Monday, December 31, 2007

New Year’s Resolutions

1. I will never again poke holes in the fatuous arguments of dumb-assed lefties. Instead I will learn to feel empathy for their sad, lost souls and for their misguided views on the ugliness of humanity. Cheer up comrades.

2. I will support the Australian pharmaceutical industry and purchase supplies of sleeping pills. Reading Paul Krugman’s Conscience of a Liberal has resolved my insomnia over the past month with only about 2 pages of reading per night. But enough is enough. Australian jobs in big pharma are at stake here.

3. I will lose 20 kgm in weight and reduce my golf handicap to less than 9. I played appalling golf today in Melbourne's record New Year’s Eve heat of 42 degrees C and afterwards drank the clubhouse dry of low carb beer. I cannot afford these sorts of tabs and there is a still unfinished national drought. Mitigating climate change will reduce golf handicaps and restore needed supplies of low carb beer.

4. I will never post again justifying the revoking of Haneef’s visa or debunking David Hick’s place as a hero of the Australian lunatic left. Even lunatics need their heroes and Haneef’s connections with his terrorist cousins would never require any brain-dead leftist government to even exhibit caution. The world as it is grinds into grim vision!

5. I will not obsess on Kevin Rudd’s ear wax consumption. He is now our PM and cannot spend all his time saying his prayers and reminiscing with his millionaire wife on how he had to sleep in the back of a car after he was kicked out of his home as a kid. Sometimes even boring ex-bureaucrats get the munchies.

6. I will never again get irritated by Homer’s puns or being sworn at by Yobbo.

7. I will cease applying the ‘nonsense test’ to bigoted Islam although I will continue to apply it to all other aspects of thought and life. 'Does that sound right?' should not apply to non-Anglo-Celtic absolutes?

8. I will have accumulated, by the end of 2008, the combined wealth of Bill Gates and Warren Buffett, the spiritual wisdom of the Dalai Lama and the intellectual wisdom of all pre-existing sages. I will have the physique of Chuck Norris, the political skills of Bill Clinton and a harem in Bondi consisting of all the beauty and intelligence-optimised females in Australia aged from 16-50 years. I will also write a best-selling novel that will be snapped up by Hollywood for a feature film starring Stacy Keach and Cher.

9. I will get myself a new Sony laptop - one of those fashion accessory types.

10. I will win an award on Club Troppo’s blog posts of the year and have my blog syndicated in every major international newspaper and Rolling Stone. My hits per day will hit the billion mark.

11. I will introduce the Pope at World Youth Week. No, I won’t do that.

12. I will exercise each morning for 2 hours while reciting the Hare Krishna mantra, reading the Tibetan Book of the Dead and communicating with the great abyss. I will prepare to live forever.

Putting my shoulder to the wheel. 2008 will be a better year than the already excellent 2007. I hope your's goes well too.

Thoughts on the Australian economy and investment opportunities in 2008

The last 5 years have been among the most prosperous in Australia’s economic history. Emma Connors in the AFR December 28 quotes CommSec’s Craig James:

‘Australians are not just doing well, they are doing better than previous generations by a country mile. Once allowance is made for inflation, private sector wealth has doubled in the past 5 years, a result never before achieved.’
The main factors that I see bearing on the Australian economy during 2008 are: (1) The continued dependence of Asian countries on Australian raw materials and food supplies which will drive strong Australian growth in supplying these areas; (2) a subprime-related slowdown or below par growth in the US economy that will moderate global growth prospects but which will create speculative investment opportunities; (3) an inexperienced Labor Party in government which will partially re-regulate labour markets in the face of mild inflationary pressures and continuing strength in the Australian dollar and (4) major new investment opportunities as well as problems presenting themselves as a consequence of the climate change mitigation and adaptation area.

Some have described the conflicts between pressures (1) and (2) on the Australian economy as a tug-of-war between US and Chinese influences on Australia. That is a fairly accurate description but, in broader terms, current developments show the effects on increased economic integration and the one-to-one harnessing of economic events in Australia with those in China and other rapidly developing poor countries. There will be a fair bit of uncertainty so wise investors are building up reserves of cash - a factor contributing towards the credit market slowdown - to jump into opportunities in the face of over-reactions to instability.

Generally I expect that positive factors (1) will outweigh negative factors such as (2) and (3). Thus I anticipate strong continued growth in the Australian economy with Labor Party rule damaging the economy (ex public servant Rudd will soon understand that a barrage of glib slogans is a long way from defining a course of action) but, in the main, the costs will be inconsequential as the Labor Party remains a passive observer of the drama that is currently transforming the Australian economy. The subprime crisis will drive poorer economic outcomes in the US with retreating US consumer demands marginally damaging growth prospects in China. In the main, increased trade with Asia and increased global integration provides protection for Australia against particular nation-based instabilities.

In equity markets it is almost certain that the subprime crisis will provide nasty surprises in isolated pockets – I am obviously wary or property investment and building products companies - as the Australian market faces the prospects of longer-term declines in highly overpriced residential and commercial property. But the US economy is a resilient beast – it will slow a little though I do not expect a recession and speculative opportunities will emerge if panics develop. It is difficult not to remain positive about the Australian resource sector evben though lagged supply effects might cause some easing of commodity prices.

A punt might be that a speculative equity boom might start to develop in firms fostering alternative energy supply technologies in response to anticipated global warming initiatives – Eden Energy (a geothermal spinoff to become Torrens Energy), Geodynamics, Greenearth Energy, Green Rock Energy, Petratherm and Panax Geothermal are the sorts of geothermal energy companies that might bubble from the earth. In practice a shift to increased use of natural gas is likely to be the most significant actual short-term response but there is less 'blue-sky' in this sector.

Many of the sorts of stocks I am looking at now I began being interested in at end 2006. My interest remains in these areas.

Of course the wise guys will stay attuned to possible ripples from the US subprime problem and to instabilities in the Chinese economy. The Chinese market is very likely to take a substantial correction in 2008 providing possible opportunities for buying Australian resource stocks at a discount.

(The usual disclaimers on these last three paragraphs – don’t take my advice, consult a professional!)

Generally then I am very positive about the prospects for the Australian economy in the short-term with continued high growth, a strong currency and more terms-of-trade induced income and wealth gains.

In the longer-term – over the next 20 years or so - I see an enormously strong economic future for Australia with quality lifestyles coupled with good environmental policies and high levels of material wealth. A significant longer-term issue will be the impact of climate change policies on Australia’s export capacity. This is somjething Austrial firms need to reason through with appropriate technological responses. But fundamentally Australia is a society with many options and strength that fundamentally derives from our stable socio-politico-economic system, our generally well-educated population and our immense natural wealth for a relatively small-sized population.

Saturday, December 29, 2007

Freeing up international trade with poor countries & wage inequality

Paul Krugman in today’s NYT summarises a widely-held assessment of the impact of trade with low wage countries on US growth and inequality. There is nothing radical about his claim - free trade with poor countries increases growth but increases wage inequality by driving down unskilled wages.

The same general message applies to effects on Australian labour markets of promoting freer trade here with poor countries.

The US now imports more manufactured goods from poor than from other advanced economies so most industrial trade is with countries that pay their workers much lower wages. This reduces the real wages of many and he claims ‘perhaps most' workers in the US. Krugman's claim: Trade between countries at very different levels of economic development tends to create large classes of losers as well as winners.

Workers with less formal education either see their jobs shipped overseas or find their wages driven down as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices of goods that these unskilled workers purchase are not, in themselves, sufficient compensation.

Textbook economics says that free trade normally makes a country richer – growth prospects are in aggregate improved - but it doesn’t say that it’s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists looked at the data and concluded that any negative effects on US wages were modest. These effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from 2.5% of G.D.P. in 1990 to 6% in 2006.

And the biggest growth in imports has come from countries with very low wages. The original “newly industrializing economies” exporting manufactured goods — South Korea, Taiwan, Hong Kong and Singapore — paid wages that were 25% of US levels in 1990. Since then, the sources of imports have shifted to Mexico, where wages are only 11% of the U.S. level, and China, where they’re only 3-4%.

There are some qualifications. Many made-in-China goods contain components made in Japan and other high-wage economies. Still, there’s little doubt that the pressure of globalization on American wages has increased.

Krugman sums up:

‘So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express scepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect’. (my bold)

Greg Mankiw points out that Krugman’s argument is totally a priori and begs for empirical evidence – the bolded passages need to be demonstrated though Krugman’s overall claims seems intuitive. To this point empirical evidence supports the direction of the effects suggested by Krugman but not their extent. Moreover, Krugman’s claim is supported by evidence of low US wage growth. But this evidence is also consistent with the high immigration policies of low-skilled labour that the US has pursued. Some econometrics is called for here to back up the claims. (My own preference for Australia is to do as it did under the Howard Government and emphasise high-skilled migration which does not harm the less skilled but creates better job opportunities for these low-paid workers).

It is also clear that theory predicts that returns to inputs other than unskilled labour (namely skilled labour and capital) must be increased more than the losses to unskilled labour. Thus incomes overall do rise with freer trade it is just that low income earners lose out. Overall the US economy must enjoy uncompensated gains from improved opportunities to trade with countries such as China provided that China pays for all of its inputs*.

There are two types of policies I believe can ensure free trade benefits all:

1. One policy approach is to effect transfers which bring about the requisite compensations. Taxes on capital and on high income skilled labour need to be increased not cut, if all sections of the community are to benefit from freer trade with the developed world. It is a lesson Australia needs to remember. This is a variant of Krugman's policy to 'strengthen the social safety net'.

2.. Another approach is to try to provide an increasingly skilled workforce. This is a more positive policy which recognises that having people doing unskilled, unpleasant work in poorer countries creates opportunities for people in wealthier countries to do more skilled, creative work and to enjoy their lives even more. This can only occur however if private individuals are motivated to invest more in their own skills and human capital. On the demand side this does not seem to be the pattern at present – kids in Asia (and Asian migrants to developed countries) seem to have a much higher motivation to acquire skills than residents. On the supply side Australians seem to want a cheap education system heavily dependent on full-fee income Asian students and that is what they are getting. This needs to change.

Adopting these sorts of policies will enable countries to fully enjoy the benefits of free trade while limiting the distributional damages. Not addressing distributional concerns will ultimatetely undermine the case for free trade.

*Paul Samuelson in the link points out that if China 'steals' technology by importing educational services at less than the value of such services that the US can be immiserised by trade – its per capita income can fall. But even in this case Samuelson still supports free trade on the grounds that the losses from restricting trade will be more than the losses from the theft-induced immiserisation.

Friday, December 28, 2007

Bhutto dead

Benazir Bhutto assassinated. A brave woman who risked all for her country. What a tragedy for Pakistan. What a terrible further tragedy for the Bhutto family. It was only 13 days to a general election that she had a good chance of winning.

What conceivable good can come from this evil action? Civil strife, more killings, abandoning even the fragile pretence at democratic process? Perhaps the only bright spot - an intensified revulsion for the murderous thugs who could only see one way of addressing her ideas namely to kill her. Al Qaeda vermin have claimed responsibility for the killing.

Tuesday, December 25, 2007

What does Xmas mean?

Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.

In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief - part of the 'counter-culture' - in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us - both the secular and the religious.

I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect - but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas - carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.

The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the 'son of God' or our 'saviour'. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.

No religion - Christianity included - should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this - we are after all human beings - but the core message of Christians and the hope of Xmas is not.

Sunday, December 23, 2007

Xmas holidays

I am winding down my blogging activities and will post only intermittently in the period through to the New Year. I hope that readers have an enjoyable break. Compliments of the season to all.

Saturday, December 22, 2007

In the spirit of Xmas: Hogwart's Hall of Fame Nomination for Conjuring Trick

"To Kevin Rudd. At a time when Australia was suffering an unprecedented shortage of skilled labour (truck drivers were earning $100,000 in the Pilbara, for example), Kev managed to persuade the electorate that workers were being persecuted under Australian workplace agreements. If St Kev and La Jool carry out their election promise and hand bargaining power back to the trade unions, Australia will enjoy a sharp burst of wage inflation. The media chorus who have been singing hallelujahs ever since election night will doubtless manage to explain how this wasn't Kev's fault."
Pierpont's Dubious Distinction Awards for 2007. AFR December 21-27, 2007.

Friday, December 21, 2007

Vignettes on the sub-prime crisis

The losses associated with the sub-prime crisis are now being estimated to be US$500b. Lenders are now being overly careful about who they lend to ('shutting the gate after the horse has bolted') and generating talk of a US 'liquidity trap' that prevents credit market transactions occurring even though official interest rates are set low. Mining ventures in Australia with sound business prospects are facing difficulties getting finance because of inept US lending policies.

I was interested in one vignette on the crisis by George Anders from the Wall Street Journal. It was in Thursday's The Australian - I cannot find the link.

Anders points out that there is an emergent class of new US home owners who are 'owners' in name only. They bought houses on typical low or zero deposit loans and hence have almost no equity in their properties. Their solution to the sub-prime crisis and crashing property prices: walk away. Many couples are defaulting on mortgages but keeping credit card payments up to date. Simply walking away from a property whose resale value is less than the outstanding debt turns out to be the simplest way of restoring their troubled finances.

Lenders end up being stuck with the housing as a consequence of their lack of prudence in lending policy, cheap credit-rating data and their 'herd mentality' for market share.

While one might feel a certain sense of satisfaction that the outcome reflects poor business decision-making the costs will generally not be borne by those executives with poor foresight hungry for a quick buck. Moreover, as phenomena such as 'walking away' intensify capital losses, the costs spill over into other sections of the credit market to home borrowers with substantial equity and to potential borrowers with sound business prospects.

These external costs provide a convincing case for macroeconomic intervention in these markets to restore better lending practices. This again is to a large extent 'shutting the gate after the horse has departed' but helps prevent a distant repeat. Self-interest alone in economies populated by quick-buck merchants where ownership is separated from control and where other types of credit market 'agency problems' abound will not drive sensible behaviour.

Wednesday, December 19, 2007

Obligations on lenders not to create impossible debts for customers

This proposed policy seems to me a sensible notion with applicability in Australia.

US lending institutions will now be required to show customers they can afford the loans they offer them. Lenders would also be required to reveal all hidden charges in loans and commissions. If they did provide inaccurate information they could then be sued by customers for limited compensation. The measure applies to new mortgages only where the lending rate is 3% points or more higher than the Treasury rate. In my experience, the Australian banks, in particular, are thoroughly irresponsible in terms of how they offer credit card and home mortgage debt. They generally offer too much debt!

In Australia lending institution employees are offered financial rewards to sell people expensive debt that in some cases they cannot afford. Recently I was offered credit card debt with a leading bank for in excess of $40,000 at an interest rate of 18%. I obviously did not accept - given my mortgage and other obligations it would have been unwise to do so and a personal loan would be a better option anyway - but those less knowledgeable might. A friend buying his first home worked out that he could just afford to borrow $200,000 given his income and that of his wife. The bank offered double that. There are countless stories of this type in Australia.

Objecting to dumb lending practices that leave the less-than-well-informed in difficult situations is not nanny-statism. It is recognition that stupid lending policies by inept institutions impose broader social costs beyond individual bankruptcy and default. I would prefer a return to the older regulated system where credit was rationed on the basis of demonstrated ability to repay and where, without default risks, interest rates would be somewhat lower. But I know things have gone too far to return to such a regulated system. These more modest moves proposed by Bernanke's are a reasonable 'second-best' policy alternative that Australia should think about mimicking - hopefully before we get into our own sub-prime mortgage mess.

In praise of high petrol prices: Why not higher electricity prices also?

Mr Rudd's foolish mutterings during the election campaign to manage petrol prices may come back to haunt him. He didn't say 'control' but he did suggest that something needed to be done about them - the impression was unmistakeable. Mr Rudd's concern was to win a few votes from disgruntled consumers but this message was both misleading and inappropriate. He cannot do anything about petrol prices and, anyway, should not try.

The ACCC have again reported that nothing can be done about these prices - they reflect international marginal costs. While the local wholesaling industry that imports most of the fuels we use is highly concentrated there is no evidence of significant collusion. Margins are around only 4 cents per litre and, compared to other countries, government taxes are relatively low.

In one respect the ACCC findings are unusual. The findings did identify the unique Australian weekly cycle in petrol prices with trough prices being experienced on Tuesdays and peak prices on Thursdays. The difference between peak and trough prices is often 10 cents per litre - it is a large range with the majors adding about 8.7 cents per litre to prices each Wednesday.

These price cycle differences are so regular and so long standing that one might suspect a measure of collusion is occurring. One wonders for example why enterprising service stations don't corner the market on Thursdays by selling at a discount and having a relaxed Tuesday by charging premium prices then. I don't know the reason this does not occur and nor does the ACCC - the issue is a mystery. But the ACCC is convinced they do not reflect wholesaler collusion.

Like every other motorist I grimace at my monthly petrol bills and try to fill up my tank each Tuesday. But these high prices are steering things in the right direction - even if, by themselves they are less than completely adequate. We do need to develop alternatives to petroleum-driven transport and these are being developed in response to higher prices. We also need to make practical steps in our everyday lives to reduce greenhouse gas emissions. The prospect of 'peak oil' and an efficiently functioning forward-looking liquid fuels market is helping net to address climate change issues - even though by raising costs it reduces resources available to address climate change. The same cannot be said of coal use in electricity generation where scarcity is not an issue and where carbon taxes must be introduced to cut associated greenhouse gas and other pollution externalities.

I have an aging vehicle that is a petrol-guzzling hunk of rubbish - when it expires I will replace it with a more fuel efficient vehicle partly because of the financial incentives that drive my behaviour. This is as it should be.

I should, in fact, be facing the same incentives to change my use of greenhouse gas emitting electric power. We should accept the need for higher energy prices and the case for a conservation ethos.

Tuesday, December 18, 2007

Centro in liquidation mode?

The Centro Properties Group hit a low of 42 cents on the market today, closing at 82 cents. They hit a peak of $10 mid last year. At these sorts of prices investors are signaling real concerns about the ability of Centro to survive. If you think that is an exaggeration you should join the bottom feeders and buy up big. My guess is that, at best, the company will be a shadow of its former self as it is forced to liquidate assets at significant losses. More plausibly it will not survive as a going concern.

Centro is the second largest (after Westfield) owner and manager of shopping centres in Australia and a ‘global enterprise’ - it is a significant holder of US sites. Indeed it is the latest victim of the global credit crisis and could potentially be first card to fall in the ‘house of cards’ that defines the Australian listed property trust sector – you know that sector that ‘mom and pop’ investors go for because it is allegedly ‘safer’ than other investment vehicles.

Centro does not seem able to refinance $3.9b of debt and has cancelled distributions to investors. It is tough being a borrower these days – lenders are very risk-averse at prevailing low interest rates. This is, of course smart, since the US property market is imploding and 70% of the assets owned by Centro are backed by debt. If it cannot refinance it is finished.

CEO Andrew Scott is an entrepreneur with distinctive talents. He has bought a stack of US shopping centres funded by billions of dollars of debt just as US debt markets were getting tight. Many of the big acquisitions have occurred over the past year - many from Westfield - with funds under management rising from $10b to $26b. Returns to listed property trusts to managers are very much based on size and this appetitive is fed by investment banks greedy for fees. Centro has also bought a large number of shopping centres in Australia.

It amazes me that every 10 years or so when stock markets go through their periodic booms and crashes that the best paid people in town are those who borrow or lend too much. Even if interest rates are low or even negligible it is always a bad deal to debt finance assets which look like depreciating in value.

Of course, the main claims of these financial gurus are that investing in property involves buying real assets which can always be sold if needed. But a fire-sale of shopping centres in the US these days is going to attract only bottom feeders because investors expect capital losses and are aware of the incentives facing vendors who are potential bankrupts. I am also surprised that many of those who invest in property trusts believe that choosing a listed vehicle offers that much more protection than one which is unlisted.

Digressing I should say that I am very much a nationalist when it comes to investment strategy. Australians investing in other markets face huge informational disadvantages as a string of failed foreign acquisitions over the years confirms. It is partly the naive good nature of the average Aussi businessperson combined with their greed that does them in. The American definition of a ‘deal’ is often what most (outside the 'easy money' society) would describe as overpriced rip-offs. The Aussie entrepreneurs, their inflated egos fanned by B-grade phonies from the investment banks and by nonsensical arguments for ‘going global' because that’s where most of the assets are, go to America like proverbial lambs to the slaughter. Charity for the British should have ended with gifts of lard during World War 2 – avoid these ‘chaps’ like the plague – their greed is borne of necessity. Look at Rio's foolish attempt to scrape a few more dollars out of the much better run BHP-Billiton given a very generous merger offer.

If as an individual investor you must buy foreign assets my suggestion is to buy foreign-based index funds – don’t try to out-guess the sharpies. And of course avoid Australian companies that avoid 'management speak' of the necessity for globalisation of investment efforts.

Labor has no IR mandate

Kevin Andrews points out that at the recent election the ALP scored 43.38% of the vote and the Coalition 41.78%. Over 5 million people voted to return the John Howard Government. Many of them were workers who have benefited from a prosperous economy and from improved employment possibilities in labour markets.

While in power the ALP voted over 40 times to reject changes to employment-destroying 'unfair dismissal' laws that the Coalition had repeatedly promised to implement.

Julia Gillard can huff and puff all she likes - even threaten a double dissolution of parliament - but Labor has no mandate to implement its IR agenda. It has the right to bring this legislation to the parliament where it can be debated but no mandate to enforce its introduction. The debate needs to centre on whether or not the proposed changes will encourage economic growth and employment or not. There are reasonable arguments they will make things worse.

Update: Brendon Nelson has given the lot away - WorkChoices is dead he claims. He even praised Rudd's determination to restore unfair dismissal laws for small firms - a measure that will certainly destroy jobs. A disappointing capitulation that will not win the Coalition parties friends.

Sunday, December 16, 2007

Hope but no policy substance from Bali meetings

The political left and the diplomats are celebrating but the reasons for the 'party' are not clear. The UN themselves see the 'Bali roadmap' as an opportunity to negotiate, with perhaps a heightened sense of urgency, up to 2009.

But the outcomes from the actual Bali talks seem to be close to nil - the substance of the negotiations remains to be done. No plan and no fixed emission targets although there does seem to be an agreement to seek an agreement by 2009 when President Bush won't be there.

The pressure by the US on developing countries to cut emissions as part of an overall deal seems to have been removed by opposition from sanctimonious developing countries such as China and Indonesia (first and third worst carbon emitters on the planet) who are some of the globe's worst environmental vandals. Developed countries are obliged to help undeveloped countries meet costless, 'no regret' options and, there is acceptance by China, of the need to pursue emissions-cutting actions that are “measurable, reportable and verifiable".

Frankly this is pathetically vague and repudiates only the stronger parts of the US arguments (which correctly insist on the need for developing countries to be part of a global treaty) while leaving other less desirable aspects of US climate change policy untouched.

I am not strong on the language and nuances of international political agreements - on this occasion I would be happy to be corrected and a more optimistic gloss painted on the 'Bali roadmap' than I can detect. It sounds to me like a close to a zero outcome.

The diplomats would have failed had they not produced some sort of agreement - they have delivered a void that needs to be renegotiated.

Under the heading 'A big win for the planet, and others', John Quiggin's assessment is that the Bali talks are a huge victory for Kevin Rudd:

'But for the first time, we can be reasonably hopeful that the people of the world will act to avoid the worst of the impending ecological catastrophe of climate change'.

John's comments on Rudd are clearly wrong - Rudd has ratified a symbolic Kyoto agreement but in other respects just mimicked John Howard. On John's other views I hope I am wrong but the claim he makes seems to be unwarranted optimism rather than anything specific that come out of the negotiations. Maybe the 'sense of urgency' or some other intangible I did not discern from the meetings is a narrow positive. None of the tough decisions, however, that need to be made have been made. The developing countries (China, India, Brazil, Indonesia) need to commit to costly climate change control measures which will impact on their economic growth and all developed countries need to commit to specific targets.

Saturday, December 15, 2007

Friday news post Saturday morning

I spent yesterday morning on Bondi Beach with son William and the afternoon smashing golf balls at a practice range in the Macquarie University grounds. It was a glorious Sydney day with an overwhelmingly blue sky – only a little cloud in the west. I am as pink as a lobster in most of the areas that the 30+ sunscreen lotion didn’t reach. As I have written before on this blog, there are few places on this planet that I enjoy more than crass, brassy Sydney with its magnificent natural beauty and its aggressive local inhabitants. As I am interested in roads and transport economics I enjoyed several trips through the Cross City Tunnel and the new (very useful) Lane Cove Tunnel. I had heard there were problems of patronage – not evident while I traveled yesterday – lots of traffic including many large trucks. My old stomping ground at Macquarie University has matured into a great setting for a university.

I was going to write a deep introspective piece on the significance of beach culture to an aging, rotund, ex-surfer but there wasn’t anything deep to say – I just still dig it – 30 years flew bye in a flash and it was clear that the important, ingrained things like the love of salt water, sand, boobs and the sensuous joys of sunlight, hot sand and cool ocean do not change! I don’t actually surf much these days – in the main I just float around aimlessly like a largish blob of jelly that gets clobbered by the shore-break. I do however get real vicarious pleasure watching William do what I did as a kid.

There was also quite a lot that was interesting in the news recently.

1. It is clear Rudd has a climate change policy equivalent to the Coalition. Get rid of the talk about ‘flexibility’ and ‘concern’ he has done nothing in Bali that is not symbolic. Rudd claims to be playing ‘hardball’ with the US but US government officials say they see no difference between his policies and those of John Howard. Nor do I. The Europeans understand Rudd well – his conservative instincts run at least as deeply as those of John Howard but he lacks Howard’s ability to be non-committal when he is out of his depth. His attempts to hang future Labor policy on the research outputs of Ross Garnaut are remarkably foolish - Garnaut will not tell us anything new.

Rudd will turn out to be a disappointing Prime Minister for all voters. This gpoes beyond partisan politics. He is an unimaginative bureaucrat who will never deliver much. He mimics Tony Blair but lacks Blair's talent.

2. The news that the Arctic Ocean might be ice-free by 2012 - rather than the previous worst-case scenario of 2040 - illustrates the gravity of the climate change issue. Water floating into the Arctic Ocean is 3.5 degrees warmer than its historical mean so the ice is disappearing quickly – the ice pack is half its size of four years ago. The canary is whistling loud and clear.
In other news scientists claim the Great Barrier Reef is already probably irreparably damaged by climate change.

The Liberals were foolish on climate change and so too is the Labor Party. Politicians have short-term time horizons and none in Australia recognise the need for an urgent response to a serious situation that could become catastrophic.

3. The Rudd Government says it will accumulate data to prepare a legal challenge to Japanese whaling in Australian Antarctic Waters. Big deal – the Japanese have already stated they welcome a legal challenge because they know they will survive such. On most of the ‘environmental sentiment’ issues I am convinced Rudd will progressively reveal himself to be feeble – the trade unionist rump of his party will foster this weakness.

4. With evidence of gross ineffectiveness in its indigenous policies Queensland government Ministers have put a gag on public servants speaking about hundreds of child abuse cases on Cape York. The Labor Party wishes to protect its record for verbose declarations of a sense of injustice in aboriginal, affairs and continue to ignore arguments that Territory-style interventions – which already seem to be working by the way – might work well in our deep north. Peter Beattie is sniping from the sidelines – a media tart flog he will always be.

The counteraction to community outrage to the 10-year old girl from Aurukun continues to develop and will (my prediction goes) evolve into a considered justification for the non-sentencing decision. Eventually Federal intervention into indigenous affairs in Queensland is essential but watch the left fight this one!

In my view Judge Sarah Bradley is unfit to be working on the bench – her views amount to the claim that black kids deserve lower levels of protection than white kids. Moreover, her assertions that aboriginals should not be jailed for serious assaults because too many are already in jail are inappropriate for someone seeking to uphold the law and not her concern.

Deep thought: The supporters of our claimed collective white guilt for the ‘Stolen Generations’ are inflicting more human misery on aboriginals than any other group. Their lies and assertions of implied white guilt destroy the lives of young black girls and boys now. The premise is that us white folk are rotten, through and through so don’t accept any intervention involving white folks. The premise is wrong.

5. Marcus Einfeld, a former leading judge, the foundation President of the Australian Human Rights and Equal Opportunity Commission faces 13 charges including perverting the course of justice, making use of a false instrument and perjury in relation to a traffic fine case. I am pleased to see equal conviction opportunities present themselves for Einfeld and hope that, if he is convicted, of these offenses he goes to jail. A significant side benefit would be that we would hear less of this gas-filled windbag. Of course, he has not been convicted of anything else and deserves a fair trial just like any other man in the street.

6. The Pope has become a nun and is living in East Brunswick with Norman Gunston. No, not really, but State and Federal Governments will cough up $41 million to compensate Randwick Racecourse for be vacated for 10 weeks in preparation for the six day World Youth Day Papal Mass when an estimated 500,000 Aussies will line up to listen to some pointless, remarks. The smart money says he will urge that the ‘world should strive for peace’ and ‘reject violence’. Overall the community will be slugged about $95 million for this advice. Special legislation over a period of six months (why so long?) has been introduced by the State Government to ensure the Holy Father gets adequate security. I’d prefer that a 'user-pays' principle be applied and that public money be spent on things that provide greater payoffs.

Saturday is sunny and clear - off to lunch at Palm Beach with golf in afternoon at Bayview. Someone has to do it - as they say.

Update: My golf wasn't that wonderful but Bayview is the extreme end of Pittwater with lots of rainforest pockets and wetlands/estuaries. During my golf round I saw lots of native bird species including White-bellied sea eagle, Spangled drongo, Dollarbirds and Sacred kingfishers. A new potential sport occurs to me: golf-cum-birdwatching!

Update 2: The Drongos, Dollarbirds, Kingfishers are northern migrants. So too is the Koel that disturbs my sleep each morning from about 5-30AM each morning here in Sydney's inner west.

Thursday, December 13, 2007

Political correctness & historical myth destroys young lives

I agree with Miranda Devine - Jenny Macklin 'should start formulating an apology to all those children murdered, raped and abused in the past decade as a direct result of the (Stolen Generations) report, which, in the name of cultural correctness, has put so many obstacles in the way of removing indigenous children from unsafe homes'.

I have been following the story of the nine men who gang raped a 10 year old girl in Aurukun last year and who were allowed by Judge Sarah Bailey to walk free because the girl 'probably agreed to have sex with all of you'. Six were released without charge while three others - the eldest aged 26 - were given a suspended sentence. They were all given a stern warning 'you must not have sex with young girls'. They would have been shaking in their boots!

Is this not blatant racism of the worst type? Judge Bailey would never have imposed this type of judgment on the rapists of a white kid. Moreover it is not skin colour-based George Wallace style racism but prejudice bred from political correctness, historical myth and a foolishly myopic belief in cultural relativity.

The girl had been raped before and had been removed to foster parents who ensured she went to school and received counselling. The CHILD SAFETY DEPARTMENT (!) however ruled that, as the foster parents were not indigenous, the foster home was creating a new 'stolen generation'.

Macklin will never apologise. The left would prefer to offer apologies for 'stolen generations' fiction that allegedly occurred 40 years ago than face up to the catastrophic consequences of current policies that the political correctness and excessive caution is forcing on civil servants. Moreover, the idiocy of the left that stem from its hatred and contempt for what it means to be an Australian does not excuse in any way the stupidity and prejudice of the civil servants or of the leftist ideologues and hypocrites in the indigenous rights movement who have forced this nonsense on us for decades. I hope the horror of what has happened to this unfortunate child - her life and her vision of the future have been unalterably destroyed - remains a permanent nightmare to you all.

Update: Mark Bahnisch at Larvatus Prodeo is most concerned at this 'regrettable incident' but wants to resist the temptation to look at it narrowly - it needs to be placed in a 'broader context'. No case for Federal intervention at Aurukun - we don't want a return to the paternalism of Noel Pearson and the Coalition when we have a healthy preexisting pile of left-wing paternalism and lies to help us digest the sad facts. He makes me want to throw up.

Wednesday, December 12, 2007

The case for further liberalising labour markets

Economists seek economic efficiency by utilising the effectiveness of free markets. They do this because they want markets to maximise the value of net outputs produced - to maximise the size of the social pie. The idea is not to ignore ‘fairness’ or ‘equity’ concerns but to realise these objectives in quite different ways using the maximised value of output, achieved as a consequence of pursuing efficiency, as the best basis for achieving these other objectives. The rough idea - if you have got more you can do more.

This is true in all markets but particularly in labour markets. Here net value will be maximised if the specific skills possessed by workers go into their highest-valued uses. This will be so if highly skilled workers go into jobs that require high skills and less skilled workers do less skilled alternative tasks. Having skilled people doing unskilled tasks is wasteful as is trying to get unskilled people to master jobs that require skills. Setting wage or employment standards that apply across heterogeneous groups of workers, with differing productivities, creates inefficiencies either because those with above average talents are given insufficient incentives to contribute or those with lower than average skills are paid too much.

The best way of matching up skills with tasks to be done is via a free and competitive labour where no one (no union, no government agency) interferes with the ability of an individual worker to do the best deal they can do with an individual employer who has similar motivations. This best facilitates the process by which the worker can sell his skills and the employer can realise his or her profit objectives. Society’s total advantage is maximised with this arrangement.

The only requirement here is that the market be competitive so that there are plenty of job opportunities out there for a worker with any given set of skills. Then, in the bargaining process that occurs between worker and employer, the worker has a fallback option that yields close to his or her market value. If an employer does not offer a fair wage that reflects the fallback for this skill mix the worker will take an alternative offer. Similarly if the worker demands beyond what is fair remuneration for the skills the employer will select another applicant.

The best way of ensuring competition is to have good information about job offers, low barriers to switching between jobs and close to full employment. Low unemployment of any skill class of workers means that employers do not have undue bargaining power.

Skilled workers are generally in scarcer supply than unskilled workers yet the demand for their services in a modern economy is higher. Hence wages for the high skilled will tend to be high. This means that the distribution of income might be ‘biased’ with freer labour markets towards rewards favoring those with skills – perhaps those who, originally, had strong family support or an exceptional education. There is, furthermore, no guarantee than unskilled workers will only be demanded at a wage that provides only a very low standard of living. In short, a free labour market does not ensure what some would say is ‘social justice’ in the sense of ensuring a reasonable minimum standard of living.

The answer to meeting this social objective (if you believe in it) is not to distort the wages paid in labour markets. Setting minimum wages only creates unemployment if the value of an unskilled worker is less than the wage a government legislates must be paid. A rational employer in this situation will not give this worker a job since the employer will be worse off if they do. The solution instead is to tax well-paid workers and to pay these taxes to workers who earn low incomes as transfer payments. This realises equity objectives by the state acting to supplement the low income workers’ wages. This solution clearly outperforms having the unskilled worker unemployed and paying them unemployment benefits since – even ignoring issues of enhanced self-worth - society gains the value of the unskilled worker’s output when they are employed.

The notion that you can separate out issues of equity from those of efficiency is known as the ‘Second Theorem of Welfare Economics’. Strictly speaking this theorem requires that taxes and transfers be lump-sum (and hence independent of what workers choose to do) since otherwise, when one employs them, the incentives of economic agents are influenced so that in general efficiency need not be achieved. For example it can be argued that taking income from high income workers might conceivably reduce their incentives to work hard. Then funding salary supplementation for low income workers by taxing the well-off might reduce economic efficiency by reducing overall levels of skilled effort in an economy.

There are two reasons I think these types of effects are unimportant.

(i) High income workers have relatively strong income effects when their wages are reduced. Ignoring externalities this means that taking income away from a high income worker is likely to encourage the worker to work harder rather than to enjoy more leisure. The price of leisure is reduced which you might think provides incentives to take more leisure – this is the substitution effect of the net wage reduction - but the strong income effects here mean that wealthy workers will tend to regard their leisure as less valuable because they have less income to enjoy it with.

(ii) In so far as there are important effort-related externalities in this type of market they tend to take the form of ‘other-regarding’, relative income effects of the ‘rat-race’ type. Higher income workers sometimes supply excessive work effort because of a desire to ‘keep up with the Jones’. Even hefty progressive taxes on such workers reduce adverse ‘over-work’ effects. Most of us earning middle or high incomes could live without that new flat screen TV or that second house extension - limiting the opportunities of our wealthier neighbours to do this encourages a greater degree of socially desirable sloth by us.

The ‘Second Theorem’ is widely seen as an argument for social democracy. The ‘First Theorem of Welfare Economics’ says that competitive markets deliver efficiency while the ‘Second Theorem’ provides a restricted case for government intervention via the tax-transfer mechanism to deliver equity and social justice.

While the political left should probably be appreciative of intelligent minds (Kenneth Arrow and Gerard Debreu were the originators) trying to add a bit of logic to leftist ‘bubble-and-squeak’ theories - in general the left show no gratitude. Recognising the intellectual force of the ‘Second Theorem’ involves abandoning attempts to treat firms as social welfare agencies and rigorously delimits the role of the state to taxing and to transferring. This is problematic to those on the left. So too is the fact that there is no suggestion of any regulatory role for government in labour markets and none at all for trade unions.

Is this a reasonable position? In my view, ‘yes’. The counterarguments that are always brought up are things such as child labour laws and laws governing occupational health and safety. There is a reasonable debate that one can have over the role of such laws although it is one that I do not wish to enter into here – some of these laws reflect past historical circumstances and some reflect information failures that probably should be addressed by State action. But the case for governments intervening to secure pay or other reward-related issues to drive a social agenda seems to me weak.

The basic philosophy is to discourage unions and State intervention and to let the forces of self-interest and competition drive labour market outcomes. If society has social objectives in relation to the wages people are paid pursue this via the tax transfer mechanism not by erecting barriers between employers and those wanting jobs.

To be frank many leftwing critics of labour market reforms do not get to the point where they ever entertain the ‘Second Theorem’ logic. Instead, although they will hotly deny it, they operate with an entirely defective antique theory of wages and conditions which they see determined by a variant of old-fashioned class struggle theories rather than by worker productivity. According to this view wages are something like a charitable contribution to worker welfare which needs to be goaded and prodded by trade union action and legislation. In extreme versions of this ratbag theory they have little to do with productivity.

The recent electoral defeat of the Howard government largely on the basis of criticisms of its flawed attempts to increase the role of individual work contracts free from pre-set award conditions has set back labour market reform years if not decades. The overwhelming criticism of the WorkChoices reforms is that they disadvantaged poorer workers. There was no appreciation of their structural impact of attempting to better match individuals with jobs and to maximise the opportunities of all those with something to contribute to our society in terms of work to do so. The criticisms of those with a leftwing political bent were understandable even if they were clearly misinformed. Moreover, the reform package was overly complex and conditional because such nonsense as the ‘no disadvantage’ test was forced on it.

But no mercy or forgiveness should be shown to economists who preach the value of free trade in all markets but make a crucial exception of labour markets. It was this group who helped sealed the fate of WorkChoices by not pointing out the structural advantages it provided. Left wing ideology drove economic interpretation to the point where the implicit economic theory advanced by the left in Australia became internally inconsistent and operated to the disadvantage of ordinary Australians.

Tuesday, December 11, 2007

Keeping it simple: computers & blogging software

I am (by constraint) using a MAC to post for the next couple of weeks. It is amazing these clumsy, clunky fiendishly obscure toys survive when the modern PC offers such convincing competition - simpler, cheaper and very robust with modern operating systems such as XP or Vista. It is testimony to the extent that dislike of Microsoft and Bill Gates can distort people's tastes. I have witnessed the anger colleagues feel for Microsoft and the wholly unnatural love MAC owners feel for their machines. But, even ignoring the economics that favour PCs, I still think PCs are easier to use. Maybe a couple of weeks forced use will improve my MAC ability.

While I am on it there are strange preferences for blogging software as well. The adult software to use is widely seen to be WordPress. The kiddie level software that I have used without hitch for nearly two years is Blogger. But from my perspective - having tried both systems - anything you can do in WordPress you can do far more simply in Blogger. I always assumed that WordPress offered advantages if you ran a site with enormous volumes of traffic to monitor. But I notice that Greg Mankiw's excellent blog, which has upwards of 14,000 posts per day, operates more efficiently than smaller blogs that use WordPress.

For example, among Wordpress users, Larvatus Prodeo seems to be having an endless maintenance problem - it attributes these to right-wing inspired 'spam' attacks but I wonder if these lefties don't worry about Liberal Party agents spiking their cornflakes. There are also recurring problems presenting themselves at John Quiggin's blog and Troppo.

So until someone convinces me to make the switch, with clear evidence of enhanced capabilities from doing so, I'll continue to blog on a PC using Blogger. Just keeping it simple.

Monday, December 10, 2007

An obituary for the Coalition is premature

Every time a ruling political grouping in Australia is defeated the cries grow that the party is finished that it will never win another election and so on. The cries are partly just the triumphalism of the victor party and its supporters and partly just the press trying to manufacture a story out of ordinariness. It is refreshing therefore to see sensible press coverage of the future of the Coalition parties in Australia.

Labor was slaughtered in 2004. It now has 8 seats more than a bare majority majority. It could lose office with as little as a 2% swing against it. With inflationary pressures accumulating, with inevitable problems that stem from inexperience and daft labour market policies in place that will undoubtedly not reduce unemployment all is not lost for the Coalition.

Brendon Nelson has made a better start of it than I imagined he would. Time for the Liberals to focus and perform the role of a constructive opposition that does what Labor did. Search for what is positive in the competing party's platform and then to steal or adapt it. Labor is largely implementing the Conservative political agenda and the Conservatives can do it better.

Sunday, December 09, 2007

Open thread on Christmas

I am now taking some time holidaying in Sydney – I need to recover from my exhausting European travels - and, for the first time in 30 years, am staying in Sydney’s inner west (Summer Hill).

I am looking forward to some surfing at Bondi and some golf in other parts of Sydney - at Bayview and Pennant Hills in particular.

And I have quite a bit of pre-Christmas socialising to do and some good fiction to read.

It is a bit more than two weeks to Christmas. The last lines summarise what it is mainly about for me. What is Christmas about for you?

Saturday, December 08, 2007

Mildura a town based on irrigation

I drove through Mildura in north-western Victoria a few years back and was surprised at the opulence and general prosperity of the town. It was a contrast to smaller towns in western NSW and Victoria. It is very much an oasis in the desert compared to the the devastated landscapes north of the town between Mildura and Broken Hill. There are many rabbits and the semi-desert country runs right up to the fringes of the Darling River. I am a big fan of the huge, magnificent neighbouring mallee parklands at Hattah-Kulkyne, Wyperfeld and the vast Murray-Sunset*.

But tariff cuts, low agricultural prices and the drought are destroying Mildura. For the most part – 45% of the town depends directly or indirectly on irrigated agriculture - Mildura relies on water-intensive agriculture that is unsustainable given likely future trends in climate change. Orange orchards that require continuous water supplies if they are to survive – irrespective of water availability – are not a viable longer-term agricultural option.

The local council has a program to cut greenhouse gas emissions. That is creditable but not the main policy issue confronting this town which is adaptation to the effects of permanently reduced water supplies and greater drought frequencies. The appropriate adaptation is to help marginal farmers shift out, to encourage farmers who remain to shift to more flexible production options and to encourage water savings where possible. Maybe too the tourism resources the town possesses are worth emphasising in future development plans.

*Wary of these places too – a loss of concentration and not having a compass in homogeneous, flat, low, mallee eucalypt country at Wyperfeld a few years back got me seriously lost.

Gasoline now costs less as fraction of net worth

Mark Perry’s blog (Hat Tip Greg Mankiw) graphs gasoline prices compared to average US household net worth 1947-2007. As a percentage of net worth, consuming 1000 gallons of gasoline in the US these days costs less than at any time prior to 1985. I assume, the same story for Australians. Rising wealth is insulating us from the prospects of reduced oil availability.

A discussant on Mark's blog points out that the decline in effective expense would be greater if improvements in full use efficiency were accounted for.

More on Rudd on climate change

Further to the post I made yesterday on Kevin Rudd’s position on climate change, the following argument by Paul Kelly is persuasive:

Rudd made progress towards Kyoto ratification his first executive act, a sharp way to symbolise the break from Howard's era. Delegates to the UN conference in Bali applauded when informed (most such delegates represented nations that have no binding targets under Kyoto anyway). But by week's end the reality of climate change policy was superseding the switch in Kyoto symbolism.

As expected, Rudd said his Government's 2020 emissions target would not be decided until the mid-2008 report from Ross Garnaut. Australia has no intention of being trapped into the 25-40 per cent emissions cut by 2020 that the IPCC proposed for developed nations.

This betrayed the real political moral of the week: how quickly the gulf is opening between the Rudd Government and the scientific or green lobby groups in Bali and elsewhere demanding radical outcomes. This conflict, sooner or later, will assume epic dimensions.

The policy test for Rudd at Bali is how much he changes Australia's negotiating position. That position under Howard was to argue for obligations of some sort to be accepted by developing nations as conditional on a post-2012 regime in which developed nations agreed to steeper binding commitments. This put Australia, as chair of the umbrella group (of developed non-EU nations such as Japan and Canada), at odds with the EU and with most of the developing world.

The logic of Australia's position is sound and it has much support. This seems, broadly, the strategy that Rudd wants to pursue. It is, however, not the stance favoured by much of the scientific-green lobby in its ideological demand that the main burden must fall on developed nations, a view undermined as more of the emissions problem comes from developing nations.

Rudd goes to Bali an optimist. He will discover the reality: the unbridgeable gulf between green lobby demands for radical action and establishing any single viable multilateral regime for the post-2012 period. (my bold).

I agree with much of this. What I find galling, in view of the recent election, is that Rudd achieved prominence by presenting John Howard as someone 'going slow' on climate change. Rudd is replicating the Howard position along with some inconsequential rhetoric relating to targets in 2050. There will be more of this. My substantive disagreement is that I think both Howard and Rudd get it wrong on the need for shorter-term targets. The Bali Declaration by Scientists suggests we have at most 15 years to get carbon emissions falling and keep temperature increases below 2 degrees C even by 2050. It will be very difficult to get developing countries to agree to cuts if they see developed countries procrastinating and asking for more time to make adjustments.

Friday, December 07, 2007

Friday joy as wealth grows

Over at my near-defunct Moneybags blog I checked today on the growth of the nominal portfolio I selected 30 December last year. In 11 months it has increased 49.5%, more than double the increase in the All Ordinaries.

Today's inspection was motivated by a success story - former dog stock HostWorks announced today that it will be taken over by Macquarie Communications Infrastructure for 41 cents per share. Your enterprising scribe 'bought' 25,000 last December at 16.5 cents in a minor flutter.

I've got a more than reasonable bottle of wine, my well-thumbed biography of John Howard and will now enjoy a leisurely evening with son William next to the pool as I gloat over financial wizardry and contemplate sage investment decisions for 2008.

Kevin Rudd needs to come clean on climate change

Kevin Rudd is a bit of a bull-artist. Of course most politicians are. His personality marks him as a Labor Party baloney merchant - only one of the many reasons I prefer the conservative side of politics.

Rudd is full of significant claims but, one senses, without John Howard’s innate sense of caution and, more than that, foresight. It is easier to make strong claims than to think things through. I hope I am wrong since much that Rudd advocates is worthwhile - particularly on climate change.

Rudd and the Labor Party have an apparently strong position on climate change – recall that the Coalition was evading the issue according to Rudd - an important reason to vote Labor.

But then Peter Garrett spilled the beans. Post 2012 Labor’s policy on cutbacks will be conditional on developing countries making agreed-to cutbacks. They could not be excluded from an international agreement. But this was Coalition policy and Australia will already hit its Kyoto targets anyway. Indeed ratifying Kyoto although an important gesture masks the fact that the real issue is what to do post-2012.

This is where things get very murky for Labor.

Labor seeks a 60% cut in emissions by 2050. But Rudd has rejected 25-40% cuts in carbon emissions by 2020 while he waits to be told what to do by Ross Garnaut. Is this serious? Garnaut is not a climate change specialist - he speaks of tragedy-of-commons issues as if they are some great new original insight. There have been many other inquiries into climate change organised by people more knowledgeable (in this area) than Garnaut.

The cuts, according to Rudd, will be ‘environmentally meaningful and economically responsible’ whatever that means. This is gobbledegook.

Setting targets to be met in 42 years time is easy politics. Many of the current batch of Labor politicians will be dead by then. But a 25% cut in 12 years time is a policy that has more bite.

Moreover, taking a linear interpolation, if Rudd is sincere about his 60% cutback target he should cut carbon emissions by 2020 by at least 60%*12/42 = 17% anyway. Given that the early cutbacks will be the easy ones a figure of 25% does not seem outrageous as a target.

And why set a 2050 target if you are uncertain about the target you want to hit in 2020? It is all very well for Rudd who ratified Kyoto a few days ago to say ‘Australia will lead the world’ - he is already sounding like Keating - but cut out the bull Kevin.

Do - don’t talk Kevin - the issues are serious and we need to recognise that meaningful action will be costly - don't let insincerity undo us all.

Iran remains a threat

Melanie Phillips dumps on a National Intelligence Estimate (NIE) report that guesses Iran stopped its attempt to produce nuclear weapons in 2003. Israel doesn't believe the report and others suggest it might reflect a deal done with Iran whereby the US agrees not to bomb it provided Iran stops assistance for terrorism in Iraq. This type of deal leaves Israel out in the cold completely.

Nor does the International Atomic Energy Agency agree completely with the report.

Indeed, the NIE report itself offers only a qualified view: ‘Iran's civilian uranium enrichment program is continuing.’ Such a ‘civilian’ program could be converted speedily and stealthily to military use. As the new NIE notes, ‘Iran has the scientific, technical, and industrial capacity to produce nuclear weapons if it decides to do so.’

Iran is laughing – Mahmoud is declaring a ‘great victory’. It is a propaganda victory that builds on the back of the WMD fiasco and subsequent US problems in Iraq. It is foolish to believe that an agency, which has provided flawed intelligence in the past, has got it right this time.

Moreover, the report's qualifications about Iran’s ability to switch to pursuing a nuclear option should be kept in mind. President Bush and International Atomic Energy Agency director-general Mohamed ElBaradei have been cautious and have urged Iran to clarify its nuclear intentions further. Iran remains a threat.

Cap & trade systems outperform offsets in cutting carbon emissions

The idea of a carbon offset is that you can emit lots of carbon but pay for it by the planting of trees, buying into wind energy or other schemes that reduce emissions. It is an echo of the ‘cap and trade’ approach to pollution control except that participation is voluntary.

Posner and Becker make insightful remarks about carbon offsets.

Offsets are voluntary - a purchaser makes a charitable contribution to fight global warming. But because we are not a very charitable society, offsets are a poor substitute for cap and trade. Moreover, offset programs are limited because consumers are not the only carbon emitters and investments by carbon-offset firms may simply replace existing investments. There is commercial and governmental investment in wind and nuclear energy, reforestation, climate research, fossil-fuel efficiency, and so forth, and if now consumers through carbon-offset programs invest in such projects, commercial and governmental investors may scale back.

The most serious drawback of the offsets movement is that it is likely to make the problem of excessive carbon emissions more rather than less serious. It creates the impression that modest reductions in carbon emissions due to offsets meaningfully reduce global warming when their effectiveness is negligible. Ineffective voluntary efforts may make people believe there is no need to incur the heavy costs necessary to avert the risk of catastrophic climate change.

Clearly the offset movement does increase public awareness of global warming which may lead to other voluntary efforts to reduce emissions. This again will not be a strong effect – the greedy will ‘avoid cognitive dissonance by exaggerating the practical efficacy of largely symbolic gestures, such as purchasing carbon offsets’.

Alleged "offsets" would have greater effectiveness if they became compulsory rather than voluntary. But then the offset system would be no different from cap and trade.

‘The natural link between an offset system, whether compulsory or voluntary, and an emission trading system does dispose of the criticism that offsets are not desirable because they are like the indulgence system of the Middle Ages, In that system, sinners could purchase forgiveness for some of their sins without either having to repent, or having to agree not to sin anymore. Yes, an offset system does essentially involve buying the rights to pollute, but buying such rights helps get polluting into the hands of those businesses and consumers who get the most value from these rights. That is why the world has gravitated toward a cap and trade system rather than merely a cap system’.

Thursday, December 06, 2007

Transparency from the oracular RBA

The Reserve Bank of Australia kept interest rates fixed yesterday but, more interestingly, has decided it will release the minutes of its Board meetings with a 2 week lag. This follows the practice of most other key central banks and enables the public to discern the RBA’s assessment of the economy. Votes will not be not recorded and individual viewpoints will not be uncovered. The minutes will provide the factual assessment that guided the RBA’s decisions. In the first minutes released today from its November meeting the RBA criticised the Howard Government for its expansionary spending plans leading into the election which made the RBA’s job harder.

This will be interesting for capital market analysts trying to plot the RBA’s policy reaction function – how policies react to the state of the economy. For mainstream economists, such as me, it will help simply to be able to judge where the RBA thinks the economy is going. I was told by a former RBA Board member that the macroeconomic information assembled at Board meetings is of extremely high quality. This information must be summarised and presented in a form comprehensible to busy industrialists and businesspeople. This should be helpful to non-macroeconomics specialists.

The minutes for the November 6 meeting which did increase interest rates by 25 basis points to 6.75% are here. The role of international credit conditions was clearly downplayed – it say the outlook for the US economy as much less favourable than for Australia - with major emphasis being placed on local inflation pressures.

By the way, the economy is roaring away and growing at 4.3% in the September quarter – the highest rate for 3 years. The Aussi dollar tumbled a bit because interest rates were not increased. It is interesting to note that, at the same time, the Canadian central bank actually cut interest rates by 25 basis points because of fears over the fallout of the US subprime market.

Treasurer Wayne Swan has stated that the Labor imperative is to contain inflation. A shrewd objective since the RBA expect the inflation rate to move above the 3% maximum of its target range in the short-term and then to drop back. Lest the RBS might get it wrong Swan further remarked that we have ‘inherited inflationary pressures’. Swan is already beginning to sprout defensive politics.

Fuller-figured women are just fatter

Why are women developing larger breasts? Hormones that stem, in part, from taking the pill play some role but the major fact is just that women carry more fat generally and a significant fraction of the breast is fat.

Hat tip to: A Random Walk.

Wednesday, December 05, 2007

Economics blogs

This is the most comprehensive list of economics blogs I have seen.

Baby boom boosts Aussie population

This descriptive piece in The Australian grabbed my attention. Australia’s population growthhas accelerated strongly over the past decade both from natural growth and migration but migration now provides a higher proportion of the total increase than it did a decade ago. Signs of a heathy economy and a prosperous, decent society. Part of the original ABS report on which the article is based are here.

ABS figures for the 12 months to the end of June show that the total fertility rate in the 12-month period was 1.85 births per woman, the highest for 14 years.

This led to a record 273,000 births in the 12 months… 3.6% more than the previous year.

At the same time, fewer children are dying, with the infant mortality rate in the 12-month period at 4.62 deaths per 1000 live births recorded, the lowest since record-keeping began.

While younger Australians seem to be taking to heart the advice of ….Peter Costello to have more children, at the other end of the age spectrum older Australians are hanging in there longer.

As at June 30 there were 2860 Australians aged over 100, well up from 2441 the previous year. For the few years before that, there had consistently been about 2400 Australians aged over 100.

The other major contributor to population growth, immigration, was also higher, with 178,000 people coming to live in Australia in the 12-month period, up from 135,000 the previous year.

The ABS figures show that Australia's population as at June 30 was 21,017,200, or an extra 315,700 people from the previous year. Migration accounted for 56% of the growth, while the natural increase of 138,000 (272,900 births less 134,800 deaths) accounted for the remainder.

Queensland and WA continued to be the fastest-growing states with their populations growing at 2.3% and 2.2% respectively, while Victoria's population grew at 1.5% and that of NSW by 1.1%. SA's population grew by 1% and that of Tasmania by 0.7%, while the NT grew by 2% and the ACT by 1.7%.

…The ABS projects Australia's population will reach 24 million by 2050. At present we are ranked the 54th biggest country in the world, but by 2050 Australia will be ranked at No65.

The ABS projects that internationally, India will overtake China by 2050 as the world's most populated country with 1.8 billion people, while China is projected to have 1.4 billion by 2050.

While the growth in Australia's population in the most recent 12-month period of 1.5per cent was higher than the growth in the world population of 1.2%, it was lower than that of Australia's immediate neighbours in Papua New Guinea (2.2%), Malaysia (1.8%) and India (1.6%).

But growth rates of individual countries fail to take into account the base of that population. In that league, China and India continued to be world leaders, with China growing by eight million people to have 1.3b, India growing by 18m to 1.1b, Indonesia growing by three million to 234m, and the US growing by 1.7m to 301m. (my bold).

Chinese steel-maker to bid $200 billion for Rio Tinto?

China’s biggest steel-maker, the state-owned Baosteel, claims it is contemplating a bid in excess of $200 billion to top BHP-Billiton’s $125 billion bid for Rio Tinto. The claim is that this would ensure Chinese supply of iron ore. Of course, even if this is all just talk (Baosteel is capitalised at only about $40 billion itself) it has the effect of at least temporarily driving up Rio Tinto’s share price and thwarting the chances of BHP-Billiton. The whole world resource sector is now in play on the back of expectations of enormous ongoing anticipated future growth in China.

I predicted months ago the likely bid by BHP-Billiton and still believe this is the bid most likely to succeed. It is BHP-Billiton that has all the synergies that make a successful huge bid viable. For a Chinese firm these synergies are not there - there are few synergies between an iron ore provider and steel mills - although there would be the potential to offset enhanced monopoly pricing power. Support for the notion of a PACMAN defence by Rio Tinto – Rio turning the tables on BHP-Billiton by seeking to take it over, seem to have faded. This rumour might have been fostered by Rio Tinto again to drive up its purchase price by BHP-Billiton.

Subprime crisis

This is amusing – from Greg Mankiw’s blog – an insightful, entertaining discussion of the subprime crisis. This is also good on moral hazard. Tom Wolfe's 'masters of the universe', the giants of the financial world, are very, very naked.

Tuesday, December 04, 2007

Climate change: Last chance for change

I have been reading a range of literature on climate change. Most of it has been rather dry, technical or policy-oriented work with an economics emphasis.

My favourite general ‘read’ is the attractive and informative discussion of the various aspects of the climate change by former Guardian environmental correspondent, Paul Brown, titled Global Warming: The Last Chance for Change, Reader’s Digest Books, 2007. Some short reviews are here. Intended for the general reader it is nevertheless accurate in the science presented. It is written clearly in plain language and is informatively illustrated. There is sound discussion of the basic science, of issues for developing countries, US policy, the case for renewable compared to nuclear power and simple ways of changing our lives to reduce our carbon footprint.

This is a good Xmas present both for environmentally-conscious families and for those not so. It is well-written enough to hold the attention of sceptics and to make them think.

Highly recommended.

The Reader’s Digest is an interesting publisher. Although disliked by snobs their family magazine has a readership of close to 80 million concentrated mainly among high income earners. RD have often pursued important social causes – in 1950 they were the first mainstream publication to attack cigarette smoking in a famous article ‘Cancer by the Carton’ – now they are directly tackling George Bush and US policy on climate change. Good stuff.

Tiny laptops

I am interested in pint-sized, cheap laptops such as this Asus Eee PC. At $499 and weighing only 900 grams, it will allow you to surf the web and type a document in OpenOffice. It runs Linux not Windows. It has a negligible harddrive - about 1.5MB of free space - but you can boost storage with a USB. Sounds great for travelling and for younger kids school needs although the touchpad and keyboard sound a bit dinky. A step in the right direction and competition should deliver improved options over the next year or so.

I first read about this at Troppo. This tiny laptop now on sale in Australia at Myers.

Monday, December 03, 2007

Bali talks

Since Kevin Rudd has ratified the Kyoto convention the US is the only major country not to.

It is vital that the IPCC talks starting Monday, in Bali, reach a post-2012 resolve restricting carbon emissions that will ensure decisive action will be forthcoming. There will not be a final agreement - the cagey US and the major creators of new carbon emissions such as China will prevent this - but the supreme urgency of the current situation should assert itself.

I'll watch and monitor developments on this blog.

It is time for all countries to sense the dramatic stakes at hand. Without a dedicated resolve to reduce dependence on carbon-based fossil fuels the world faces the prospect of a fearful apocalypse.

This isn't melodrama - it is our likely future. Time to act.

Rudd becomes PM

Dr. Death scrubs up well, doesn’t he? But were those ear canals so spotless you could eat your wax off them? You bet. Both had been freshly harvested. And only hours after Rudd became Australia’s 26th Prime Minister the current account deficit improved and the outlook for immediate future interest rate rises diminished. Rudd has also ratified the Kyoto Protocol (John Quiggin points out that this has already improved our relation with Indonesia), insisted he will keep a close eye on petrol and grocery prices, urged the Defense Department to cut bureaucrats and increase soldiers in the field and knocked back a dinner invitation with the GG. It is believed that tomorrow Rudd will launch Australia’s education revolution.

Israel attacks nuclear 'facility' in Syria?

The Times has an interesting account of the Israeli air raid on Syria on 6th September - it claims the raid knocked out a ‘plant’ equipping missiles with nuclear warheads - the plutonium in the warheads being supplied by North Korea. If true it makes a bit of a joke of Bush’s claimed nuclear diplomacy with North Korea - Bush has gone strangely quiet over the whole episode.

The New York Times suggests that although the development of a missile would have been years away this credibly signalled to the Syrians that such developments would not be allowed by Israel. Who could blame Israel?

A loss for civilisation

I thought this by Mark Steyne basically said it all.

Cats & the environment

It is a true New York Times story that involves issues of conservation substance. In Texas, a Jim Stevenson shot a feral cat that was attacking an endangered bird species – the Piping plover. Feral cats are among the most destructive animals in the natural environment. Stevenson was put on trial with some competing groups baying for blood (the cat lovers see it as ‘natural’ for cats to kill birds) and others seeing him as a heroic defender of the natural environment. Finally, the jury reflected the complex mix of moral issues here and could not agree on a verdict - he was acquitted.

I don't dislike cats on an individual level and recognise the great pleasure they bring people. Generally I am interested in pets that live with humans. Recent economic theory extends models of the household to include pets – which are treated as complementary or substitute inputs into the services provided by households. In Australia we spend huge amounts on pets. We have about 2.4 million domestic cats and far more than that are feral – unlike children people routinely buy and then dump pets that are unwanted.

Some identify positive benefits on people from owning pets are claimed to arise in the form of biophilia or ‘biological fitness’ benefits from an association with non-human life. Of course one can enjoy nature and non-human life without keeping pets.

But I do have specific problems with cats that are not constrained, by being kept inside a house or on a leash, from killing native wildlife. I recognise that restraining them limits their welfare and perhaps that of their owners but because I place weight on the natural environment I can live with that. The positive benefits that can be gained from having pets can then be gained without imposing negative external costs on the environment.

(Parenthetically I also have problems with dogs inside a house – the pervasive doggy smell that runs through carpets and furnishings puts me off.)

It is however very difficult to rid the environment of feral cats and indeed foxes. In fact shooting them is not very effective since – like foxes – they bread prolifically. A few crushed aspirin tablets mixed with tuna fish will kill unwanted cats in bushland or your backyard but, of course, approach any known owners with concerns, before you employ such solutions.

There is some limited work on the biodiversity effects on cats in Australia. A longer report is here. Everyday observation confirms that they are, in close competition with foxes, one of our most destructive environmental forces. This motivates my preference for trying to introduce nature as a part of our urban environments and to enjoy this rather than to keep environmentally destructive pets that cost society so much in private costs and external costs to the environment.