Saturday, January 31, 2009

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.

Friday, January 30, 2009

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).

Thursday, January 29, 2009

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.

Wednesday, January 28, 2009

Business-people who reduce capitalism's appeal

Maureen Dowd shows justifiable contempt for the greedy 'masters of the universe' who have destroyed the lives of millions - 80,000 extra unemployed globally in one day this week - and yet still cretins like former CEO of Merrill Lynch Mr. Thain - a man who in my view should be in jail - cries that huge salaries need to be paid to retain the talent.
(Thain) "“If you don’t pay your best people, you will destroy your franchise” and they’ll go elsewhere, he said.
(Dowd writing about Merrill Lynch) Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a great job market it is for the geniuses of capitalism who lost $15 billion in three months and helped usher in socialism".
The maximum salaries paid in large companies should be subject to shareholder approval.  If shareholders underpay they will cop it in the hip-pocket but director-determined salaries (on the basis of reports by 'independent' remuneration committess) don't work. Salaries that are 100X the average worker's salary in the UK and 358X the average worker's salary in the US are ridiculous.  You don't have to get involved in arguments about angels dancing on the heads of pins to understand this.

It should be understood by all shareholders and all boards that all incentive contracts should be a minor top-up to fixed salaries that are payable as equity claims realisable with at least a 10 year lag. The claim that then executives are subject to the whims of their successors (more moral hazard reasons for enriching themselves!) is nonsense - they should select good successors as part of their job.

We all know that the 'get rich quick' society is a crock.  People who do a good job of managing firms for the longer-term should get good rewards of perhaps twice or three times average earnings.  Psychopathic executives (the sought after cunning, manipulative, untrustworthy, unethical, parasitic, and utterly remorseless output of the business schools) are not required nor are greedy spivs who believe that the path to wealth is simply to gear up and buy. All business schools need to teach courses in ethics and never pretend that an MBA alone provides the skills to manage anything.

Shareholders need to be clear. We don't believe your lies, spivs. You have to work as anyone else does to justify a good salary. I am a defender and supporter of capitalism but I am not a fool and we have been dudded.

Hot hot hot hot

There are forecast to be four days (Wednesday-Saturday) of 40oC+ temperatures in Melbourne this week.  Melbourne has not had 3 days above 40oC since 1959.  The heatwave, defined in this way, is the worst since 1908.  The whole of Victoria is sweltering.

Checking out the records I find that this heat wave is up there with some of the worst ever in an Australian capital city. Adelaide in 2006 apparently had five consecutive days above 40oC.

I notice that even the native trees in the streets look dead in the heat this morning.  On the university campus wood ducks were avoiding the open water and sitting corpse-like in the shade of trees.

I have been fairly comfortable myself. Swimming pool, beer......and, when at work, an office with a ceiling fan on. Last night was not too hot though that will change over the next few days.

Monday, January 26, 2009

People who caused the global financial crisis

This Guardian survey sounded at first to me like a dumb idea but it is interesting. The wide range of people surveyed suggests the diverse origins of the current mess.

I'd foregotten all about Abby Cohen - the perpetual stock market 'bull'. But, yes, she makes the list.

At the end of the list there are 6 more who saw the whole thing coming.  I was interested in the inclusion of Kathleen Corbet, former CEO, Standard & Poor's.  I don't understand why.

Sunday, January 25, 2009

Australia Day

26th January 1788 was the day the British initiated their settlement of Australia. As a celebratory tribute I am off to play golf in the morning at Yarrambat – the aboriginal name for ‘high hill’ which pretty much summarises my attitude to Australia. After that I’ll have a beer (or three) and thank providence for me being born Australian and for the fact that Australia has British ancestry. A civilised, society with liberal, democratic values and a sound, effective legal system.  Take multi-cultural ambivalence and dump it elsewhere.

Australia day is viewed by certain backward aboriginal groups as Invasion Day – they want the date changed – (that would improve things?) presumably to a ‘year zero’ – but how do you date the Dreamtime?  Well I have no idea but who should care about such myths anyway? Attempting to change the date would be a move by the Rudd Government I would favour - they would then be thrown out of office. Go on Kevin try to change that date! Aboriginal Australians would not have been better off living under Indonesian or Chinese control and enjoy better living conditions and prospects as a consequence of the advent of white settlement.  Aboriginals need to make a go of it.  Many are.

The truth is that we all tend to take for granted the economic and political freedoms and the quality of life that we enjoy as Australians. Australia Day should remind us of our luck in the genetic lottery. It is nice that we are not a theocratic state or a worker paradise celebrating its national day of rebellion. I celebrate the fact that I wasn’t born in Iran, Saudi Arabia, North Korea or Cuba.

This isn’t self satisfaction. It amounts to seeing what is in front of my eyes.

Tomorrow I won’t even consider the hateful anti-Australianism that left wing blogs and Melbourne’s Pravda parade this day each year. I had my say last year.  At first sight their postings disgust me but it really is mainly false consciousness and stupidity.

Monetary mop-ups

This graph shows the US monetary base - the 'high powered' money that generates the money supply - for the last 100 years.  I assume that this base is generating a less than proportionate growth in the US money stock - M3 grew in 2008 at only about 15% - because of the much-publicised decline in lending.  But if lending were resumed how would the astounding consequent growth in the money supply be 'wound back'?

I am not a macroeconomist so better answers than I can conjecture intrigue me.   Are we in for a massive bout of global inflation as the depression/recession we are going to experience over the next year or so (hopefully) eventually peters out? Or are such massive increases in base money easily reversed by open market sales of bonds (sounds implausible) or increased reserve requirements (also sounds implausible)?

Couple the monetary moves with the latest $819 billion fiscal package and the monetary moves look very expansionary.

One reason for my caution is that econometric models are operating entirely in out-of-sample territory in trying to estimate the effects of these policies. I don't believe any model-based forecasts at this stage.

Comments welcome.

Ethics & Merrill Lynch executive remuneration

The real bonuses and the phoney profits have been a feature of Merrill Lynch's US operations.

But ex CEO John Thain's actions seem to me to show the moral bankruptcy of Wall Street.  Merrill Lynch paid out $15 billion to executives in 2008 which just matched the controversial 4th quarter losses that Bank of America (its purchaser) have complained they were unaware of. Moreover, while Bank of America begged Washington for $20 billion more in handouts, Thain approved an accelerated bonus pool of $4 billion for his executives. 

In addition while, in the scheme of things it is trivial, one cannot help wondering how Thain could have approved $1.2 million of shareholder monies for redecorating his office.  I think Thain should go to jail.  The argument that Thain sold Merrill Lynch to Bank of America for $44 billion and therefore 'saved the business' seems questionable to me.  This seems, again, to have been a deception - the $50 billion dollar deal from hell.

I've read for years that executives have to be paid absolutely huge salaries to prevent them leaving.  It was 'competition' working.  But what's the point of retaining executives who drive firms into bankruptcy and who require bonuses that exceed earnings.

What happened to ethics in all this? Do ethical issues become redundant when you 'allign' executive interests with those of shareholders by suitably cute incentive contracts?

The appalling behaviour of prominent business executives threatens our prosperity by undermining the basic institutions of capitalism.

Friday, January 23, 2009

GPS’s for cars & for golf

I have long-enjoyed my car GPS system. It is a useful device particularly when I travel interstate and hire a car but don’t know where I am going. My knowledge of my former hometown, Sydney, is fading which isn’t surprising – despite visits I have not lived there for 30 years! Now all I need to get around are addresses and my GPS. A few times it has directed me to attempt the impossible but it mostly works well.

Readers of this blog will also know that I play golf. Now GPS technology is being applied here. Golf basically involves hitting a ball with different golf clubs in the direction of a golf hole. The club you select depends on the distance to the hole (and perhaps various hazards) as well as how well you can hit. Distances you need to hit and distances you can hit can both be measured from a pair of satellite signals that can be monitored by a GPS.

Finally, I purchased a GPS for my golf and used it for the second time today. It gives distances from where you stand to the back, centre and front of greens/water hazards/bunkers and so on. It also tells you how far you hit each shot and the composition of your game between various types of shots (fairway, putts, and bunkers) as well as distances hit by club.

Yesterday there were blustery (north-west swinging to south-west) winds so distances were only part of the story in deciding what golf club to use but the device itself worked well. From officially placed pin-markers with a straight trajectory to a green – these define reference distances - the accuracy of the GPS was normally within 2 metres and mostly within 1 metre over 200-450 metres which is better than my imagination.

On one 5 par the GPS told me that the water hazard in the path of my second shot was between 145 and 165 metres out. This was useful information and led to a (cowardly) risk-averse strategic shot.

The golf GPS is a fun gadget that records the details of a subset of 12,000 golf courses around the world. Indeed you can easily record your own ‘course’ or modify the records of a course you play on a lot. You can also work out how far you hit various clubs and receive recommendations on the club you should use. You can finally use it to assess your game.

Like the car GPS my guess is that it will be most useful when I play out of town and don’t have much memory for the local distances. I am playing at Wodonga Country Club over the next week and judging distances there has always been a challenge for me. The course is now on my GPS.  The following week I will be in New Zealand attending an important conference and the strenuous mental efforts I make will certainly call for a relaxing round of golf there. Yes its on my GPS too.

I shot 4 under my handicap yesterday under terrible weather conditions. Today I played in a “Pool” competition at my beautiful golf club and won the money. The GPS definitely helped.

I wonder if I can get paid for this type of testimonial.

Wednesday, January 21, 2009

Barack Obama's presidential acceptance speech

Gracious and serious this is a speech worth listening to. There is much sense amid the rhetoric and Obama is - as everyone now knows - a talented man of enormous charisma. But as I stressed a few days ago the difficulties facing the US and hence Obama are immense*. The positive changes will only take effect gradually - a couple of terms in office at least.

He seemed so relaxed and yet determined. As I have said before I think Obama has the makings of being a great US president. He has buried the race issue because there is no issue of a Obama being an 'accepted' black man - he is an outstanding person, period.

I assume the interest group pressures on him will be as great as for other presidents but there is a backbone there that augers well. I am optimistic.

* As many have pointed out this was the worst inauguration day in US history for stock market prices. The US banks plummeted (shares of Bank of America, under pressure over its Merrill Lynch takeover shares dived 29%. JP Morgan dropped 21%, Citigroup 20%, Wells Fargo 24% and Goldman Sachs 19%) and as a group seem destined to fail. Nouriel Roubini, is quoted saying 'losses in the US financial system could hit $3.6tn before the credit crunch ends – which, he said, means the entire US banking system is effectively bankrupt".

This is a stunning statement backed up in markets. The Dow dropped 4% mainly because of the banks while, in Australia, the ASX dropped 3.1% with banks again pounded but resource stocks being even more heavily dealt with - BHP-Billiton announced 3400 workers in Australia will be sacked.

What a mess. The US banks may need to be nationalised or put into receivership.

Tuesday, January 20, 2009

Harry Nicolaides

As a past resident of Thailand a number of people have asked me what I think of the Harry Nicolaides case. Nicolaides has just been jailed for 3 years for lèse majesté - specifically for insulting the Thai monarchy.   Generally I am puzzled at what has occurred as Nicolaides has worked in Thailand since around 2003 - he should clearly have understood the reverence and respect Thais place on their monarchy.  I find it difficult to believe his claim that he didn't understand the law since any foreigner working in the country finds about about this very quickly.

Moreover, it is not just a question of law. The fact is that the Thai do hold the monarchy in intense respect.  They have an almost religious significance. Almost every household in this Kingdom has pictures of His Majesty the King (King Bhumibol) and other members of the Royal Family.  There is affection and respect for the Royal Family. In addition the Monarchy are seen as unifying the nation.

Australians who are republicans or luke warm royalists might find it difficult to appreciate these attitudes but for the Thais they are genuine and heart-felt.  Thailand is a very free and easy society - I don't believe it is too much to expect foreigners to appreciate these significant Thai attitudes.

Nicolaides seems at least to have been most unwise. As some have pointed out he seems to have even sought to draw attention to his poorly-written novel through his own actions.  On the other hand life in a Thai jail is a fearful outcome and, given that he has already served some time in jail, I can only hope that His Majesty the King grants him a pardon.  This has happened in the past in other cases of lèse majesté .  I am uncertain that public protests outside of Thailand are the best way of achieving this outcome.

If you are travelling or living in Thailand you need to be respectful of the monarchy. And of course keep away from illegal drugs.

First sharkgull spotted in Australia

Long believed to be extinct in territorial Australia - but occasionally seen on off-shore islands that do not lie in Australian territorial waters - this great snap of Accipiter selachimorpha (the Common sharkgull) was taken by C. Marter while the bird roosted on the roof of a local eatery near Gosford NSW.  Until this gory discovery missing livestock in the Gosford area had been explained as theft.

The single bird was seen and photographed by C. Marter and seen by most members of the Mid Coast Birdwatchers Guild on 12/1/2009.  The sighting needs to be officially recognised by BARC before it can be added to the Australian lists.

Monday, January 19, 2009

This little girl wants more Nazis

Despite the ceasefire (which now even the Hamas terrorists have agreed to)  thousands of Palestinians marched in Melbourne yesterday condemning Israeli violence. I wonder if the caped crusader to the left of the little girl is her history teacher. For the following photo HT Tim Blair.

Meanwhile despite the usual pathetic claims Hamas do in fact seem likely to be restained by angry Palestinians who, while hating Israel, fear her.  That's about all Israel could hope to achieve.  The cost - around 1300 Palestinians dead and 13 Israelis.  Hamas has already declared victory (!) and announced its its intention to replenish its arms stockpiles.  They will continue their mission to secure 'holy weapons'.

Optimism & the Obama Presidency

Barack Obama will become the 44th President of the United States tomorrow.  Despite the exceedingly tough economic times Americans overwhelmingly see Obama as something positive for America.
'a New York Times poll found 79% think Barack Obama will improve the nation – a level of support that is higher than for any incoming president in 3 decades'.
Cynics might say that this optimism partly reflects disaffection with the current President George Bush.  Maybe true and, in any event, optimism can feed disappointment. It is wonderful news that a black man is entering the White House but we should not assume that a public works program will resolve America's intractable soccial and economic problems:
Ten trillion dollars have evaporated in the greatest stock market crash since the 1930s. Twenty million Americans face negative equity, 30 million Americans are in poverty, 40 million have no health insurance. The numbers just keep piling up.....
And so, pretty soon, we will all probably start to complain that Obama is a man of straw, a media creation, a triumph of style over substance; more a celebrity than a politician - a "polebrity" to use the latest ugly neologism.
Americans must be realistic and demand only the possible. Obama has already begun the difficult task of trying to hose down expectations.

Saturday, January 17, 2009

Confused thinking on the environment at Catallaxy

A post over at Catallaxy suggests that policies of preventing the exploitation of oil and gas reserves near national parks in the US harm the poor (mainly blacks) and are therefore unacceptable - there is even the suggestion in the original news story* that such policies are racist . It is at best a partial story and in conceptual terms highly misleading.  The general intent by Catallaxy is to poke fun at the middle class affluent in a way reminiscent of populist left-wing attacks on reason.

The decision to limit exploitation of oil and gas reserves (or any other marketed good) because of conservation concerns (or concerns over any non-marketed good) is one that revolves around a social cost benefit analysis of the respective options.  Oil and gas products are marketed whereas conservation values are not so it is more difficult to get a feel for the present value of the latter types of outputs.

More effort is involved in valuing conservation assets but various indirect procedures can be used (advice from experts and scientists, travel cost method, contingent valuation and so on).  A premium should, of course, be added to the conservation values - a quasi-option value  - since the decision not to proceed with development of the oil and gas deposits is reversible while the decision to proceed with these developments is much less readily reversed to reinstate conservation values.  In addition, technical progress in the future will yield new sources of energy but not new conservation assets and, if you believe the environmental luxury good hypothesis, people's values switch toward conservation as they become more affluent. Environmental red necks tend to be working class.  Both of these factors intensify the case for taking care with the destruction of already over-exploited natural environments.

All this is basic resource economics and provides a rational basis for being conservative about certain natural resource destructions.

The cost benefit comparison proposed involves ignoring distributional impacts and is largely efficiency-based.   This is essentially the 'second theorem of welfare economics' - maximise the value of society's outputs first and then (if necessary**) make transfers to accommodate the specific interests of particular disadvantaged groups such as the poor.  One can raise qualifications about the general applicability of this result but it works well in the current setting.

If it is mainly middle class affluent people who seek conservation outcomes then, on this account alone, they should pay for those outcomes and transfers should be made to those suffering the costs. But this has nothing to do with the case for making the conservation versus development issue using efficiency-oriented cost-benefit analysis.

The point is to value things at their social worth something a libertarian blog like Catallaxy should understand.  Economics is, in my view, a discipline which sensibly protects the environment.

It is foolish to sling-off at environmental activists because they are middle class or rich and because some of those bearing the costs of development restrictions have lower incomes. To a very large extent environmental equity and efficiency issues are separable and those committed to free markets should always target efficiency leaving the tax and transfer mechanism to address distributional issues.

* It is a generally ignorant account which suggests that poor inner city blacks will suffer most the effects of higher energy prices if the deposits are not developed.  This fails to recognise that energy prices are globally determined with the local developments being discussed having only a limited, short-duration impact on prices. Both rich and poor are impacted on by any higher prices.

** The poor do not need to be compensated for every policy that runs against their interests if they already receive huge transfers from those more wealthy in order to effect general redistributive concerns. In the present setting specific benefits to the wealthy of conservation might be consider a payback for redistributive taxes. This is an important since it is generally not necessary to provide specific compensations for every project.

Update: In a comment Tim Lambert points out that the source of the claim that protecting conservation areas is racism is CORE (Congress on Racial Equality) which receives funding from ExxonMobil.  CORE has been an active supporter of climate change denialism and opposed (for example) the listing of polar bears as endangered species on the grounds that such protection damaged poor black Americans

Tuesday, January 13, 2009

A break in Syd

I am relocating to Sydney for a few days R&R – escaping forecast temperatures in Melbourne of 39oC tomorrow for a more moderate 29oC in Syd. I’ll post if Bondi beckons less than I anticipate it will but I doubt it.

Son William: ‘Dad, those ladies over there are missing the tops to their bikinis’.

Dad: ‘For God’s sake don’t stare. Where was that, son?’
Back Monday.

Update: It was stinking hot in Syd and, from reports, no worse in Melbourne.  Cooled a bit on Saturday but looking forward to regaining the civilised Melbourne lifestyle.

Keep wages high to increase misery

As unemployment in Australia looks ominously set to soar the mindless are at it again endorsing preservation of real wages in the face of the most serious threat to employment Australia has faced since the Whitlam and Keating years. The reason they claim – keeping wages high will stimulate aggregate demand and the role of wages as a cost of production is exaggerated. It is also, they claim, socially just. Employers can deal with reduced demand for their output by means other than shedding labour – for example by investing in skills. Of course if this argument is valid then why not increase wages when the demand for labour falls – this will really get unemployment increasing at a time of falling Labor demand! Indeed that is the ‘strategy’ (to stretch a term) of the ACTU that I have recently discussed.

Of course, the reason this is so daft is that firms employ workers in terms of the value of their additional contribution to output the workers generate so that when this value falls employment will fall. The extra demand from higher incomes will only reflect extra spending from the diminished pool of those who hang onto jobs. Not from that pathetic lot forced to join the dole queues whose diminished incomes are paid for by transfers from those lucky enough to retain their jobs.

The notion that keeping wages high is 'socially just' is economic illiteracy. It is behind the nonsensical notion that whatever happens the real wage should only ever remain fixed or increase. A social wage can be sometimes preserved by means of government transfers but, in market economies - all economies other than North Korea and Cuba - privately paid wage signals determine employment decisions. The notion that wages themselves should reflect what dreaming lefties believe are appropriate living standards essentially denies the existence of labour markets.

Sunday, January 11, 2009

The Brothers Karamazov

I have re-read Fyodor Dostoyevsky’s The Brothers Karamazov after more than 30 years. I remember being almost spellbound by the novel when I first read it – it led me into The Idiot which I also found a revelation. A curious feature of my reading of both books is that, after such a time, the plots had faded almost entirely in my memory. I did remember a pervading sense of delirium yet a strong sense of realism in the writing. Obviously the impact was on me was emotional not narrative. Let’s face it the human condition seldom gets described accurately by popular culture and Hollywood - when we come across a quality portrayal the description sticks. Particular emotionally-charged passages I recall vividly as if I read them yesterday. One terrifying image that stuck is of a peasant beating a horse around its ‘gentle eyes’. Yet I had forgotten almost entirely about Fyodor Karamazov, his death and the prosecution of Dmitri which provides the bulk of the second half of the story.

In the chapter before that titled the ‘Grand Inquisitor’ Dostoyevsky exposits what, as far as I know, is one of the earliest versions of the ‘ticking bomb’ problem that I recall discussing on John Quiggin’s blog a few years ago. In the version I discussed the question was whether one should torture a terrorist who knew where a ticking bomb was concealed if the discovery of the bomb would prevent the deaths of millions. Dostoyevsky poses this problem much more dramatically. Should you torture to death a young innocent child if by so doing you could bring eternal happiness to all in the world? Our hero, Alyusha* Karamazov, thankfully says ‘no’! I thought I might have been the first to recognise this literary connection to a contemporary problem of ethics but Dostoyevsky’s argument, and its link to the ticking bomb issue, is, in fact, widely- known.

The Brothers Karamazov is not all gloom and pessimism and it does capture real life in all its complexity. I am intrigued by the initially peripheral figure Grushenka who is initially portrayed as a conniving slut but who gradually is revealed as a highly intelligent free spirit and ultimately as the ideal Russian woman. Indeed the whole novel is fascinating writing. Freud described it as the most ‘magnificent novel ever written’. In the absence of evidence to the contrary - and given my limited literary experience - I concur.

I was lucky enough to read this book in a beautiful Folio edition illustrated with wood engravings. It does make a difference reading an enjoyable novel that is so elegantly presented - hard cover, heavy high-quality paper and attractive non-miniscule fonts.

*Incidentally Alyusha was the name of Dostoyevsky’s young son who died aged 3 from epilepsy – a disease his father inflicted on him through his genes.

Saturday, January 10, 2009

Buffett's Snowball

I have just read the massive 900 page biography of Warren Buffett, by Alice Schroeder, The Snowball, Warren Buffett and the Business of Life. I was thinking of reviewing it but after as couple of drafts I gave up because my review seemed so narky and negative in what I gleaned as the character of Buffett*. Yet I didn’t quit reading the book and, indeed, enjoyed it thoroughly. This review says what I wanted to say much better than I could. Quote:
Over 900 pages about a man who loves money so much that he has no interest in religion, the arts, literature, science, travel, partisan politics, his surroundings or fine living. Before the global recession (which reduced his fortune by around $16.5 billion), Warren Buffett was said to be the richest man on earth, with an estimated net worth of $62.3 billion in March 2008. But he lives in a house in Omaha, Nebraska, which he bought in 1958 for $31,500, subsists on a diet of hamburgers, cherry Cola and potato chips and spends his days in a repetitive routine which most people would find mortifyingly banal.
Of course we all want Buffett’s wealth but I doubt many would enjoy the miserable existence that he calls a life. On cost benefit grounds even if I could mimic his financial genius I couldn’t bring myself to live what to me would be an extremely tedious and narrow obsession with the almighty buck.

Essentially the flaw in the Buffett view of the world is mercantilist. His object in life is to accumulate piles of silver not to spend it or even to leave it to his kids. The world’s richest man provides a living contradiction to the basic idea of economics that it is consumption not income that should matter.

Did I learn anything about investing from this book? I think so. Common sense ideas about trying to understand a business and taking advantage of the ‘madness of crowds’ were appealing. Buffett’s idea of a ‘safety margin’ and his obvious disdain for tricky financial engineering were refreshing.

Buffett is interested in accumulating wealth not in spending it. His recent stated intended philanthropy via the Gates Foundation is partly just a manifestation of this – Buffett just wants to control the distribution of his wealth beyond the grave. I guess too that GF’s ethical view that all human lives have equal worth would be supported by Buffett – he strongly believes that kids should not receive a meal ticket for life because they win a genetic lottery. That’s sensible.

*On a positive note he is honest and values hard work.

Friday, January 09, 2009

Promoting test cricket

My colleague Dr Liam Lenten has some controversial ideas on promoting Test Match cricket.

" it may be that what we need is more draws, or at least the chance of more draws...

...the modern-day version of Test cricket is characterised by quicker scoring and wicket taking, more frequent dismissals due to third umpires, a steep fall in the frequency of draws and fewer matches going into the fifth day.

...the side that struggles early in the Test and is no longer in a position to win the Test finds it harder to hold on for a draw.

Dr Lenten believes administrators need to reduce the number of overs bowled each day and consideration should be given to Tests lasting four days rather than five".

Most Tests that finish with a result in the final session of the fifth day are highly absorbing matches, and currently there are not enough Tests going into the fifth day,"

A full analysis is contained in the December Economic Papers published by the Economic Society of Australia - unfortunately not yet available online.

Thursday, January 08, 2009

Trade union policies for increasing unemployment

The Whitlam-inspired wage breakout in the 1980s drove unemployment to 10.4%. Another Labor-driven wage breakout in the 1990s exacerbated the recession we 'had to have'. This was Labor's economic legacy. I remember my left-wing mates at the time telling me that 30% wage increases given to metal workers would boost purchasing power and stimulate the economy! They didn't - these sorts of decisions created high unemployment and high inflation - stagflation.

But from December 1995-December 2005 the Howard Government created 1.7 million jobs. In the 18 months to September 2007 another 500,000 jobs were created in an astonishing burst. Inflation was almost eliminated. Howard's reward was to be voted out of office.

Now the Labor Party is at the helm again and, in the face of a looming recession, the real contribution John Howard made to reducing human misery in Australia by driving unemployment to a 33 year low faces the prospect of being destroyed not, in the main, by economic circumstances as much as by idiot trade unions.

According to The Age:

"The union movement is pushing ahead with wage claims despite the Rudd government calling for restraint in difficult times.
The slowing economy will suffer further if the real incomes of workers are not protected, the ACTU says.
Unions are under pressure to moderate their positions during bargaining negotiations with employers after it was reported the CFMEU will ask aluminium giant Alcoa to strike a new deal giving power plant workers at its West Australian operations an immediate pay rise of up to 33%.
ACTU president Sharan Burrow defended the union saying the claim amounted to annual pay rises of between 5-10% over several years.
It was important real incomes were maintained because the economy would suffer if workers could not pay their bills.
"If you don't protect incomes, then that's a negative for the economy as well," she said.
"If working people can't pay their bills, if in fact their mortgage is threatened ... then that's not going to help the economy survive, nor indeed recover."
Apparently Burrows sees the role of wages as a source of aggregate demand but does not want to understand that they constitute a cost for firms and will influence employment because they are a cost. The Burrows policy position is that in times of emerging unemployment wages should be prevented from falling. Her claim is that wage reductions to reflect reduced demands for such things as our mineral exports will damage Australia! This is precisely analogous to the remarks of my friends in the 1980s on the metal worker wage claims.

If anything real wages need to fall in industries experiencing hard times and reduced demand just as they rose during the good times. This flexibility is the best guarantee we have against another emerging unemployment catastrophe. 5-10% wage claims in a time of depressed demands when productivity growth is less than 2% is a recipe for disaster.

The contrary suggestion that higher wages act only to boost aggregate demand is really too stupid to warrant serious analysis but it does show the forces that our intellectually-challenged Treasurer Swan is up against in trying to manage the economy. It is not just a few CFMEU ratbags but the ACTU - those dinosaurs whose contributions funded the current mob of nitwits into Federal power and whio are now baying for payback - who endorse this sad idiocy.

Watch the left of politics duck this issue! Silence will prevail! They cannot challenge this stupidity even though they recognise its craziness because of their blinkered ideological priors and hypocrisy. Their integrity is close to zero in these areas.

Richard Posner recently made the following remarks about US trade unions – they are appropriate to Australian unions as well:
"The goal of unions is to redistribute wealth from the owners and managers of firms, and from workers willing to work for very low wages, to the unionized workers and the union's officers. Unions do this by organizing (or threatening) strikes that impose costs on employers. ... Because the added cost to the employer of a unionized work force is a marginal cost (a cost that varies with the output of the firm), unionization results in reduced output by the unionized firm and, in consequence, benefits nonunionized competitors. Unless those competitors are too few or too small to be able to expand output at a cost no higher than the cost to the unionized firms, unionization will gradually drive the unionized firms out of business.
Unions, in other words, are worker cartels. Workers threaten to withhold their labor unless paid more than a competitive wage (including benefits and work rules), but unless their union is able to organize all the major competitors in a market, the cartel will be eroded by the entry of nonunionized firms, which by virtue of not being unionized will have lower labor costs. The parallel to producer cartels is exact--workers are producers.....
I don't think there's much to be said on behalf of unions, at least under current economic conditions. The redistribution of wealth that they bring about is not only fragile, for the reason just suggested, but also capricious, as it is an accident whether conditions in a particular industry are favorable or unfavorable to unionization. By driving up employers' costs, unions cause prices to increase, which harms consumers, who are not on average any better off than unionized workers are. Unions push hard for minimum wage laws and for tariffs, both being devices for reducing competition from workers, here or abroad, willing to work for lower wages.....And by raising labor costs, unions accelerate the substitution of capital for labor, further depressing the demand for labor and hence average wages. Union workers, in effect, exploit nonunion workers, as well as reducing the overall efficiency of the economy".
Indeed this describes what happens in normal economic times not in the current severe economic situation. Alcoa, the firm subject to the above-mentioned 33% pay claim, is already planning to cut 15,000 jobs. The union stance is madness. Unemployment will be much higher than it would otherwise be because of union and complicit Labor Party stupidity. Without wage restraint now we will have an appalling recession with hundreds of thousands of additional people on the dole.

And chardonnay socialists will declare Kevin Rudd a Great Leader because he has apologised to aboriginees on behalf of us all for claimed sins we had no part of and ratified the impotent Kyoto Protocol but done little to address climate change. November 2007 was an eventful moment in Australian history.

Way of the Tao

Professor Terry Tao (born 1975) is an Australian mathematician now working in the US. Tao was a child prodigy who taught himself arithmetic at age 2. He received his PhD at age 20, was appointed a full professor at UCLA at age 24 and won the Field’s Medal in mathematics at age 31. This award is something analogous to a Nobel Prize in maths. (There is no Nobel Prize in mathematics though this is not because Nobel’s wife ran off with a mathematician).

Gregory Mankiw (and Joshua Gans) recently discussed a delightful version of the ‘airport problem’ a problem Tao conceived while manoeuvring around a long airport terminal. The apparently self-evident answer to the first part of this easy-to-state problem* is wrong but thinking clearly about the issue clearly resolves things quickly**.

Anyway I happened to see some classes given by Tao that have been recorded on YouTube. He is not only an obviously brilliant mathematician but an extremely able teacher. This introductory class on the prime numbers is beautifully presented.  Poetic, insightful, simple.

It is a pity – from Australia’s perspective if not his own - that he is not working in Australia building up a great mathematics department and attracting scholars of renown here. I’d make the same observation about notable scholars in my own field of economics. That’s definitely not a criticism of any individual – purely an observation that academe here would be better-off with their presence.

By the way Terry Tao is also a blogger – I added his site to my list of blogs a few weeks ago.

*You wish to get from one end of a long airport terminal to the other in minimum time by walking and taking motorised walkways where you can also walk. But you need to stop to tie your shoelaces. Should you stop on or off the walkway?

** Consider two people taking the walking journey. They leave at the same time and one stops to tie his shoelace just before he gets on the walkway while the other takes one more step and gets on the walkway where he then ties his shoelace. It is easy to see who gets to the other end first!

Tuesday, January 06, 2009

Windy gets hoaxed

My paper on climate change correcting the climate change denialist drivel Quadrant has been publishing over recent months may not have been rejected as much for its content than because of the lack of judgement of its editor Keith Windschuttle. Windschuttle has been comprehensively hoaxed by a fictitious author 'Sharon Gould' who wrote a piece of preposterous drivel on genetic engineering which Windschuttle accepted as legitimate science. The hoax is described in detail at Crikey. In the tradition of Ern Malley – the famous literary hoax perpetrated by Quadrant’s first editor, James McAuley – the 'Sharon Gould' persona is entirely fictitious and the article is studded with false science, logical leaps, outrageous claims and a mixture of genuine and bogus footnotes*.

Windschuttle to 'Sharon Gould' on the article:
"I really like the article. You bring together some very important considerations about scientific method, the media, politics and morality that I know our readers would find illuminating… if you could re-work the intro along these lines, we would be very pleased to publish the article in our January edition. I would need to hear back from you as early as possible next week".
A blogsite has been compiled to describe the origins of the hoax. Windschuttle has admitted the hoax but has described the article as 'fraudulent journalism'. That is one interpretation - another is that Windschuttle in making editorial judgements is not good at discriminating between sense and outrageous stupidity.

That in itself is not a crime. I edit a journal myself and am not expert on more than half the submissions made. But that is why all articles undergo a refereeing process. Quadrant might think of doing much the same. Its output on climate change issues (in particular) could not fail to improve.

It might also think about checking the bona fides of its contributors.

* Example (quote from the hoax Quadrant article)

"Let us suppose Australia had plans to commercialise a variety of wheat engineered with human genes.

Too far-fetched a scenario? Not at all. Human genes are at present engineered into tobacco plants in order to produce a protein called Factor VIII, and into rice crops to produce a protein that when consumed triggers human immune responses.

In July 2003, buried within a footnote of an article in the Plant Biotechnology Journal was an astonishing revelation. Researchers at the CSIRO had, according to the reference, abandoned plans to commercialise a variety of wheat that had been engineered with human genes. The genes were responsible for helping trigger immune responses in humans. When eaten, the wheat could potentially trigger a body’s immune response to fight pre-cancerous cells, but the company’s annual report, according to the footnote, stated: “the transgenic wheat was abandoned because of the potential of perceived moral issues among the public”."

Yep, Keith, I strongly recommend refereeing science-based articles or articles claiming to state facts. What confidence can anyone otherwise have in the content of Quadrant?

Pessimistic views on the global economy

Stock markets have been strong in recent weeks – in anticipation of an Obama fiscal-led recovery - and many financial analysts are predicting the end of the panic and a reversal toward economic normality. That is a false perspective – the US, Chinese and European economies are in free fall. As with the Great Depression the dramatically low interest rates are not doing the trick and there are inevitable political difficulties in getting an effective fiscal stimulus package to work.

US job losses in 2008 are the worst since the end of WW2 – 2.4 million Americans lost their job in 2008 and yet the severe financial jolts occurred late in the year. Clearly the worst is yet to come as deleveraging throughout the economy occurs to offset decades of excessive borrowing.

Paul Krugman has come out and said it plainly* – this looks like a ‘second’ Great Depression. Janet Yellen has described the downturn as likely to be the longest and most severe since the Great Depression.

I am a pessimist and view the current stock market mini recovery not as a leading indicator of future prosperity but as a false dawn. The real effects of the disastrous financial crisis are only beginning to be felt.

* Excerpts of Krugman's views:

" Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

... We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas ... in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”

...Yet credit remains scarce, and the economy is still in free fall.

Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes (but) The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans....

But these plans may turn out to be a hard sell. News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.

In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.

More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.

The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

All of this leaves me concerned about the prospects for the Obama plan. I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.

Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.

So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?"

Update: earlier views that the recovery of US employment reflected spurious seasonal effects are confirmed. In December US unemployment jumped by 525,000 to 7.2% of the workforce. This is a 16 year high. 2.6 million Americans lost their jobs in 2008. In total 11 million Americans are unemployed. My earlier forecast that US unemployment will hit 10% looks close to the mark - official forecasts are around 9% by end of 2009. The US economy is in freefall.

Monday, January 05, 2009

Israel launches ground attack into Gaza

The widely-predicted ground attack by Israel into Gaza occurred on Sunday.  The response of the media and mealy-mouthed politicians has been predictable.  On the one hand a section of the media, backed up by supporters of terrorism around the world, has been to attack the immorality of the Israeli attack often without mention of the past and continuing bombardment of Israel by missiles from Hamas.  This is one-eyed hypocrisy given the avowed intent of Hamas to wipe-out Israel.  A milder version of this critique is to assert that the Israeli punishment (in terms of military attack or casualties inflicted) exceeds the crimes of Hamas so that Israel is 'overreacting'.  But Israel is not merely trying to inflict reciprocal damage on Gaza as a payback but trying to prevent the missile attacks. It can only do this by seriously damaging Hamas.

Mealy-mouthed politicians (including our own Julia Gillard and the toothless UN - this is particularly disgraceful) have participated widely in these forms of hypocrisy as well as by launching the standard response that both sides should stop the conflict, kiss and go home. This is unhelpful.

The more serious complaint about Israel's ground actions are that it might experience substantial losses in terms of casualties as it did in its conflict with Hezbollah in Lebanon. The Hamas terrorists it is claimed have greater knowledge of the local geography and will, in their usual cowardly fashion, conceal themselves in heavily populated areas - not difficult in densely populated Gaza. The body bags created by the Hamas cowardice will weaken public resolve in Israel to continue to prosecute it.

While this is a serious problem it is difficult to come up with alternative viable responses from Israel.  Hamas is employing the standard technique of terrorists by holding a civilian population to ransom and then provoking an attack. The Palestinian casualties are due to Hamas (and its backers in Syria and Iran) not to Israel.  The Palestinian deaths are a human input to the military objectives of Hamas and provide a further radicalisation of the local surviving population in its resentment of Israel. The predicted Israeli deaths are a problem because Israel's government - like most other civilised governments - is concerned with deaths of its citizens.  Hopefully Israel's retrained and better-equipped army will do a better job than it dis against Hezbollah.

But despite the real probability of substantial Israeli costs I do not believe it is possible to deal in a reasoned way with Hamas.  Israel needs to make it clear to the Palestinians that electing terrorists and prosecuting an ongoing conflict with Israel is a costly strategy for Israel's enemies.  Above all Israel needs to establish its military credibility and not be black-mailed by the terrorists.

Saturday, January 03, 2009


Yesterday I saw my first movie of 2009 - Frost/Nixon - the stylised account of the lead-up to and the actual interviews between the British interviewer David Frost and disgraced US President Richard Milhous Nixon. There were a few much-criticised historical inaccuracies in the film (many relating to the claimed priority Frost enjoyed in getting admissions from Nixon) but it is a dramatic and suspenseful movie. There is also much grim humour. Frank Langella is superb as Nixon and must be a contender for an Oscar – the film has been nominated for Golden Globes awards for best dramatic picture, best actor in a drama (Langella), best director (Ron Howard), best screenplay (Peter Morgan) and best original score (Hans Zimmer).

I also thought Michael Sheen was a more than capable David Frost - some critics found his smile wooden but his frivolous easy-going character was the exact counterweight to the neurotic intelligence of Nixon. Both lead actors previously participated in performances of a play with the same title.

By the way my sympathies during the film were almost entirely with Nixon – an imperfect, difficult although obviously highly intelligent man. In the film he runs rings around Frost until the final 2 hours of 30 hours of interviewing when finally and climactically Frost induces Nixon to spill the beans on his complicity in the Watergate scandal. The final admission almost seems cathartic for Nixon who finally realises it is over for him.

An enjoyable dramatic film.

Friday, January 02, 2009

Denialist stupidity

I am astonished at the The Australian newspaper for suggesting that cool temperatures in 2008 might provide a ‘serious blow to global warming alarmists’. It is my bolding on the word ‘alarmists’ – an unusual turn of phrase since it includes almost all figures in climate science and the Australian Bureau of Meteorology.

The Australian's judgement is wrong on two counts. First, climate is not determined by a single year’s average observed temperature. To suppose otherwise is just incorrect. Keith Colls and Richard Whitaker’s excellent, The Australian Weather Book, Second Edition, 2001 define climate as the probability distribution of the various elements of day-to-day weather. To determine this probability distribution, for weather patterns as variable as those for Australia, the authors suggest that it is necessary to draw on rainfall records dating back 150 years and temperature records drawing on 50 years (page 156). Second, there may well be medium term deviations from warming trends due to climatic effects related to cooling of the oceans. This is the reason I am strongly opposed to viewing the current drought as a reflection of climate change. If the public come to accept that medium term droughts reflect climate change they may falsely believe that medium term reductions in average temperatures imply that anthropogenic global warming arguments are false.

The difficulty with the foolish reasoning presented in The Australian is that it may cast sufficient doubt in the minds of the public and in politicians to forego activist climate change policy particularly given the current economic difficulties.

In fact the current cooling trend has been analysed at length by the Bureau of Meteorology. Their December 23, 2008 ENSO Wrap-Up states:
The equatorial Pacific has continued to cool during the past fortnight, with large areas in the east and centre of the basin between 0.5°C and 1.5°C cooler than normal. This raises the possibility of indicators reaching La Niña levels, even if only briefly, if the cooling persists. In the atmosphere, Trade Winds have been persistently stronger than normal for some months across the western half of the basin, cloudiness is suppressed along much of the central and eastern equatorial Pacific, and the SOI remains strongly positive, with an approximate 30-day value of +13 as of 21st of December.

Given current conditions and recent trends, the development of a La Niña during the southern summer cannot be ruled out. However, for the first quarter of 2009 the majority of climate models forecast neutral conditions, but with a cooler than normal equatorial Pacific. Historically, it is unusual for La Niña thresholds to be reached during the southern summer, though this did occur as recently as the summer of 1999/2000.
Thus there is the possibility of a cooling related to a La Niña event during the current summer.

Further comments on The Australian’s arguments are provided at Deltoid.

Thursday, January 01, 2009

Recessions & depressions

This Economist piece pins down the distinction between recessions (2 consecutive quarters of negative growth)  and depressions (declines of GPD which either exceeded 10% in a year or which persist for more than 3 years) and  analyses when and where they each occur.  Depressions were more common in the past because bank failures were more often permitted and because the share of government in the economy was smaller.  These days depressions are much more common in emerging economies - Russia had a dozy 1989-1998 when GDP fell 45%.  ASEAN countries experienced depressions following the 1997 Asian crisis.

It remains an open question whether the US will experience a depression now. Most economists say not (fiscal actions and support of financial institutions the reason) but in the current disturbed environment these forecasts have limited (I would say close to zero) value.  Model-based forecasts are only valid in the range of experience the models are based on and the current situation is something distant from recent experience. What is true is that the US economy declined 6% on an annualised basis in the December quarter.

The price paid at Intrade for a US depression outcome implies a depression probability of about 30% compared to a probability of 10% in November 2008.  See: