Paying aboriginals not to smoke

Andrew Leigh comments on Simon Chapman’s interesting proposal to pay aboriginals to stop smoking. Why not give such schemes a trial? They are cheaper and probably more effective than active treatment programs including use of NRTs. There is quite a deal of data on incentive effects of such programs in encouraging abstinence among users of illicit drugs such as cocaine.

The main idea is that drug users have short-term time horizons (they are 'hyperbolic discounters') and these programs provide small short-term rewards for remaining abstinent over short periods. This helps deal with short-term incentives to use and helps build up will-power and commitment.

We need to build up an inventory of experience of alternative means of trying to induce aboriginals to control their consumption of harmful drugs. Reading the published literature in this area my impression is that we don't know much. My impression is that there is a lot of verbiage but not much hard evidence and experience. (If I am wrong let me know, please!)

I quote Simon’s argument.

Kevin Rudd has announced a $14.5m injection of funds to lower smoking in Indigenous communities. Indigenous Australians smoke at around 2.5 times the rate of non-Indigenous Australians, with rates being as high as 80% in some communities.
That prevalence is one of the key reasons that Indigenous Australians are twice as likely to die within five years of a cancer diagnosis than non-Indigenous people, says the Cancer Council Australia. That's because "cancers caused by smoking are among the most difficult to treat successfully."

Few will see this investment as anything but overdue. But how could it be spent most effectively rather than squandered on legions of endless rounds of tiny interventions?
A paper in last week's Lancet poses an intriguing question.

In a report from Mexico, the Oportunidades program, which sees dirt poor Mexican villagers given "Conditional Cash Transfers" (CCTs) if they comply with a set of requirements such as attending health care, using free food supplements and enrolling kids in school, has seen remarkable improvements in increased height for age, reduced stunting, and reduced obesity.

The program across Mexico involves 20 million families and the evaluated component reported in the Lancet saw 90% of families in the trial areas volunteering to participate -- only 1% were refused payment for failing to comply.

Nancy Birdsall of the Center for Global Development has said of CCT interventions "I think these programs are as close as you can come to a magic bullet in development ... They are creating an incentive for families to invest in their own children's futures. Every decade or so, we see something that can really make a difference, and this is one of those things."

Unlike schemes that withhold welfare entitlement payments for failing to meet health and schooling goals, the CCT program is an entirely voluntary incentive scheme. Ethically, the two are therefore miles apart. With smoking, those who want to keep the habit can, while those interested in being paid to stop could sign on and be assisted with evidence-based cessation products to quit (although more than 85% of smokers stop without any formal assistance).

Payment could be staggered to ensure that temporary quitting lasted more than a few days or weeks. Smoking status is easily checked by a simple salivary test for cotinine, a metabolite of nicotine. Health insurance companies have of course been doing something very similar for decades: giving customers massive discounts if they don't smoke.

As I have posted before aboriginals have a poor health record partly because of their high incidence of smoking.

This problem has been somewhat overlooked because of an obsession with aboriginal problems with alcohol. Little is known about specific aboriginal smoking issues. Adult males smoke at a much higher intensity of non-aboriginals so targeting aboriginal smokers has a high possible anti-smoking impact. We also know there are severe passive smoking problems in the home. Little is known of Quit campaigns since – there are comparatively few ex smokers among aboriginals so this source of moral pressure to quit is low. There is a much ignorance among aboriginals about the health consequences of smoking and a lack of engagement with 'white-oriented' Quit campaigns both in country and city areas.

I have a postgraduate student writing a thesis on aboriginal smoking issues so this suggestion is of great interest.

Australia's emerging debt crisis

Over the past few years I have repeatedly referred to the effects of rising debt in the Australian economy – most recently here. Australia has been on a huge borrowing binge that follows closely - if not so severely - what has happened in the US and the UK. Our solid, persistent economic growth and our avoidance of recession for 17 years has sharpened the community appetite for risk and led to a situation where we hold too much debt.

It annoys me intensely that the RBA and many economists – some doubtless drawing lucrative financial consultancies from the banks – have been telling us that debt is not too high given the growth in the share-market and in asset values, in terms of the ratio of interest payments to incomes and so on. These explanations work only if incomes continue to rise, if interest rates remain low and if asset markets continue to grow in value at unsustainable rates.

The human and practical dimensions of Australia’s forthcoming debt crises (plural) were well portrayed on Four Corners this evening. If you didn’t see it you should. We need to consider at least partial reregulation of the financial system so that we do not rely mainly on the self-regulation of lending practices by the inept and immoral major banks.

From the blurb for ‘Debtland’:

Mortgages doled out to people on disability support pensions; loans to refugees with no English and no jobs that leave their families with next to nothing to live on; home loans so large they push borrowers below the poverty line…

This isn’t America’s sub-prime meltdown – it’s Australia’s debt debacle, the legacy of a credit binge that’s sent household debt through the roof and lending standards through the floor. Now the hangover is kicking in.

As many as 300,000 Australian households may be at risk of losing their homes. It mightn’t take much – another rate rise or two, a family illness or maybe just the car breaking down – to send people under. And for thousands more who are better off but feeling the pressure, this credit crisis is getting too close to home.

Dianne and her family are frontline casualties. Their home is being repossessed after constant refinancing landed them with two mortgages, one at 10% and another – on terms they didn’t understand - at 20%.

Four Corners meets them as they despairingly pack their belongings and give up the keys. Why did they take out loan after loan? "Because they keep giving them to us," is Dianne’s blunt reply.

It’s not just fringe lenders but also big banks which have pushed unaffordable credit. "We lent to whoever we could and as much money as they wanted," admits a former bank credit salesman.

Four Corners reveals how one major bank dished out unsustainable loans to numerous refugee families in one area. Some had no English and no job. In one such transaction a nine-year-old girl acted as interpreter. Elsewhere a disabled pensioner tells how her welfare cheque and small part time wage were enough for another bank to lend her $200,000. She is now in penury.

These cases exemplify how lending standards have slackened. Not long ago the rule of thumb was that mortgage payments should not exceed 30% of gross household income. Now lenders leave borrowers teetering on the poverty line.

Mortgage stress is compounded by plastic debt. "The banks are just handing out money on credit cards like there’s no tomorrow… It’s quite terrifying to think that the average household… now has three months of their disposable income on a credit card balance," says one analyst.

All the rage now are store-branded cards offering in-house credit with zero to pay for several years – then, typically, punishing interest takes effect. More than 10,000 stores offer these cards and many shoppers have several of them - but behind nearly all of them is one global financial colossus. [General Electric].

Many Australians have gone deep into the red to fund a newfound love affair with the stock market. The amount they have borrowed to buy shares now equals the total they have racked up in credit card debt. And as Four Corners discovers, when the market plunges and a margin call comes, some people are just reaching for the plastic…

Reporter Stephen Long surveys the human wreckage of the household debt crunch and looks at the key players and tactics behind recent aggressive lending. Long’s disturbing report also throws doubt over the data that banks rely on to make crucial lending decisions.

Big Kev & the US President

RUDD: Mr President, you said that you had a warm regard for me because from a Texan point of view you found me to be a reasonably straight shooter. I therefore designate you as an honorary Queenslander.

In the great state of Australia (!), I come from the great state of Queensland (!).

It may surprise you that it's bigger than Texas.(laughter)

But can I say - but can I say quickly …

BUSH: Can you recover nicely, yeah? (laughter)

Bush immediately caught his gaucherie. I agree with Tim Blair and Andrew Bolt that Rudd’s ineptness – he would have rehearsed his silly lines beforehand - probably partly reflects stage fright but there is also a measure of stupidity. This tedious, verbose, ex-bureaucrat could not handle the occasion.

I suppose that, at least, he didn’t get the ear wax munchies.

The Australian media have made a lot of the fact that Bush and Rudd seemed to get on in public. What could be expected? Particularly when Bush realises he is dealing with a dill.

Of course Rudd has confirmed the announced exit of Australian troops from Iraq at just the right time. And to his credit he has apologised to the aboriginals, has ratified the largely irrelevant Kyoto Protocol, is holding a 2020 talkfest with 51% women and has just got Victoria to participate in the national water plan by paying farmers $1 billion to conserve water at more than four times its opportunity cost. Yippee!!!!!!!!!!!!!!!!

COAG & the new water agreement

Last Thursday I went to a talk by Professor Mike Young on sustainable management plans for the Murray-Darling Basin run by the Australian Agricultural and Resource Economics Society at the Elephant and Wheelbarrow pub in Melbourne. Mike made a presentation based on this paper (well worth reading) and commented on the recent COAG meeting’s water outcomes.

I’ll get around to sorting out the issues and posting eventually on these issues but want to point out this interesting AARES symposium on related issues in May that I will probably attend.
Victorian farmers did well extracting a billion dollars from the Commonwealth for foolish investments in improving irrigation technology that are handouts. There was never any issue of principal in the Victorian Government’s opposition to the wrong-headed Howard Plan – it was only ever a question of the size of the required bribe. It reminded me of an ancient joke.

The Labor Premiers and PM Rudd were full of congratulations for each other but the COAG achievements on the MDB were modest with most of the difficult work remaining to be done. Moreover, it is by no means clear that the framework set up will resolve these outstanding issues. The COAG meeting was pragmatic politics.

One issue is timing. The agreement to limit water taken from the MDB is supposed to be finalised by 2011 but will not be enforceable until the state water plans expire or are updated. The final plan is Victoria’s which expires in 2019. Given the severity of current problems we cannot wait a decade for a sustainable management plan.

The $1 billion bribe for uneconomic technological investments in improving water use efficiency in Victoria does not make a great deal of sense. Water buybacks could realise more efficient water gains than investing $1 billion in Victoria’s ‘Food Bowl’ project where infrastructure upgrades will yield 100 billion litres at a cost of $10,000 a megalitres – more than four times the cost of buybacks. The Food Bowl project is an economic absurdity.

The idea of buying water back and using the water for environmental flows is sound but is most strongly opposed in Victoria.

Young points out that the heavy spending on infrastructure of $5.8 billion under the Howard National Water Plan to save 200 billion litres due to leakage and seepage overstates gains since much of this water would have drained back into the river system.

Gold-plated irrigation infrastructure will become redundant once the over-allocation of water irrigation licenses is dealt with by buybacks. Inevitably feeing up rural water martkets to allow free trade in water with urban areas will further reveal the poor economic rationale for such investments.

In addition the current COAG deal leaves the states in charge of water allocations within their boundaries and be able to insist on a review of the basin plan. The states will still manage the Goulburn and Murrumbidgee rivers. A federal minister does have final say on the cap on water extractions and its enforcement but this puts pressure on a Commonwealth Government that seems to have less backbone than John Howard’s.

Who are we?

This film clip of a talk given by Jill Taylor at TED is gripping! It describes the personal experience of a female neuroscientist who lost the entire left half of her brain and who could then depict clearly her ‘right brain experience’. It describes the instant when she thought she was in transition between life and death and how that felt. She suggests we can choose between being left and right brain beings (and the hemisphere she prefers).

Find a time when you have 18 minutes to watch it. Your response is of interest.

Lung cancer, who cares? Tobacco company funded research shows it isn't much of a problem

Last year I cited some studies by Claudia Hensche which suggested that 80% of lung cancer deaths could be avoided through use of CT scans. I suggested in an update that these studies might be overoptimistic because there were far too many false positives and in any event fast-growing tumors are likely to occur between scans.

The problems with the Hensche work might even be much worse than that - in fact sickeningly worse. The Hensche studies it turns out were financed, via a foundation, by a tobacco company (The Liggett Group) who, it is now claimed, were interested in promoting research which minimised the possible costs of contracting lung cancer.

"Dr. Jerome Kassirer, a former editor of The New England Journal of Medicine and the author of a book about conflicts of interest, said he believed that Weill Cornell [the institute where Hensche works] had created the foundation to hide its receipt of money from a cigarette company. “You have to ask yourself the question, ‘Why did the tobacco company want to support her research?’ ” Dr. Kassirer said. “They want to show that lung cancer is not so bad as everybody thinks because screening can save people; and that’s outrageous".

If these claims are true they are among the most disgraceful I have come across in the literature that deals with the lack of corporate morality by the tobacco companies. I draw attention to some points in an earlier post I made on related issues. Big tobacco it seems have ruthlessly sought to distort the research agenda to provide a biased picture of the damages that cigarette smoking can cause. This report suggests they are continuing these disgraceful efforts.

Bitter melon

While I lived in Thailand one of my favourite Thai soups had as its solid ingredient bitter melon often stuffed with a meat such as pork. Bitter melon is now readily available in most Australian fruit markets – particularly those with Asian customers. I have read that it has been suggested as a cure for HIV and other ailments. I have also read that the group of Japanese people who live on Okinawa – the longest lived people on earth overall – eat a lot of the melon.

Now I learn this morning that it helps people deal with the chronic disease Type 2 diabetes by helping the disposal of glucose in the bloodstream. It also apparently helps deal with obesity.
Bitter melon extract can be purchased as a supplement though I have no knowledge of this.

The melon itself is an unusual tasting food – it is indeed bitter – but it might have a ‘no regrets’ medical potential. I wonder whether you can get seeds or seedlings and grow it yourself?

Update: Reader Lee pointed me to this informative discussion of bitter melon on last night's 7.30 Report. Reader Slim pointed to this source for seeds which I will follow up. Finally this source gives details for growing in Australia - in my home town of Melbourne only in the summer months with planting in late October. Mainly a tropical sort of vegetable.

A case for increasing the minimum age for legal drinking

The proposal to increase the drinking age in Victoria from 18 to 21 is back on the table. It will be considered by the State government if current policy efforts to restrict binge drinking fail.

I strongly support the move to restrict youth access to alcohol with such a policy. Alcohol is a neurotoxin that has particularly damaging effects on the brain at ages up to 25. In addition those who start drinking early are more likely to become alcohol dependent and drinking is a major cause of traffic accidents particularly among the young – they are much more at risk than older drinkers. Most importantly alcohol abuse at young ages delays development of the thinking parts of the brain.

The claim that such policies are sometimes ineffective is true but irrelevant. Making it illegal to consume alcohol at age less than 21 increases the user costs of gaining illicit supplies and provides an obstacle to youth drinking. It also sends out a negative message that can be backed up with empirical evidence of the neurotoxicity of alcohol for consumption at young ages.

I also strongly support bans on the advertising of alcopops and related alcoholic drinks that appeal to youth. Industry codes of conduct won’t work since the adult alcohol consumption market is declining and the industry depends on addicting young drinkers for its growth. I agree with Chris Berg of the IPA that advertising of alcopops is informative advertising which introduces young consumers to new products. But the information provided is misleading in that it does not warn adequately of the health risk dangers of drinking while young and falsely suggests a range of benefits associated with drinking alcohol.

By the way it is claimed that keeping the US drinking age at 21 cuts the road toll among 18-20 year olds by 13%. Despite this many US states are thinking about reducing the age limit.

The Federal proposal to put warning labels on alcohol containers can do no harm. The literature on deterring kids from smoking however suggests that the best way to deter kids from drinking excessively however is to portray drunken kids as losers which of course they are. The best costs to emphasise are those that relate to current fitness and social acceptability. Absolutely there should be no suggestion that excessive drinking is something that adults only can engage in.

To the standard charge when I make these posts that I am a hypocrite because I drink myself (or did* drink) I say balderdash. That has literally nothing to do with the issue being discussed which relates to the case for allowing young people to damage their brains. The issue of my own hypocrisy – or indeed stupidity - is irrelevant to this.

* I’ve been off the booze for 2 months 24 days. Researching the booze issue has changed my own attitude to the stuff.

Maternity economics

In advance of the Productivity Commission report being released Melbourne’s Pravda has come out strongly in support of paid maternity leave for all ‘working’ women with a front-page editorial (it could never be mistaken for a news-story) written by two concerned sensitive femmes and, luckily for them, a supportive article by Pru Goward who is miffed previous governments did not endorse her scheme, a backup story on two struggling mums and a mainstream editorial further on. Pravda takes its role of educating the ignorant masses of Victoria seriously although perhaps here with a certain amount of overkill.

The concerned femmes reject waiting for the PC report on the grounds that: ‘Disappointed women's equity activists [they don’t specify who these are] see this as a delaying tactic’.

This is trash journalism at its worst. Indeed the story itself points out the complexity of the PC inquiry:

‘The terms of reference include exploring what employers now pay; it will also identify pay models and their interaction with social welfare systems; assess the cost and benefits to business; examine women's workforce participation, employment and earnings; investigate post-birth health of the mother and development of children from newborns to two years; and analyse financial pressures on families’.

Pravda seems (I am unsure) to want extended leave provision funded from the public purse at some fixed percentage of salary and they don’t like the baby bonus (BB). It is a bit non-specific since when it comes to details they are, well, vague.

If this is Pravda’s advocated policy it is not a self-evidently good thing at all. I think we should wait before the PC inquiry reports before making up our minds. First, it seems to me that, as a matter of course, parents should save to provide a decent environment for their newly-born while one parent takes unpaid leave. The government has already taken over our task of saving for our old age by compulsory superannuation and now is being urged to take away from us any need to save for large consumption and income-depleting events such as having a child. It is the nanny-state gone bananas.

The chorus from the fruitcake left will in unison say – ‘what about the poor and ‘working families’’(to use a treasured Ruddism). Well economic theory is clear on this. Give them income if they need income but don’t meet their income needs through paid maternity leave.

Second, while the current baby bonus is regressive the scheme proposed by Pravda is even more so. With a fixed proportional payout per worker a lawyer earning $200,000 per year who gives birth would get 5 times the benefits a factory worker taking home $40,000 who does the same. Do the rich sheila’s kids provide more social externalities than the battler? I don’t see it.

Third, one can ask, why the payment? The editorial thunders:

‘First, it is not about who pays — clearly, it should not be a direct cost to employers, but accepted as a national responsibility. Taxpayers who paid for maternity leave would ultimately benefit because they would retain vital members of the workforce and allow them to produce the next generation of Australians at a time when fertility rates are low. It makes sense to subsidise women to have families, rather than to penalise them for what comes naturally. If a generation of working women sacrifice motherhood to preserve jobs and careers, it will cost us all’.

This suggests that, giving birth provides an external benefit to the community. But if that is the case then why restrict the payment to working women? Why not give a baby bonus type payment to all women including stay-at-home mums. An enhanced baby bonus, perhaps means tested and perhaps coupled with the right to unpaid leave for working mothers, seems a better suggestion than Pravda’s suggested policy. (By the way I disbelieve the proposition that enhancing the bonus would lead to significant costs of mothers delaying delivery as Joshua Gans and Andrew Leigh apparently do).

These articles and policy recommendations are, as I say, trash journalism from what is becoming Australia’s worst daily newspaper. Pravda has no hesitation in pushing any daft fashionable leftwing political causes its nitwit journalists believe in but is short on analysis of the consequences of its endorsements.

Exporting health services: Bumrungrad

While I lived in Thailand in the 1980s I always appreciated the possibility of cheap local dental and health care. It was easy to find well-qualified, English-speaking dentists and doctors – an incidental bonus was that the nurses who looked after you were often extremely attractive. The cost of these services was a fraction (about ½ as I recall) of the cost of the services in Australia. It would be an even smaller fraction of the cost of services in the US.

One of the large hospitals I visited occasionally for check-ups was Bumrungrad on Soi Nana, Sukumwit Road in Bangkok. It is now Bumrungrad International Hospital and has a website advertising services to both locals and foreigners. In fact it instructs foreigners in every aspect of their planned visit to receive health services in Thailand.

Business Week now has a feature article on Bumrungrad. 65,000 Americans visited the hospital last year compared to about 10,000 in 2001. The hospital earned $41 million US in profits last year on revenues of $618 million US. 55% of the hospital’s revenues came from foreign patients.

Many of the US customers came from the pool of 47 million Americans without health insurance. Despite this Bumrungrad has signed an agreement with Blue Cross & Blue Shield of South Carolina, with the American insurer agreeing to cover expenses for members who travel from the U.S. to the Thai hospital.

Bumrungrad faces capacity constraints and will increase its capacity by 20% to 2012. Its rival Bangkok Dusit Medical Services is less capacity constrained and, although it doesn't get as many Americans, it attracts more international patients overall, with 649,000 checking in last year.

With low transport costs the range of developing country service exports will expand and will put a welcome cap on service costs in developed countries.

Meanwhile Gregory Mankiw looks at the lighter side of exporting childcare services.

Debt crunch hits the UK too

UK consumers are even more indebted than those in the US according to this New York Times report. The story in the UK: In the past there has been plenty of debt available, rising house prices and an obsession with home ownership. Economic prosperity has meant caution has been thrown to the wind - spend now! Now growth is slowing, property prices are falling sharply and debt is scarce and increasingly expensive.

Sounds very much like the current situation in Australia - the only thing we lack as yet is the serious decline in house prices - we are certainly experiencing the same credit crunch.

White flighting and the case for rethinking the migration & refugee program

Laurie Ferguson, parliamentary secretary for multicultural affairs, says that because Australian families are ‘white flighting’ - withdrawing their kids from public schools and placing them in church or private schools to avoid unsought impacts migrant communities on the schools - that more needs to be done to avoid children from places like Africa, who had grown up in refugee camps and had limited education, being heavily concentrated in some areas and schools.

A report by the NSW Secondary Principals Council in 2006 raised concerns about ‘white flight’ undermining the public education system and threatening social cohesion. It showed the percentage of Anglo-European students in public schools had decreased by a third in western NSW, by 42% in North Sydney and 37% in New England.

The need Ferguson thinks is to diversify the location of housing for refugees and humanitarian entrants.

A moment's reflection suggests this policy has no chance of success. Residents will just 'flight' further or relocate. Perhaps, instead, we need to rethink the current direction of the migration program to reduce the pace of migration from areas that are slow to gain acceptance in Australian communities.

Some weight in immigration policy should be placed on the attitudes of those communities accepting the migrants – it is wrong even in refugee policy – to consider only the needs of the immigrants.

This is quite apart from the fact that some migrants we are accepting seem to be completely inappropriate. Even in terms of general immigration and refugee policy the preferences of local residents matter.

My own preference is to switch the composition of our migrant intake towards accepting more migrants from Asia. The sons and daughters of these migrants do well in our schools and the families integrate well into local communities.

Garnaut on emissions trading

The carbon emissions trading scheme released yesterday (in full here, brief version here) by Professor Ross Garnaut is worthy of careful analysis. The Age has a useful brief report.

Garnaut argues the scheme should be developed before a comprehensive global agreement but the intensity of its operation should depend on the response of other countries. Permits for the right to emit carbon should be auctioned so they go into their immediately identified highest value. This auctioning will yield up to $20 billion in revenue.

Garnaut suggests this revenue should be spent on improving the productive or adaptive capacity of the economy in ways consistent with reducing greenhouse gas emissions. I disagree with this claim – the revenues should go to those parts of public sector activity where they yield maximum benefits. Indeed it would be a positive outcome for revenues from carbon taxes to be seen as a way of cutting income taxes or the GST since they have the double-dividend advantage of tackling a public bad as well as providing the basis for a large and growing revenue base.

Proposals for $1b compensations to power companies for their higher costs are rejected but compensations will be paid to associated local communities. Garnaut argues such compensations would not reduce the electricity prices they charge which is true if the compensations are lump-sum. For the same reason I disagree with the claim of generators that the failure to compensate means that electricity generators have reduced incentives to introduce carbon-saving technology. Price rises for electricity are (of course) inevitable.

Heavy-polluting industries exposed to overseas markets, such as aluminum and cement, would be exempt from the quotas to prevent the destruction of their businesses and the leakage of carbon emissions to countries such as China which will not limit emissions.

I like the fact that three emissions trajectories are selected depending on the carbon mitigation responses elsewhere. The first would meet our 2020 target. The second would be more ambitious, which we would switch to when the West (the US and Japan) adopts a target to reduce emissions by 60%. The third would be the most ambitious, going beyond a 60% cut, but we would move to it only when developing countries such as China and India adopt effective responses. That’s limits the potential for Australia to be stuck with a first-mover disadvantage and provides some incentives for other countries to comply.

Each year fewer permits would be issued, as the trajectory chosen by the Government is pursued but the running of the scheme to an independent carbon bank. This means an intensified effort to cut emissions through time.

Hoarding and lending of carbon emission quotas is generally approved of by Garnaut - borrowing was prohibited by the earlier PM taskforce..

Penny Wong sounded more positive about this effort than the earlier work of Garnaut. She made the position of the Government on their carbon policies as clear as a sooty East Gippsland smokestack in a brilliant piece of Ruddspeak:

“We want to get the best results for our climate and for future generations, while minimising the pressures on working families and the risks for our economy. The Government is committed to taking international leadership by reducing Australia’s greenhouse emissions by 60 per cent of 2000 levels by 2050 but currently has no interim targets”.

The press as a whole seems much more enthusiastic about the Garnaut approach than the close to equivalent proposals unveiled during the time of the Howard Government by the PM's taskforce. It was probably Penny Wong’s references to ‘working families’ that did it.

Mr Rudd's symbolism barely a start

I thought today's editorial in The Australian was illuminating. The Rudd Government is inexperienced with an unskilled ministry (even Gillard has disappointed). Rudd however is an experienced showman - the type of confidence trickster who can play stupid political games with apparent conviction. I say 'apparent' because he doesn't believe what he says and it shows. He has consolidated his power base skillfully.

'It has been quite a honeymoon, but now reality bites. Kevin Rudd apologised to the Stolen Generations and signed the Kyoto Protocol in style. Banishing Work Choices booklets to the pulp mill, Deputy Prime Minister Julia Gillard turned the "rip-off of working families" into high emotion in parliament. Industry Minister Kim Carr is off on a mission to distribute buckets of money to needy multinationals keen to manufacture a green car. Environment Minister Peter Garrett has declared war on plastic bags. And the Prime Minister is alarmed about the "epidemic of binge drinking across the country".

To date, the Rudd Government's symbolism has been rewarded with record opinion polls, with Brendan Nelson struggling to hold double figures. At some point, though, voters, as well as history, judge governments for lasting achievements. It's too soon for the Rudd Government to have long-term runs on the board, although it is generally doing well keeping the Northern Territory intervention on track. Already, however, the Government has made one lasting mark on the reform process: it is the only government in 30 years to wind it backwards.

Elected on a promise to abolish WorkChoices, the Government will have to deal with the inflationary and unemployment consequences of doing so. Undoubtedly, 25 years of industrial relations reform under the Hawke, Keating and Howard governments swept aside restrictive work practices and helped drive jobs growth. Yet so cowed is the Rudd Government in the face of union muscle that it won't even proffer an opinion on a responsible figure for a rise in the minimum wage. '

Oil prices again

I have posted several times on the future of oil prices. One notion is that the US recession might put a dent in them and that longer-term the price of oil will ease. This article in The Times suggests that is not true. A US recession might cause a temporary brief fall but - through to 2015 - you can purchase oil 7 years in advance - the futures markets suggest that oil prices will remain high at something in excess of $100US per barrell.

Will the sickly US consumer drag the global economy into a massive slowdown that puts Chinese factories out of business and leaves the Saudi sheikhs floating face-down in a lake of unsold crude? The futures market tells a different story. It is not the crude price over the next three months or even a year that matters, argues Jeff Currie, of Goldman Sachs. If you want to understand where oil might be going, look at the long end of the crude futures market.

You can fix your cost of oil as far out as 2015, and the interesting thing about those distant prices is that they have been rising faster than the prompt prices of Nymex crude.

Oil for delivery in April was priced at about $107 yesterday, the price rising a couple of dollars as traders quickly forgot about Bear Stearns. December crude was cheaper, priced $102 to reflect the nervousness about Americans' continuing addiction to motoring when the bank is seizing the keys to their homes.

But look further out to December 2010, 2011 and 2012 and the crude price is virtually unchanged at $100 a barrel. The market seems to be saying there is a strong likelihood that demand for crude will remain strong and that the world's ability to supply it will remain restricted for years to come.

Look at what is happening in the world at large and you see ample evidence that the futures market is right. If rich-country appetites dwindle over the next 18 months, Opec will react. They need a crude price of more than $60 a barrel to pay their bills and their recent behaviour suggests that they like $100 oil. They can easily cut output - the Saudis will take the hit - if necessary. Meanwhile, there is little evidence that the oil majors will produce more oil. They are not finding much and they are unwelcome where it is easily found. What they have, they struggle to produce fast enough.

The evidence suggests that the price of energy will dip and then continue its upward climb.

Super Hornet purchase to go ahead

I posted previously on the decision of the Howard Government to purchase the Super Hornet jet fighters. A Four Corners show (and some excellent posts by Robert Merkel at LP) convinced me that there were serious questions about these purchases as interim replacements for the F111's. They seemed an expensive short-term option at $6.6 billion. The Labor Party also strongly criticised the Government for its decision to proceed with the purchases while it was in opposition. Well guess what? Joel Fitzgibbon the new Labor Defence Minister has decided to go ahead and purchase the planes after slamming the purchase only a few weeks ago. There would be financial penalties and political costs in cancelling the order but Fitzgibbon certainly sounds to me like he has changed his tune. To quote him now:

"I hold no doubt that the Super Hornet is more than capable of doing the job," Mr Fitzgibbon said. We embrace the Super Hornet as a very special aircraft which is more than up to the job."

The Opposition's defence spokesman, Nick Minchin, correctly identifies this as a humiliating back down for Mr Fitzgibbon.

"Conducting his much-vaunted review and what do we find, they're going ahead with the order anyway," he said.

"This ought to teach Mr Fitzgibbon to stop playing politics with the nation's defence and with these acquisition projects and just get on with his job of ensuring this nation's defence.

"This is a day of shame for Mr Fitzgibbon."

I agree although I seem to have a limited amount of egg on my own face - I certainly did not make the extravagent claims of the Labor Party. I'll be interested to see what Robert Merkel makes of this (Update: he responds here). I'll update as I learn more - The Age has already done its patriotic duty by putting the best possible gloss on Fitzgibbon's backflip. .

Hat tip to the Currency Lad.

Petitioning the Chinese on Tibet

I just signed an urgent petition calling on the Chinese government to respect human rights in Tibet and engage in meaningful dialogue with the Dalai Lama. This is really important, and I hope you will join me by signing the petition here.

After nearly 50 years of Chinese rule, the Tibetans are sending out a global cry for change. But violence is spreading across Tibet and neighbouring regions, and the Chinese regime is right now considering a choice between increasing brutality or dialogue, that could determine the future of Tibet and China.

Maybe we can affect this historic choice. China does care about its international reputation. Its economy is totally dependent on "Made in China" exports that we all buy, and it is keen to make the Olympics in Beijing this summer a celebration of a new China that is a respected world power.

President Hu needs to hear that 'Brand China' and the Olympics can succeed only if he makes the right choice. But it will take an avalanche of global people power to get his attention. Click on the link and sign the petition to President Hu calling for restraint in Tibet and dialogue with the Dalai Lama. Please tell absolutely everyone you can to consider doing the same.

The petition is aiming to reach 1 million signatures to deliver directly to Chinese officials.

Eliot Spitzer had sex which he paid for

I am not surprised by the press's treatment of Eliot Spitzer. US and to a less extent Australian popular culture is an uneasy mix of puritanism and excessive sexualisation of the ordinary. Bill Clinton was a good US President but came close to being toppled because of he took advantage of a sexual opportunity that most men would accept with glee.

Natalie Angier in the NYT however gets it right:

'You can accuse the disgraced ex-governor Eliot Spitzer of many things in his decision to flout the law by soliciting the services of a pricey prostitute: hypocrisy, egomania, sophomoric impulsiveness and self-indulgence, delusional ineptitude and boneheadedness. But one trait decidedly not on display in Mr. Spitzer’s splashy act of whole-life catabolism was originality'.

In most animal species faithfulness is a fantasy. Apart from a flatworm, where male and females species are immutably fused together from adolescence, virtually no animal species displays 100% faithfulness. Moreover, prostitution is widespread throughout the animal kingdom with those seeking a mate paying more for more attractive selections that are made when the competition is keen.

Like humans, however, while other animals commit adultery widely they never seem to approve of it:

'Commonplace though adultery may be, and as avidly as animals engage in it when given the opportunity, nobody seems to approve of it in others, and humans are hardly the only species that will rise up in outrage against wantonness real or perceived. Most female baboons have lost half an ear here, a swatch of pelt there, to the jealous fury of their much larger and toothier mates'.

Could loss in faith in the US dollar cause a rout?

The Wall Street Journal think it might. The main concern is that unanchored inflationary expectations might cause a collapse in confidence in holding dollars. Quote:

'The Fed needs to restore its monetary credibility, or today's panic could become tomorrow's crash'.

Farmers facing drought & climate change

A lot of my research efforts over the past year or so have been devoted to thinking about the implications of climate change for managing biodiversity. In part this reflects my ‘greenie’ orientation which I think is consistent with my general conservative political philosophy.

Gradually however I have come to see conservation issues as part of a broader range of economic management problems including water resource management issues and agriculture as key auxiliary problems.

I posted here on climate change and biodiversity – a paper eventually published in revised form in Agenda (preprint here), here on agriculture business opportunities from climate change, here on joint agricultural and biodiversity management issues in relation to climate change – this resulted in this academic paper which is as yet unpublished, here on a remarkable paper by Terry Hillman on water resource management (not necessarily related to the issues of providing environmental flows) in the Murray-Darling to protect the environment, here on the proposed cap and trade scheme, here on the nexus between food supply, energy and climate change issues and most recently here and here on the water buyback policies.

I was pleased this evening to see a Four Corners show on the human dimensions of climate change and drought for six families in mallee country in north-western Victoria. It is all too easy for unthinking economists to treat struggling farmers much as they treat the unemployed as an inevitable ‘problem’ that inevitably arises as a consequence of economic and environmental changes. I hope I don’t ever come to even indirectly do this.

The picture was of a group of fairly optimistic farmers – perhaps overly optimistic - who have faced an 11 year drought and borrowed increasingly using their property as security in the hope that next year will be a good season. This optimism is often sustained by rejecting the hypothesis of climate change – the presumption is that the current drought will end and things will return to normal. One argument against this view is that the current drought is hotter than previous long droughts.

There is also a picture of experimentation and adaptation in response to climate change – new crop varieties being trialled, new land use technologies (‘farming systems’) employed and so on. The presumption is that it is the flexible well-managed properties that will do well.

The Commonwealth government is subsidising half the interest costs faced by farmers in difficulty – a policy widely disliked among economists on ‘moral hazard’ grounds – it encourages poor performers to hold on. Surprisingly to me there were strong divisions within farming communities over exactly this issue.

Also interesting to me is the fact that certain supply effects – for example increases in grain prices globally – are inducing farmers to ’hang on’. There is also a possibly related move of large corporations into the farming sector. These corporations can diversify their land holdings across different regions to smooth their cash flows – and in the case of livestock truck animals away from drought affected areas. These avenues are not so easily open to family farms suggesting one rationale for the increasing corporatisation of this sector (I posted on one such Australian company in the past).

My overriding impression from this show is that the optimism of some of the farmers seemed misplaced. Many too seemed very happy to depend on public handouts to keep them operating even though their businesses seemed at best marginally viable. Hanging on too long deletes a farmer’s equity in his or her property and carries a longer-term penalty. I strongly agree with Dr. Brian Fisher (who appeared on the show) that the decision to exit an agricultural business should be left to the market.

I'd be interested to hear from readers - particularly those with connections to rural Australia - whether I have caught the flavor of rural issues accurately or not in the remarks above.

Real-world economics

The current real-world economics review is now available free online. There are a couple of provocative short papers I liked by Nobel Laureates Ken Arrow and Joe Stiglitz. The Arrow piece argues that controversy over choice of the discount rate does not bring into question the conclusions of the Stern Review - for discount rates less than 8.5% the Stern's Review's conclusion that the benefits of mitigation exceed the costs are valid*. Stiglitz's piece builds on earlier attempts to build the Iraq war into a picture of the likely development of the global economy. He argues that a repeat of the stagflationary experiences of the 1970s and 1980s is a likely consequence of the war.

This is becoming a classy, readable, generalist journal and, as it is free, I recommend subscription to anyone vaguely interested in the economic view of our world.

*In the same issue an Aussi Ted Trainer takes issue with the Stern Review's estimates of the required extent of mitigation (Arow accepts this as accurate) claimimg it is a gross underestimate. To the contrary Trainer argues for a global abandonment of affluent enery-intensive lifestyles.

Chinese repression in Tibet

I searched through the leftwing blogs I know about and not one had anything critical to say about the current repression of peaceful demonstrators in Tibet by Chinese troops. I always wonder about the sincerity of the left when it couples intemperate criticism of the United States and the forces of decency and civilisation in this world with conspicuous silence concerning abuses by the largest totalitarian power on this planet. It is a part of the left's fundamental stupidity that reflects its racist, self-hatreds. The events in Tibet are a tragedy and the Chinese must answer for this tragedy.

Despite the lies of the Chinese government the Tibetans do not want Chinese people or Chinese culture in their country and who could blame them given Chinese invasion of Tibet, the Chinese treatment of Tibetan nationals as second-class citizens in their own country and through the fostered emigration of large numbers of Chinese to Tibet.

Unfortunately even with the Tibetan craftiness in staging demonstrations in the leadup to the Beijing Olympics I have no doubt that, if pressed, the Chinese will settle this issue with a bloodbath.

If they do all countries - including Australia - should withdraw their athletes from the forthcoming Beijing Olympics.

Water buybacks in the MDB

I posted recently on the water buybacks about to occur in the Murray-Darling Basin to provide increased environmental water flows. John Quiggin also made an post based on an AFR article he wrote. At the time I scouted around for a brief of the current state of play. This article by Asa Wahlquist in The Weekend Australian provides very useful background – the scale of purchases achieved and sought, opposition from farmer groups (mainly, that it will drive up water prices) and the response of water owners to planned purchases. Some quotes (I inserted hyperlinks and corrected some minor inaccuracies in names):

‘Under the Living Murray, the Murray states have agreed to return 500,000ML to the environment by 2009.

The $425 million Water for Rivers program, run by a corporation funded by the NSW, Victorian and federal governments, will deliver 158,000ML by July. It aims to put 282,000ML back down the Snowy and Murray rivers.

The acting CEO of Water for Rivers...says most of the water will be acquired through water efficiency savings. But the corporation did purchase 40,000ML sooner than they originally planned: "We have front-ended our purchases in anticipation of these other players coming into the market. We felt we would get in there, we would buy as much water as was available."

...The NSW Government program NSW Riverbank has $105 million to spend over five years on purchasing water for inland wetlands, as well as the $28.5 million Wetland Recovery program. Together they have purchased 27,500ML so far.

South Australia has purchased 17,000ML for its 35,000ML Living Murray target, and is still buying, while Victoria is concentrating on acquiring the water through efficiency savings. But the really big money on the table will come from the commonwealth.

Earlier this month, federal Minister for Water Penny Wong announced that the Government would spend $50 million buying back water. That is just a small part of the $3.5 billion committed to water buyback under the National Plan for Water Security.

Water economist Mike Young, from the University of Adelaide, points out that $3.5 billion effectively means spending well over $400 million a year for the five years from 2009-10.
"The value of water traded in permanent sales at the moment in the entire southern system is about $100 million," Young says. "You are talking about government buying four times the current size of the market. Doing that without increasing the price of water is going to be very, very difficult."

...the 500,000ML of the Living Murray is just the first step. Scientists such as Rod Oliver argue that the river needs more like 2000 GL. Oliver has been working on the CSIRO's Murray-Darling Environmental Water project, looking at submerged wetland vegetation, or macrophytes, and red gums along the Murray.

"If we wanted to maximise the diversity of macrophytes along the Murray - this is not to return it to what it was, just to maximise where we could - we would need of the order of 2000GL of water," Oliver says. "The modelling for the red gums to sustain them in good health was of the same order."

The past year has been the 10th year of drought along the Murray River, and the water market has been going gangbusters.

Brian Peadon runs the Waterexchange, an exchange service for water trades. He says that for the first six months of this financial year the temporary trade notched up $160 million. "That is just phenomenal turnover, because there have been phenomenal prices. At the peak of the season it was $1200 a megalitre, which is totally unsustainable."

But he says not much is happening now in the permanent trade, "because the expectation for the sellers has been raised. If you have got four government departments competing with each other for the same resource, it is a seller's market, so why would you be selling now. What will the price get to?" Peadon says the price is certainly rising "but not dramatically at this point, purely because there is not much actually selling".

In July last year, the MDB Commission launched a pilot program to buy 20,000ML for the Living Murray. It was supposed to run for 11 weeks, but MDBC chief executive Wendy Craik says it had acquired enough water and closed at the end of four weeks.

"Given that other people got better offers than we were prepared to pay, I don't think we pushed the price up," Craik says. "The prices offered ranged from $790/ML to $3500/ML. The top price went up to $6000." A final report, with the prices paid, has not yet been released’.

Three monetary pessimists

As I argued in a recent post it is important for Australia to anticipate the likely success of US Federal Reserve moves to avoid a long and severe US recession. These three monetary economists are pessimistic and believe recession is a sure thing and that it will be long and severe. This suggests that commodity price pressures currently driving Australia’s terms of trade as well as local inflation will moderate the US economy weakens. To state the obvious it also means that Australia’s RBA must exert caution with respect to future interest rate hikes lest it induce a local recession here. Indeed the need to be flexible about possibilities for reversing interest rate movements might become apparent over the past year.

Thus although I have argued that the RBA are correct in placing heavy weight on limiting inflation and on maintain credibility for doing so (see here) I take the following pessimistic views seriously.

1. Nobel Prize winning economist Edmund S. Phelps takes a pessimistic view of control possibilities in a modern economy. He rejects the possibility of fine-tuning using monetary ‘financial engineering’ based on standard risk analysis as conceit. He foresees higher US interest rates and higher unemployment for wealth effect reasons – current monetary policies will only have short-term effectiveness. I agree completely – I am disgusted with the way contemporary macroeconomists trot out ‘natural rates of unemployment’ as guides as to whether the economy should be expanded or contracted. As Phelps notes the US natural rate will be higher now than in the past because of financially-induced long-term job destruction in the US residential investment sector. The natural rate idea is so volatile that it is not a useful guide to thinking about macroeconomic policy. Australia’s RBA said last year they don’t use the idea in their policy analyses and that seems sensible to me.

2. Gloomy Paul Krugman also believes that US monetary policy will fail and anticipates a long and deep US recession. It is not that the increasingly ‘desperate’ (Krugman’s word) Federal Reserve is not doing a lot – it is just that the scale of the US woes is so vast. The Fed is buying $400 billion worth of insecure bonds backed by mortgages – this is half of its available funds. To Krugman the current US difficulties look like becoming one of history’s great financial crises with the Fed bailing out the banks but the banks still being unwilling to lend. He seems these monetary woes as the major task of the next US administration. Ugly economics will create ugly politics.

3. David Roche completes the triumvirate of monetary pessimists. Hedge funds and other NDFI (non-deposit taking financial institutions) are now being hit by the credit-crunch. Roche says some strong things:

‘Creating a lot of liquidity does not resolve an issue of solvency, which is now the driver of credit contraction. All the Fed will achieve is a dollar that will be further debased and inflation that will be higher. It cannot stop the process of deleveraging and asset price decline’.

‘Credit contraction translates through the financial system into a reduction in available credit for the non-financial corporate sector, and thus into reduced investment and growth in the real economy. The size of that contraction can be estimated from the leverage ratios of the financial sector and their impact on real GDP growth.

We estimate that nonfinancial corporate debt ultimately will have to shrink by 11%-12%. This will generate a decline of five percentage points of real U.S. GDP growth and push the U.S. into recession. Europe's real GDP growth will contract by two percentage points.

Globally, total credit losses of $1.4 trillion will cause a contraction in world GDP of 2.5 percentage points, or half the current rate of global growth. So the global economy will become a gray, dull world of semi-recession and sticky inflation that will last a long time’.

Meanwhile there is value in trying to shut the gate even if the horse has bolted.

A blog for introductory microeconomics students

For the first time in my teaching career I am teaching a first-year microeconomics unit. I thought I'd try to develop a blog to help maintain contact with students and to provide information. This is the result.

Students have access to online resources separate to this blog.

So far a number of students have approached me to ask about material on the blog but there has been next to no online commentary. It is an experiment and if it is revealled in student evaluations as being of little interest to students I will rethink or perhaps cancel the experiment.

Comments on the idea of using a blog as a teaching aid are welcome - particularly from fellow economics teachers. Of course if you are not an enrolled student in this unit you should place those comments here rather than on the Microeconomics blogsite.

Macroeconomic issues at Blogocracy

I joined with John Quiggin in responding to the following macroeconomic questions over at Tim Dunlop's Blogocracy.

• Has the Reserve got its policy settings about right? In other words, have they overplayed the interest rate card, or do you think we are in for more rises in the next six months or so?
• The Rudd Government is making much play of its so-called five-point plan to tackle inflation long-term. Do you share their diagnosis about what needs to be done? They say the keys are (1) fiscal constraint—cutting back government spending (2) measures to encourage savings (3) measures to increase the skilled workforce (training investment etc) (4) identify and fund (probably via public-private programs) major infrastructure projects (ports, for eg) (5) lift workforce participation. Is this more or less how you would approach the matter?
• Can the government really achieve the sort of spending cuts they claim to want without getting rid of so-called “middle-class welfare” policies such as family allowances and negative gearing?
• What is different about the US economy—where they are lowering interest rates—and the Australian economy, where we are raising ours?
• The proposed tax cuts I suggest are a political necessity - a promise the new government can’t afford to break. That aside, what do you think of them from a economic viewpoint? Stay or go? Good or bad?

I'll wait to see how the discussion pans out at Blogocracy before I think about posting an update here.

Intertemporal macroeconomic tradeoffs

The US Federal Reserve is keeping interest rates low to limit the possible extent of a US downturn or recession. Housing prices are collapsing and credit markets are imploding in the US. Fears of resurgent inflation - currently running at 4% in the US economy - are set to one side by US policy-makers on the grounds that the enormous commodity price hikes of between 20-50% are once-and-for-all price changes that need not become inflation.

That is probably an optimistic illusion given the high growth rates in monetary aggregates now occurring.

Ken Rogoff argues that these price hikes are indeed likely to become inflationary and that the cost of moderating the current downturn will be an inflationary surge that will last for years. A difficulty is that a range of foreign currencies are effectively pegged in value to the US dollar. When the US cuts its interest rates these economies face pressures to cut their own - otherwise induced capital inflows will drive up the value of their currencies making it harder for them to export. This creates a basis for an inflationary spiral in much (perhaps 60%) of the world economy.

Paradoxically this inflation problem will be worse if the US recession is mild - because current policy works - rather than a deep, prolonged downturn. Then the implied global contraction will not be strong enough to induce a fall in global commodity prices and as a means for tempering global aggregate demand.

The short-term gains from seeking to avoid recession by flooding the US economy with liquidity now need to be assessed against the costs of the longer-term global inflation that will develop with some ferocity particularly if the short-term policy is effective. It is an intertemporal policy tradeoff.

Australia does not as yet need to address problems associated with collapsing property markets and imploding credit markets. The RBA has accordingly stuck to its central objective of avoiding inflation and maintaining its credibility of dealing with inflation. Interest rates are much higher than those in the US so that the Australian dollar will tend to remain strong even should commodity prices weaken somewhat.

Australian policy-makers face simpler tradeoff issues than do those in the US since we do not face an immediate need to stimulate the economy. Indeed as Australia is, to the contrary, enjoying the biggest investment boom for 18 years the policy objective of targeting inflation reduces demand pressures generally in the economy - the only fear here is damage to the investment boom itself which could damage the economy's future productive capacity. Ignoring the latter fear Australia can therefore sensibly pay more attention to longer-term inflation issues.

Moreover, should the expansionary US policies fail to work so the world economy moves into recession it is straightforward for Australia to cut interest rates and reverse the current policy stance. If the US policies do work and inflation is strongly invigorated we can perservere with current policies for a time to make sure than we live longer-term with lower rates of inflation than will be experienced elsewhere.

Rough, provisional ideas - comments welcome.

Hat-tip for the Rogoff paper to Gregory Mankiw.

Emerging economies increasingly decoupled from the US?

I have been thinking about the RBS's interest rate policies and their drive to deflate inflationary expectations in Australia when all the evidence suggests that the US economy is probably already experiencing recession as well as emerging inflation.

The catch is that the interest rate hikes that have occurred in Australia over the past few years impact on aggregate demand with a long lag - perhaps 12 to 18 months. By the time they impact Australia may be experiencing the direct effects of a US slowdown and the indirect effects of such a slowdown on the Chinese economy which directs 21% of its exports to the US. A decline in US import demands would trigger a decline in demand for our raw material exports to China.

The double wammy of a policy-induced local interest rate hike coupled with a global slowdown might well drive the Australian economy into a policy-induced recession. It is a fear that needs to be balanced against the urgent need to retqain RBA credibility at controlling the commodity cost driven inflation that Australia is now experiencing as well as the biggest investment boom Australia has experienced in 20 years.

The empirical question here vis the extent to which events in the US will drive events in Australia or, to put it another way, the extent to which the Australian economy is coupled with or decoupled from the US economy.

This article in The Economist studies the decoupling debate. One approach to the decoupling issue is to say that with increasing economic integration and interdependence decoupling is less likely. Empirical evidence from developing countries however suggests they are more decoupled than in the past. While the US economy has been stumbling countries such as China have reduced their exports to the US but substantially increased their exports to other emerging countries - half of China's exports now go to emerging economies.

Moreover in the face of a US decline consumption and investment spending in many emerging economies has continued to grow strongly. In China this is so because less than 15% of total investment is linked to exports - over half is in infrastructure and property.

A recent IMF study by Cigdem Akin and Ayhan Rose finds that decoupling can proceed alongside globalisation. Growth seems to have become more synchronised among developing countriesw and among developede countries but developed countries as a group have decoupled (increasingly diverged) from developing countries as a group. Again the reason seems to be that emerging countries are increasingly trading among themselves.

The Economist concludes:

A severe recession in America could still have a nasty impact on the developing world if commodity prices collapsed and if it caused stockmarkets to fall more steeply, depressing global consumer and business confidence. A sharper fall in the dollar could also further squeeze emerging economies’ exports.

But for perhaps the first time ever, developing countries would be able to make full use of monetary and fiscal policy to cushion their economies. In the past, when they were net foreign borrowers, capital inflows tended to dry up during global downturns as foreign investors shunned risky assets. This forced governments to raise interest rates and tighten fiscal policy.

Economies with large external deficits are still vulnerable, but most emerging economies now have a current-account surplus and large foreign reserves; many have a budget surplus or are close to balance, leaving ample room for a fiscal stimulus if necessary.

Perhaps the best support for decoupling comes from America itself. Fourth-quarter profits of big companies, such as Coca-Cola, IBM and DuPont, were better than expected as strong sales growth in emerging markets offset a sharp slowdown at home. Bits of American business are rising above their own economy. With luck, the world economy can rise above America’s.

This is perhaps good news in terms of the indirect effects of a US recession on Chinese demands for Australian exports. We will still cop the coupled direct effects but the indirect effects will be muted because much Chinese demand for our raw materials is not export related and, in any event, China is increasingly diversifying its exports away from dependence on the US.

Blogs

Sarah Boxer of the New York Review of Books examines what is distinctive about blogs. There is quite an emerging field of literary work on blogs comparing them to newspapers, analysing their style (or lack of it) and so on. Boxer captured a few aspects but still misses the mix of anarchy and information provision that characterises blogging and the blogging movement. It is a slightly snobby, literary rant.

When I ask myself why I operate a blogsite I am unsure. I just do it and often manufacture what is only ever a partially accurate motivation if pressed on the issue. It has something to do with ego, with keeping an online diary, with summarising interesting observations as I scour the web and with having an online conversation. There is also a fun element. But to be frank the motivation varies - it is an open-ended activity that provides surprises.

By the way Boxer claims there were 100 million blogs at the end of 2007 with 37% of posts now in Japanese. At the end of 2003 there were 2 million.

RBA gambles on reduced sensitivity of the Aussi economy to the US

63,000 Americans lost their job in February – the biggest employment decline in 5 years. Whether you say the US is entering a 'recession' or a 'slowdown' is immaterial – the US economy is in trouble. As Australian interest rates continue to rise US real interest rates are negative as Gregory Mankiw points out and as is illustrated above:

‘negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.’

Current attempts to squeeze back business investment in Australia by raising interest rates to close to double digit levels to deal with what is regarded as an unacceptably high inflation rate of 3.5% are a gamble that continued strength in the Asian economies will more than counteract the impact of a slowing US economy. Monetary policy operates with long and variable lags so this is a risky approach to snuffing out Australia’s biggest private investment boom in two decades.

Long-term this Howard-government created investment boom will strengthen the Australian economy by increasing economic capacity. But it is the short-term effects of the boom that the RBA is focussing on.

Specifically the RBA's use of interest rate hikes is is a gamble on a structural change having occurred in the Australian economy which produces lower dependence on the US economy both directly and through what is being presumed to be weaker feedback effects on the Chinese economy from the US slowdown. These indirect effects will impact on Chinese import demands for Australian raw materials.

I suspect too that the RBA are concerned that Mr Rudd's government will provide a more supportive environment within which cost-push pressures from wages can develop. This is not the present situation - inflation is emerging in response to higher commodity and food prices - but if trade unionists can convince the government of the need to 'secure the real wage' in the face of inflation then the long-term expansion of the Australian economy will come to a griding halt with resurgent inflation and unemployment. It is a grim prospect that I assume the RBA see as their worst nightmare.

The Labor government has ended any prospect for further labour market reform and has left as the only means for addressing potential cost push pressures reducing the demand for labour through higher interest rates. Otherwise commodity price shocks would simply be experienced as once-and-for-all factors slowing down demand and could be more easily ignored.

Functions of the female orgasm

I have been looking at the negative effects of anti-depressant drugs, such as Prozac, and the cynical role big pharmaceutical firms play in making consumption of these drugs so widespread. Eventually I will post on this material but probably won’t come up with much more substantive content than this excellent article in The New York Review of Books.

A subsequent letter to the NYRB examines the adverse effects of anti-depressants on sexual performance. As is well-known seratonin-enhancing antidepressants such as Prozac cause sexual dysfunction and restrict people’s ability to fall in love but I was struck by a description of the function of orgasm in women that was developed as part of this argument:

‘... female orgasm has many functions. Among them, it aids sperm retention and enables women to discriminate between self-centered as opposed to dedicated partners—partners who might be more likely to help them rear their young. Female orgasm may also help women choose men with better genes, as women are more orgasmic with men who are healthy and symmetrical, markers of good testosterone load. Female orgasm may also enhance feelings of attachment, because it stimulates the release of oxytocin and prolactin. As these drugs [the antidepressants] impair or eliminate female orgasm, they interfere with delicate biological mechanisms designed to aid mate choice and partner attachment....

In short, the sex drive operates in conjunction with many other neural systems that govern desire, mate choice, romantic love, and attachment, perhaps even mechanisms that detect facial attractiveness, immune system compatibility, and other neural systems we unconsciously use to mate, breed, and rear our young.....’

Of course men don’t get off without direct effects either when they consume anti-depressants – they reduce the capacity to court, inseminate and attach to a potential partner but the description of the function of a female orgasm – the way it sorts out caring males from non-carers - I had not seen before.

I am interested in factors which increase and decrease libido. Of course the snigger factor and a residual prudery towards the explicit examination of sexual matters provide obstacles to discussion.

Plenty of oil?

This oil industry spokesman, Mr Nansen G. Saleri, argues the world has plenty of oil to the end of the century and that $100 barrel prices will stimulate the types of innovations that will bring new supplies on board.

I don’t have enough oil industry knowledge to evaluate these claims - they seem to depend on the viability of improving extraction technologies and utilising alternative sources of fuel such as tar sands. Some claim alternatively that the point of peak oil production has already been reached. But I am intrigued that Exxon-Mobil – the largest Fortune 500 company – is terrified of a collapse in fuel prices and is sticking to oil as a core product. It is not diversifying into other energy resources. The Economist in 2006 made similar claims to Saleri as did very knowledgeable economists with good information about the oil industry such as Morris Adelman in 2004.

Supposing Saleri and the other 'optimists' are right, the case for investing in renewable and nuclear power will need to be much more firmly based on carbon emission issues. Carbon taxes on liquid fuels will need to be huge to cut carbon emissions from this source. There will also presumably be many red faces (and much red ink!) in the public and private sector components of the 'alternative fuels' market. Oil depletion will not act as a natural constraint on liquid-fuel-induced carbon emissions and the imperative to switch towards coal-fired electricity generation will be weaker. It will be a very different world.

Gender inequality in education

Gary Becker examines the new gender inequality in US education – females do better that men at school and because they get married later and have fewer kids have become the majority gender (57%) in US college education. Men get lower grades and drop out more. The obvious question is why women do better at school? This isn’t clear – perhaps they are ‘more diligent students, less rebellious and more docile’.

The outcomes here are interesting since, as Richard Posner notes, men still dominate the workforce and wage inequalities favour men. Posner accepts that women are more ‘docile’ than men who are likewise more ‘aggressive’ and hence less open to new educational experiences but again asks why this is so.

One speculative explanation suggested by Posner rests in the decline in the disciplined ‘patriarchal’ family (due to increased illegitimacy and a higher incidence of divorce) which might be ‘harder’ on boys than girls. If dad isn’t around maybe boys become more unruly than girls and do worse at school.

Maybe too because boys can more easily get into a wide range of well-paid jobs than girls that they have less incentive to invest in their human capital.

A quick flip around the web didn’t yield much more than a general confirmation that these patterns also exist in Australia although my casual observation suggests they do.

Labor policies that definitely damage Australia's economy

Labor is driving Australia along an unnecessarily difficult path by pushing the Productivity Commission to one-side, by ignoring Ken Henry’s advice to allow the forces of competitive advantage to work in the economy to address structural adjustments associated with the commodities boom, in evaluating the case for continuing protection of the car and textiles, clothing and footwear industries and by seeking to impose an ‘industry policy’ generally. Moreover, this is not only the stance of a few leftist maddies like Kim Carr and Anthony Albanese - it is mainstream Rudd.

The inquiry into continuing protection of the automobile industry has bypassed the Productivity Commission and been handed to protectionist ex Labor Premier Steve Bracks – he has previously opposed tariff cuts andd supports a sustainable car industry so the results of this inquiry are already obvious. The man expected to be appointed by Senator Carr to head the Government's review of protection for the textile, footwear and clothing industry is Roy Green who has argued against Dr Henry's prescription, proposing instead that government should support innovation to assist industries retain competitiveness. Left-wing economists will support these moves partly in the hope that they can get their hands on lucrative board appointments and consulting contracts.

It is a mistake to attribute the efforts to articulate interventionist industry policies simply to left-wing ministers such as Kim Carr and Anthony Albanese. Rudd is quoted as saying:

‘If I become the next Prime Minister of Australia I don't want to be Prime Minister of a country which doesn't make things any more," Rudd said in the lead-up to last year's election. He argued throughout the campaign that the mining boom would not last and that more needed to be done to support other sectors.’

He has plenty of supporters among his trade union hack colleagues:

‘Industry Minister Kim Carr is channeling his leader when he argues that national strength requires that an advanced economy needs manufacturing.

"The Government has definite plans to reinvigorate Australian industry to prepare us for a future beyond the mining boom," says Carr.

The reviews Carr has announced into the motor industry and innovation, along with the one he is due to announce into textiles, are all designed to identify the most effective method for government to support manufacturing industry.

The idea that government can shape industrial destiny is expressed by many other members of the Government.

The new parliamentary secretary for defence procurement, Greg Combet, last week outlined how prime contractors for defence equipment would have to detail opportunities for Australian industry in their tender documents. "This will help Australian industry get a fairer go for high-value acquisitions. This is about us using the leverage available through procurement contracts to secure the right for Australian companies to bid into the global supply chains of the large primes."

Minister for Energy and Resources Martin Ferguson has foreshadowed support for companies investing in gas and coal liquids projects to reduce Australia's dependence on imported oil, and possibly also for exploration.

"These industries are going to become more attractive because of need. But I might also say that is an absolute priority to the Government to secure our economic future."

He said it was not acceptable that Australia's dependence upon imported oil should rise from 20 to 80% of our requirements.

Trade Minister Simon Crean has commissioned a review of trade policy with a goal of revitalising trade facilitation programs, particularly for elaborately transformed manufactures, services and small business sectors.

Infrastructure Minister Anthony Albanese has asked the newly formed authority, Infrastructure Australia, to come up with a priority list of infrastructure projects for public and private investment.

The common thread is that active government intervention in industry policy can produce superior outcomes for the economy.

Albanese harks back to Ben Chifley's Snowy Mountains Hydro Scheme and Gough Whitlam's Department of Urban and Regional Development, while John Button's industry plans are seen by many within Labor as delivering a manufacturing revival as happened during the Hawke government’. (my bold)

Note that Labor has also foolishly committed to involving the trade unions in assessing the case for (among other things) continued protection. This provides a forum for the economically illiterate supporters of protection to voice their views.

What will the left-wing cheerleaders for Rudd and the leftist blogs say about these inanities – I’ll bet nothing at all. It shows their prejudice and hypocrisy that, while they loudly support the empty symbolism of Rudd (Kyoto and meaningless apologies to aboriginal people), they do nothing to criticise Rudd when he acts to destroy the basis for Australia’s recent prosperity.

The long-term implications of this bunch of peanuts trying to outguess markets and to impose their own vision on an economy that is performing so well by transforming itself is worrying.

Words that trivialise the Holocaust

A piece in The Age yesterday (by Dvir Albramovich) listed various ways the Holocaust has been trivialised by western comedians. I agree that such humour is in poor taste (although I disagree that the movie 'Life is Beautiful' starring Roberto Benigni, that Albramovich criticises, trivialised the Holocaust – it was, in my view, unrelentingly anti-Nazi even if it was unorthodox*).

In the same edition of The Age Israel is recorded as warning the Palestinians that they face a ‘holocaust’ if they continue to launch rocket attacks on Israel. The report is overall very hostile toward Israel. Presumably the Age got this report from Reuters or the BBC.

Melanie Phillips argues that the word ‘Holocaust’ is a mistranslation of the Hebrew word ‘shoah’ which generally means disaster. The word is used to describe the holocaust but describes a broader set of calamitous situations than the Holocaust. It is not an innocent mistake. For example, the word ‘death’ includes the idea of ‘murder’ but it is wrong to say when a ‘death’ occurs that that is inevitably a ‘murder’.

The misrepresentation seems to have first been made by Reuters. It provided Hamas with one of their vile, deceitful propaganda victories – the Jews are ‘new Nazis who want to kill and burn the Palestinian people’. This is a convenient deception and exaggeration as Hamas continues to pour rocket attacks on Israel and Israel asserts its right to defend itself.

If Phillips is correct The Age – and numerous other newspapers who took the Reuter’s story - has again indulged itself in poor quality journalism. They should clarify matters quickly and immediately.

Update: 54 Palestinian's were killed yesterday and 2 Israeli's as Hamas continues to fire rockets and shake its fist at Israel. Why did the Palestinians elect such so-called leaders? Hamas is a terrorist organisation that attacks innocent civilian communities in Israel and then feins shock outrage when Israel responds with force to terrorist attacks. Hamas argues that Israel is trying to destroy it. Hmmmm.

*Many others, including Robert Manne, have criticised this movie on similar grounds. The movie won 3 Oscars and gets my award for a touching poignant analysis.

Albrechtsen vs. Keating

The Keating versus Albrechtsen stoush is here (Keating) and here (Albrechtsen). I grade it as close to a knockout to Albrechtsen but I cannot quite give her that glory given her snide remark about Gustav Mahler and my fading adulation for than neurotic meanie.

On the other hand accounting for Keating's attack on the recently-deceased Paddy McGuinness - he called him a 'fraud and a liar' on the eve of his funeral - I think Keating is close to down and out anyway.

How do you score the Keating/Albrechtsen encounter?

Keating is certainly an important figure in Australian politics though much of what he did (relaxing foreign exchange controls, moving towards exchange market flexibility) was part of a prevailing global economic reform agenda. He favoured labour market reform so long as he was leading his troops in the trade union movement and provided, of course, it did not go too far. These qualifications aside, Keating was an important force favouring more liberal economic policies.

But, Albrechtsen is right - Keating had contempt for ordinary Australians and their pursuits - and no politician should put themselves in that position. Keating could certainly hit his opponents with witty insults but seemed a rather frail character - I recall stories of him sitting at home in The Lodge listening to his Mahler records while Parliament met.

These days Keating is increasingly appearing to be a bitter, old man with an inordinate regard for his own importance. The Canberra Times takes a more neutral view - Jack Waterford clearly takes masochistic delight in seeing journalists subject to a stream of Keatingesque invective.