Wednesday, July 30, 2008

A break from blogging

Apologies to readers for the recent lack of posting. I have been busy lately with preparations for forthcoming teaching and have been travelling. Hopefully things will normalise over the next week or so.

On Friday this week I am presenting a seminar on 'Policies for Reducing the Costs of Cigarette Smoking in Australia' (a much earlier version here) at the University of Queensland from 11-12pm in the Colin Clark Building Room Level 6. I'll be in Brisbane Thursday-Saturday morning and would like to meet blog readers in Queensland. I'll be staying at Hotel Ibis on Turbot Street.

The good news this morning is that the much-maligned Premier Iemma has moved decisively in NSW to ban the public display of cigarettes in stores and to fine the 10% of smokers who insist on smoking while driving when there are young children in the car. This follows similar moves in other states such as South Australia.

Passive smoking is particularly injurious to kids and lurid displays of cigarette products are primarily designed to attract young kids into this disgusting habit (a source of Phillip Morris' disgraceful opposition to this move).

Well done Morris and brickbats to those hideous corporates who continue encouraging our kids into making a premature visit to the morgue.

Update Sunday:  Brisbane was sunny and University of Queensland a pleasant destination.  Saw old friends and had a great few days. Now back in freezing Melbourne.

Monday, July 28, 2008

Oil subsidies in emerging countries

A standard economic proposition is that poorer people generally have more price elastic demands for many goods.  When a good's price rises it is those with constrained purchasing power who cut back their consumption most. Why then have oil demands not fallen in oil importing emerging and middle income countries when we know demands have fallen off markedly in developed countries?

This is partly because in countries accounting for 96% of the increase in demands last year oil prices are subsidised - often massively. Until recently Malaysia devoted 7.5% of its national economic output toward fduel subsidies.

Often provision of these subsidies is an intractable political issue. Sometimes too the subsidies are a second-best way of addressing the environmental problems of deforestation that would worsen were poor people to be charged the fiull price of kerosene.

These subsidies mean that the aggregate quantities of fuel demanded will not adjust in response to higher prices so as to stabilise these prices - they keep prices high in developed countries where oil products are generally taxed rather than subsidised.

Thursday, July 24, 2008

Eddi Reader

In terms of contemporary music I have to agree I am out-of-touch.  This is of course a disadvantage but pleasant surprises often present themselves as a consequence. The other night on ABC TV I saw a talented, female singer performing at The Basement in Sydney - Eddi Reader.  She is Scottish and that's about all I know about her. The next day, selecting at random, I bought an early recording of hers - its just called Eddi Reader - and I have been listening to it this evening.   It is distinctive contempory, uncompromising folk-rock (occasionally bluesy) music.

I can't find any poached versions of music from this album of Eddi on the net but there is plenty of other stuff. Try this YouTube for a sample - or this or this or this.  She obviously shines in concert!

Are excises on fuel too high?

This provocative post by Gary Becker argues that the low taxes on US petrol completely internalise the external costs of petrol consumption in terms of the global warming and foreign oil dependence externalities imposed on the US.  On this basis, Australian excises on petrol - much higher than US excises - would seem to be on the high side and to go further than you would want in internalising externalities that hurt Aussies.  Thus the Rudd Government's Green Paper decision to exempt petrol from carbon charges by rebating any carbon cost from current excises would seem justifiable.  At least it is not a priori a foolish argument.

Of course Rudd is concerned with the political costs of taxing petrol further when its cost is currently high.  Maybe this is not a dishonourable position either.

Becker points out a host of benefits of high current fuel prices in internalising congestion and other externalities.  He is right. OPEC and China are jointly doing a better job of managing congestion issues in Melbourne than the Victorian Government with their inane fixation on expensive tunnels and extra freeways.

Tuesday, July 22, 2008

Climate change adaptation policies for the City of Melbourne

This interests me – a draft plan for adaptation to climate change in the City of Melbourne. As stewards of their local communities, local governments have a role in assessing and addressing the impacts of climate change.  Note I am interested in the fact that such a plan exists for our local community rather than the specific insights of this draft report. 
Generally cities are seen by this report as likely to be affected by climate change in three key ways:
  • Impacts on resource productivity or changes in market demand for goods and services;
  • Performance of physical infrastructure & industries directly affected by changed climate conditions or damaging extreme events;
  • Populations affected by extreme weather, scarce resources, health status, changed economic conditions or migration.
By 2030 Melbourne is expected to be significantly affected by warmer temperatures and heatwaves, lower rainfall, intense storm events and flash flooding. An adaptation response comprising four policies sought:
  • Loss prevention – actions to reduce vulnerability to climate change;
  • Loss sharing – spreading the risk of loss among a wider population (eg insurance);
  • Behaviour modification – eliminating the activity or behaviour that causes the hazard;
  • Relocation – moving vulnerable population or systems away from hazards induced by climate change.
The City of Melbourne has employed consultants to assess Melbourne’s climate change risks for 2010, 2030 and 2070. The main climatic effects envisaged are:
  • Reduced rainfall and drought;
  • Extreme heatwave;
  • Intense rainfall and wind storm;
  • Sea level rise.
Melbourne is expecting unprecedented population growth to become Australia’s largest capital city by
2030 - population within the CoM is expected to double over this period.
Two key adaptation measures seen as having high value in this draft report are:
  • Stormwater harvesting which can assist in both flash flooding events & insufficient water supply;
  • Increasing passive cooling of the city to reduce the heat island effect.
With respect to the latter Melbourne’s CBD can be 7 degrees higher than other Melbourne suburbs on a hot day. This significant difference substantially heightens the vulnerability of people in the city to heat stress, injury or death. Measures to reduce the city temperature both inside buildings and at street level will provide considerable benefits to reducing overall exposure.
Feedback on this proposal can be submitted by replying to this email, via the online feedback form. I am interested in collecting information on this type of work and thereby increasing my knowledge of climate adaptation to urban and city areas.

Mr Ali Allawi on Iraq

Former defense and finance minister in Iraq, Mr Ali Allawi, gave a valuable account of the current political situation in Iraq on last night's Lateline.  According to Allawi the majority of parliamentarians - and probably most citizens*  - would quietly back Obama's policy to withdraw troops from Iraq in 18 months.  At the same time the government feels a debt of gratitude to George Bush - if only because many owe their positions to the US intervention. Of course Bush too has noew stated a commitment to withdraw although there is no specific timetable. The reasons for the improved security situation in Iraq - extra oil money driving a more prosperous economy, the decline in the Sunni Arab insurgency,  the defeat of  al-Qaeda and - paradoxically but unquestionably - the success of the recent surge.

Critics of the US effort in Iraq (including Obama's criticism of the ineffectuality of the 'surge') have been proven completely wrong. 

The transcript is short and very worth reading.

* Not the Kurds and some Sunni who, despite their public opposition, fear the consequences of a US withdrawal.

Sunday, July 20, 2008

Let's hear it for the 'old' guys

After 3 rounds Greg Norman is leading the field in the British Open at Royal Birkdale. At 53 years of age and without having played a lot of golf in recent years Norman has astonished the golfing world.  Good on him - regardless of what happens in the final round it is an amazing achievement. His marriage to Chris Evert undoubtedly improved his game. Cheers too for Rocco Mediate who came within a whisker of beating Tiger Woods at the recent US open - he shared the lead with Norman in the British Open for a while. The likeable, 45 year old Mediate has demanded a rematch with Tiger! 

I never thought I'd come to backing sports people at least partly because of their age.  I agree it is a bit tragic.  But the conditions at Royal Birkdale - high winds and rain - were about as bad as I have seen at a major tournament.  The old guys had the golf skills and the general savy to do well.  They deserve applause.

Update: Norman crashed in the final round with a 77 while his worthy opponents shone with great rounds of 69. The Shark went down and ran a distant third.  He was leading after 9 holes so - Harrington and Poulter must have put in fantastic performances then.  The criticisms of Norman losing his nerve etc have already started. What a sad lot of critics they are.

Saturday, July 19, 2008

Carbon Pollution Reduction Scheme

This is my take on a ponderous, overly-long document. They were notes for a university class so if I’ve missed important points I’d appreciate being told.

According to the Green Paper we will have an emissions trading scheme (ETS) – a Carbon Pollution Reduction Scheme (CPRS) - by 2010 based on cap & trade. The cap will be consistent with the goal of reducing national emissions by 60% below 2000 levels by 2050 – a bound that may be too low but which is a start. The caps & hence the equilibrium carbon prices will be determined in a White Paper in December 2008.

Generally the scheme seems a good start to me. Many of the criticisms of it are at best naive.

There will be a cap on the price businesses would pay for permits from 2010–11 to 2014–15 so a hybrid trading/price system. This enhances the credibility of the scheme by ensuring carbon prices don’t get ‘too high’ and also provides predictability as we move into unchartered territory.

The propaganda arm of government has been quick to point out that more than 99% of all firms in Australia will not be directly involved in the regulation of emissions. Only about 1,000 firms will be directly affected although, as general equilibrium theory makes clear, there will be impacts throughout the community. That is the idea – to change people’s behaviour by making them respond to higher prices. Significant emitters must acquire or be granted permits.

The transport sector will be covered but, for 3 years, charges on petrol will be offset by excise reductions. This seems inevitable to me given rocketing fuel prices. If fuel prices did slump in 3 years the policy could be revised.

An ‘equivalent’ rebate will be applied to businesses in agricultural & fishing industries for 3 years – this was seen as necessary as excise system does not apply to this sector. A bit weird.

Forestry is included on a voluntary ‘opt-in’ basis. Carbon pollution permits additional to the cap would reward the net quantity of CO2 stored in forest. A liability would be imposed for net reductions in stored CO2. Deforestation is not included in the CPRS which I think is a mistake.

Agricultural emissions are not included until at least 2015. Predictable -  but this sector is a major source of emissions – eventually it must be included.

There is limited scope for offset credits on the grounds of the implied administrative complexity - you know ‘what would have happened in the absence of a particular decision’.

Carbon pollution permits could be used in any year from or after their year of issue (unlimited banking) with limited borrowing from future scheme caps is possible. Seems sensible.

The scheme will be designed to link with other schemes overseas to lower the price of carbon pollution permits in Australia. The decision to link would depend on the reliability of the monitoring systems, of another country. Sensible.

Revenue raised will help households & business adjust. It will provide low income households with increases in assistance through the tax & transfer system & all households with some assistance. This is reasonable. The aim is not to levy another tax but to change relative prices. I would cut GST and income taxes and push for greater reliance on ‘double dividend’ yielding green taxes such as those implied by the CPRS.

A Climate Change Action Fund (CCAF) will assist business transition to a cleaner economy. The CCAF will assist in funding capital investment in innovative low emissions processes; industrial energy efficiency projects with long payback periods; dissemination of innovative practice among SMEs. Strongly agree – demand management measures will be insufficient. Also need supply measures and measures to induce appropriate technology switches.

Free permits will be supplied to the most emissions-intensive trade-exposed activities to reduce ‘carbon leakage’. Around 30% of free permits will go to emissions-intensive trade-exposed activities. Strongly agree with the sense of this and disagree with much commentary on this issue. The objective is to charge for emissions associated with Australian carbon consumption not production – to charge on a destination basis. Ideally this would be achieved by taxing our consumption of carbon producing goods that are produced locally and by taxing imports of such goods – via retaliatory tariffs - if other countries are not taxing carbon emissions. Exports would be tax free. This amounts to charging for emissions on a destination basis.

The bureaucratic machinery to work all this out would be nightmarish. Just giving free permits to major exporters is enough. This principle should extend to all carbon intensive exports including those of environmentally friendly natural gas. The grizzles by BHP-Billiton and Woodside Petroleum are fully justified and I hope will lead to a policy change by government.

Assistance to trade exposed industries will be on the basis of industry average activity emission intensities to ensure businesses have an incentive to reduce their emissions leading up to the introduction of the scheme. It would reward those firms that have already taken action to reduce their carbon footprint. The rate of assistance given will be gradually reduced over time at a pre-announced rate to ensure all parts of the economy contribute to the objective of reducing emissions. I am not sure that these points reflect a sound understanding of the principles of destination accounting or not. Again, we should tax our consumption of carbon not our production – that is the point.

The Government proposes to provide a limited amount of direct assistance to existing coal fired electricity generators. To ameliorate the risk of adversely affecting the investment environment, the Limited direct assistance will be provided to existing coal-fired electricity generators via the Electricity Sector Adjustment Scheme (ESAS). I don’t really think this is sensible. These are non-traded goods and the prospect for carbon trading has been anticipated for years. For the most part this will be a cash handout to multinationals that will not have any effects of making them greener. I’d rethink this one.

An independent scheme regulator will be established to conduct reviews of the CPRS every 5 years. The responsibilities will be to monitor and enforce compliance, run auctions for permits, allocate free permits according to specified rules & maintain the national emissions registry. Unfortunately the Government will set and extend scheme caps and gateways, decide the nature and extent of international links, and decide when allocations of free permits to emissions-intensive trade-exposed industries should cease.

On this last point I would have set up an independent authority that had most powers with respect to these issues. There are too many opportunities for backtracking by future Labor and Liberal Governments. There are real credibility issues here. Industry will only undertake the sorts of massive capital investment programs sought if they expect carbon trading to last.

We need to be committed to a program of carbon pricing that will gradually lead to a phasing out of the use of fossil fuels in the economy.

Thursday, July 17, 2008

A minimum price for booze

This is a cute microeconomics task.  From an group email sent to me by NCETA's Dr Anne Roche:

‘The National Centre for Education and Training on Addiction (NCETA) has been contracted by the Australian Government Department of Health and Ageing to conduct a feasibility study on setting a floor price for alcohol products. This study is being conducted nationally to determine if state and territory governments, working in conjunction with liquor licensing bodies, can introduce a floor price to control high-risk alcohol consumption.
For the purposes of this study, an alcohol floor price is defined ‘as a minimum fixed price per standard drink applied to all alcohol products in Australia’. Please note that an alcohol floor price is not a synonym for an increased levy or tax on alcohol. It is a distinct and unique strategy’.
The move is presumably an effort to stop heavy boozers from drinking themselves silly on cheap flagon wine. In a sense it is an imperfect surrogate for volumetric pricing. The latter identifies ethyl alcohol content as the prime cause of alcohol’s social costs and advises taxing accordingly in accord with the alcohol content of booze.

A key issue is how a minimum price would compare with a volumetric tax. One obvious effect is that the tax revenue would accrue to the government rather than as revenue to the booze companies.

The effect of a minimum price would be to force a switch towards better quality booze whose price lies at or above the minimum away from booze that is currently priced below the minimum. There would also be a reduction in overall consumption.

The measure would have very regressive impacts and will undoubtedly be criticized by non-thinking social worker types on these grounds. (It’s a dumb argument because regressivity should be assessed from the viewpoint of the total impact of the tax-transfer mix, not the impact of a particular tax).

It might restrain limited income youth from experimenting with booze which might be a good thing.

It would presumably foster the creation of homemade brews which might have some health and other costs.

It might encourage substitution toward non-alcoholic intoxicants via activities such as petrol sniffing and smoking cannabis.

It would reduce problem drinking by those with drinking problems though the precise effects are a matter of evidence. Dependent drinkers might often be income-constrained but their compensated price elasticities are likely to be low in any event. It is an empirical question which of these effects works harder.

NCETA are seeking submissions on this. If we got some good comments and some bright ideas we might send in this blog post as a joint contribution. What are your views on this proposal?

Investing wisely in love

Love is scarce so invest in it wisely. That's the message of this piece by Ben Stein in the New York Times.  I'd be interested in comments.   I guess don't want to just be 'something you invest in' but do you organise your affections on the basis of cost-benefit analysis and the payback principle?

According to Stein the returns in love situations are proportional to time and devotion invested. The amount of love you get from an investment in love is correlated to the amount of yourself you invest in the relationship. If you invest caring, patience and unselfishness, you get those things back.  Of course that is not necessarily true - ask any parent!

It helps if you stay with 'high-quality human beings'. Don't have relationship with someone with many 'serious problems'. The question ios how do you know? I guess inspection procedures go with investment effort.

And do your research. The most appealing exterior can hide the most danger and chance of loss.

Diversification in love, at least beyond a very small number, is impossible Stein claims so be relatively faithful.  Quote:

'In every long-term romantic situation, returns are greater when there is a monopoly. If you have to share your love with others, if you have to compete even after a brief while with others, forget the whole thing. You want to have monopoly bonds with your long-term lover. At least most situations work out better this way'.
I wonder if there isn't a case for optimal diversification - though it depends what you mean by love.

Finally, according to Stein, apply cost-benefit analysis towards your relationships and take a long-term perspective:
'The returns on your investment should at least equal the cost of the investment. If you are getting less back than you put in over a considerable period of time, back off.  Long-term investment pays off. The impatient day player will fare poorly without inside information or market-controlling power. He or she will have a few good days but years of agony in the world of love'.
I wonder - are many of these things not built into our genes. The next thing so mid-west American college will incorporate these ideas into a dubious undergraduate unit 'Personal Finance 3'.

Monday, July 14, 2008

Fannie, Freddie & you

A joke in Washington these days goes like this: "What's the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted."

(WSJ as part of a potted history)

The US will intervene to lend to Fannie May and Freddy Mac - by far the biggest home lenders in the US. They may even buy stock in the firms to support their equity price. Their equity prices have fallen by half in a week.

Paul Krugman sets out the background to the Fannie and Freddie problems. These institutions were not involved in the sub-prime crisis - they have just been caught with substantial lending to housebuyers who paid too much for their houses. Many borrowers have negative equity in their houses so that delinquency rates are high. This poses problems basically because these institutions are undercapitalised and the US government have effectively guaranteed their liabilities.

Krugman argues that it is no big deal that taxpayer money will need to rescue these firms - he argues theUS is in a major financial crisis and this ctype of intervention is inevitable. To Krugman Fannie and Freddie can’t be allowed to fail since with the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.

Its true that intervention is desirable from the viewpoint of the global financial system - it would be dealt a hefty blow were these firms to fail. These institutions have over $5.3 trillion in liabilities and the problems they face stem from the moral hazard implications of the US government guaranteeing these liabilities. Its ca repeat of the S&L saga. The difficulty here is that the current bailout provides the grounds for worse problems in the future. It is an apparently tough choice but not really a choice at all given that history cannot be rewritten.

Sunday, July 13, 2008

Fortune magazine

Fortune is one of those magazines I subscribe to with mixed feelings. On the one hand it caters to some the worst aspects of US consumerism and an almost adolescent worship of wealth. But it also provides a gritty and useful view of the world of business from a business rather than economics perspective. It's latest issue contains the Fortune 500 Global edition which looks at the performance of the world's biggest firms. I generally look at this carefully noting particularly how Australian firms figure and how the emerging giants of China, India and Mexico are making their impact. I always stick my copy of this particular edition on a bookshelf and refer to it over the coming year - it is an invaluable resource and a great teaching aid.

Another feature of Fortune I greatly respect is that much of its material is online.

On the Fortune 500 listing Australia's own BHP-Billiton is 183rd on the Fortune 500 list but 17th in terms of profits. For every three dollars of sales it makes about a dollar profit. For its size it is one of the most profitable firms on the planet. Amazing!

Barney Gimbel's piece The New New World Economic Order in the same edition (unfortunately not online) is about as eloquent a 2 page summary of where the world economy is going as I have seen. The US, and indeed the developed countries as a whole, are no longer the locomotive of global growth - 54 developing countries surveyed will grow by 6.7% this year even though growth in 31 developed countries averages 1.6%. Voracious consumerism has historically come from the US but its source will soon be elsewhere. By 2020 China will have 700 million middle income earners and India 583 million. Gimbel sees the major threat to the world economy as exploding inflation in developing nations.

Despite some mild misgivings Fortune remains one of my favourite weekly reads.

Thursday, July 10, 2008

Choose economics as your business specialisation

I have never recommended that any other than the least academically able business students* even consider enrolling in undergraduate degrees such as dedicated marketing and human resource management. The vast bulk of students are far better off studying a discipline like economics or finance provided, again, that the latter provides a solid background in basic economics.

Economics students are better off that this lot because they learn to analyse the world in terms of a solid body of theory that has been developed over the past 200 years. Apart from providing them with an education of intrinsic interest (with quantitative methods, modelling skills, economic history, knowledge of institutions) economics also gives them a good fundamental education that they can apply in various areas. They also earn more money.

  • Those who want to employ marketing specialists would be better-off seeking an economics or arts graduate with a good fundamental education followed by practical experience (and perhaps an MBA) rather than an undergraduate who has majored in marketing but doesn't know what a demand curve is. Or who doesn't know any finance or macroeconomics and hence doesn't understand the broad forces that drive business.
  • Those who want to employ human resource managers could usefully sample from the same pool. They will certainly do better than employing an undergraduate who has studied some gobbledegook personel management and third rate psychology - but no labour economics, game theory or industrial law - and who, apart from a part-time job working at McDonalds, has never themselves been part of the paid workforce. How can they assist in bargaining with a trade union or employer when they have never studied bargaining?

The fallacy in believing that you do best by choosing a vocational specialisation rather than a solid fundamental education is underlined by a recent Forbes study on graduate salaries in the US. Business isn't fooled even if naive undergraduates fall for the vocational slogans and the managerialism-speak.

In the Forbes study, guess what - economics comes second! in terms of reward. In order of the fields are:

1. Computer Engineering
2. Economics
3. Electrical Engineering
4. Computer Science
5. Mechanical Engineering
6. Finance
7. Mathematics
8. Civil Engineering.

The reason that economics is valued so highly is that it provides strong generic, analytical skills. It is adaptable and is consistent with flexible thinking. Those who seek to analyse marketing and human resource issues without quantitative methods and without the economics that provides a clear understanding of how markets work are like the hapless soldier trying to charge a regiment of tanks with a defective slingshot.

They will almost inevitably lie at the bottom of the managerial ladder both in terms of status and salary and deservedly so.

Firms provide better on-the-job training than universities do. Most of the self-proclaimed practical 'businesspeople' pushing an atheoretical, anti-analytical line in the universities couldn't organise themselves a root in a brothel. Most have no business experience and parade their philistine anti-intellectualism as something to be admired when it is clear to all that they are simply making a virtue of necessity.

For the Forbes survey (not the polemics) a Hat Tip to Greg Mankiw.

* The least able students have other options too. The generic B.Bus when properly constructed with enough quantitative methods, economics and finance is better than any amorphous dedicated vocational degree that, in the main, combines psychobabble with management-speak. They would also be better off doing an Arts degree.

Financial markets & the world

These types of headlines amaze me:

'The Australian dollar has open higher as the US dollar weakened on world political tensions after Iran test-fired 9 missiles overnight'.

Its an obvious point - my obvious point for the day - but we do live in one world.

Tuesday, July 08, 2008

Nelson nibbles away at a 2010 start on carbon trading

Brendan Nelson seeks to gain appeal by abandoning all principle. He has now reverted to the Howard position of not endorsing controls on carbon emissions before other large polluting countries (China, India, Russia) do so. Nelson warns of economic peril in ‘going ahead of the pack’. Nelson's warning is simply opportunism.

As the Garnaut Review suggested the climate change issue is ‘diabolical’. We don’t need to act on warming problems today - we can apparently delay until tomorrow so there are endless procrastination probabilities. In addition we need international co-operation, there is much uncertainty etc etc. It is just all too hard!

But the bottom line is that the probable costs of not taking action are huge and the costs of taking action are relatively low. The costs of constantly postponing are accumulating and this is making decisive actions more difficult and expensive.

The issue of carbon leakages has probably been exaggerated and leakage effects can be dealt with anyway by applying destination accounting in taxing carbon. This means exempting exported energy intensive outputs and placing tariffs on imports from countries that do not price carbon emissions correctly.

Update 1: It seems Penny Wong, the Australian Worker's Union and Labor's Michael Costa are all backpedalling on Garnaut's proposed 2010 startup date for carbon trading. It is a pathetic display and an indictment of that miserable branch of humanity comprising Australian politicians.

Update 2: Nelson continues to dig himself a deeper hole. He rejects the position of the Shadow Treasurer Malcolm Turnbull that Liberal Policy is for emissions trading to begin unconditionally in 2012.

Monday, July 07, 2008

Garnaut Review preliminaries

I have been reading the enormous Garnaut Climate Change Review (hereafter, Review) rather selectively – mainly in relation to forecast events in the Murray-Darling Basin. I'll report on my investigations later and also comment on what to me are the guts of the Review's work - it's findings on designing an emissions trading scheme which are in the last one third of the Review.

I wonder about the size of this Review. Those without specialist interests in climate change will not read the whole document because the effort is too daunting while those with specialist interests might not read it because there is a huge amount of material in the Review that is non-new – I cannot see much that is new in Chapters 1-5. Chapters 6- 7, 11-13 include much descriptive material already published or which is on meteorological websites. The substance starts after Chapter 14 - that is useful information since it cuts the read by 50%.

I can’t help thinking a much shorter and more focused discussion would have been better. It is unnecessary to engage in yet another literature review – there is already plenty of material out there e.g. the Stern Review. What is of interest are the specific problems Australia faces and this should have been the exclusive emphasis – indeed these problems were the main assigned ‘terms of reference’.

On the other hand the document is well-written and thoughtful. Climate change is a ‘diabolical policy problem’ and is ‘insidious rather than confrontational’. Given the high levels of uncertainty involved there are significant incentives to procrastinate yet the costs of doing this are huge. We need to take action when there is no immediate need to do so and where third-rate politicians eager to grab at any short-term political advantage bedevil attempts to deal comprehensively with the issues. Moreover international cooperation of a type never achieved in history is required. The Review points out the problems but also the advantages Australia has in terms of being a resource supplier to Asia and in terms of its resilient market-driven economy.

The Review does not present specific targets or estimate the costs and benefits of mitigation - these we are told will come later - although it does estimate trajectories of the economy without climate change or mitigation comparing this with estimates with climate change but without mitigation – the difference between these scenarios is one way of measuring the cost of climate change.

The Review is frankly a political document that is designed to encourage politicians to show conviction on the climate change issue and to motivate voters to back those who do. Thus there is a considerable amount of pure fiction in the report. For example the Review forecast in 2008 that output in 2100 (in the absence of climate change) will be 700% higher than at present with per capita output quadrupling. With median estimates of climate change and no global mitigation response GDP would fall from this level by 4.8%. I wonder if any economist in Australia places faith in such numbers. Yet it is these numbers which are being used as reference scenarios through to 2100.

Of course the immediate defence is the imperative 'do better' which I cannot. There is also the inevitable defence that a simple message needs to be told to achieve what those pursuing the Review believe is sensible policy.

I also would have liked much more explicit discussion of the 2007 report by the CSIRO detailing climate change forecasts for Australia – these are very similar to the 2001 forecasts. I would also like to see detailed the Monash Multi Regional Forecasting (MMRF) model which is the main way actual climate changes are forecast to translate into economic changes which is barely discussed at all. The only reference to it is to a qualitative piece by Phillip Adams in 2007. We are told that more details will be provided in the ‘Supplementary Report’ due later this year. In my view this is unsatisfactory and not a detail - these two inputs determine the climate change outcomes of the Garnaut Review.

Update: Colleague Damien Eldridge points to this link to further information on MMRF.

Saturday, July 05, 2008

Birthday bash

Friend Jack R, is having his 60th birthday party soon - in Forestville, Sydney. I will be there but it seems the acceptances have been slow. This has got to be the YouTube of the decade.

Friday, July 04, 2008

Fuel price surrogates for congestion pricing

New York politics failed to agree to introduce congestion taxes to deal with traffic congestion. But higher fuel prices are delivering desired outcomes anyway. This is true in New York and, of course, in all major cities along the eastern seaboard of Australia. Fuel tax increases to deal with congestion are generally ill-advised because they lead to drivers being penalised when they take non-congesting trips. But when urban dwellers take fewer private car journeys because of high fuel prices there is no such distortion.

It seems to me there are few downsides on the fuel-priced-induced traffic slowdown. And it does mean that with lower congestion, congestion tolls where they are levied, can be lower than they would otherwise be even if travel costs overall are not reduced. With private operators of facilities such as CityLink and EastLink in Melbourne this will not occur - charging here is based on cost-recovery not on ensuring travel efficiency. This is another reason for leaving the management of tolls in public hands and for redesigning the contracts State governments have with private operators. .

Wednesday, July 02, 2008

Sting: A bitter post

I have an unfortunate, rather negative approach to rock musicians like Sting. They have no obvious musical talents or intelligence and travel the world in their personal jets telling us all how to be environmentally friendly. It is accurate to describe them as hypocrites.

And look at Sting's taste in women. Look at Rita Sting's charming, unpretentious natural smile and the elegant d├ęcolletage. Note the way the cleavage neatly bunches over her high waist band-cum-broach. Was it air-touched?

They deserve each other but, surely, the world does not deserve them.

Last words: Environmental tobacco smoke

'Last twinges of a coffin posting this book where the awning flaps a distant thank-you'. (William S. Burroughs)

The US Surgeon General’s ‘Health Consequences of Involuntary Exposure to Tobacco Smoking’ is a massive 19MB document with a reasonably accessible Executive Summary. The evidence is mainly for the US but many arguments apply to Australia. It is a 2006 report but I have only just had the chance to pour through it with care.

Forget about the lies the tobacco companies (and their allies in the libertarian movement) tell you about the freedom you have to kill yourself and those about you.

Life itself is a somewhat sick joke. We survive for 3 score years (and perhaps ten or twenty) then our bodies and our frantic concerns about income and status turn into dust. But we want to live – or at least I do! That’s the funny bit.

Exposure to environmental tobacco smoke (ETS) has fallen dramatically in the US mainly because of near total restrictions on smoking in the workplace – cotinine concentrations (a metabolite of nicotine) have fallen 75% in 10 years.

Still in 2005 ETS in the US killed more than 3,000 people from lung cancer, approximately 46,000 from heart disease and 430 newborns from SIDs. And still about 60% of non-smokers in the US show exposure to ETS.

The argument that cigarettes mainly cause internalities (market failures due to ignorance, youthful impulsivity) rather than externalities is true. A wonderful paper on internalities by Gruber – that demolishes the ludicrous ‘rational addiction’ model - is here.

Smokers reward non-smokers by paying more in taxes than they recoup in medical benefits simply because they die earlier. Perhaps non-smoking spouses who marry spouses cannot complain of 20-30% higher lung cancer death rates and 20-30% higher risk of heart disease. Perhaps too you can stretch it and say that workers in bars get better salaries that compensate them for higher heath risks. But what do you say about kids who suffer respiratory problems, slower lung development, higher rates of asthma and much higher rates of mid-ear infections because their parents smoke.

There are externalities from ETS and no-one should be forced to experience them.

Tuesday, July 01, 2008

A tipping point toward global deflation?

The Bank for International Settlements reported yesterday that the current global financial situation - viewed as a bust after a boom - could trigger a global recession on a par with that experienced in the 1930s. The full report is here. Basically it argued that central banks should act as, well, central banks, by restraining excess credit growth by raising interest rates during boom times and puttting aside capital so that cutbacks on lending could be more restrained when times turn bad.

The BIS instruction seems to be to keep current interest rates high even if inflationary expectations do not materialise. On balance however they do see inflation as a threat obviously driven by high oil prices although they see wage increases as a significant threat. According to the credit crunch now being engineered by central banks has the potential to have catastrophic implications for the global economy.