are an extreme denialist, you would time an intervention to deal decisively with the problem and allocate a certain amount of resources to address the problem based on these expected value calculations.

With irreversibility calculating expected values is inappropriate. Not taking action or taking inadequate action to address the costs of climate change has more serious consequences than taking action inappropriately (too early or with an excessive use of resources) because the costs of climate change persist for very long periods due to irreversibility*. The respective benefits from taking action promptly and intensively are greater than the benefits from holding back on the response somewhat and underinvesting in the response. This asymmetrical loss of benefits provides a case for a prompter and more determined response than would be suggested by using expected values.

In short acting decisively (promptly and with significant public and private investments) to deal with climate change - and beyond levels suggested by replacing random variables by their means - makes sense if uncertainty is coupled with irreversibility. The argument is particularly strong because it does not rely on decision-maker risk aversion. With risk-aversion the argument is, of course, stronger still.

This argument is related to the economic case for managing natural resource assets such as wilderness 'conservatively'. This was originally put forward by Ken Arrow, Anthony Fisher and, in a separate argument, by Claude Henry - I discussed it 20 years ago here.

* There are 'sunk cost' irreversibilities associated with wasted-excessively early investment but these are less long-lived and less significant irreversibilities.

IMF forecast worst world economic performance for 60 years

The IMF revise their growth forecast for the world in 2009 from 2.2% two months ago to 0.5% now.  Growth has virtually stopped.  50 million jobs will be lost globally.

The developed countries will experience major declines. The US economy will contract by 2%, Britain by 2.8% (the worst in the developed world), Japan 2.6%, mainland Europe 1.6% and a group known as "other advanced economies", which includes Australia, 2.4%. China will grow at 6.7% half its rate in 2007.  India will grow at 5%.

The volume of world trade will contract by nearly 3%.

In one sense the forecasts are optimistic - there is forecast to be a recovery to 3% world growth in 2010 due to expansionary monetary and fiscal policies around the globe.