Cooperation in climate change negotiations

For certain types of national payoffs the problem of engineering a cooperative agreement among nations to achieve good greenhouse gas controls can have the structure of a Prisoner’s Dilemma. The welfare of all countries is maximised if they all agree to mitigate their emissions but each country has incentives to ‘free ride’ on mitigation agreements. This reflects the ‘public bad’ character of greenhouse gas emissions and the prospects for gains through carbon leakage (the setting up of carbon emitting industries) in countries that don’t mitigate.

I have been studying this issue using game theory. One issue I have focused on is whether getting an additional country to mitigate improves the prospects for negotiating a global agreement or not. When does some element of ‘moral suasion’ work in driving further countries to mitigate?

It isn’t as easy an issue as it looks. When an extra country mitigates the possibility of losing business to that country via carbon leakage falls and this improves - perhaps only marginally – the prospects for other countries to mitigate since their industries can now leak away to a smaller subset of non-mitigating countries. But the local gains from mitigation must still exceed the presumably large gains a country would receive when it alone does not mitigate but gets carbon leakage benefits from all the countries which do.

But, for the dominant strategy to be mitigation, local gains from mitigation now do not need to exceed the presumably huge costs of going it alone in mitigating since the pool of potential carbon leakage losses has fallen as other countries commit to mitigating. These improvements in the prospects for avoiding Prisoner’s Dilemma issues improve the greater the potential reduction in carbon leakage losses that follows commitments to mitigate.

Thus if a developing country like China were to commit to mitigation, and to thereby rule out extensive carbon leakage losses for developed countries if they mitigated, then the improvements in the prospects for cooperation are enhanced. If a small country or an already developed country – such as Australia - mitigated then the case for other developed countries to mitigate in response would be relatively weaker.

These ambiguous prospects for enhanced global cooperation can be re-examined in repeated or dynamic game settings - I have done this and will discuss these results in further posts. This work can be adapted to account for asymmetries in national interests and for the possibility of repeated negotiations.

But an alternative approach draws on behavioural economics and examines the conditions under which agents cooperate even though it is not in their individual self-interest to do so (I recently came across this interesting paper by Brekke and Johansson-Stenman (2008) which takes this approach).

Laboratory experiments suggest that people are willing to cooperate if they see others doing so. Moreover, field evidence suggests that people’s willingness to contribute to good social causes increases with their perception of the contribution of others. These are instances of conditional cooperation. There is also much laboratory evidence consistent with reciprocity – this is a social norm that motivates people to reward kind and to punish unkind actions towards them. This reciprocity is not conditional on gaining some long-term reward and can even occur in one-shot interactions. Intentions of kindness or unkindness matter as well as consequences of actions.

These observations relate to individuals rather than countries interacting in a multi-country setting. A key issue then is whether or not agents become more or less cooperative in a group situation. Unfortunately the experimental evidence here goes both ways - sometimes groups behave more cooperatively than individuals and other times less so.

Behavioural economics also provides evidence of self-serving biases. When facts and principles are ambiguous we tend to choose those which favour our self-interest. Even if people are motivated by ‘fairness’ their world view as to what delivers fairness is likely to converge toward views that serve their own self-interest. For example, policy-makers in rich countries may simply seek to avoid ethical discussions involving the needs of energy-poor developing countries and climate change because entering into this discussion with them might induce the discomfit of guilt. Cognitive dissonance may also be a factor. Countries which release large volumes of GGEs may change their beliefs to fit their behaviour by coming to believe that the damages of GGEs are overstated.

These behavioural perspectives provide new ways of thinking about enhancing the prospects for greenhouse gas control. To quote Brekke and Johansson-Stenman:

First, people, and also countries, are able to make decisions that are not in their own material interest if they have other sufficiently strong reasons for doing so, such as obtaining a situation that is overall socially desirable and if this can be obtained in a way that is perceived as reasonably fair. Second, when individual parties analyse what a fair outcome should look like they are typically influenced by self-serving bias, and this makes it more difficult to reach agreements. Third, negotiating parties are likely to avoid looking at information that would force them to reflect over ethical issues. A potential policy implication is therefore to emphasise such information to the point where it is impossible for the negotiators to ignore it. Fourth, the possibility to use sanctions and punishments seems essential for the longer term effectiveness of a climate agreement. The Kyoto protocol and the forecasts for the next agreement currently lack this opportunity….see also Stiglitz (2006) for a suggestion of linking the climate and trade negotiations, leading to countries that fail to act responsibly in the climate area being punished by tolls’.

Acid mud (= ‘sulfidic sediments’): A repost

I got several things wrong in my earlier effort on this. This is a rethink which probably is still not error free but it is an improvement.

In many wetlands along the Murray and Darling Rivers, sediments flooded for decades by locks and weirs, are being exposed to air as drought-affected water levels fall. Inland sulfidic sediments have been found in NSW, Victoria, South Australia and Western Australia.

Waterlogged soils often contain sulphides produced by bacteria decomposing organic matter, but if these sediments are allowed to build up and are then exposed to oxygen, they form sulphuric acid – hence the names ‘acid mud’ and ‘sulfidic sediments’. These are usually naturally occurring events but are worsened by human activities, particularly in inland aquatic ecosystems, and by sustained drought. I learnt more about ‘sulphide sediments’ from colleagues at La Trobe University Albury-Wodonga Campus last week. The following notes are based on this meeting together with an earlier inspection of the Web to find some background facts. Again I would be interested if readers had links to further information.

The basic idea is that while water resource analysts have paid attention to the need for periodic flooding of river systems and wetlands to maintain ecological health (see here) some wetlands need to be periodically and regularly drained dry to inhibit the formation of sulfidic sediments. For example Bottle Bend, near Mildura, was once a healthy wetland but it is now it’s a toxic waste site where nothing but micro-organisms can survive the acid water given its steel-eating pH of 1.6. This caused the death of all fish in the wetland and all the trees surrounding it. Thousands more wetlands – particularly those in the lower reaches of the Murray - could be brewing the same deadly formula and if the rivers again flow enough to re-flood the exposed acid mud, toxic baths will pose a major threat to towns and cities downstream. This slide show by the Murray-Darling Freshwater Research Centre was useful in getting an overall picture.

Constructed wetlands are potentially at more risk of producing sulfidic sediments than other wetlands because such wetlands are often designed to help improve water quality. The water, whether it is from storm water, treated sewage, industry or other sources is often of poor quality. If the levels of sulfate in the feed water is high (greater than about 10-20 mg S/l) then there is a real likelihood that the wetland will develop sulfidic sediments over time. There are fairly high salt levels at sewerage treatment works such as the Western Treatment Plant and I would be interested to know how sulfidic mud issues are avoided there or why, indeed, they do not arise.

Coastal problems of sulfidic sediment can be dealt with by adding lime to soils but this type of policy response is ruled out in inland waterways simply because of the scale of the problem. Indeed not a lot is known about treating inland sulfidic sediment problems. Essentially they need to be first identified and then regularly flushed out. The flushing out required however needs to be repeated and will, of course, have impacts on water availability upstream from the sites of sulfidic sediment.

One potential approach is to utilise triage arguments to isolate areas where sulfidic sediments exist to prevent them interacting with other components of a river system. Then the emphasis becomes one of attempting to prevent the development of acid sulphide problems elsewhere in river systems with appropriate management policies such as periodic drying out of wetlands. For example as pointed out by Kenneth Davidson, in Lake Alexandrina at the mouth of the Murray River, the soil in the lake is laced with sulphides that have turned into sulphuric acid. The pH of the lake, which measures the acid/alkaline balance, is already bad enough to make it toxic to animals. Moreover, without flushing as a result of heavy rains upstream, the combination of salt and acid will move upstream and progressively contaminate the lower Murray. The danger is immediate. Murray Bridge, 38 km from the mouth of the Murray, is only two metres above sea level at the mouth of the river — a drop of less than 0.5 cm/km — which means that the salt and acid can move relatively easily upstream. The lower Murray is more akin to a series of interconnected ponds rather than a free-flowing river.

This is serious because Adelaide and South Australia's main provincial towns depend on the Murray for most of their water. Without flushing rains or 200 GLs from the Dartmouth Dam on the upper Murray, the water that Adelaide pipes from the Murray below Murray Bridge will be undrinkable. But if the water that is available from Dartmouth is allocated to the environment, it won't be available to irrigators further up the Murray.According to Davidson, this is why the Brumby Government delayed for 15 months signing up to the Murray-Darling Basin Authority, which is supposed to give ultimate authority for allocation of the water to Federal Water Minister Penny Wong. Either the system must get well above average rainfall during the coming winter, sufficient to flush out the lower reaches of the Murray, supply Adelaide and keep irrigators alive or Wong will have to choose between Mildura and Adelaide as to who gets the 200 GL of water held in reserve in the Dartmouth dam. But there is no real choice. If the southern river Murray system dies, Mildura and the other irrigators along the southern Murray will die as well.If salt and sulphuric acid damage is limited to Lake Alexandrina, the irrigators and the towns along the southern Murray can be kept on life support until there is a permanent increase in the flow of water into the Murray system.

One proposal is to flood Lake Alexandina with salt water from the ocean to flush it out. This would help disperse the acidic liquids but would damage the lake if it is judged to be primarily a body of fresh water. Evidence from diatoms in the lake floor has been used by different spokespeople to claim different things – some have claimed that historically it is a freshwater lake while others claim it is saltwater. History here matters if the policy objective is to retain levels of environmental authenticity.

Among the groups studying sulfidic sediments one with very useful data and articles is the CSIRO’s Land and Water. Staff members of this group provided me with useful information last week but should not be held responsible for the tentative remarks made above.

Joni Mitchell

I’ve been busy working over recent days but I after finally receiving a few early Joni Mitchell CDs from Amazon.com I got to listen to them last night. After a few minutes I abandoned all thoughts of anything other than this music.

For some reason I’d forgotten just how good she is. I started with the more recent Court and Spark – mature voiced Joni - the title track is close to perfection. Also enjoyed her second album Clouds (including Both Sides Now) and the rather cerebral, elegant first effort Song to a Seagull – that has her early, totally captivating ‘little girl’ voice with some of the most poignant lyrics she ever composed - here is the haunting title track. Supremely elegant intonations and background instrumentals.

Mitchell in my view is one of the most important popular female singer-songwriter over the last 50 years. She sounds timeless – fresh, undated, with a style of her own.

Here are a few more video clips I have collected. California. Blue, Big Yellow Taxi, Both Sides Now, Circle Game, Free Man in Paris.

AIDS-HIV & heterosexuals

For a long time heterosexuals have been told that they run significant risks of contracting HIV-AIDS if they have unprotected sex. Outside of Africa this claim is now seen to be false. Outside of Africa the main groups at risk from the disease are homosexuals, intravenous drug users and sex workers.

There will be no generalised AIDs epidemic among heterosexuals outside the African countries. AIDs still kills vast numbers of people - more than all wars and conflicts together - but expensive negative advertising campaigns directed at general populations are a waste of money.

African countries have high rates of AIDs for various reasons - low levels of male circumcision, high rates of genital herpes and high use of commercial sex workers.

Happy birthday Queen Elizabeth II

It is six weeks late but still definitely worth celebrating. (Inexplicably once again I did not get a gong. I'll hang onto the drafted acceptance letter/email and wait hopefully again for recognition of my services in 2009.)

Great leader Rudd

What a disappointing PM Kevin Rudd is turning out to be. Despite the rhetoric about ‘working families’ and the impression he seeks to create of a diligent, hard-working leadership this guy is not proving to be a particularly competent PM. In part it is presumably inexperience which means that the key resource he needs are those civil servants he has recently been so intent on alienating by accusing of laziness - these guys obviously are not part of the 'working families' brigade.

Rudd has said a profoundly ambiguous ‘sorry’ to indigenous people and has signed a soon-to-be- redundant Kyoto agreement. We should all be underwhelmed by these symbolic actions that do nothing to improve the lot of anybody.

On economic policy Rudd’s decision to encourage middle income earners to abandon private health insurance thereby putting increased pressure on an already overstretched public health system is possibly the most socially destructive policy he has yet undertaken. The move should devastate the public hospital system and will reduce overall standards of community health care. To suggest, as both Rudd and Nicola Roxon did, that the policy can be justified on the basis of the implied tax relief is ludicrous unless you favour the poor paying relatively higher taxes.

I say it is 'possibly' the most foolish policy move since an almost equally foolish policy was to sideline the Productivity Commission in assessing the case for continued protection of the automobile assembly industry by substituting known protectionist and Labor hack Steve Bracks to head an enquiry whose outcome was well understood from the day it was set up. Rudd last week compounded the error by rejecting an opposing view from the Productivity Commission before it had even been publicly released that showed that reducing protection to 5% after 2010 would provide significant benefits to automobile consumers and small gains to the economy. a doubly stupid move since the PC report provided valuable information on how protection might be structured even assuming you did want to continue it.

The FuelWatch policy which essentially tells retailers that they must post prices in advance improves the prospects for coordination among retailers and might therefore increase prices a little – contrary to the stated intention of the policy.

Rudd followed these moves with a scathing critique of the foolish proposal by Brendon Nelson to cut the excise on petrol by 5 cents per litre. But he then reversed his stance by implicitly endorsing Nelson’s foolish populism with a proposal to cut the GST on petrol on the grounds that petrol was already subject to a hefty excise. This is populist backflip nonsense since there are taxes on taxes throughout the economy.

The rhetoric about grocery prices and the proposal for the ACCC to monitor prices will noit help the government repeal the laws of supply and demand with food prices continuing to increase as a consequence of supply shocks and, in particular, increased energy prices. Moreover, there is little the government can do to reconfigure industry structure to drive more competitive outcomes. The horse has bolted in retailing with the large duopoly (Coles, Safeway) established in the field.

The chorus of Labor drones are singing their foolish tunes of hero worship for Rudd but I imagine they simply don’t have the brains to think through these policies or are too committed in their quasi-religious fervour to think about much at all. Mark Banished at LP is now criticising the ABC for being biased about Labor over claims of its pro-Chinese, anti-Japanese biases because it didn’t first check with the Japanese that they had in fact been offended by being overlooked. As if they would say they were offended!

I’ve been banned from LP for suggesting that MB lacks independence of thought. I think I should have been banned for being tediously boring in stating the obvious. On the other hand a ban has commitment benefits for me - my urge to comment on the drivel LP usually offers as social commentary will be diminished. More time for the important things of life.

Intellectual property to get cheaper

This article by Paul Krugman takes up the theme that, as a consequence of digitisation and hence of easier replicability, that intellectual property (including software, books, music, movies) will inevitably become cheaper and that products sold in conjunction with the increasingly free goods will become important. Thus the Grateful Dead encouraged the reproduction of its music but sold lots of Grateful Dead teashirts. Digitised books may be given away free but live readings by authors will be marketed with the books.

The turnaround in Iraq

A favourable outcome seems likely if the US commits to a continued presence in Iraq after the next US presidential elections according to the WSJ.

The Iraqi army have routed insurgents in 3 of their most important urban strongholds. This follows the success of the surge in crushing al Qaeda in the Sunni triangle. Basra has been retaken from Moqtada al-Sadr's Mahdi Army and is now mostly peaceful. After this Mr. Maliki repeated the same exercise in Sadr City. Recently Iraqi army operations in the northern city of Mosul netted more than 1,000 suspected Sunni insurgents in al Qaeda's last major urban sanctuary.

US deaths in Iraq now number around 4,000 but for the last few weeks the violence has subsided. The number of violent incidents recently have been at their lowest level since the spring of 2004 with the number of US combat fatalities last month, at 19, being the lowest of the entire war. Iraqi military and civilian deaths are also sharply down. In addition during the first 5 months of this year, 4,500 insurgent weapons caches were found, compared to 6,900 for all of 2007. These numbers have sometimes moved in the wrong direction and may do so again, particularly during major combat operations but the trend is positive.

'The Iraqi military is also improving, partly from the confidence gained from its recent successes. The government now counts more than half a million men under arms, and the army is emerging as a reliable and multiethnic national institution'.

'a permanent U.S. military presence – albeit one reduced over time – would give Iraqis the confidence to continue their political maturation. Another Iraq national election is scheduled for next year, and it is an opportunity for democracy to put down even deeper roots. It's crucial for Americans to understand that, apart from the Sadrists, all factions of Iraqi politics now support some kind of U.S.-Iraq status of forces agreement to succeed the U.N. mandate that expires later this year'.

Kevin Rudd implemented Australian Labor Party policy this week by announcing the withdrawal of Australian combat troops from Iraq. This will have a minor effect on the war effort in Iraq - although the Australian forces in Iraq have performed a very useful role but does offer encouragement to the terrorist destroyers in Iraq. I cannot believe that it will leave the Australian-American alliance as 'rock solid' as Rudd suggests. Being a 'fair-weather friend' cannot fail to do harm to the most important defence alliance Australia has.

Economics of alcohol policy

My paper 'The Economist's Way of Thinking About Alcohol Policy' has just been published in Agenda. I continue to work on these issues so comments are very welcome.

The 'four pillars' policy

Melbourne Business School’s Professor Ian Harper has written an article in today’s AFR (subscription required) attacking the ‘Four Pillars’ policy recently reindorsed by the Labor Treasurer. This policy limits mergers between the four major Australian banks.

Professor Harper has two main arguments. One is that such a policy is unnecessary since the ACCC has the power to disallow mergers which it sees as not being in the national interest and, in making this determination, the ACCC would be able to sort out the cost-benefit case for allowing or disallowing mergers. The second argument is that the four major Australian are ‘bonsai banks’ that are ‘pot-bound by a regulation which blocks the most natural route to growth and scale’. He asks that the banks be given the ‘same opportunity to grow as any other Australian company’.

None of these arguments seems self-evidently correct.

The ACCC is an agency of government that assists in the promotion of competition in the Australian economy. If successive governments make the judgement that maintaining minimum levels of competition among the banks is a desirable social policy it is entirely appropriate to enact policies which achieve this. What matters here is the government policy itself not whether it hands over responsibility to the ACCC. The only issue is whether the ‘four pillars’ policy is sensible or not.

The second argument is that our banks are too small to realise economies of scale. I am not expert on such matters but it would be nice to see some empirical evidence on this. Are Australian banks with their privileged oligopoly position unable to access funds internationally at the lowest cost? Are costs of managing deposits or making loans locally too high to promote productive efficiency in banking? I would like to see some evidence on this rather than poetic claims about 'bonsai'.

According to Fortune the National Australia Bank is the 239th largest firm by revenues in the world. The Commonwealth Bank is the 340th, the ANZ is 376th and Westpac is the 464th. Ranked among the world’s banks on the basis of revenues the National Australia Bank is 35th largest, the Commonwealth Bank is 45th, ANZ is 50th and Westpac is 56th. Are these banks minnows? Just how big do you need to be to realise economies of scale in banking?

Furthermore, as banks increase in scale is there always an efficiency dividend or are there x-inefficiency concerns? Banks in Australia seem to be out of touch with their customers and to increasingly offer depersonalised, inflexible services at the same time that bank fees are rising strongly – over the past 10 years fees from households have quadrupled. This evidence does not clinch things since it is possibly consistent with increasing efficiency and offering a wider range of services. But it is also consistent with lack of competition and banks squeezing customers using their monopoly power.

And why are mergers among domestic banks the most ‘natural route to growth and scale’? If the primary economy sought is better access to international capital markets why focus growth locally where customers are offered only restricted banking choices and limited competition?

The suspicion is that the major banks wish to further consolidate their monopoly power in a limited market by decreasing the limited competition and by improving their already substantial opportunities for coordination. The evidence on increasing fees and surging profits is consistent with this view.

Finally, it is not sensible to claim that the banks should be given the 'same opportunities as other Australian companies' when they are quite unlike other Australian companies both in terms of the size and the fact that they obtain banking licences from government. It is entirely appropriate that governments isolate those large businesses that impact on the lives of every Australian and expose them to specific scrutiny and regulatory effort.

Update: Joshua Gans also comments on the Harper article.

John McCain is too old to be President

This YouTube outlining John McCain's views on economics, foreign policy and disaster relief amused and frightened me.

I have suggested before that Barack Obama will be the first black American President and, despite my conservative politics, believe this will be, on balance, a good thing. He is the best of a weak field and John McCain is well past his best.

My support as a non-American for Obama would be unambiguous were it not for his support for a 'cut-and-run' Iraq policy. I think his assessment that the US position in Iraq is hopeless is not consistent with current developments. But John McCain lacks credibility on this same issue.

Hat tip to RH for the clip

Disappearing honey bees

Honey bees around the globe are disappearing and nobody knows why - maybe it is due to bloodsucking mite called varroa - pictured above. One-third of US honey bees were wiped out last year. Bees are crucial for the pollination of 90 major crops. Albert Einstein is claimed to have said that if honey bees disappeared the human race had 4 years until it to became extinct. Commenter AndrewT points out this may well be apocryphal.

In addition there is the possibility that wild bees may substitute as pollinators if honey bees disappear.

An intriguing story and the subject of a book.

Around the blogs

I have been too busy to actively blog the past few days but a few issues caught my attention.

1. Bill Hensen. I enjoyed this post by Liz Conor on the Hensen controversy (Is it Hensen or Henson – both spellings are widely used). Conor's post makes some comparisons with Nabokov’s Lolita – and tries to understand the ‘peculiar’ beauty of art involving young beautiful people while feeling caution and fear over their vulnerability. As a parent of two daughters (& one son) I can relate exactly to what she says. Of course Nakokov is discussing the views of a young woman from the perspective of a pedophile while Hansen is definitely not taking such a perspective.

There is no debate on this issue on the right side of politics . Hensen’s work is pornography pure and simple to these sober minded defenders of the faith. But there is plenty of misogynistic porn on the web – comparing its to Hensen’s work shows there is no overlap at all. The religious right have predictably voiced their support for the interpretative role of storm-troopers in our art galleries. Predictably Kevin Rudd has felt it necessary to inject his ‘absolutely revolting’ critique something which really appeals to these fanatics. Rudd should butt out of these moral debates or use more measured language.

2. FuelWatch. The FuelWatch scheme is likely to make very little difference to the cost of petrol for motorists. Apart from imposing hefty compliance costs on motorists it seems likely to encourage coordination among retailers and hence increased collusion – if anything this might push prices up a smidgeon. Rudd’s abuse of the public servants for leaking their opposition to the scheme is understandable – nobody likes being shown to appear an idiot – but his bully-like threat to increase their workloads seems to be the response of a peanut. More of this idiocy to come I am sure. Rudd choose what he thought were an indefensible group of ‘fat cats’ to use earlier Labor language but is revealed to be a total hypocrite in terms of his pre-election comments on the needs of ‘working families’ to enjoy their leisure.

3. Medicare Tax Levy Threshold. The move to raise the income tax threshold for avoiding the Medicare tax levy – from $100,000 to $150,000 for families – is the most foolish policy move of the Rudd Government so far. Forcing those who can afford it to pay the cost of their private health cover helps release resources for public health. This measure hurts those constituents Labor would claim to be supporting. Labor Health Minister Roxon should learn some basic economics. It makes perfect sense to encourage private participation in health insurance by providing tax relief given that Australia has a national health scheme that provides a measure of health cover at zero explicit cost.

4. Climate Change & the Right. I generally enjoy the wit of Tim Blair and the hard edge that Andrew Bolt applies to current events but I still wonder about the propensity – which they share with members of much of the conservative right - to continually (on a weekly basis) provide posts which deny or ridicule the theory of anthropogenic climate change. It is a interesting question. It is reflected in the fact that over at Troppo’s blogroll I am described as an economist with mostly conservative views who unusually takes a strong stand on climate change issues.

The science on climate change is overwhelmingly accepted. Why are the right so vehemently opposed to this science? One reason seems to be simple anti-intellectualism and to desire to appear to be against 'mainstream thinking'. Another reason is the implication that global action needs to be taken to deal with global warming – this hardly advances the cause of laissez faire.

But this latter reason is illogical. Belief in laissez faire needs to be based on the facts not on blind religious faith and public good/externality reasons for intervening in market economies have been accepted for over 200 years. The climate change issue is an extension of these arguments.

Moreover, accepting these arguments and moving to adopt carbon taxes or transferable carbon quotas does not make you ‘anti-market’ – accounting for climate change costs can be understood as attempting to get markets to work more effectively.

Acid mud (= ‘sulfidic sediments’)

In many wetlands along the Murray and Darling Rivers, sediments flooded for decades by locks and weirs, are being exposed to air as drought-affected water levels fall. Inland sulfidic sediments have been found in NSW, Victoria, South Australia and Western Australia. Waterlogged soils often contain sulphides produced by bacteria decomposing organic matter, but if these sediments are allowed to build up and are then exposed to oxygen, they form sulphuric acid – hence the names ‘acid mud’ and ‘sulfidic sediments’. These are usually naturally occurring events but are worsened by human activities, particularly in inland aquatic ecosystems, and by sustained drought.

I will learn more about ‘sulphide sediments’ from colleagues at La Trobe University Albury-Wodonga Campus this week but, before this, I inspected the web to find some background facts and what follows are some notes. I would be interested if readers had links to further information.

For example Bottle Bend, near Mildura, was once a healthy wetland but it is now it’s a toxic waste site where nothing but micro-organisms can survive the acid water given its steel-eating pH of 1.6. This caused the death of all fish in the wetland and all the trees surrounding it. Thousands more wetlands – particularly those in the lower reaches of the Murray - could be brewing the same deadly formula and if the rivers again flow enough to re-flood the exposed acid mud, toxic baths will pose a major threat to towns and cities downstream. This slide show by the Murray-Darling Freshwater Research Centre was useful in getting an overall picture.

Constructed wetlands are potentially at more risk of producing sulfidic sediments than other wetlands because such wetlands are often designed to help improve water quality. The water, whether it is from storm water, treated sewage, industry or other sources is often of poor quality. If the levels of sulfate in the feed water is high (greater than about 10-20 mg S/l) then there is a real likelihood that the wetland will develop sulfidic sediments over time.

Not a lot is known about treating inland sulfidic sediment problems. Essentially they need to be first identified and then regularly flushed out. The flushing out required however impacts on water availability upstream from the sites of sulfidic sediment.

For example as pointed out by Kenneth Davidson, in Lake Alexandrina at the mouth of the Murray River, the soil in the lake is laced with sulphides that turn into sulphuric acid with prolonged contact with the air. The pH of the lake, which measures the acid/alkaline balance, is already bad enough to make it toxic to animals. Moreover, without flushing as a result of heavy rains upstream, the combination of salt and acid will move upstream and progressively contaminate the lower Murray. The danger is immediate. Murray Bridge, 38 km from the mouth of the Murray, is only two metres above sea level at the mouth of the river — a drop of less than 0.5 cm/km — which means that the salt and acid can move relatively easily upstream. The lower Murray is more akin to a series of interconnected ponds rather than a free-flowing river.

This is serious because Adelaide and South Australia's main provincial towns depend on the Murray for most of their water. Without flushing rains or 200 GLs from the Dartmouth Dam on the upper Murray, the water that Adelaide pipes from the Murray below Murray Bridge will be undrinkable. But if the water that is available from Dartmouth is allocated to the environment, it won't be available to irrigators further up the Murray.

According to Davidson, this is why the Brumby Government delayed for 15 months signing up to the Murray-Darling Basin Authority, which is supposed to give ultimate authority for allocation of the water to Federal Water Minister Penny Wong. Either the system must get well above average rainfall during the coming winter, sufficient to flush out the lower reaches of the Murray, supply Adelaide and keep irrigators alive or Wong will have to choose between Mildura and Adelaide as to who gets the 200 GL of water held in reserve in the Dartmouth dam. But there is no real choice. If the southern river Murray system dies, Mildura and the other irrigators along the southern Murray will die as well.

If salt and sulphuric acid damage is limited to Lake Alexandrina, the irrigators and the towns along the southern Murray can be kept on life support until there is a permanent increase in the flow of water into the Murray system.

Among the groups studying sulfidic sediments one with very useful data and articles is CSIRO Land and Water.

Amartya Sen on food shortages

Amartya Sen argues that droughts such as that being experienced in Australia, high economic growth in some developing countries as well as the diversion of grains into biofuelds servicing the needs of the wealthy has created a surge in the demand for foods that has driven up food prices and endangered the world's poor.

Its a sensible argument - in my own household I have felt the increase in food prices clearly in terms of its impact of our household budget - it is a real impact but as a household we spend less much less than one third of the budget on food. At most I might have to cancel that mid-winter holiday and forgo that new set of golf clubs! For families already spending most of their low incomes on food the issue is of life-threatening seriousness - particular since high food prices are seen as likely for at least another decade. In South America alone 71 million extremely poor people face hunger as a consequence of rising food prices. Globally 850 million people suffer from hunger caused by poverty.

Global economic development has been a success story in recent decades. This should not induce complacency. While levels of absolute poverty have fallen dramatically it is important not to forget those 1 in 10 people of the world's population who are left behind and who suffer the adverse effects of economic growth on such things as food prices.

Park & ride dilemmas

An apparently obvious way of dealing with traffic congestion in a city such as Melbourne is to drive your car to the nearest train station and catch the train to your destination. It is a great theory but the hitch is that parking places near train stations are becoming exhausted and the cost of constructing extra parking spots is high – around $17,000 per spot according to this Age article. That is the cost of getting just one traveller off the road and using public transport.

The solution is to price the parking spots so there is never any search time at a station site – this means hefty parking charges. Indeed according to parking expert Donald Shoup the ideal is to have 15% of parking spots free at any time in any location to prevent wasteful searches. Melbourne has the second highest fraction of its lands allocated to parking of any of the world’s cities – it is just eclipsed by Los Angeles. This is a wasteful use of land that imposes huge community cost.

I agree with Public Transport Users Association president Daniel Bowen - bus service upgrades should be a priority which will encourage people to switch toward bus rather than train services alone. It is often easier to walk to the local bus stop and even ‘park and ride’ solutions for bus travel and less likely to lead to the excess parking demands that occur at train stations.

Congestion issues are not straightforward to resolve. Parking issues need to be resolved if traffic congestion issues are to be sensibly addressed.

Regulating pharmaceutical monopolies

Joshua Gans has a good post on the Australian Pharmaceutical Benefits Scheme (PBS). The scheme uses the bargaining power of the Pharmaceutical Benefits Advisory Committee (PBAC) that derives from its ability to 'list' drugs eligible for government subsidies to curb the price demands of monopolistic pharmaceutical producers. Unless drugs are 'listed' (and supplied at a maximum government-subsidised price to the consumer in 2007 of $30-70) they are seldom prescribed by doctors so listing is very much sought after.

But listing is only provided by the PBAC if it judges drugs to be effective and not excessively expensive. This drives producers to offer drugs at lower prices and saves Australians a lot of money for their drugs - they are much cheaper than in the US even accounting for implied subsidy costs. Joshua has a couple of good posts on this topic himself but also points to a new NBER study showing that the PBS scheme saves on average a year of life for Australians by encouraging the use of the most recently developed drugs. I cite the abstract:

We examine the impact of pharmaceutical innovation on the longevity of Australians during the period 1995-2003. Due to the government's PBS, Australia has much better data on drug utilization than most other countries. We find that mean age at death increased more for diseases with larger increases in mean drug vintage. The estimates indicate that increasing the mean vintage of drugs by 5 years would increase mean age at death by almost 11 months. The estimates also indicate that using newer drugs reduced the number of years of potential life lost before the ages of 65 and 70 (but not before age 75). During the period 1995-2003, mean age at death increased by about 2.0 years, from 74.4 to 76.4.

The estimates imply that, in the absence of any increase in drug vintage, mean age at death would have increased by only 0.7 years. The increase in drug vintage accounts for about 65% of the total increase in mean age at death. We obtain a rough estimate of the cost per life-year gained from using newer drugs.

Under our assumptions, using newer drugs (increasing drug vintage) increased life expectancy by 1.23 years and increased lifetime drug expenditure by $12,976; the cost per life-year gained from using newer drugs is $10,585. An estimate made by other investigators of the value of a statistical Australian life-year ($70,618) is 6.7 times as large as our estimate of the cost per life-year gained from using newer drugs. We discuss several reasons why our estimate of the cost per life-year gained from using newer drugs could be too high or too low.

Congestion taxes to encourage selectivity in car use

In an interview I gave on Friday for the Today Tonight show on traffic congestion I was asked a very standard question. ‘Won’t congestion pricing have particularly adverse effects on low income travellers and mainly benefit the rich?’

I have been asked this question countless times over the years in relation to a various taxes - taxes on alcohol, cigarettes and gambling all hit low income earners rather heavily. The standard economic response to this question – and one that I endorse – is that one should not be overly concerned with the impact of taxes on the consumption of particular items but should look at the overall impact of taxes and transfers on welfare. Particular taxes may be regressive – impact primarily on poor people – but the overall taxes and welfare transfers should be designed to compensate for such regressivity if one wishes to avoid it.

While there is certainly an element of truth in this explanation with respect to congestion tolls there are even more important issues. These tolls should not discourage car ownership but should encourage more selective use of cars. The opposite has been the case over recent decades since we know that cars are used more intensively rather than less. Some households make virtually all journeys by car – going to work, taking the kids to school and sports events, visiting friends and, of course, doing the shopping.

In my view we should think of public transport alternatives or of walking or taking a bicycle for many routine journeys that we make each day where large amounts of materials need to be carried. Trips to work and school are often repetitive tasks that can often be programmed to be dealt with via public transport, walking or by ‘park-then-drive’ actions. Certain trips require use of a car either because they are unexpected – the need to pick up a sick child from school – or because they involve transport of a large quantity of goods – for example, the weekly shopping.

Good road pricing should encourage greater selectivity in car use with the largest possible car ownership to facilitate the accomplishment of journeys which require a car. Generally I am in favour of hefty congestion charges, and petrol charges that are large enough to encourage the substitution of alternative fuels, but low car ownership costs.

This will encourage the type of car usage discussed for the US by John Quiggin – less usage of cars partly as a response of fewer journeys taken and increased reliance on public transport but also because, as I have emphasised above, car users more stringently rationalise their use of cars across tasks .

Agenda online

I have been a long-standing supporter of the ANU-published applied economics and social commentary journal Agenda. It provides a clearly-written account of many contemporary Australian economic problems without a lot of irrelevant technical clutter. In the early days it was edited by the very capable Michael James and subsequently by colleagues Robert Albon and Franco Papandrea. These days it is edited by well-known ANU economists William Coleman and Alex Robson.

Recently the journal has become a completely online affair – hard copies must be purchased from the ANU publisher individually. I am a bit unhappy with this – though still a strong fan of Agenda – I can’t for the life of me see why it is so difficult to provide the option of a paid annual subscription rather than having to buy each issue separately.

However a side benefit of publishing the journal online is that everything ever published in the journal can now be viewed at an ANU website. In particular all of the papers I have ever published in Agenda are there. Access to the entire contents of Agenda is also now free.

In 1999 I wrote one of my first efforts on addictive drugs Public Provision of Heroin for Addicts where I debunked proposals to provide heroin free to those addicted to it. In 2000 I wrote what I thought was an interesting, if to some an idiosyncratic piece, Aesthetics, Economics and Conservation of the Endangered Orange-bellied Parrot which provided a case study of species-specific biodiversity conservation efforts. In 2001 I wrote Prioritising University Research: A Critique of the Kemp Reforms which provided a sustained polemic against proposals for commercialising and prioritizing research effort in the universities. I think it has stood the test of time quite well and have not shifted an inch from my earlier position that succeeding Labor and Liberal Governments have forced a foolish research policy on Australian universities. In 2002 I wrote what I thought was an interesting piece, Institutional Design for Biodiversity Conservation, which tried to apply agency theory ideas to biodiversity conservation policy. It has generated much less interest than I had hoped. In 2006 I wrote (with former student Andrew Hawkins) one of my most widely-cited papers in recent years an Economic Framework for Melbourne Traffic Planning. It is still bearing fruit – on Friday I was interviewed by the Today Tonight television show and asked to provide views that stemmed from work leading up to this paper. Finally, in 2007, a piece that I first previewed on this blog, Conserving Biodiversity in the Face of Climate Change, appeared.

I have written four book reviews over the past decade on ‘Drugs and Democracy’, on the Gans-King book ‘Finishing the Job’ and two reviews of books on Australian immigration policy (here and here).

I have always enjoyed the freedom to get away from the strict model building methodologies insisted on in other journals that often amount to little more than symbolic window dressing for what are typically straightforward ideas. I always feel that I have the freedom to exercise more than 5% of my brain when writing for Agenda. I do not always get that feeling when seeking to publish in more conventional economics publications. Nor do I feel that some of the editors of these publications always exercise more than about 5% of their intelligence when refereeing contributions.

These last two sentences doubtless reflect unsavoury attitudes on my part. I’ll happily confirm more evidence of such attitudes. I recently gave away my complete sets of Econometrica, International Economic Review and the Review of Economic Studies from 1975. They were clogging up my office bookshelves and I realised that I’d rather chew on funnel web spiders than take a serious interest in much of their content. I am interested in the world these days and in models which illuminate the world. The exercise of building models - as an end in itself - I’ll leave to the next generation. Life is too short.

Celibate soldiers?

I am stunned by the media interest in whether soldiers had sexual intercourse with a visiting female entertainer. It seems that she did not but even if she did who cares?

Why would such sexual intercourse be a 'scandal' even if it did occur? Are soldiers intended (or ordered) to remain celibate while on duty? Are women not permitted to select soldiers as sexual partners? The whole episode is a stunning non-event.

Update: In a separate incident an MP from Western Australia has become the 'lastest casuality in the state's political sleaze scandal'. His alleged offence - he invited a woman with whom he was apparently on friendly terms to join in a sexual threesome. He didn't do anything other than ask her. I am bewildered as to what the 'offence' here was.

Are 'threesomes' illegal in WA? Is it disrespectful of women to invite them to join in consensual sexual activity? Is the presumption that not only do women wish not to participate in sexual activities but that they also resent even being given the opportunity to do so?

A person cannot be made worse off if they can accept or costlessly decline any offer. They get choice. I can understand that offers can be put to people in terms that are offensive but then that should be the offence not the offer itself.

Australians are becoming very American in their attitudes - on the one hand many aspects of life are becoming sexualised via a media focus on sex and, at the same time, there is an underlying puritanism about sex in the media and the women's movement.

China's environment

As I have posted before the environmental situation in China is currently very bad. China burns 1/3 of the world's coal and a recent report estimated that 750,000 people per year die through the effects of pollution in China. China is already the world's largest emitter of greenhouse gas emissions - a leadership role that is likely to become more pronounced as demands for refrigeration, air conditioners and automobiles increase from low current levels.

But as this article in The Atlantic makes clear, the local situation is improving in some respects and China is serious about climate change. It is important in the west to acknowledge such improvements - and indeed to nurture them - if the right types of political signals are to be set in motion within China. The situation remains awful but is improving and the Chinese seem to want international approval and recognition for their efforts rather than ongoing condemnation.

Do higher cigarette prices make smokers better off?

Economists have long searched for goods they can tax which impose no deadweight losses (DWLs) on society. Henry George supposed that assets like land which are in fixed supply can be taxed without social costs since customer demands will not change and supply will not change - the only effect of a tax on rents would be to shift rental income from land owners into the pockets of government. Such taxes produce large transfers but impose no DWLs. George in fact argued that all taxes should be based on taxing land. He wasn't quite right because he ignored quality improvements in land - these are less likely to be made with hefty land taxes - and anyway a tax base that was based on land would be too small to fund Labor Party wish lists. (George's idea was quite smart however and led later economists, such as that legendary genius Frank Plumpton Ramsay, to suggest focusing taxes on goods in inelastic supply and demand to avoid allocative losses).

My colleague at Monash University, and by far the best welfare economist in Australia, Professor Yew-Kwang Ng, has suggested taxing diamond-like goods whose value is seen to be higher in the eyes of consumers when they are more expensive. Again the basic idea is that noone loses with such an excise tax. The government gets revenue and diamond consumers get more satisfaction by being able to display even more expensive diamonds.

Now I have found a third twist to the possibility of taxes without DWLs that involves taxing naughty or sinful goods that consumers really know they should not consume. FXH sent me a link to this attractive piece in Slate that reviews a relatively old paper by Jonathon Gruber and Sendhil Mullainathan arguing that excises on tobacco products made consumers better-off in both the US and Canada by increasing their ability to resist the temptation to indulge in the filthy habit of cigarette smoking.

Its a fairly complex argument but basically this paper argues that higher taxes and hence higher prices give consumers greater motivation for self-control. Higher prices reingage the cognitive parts of the brain and make it easier for smokers to cut back or stop smoking

It is worth noting that this argument augments traditional Ramsay-George arguments for levying hefty taxes on cigarettes because their demands are relatively inelastic. From these perspective taxing cigarettes both punishes a sinful activity and delivers loads of dough to the Treasury.

Thanks FXH for the Slate reference.

Paul Mees exits the University of Melbourne

The decision of the University of Melbourne to demote Dr. Paul Mees after he publicly criticised a State Government Department report concerning the privatisation of transport in Victoria needs careful community scrutiny. The comments that Paul Mees made seem to be intemperate but perhaps should have been criticised on these grounds. There is no indication that his teaching and research were sub-standard. Instead the basis for the attempted demotion (he has subsequently resigned and gone to RMIT) seem to be that he offended a state government department and endangered university funding from this department.

I don't agree with many of Paul Mees' views on transport - I clashed with him once on the issue of congestion pricing - but he is a valuable member of the academic community who does maintain an academic focus on contemporary issues of transport policy.

University administrations are becoming increasing centralised and authoritarian at a time when private firms are becoming more decentralised and liberal. As every academic in Australia knows this is true everywhere - collegiality is dead. Maybe the University of Melbourne had good grounds for disciplining Dr Mees - I do not know all the background - but I have not heard these reasons. The notion that criticism of a state government department can lead to demotion within a university is deeply troubling.

It calls into question the whole critical function of a university and brings into focus the pressures that competing for research funds places on academic pursuits.

Update: This letter from one of Mees' colleagues shows there is concern that the action was political.

Liberal Party woes

The Liberal Party seems to be hell-bent on self-destruction at present. Incompetent and corrupt Labor Governments in Western Australia and NSW have remained in power while a Liberal Party leader in WA sniffs the seat of a female employee and the leader in NSW tries to sit on the fence in relation to electricity privatisations – eventually he 'swings around'. Federally we have Brendon Nelson trying to cut taxes on alco-pops in the face of a clear binge drinking problem among youth that induces horrific externalities (for example via road deaths) and also seeking to reduce the excise tax on petrol in the face of higher international energy prices and the prospect of climate change problems. The policy confusion is obvious – there seems to be little respect for Liberal policy principles and instead an obvious and almost embarrassing populism that seeks to regain leadership by offering only superficially attractive policies.

In this setting treachery within the Liberal Party is almost predictable. The Victorian Liberal leadership has been viciously attacked in a blog apparently organised by employees at state Liberal Headquarters – incidentally the blog can still be viewed. Now Brendon Nelson claims that the Shadow Treasurer has leaked an email that showed he did not support the cut in excise on petrol. It is a fiasco for a Party presenting itself as an alternative government!

The problems of inept policy and of intra-Liberal Party treachery are linked. It is imperative for the Party to speak with one voice on policy positions that are democratically agreed to. It is also imperative that the battle for political power within the Party remain within the Party. To accept a position where insiders can attack the Party leadership in the public arena is to accept permanent opposition and permanent political irrelevance. But this unity will be much easier to maintain if the leadership espouse policy positions based on Liberal Party principles rather than opportunism and cheap populism.

There is a broader dimension to this issue as well. The Labor Party is composed very largely of power hungry incompetents whose devotion to symbolism and the glib response will damage Australia. They need to be held to account for their political position when they get it wrong and they deserve support when they get it right. Democracy does not work without effective political opposition and currently the Liberal Party is behaving like a bad joke – not an effective opposition.

Gleick on Isaac Newton

I enjoyed James Gleick’s biography of Isaac Newton (1642-1726). It only provides a very brief introduction to Newton’s life and work but it is a tantalising glimpse of one of the most important scientific figures in history. One of the reasons Newton is less discussed than others in recent times is that much of his scientific work has become ingrained into our everyday thinking – he certainly ushered in a new approach to science but also changed the way people think.

When we talk about the ‘momentum of a winning football team’ we are talking Newton-speak. The calculus that we learn as high school students was co-discovered independently by Newton and Leibnitz – it is impossible to imagine modern mathematics without it. Much of his work on optics is core knowledge these days. His contributions to astronomy were immense.

Newton’s long-standing interests in alchemy made sense to me since it was such experimentation that helped foster scientific revolutions. Likewise Newton’s Christianity seemed to dominate many aspects of his life though on his deathbed he refused the sacrament of the church.

Newton had tremendous powers of observation and an overwhelming compulsion to understand the world. He made contributions in many fields of mathematics and physics. I am not sure he was an overly likeable person – he was only ever recorded laughing once - but a supreme, cautious intellect. Very highly recommended as a starting point for understanding this remarkable man - a survey of complete reviews of the Gleick book is here.

I found the Wikipedia study of Newton to be useful companion reading – it added many points that Gleick missed.

Drug treatment industry supporters of illicit drug decriminalisation

I've posted before on the preposterious claims of Dr Alex Wodak that decriminalising cannabis use would decrease use. To the extent it provides an additional source of supply not subject to the user costs of relying on illegal markets I find it impossible to believe such claims*. The difficulty with these effoneous claims is that current policies to reduce cannabis use are working effectively. This is a beneficially especially because cannabis use itself is, in fact, increasingly seen as a dangerous illicit drug rather than something benign.

Miranda Devine asks what should be done about Dr Wodak's position as Director of the alcohol and drug services at St Vincents Hospital? I have not heard criticism of his work in this role so I guess not much. But he does speak with a voice of authority. I think he inflicts a lot of false views and hence social damage on the community because of these views but I assume we have to live with that cost as one of the effects of living in a democracy.

Moreover, my experience with the APSAD meetings is that many in the drug treatment industry (those earning good livings from treating those with drug and alcohol problems) are supporters of liberalising policies with respect to illicit drugs. Dr Wodak is not alone. Most of these people have never made any attempt to study economics or other disciplines that address the social effects of eliminating constraints on drug usage and instead look solely at the welfare of patients as they present themselves for treatment right at the time of treatment.

It is a deep problem that many of these supporters of legalising illicit drugs depend for their existence on the public teat. I wonder how many tax payers are aware of this?

(*) A logically consistent claim would be to assert usage might decline with legalisation because people demand cannabis because it is illegal for 'thrill-seeking' reasons. This seems to me farfetched. The legalisation of alcohol after prohibition in the US did not discourage use.

Smoking bans deter the initiation of smoking

I have posted many times on the value of smoking bans. These stop passive smoking externalities but also increase the user costs of smoking which encourages quitting. They also improve financial returns in businesses subject to the bans. They also provide libertarians with a no-brainer way of padding out their blogsites with attacks on ‘nanny-staters’ which is probably a socially safer activity than advocating legal gun ownership or the legalisation of herpoin for toddlers. This piece from NewScientist suggests they also deter teenagers from taking up the habit.

Restaurant smoking bans don't just protect diners and staff from other people's smoke, they help stop young people becoming habitual smokers.

‘In 2001, Michael Siegel* and colleagues at Boston University surveyed 3834 Massachusetts youths, with follow-ups two and four years later. In towns where restaurants had no smoking bans or kept smoking areas, 9.8% had smoked over 100 cigarettes in their lifetimes, compared with 7.9% in towns with smoking bans.

Once the researchers corrected for factors such as whether their parents smoked, those in towns with bans were 35% less likely to be habitual smokers (Archives of Pediatric and Adolescent Medicine, vol 162, p 477).

Bans don't make teenagers less likely to try cigarettes, but seem to stop them making it a habit, perhaps due to less contact with smokers or because smoking seems less socially acceptable.’

The full article by Siegel is available free at the link. BTW Michael Siegel has a very active and interesting blogsite here. Via it I came to this interesting report on tobacco control in Canada – one of those countries most successful in encouraging less smoking.

Mid-week humour

Unending piles of work - writing exams, marking assignments, complying with bureaucracy - have muted my sense of the joy-of-life over the past few days. Life feels like one hassled, pointless, industrial-strength march towards boot hill.


The following from John S. and Lena provided comic relief.

Adam & Eve in Saudi Arabia (with apologies to the NappyHeads).

Michelango's David after a two week visit to the US. (both thanks JS)

Cars, roads & petrol (thanks Lena)

Federal Budget 2008

I've been busy and found it difficult to assign time to assessing the budget. Clearly the Labor Party has inherited a fabulously prosperous economy - that the terms of trade is due to increase by so much over the next year is astounding and should dominate our impressions of where the Australian economy is going.

The bugdet response has been to award miserly tax cuts to lower income groups and to defer them for higher income groups and to run a massive budget surplus. Much of the surplus is to end up in investment funds to be spent on infrastructure, health and education.

This budget is therefore a beginning not an outcome. The main issues are how these funds will be allocated and how they will be spent when the economy is close to full employment. Project costs will be high so there is the prospect that returns on these investments will be under pressure. There is the possibility Labor will use them to pork-barrell in 2010 but they may surprise and spend the money wisely. It is a beginning.

Longer term these surpluses belong to the citizens of Australia not to the Labor Party. It is unsatisafactory for tax rates to be set so high that the government runs massive surpluses.

The funds can only be spent with a continued commitment to Labor market reform that prevents cost push inflation from emerging. The economy should be able to reduce unemployment still further and guarantee longer term better wages if the link between wages and prices can be broken.

I was less-than-impressed by the response of the Coalition to the budget. Malcolm Turnbull's responses on alcopops taxation added a bit of comic relief however. His claim was that the tax could not seriously target youth drinking because revenue to the government was forecast to increase with the tax! This is incorrect since the demand for alcopos clearly will slope downwards. The tax can still yield additional revenue if the price-elasticity of demand for alcopos is low enough. If the price elasticity is high then the tax will substantially reduce consumption but (contrary to the expectations of Treasury) yield less tax.

Update: John Quiggin makes a scathing attack on Brendon Nelson who has apparently followed Malcolm Turnull in criticising the alcopops tax. As I publicly supported the Government in increasing this tax two weeks ago I've got to agree with John that the criticism of the increased tax is foolish politics that suggests foolish policy sense. Taxes on alcohol in Australia are approximately volumetric which makes sense if you believe (as I do) that alcohol is a neurotoxin - they are not quite right however as the alcohol in beer is taxed less heavily than that in spirits. I favour a hefty tax on alcopos because these drinks are directed at youth and at ensuring an ongoing dependence on booze.

Albert Hofman RIP

Albert Hofman, the discoverer of LSD and long term psychedelic adventurer died on April 29 aged 102. A collection of obituaries and videos on Albert’s life are here. Hofman disliked the way Timothy Leary and the other psychedelic enthusiasts gave LSD a bad press since he believed LSD could expose people to the spiritual side of life. To Hofmann however LSD was by no means essential for doing the latter:

His advice to would-be trippers was simple. “Go to the meadow, go to the garden, go to the woods. Open your eyes!”

I concur. The main argument against the use of illicit drugs is that while they raise the prospect of damage and harm they are unnecessary. It’s called life. Get into it.

Cannabis a dangerous illicit drug

This most recent report by the British Advisory Council on the Misuse of Drugs provides a careful evaluation of cannabis. It recommends retaining the classification of cannabis as a Class C drug (along with valium, GHB and steroids) rather than upgrading it into Class B of more dangerous drugs such as amphetamines and barbiturates. Nevertheless it does describe cannabis use as a significant public health issue. With a few exceptions the report’s views coincide with my views on cannabis.

As a Class C drug a maximum prison sentence of 2 years is set for use while supply carries a maximum penalty of 14 years.

In Britain as in Australia cannabis use has decreased markedly (20-25%) over the past 5 years in all age groups.

Cannabis damages lungs but by less than cigarette smoking because less is smoked. Severe lung damage has been reported in heavy young users and there is the potential longer-term risk of lung cancer.

Cannabis damages the reproductive system in both males and females and causes low birth weights among pregnant women.

Cannabis can cause short-term psychotic effects - usually short-lived and responding to tranquilisers. A Danish study suggests half of those who contract a cannabis-induced psychosis experience repeat symptoms over 3 years although this may be due to continued cannabis use.
The incidence of cannabis psychoses has not been increasing.

Cannabis is the most common illicit drug found in the body fluids of those suffering motor vehicle injuries.

Dependence on cannabis is ‘unquestionably, a real phenomenon’. Significant numbers of young (under 18) and older cannabis users are dependent on cannabis.

Cannabis worsens the symptoms of schizophrenia and dealing with cannabis use (including dependence) is a major element of the treatment of many young males with this disorder.
The Council concluded that the evidence supports a causal link between use of cannabis in adolescence and the subsequent development of schizophrenia (page 18, para 8.10). Heavy users of cannabis have a 2-fold increase in the incidence of schizophrenia (page 19 para 8.10.1).

The Council was unclear whether cannabis use supported the ‘Gateway theory’ – that it led to use of more dangerous Class A drugs.

Cannabis impairs performance of tasks requiring sustained attention.

In preferred forms of cannabis (‘Sinsemilla’) THC concentration has doubled over the period 1995-2007.

The Council favours campaigns to drastically reduce cannabis use particularly among young people.

St George Bank should not become part of Westpac

The ACCC should object to the proposed takeover by Westpac of the St George Bank on the grounds that it will reduce competition. My guess however is that Treasurer Swan will have already given indications that the merger be permitted.

There would be some cost-savings generated by the merger because branches could be closed and moderate network externalities realised. But these businesses are already large so that the gains in terms of having lower cost access to capital markets would be very modest.

The main effects will be however to reduce the very limited competition Australians have with respect to choice of banking service. The 'big four' banks offer lousy, expensive service and yet yield bloated profits to their shareholders on the basis of their preexisting market power. Service will be marginally worse not better should this takeover proceed because there will be still less competition.

Why can't the banks come up with innovative market ideas and improved service to extract better returns for their shareholders? Or are the only strategies open to the financial geniuses in the big four banks those involving takeovers of smaller Australian banks or dud investments overseas?

Expensive textbooks

I am surprised at the cost of non-specialised undergraduate textbooks these days. First because, as a parent of a university student, I get presented with what seem to be huge bills each semester and second because I as a first-year instructor I set hundreds of students each year texts that seem to always cost more than $100 per volume.

Incidentally I am also annoyed by claims that professors could not care less about the cost of texts because they do not pay the costs – this is untrue. This professor at least does exercise concern. Many students work part-time in relatively low paid positions and a bill of $500 per semester for texts is a real burden. In addition it is often an unnecessary burden given that many undergraduate course materials are fairly standard and could in principle be supplied online at zero cost. Many course materials and course guides are provided online in any event.

As a general issue consumers are better-off if they can be offered cheaper goods and services – and with respect to textbook provision they can be.

In microeconomics where I teach there are dozens of texts on the market which cover more-or-less the same content and many of which are updated every year or so with new editions and new paginations designed to ‘kill off’ the second-hand market. While some of these Australian versions of US texts are good many offer product differentiation only in treating an unnecessarily large range of topics. They do not teach core material better. Many are appallingly proof-read and poor value for money – in my view the authors should not claim publication credit for participating in commercial scams. We would all be better off if fewer high quality texts were written.

Of course the strategies of the textbook vendors in pricing high but in killing off the second hand market reduce the value of buying a textbook. Whereas almost all undergraduates bought all recommended texts 20 years ago my contacts in the University Cooperative Bookshops tell me the figure has fallen to about 50% today. Why buy an incredibly expensive text that will have low resale value because suppliers can be anticipated to intervene to ‘kill off’ the second-hand market?

Greg Mankiw asks the question why don’t critics of excessive textbook pricing provide texts competitive with those claimed to be over-priced? It is a fair question. My guess is that the use of ‘big name’ US professors in an Australian market where the cultural cringe is alive and well, provides a strong barrier to entry of perhaps equally competitive locally-produced texts. Reflecting the strength of cultural cringe factors academics at one large university I know advise their best graduate students not to pursue their PhD in Australia. Too many Australian academics buy what is obviously just self-interested deceit.

With respect to book publication there are substantial fixed costs that need to be incurred in marketing new textbooks. Large firms with established distribution and marketing efforts can impose big entry barriers here.

How to defeat this manipulation? One immediately pragmatic response if you do use texts authored by our US ‘betters’ is to issue reading lists which include references to past as well as current editions so that ‘killing off’ the second-hand market works less effectively. Another response is to not discourage students in their development of creative skills with photocopying machines. Instructors should be careful with your words here or the greedy publishing houses will be on your back with legal actions – a text of 500 pages could be photocopied at the University of Melbourne library for about $30 (12 cents per page) although this would violate copyright law. Photocopying short sections of texts that are provided in the Reserve sections of libraries is legal and should be encouraged as a substitute for complete texts.

Probably the best solution of all is to use online material as texts and to encourage reading of reference texts in the library. A few texts have been placed online for free and this is definitely the way of the future. Greedy publishing houses who charge monopoly prices for overrated, poorly-written US-style textbooks that have limited resale value are creating incentives for their own destruction.

Health tourism

I posted recently on the booming market in Thai exports of health services. Americans and Europeans are travelling in droves to Thailand to take advantage of lower costs of health services there. I sent a copy of the post to a well-known Australian trade theorist and his immediate response was – why doesn’t Australia get in on this act?

I agree and so too does the Managing Director of the Australian Tourism Export Council. His argument – having a sound international reputation for health services would encourage heath tourism and regular tourism among those with health concerns. It would also lead to having improved health facilities available for Australian residents. We would have to pay more for our health services - unless discriminatory pricing was enforced via, for example, a tax on health exports - but economically Australia would enjoy gains from trade.

Refugees & the heartless Labor Party

I got this insight into traditional Labor insensitivity to refugees from Tim Blair. Blair points out that Rudd is doing his best to keep the insensitivity tradition alive. A nice quote from the still living treasure ‘Then-there-was-Gough’ in 1977:

"Any sovereign nation has the right to determine how it will exercise its compassion and how it will increase its population."

I think I have heard that sort of sentiment more recently – was it John Howard? Hard to believe since compared to his Labor predecessors Howard expanded both the refugee and migration intakes.

Rudd, when asked whether ‘Advance Australia Fair’ fills him with pride, said:

‘It does, and the reason it does is when you’ve got verses like ‘For those who come across the seas we’ve boundless plains to share’ that that should be the resolve of any Australian Government, unlike the one we replaced which seemed to pull up the shutters when it came to our proper international obligations, particularly to refugees who found themselves in real strife.

(Hat tip for the last quote to Andrew Bolt).

While his detractors might suggest that Rudd is knowingly lying his head off here I'd prefer to assume is just another instant of his compulsive grap for the glib phrase regardless of any issues of truth. Truth is secondary when those famous cliches start rolling off his tongue.

BTW, to be fair, Rudd has increased the skilled migration intake significantly. Probably reflects the fact that Aussies generally are more relaxed about having migrants – although only one-third want public support for preservation of ethnic cultural identity among migrants.

Gambling & government in Victoria

I’ve been too busy to follow the recent news on gambling contracts in Victoria in detail. But there is a smell around this issue that makes me suspicious.

An Upper House parliamentary inquiry into alledged corruption by the State Government and by consulting firm Hawker Britton has returned an open finding although it asserted that the refusal of former premier Bracks to give evidence hindered its investigation. Former Labor minister David White was offered a $350,000 success fee in acting for Tattersall’s and the firm of which he was director (yes, Hawker Britton*) received access to confidential information in relation to the lottery license tender process before its public release. Bracks denied ever speaking to Tattersals regarding licences though the committee of inquiry concluded he probably did. There are many unresolved issues – Bracks seemed to have a non-incidental role:

‘...the committee also heard from former Tattersall's trustee Peter Kerr, who said Mr White's subsequent report of the Lorne meeting with Mr Bracks was the 'blockbuster' development that led Tatts to float on the share market’

The Greek company Intralot has got that share of the lotteries market that Tattersals lost. Intralot spokesperson Tony Sheehan is a former Labor Treasurer in Victoria. Some wicked gossip has suggested Intralot does not always walk the straight and narrow.

As many have pointed out there are numerous Labor Party hacks and ex pollies involved in advising the $2.5 billion gambling industry in Victoria.

A week ago the current Labor Premier John Brumby announced that both Tabcorp and Tattersalls were no longer to be the duopolies controlling most of Victoria’s pokie industry. I praised the decision but my guess is that the background to this decision would make a great blog post.

I have respect for John Brumby's integrity. As a speculation – I have no firm evidence for it – I wonder whether the machinations in the gambling industry over recent weeks represent an attempt by Brumby to extricate the Labor Party from a scandalous history in relation to gambling in this state.

If readers had information I would be interested in hearing about it. Either through the comments thread or by email to me directly.

Of course these issues have been ignored by leftwing blogs. They are still preoccupied with the AWB 'scandal' and 'children overboard' incidents and, as any honourable lefty will tell you, allegations of corruption are only ever a problem when they occur on the conservative side of politics.

* White is still listed as a staff member. Its MD is a former Carr staffer.

Who runs Australia?

Michael Egan has a cogent argument in The Australian regarding the need for the Labor Party to stand up to the unions. My arguments have centred on macroeconomic policy concerns and the need to avoid a wages explosion that will damage the economy and force a recession.

Egan's argument is more pragmatic. Labor will be unelectable federally and in any Australian state if it is perceived by the community to having its policies dictated by narrow trade union interests. He then argues that the Prime Minister and the Labor Premiers will understand this and therefore will not allow themselves to be dictated to by the unions. They will need to assert themselves to assert autonomy in order to survive.

There is not a gram of principle in this approach but it does bring joy to my heart. If Egan is right then Rudd and the Labor Premiers will stand up to the unions and limit the riole of the unions. This is certainly the appropriate policy. But if he is wrong and the Labor leaderships do not assert themselves then they will be replaced by an opposition who identify their cowardice in the face of the union bullies. Thus any pain that the community experiences as a consequence of Labor rule will be transitional - there is light at the end of the tunnel or, dare I say, at the top of the hill.