Limits of redistribution

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

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

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

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

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

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

Barack Obama's speech to Congress

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

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

Sri Lanka & the defeat of the LTT?

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

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

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

Scrapping private health insurance rebates a poor proposal

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

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

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

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

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

Instrument instability & the global economic crisis

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

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


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

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

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

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

Wong not wrong on case for an ETS

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

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

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

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



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

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

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

Auckland & its traffic

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

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

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

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

Costello is right on Rio

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

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

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

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

Thoughts of depression fade to long white clouds

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

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

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

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

Bushfire insurance

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

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

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

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

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

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

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

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

Suntech's Shi Zhengrong

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

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

5 new bird species for H

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

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

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

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

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

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

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

These all get added to my lifelist.

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

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

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

As Ergas states:

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

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

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

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

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

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

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

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

Cost efficient terrorism control

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

Thanks Sir Henry

Baggage handlers strike

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

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

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

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

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

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

Bushfire tragedy hits home

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

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

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

This nightmare will stick around for quite a while.

Satellite images of the Victorian bushfies

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

Cairns in the wet & birding

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

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

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

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

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

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

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

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

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

Fires in Victoria & floods in Queensland

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

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

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

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

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

What a bizarre and tragic meteorological equilibrium!

Climate change - who caused the damage?

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

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

David Cross cracks me up every time

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

HT to Coreopsis.

High temperature

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

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

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

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

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

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

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

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

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

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

The Treasury critique of Turnbull

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

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

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

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

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

Shutting down Detroit

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

Bird photography - Black Grouse

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

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

Turnbull opposes Labor $42 billion package

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

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

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

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

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

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

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

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

Iraq elections

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

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

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

Rudd's big package

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

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

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

Australian economy & Labor

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

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

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

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

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

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

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

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

Sunday night & medical cannibalism

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

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

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

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

HT John S.

Rudd banalities & handout disease

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

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

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

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

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

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

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

Toohey crisply sums up the Rudd problem:

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

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

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

Olivier Blanchard on uncertainty & the financial crisis

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

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

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

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

Wrong Wong

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

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

Uncertainty & irreversibility of climate change

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

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

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

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

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

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

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

IMF forecast worst world economic performance for 60 years

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

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

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

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

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.

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.

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.

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.

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.

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* 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.