Tuesday, December 30, 2008

Iranian Presbyterians to fight in Gaza against Zionism

These Presbyterians have offered to fight Zionism from a base in Gaza. They are part of a movement to establish democracy, women's rights, liberal educational values, business acumen, economic progress and freedom in one of the world's worst current trouble spots.

Progressive (often nappy-crested*) idealist followers in Syria, Yemen, southern Beirut and Sydney have voiced their support. Shaking their fingers they have warned the Zionists not to respond provocatively to freedom-fighting missiles directed at them. If the Zionists continue to fight back the Presbyterians warn that they will jump up and down and get annoyed. They won't like the Zionists any more and will whip their asses like they did last time....err the time before that...well you know when.

* Mr Natural - below - forgot his nappy and has not yet learnt how to goosestep.

Pharmaceutical market failures?

This review in the New York Review of Books shows how drug companies pay bribes to medical doctors and psychiatrists to have new drugs publicly endorsed and promoted and how research activities into new drugs are given a positive spin through the input of drug company money.  Quote:
'No one knows the total amount provided by drug companies to physicians, but I estimate from the annual reports of the top 9 US drug companies that it comes to tens of billions of dollars a year. By such means, the pharmaceutical industry has gained enormous control over how doctors evaluate and use its own products. Its extensive ties to physicians, particularly senior faculty at prestigious medical schools, affect the results of research, the way medicine is practiced, and even the definition of what constitutes a disease'.
Consider Dr. Joseph L. Biederman, professor of psychiatry at Harvard Medical School and chief of pediatric psychopharmacology at Harvard's Massachusetts General Hospital.
'Thanks largely to him, children as young as 2 years old are being diagnosed with bipolar disorder and treated with a cocktail of powerful drugs, many not approved by the FDA for that purpose and none of which were approved for children below 10 years of age.
Legally, physicians may use drugs that have already been approved for a particular purpose for any other purpose they choose, but such use should be based on good published scientific evidence. That seems not to be the case here. Biederman's own studies of the drugs he advocates to treat childhood bipolar disorder were, as The New York Times summarized, "so small and loosely designed that they were largely inconclusive."
In June, Senator Grassley revealed that drug companies, including those that make drugs he advocates for childhood bipolar disorder, had paid Biederman $1.6 million in consulting and speaking fees between 2000 and 2007. Two of his colleagues received similar amounts'.
In an interesting twist after this was revealled the president of the Massachusetts General Hospital and the chairman of its physician organization sent a letter to the hospital's physicians expressing not shock over the enormity of the conflicts of interest, but sympathy for the beneficiaries! "We know this is an incredibly painful time for these doctors and their families, and our hearts go out to them."'

The conflicts of interest here are clear enough for prescribing doctors and pharmaceutical regulators to appreciate.

Update: This article in NYT records that US pharmos have agreed to stop issue branded trinkets - Vioxx pens and so on.  Quote:
“We have arrived at a point in the history of medicine in America where doctors have deep, deep financial ties with the drug makers and marketers,” said Allan Coukell, the director of policy for the Prescription Project, a nonprofit group in Boston working to promote evidence-based medicine. “Financial entanglements at all the levels have the potential to influence prescribing in a way that is not good.”

Monday, December 29, 2008

Israel attacks terrorist bases in Gaza

The UN have condemned Israel for 'overreacting' in their airstrike attacks on the Gaza Strip*.  I think in fact that Israel have acted decisively and have not overreacted at all. The attacks have real ferocity and regrettably have killed an estimated 290 Palestinians - many of them civilians.  It is a miserable outcome for a poverty-stricken people living in what amounts to a large prison camp.

Hamas provoked the airstrikes by launching sustained missile attacks on Israel.  The horror of civilian deaths is real but irrespective of any moral arguments the core issue is how else a country like Israel could respond to missile attacks from a group which seeks to anniliate it?

Likewise while the Palestinians grizzle about travel restrictions into and out of Gaza the culprit here is Hamas which sends suicide missions into Israel.

Residents of Gaza gave a political victory to the Hamas terrorist group which seeks the destruction of the neighbouring state that, in fact, exited the occupied Gaza in 2005.  The Gaza residents are now paying a terrible price for their choices. The Hamas cowards are launching their missile attacks from civilian areas inside Gaza essentially using the civilians as human shields.  To some Hamas seem to be preventing the treatment of injured Palestinian civilians in Egypt while to others Egypt has closed the border with Gaza. Both Egypt and Jordon generally don't have much of a stomach for the short-sighted and callous Hamas stupidity.

Israel is asserting a display of military might that reminds its enemies that it does have teeth after the seemingly bungled dispute with Hezbollah in Lebanon in 2006 - hence the decisiveness of the current attacks. Hezbollah like Hamas is a terrorist organisation committed to the destruction of Israel. Indeed the current Israeli successes are reminiscent of the early claimed successes against Hezbollah.  Hopefully the current tit-for-tat efforts will have the longer-term conclusion of forcing Hamas to negotiate a new more binding peace. The more damage that can be inflicted on Hamas the greater the likely success.  indded the more damage that can be inflicted on the terrorist Hamas the better the prospects for the Palestinian people.

* Our acting PM Gillard has unhelpfully urged both sides to avoid fighting although, to be fair, she does recognise Hamas as the origin of the current problems. The real morons of the left adopt the usual 'sins on both sides' posture which again suggests Israel has no right to oppose those who seek to destroy it.

Friday, December 26, 2008

Capitalist fools

Who is to blame for the current global financial mess? Joseph Stiglitz in this Vanity Fair classic identifies 5 key mistakes made by 3 US Presidents. 

(i) Appointing an anti-regulator (Alan Greenspan) to the position of Federal Reserve Chairman was a basic error - Greenspan did nothing to prick two asset market bubbles and refused to intervene to regulate derivative markets when many knew they were instruments of financial mass destruction.   Spiv economic culture was promoted.

(ii) Tearing down the walls and repealing the Glass-Steagall Act which separated commercial banks (which lend) from investment banks (which organise the sale of bonds and equities).  More spiv culture.

(iii) Applying the leeches - providing tax cuts to mainly upper income earners did little to stimulate the economy which was driven by a wash of liquidity and incentives which favoured capital gains over hard work.   Giving the spivs a chance in life.

(iv) Faking the numbers proceeded partly through gaps in the Sarbanes-Oxley Act which excluded executive options gave firms incentives to fiddle the books and partly through the operations of rating agencies who were paid by firms whom they were rating - financial overseering failed.  Spiv-related industry assistance.

(v) Letting it bleed - the bailout package is a confidence trick that forces ordinary Americans to bailout the rich but which will fail to restart lending - the core issue.  The spivs did well.

The issue to Stiglitz revolves around the need for regulation and for what I have elsewhere called the failure of free market fundamentalism:
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today. (my bold)
HT to Sir Henry Casingbroke

Wednesday, December 24, 2008

Harry's Xmas message

I’ve been slack over recent weeks with meandering posts and important issues (such as Rudd reneging on meaningful climate change targets) going undiscussed*. In part this is because it is Xmas and I feel like being non-committed and because pissing into the wind has often in the past involved my boots getting splashed. It’s what I’ve described in the past as the need to go dum-dum. The blogosphere (and the press) tend to slow down at this time of year which is probably as it should be. It is a ‘don’t-need-to-do’ period.

I also feel dum-dum because I am on holidays, playing golf and really enjoying the prospects of Xmas. I wonder if I am the only atheist in Ivanhoe who loves Xmas carols – this is my favourite Xmas carol and a great performance. This version of Silent Night moves me.

Generally last years’ post on the meaning of Xmas expresses my attitudes toward this happy time.

Happy Xmas to all my readers! With probability p = 0.9998 I’ll be back in force in a week or so rejuvenated, replenished and with a long list of soon to be foregotten resolutions.

*I stopped on this one though I did give warnings to all and sundry that it would happen.

Rudd greets world at Xmas.

 In a Xmas message released yesterday:

Rudd urged Australians to spare a thought for troops serving overseas as they enjoy their Xmas break. People should remember Australia's troops serving in Iraq, Afghanistan, the Solomon Islands, East Timor and elsewhere. Many of them have little kids of their own but they won't be with them this Christmas. "We acknowledge the sacrifices they make and thank them for serving our nation with such courage and distinction abroad".

Rudd paid tribute to police, firefighters and other emergency service workers who are on duty and away from their family to help the community on this most special of days.

Rudd said Christmas was a wonderful time of celebration and recuperation with family – a time of reunion for families that have been separated for reasons of work, study and travel.

Rudd said it was a special time for kids, whose experiences of Christmas are among the happiest memories they carry throughout their lives. It was for him.

Rudd urged compassion for people dealing with the death of loved ones.

Rudd said people should support those around them and take care if they were travelling. "Please, please, drive carefully and please be considerate in sharing the road with others”.

Rudd said whether you are in a city or the suburbs, the beach or in the bush, at home or abroad, that he wishes all Australians a very safe Christmas, a very happy Christmas and a very happy and peaceful new year.

The world listens to your every banality Kevin. The world will vote for you Kevin. Your winning smile and hyoperactivity provide a model for us all Kevin.

Pope's Xmas Message

Homosexuality is a bigger threat than climate change.  My question: Why do people listen to this sanctimonious old shit? I'd say ratbag religions and the bigots who promote them are a bigger threat to the planet than people who prefer to have sexual relations with their own gender because that is the orientation established in them on the basis of their genes.  But maybe some corpse-like ex-Nazi who's never had a root in his life knows better.

The Pope (and the Catholic Church) are far from espousing the message of love preached by the man Jesus Christ.  The values of Christ provide a possible, useful moral code for humanity.  The message of the Catholic Church is one which glorifies the pale virgin shrouded in snow. The Corpse Hour with Commandant Benedict. Arise from your graves you ignorant bigots and go where the sunflower wishes to go!

Update: the relevant section of the Pope's message.

"What is necessary is a kind of ecology of man, understood in the correct sense. When the Church speaks of the nature of the human being as man and woman and asks that this order of creation be respected, it is not the result of an outdated metaphysic. It is a question here of faith in the Creator and of listening to the language of creation, the devaluation of which leads to the self-destruction of man and therefore to the destruction of the same work of God. That which is often expressed and understood by the term “gender”, results finally in the self-emancipation of man from creation and from the Creator. Man wishes to act alone and to dispose ever and exclusively of that alone which concerns him. But in this way he is living contrary to the truth, he is living contrary to the Spirit Creator. The tropical forests are deserving, yes, of our protection, but man merits no less than the creature, in which there is written a message which does not mean a contradiction of our liberty, but its condition. The great Scholastic theologians have characterised matrimony, the life-long bond between man and woman, as a sacrament of creation, instituted by the Creator himself and which Christ – without modifying the message of creation – has incorporated into the history of his covenant with mankind. This forms part of the message that the Church must recover the witness in favour of the Spirit Creator present in nature in its entirety and in a particular way in the nature of man, created in the image of God. Beginning from this perspective, it would be beneficial to read again the Encyclical Humanae Vitae: the intention of Pope Paul VI was to defend love against sexuality as a consumer entity, the future as opposed to the exclusive pretext".

Tuesday, December 23, 2008

A Xmas present from America?

The insincerity and deceit of PM Grub Rudd partly mirror the views of the Australian electorate and also Rudd’s perception of international political opinion. Politicians like Rudd just don’t get it – we need massive cuts in carbon emissions and an end to the use of carbon based fuels soon if the earth is not to very likely to experience catastrophic (2 degrees plus) climate change*. Rudd is not alone in his stupidity. The Europeans have reneged on commitments to address climate change seriously despite the leadership role of Germany’s scientist leader Angela Merkel.

French climate scientist Philippe Ciais argues the earth will experience 2 degrees warming even if all emissions stopped today. There is even one notable forecast by NASA scientist James Hansen of record global temperature highs during the first term of President Obama’s office and of the possibility of runaway warming with the destruction of all life on earth and in the oceans.

These are fearful scenarios and will be derided by climate change sceptics but the outcomes they point too as serious scientists are very adverse and are worthy of weight on that account alone. It is not alarmism but prudent regard for a serious risk that endangers life on earth.

Some of Obama’s appointments suggest a new US respect for science. Obama is committed to serious climate change policies and has:

...pledged to create 5 million green jobs and break U.S. dependence on foreign oil, investing $150 billion in the next decade to build an energy economy that relies on renewable sources such as wind, solar and geothermal energy.
Moreover, despite US economic problems these sorts of policies seem like a plausible and reasonable vision. Already the appointment of serious climate change scientists to key positions in his administration has led to forecasts that this will have a positive effect of Indian, Chinese and Brazilian climate policies.

The old US ‘enemy’ may yet arise to save the day - I have already posted that there is a conceivable economic rationale for doing just that. It would be a great Xmas present for the world for Obama to establish his position as a great US President by getting the world’s political leaders to take seriously climate change.

* My own work as an economist interested in climate change policy will emphasise adaptation policies on the assumption that (regrettably) mitigation policies are likely to be ineffectual.  I am also completing work on strategic aspects of mitigation policy.

Sunday, December 21, 2008

Chinese biodiversity

I've got in trouble before commenting on Chinese attitudes to nature and non-human life but, to return to a theme, many Chinese attitudes are, from a Western perspective, appallingly destructive despite official Chinese ideological claims about the need to live in 'balance with nature'.  Historically many of the forests of China were cleared in the 'great deforestation' and animal and plant species are often seen in Chinese culture purely in instrumental terms as things that can 'serve' people in the narrow sense of providing food or material products or caged amusements.  This has had dramatic consequences for the environmental history of China. China has also long been intensively cropped rather than ranched - an activity particularly inimical to biodiversity.

Marine and aquatic environments have been subject to particular damage. The probable extinction of the Yangtze River Dolphin was a notable loss. Historically Chairman Mao's policy of wiping out bird species because they ate grain was a supreme example of short-sightedness since a disasterous locust plague immediately followed as well as an errie bird-free silence in many Chinese cities.

China has high intrinsic biodiversity - for example 1329 bird species out of a global total of about 9000 - but a biodiversity which is under severe threat from rapid Chinese economic development, harvesting and pollution.  This affects non-Chinese because existence values on biodiversity are global. Non-Chinese experience discomfit when biodiversity is wiped out in China. In a more immediate  sense the conversion of mudflats and wetlands into commercial sites is endangering bird species that migrate between the northern and southern hemispheres along the East Asian-Australian Flyway.

A colleague working on conservation issues in the Flyway told me how angry he got when fellow Chinese 'conservationists' immediately discarded into the environment any litter they had generated - this view of the environment as an inexhaustible sink is clearly inappropriate in a Chinese setting.  I winced when he told me that the migratory waders the Chinese collect as food are attracted into nets by posting captured birds in wetlands with their eyes stitched together so they do not make alarm calls. OK these practises do reflect different values but, for sure, Chinese attitudes towards nature, create external costs for many non-Chinese.

This article on the critically-endangered Chinese crested tern (pictured above) sets out the issues well in terms of issues surrounding the conservation of an individual species. It is a good general read.

Things are improving in China due to official government policies but I question whether the improvements will offset the pace of so-called 'progress'.  It is pointless for the Chinese people to seek to become rich by living in a barren rubbish dump.

Friday, December 19, 2008

Madoff economies

Paul Krugman asks a basic question. While everyone is tutt-tutting about Bernard Madoff's amazing fraud (how come the SEC never saw it even though it had been denounced as a Ponzi scheme in 1999? How come knowledgeable investors fell for it? etc etc etc) isn't Madoff not really just a symptom of what is endemic in the US (and perhaps global) finance industry? Madoff was an explicit crook but large sections of the US finance industry as a whole are crooked.  They have destroyed value, distorted individual incentives (including those of politicians!) and ruined lives while making those who operate the industry incredibly wealthy. 

Spivs invest in worthless mortgage contracts (or ultra-high risk investments) and make millions just before the contracts turn toxic.  Doing this yields the practitioners more wealth in a short period than a skilled scientist or engineer can earn in a lifetime. Indeed, American wages generallly have stagnated over the past few decades while the salaries of the spivs and bankers have exploded. Moreover, it is not the equity issues that are of major concern but the sheer illogic of believing that such outcomes have economic rationality.

Thursday, December 18, 2008

Real bonuses & phoney profits

For years in business school courses I have taught that incentive contracts - fancy language for 'bonuses' or 'performance pay' - are a way of motivating extra effort from business managers or of elimating principal -agent problems between managers and shareholdersw.   Sometimes this is true but the devil is in the detail of how such contracts are designed.  Sometimes the contracts increase risk-taking unreasonably particularly in an investment setting where rewards from sound decision making accrue through time and where the costs of poor investment decisions are not identified immediately.

The NYT  discusses the interesting recent case of Merrill Lynch.  To quote their former CEO E. Stanley O'Neal in March 2008:
“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
When he left Merrill, O'Neal was awarded an exit package of US$161 million.

Moreover, benefits of huge magnitudes were made further down the line. For one employee in 2006, on a salary of US$350,000, total compensation was 100 times that at US$35 million. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million. Many of these bonuses were in cash not equity so employees had little reason to take a longer-term view.

These huge payouts were intended to reflect huge earnings but they did not.  Quoting the NYT:
'...Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed'.
The losses Merrill made exceeded all the profits they had made for 20 years.

Furthermore banks like Merrill will dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money.

These bonuses should never have been so big because they were based on 'ephemeral earnings'. They encourage employees to act like gamblers at a casino who can collect their winnings while the roulette wheel was still spinning. Employees contiunued to pursue risky deals even as the housing and mortgage markets weakened because what happened to their investments was of no interest to them - they have already been paid.

Sir Henry Casingbroke's amusing - though pointed - account of the US auto bailout provides further observations on crazy US incentive contracts.  I assuime the business school gurus will publish a whole rash of learned papers pointing out that refining the way incentive contracts are designed can perfect their operation. But something more fundamental seems lacking - corporate morality for one thing.

Wednesday, December 17, 2008

The US Auto Bailout....

Guest post by Sir Henry Casingbroke

A Japanese company (Toyota) and an American company (General Motors) decided to have a canoe race on the Missouri River.

Both teams practiced long and hard to reach their peak performance before the race.

On the big day, the Japanese won by a mile.

The Americans, discouraged and depressed, decided to investigate the reason for the crushing defeat. A team made up of senior management was formed to investigate and recommend appropriate action.

Their conclusion was that the Japanese had 8 people rowing and 1 person steering, while the American team had 7 people steering and 2 people rowing.

Feeling a deeper study was in order; American management hired a consulting company and paid them a large amount of money for a second opinion.

They advised, of course, that too many people were steering the boat, while not enough people were rowing.

Not sure of how to utilize that information, but wanting to prevent another loss to the Japanese, the rowing team's management structure was totally reorganized to 4 steering supervisors, 2 area steering superintendents and 1 assistant superintendent steering manager.

They also implemented a new performance system that would give the 2 people rowing the boat greater incentive to work harder. It was called the 'Rowing Team Quality First Program,' with meetings, dinners and free pens for the rowers. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses.

The pension program was trimmed to 'equal the competition' and some of the resultant savings were channeled into morale-boosting programs and teamwork posters.

The next year the Japanese won by two miles.

Humiliated, the American management laid off one rower, halted development of a new canoe, sold all the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses.

The next year, try as he might (and having no paddles), the lone designated rower was unable to even start the race, so he was laid off for unacceptable performance, all canoe equipment was sold, and the next year's racing team was outsourced to India.

The End.

PS: General Motors has spent the last thirty years moving its factories out of the US , claiming they can't make money paying American wages. Toyota has spent the last thirty years building more than a dozen plants inside the US.

The last quarter's results: Toyota made 4 billion in profits while General Motors racked up 9 billion in losses.

Monday, December 15, 2008

Golf & the Australian Open Championship

I attended the final day's play of the Australian Open at Royal Sydney Golf Club.   I endorse entirely Robert Allenby's criticisms of the organisers of this event and of the attending Aussie print media.  The hounding of the visiting American professional John Daly because he smashed a spectator's camera against a tree was stupid.  The foolish fan rammed the illegally-held camera (cameras were supposed to be banned at the event) in Daly's face while Daly was taking a difficult shot.  Also stupid was the positioning of a booze-centre at the back of the 17th green from where offensive, drunken louts hurled insults and hooted at players who hit bad shots or indeed anyone who they took a dislike to.  It was an  ugly interlude in what was otherwise a fascinating day.

I followed Allenby for a while that Sunday. What a great golfer and what a genuinely decent guy he is. He chatted amiably with spectators and played entertaining, aggressive golf - Allenby is a star and hardly a prude.  His comments should be taken seriously by golf officialdom and the gutter press.

Why is it that so many Australians cannot enjoy watching sports without getting aggressively and moronically drunk? Why cannot the Aussie media ever resist the temptation for a bit of cheap scandal?

Saturday, December 13, 2008

Keith Windschuttle on acceptable climate change papers for Quadrant

My paper criticising what I saw as the foolish climate change 'denialist' views that have been repeatedly put forward in Quadrant magazine was rejected by its editor Keith Windschuttle on the grounds that an earlier draft of the paper had been published on this blog. This seemed to me a totally spurious grounds for not publishing the paper - there may have well been non-spurious grounds not set out in the email to me by Keith - so I emailed Keith requesting a rethink. Everything I publish in academic and popular journals I pre-circulate first in working paper form or as a post on a webpage. Most academics I know do the same. For whatever reason Keith did not respond at all to my email.

Now I learn from Tim Lambert's Deltoid that Keith has rejected another paper by David Karoly criticising the same 'denialist' climate change views without any apparent review or consideration on the grounds that:
...at the moment Quadrant is focusing on offering a platform for the sceptical position on this issue. We find that the pro-IPCC position is very well represented in almost every media outlet in the country, including academic journals and websites, but it is very difficult for sceptics to find any outlet for their voices to be heard. Hence, in the interests of balance, we believe the sceptics deserve a fair go in a little journal like ours. If the current position changes, we will be glad to consider pro-IPCC articles such as yours. 

But, as a fellow conservative, I am really just really disappointed in Keith Windschuttle. The disappointment goes well beyond not having my article reviewed and considered for publication in Quadrant. It is the festive season so I'll simply say to Keith that his behaviour seems to me appalling and short-sighted and hope that eventually he will see this and allow Quadrant in the future to present a more truthful, balanced and accurate picture of the consequences of anthropogenic climate change.
I wonder had I not published the draft on my website whether Keith would have applied this alternative reason for rejecting my article. If he had I would still have rejected his view as inappropriate. Journals such as Quadrant are misleading the public by presenting only climate change 'denialist' views and ignoring the overwhelming alternative views of mainstream science. Moreover, the consequences of Quadrant getting it wrong are serious.

Friday, December 05, 2008

The end of free market fundamentalism not of the mixed economy (revised)

My earlier lengthy post under this title has been published in terser form over at Online Opinion.

Proposed Qantas BA merger

The predictable outraged sense of nationalism of Labor toward the proposed merger between Qantas and British Airways is only exceeded in stupidity by its commercial stupidity.

Keating was the first of Labor’s economic ‘geniuses’ to stamp his mark on Qantas’ adventurism by thwarting a tie up between Qantas and Singapore Airlines. He ‘saved’ Qantas by instead fostering Grandma BA’s acquisition of a 25% stake in Qantas (which they subsequently flogged off at a big profit to cover their own financial difficulties) and prevented Qantas from aligning itself with a star performer in the Asian region - the obvious choice was Singapore Airlines - that could perhaps have engineered real synergies and efficiencies. Now Qantas who were originally opposed to the BA move, and favoured an Asian connection, are clamouring to get into bed with unprofitable, debt-ridden Grandma once again.

Are there further realisable synergies on routes between ends of the world in Europe and Australia? Qantas and BA already coordinate fares and schedules on the Australia-London route. What synergies can Australia foster on flights between London and Stockholm? Between the UK and the US? You are joking. But, yes ’ll bet Grandma BA is hot to trot with the coltish flying kangaroo on this one. Wouldn’t you? BA would at least then gain the stupid protectionist advantages now assigned to Qantas on Australia-Japan and trans-Pacific routes.

BA and Qantas have comparable operational costs although BA’s are higher – a ludicrous op ed by Jemina Whyte in yesterday’s AFR suggested a basis for synergies lay in the fact that both carriers had unionised work-forces – but an carrier like Singapore Airlines has significantly lower costs. An Asian carrier would realise economies with Qantas in terms of being a regional hub and in terms of pressuring the featherbedding of the Qantas workforce. If a deal is not currently on then that is no reason to hop into bed with aging Grandma.

But whatever the stupidity of outraged Labor nationalism any moves to prevent the unseemly liaison between Qantas and BA can only be welcome.

Presumably there is a price at which the merger makes sense but it is a price that BA will not accept. Currently the proposed deal is said to involve ‘no premium’ and that in itself is revealing. The British are being generous enough to admit that low debt Qantas which will probably halve its profits to $250 million this year does not need to pay a premium to acquire heavily indebted BA which will be lucky to break even this year in intensely competitive international markets. BA are also ‘prepared’ to entertain the notion of a rotating CEO! The combined entity will thus be mis-managed at least 50% of the time.

I have often felt that many university bureaucrats should be offered memberships of local golf clubs or paid holidays for 48 weeks per year rather than ‘manage’ universities by trying to regulate how working academics teach or do research and in devising strategy documents that literally nobody reads. Given the political impossibility of sacking these cretins damages and costs would be smaller if these hapless bureaucrats could simply be kept off the street. Cannot new Qantas CEO Alan Joyce be offered something similar? Just run an airline Alan, pay Qantas’ bills in these difficult recessionary times and forget about trying to be a Master of the Universe -with an aging, crotchety and broke Grandma BA.

Since I wrote the above remarks the stock market has voted with a resounding thumbs-down to this foolish proposed deal.

Wednesday, December 03, 2008


The middle class radicals who have forced the end to democratically-elected governments* in Thailand have not done Thailand any long-term favours.  Recent events in fact constitute a middle-class coup that has driven a popularly elected government from office.  That is true even if the government was not entirely saintly.

When I lived in Thailand 20 years ago there were periodic military coups (2 in the 8 years I was there) which shuffled the deck chairs and occasionally produced significant violence. At about the time of my departure there was the optimistic feeling that the military would occupy a more traditional military role that largely lay outside of politics and business.  For a few years this seemed to happen and the strong growth that Thailand enjoyed continued unabated up until the 1997 financial crash.

Now PM Somchai's party has been found guilty of electoral fraud and dissolved. Somchai has been barred from politics for five years and Deputy Prime Minister Chaowarat Chandeerakul has become acting prime minister. Anti-government protesters have declared victory and say they will vacate the airports that they occupied to force this issue.  It is difficult to judge the extent to which the Thai military passively stood to one side to allow this to happen.

The best way for the Thai people to strengthen their democracy is to vote out poor politicians at election time.  Coups whether launched by the military or by a Bangkok-based middle class are a short-cut that will never be a successful longer-term solution.

The Thais are one of the most pleasant of peoples. Friendliness is ingrained into the national character.  But there is a dark side to the country - high murder rates and a proclivity to settle everyday disputes with the gun - that cannot be ignored.  The current elitist coup may settle some immediate political scores but has disinfranchised a majority of the Thai population.  It is a dangerous precedent that could lead to significant violence.  Of course I hope I am wrong in this but I fear I will not be.

And of course the real development problems that Thailand still continues to face will not be improved by having a permanently threatened democracy.

*The recent PM (Mr Somchai Wongsawat) was admittedly nominated by the Thai Parliament but his party (and that of his predescessor Mr Thaksin), repeatedly were endorsed by a majority of the population.

Monday, December 01, 2008

Heroin on prescription

The Swiss have legalised the prescription of heroin to addicted users. The measure apparently has 68% Swiss community support although 63% oppose the legalisation of cannabis.

This move is poor policy since it reduces the user cost of heroin to addicts and therefore reduces their incentives to cease using. To the extent there is any inelasticity in supply of illegal heroin it will reduce the price and increase the incentives to use of new users. It will reduce the heath costs faced by the given pool of addicted users but - to the extent that demand curves slope downwards - will create a larger pool of users who will be exposed to lower risks. Even if supply is perfectly elastic - so Swiss users face an internationally given price - those selling illegal supplies face increased incentives to secure new users. At best new users face no immediate increased incentives not to use but increased incentives by virue of the fact that new users now have a low cost escape into government-provided heroin should they become addicted.

Those in the drug treatment industry will cheer at this legalisation partly because it secures the size of their long-term client base. The policy will fail to resolve the heroin abuse problem since it leaves unaddressed the usage incentives faced by new users. It simply ensures that existing users remain so.

Supporters will say that abolishing these laws reduce health and law enforcement costs. The first point is unclear for reasons advanced above while the second argument applies to any criminal activity. It is only sound if heroin use is considered victimless. I don't.

Friday, November 28, 2008

Summer grabs me by the throat once again

Last year I deviated from my standard summer routine by holidaying in Sydney rather than in Ulladulla NSW where I have enjoyed my holidays for most of the past 20 years. But I am reverting to form and heading off to Ulladulla tomorrow for a minimalist summer vac – two weeks. I stay in a house about 200 metres from Narrawallee Beach. I like it more than a little.

Up the coast a bit is Jervis Bay where I have spent the last 6 years trying to track down Eastern Bristlebird. I have often seen it at Barren Grounds but never at Jervis Bay – until 2 years ago when, with son William, I saw it clearly in heath near the old lighthouse along with Brown quail. The definition of success depends on one’s horizons.

Apart from such highlights my life is measured out in coffee-spoons of surf-beer-KFC then test cricket followed by a late afternoon surf repeat then vino. Sometimes, if I am energetic, I drive down to Mollymook and watch the dolphins from the Mollymook Golf Club and follow this with some flabby seafood. This is paradise.

I am not sure how much I will post over the coming weeks so this is an open thread. Comments are welcome particularly on my valuable contributions to improving the lot of suffering humanity. Leave Kevin Rudd out of all discussions – I’ll think of him every time I wax my surfboard anyway.

Refusing to consult foxes on welfare of chickens

160 countries have refused to admit cancer producers into discussions on limiting the global spread of cigarettes.  The countries argued there is a fundamental conflict between the interests of public health and those of cigarette producers.  That is obviously true.

Meanwhile, the Lancet reports that, at current smoking rates, 100 million Chinese men will die as a consequence of smoking between 2000-2050.  Many will destroy family finances vainly seeking a cure for their ailments.

Cigarette producers generate far more human misery than international terrorism.

Thursday, November 27, 2008

Violent, racist Islamists kill innocents in Mumbai

The reports of the overnight killings in Mumbai are horrifying. The image of religiously-motivated young men searching for totally innocent civilians with American or British passports and then killing them because they originate from these particular countries makes all civilised humanity recoil.  Pure evil.

Sympathies for the 100+ dead innocents and for the 280+ injured and something approximating a prayer for those held hostage by these evil men.

Update 1: In Cairo 20,000 holy Muslims have surrounded 1,000 holy Christians in a Church chanting Jihad verses  and claiming "We sacrifice our blood and souls, we sacrifice ourselves for you, Islam" while the entrapped Christians chanted "Lord have mercy". The Muslim mob included young children and women.

Update 2: The attack in India may have been planned with a view to eliciting tit-for-tat responses.  This would create a dangerous new front-line in the war against terrorism. India has 150 million Muslims but far more 'safe' non-Muslim targets.

Resurrecting the mammoth & science fiction

$10 million to resurrect the mammoth? It is better to concentrate conservation resources in attempting to limit current species extinctions than to engage in resurrectionist science that has almost no chance of success.  There will not be a mammoth coming to a zoo near you soon. 

Tuesday, November 25, 2008

BHP-Billiton - Rio Tinto deal is off

On July 14 2007 I tipped a possible takeover bid for Rio by BHP-Billiton. On November 8 that year it happened. I got it wrong however in suggesting it likely that eventually some sort of deal would be done. In dramatic news yesterday the 3.4 BHP-Billiton shares for 1 Rio Tinto shares bid was abandoned. As it turns out too my conditional argument that Rio Tinto was a cheap way of getting into BHP-Billiton provided the takeover goes through, although correct, is now irrelevant since the deal is not going through. In fact, those who punted on the takeover going through are taking a caning - Rio were off 36% in London when I looked at 12-46pm (London Time) - the biggest drop in 20 years. There will be fallout from this alone. I'll watch Rio with interest on the ASX tomorrow.

Currently Rio is trading at 1.4 times the value of a BHP-Billiton share - the terms of the merger implied a valuation of 3.4 times. Apart from having the bid abandoned Rio is stuck with the $35 billion dollar debt resulting from the top-of-the-market takeover of Alcan last year. BHP-Billiton has only $6 billion in debt and is a much bigger company.

This outcome suggests to me that the takeover was possibly not a good deal at all for BHP-Billiton and that Rio Tinto by playing hardball in negotiations with BHP-Billiton severely disadvantaged their own shareholders. I cannot believe that the possible monopoly and synergy benefits were worth 36% of Rio's capitalisation.

The Chinese who bought a massive slab of Rio script to help thwart the takeover paid over-the-top prices and are caught with their pants down. Their 7 billion pound stake is now worth about one quarter of that. The steel makers however can rejoice a little since the possibility of a world's resources monolith is no more. Fascinating stuff and congratulations to BHP-Billiton directors and management for not being wedded to a dubious deal.

A few insiders seemed to have got a sniff of what was happening - BHP-Billiton shares surged strongly in the days prior to the announcement.

Monday, November 24, 2008

Climate change - Obama's problems and the Garnaut prescription

Over at the East Asia Forum blog two useful articles on climate change:

Frank Jotzo looks at Barack Obama's climate change problems.  He argues that the double bottom line argument for US pursuing an active mitigation stance (improving global climate, reducing US dependence on imported oil) has become a triple bottom line case given the current financial crisis because the investments required can held driver a revival of the US (and world) economies.  He argues that a model for encouraging co-operation between the super emitters (US, China, India) might lie in the prescriptions of the Garnaut Review with its advocated equal per capita emissions targets by 2050.  Broadly I agree. Increased taxes on US imported oil use could be motivated by the vast costs of stabilising the Middle East to ensure supply.  Moreover, the weak case for emphasising capital intensive expansion strategies in the face of a likely long world recession - the move won't directly target employment - is bolstered by the by the double bottom line arguments cited.

Shiro Armstrong writes a piece defending the Garnaut conditional targets that despite some earlier reservations I support.  I agree with Armstrong that Garnaut has received an unfair press - including initially from me - Garnaut is focusing on what is realistically achievable. Tightened targets - which many in the Green movement support - can be negotiated once weaker targets (that will, in themselves, be difficult to negotiate) are agreed to.  The Garnaut Review has provided a useful input into the UN discussions of a post-Kyoto treaty in Copenhagen in 2009.

The East Asia Forum is a blog well worth bookmarking.

Sunday, November 23, 2008

Indonesia & climate change

Indonesia is the third-largest greenhouse gas emitter on the planet - after China and the United States. The vast bulk of its emissions are caused by deforestation of its tropical rainforests - particularly in central Samatra.  Deforestation emissions in Indonesia are about half the total emissions of China.

 Australia has an interest in reducing these emissions if only because this might help forestall the arrival on our doorstep of millions of impoversished environmental refugees generated by climate change.   In addition, Indonesia has 120 million hectares of rainforest and 10% of the world's biodiversity that people around the world value as public goods. 

Australia does have an aid scheme to help Indonesia limit deforestation but the amounts involved are of the order of tens of millions of dollars when billions are required.

There are huge potential climate change mitigation as well as biodiversity conservation benefits from limiting this deforestation.   Integrating forestry into Clean Development Mechanism arrangements would be a low cost way of reducing global emissions.

Saturday, November 22, 2008

Car industry woes

Chapter 11 is the best outcome for GM since it will permit the types of restructurings that are currently impossible given union demands for taxpayers to pay their member’s salaries and state resistance to plant closures. The US autoworkers were big financial supporters of Obama’s election campaign and for good reason. An aid package from the US Government won’t fix things. Wage costs at US auto-makers are a mile higher than comparable costs for Japanese producers, like Toyota, based in the US. The three US auto-makers (Ford, GM and Chrysler) are asking for a loan of $25 billion to prevent what they claim will be 3 million in job losses within a year and $156 billion in tax losses over 3 years. In other words they are suggesting a bailout is a bargain. This view is predicated on the assumption that Chapter 11 would involve an evaporation of the three firm’s assets and a total loss of all jobs which is false.

Henry Paulson has refused to allow his $700 billion piggybank to be used as a general source of bailouts in the economy and, in particular, to the auto industry.

Australia can scarcely point with high-minded free market zeal to the disgrace of a possible $25 billion US auto bailout by the US Government. Such a bailout will seek to preserve inflated wages and conditions for US workers but Australian workers in Geelong and Adelaide won’t benefit. The Rudd Government has already committed its own $6.2 billion handout to foreign multinationals based in Australia – proportionately higher in given Australia’s diminutive industry size than the US bailout. And news to hand – Ford will stay in Geelong and not cut 600 jobs as announced last year. Ford will invest $21 million upgrading its environment-friendly car production facility of which $13 million will be funded by Kim Carr, err no, by the Australian public.

The Productivity Commission have clamoured to favour lump-sum handouts of the ACIS type to the Australian car industry over tariff protection because such measures do not alter relative prices.  It would be better however to forego both lump-sum handouts that have very limited incentive effects and tariffs.

Friday, November 21, 2008

George Soros: The crisis & what to do about it.

Always of interest to read Soros' views - here.  Can also look at him at MIT discussing his new paradigm for financial markets - here.

Thursday, November 20, 2008

Viral fads

On the real estate crash.

Which is a pale imitation of a memorable previous post here on slow rates of acceptance for a sixtieth birthday party.

In fact, the same clip has been exploited many times. It has become a viral internet fad!

Now for the really bad news

The Dow Jones last night fell another 5% to end up below 8,000 - its lowest level for 5 years.  Banking stocks were again savaged as were auto producers - a large slab of the US auto industry faces the prospects of collapse. In addition the US is experiencing deflation - the US CPI dropped 1% in October. The December Share Price Index Futures was down 4.6% in Australia so a future dramatic rout on Australian equity markets will occur today driven in part by an overnight commodity price retreat.   The All Ordinaries is at half its peak level of about one year ago.  Indeed the betting agency Intrade are selling bets on the possibility of the US going into Depression in 2009 with GNP falling by 10% or more (HT Gregory Mankiw) . The current implied depression probability is around 0.15.  It is not a negligible disaster probability.

The problem for Australian and the world is that people all want to save more because they see their residential and share market wealth decreasing.  This has created a 'paradox of thrift' - in seeking improvement in individual financial positions by saving more they bring about a sharp contraction in demand and therefore economic activity that makes society as a whole worse-off. Indeed they end up saving less. The RBA is not convinced that lower interest rates will succeed in expanding the economy - the real need is for a traditional Keynesian fiscal expansion.

The share market collapse is a leading indicator that Australia is in for very tough economic times ahead.  That is for sure.


Thanks Sir Henry

Wednesday, November 19, 2008

Sense & stupidity in America

Most academics believe that US universities are among the best in the world - of the top 20 fully 17 are supposed to be in the US. Yet in many respects American society is ignorant. It is a paradox that presumably reflects a divide.

In late 2006 fully 55% of Americans believed in Creationism. Of the remainder 27% believed in God-driven evolution while only 13% believed in Darwin's Theory of Natural Selection. Low income people and Republicans dominate in the stupidity stakes.

Moreover, America seems to have a monopoly on Creationist stupidity. A British Survey of 103 Christian religious ministers showed that 97% did not believe the world was created in 6 days and 80% did not believe in the existence of Adam and Eve.

If Americans hold foolish religious beliefs I guess it doesn't matter much. But on climate change issues only 18% of people believe that climate change is real, human-caused and with serious consequences. Troubling since, at least until recently, the US was the world's largest Greenhouse gas emitters.

I was puzzled at the AEA meetings in Chicago in 2007 that so many participants disbelieved the anthropogenic climate change hypothesis. Maybe these same people believe that we are all around because of a sinful fornication between Adam and Eve.

Tuesday, November 18, 2008

Barack Obama the great black hope

I said that Barack Obama would be the US President when it was unpopular to say so.  This video interview with CBS confirms my belief that Obama may well be a great US President. Apart from letting his necktie dangle a bit this interview suggests that real inspiration lies in this man.  It is a big ask to get the US out of its current hole but Obama seems to be a top person with intellectual agility/ability and personal charm.

Case for a migration policy discriminating against entrants with above-average health costs

The recent case where parents with a child having Down's Syndrome were excluded from migrating permanently to Australia has aroused much emotion.  It is widely seen as discrimination against disabled people. It is nothing of the sort. It is discrimination against immigration applicants who may not provide net economic benefits to Australia if they are awarded migrant status.

The lifetime cost of supporting a Down's Syndrome child at a discount rate of 5% was  estimated 10 years ago at $235,000. With a public health system most of this cost will fall on the taxpayer.

Having new migrants usually increases the value of assets and non-wage incomes received by Australians so we derive economic gains from immigration. But Australia provides many public goods - social security benefits and health benefits are prominent examples.  There are incentive reasons to suppose that those with above-average health costs and poor employment prospects have incentives to migrate to Australia.  The restrictions placed on the immigration intake are those designed to screen against such 'adverse selection'.

I know that when I post these remarks that commentators will describe me as heartless in rejecting these children. But  I am not.  About 1 in 600 live births is a Down's Syndrome child so there are around 250,000 such children born per year around the world.  Any interest in improving the welfare of these children would be best addressed by intensifying pre-screening and treatment options rather than admitting a handful under our very limited migration quota.

Families who wish to bring Down's Syndrome children (or family with any preexisting health condition) to Australia should find it possible to guarantee private provision of all extra health costs.  But this is not feasible in Australia because 'Bleeding Heart' do-gooders will never allow enforcement of such a contract.  This lack of resolve means that people with pre-existing medical conditions will continue to be unfairly excluded from immigrant entry.  Being tough here - the alternative suggest - implies being reasonable and kind.

Using sensible heuristics in adapting to climate change.

My paper Classical Decision Rules and Adaptation to Climate Change suggests ways of thinking about adaptation decisions in practical climate change settings where probability information is poor.

The idea is to identify the net benefits from climate change when policies are applied and they work in averting catastrophic outcomes,  when climate change does not produce catastrophic outcomes even without policy and when policies fail to be effective even though adaptation policies are applied. Then one can implement a version of the Precautionary Principle and try to avert the maximum possible damage - this is a minimax rule or, alternatively,  try to minimise the regret one experiences in the future - the minimax regret rule.  The minimax rule suggests adapting only if one can be sure policies will work. The minimax regret rule always provides a case for enacting policy if losses consequent to climate change greatly exceed the costs.  This rationale justifies 'all weather' policies but can justify trying a mix of policies only if employing the mix eliminates the prospect of policy failure. The analysis is applied to a two period model of the Murray-Darling River system.

Monday, November 17, 2008

Clearing the fog

This is a guest post by Rabee Tourky, Professor of Economics at the University of Queensland

In a previous post on this blog I began describing how to my mind the market failure associated with the financial crisis has to do with market incompleteness. That is, we found ourselves in a situation in which one could not use the available securities to diversify away from certain risk.

I'll take the opportunity to refine, in a loose way, my market incompleteness argument.

First, I'll specifically address the apparent failure of the efficient markets hypothesis with regard to the securitization of default instruments; basically these were not markets in the sense understood by economists. Second, I'll conjecture a transmission mechanism in which market incompleteness, associated with a sudden collapse of the span of existing assets, affects non-financial firms; basically the mechanism is driven by a failure of the Modigliani-Miller theorem.

It is now becoming apparent that the markets for securities associated with credit default instruments was not a market in the usual sense, and not a market in which one expects prices to convey meaningful information. These assets were priced to models (inspired by relatively recent works of Darrel Duffie, I guess) and not to market. Further, these securities were essentially not traded. In the words of Susan Wachter of Wharton:
What's new this time is that unlike the securitization of the past, the securitization is tranching of risk in very complicated CDO's, CLO's, SIV's instruments which do not trade. So we do not have market discipline. Although the price of the loan may be varied by risk, the price of the mortgage instrument and the securitization of the mortgage instrument, these securities did not trade. Therefore, there wasn't a market discipline to price the risk and give the signal that these were extraordinarily risky instruments. They were marked to model, not to market. There were lots of fees up front across the board. But the ultimate risk was unknown, because in fact they weren't priced to the risk.
Let me now turn to the second point.

Imagine a sudden collapse in the span of available financial assets. How does this affect the real economy?

To understand this let's recall the Modigliani-Miller theorem, which in a very general setting tells us that the debt-equity ratios of firms do not affect their values. Of course, we know the Modigliani-Miller theorem could fail when there are possibilities of bankruptcy and under certain tax regimes. However, it is likely that what we are seeing now is the failure of the Modigliani-Miller theorem because of a sudden collapse in the span of available financial securities.

The idea, as far as I know formalized by Piero Gottardi in a 1995 article in Economic Theory, is that when there are any type of derivative securities over the shares of a firm, a change in the capital structure of a firm will modify both the real equilibrium allocation and the value of the firm. This is because "payoff of the derivative securities is affected in a non-linear way by changes in the firm's financial policy; thus the set of the agents' insurance opportunities is also modified".

In summary, there was an ineffective market for default securities that collapsed because these securities were not priced in a market setting. This sudden change in the span of financial securities meant that there was an abrupt change in the relationship between firm capital structure and value. Many firms were faced with an unforeseen need to change their capital structure and much of what we see now is a result of this shift of firm capital structures.

Much of the turbulence in relative assets prices will subside when this shift in firm capital structures is completed. We will also know when the financial crisis has resolved itself when this process is complete and when it becomes apparent that firm capital structure has become as irrelevant to firm value as it was prior to the crisis.

In this regard, at this stage government policy should be two pronged. First, helping establishing appropriate clearing mechanisms for default securities so that they are priced by markets; this involves standardization and a measure of regulation. Second, trying to facilitate the capital structure transitions that most firms are currently engaged in. One idea is to guarantee matching government-debt based funding for new equity based funding.

Addendum (inserted by Harry Clarke)

These two papers by Frank Milne, Bank of Montreal Professor of Economics and Finance at Queen’s University, make points similar to those made by Professor Tourky.

The first is a policy oriented piece:


The second is a more technical paper that sets out the failure of liquidity modelling in the Arrow-Debreu model that underlies derivative and risk management models:


Sunday, November 16, 2008

Rudd the grub

It is obvious that our grubby little ear-wax-munching Prime Minister Rudd has damaged Australia by betraying the embellished form of a conversation he had with President George Bush. The story was embellished in an attempt to make the US President appear stupid (What is the G20?) and our own PM appear smart. The effect of Rudd's loquaciousness in repeating to reporters a personal conversation with Bush was to damage Australia and to destroy the trust that any foreign leader would ever place in our grubby little PM. And Rudd looks like a pretentious, myopic smart-arse rather than anything approximating an intelligent PM. Even Melbourne's Pravda recognises the damage.

BBC News describes the gaffe by Rudd as an attempt to make Bush look like a fool. It is a great way of treating our most important ally! Imagine how the Chinese and other nations see the stupidity and immaturity of the Rudd blunder. No one would trust him again.

Malcolm Turnbull is quite correct in remarking that:

"Mr Rudd's desperate desire to big-note himself has done real harm to our relations with the US.

It is clear enough that the US President has been deeply offended. President Obama and other American leaders in the future will be very wary about saying anything to Mr Rudd and other Prime Ministers, in case what they say winds up on the front page of a newspaper.

"Mr Rudd has sacrificed our nation's reputation for trustworthiness and discretion on the altar of his own vanity.'' (my bold)
Kevin Rudd's glib meaningless 'I will do whatever it takes' assurances, his declarations of war everywhere on every issue and his thin skin when the opposition takes him to task on any of his stupid policy measures - the unlimited deposit guarantee to the banks and the decision to encourage 450,000 Australians to abandon private health insurance - mark him as the worst PM Australia has had since Paul Keating. No qualifications - Rudd is a disaster.

Rudd is unreliable in a crisis and pretentious to the point where he believes the meaningless pollie drivel he offers the media as opinion. Rudd has seriously damaged Australia and I am confident will do more damage.

Update: Catallaxy has a discussion K Dudd a national embarrassment. The Age discusses the meeting between Rudd and Bush - "Rudd looks sheepish. Bush looks prickly".  Scraping the bottom of the barrell of Labor's cheersquad we have Mark Banish from Larvatus who doesn't deny Rudd gossipped about Bush's stupidity to the media - he just argues Rudd has done us all a favour in pointing out Bush's ignorance!

Saturday, November 15, 2008

Lunch at Chateau Harry

1 dozen fresh oysters with lemon and a side salad of tomato, lettuce, sliced kiwi fruit and orange.
2 dozen lightly-grilled, skewered prawns spiced sparingly with mixed herbs.
More than 1 glass of Yalumba Viognier 2007.

The sun outside, beating down, defeats any vague thoughts of mowing the unkempt lawn.  Golf if it cools a bit.

The upside to the downside of being back in Oz.

Thursday, November 13, 2008

Foolish views on climate change being promoted at Quadrant

Recent issues of Quadrant contain a number of ‘denialist’ views on climate change issues that will leave those concerned with the implications of climate change troubled. Quadrant could analogously act as an outlet for the flat earth society and the outcome of supporting such a similar sustained attack on scientific logic would make no more sense than supporting climate change denialists without offering anything in the way of the majority accepted-science contrary view.

The most recent article by Bob Carter follows efforts by Ray Evans (here and here) and papers by Ian McFadyen (here) and William Kininmonth (here). All are attempts to debunk the global warming hypothesis as phoney science. None of the Quadrant contributions provide a mainstream contribution to recent climate change debates and indeed the minority views of these denialists are not set in the context of the broader debate.

The denialist studies are surprisingly weak in terms of their force of argument. The authors apparently reject numerical model building of the type carried out by the Intergovernmental Panel on Climate Change on the grounds that the IPCC relies on a scientific consensus (not in itself something reprehensible), that some parameters used in the modelling are not known with certainty (true of most modelling!) and that the models used contain biases consistent with the anthropogenic warming hypothesis (somewhat unfair since they do account for natural radiative forcings).  The authors implicitly question the incentives and integrity of researchers carrying out these mainstream studies while complaining at the same time they they themselves arec under the same sort of credibility attack from mainstream scientists. Moreover, it is true that prominent members of the climate denialist camp, such as Fred Singer, have also in the past denied connections between passive smoking and lung cancer. Singer has also denied that the ozone layer is being depleted and denied that there is a connection between this depletion and the incidence of cancer.  All of these claims have been refuted by mainstream science.

It is difficult to make much sense of the denialist claims with respect to climate given that there is an abundance of different types of evidence supporting the claim of substantial anthropogenic induced rises in temperature over the past 100 years. For clarity I summarise this below.

The denialists represented in Quadrant however largely ignore this mainstream literature or treat it dismissively and cite only evidence and counter-claims that they see as supporting their position. However many of the views they exposit are rejected by mainstream scientists and have been repeatedly refuted as they are endlessly recycled. For example, their claims that warming has not occurred since 1998 and that the Hockey-stick graph is a fiction have themselves been refuuted using careful statistical study. The claim that temperatures have not increased since 1998 were rejected in the Garnaut Review - Garnaut commissioned two respected econometricians to test the claim - and in a suibsequent careful study by meteorologists Robert Fawcett and David Jones. While denialists might not agree with these counterarguments they cannot simply ignore their existence and declare as an uncontested and obvious fact that temperatures have not increased since 1998.

The claim that the 'hockey stick' wrongly suggests a recent, distinctive sustained rise in temperatures is not something that supporters of the anthropogenic climate change hypothesis necessarily rely on to support their position – as the Stern Review points out there is much additional evidence - but the specific objections raised by denialists have been broadly rejected - with some qualifications - by groups such as the National Academy of Sciences. Why has this counter-evidence and the counter-views not been cited in the Quadrant articles? It is not self-evident truth that current global mean temperatures are simply a repeat of past recent experience in terms of peaks.

The denialists present themselves as a persecuted minority whose views are being marginalised by groups such as the IPCC and by most of the 2,500 climate scientists who contribute to the IPCC work. This is an unfair characterisation and a slur on the integrity of these workers. Most scientists do accept that climate change is anthropogenic though it is recognised that a small minority group dispute this consensus conclusion. But practical climate change policy calls for decisions and, utilising a 'balance of probabilities' argument, the consensus view is being relied on for public policy purposes not the view of a tiny group of scientists who reject the mainstream science. Indeed, it is difficult to see what other approach might conceivably be adopted from the perspective of policy. The insights of science are never final and it is almost certain that current climate science views will be refined and perhaps even revised dramatically. But that there is not scientific certainty on climate change does not mean that action to deal with climate change should be stalled. Indeed, if the principle that no action in this world could be taken without definitive absolute certainty, not much would ever happen.

For non-scientists such as myself who are forced to make judgements on climate change in order, for example, to make informed electoral choices the responsibility is to be as informed as possible and then to respect the consensus views of mainstream science. This is not to say that these views may not be one day overthrown by new scientific findings – it is the duty of scientists to probe and attack each other’s work – but this does not mean that citizens should endorse the views of a minority of scientists who hold what seem to be implausible views at odds with standard science.

Indeed it seems that the denialists are behaving in a strident and seemingly irresponsible way in rejecting the consensus science on climate change without at least assembling and taking seriously the alternative consensus evidence and presenting the debate in a balanced way. Why do they not consider the possibility that they may hold erroneous views that, if they were accepted, would impose huge damages on our children and on future generations? Is it only that their views have finally not been accepted in public debates that makes these minority-view scientists strike out with their strong claims?

The upshot of the denialist position is that attempts to prevent ‘human-caused global warming’ will be a ‘costly, ineffectual and hence futile exercise’ (Carter). Therefore climate change, if it does occur, should be addressed solely by adaptation policies so that society learns to live with heating effects. These claims about the primary role of adaptation and of the infeasibility, expensive climate change policies will be discussed below.

First let me cite from a standard text, Gordon Brown’s Ecological Climatology, what are the conventionally understood facts on climate change science. These views cannot be accepted by denialist scientists since they imply that their core beliefs are false.

1. The earth’s mean surface temperature has increased by 0.74oC between 1906-2005.
2. The rate of warming over the last 50 years is almost double the rate over the whole 100 years. The latter half of the twentieth century was probably the warmest in 1300 years.
3. 11 of the 12 years from 1995-2006 are among the 12 warmest since 1850.
4. Not only air temperature but oceans and ground temperatures have increased.
5. Spring snow cover in the northern hemisphere has decreased with lakes and rivers freezing later in autumn and thawing earlier in spring.
6. Glaciers and permafrost are melting and Artic sea ice is shrinking.
7. Increases in concentrations of greenhouse gases are a positive radiative forcing that has warmed climate.
8. It is extremely likely that humans have exerted a substantial warming influence on climate. It is extremely unlikely that natural radiative forcing (solar irradiance plus volcanic aerosol) have had a warming influence comparable to that of anthropogenic radiative forcing.
9. Climate change models that include only natural forcings do not explain the late twentieth century warming while models that include anthropogenic forcings such as greenhouse gases and aerosols do simulate the warming.
10. The balance of evidence suggests that annual global mean surface temperatures will warm by from 1-6oC by 2100 in response to increased concentrations of greenhouse gases.

These widely accepted views contradict denialist claims. Denialists who wish to have their views taken seriously should at least admit that these are consensus views and consider them seriously because wrongly rejecting these views can have serious implications in terms of social costs.
The claims by the denialists that climate change can be dealt with entirely by adaptation rather than mitigation and that climate change measures will be prohibitively expensive and infeasible can be decisively rejected.

There is nothing a priori wrong with the claim that adaptation policies alone can deal with climate change.  But the empirical evidence on costs suggests that this approach is not viable. Adaptation policies alone will be insufficient to address the impacts of climate change partly because of impacts of change on the natural world. For example, there are extreme problems of facilitating biodiversity adaptations to climate change given rapid projected rates of temperature increase and the fragmentation of natural landscapes that inhibit natural 'migratory' adaptation responses. In addition, adaptation responses that would be called for to adapt to such things as sea level changes, changes in the agricultural sector and 'heat island' effects in cities are often concentrated in developing country megacities with low ability to invest in adaptation. Even in wealthy countries such as Australia it would be prohibitively expensive to protect the whole coastline from sea level change changes contingent on climate change.

That mitigation efforts to thwart drastic climate change will be prohibitively expensive is rejected by major recent reports. Unmitigated climate change of 6oC would involve catastrophically large costs as suggested in the Garnaut Review -  respected organisations such as the International Energy Agency in its recent World Energy Outlook 2008 forecast temperature rises of up to 6oC. Every aspect of modern life would be destabilised by such temperature changes and global as well as national welfare would be lower in 100 years than now. This is a catastrophic outcome that is worth focusing on even it it is a relatively low probability event because of the extraordinary costs associated with it.  Rates of mean warming of more than 3oC would be very likely (Stern estimates the probability as 0.69) with the 550 ppm emmission targets that are endorsed in reports such as the Stern and Garnaut Reviews.  The best science that we have suggests that this degree of warming would be associated with the destruction in Australia of the Great Barrier Reef, the Victorian Alpine biodiversity habitats, Kakadu National Park and irrigated agriculture in the Murray-Darling Basin.  If the minority view of the denialists were accepted as the basis for public policy and it were wrong the costs would be extraordinarily high.

At a discount rate of 2.7% the Garnaut Review estimate that discounted costs of targeting 550 ppm emission targets by 2050 are 3.3% of discounted GNP while the costs of aiming for 450 ppm targets are 4.2% of GNP. These are significant costs but not prohibitively so. The Stern Review reaches much the same conclusions - the costs of not acting strongly enough to deal with climate change greatly exceed the costs of taking decisive action to address it.  Accounting for risks of catastrophic change Stern computes the cost of not addressing climate change as a permanent loss in consumption per head of 5-20% whereas the permanent cost of stabilising emissions at between 500-550 ppm would be around only 1% of GNP.

The question whether climate change mitigation is feasible or not turns on the question of community and political will and whether or not an agreement can be forged at the United Nations climate change conference in Copenhagen next year to significantly cut developed country emissions and to reduce the growth rate of global emissions. Garnaut’s assessment is that a 550 ppm target is more feasible than a 450 ppm target because of high offsetting growth in developing countries that will tend to swamp reductions in developed countries. With the policy framework he suggests an equal per capita emissions target across all countries can be achieved although the scale of reductions becomes harder with a long-term 550 ppm target. The argument for the desired global level of emissions cutbacks is can 'optimal insurance' argument - how much are society's prepared to pay to help prevent the possibility of a severe long-tailed catastrophic climate future.

Efforts to forge an international agreement to cut emissions are not helped by claims that anthropogenic climate change is 'phony science' so that efforts to control emissions should not be made. The views of the denialists need to be exposed for the delusions they involve and for the narrow perspectives they represent in the area of climate science. These minority views offer the potential for substantial risks to society if they were adopted and proved to be wrong.

One can ask why are these conservative denialists so strident and seemingly irresponsible in rejecting the consensus science on climate change without at least assembling the alternative consensus evidence? Why do they not consider the possibility that they may hold erroneous views that, if they were accepted, would impose huge damages on our children and on future generations? One can conjecture that it is only that their views have finally not been accepted in public debates that makes these minority-view scientists strike out in the way they have.

Barack Obama is Irish

This entertained me.
Thanks Bernd

Tuesday, November 11, 2008

China impressions

I have had a fascinating and enjoyable visit to China. I spent a month here in 1988 but, Beijing at least, is an entirely new city now. I am sometimes not a great supporter of Chinese policies but, to their credit, the achievement of the Chinese authorities in constructing the new Beijing is in many respects remarkable. Beijing is modern, swanky and would be even an attractive place to visit as a tourist. Moreover, it is not just entrepreneurial spirit that is doing this - the ordered attractivess of Beijing contrasts starkly with unplanned city growth in the sub-continent and in cities such as Bangkok. Things work in Beijing and the city is highly liveable!

I have been am particularly fascinated by the beautiful Peking University Campus and by the happy youth here. Many foreign students are also here studying happily. The Chinese hospitality to visitors is superb. The Chinese postgraduate students are intelligent and have strong academic motivation. Their questions on my climate change policy were rewarding to me and valuable as a way of improving the paper. One perceptive student criticised global trading arrangements to implement low cost global carbon controls from the perspective of Coasian transactions costs! These students know a lot of economics. The students even have an 'on campus' group which studies climate change.

To be frank I can think of no comparable group in Australia. I wonder why not. Why the difference?

I also wonder why it is that Australia sees Chinese students as a source of university funding rather than a chance to interact with a great civilisation. Foreign students in China have a Chinese buddy who helps them with such things as language difficulties. Why doesn't Australia do the same thing?

I think Australia has things to learn and mimic from the new China.

My provisional overall impressions about China? Too many to blog about and far too contradictory at this stage - yes it was only a short visit. Nearly forty years ago I heard the Zen philosopher Alan Watts say that the two things that would most drive the world's future were LSD and China. I think he got the first one wrong but on the second point I feel he is right. China will be both the world power and the key global economic force - that is something I have long believed. But China will also be a world cultural and academic centre. The signs are all there. The Chinese place a high priority on education, on learning from the rest of the world and have a candidness about current Chinese problems.

The fact of Chinese wealth and power is vaguely known to many. The Chinese themselves see it more clearly and are already preparing for hickups in terms of perceived 'threats from China' as the world comes to see it more starkly as a reality. The world's economic institutions were designed without China's blessing - I am sure they will insist on more regulated structures. Many other things will change as the dominant role of the US and Europe fade.

I'll try to sort out my ideas on these issues at a future date. At present I am typing these notes on the free internet service at Hong Kong airport. I like the fact that luggage trolleys within this airport (and Beijing) are also free - a courtesy appreciated by tired out travellers without local currency. A thought that occurs to me is the efficiency and courtesy in this airport compared to the disgracefully degraded facilities at airports such as Los Angeles with their incredibly rude and inefficient customs agents.

The US is squandering its wealth by dissaving and standing by as its infrastructure degrades. China has one of the highest savings rates in the world and is building a new society with high educational and cultural values. I am over-generalising but there seems to be some sort of lesson and sign for the future here.