Sunday, September 28, 2008

Vale Paul Newman 1925-2008

Paul Newman has died from cancer. A comprehensively decent man whose acting performances have entertained me for as long as I have been watching movies. This interview with him was made in 2007. 
I most remember him best from The Sting, Butch Cassidy and the Sundance Kid and a compelling, very different sort of performance, in The Verdict.   He made movies for 50 years.  I also enjoyed the early versions of his 'industrial strength spaghetti sauce' which he released in the US on my first visit there about 30 years ago. He made a fortune with his food products and gave the lot to charity.

Saturday, September 27, 2008

Krudd takes on the world

Krudd’s Australia is leading the world on climate change policy. Well, starting last November we did.

Krudd’s Australia will ‘work with’ the G20 countries to improve the world’s financial management. They will be grateful. Krudd delivers a stern economic message to the world’s economic leaders. They will appreciate Aussie honesty and directness. After all, Australia’s banking regulatory arrangements are ‘the best in the world’ says Krudd and he would know.

Krudd tells the US Congress it must pass the $700 billion dollar rescue passage now. 'No time to delay', Krudd says.  The Americans will appreciate his robust political advice and knowing where Australia stands.

Krudd urges Australia to regain its seat at the UN Security Council. Krudd has not yet set out which countries we will have to kowtow to or how being forced to take sides on Chinese versus US interests will advance our own national interest. But next week he probably will sort this out provided he isn't booked at resolving the world's financial or nuclear disarmament problems.  Maybe next Tuesday between 2-3pm.

In his few spare moments Krudd has founded a new Nuclear Non-Proliferation and Disarmament Commission.  India, Pakistan, Israel and North Korea have been urged to disarm.  You have been warned. I speak Chinese, says Krudd with that famous smile.

What will Krudd come up with tomorrow?  He is now back in Australia today and going to the footie. Apologies to the 'stolen generations', ratifying Kyoto,  an 'education revolution', dismantling the private health system - all the really tough decisions have been taken. I am certain he will come up with some new program - a new initiative or three.

Friday, September 26, 2008

Swan implements Turnbull's policy after misrepresenting & attacking it

Swan implements Turnbulls's policy. Yes, the Australian government will buy home mortgages - an amazing backflip involving $4b. OK, so no-one really knows what they are doing in the current volatile situation but sometimes the low-brows in the government's benches might consider opposition suggestions.

Anyway imitation is the sincerest form of flattery. After criticising Turnbull's pronouncements Swan is doing exactly what Turnbull suggested - to buy mortgages in order to increase competition in the mortgage market.

Malcolm Turnbull

I watched Malcolm Turnbull's extended interview last night with Tony Jones on the ABC - the video here - and believe he has the skills and charisma to defeat Labor at the next election. I also think that, even should Peter Costello eventually challenge for the leadership, Turnbull remains the better choice - Costello has already begun sniping from the sidelines. The key issue is for the Liberals to get behind the leadership and act cohesively to regain office.

The Labor Party - and its weakest major link - Wayne Swan - have good reason to be fearful of a rejuvenated Liberal Party with a young, successful and highly articulate leader. The Australian economy will be hit by the US sub-prime crisis. Many Australians who supported Labor at the last election after a decade of amazing prosperity and good government, felt comfortable and relaxed with a change. They will now begin to look hard at the emerging economic difficulties and the lack of sense in a party putting a hack politician like Swan in charge of the economy. The robotic Swan is not difficult to replace given his apparent discomfit at his current role - in Parliament he is too frequently red in the face and nervously looking at pre-prepared notes as he wades in on issues beyond his capacity. He is that chink in Labor's armour the Liberals should continue to attack.

All Australians should welcome the emergence of an effective opposition in Federal politics. Liberal Party supporters will want a lot more than that.

Thursday, September 25, 2008

Getting informed about the MDB

The ABS have just released a compendium of water use and other statistics for the Murray Darling Basin. I found it useful and valuable for understanding the MDB. Some of the choicer observations.

Physical Attributes. The MDB covers 14% of Australia's land area mostly in NSW (56%) and Queensland (24%). A fair slab of Victoria is in the MDB but it is only a small state. Australia's three longest rivers, the Darling (2,740 km), Murray (2,530 km) and Murrumbidgee (1,690 km) are in the MDB. 84% of the land in the MDB is owned by businesses engaged in agriculture with 67% of the MDB used for growing crops and pasture. In 2005-06 MDB temperatures were 2°C hotter than average. The MDB receives an average annual rainfall of 530,618 GL. Of this, 94% evaporates or transpires (not a misprint!), 2% drains into the ground, and the other 4% becomes run-off.

People. 10% of Australians - about 2 million people living in the MDB. Population is concentrated in NSW (39%) and Victoria (29%). A lot of people.

Agriculture is a significant employer with 10% of all people employed compared to 3% Australia-wide. But retail employs 14%, health and welfare 11%, Government administration and defence 10% - all more than agricultural employment - and even manufacturing is a surprising 9%. Not mainly agricultural.

Mean equivalised household income was $675 per week in 2006 compared to $732 for Australia as a whole.

Almost two-fifths (38%) of Australia's farmers reside in the MDB. The number employed as farmers in the MDB decreased by 10% between 1996 and 2006 and numbers employed in all other occupations increased by 18%. 39% of people employed and aged 65 years or over in the MDB were farmers - the oldies make up a lot of the farmers.

Water Use. In 2004-05, industries including Agriculture and households in the MDB used 52% of Australia's total water consumption. 83% of water consumed was in agriculture. MDB households consumed only 2%.

3% of Australia's electricity and 33% of the nation's hydro-electricity was generated in the MDB.

7,720 GL of water was consumed in agriculture which is 66% of Australia's agricultural water consumption. Most water consumed originated as surface water (6,499 GL or 84% of MDB agricultural water consumption) and groundwater (1,069 GL or 14%).

Most surface water consumed by agriculture was in NSW (57%) and Victoria (30%). Over 70% of the 1,069 GL of groundwater consumed was in NSW. The agricultural commodities using most water were:

  • cotton - 1,574 GL or 20% of water used for agriculture in the MDB;
  • dairy farming - 1,287 GL or 17%;
  • pasture for other livestock - 1,284 GL or 17%; and
  • rice - 1,252 GL or 16%.
Agriculture. There were 61,033 farms in the MDB or 39% of all farms in Australia.  A significant proportion of Australia's food production was grown in the MDB in 2005-06:

  • 100% of rice;
  • 95% of oranges;
  • 62% of pigs;
  • 54% of apples; and
  • 48% of wheat.
The MDB contained 65% of Australia's irrigated land. The 1.65 million hectares (ha) of irrigated crops and pasture in the MDB were distributed as pasture (43%); cereals other than rice (20%); cotton (15%); rice (6%); grapes (6%); fruit and nuts (5%); and vegetables (2%).

In 2005-06, the Gross Value of Agricultural Production (GVAP) in the MDB was $15 billion or 39% of the Australiann total. Between 2000-01 and 2005-06, GVAP in the MDB increased by 7.3% while over the same period, the GVAP of all Australian agriculture increased by 12.8%. The MDB is not growing much comparatively.

The Gross Value of Irrigated Agricultural Production (GVIAP) in the MDB remained at $4600 million. GVIAP as a proportion of GVAP in the MDB decreased from 33% in 2000-01 to 31% in 2005-06.

In 2005-06, irrigated agriculture in the MDB generated 44% of Australia's GVIAP. Of this:

  • dairy farming generated $938 million, or 20% of MDB GVIAP;
  • fruit and nuts generated $898 million, or 20%;
  • cotton generated $797 million or 17%;
  • grapes generated $722 million or 16%.
In 2005-06, some irrigated crops in the MDB accounted for relatively high levels of GVIAP using relatively low levels of water consumption. Examples:

  • fruit and nuts (20% of total GVIAP; 5% of agricultural water consumption); 
  • vegetables (12% of total GVIAP; 2% of a.w.c).
Other irrigated crops in the MDB accounted for relatively low levels of GVIAP using relatively high levels of water consumption. Examples:

  • rice (6% of total GVIAP; 16% of agricultural water consumption);
  • and cereals other than rice (2% of total GVIAP; 10% of a.w.c.).
Fairly pointed comparisons for the ABS number nuts! Good on them. It is interesting stuff.

Natural Resource Management. Most NRM effort in the MDB during 2004-05 was spent managing weeds, pests, and land and soil. Farmers in the MDB reported the lowest effort expended on managing water issues (27 person days per farm on average) of all the NRM issues, equivalent to half of the effort put towards land and soil activities (54 person days per farm on average). Hmmmm....

I learnt a lot from this data base. It is a 150 page report and I have only summarised the synopsis. Pages 140-144 provides a useful survey of government policies in the MDB. Useful for me as a teaching aid. Well done ABS!

Wednesday, September 24, 2008

TV Advertisements

During a 15 minute interval of the show Underbelly on Channel 9 last night I counted 8+9+13 = 30 advertisements over 3 successive ad-breaks. The period was between 9-15pm and 9-30pm. I noticed most of the ads were of short duration but was still astounded at their sheer volume. How anyone can question the value of commercial-free ABC TV is beyond me.

Why should we pollute a major source of information and entertainment with lies and bad taste? Even if you do support the hideous quality commercial TV shows is it sensible to plaster them with such a huge volume of advertising even from the perspective of commercial interests?

Surely the incentives are to pre-record material and delete the advertising during playback. I have slipped into doing this almost unconsciously with the pay-TV service I subscribe to.

Economists opposed to the Paulson plan

Some big names in finance and economics here. Hat tip to Gregory Mankiw whose posts I am grabbing a lot lately. The last signatory on the list of eminents is Luigi Zingales who has a fascinating article in The Economist's Voice, Why Paulson is Wrong, which suggests how the crisis should be handled. I excerpt a segment:
'....it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why has no expert mentioned it?

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition'.
I don't like the idea of the 'captains of the universe' and the greedy investors claiming huge profits and then seeking to socialise the disasterous losses they impose on themselves and society. But my anger directed at this lot, strong as it is, is tempered by the view that a lot of innocent people get hit in any major financial collapse. I'll let the financial experts work this one out but I am always surprised at how destructive errant financial markets can be when they run amok.

On this last point Gary Becker, while pointing to the costly implications of the bailout for future financial market moral hazard (future financing will be biased toward bonds rather than equity) and the unfortunate US taxpayer, broadly would agree with my caution. He writes:
'Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression'.

Tuesday, September 23, 2008

China as leader in the global financial crisis

Peter Drysdale over at East Asia Forum exposits claims by historian Harold James that only action by China can rescue the global economy from US financial ineptitude.  Indeed, to James, China is the US of the 1920s and 1930s.  China should become the anchor of the modern international financial system.

 James' argument:

'China is today’s America...When the 1920s and ’30s crisis hit, America alone had the capacity to take the big public sector action at home that was needed to stem the panic and economic collapse and the reserves to save Europe and the rest of the world from massive contagion. Andrew Mellon, US Treasury Secretary of the time, resolutely stood back, determined to let markets collapse and ‘purge the rottenness out of the system’. The collateral economic and geopolitical damage from that adjustment path through the markets was well and truly done before Roosevelt’s New Deal was put in place. Then, and now, a globalised world means that the solution to such crises spans borders. Aside from the US, only China...has the firepower to rescue the global conglomerates at the heart of the global financial system now under stress.


China, of course, has already played a role in picking up some of the pieces as the wheels fell off the US financial bus. As the crisis unfolded, Chinese and Middle East sovereign wealth funds recapitalised some of the debt of US and European institutions. But more recently Chinese investment Co (CIC) backed away from bankrolling Lehmann Bros. ....CIC backed away from picking up the tabs on Lehmann Bros as pay-back for US failure to act in the East Asian financial crisis and that is fanciful. This is only the micro play. The big play is the geopolitical paradigm shift that needs to deal China into its new responsibilities in managing the international economic and financial system. China can’t be expected to play its role in these affairs until it is brought into the centre of the global economic decision-making processes.

Meanwhile, the US crisis comes at a time that highlights the peculiar measure of influence and responsibility that rests upon China. Here, even more than in the East Asian financial crisis, China has the chance of making its own constructive and strategic contribution through underwriting policies to support a stronger RMB and boost continued growth of its own domestic demand. This will buttress the efforts of policymakers in Washington, serve China’s own national interests and leverage China’s role as an anchor of the international system'.

Monday, September 22, 2008

Superb Fairy-wren

Its just a great picture of a common bird in Melbourne. Courtesy of the Bird Observer's Club website.

Thoughts on the US economy

The US Government debt will rise to $11.3 trillion with the proposed $700 billion bailout of troubled mortgages now before Congress. That amounts to $37,098 of public debt per citizen.  To say the US financial system is stressed is to understate the issue.  The question is whether foreigners will come to demand higher interest rates on US IOU's.  Tax increases are ruled out by the political stances of each of the current Presidential candidates - Obama simply wants to shift the tax burden from poor to rich.  They are also ruled out in the US by fears such increases will intensify the likely forthcoming US recession.

The British don't seem to have the same conccerns. A tax increase of 5 pence in the pound is anticipated to cover their financial-crisis-induced budgetary problems.

US policy options are narrowing as the US economy faces the prospects of decades of removing a massive public debt burden. With a current account deficit of around $800 billion - accumulating at the rate of around $13 per US citizen per day - around 7% of GDP in aggregate - there seem to be no easy policy options.   Eventually taxes in the US must be increased and public spending cut so that the US economy pays its way internationally.  It is difficult to think of these things in the midst of a financial crisis but the US response to this crisis further constrains its longer-term policy options.

Saturday, September 20, 2008

Privatizing ocean fisheries

I haven't posted for a while on fishery issues. Such concerns occupied a fair amount of my research time in the early 1980s. This article in The Economist makes the case for imposing individual transferable quotas on ocean fish stocks. 121 of the ocean's fisheries operated under ITQ's are much healthier than those not managed in this way. The specific studies are referenced here.

Ocean fisheries outside national waters are notoriously difficult to police and groups such as the Japanese cheat in dramatic, stupid and self-defeating ways on assigned quotas. But apparently 90% of fish caught are caught in national waters so that these issues of cheating can be overstated. It is, however, true that most of Australia's ocean fisheries are heavily over-exploited. Indeed ocean fisheries generally are expected to collapse by mid-century at current rates of exploitation. This is a crisis situation. Although still reversible the loss of marine biodiversity is one of the major factors reeducing the productivity of the oceans.

I always enjoy showing to students that overexploitation reduces fish yields and increases fish harvest costs. The Japanese are shooting themselves in the foot by cheating on international conservational agreements for such species as Southern bluefin tuna.

Friday, September 19, 2008

Financial crisis

This is a clear Q&A style discussion of the current financial upheaval.  David Brooks comments on the kneejerk reregulation response that is becoming the new fashion.  Meanwhile today's surge on stock markets around the world apparently reflects moves by Congress and the US Treasury to buy back at deep discounts the remaining mortgage bad debt in the US economy - this plan involves buying the mortgages, not the distressed institutions. It would be the biggest bailout in US history.

Update: I repeat a news update from the NYT:

Rescue Plan Seeks $700 Billion to Buy Bad Mortgages

The Bush administration is asking Congress to let the government buy $700 billion in troubled mortgages, according to a draft of the plan. The proposal would raise the statutory limit on the national debt to $11.3 trillion from $10.6 trillion.

A quote from this report by Republican Senator Jim Bunning of Kentucky:  “The free market for all intents and purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably.”

Wednesday, September 17, 2008

Oil prices dip

I forecast in April this year - in the face of hysteria about $200/barrell oil prices - that the price of oil would approach $75US/barrell within 18 months and would settle around there. After I made my prediction it increased to a peak of $145-29US. Today- about 5 months later -  it touched $91-23US.  Indeed we seem to be moving back into what looks increasingly like an OPEC-determined oil price driven by supply rather than oil prices driven by surging developing country demands.  I'll stick to my earlier medium term forecast - there is plenty of exploitable oil in the world at $75US/barrell.  The OPEC cartel-type supply restrictions have a long history of repeated failure.

Of course, the current oil price fall is partly due to expectations of lower economic activity associated with the current capital market crisis. This capital market crisis has however dented speculative activity in oil markets that will make things easier for motorists and more difficult for OPEC and the Russians.

Are we in a liquidity trap?

Currently it is claimed that lending is drying up because lenders are fearful of the credit worthiness of borrowers.  That is self-evidently true. I assume lending is also limited because people are holding onto money balances to purchase assets which look like getting cheaper across the board.  I notice that in the UK there are proposals to stop short-selling of bank shares to stop large investors driving down bank equity prices further - this is occurring in the face of doubts about the future of Britain's largest mortgage lender Hbos.  The same proposals were passed into law during the Great Depression. Expectations about persistent future asset price deflation are, in part, driving a reduction in lending.  Moreover, as people try to build up their real money balances this drives further deflation and economic contraction.

My macroeconomics is rusty but are we not in a type of liquidity trap?

Tuesday, September 16, 2008

Malcolm Turnbull

The election of Malcolm Turnbull as leader of the Liberal Party is a good outcome for the party and an excellent outcome for Australia. Turnbull deserves the support of the Party and all those determined the kick the Rudd Labor Government out of office.

Turnbull has much more business and life experience than Kevin Rudd and is a much more intelligent politician. Turnbull is a serious candidate to be Australia's next Prime Minister.

Monday, September 15, 2008

Financial collapses

Bear Stearns, Lehman Bros, Fannie Mae and Freddie Mac receiving public bailouts or failing and yes even the venerable Merrill Lynch being flogged for a pittance.  And insurer AIG seems to need about $40 billion to survive. AIG is a big insurer in Australia with 500 employees. In the UK Hbos looks threatened by the collapse of Lehman. The bad news has not ended - it is only now starting to surface.

3 of the 5 largest investment banks in the US - some around for 150 years - have been wiped out or sold off at bargain basement prices. The asset values a puff of smoke.

I have been caught up with other things the past few days but watching what is unfolding with trepidation. The events over the past few days are a catastrophe beyond belief. I am interested to see what will happen to Macquarie Bank - their shares fell 11% today but I'll watch them today with interest. Babcock and Brown have fallen 94% this year and almost collapsed completely this year as former CEO departed the company completely.

Australian bank stocks generally will certainly continue to retreat but the broader market will also continue to suffer. We will all experience economic costs.

Update: Wall Street dropped 500 points last night.  Excellent discussions on the crisis by Malcolm Maiden and Michael West.

Two excellent French movies

The Diving Bell and the Butterfly is a 2007 film adaptation of the memoir by Jean-Dominique Bauby. Bauby had a massive stroke which left him paralysed except for the ability to move a single eyelid – the ‘locked-in syndrome’. He communicated using this eyelid to write a memoir describing his interior journey. The film is a remarkable achievement and one of the best I have watched in 2008. Sensitive and moving but not at all weepy, Bauby has an appealing inner toughness. The gradual pace of the movie parallels Bauby's situation – it initially adopts only his perspective but gradually unfolds to show something of his rich life prior to the stroke and his subsequent extraordinary strength and imagination. Simply a great movie.

I also watched the 2006 version of Lady Chatterley directed by Pascale Ferran. I thought this was a worthwhile adaptation and more subtle than the excellent earlier 1981 version starring a young Sylvia Kristel which warmed the blood. Kristel had experience as Emmanuel in doing that - but the film overall had an unrealistic rauchiness about it. The Ferran version has a different conclusion to both Lawrence’s book and the earlier version. This is a sensitively drawn story of romance, class and sex. I found the eroticism tasteful and the issues of class more thoughtfully drawn than in the earlier film version I mention. For example, Connie the aristocrat is sold on the game keeper Mellors for sure but not completely sold. The scenery and photography were a notable feature - the film is technically well done. Margaret and David reviewed the film in their At The Movies show and, for once, I agreed with Margaret.

Saturday, September 13, 2008

Two interesting articles on climate change

Stewart Franks supports my earlier claim that the current dought in the Murray-Darling Basin cannot be attributed to climate change.  It can be more accurately attributed to the 2002 El Niño event and there is no convincing evidence increased frequencies of such events can be linked to climate change.  In the past such events have been bunched at high frequencies.   An excellent older post on this same issue is at RealClimate.

Climate change is a real problem but lets get the science right and, with respect to agriculture, get farmers acting on the basis of sound information not exaggerated pleadings.

An article from The Economist, provides a pessimistic assessment of the medium term implications of climate change for developing countries and a strong argument for emphasising the use of adaptation policies. This new emphasis is a sign of increasing pessimism in climate change debates.

Do you ever complain about your job?

Thanks Bernd

Friday, September 12, 2008

Costello not a leader

I have always had affection for Peter Costello. He is one of the Liberal Party's strongest parliamentary performers and an even-tempered, amiable sort of bloke. I think he would have made a competent Prime Minister though not outstanding. He faced the problem that most Liberal Party members felt gratitude and respect towards John Howard so that a challenge to Howard for the top job was always going to be difficult. But that challenge was what Costello needed to make to confirm that he had the needed ticker to be leader. He didn't and, indeed, waited until the eve of the launch of his book to confirm that he would not seek leadership of the party. It is disappointing. Nick Minchin's anger over the suggestion that the Party has been destabilised in the interests of a book promotion suggests a core discomfit. He 'doth protest too much'.

Malcolm Turnbull will shortly replace Brendan Nelson as Party leader and Turnbull is a good prospect to be a future Prime Minister. No problems here in the timing - Nelson took the flack that inevitably followed an election loss by a figurehead leader. Nelson deserves the Party's praise for doing that but Costello puts a somewhat tarnished seal on his leadership aspirations. Future talk of possible comebacks by Costello should be ignored.

Wednesday, September 10, 2008

Misplaced criticism of the Garnaut proposal

Amanda Lynch from Monash University's 'Climate Program' writes a 3/4 page op ed in The Age this morning criticising the Garnaut Review's draft report on 'Targets and Trajectories' for setting excessively high greenhouse gas emission targets of 450 ppm.  Unfortunately this claim seems wrong - Garnaut targeted 550 ppm and the criticisms she makes should relate to this target. Garnaut rejects the 450 ppm target as infeasibly low. For example, at 550 ppm, not 450 ppm as Amanda claims, there is only a 50% chance of restraining temperature rises to 2oC.

 I have criticised aspects of the Garnaut proposals - though as I reread his report my attitudes are softening somewhat - but it is important for Amanda to get her facts right.

The positive claim in the Garnaut argument that needs to be critically tested is the view that to cut emissions to 450 ppm would impose impractically huge cutbacks on developed countries given the expectation of continued high emissions growth in developing countries. That's the point where I become ambivalent. Is it better to target something modest but achieveable but which still carries the prospect of catastrophe or should we target something much less feasible which substantially reduces the prospect of catastrophic change?

Tuesday, September 09, 2008

A primer on the climate change debates

In June this year in the New York Times Freeman Dyson reviewed books by William Nordhaus and Ernesto Zedillo on the economics of climate change. This has evoked a response by Nordhaus and others and an amiable counter-response by Dyson. If you don’t have time top plough through all the literature this gives a good introduction to the science and to the earnest debates between Nordhaus and Lord Stern on the choice of discount rate and, in the Zedillo book, on the dead-end debate between climate change denialists and those advocating strong policy actions. I am recommending the discussion to my environmental economics students - it is a good read. Eventually I will try to read these books which look interesting.

Monday, September 08, 2008

Melbourne's Pravda runs free ads for protectionism

The Age today runs what amounts to a free advertisement for the car industry protectionists.  It is the usual nonsense.  Other countries shoot themselves in the foot by subsidising their car industry so we should too. Plus the crazy, utterly discredited line that was pushed for a while on other blogsites that there is an optimal tariff of about 10% on cars because we don't levy tariffs on those exports we have for which there is monopoly power.   The argument here relies on the Lerner symmetry condition of trade theory showing that an export tax is equivalent to an import tariff so if an optimal tariff is not levied on exports for which we are price makers this can be undone by leving a tariff on imports.  The claim is nonsense - the last link to an earlier post shows exactly why it is nonsense.

Those propounding these economically irresponsible claims should be ashamed of themselves.

Thanks to Damien Eldridge for pointing out The Age article.

Sunday, September 07, 2008

More deceit from big tobacco

This article in The Age suggesting that tobacco companies knew that ciarettes contain a pollonium isotope that makes smoking a packet and a half of cigarettes equivalent in radiation exposure to 300 chest X-rays per year.  They kept quiet about it as they have with some many of the other deadly features of this habit. The more I look at the evidence the more I back my radical plan to get really tough on smoking - let's end this outrageously dangerous and stupid practice within one generation.

Thanks for The Age reference Damien Eldridge

Saturday, September 06, 2008

Garnaut sucks up to Labor's lack of principles

I thought Tim Colebatch in The Age this morning summed up the Garnaut Reviews proposals for climate management as well as anyone. Labor's rants at the Bali conference last year about the need for 25% emissions cuts below 1990 levels by 2020 were just an instance of the standard bull-artistry we can come to expect from bureaucrats briefed by this terrible PM. 'Say it first - then think'.

Ah, where are those computers in schools for every kid?

OK the proposal from Rudd's Labor mate, Garnaut, is for a 10% cut on 2000 levels by 2020. The EU will cut its 2020 emissions to 20% below 1990 levels, and will go to 30% if others do the same.

Garnaut's proposal for a miserly 10% cut (a 25% cut on bau) is of course conditional. It will go through only if environment ministers agree in Copenhagen next year on a global plan to stabilise atmospheric greenhouse gas levels at 550 parts per million. That's twice their pre-industrial levels, but far above the 350-400ppm many scientists now say is safe. As this is unlikely to happen even the limited proposed cut probably won't eventuate.

How does this differ from the much-criticised proposals of John Howard to commit to mitigation only if other countries do so?

550 ppm should (according to the Hadley Centre) ensure a long-term temperature rise of probably something beyond 2oC and, without an eventually reversed overshooting in GGEs, the destruction of the Great Barrier Reef (see also here).

If the agreement in Copenhagen only cuts half the growth in emissions then Garnaut suggests only a 5% cut from 2000 emission levels. With no agreement at all Garnaut suggests no target but a carbon tax of $20 to $30 a tonne until an agreement finally emerges.

The world's leaders will be quaking in their boots at the ferocity of the implied incentives for them to take an urgently accelerated approach to GCE mitigation on the basis of the couageous Australian proposal.

But Colebatch praises Garnaut and some of the praise makes a little sense. The proposals will cut emissions per capita by 25% over what they will otherwise be 2050 target and should converge to sensible global targets by 2050 - a 90% cutback in per capita emissions by 2050. That's not too bad and it does get things moving on the basis of an emissions trading scheme that proceeds so slowly that even John Howard and Martin Ferguson would approve.

And a considerable advance is that the ALP (if it adopts these proposals) will have 2020 targets as well as earlier 2050 targets. These phonies didn't have these before.

The most interesting aspect of Garnaut is the targeting of equal per capita emissions across developed and developing countries by 2050. Developed countries are being urged to make absolute cuts and developing countries cuts in the growth of their emissions to this date.  This reflects, for example, the insistence of India, that it will not exceed developed country emissions and provides a basis for a joint global response.  Both sides are being called upon to adjust.

Update: I agree with the views of the three Australian IPCC members that the Garnaut report is not ambitious enough.  One of the three, a Dr Hare, commented '...Professor Garnaut had taken the wrong approach: he should have made a case for a strong global deal, not give a political assessment'. Essentially Dr Garnaut's cuts will almost certainly ensure 3o+C warming - a temperature increase that will devastate large parts of Australia.  When threatened with immenent peril it is inappropriate to be cautious on the grounds that this is politically realistic.

Friday, September 05, 2008

Risk of death

This blog contains a diagrammatic picture of what is likely to kill you at various ages given your gender and your smoking status. Its an interesting discussion although the original Journal of the National Cancer Institute article by S. Woloshin, L. Schwartz & H. Welch is even better. The 'risk charts' Figures 3-5 are excellent.

Crucially from my perspective it gives an accurate picture of the health risks of smoking and of the prospects of my own mortality. To summarise:

At any age you are more likely to die if you are a male than a woman.

Roughly speaking if you smoke you add about 5-10 years to your life. Thus a 60 year old smoker has about the same life expectancy as a 65 year old non-smoker.

Compared to a non-smoker a 60 year old male smoker has about double the risk of dying from vascular (heart or stroke) disease and about 25 times the risk of lung cancer. Ex smokers have experience somewhere between these extremes but still a greatly increased risk of lung cancer.

Overall of 1000 60 year old male individuals, 115 never-smokers will die within 10 years, 256 smokers will die and 166 former smokers will die.

Of 1000 60-year old women only 84 never-smokers will die within 10 years, 167 smokers will die and 125 former smokers will die. Women smokers from age 40 on have a much higher risk of dying within 10 years from lung cancer than from cancer of the breast. At age 65 the difference is a factor of 8.

This is only a sketch of the main conclusions. Well worth a more careful view.


Hat tip to FXH.

Sarah Palin a rookie politician she 'aint

Palin provides an old-fashioned rabble-rousing appeal to patriotism but this woman is dangerous. And here and here. Jingoistic stupidity and far more dangerous than the largely empty rhetoric of Obama with its economic stupidity.  Palin reminds me of a scene from Altman's Nashville - 'you may say that I 'aint free but it don't bother me'.  When will America wake up from this nightmare?  Hollywood has consumed Washington.

Update: Paul Krugman sees the Republican tactics as a dishonest, strategy that seeks to encourage resentment.

Wednesday, September 03, 2008

A wander half way down my blogroll

Reading blogs is often more fun than writing blog posts. Before I started this blog I naturally did it much more than I do now.  Below are some highlights I selected from a couple of hours wandering down through the first half of my blogroll - I stopped at Marginal Revolution.  I'll do a wander through the other sites at a future date.

Among OECD countries Australia won the recent Olympics using a measure that adjusts both for population and the degree of economic development. Oh yes, Jamaica won the global top spot and the US came 17th.

The value of day-dreaming as an input to creativity.  A wandering mind is in its default state according to this post.  3quarksdaily is a blog I should read more frequently. Recommended.

Adrian’s night shift driving a taxi with interesting statistics and no drunks – a great blog by the way compiled by a man with compassion and intelligence.

Clive James has some impressive clips of the late Sir John Gielgud - the voice of the Bard indeed! Listen!

From the Dog’s Bollocks I learned of a new (apparently very good) web browser – Chrome – supplied by Google.

Stephen Dubner proposes a tax on sex. It’s a joke (I guess) but like a lot of the stuff at Freakonomics it is neither funny nor clever. At the same site Daniel Hamermesh argues the case for the superiority of American toilets. Yuppie economics on a bad sample path! Not my taste at all.

But this was very cute. A Danish chain of gyms provides memberships for free with the only caveat being that you are charged if you don’t turn up. Certainly reduces those procrastination incentives but if their business plan is smart it implies a fairly low view of humanity.

George Borgas draws on a study of 30 billion electronic communications to suggest a 6.6 degrees of separation claim.  I think this is deep.....well.....

Warwick McKibbin has some very useful papers on climate change at his website.  I listened to a paper Warwick gave last week and was impressed.  Not light reading but valuable suggestions for our post-Kyoto future.

Tuesday, September 02, 2008

Labor liars on climate change

The claims by Labor that Brendan Nelson is a 'climate change denialist' because he asserts that the current dire situation in the Murray-Darling cannot be attributed to climate change is a deceit. There is no such implication. The statements by Brendon Nelson are accurate - the current drought cannot be attributed to climate change. Moreover, Nelson's claims have nothing at all to do with denying the reality of climate change.

Droughts have occurred around large parts of Australia for about 3 years in 10 since almost the time the first settlers arrived at Sydney Cove (Rob Linn, Battling the Land, 200 Years of Rural Australia is good on this). On this basis moderate drought cannot even be regarded as an extreme climatic event. In the terrible drought of 1895-1903 40% of cattle in Australia perished. There have been major prolonged droughts in Australia from 1911-16, 1939-45, 1963-68 and 1991-95 prior to the current severe drought. There have been specific regional droughts on a much more frequent basis than even this.

Longer-term we might expect a gradual trend increase in temperature, changed rainfall levels that differ regionally and possibly an increased frequency of extreme climatic events including drought. There is, however, no basis for interpreting the particular drought event now being experienced as being attributable to climate change.

As a commenter pointed out a few weeks back on this blog the difficulty with perpetuating these false claims is that, if people are persuaded that the current drought is due to climate change, they will come to disbelieve that climate change is a serious threat if the drought breaks and we have good rains for a number of years. Moreover, there are suggestions from some that ocean temperature changes might cause a temporary easing of warming over the next decade or so before temperatures resume their upward trend.

In addition these lies turn attention away from more proximate causes of the current dire situation namely the overallocation of water use entitlements in the MDB. Nelson is quite correct to point this out.

The lies have the political purpose of seeking to ridicule Nelson (are there diminishing returns to abuse?) but they have potentially serious consequences that go beyond this. It is important that politicians stick to the truth and throw light on climate change problems rather than mud at their political opponents.

I watched Minister Penny Wong repeat this deceit on Lateline last night. She deliberately avoided answering the repeatedly posed question of how she came to the view that drought in the MDB could be attributed to climate change. It was an evasive and disgracefully, inept and deceitful performance. Moreover, when quizzed on the issue of carbon leakage complaints currently being raised by the BCA she seemed lost and mumbled something irrelevant about the need to 'share the burden' of dealing with climate change. Moreover, if she understood the issue at all - one would think she should as she is the relevant minister - she could have advanced some sensible views that would, in fact, have supported the Government's position.

Wong took over the climate change issue from an incompetent Peter Garratt who, in fact, launched the foolish attack on Brendon Nelson yesterday in Parliament. Who can take over handing the important climate and water portfolio from Wong?

Update: The press reports that MDBC boss Wendy Craik has claimed the CSIRO have determined that the current drought is due to climate change. I can't find such a statement in CSIRO material I have read. What is claimed in the literature I have read is that the frequency of droughts has risen and can be expected to rise - a claim that is plausible and indeed which I cite above. This is, of course, quite a different matter from attributing the current drought to climate change. If the CSIRO - or anyone else - claim this it is an extremely incautious claim.

Saturday, August 30, 2008

Alcopops tax revenue refunded to who?

The alcopops tax has yielded a great deal of revenue although the bill justifying the tax may now not be passed by the Senate.  Apparently then the government has to return the revenue to the party who bore the tax.  The nominal incidence of such a tax is on the alcohol producers but, if demand is relatively inelastic - and that's what the solid revenue yields suggest - then the effective incidence is mainly borne by consumers so they should get most of the rebate.  It would, however, seem totally impractical to effect such rebates. 

I find it surprising that consumers are called upon to pay a tax that has questionable legality.  If the tax is not approved by the Senate that will be its status. I can't for the  life of me work out how Labor will get out of this mess.

To be clear I do support this tax and hope the Coalition will switch and vote for it. Its effectiveness will not be zero even if demands are quite inelastic.  Note that those who criticise it on the grounds that youth entirely switch to other sources of alcohol need to explain why the tax yields in fact such a lot of revenue. The existence of close substitutes suggests elastic not the inelastic demands that seem to prevail. Moreover this is consistent with average price elasticities on alcohol of around -0.6.

While the alcopops tax will not eliminate the problem of excessive youth drinking, it will help. Other measures - education and negative advertising - are a further useful component of a policy package.

Thursday, August 28, 2008

Climate change adaptation for natural resources

I am presenting a talk on the topic above to the Australian Agricultural and Resource Economics Society (AARES) Victorian Branch August meeting tomorrow, Friday 29th August, from 12-30pm (sharp) to 2-00pm, upstairs at the Elephant and Wheel Barrow pub (cnr Bourke and Exhibition St, Melbourne).

If you wish to attend you must register with dave.appels@frontier-economics.com.  I thought I might enjoy myself afterwards on SouthBank and would like to catch up with city-based blog readers.

Macquarie Bank another domino to topple?

I dont have time to comment on this review but as I have suggested in the past the future of Macquarie Bank and its 'millionaire factory' is being increasingly questioned. In my earlier post I noted that Enron analyst Jim Chanos described Macquarie as a Ponzi scheme.

Certainly the spinoff firms from Macquarie are not doing well and I get nervous in the current circumstances when firms sell assets and use the proceeds to support their share price. I am also nervous when (for whatever reasons) major investments like TransUrban are making losses of $142 million when these investments are basically supported by mountains of debt. Macquarie does not seem to have a lot of free capital to cover itself against shocks and to ride out an expected economic downturn.

Electricity privatisations opposed by Libs & incentive contracts in schools supported by Labor

My former student colleague NSW Liberal Party leader Barry O'Farrell finally rejects proposed electricity privatisations in his state and sides with the union thugs while Federal Labor's Ear Wax Monster, Kevin Rudd, endorses earlier Liberal proposals to put schools of incentive contracts - money will be withheld if they do not provide decent academic outcomes - inviting attacks from his Labor state Government colleagues and the neanderthal teacher unions.

I am not sure if the ideological inconsistencies here are an instance of 'Tweedledum-Tweedledee' convergence or just opportunism. Farrell is desparate to win power in NSW and Rudd is suffering the perception of being a big talker but not doing much. Where are the computers that were to be provided to every school student?

O'Farrell's rejection probably means that the NSW electricity sector will not be privatised which should please those in the union movement who want high wages but low production efficiencies. This move seems blatantly political - as Catallaxy points out it runs against Liberal Party philosophy - there is widespread popular opposition to the privatisations.

I support Rudd's revisionist attempt to reinstate Liberal Policy although it is clear he faces opposition within the State Governments. If the States cave in and support the Rudd proposals they will be revealled to be the party-political hacks and hypocrites they are.  Of course ingenuity is required to get the contracts working efficiently but the suggestion in the Rudd proposal to pay good teachers more if they work in underperforming schools sounds a promising way of offsetting the inefficiencies that will be intensified if poor performing schools only attract the worst teachers.

Tuesday, August 26, 2008

Congestion pricing again & again

The Victorian Government have again acted to close off debate on the possibilities for road pricing in Melbourne. I understand that most politicians are spineless but allowing the debate to develop on this issue while remaining nominally separate from it would not have hurt these politicians much. I presented my views on these issues with Professor David Hensher from the University of Sydney on the PM radio show yesterday.

We lack real leadership in Australian politics. While our major agricultural region, the Murray Darling Basin, is facing the prospect of significant longer-term destruction and our cities are becoming congested, unpleasant places to live politicians offer us FuelWatch and token apologies to aboriginals as priority policies.

Monday, August 25, 2008

Adjusting to carbon pricing - yes it hurts, but not that much

The BCA, Saturday's Australian and many of the weekend newspapers have finally twigged to the notion that charging for carbon emissions will cause discomfit.  It will. Indeed, the objective of levying a carbon charge is to generate discomfit.  The type of discomfit that will motivate firms and consumers to use less energy, to switch to non-polluting sources of energy and generally to reorient their behaviour so that it alligns with social costs. Some supporters of  activist climate change policy in seeking to encourage community acceptance of carbon pricing have played down its costs but yes they are there.

The costs are not - as Ross Gittins points out this morning - overwhelming costs. Large polluters who will feel the effects of carbon pricing can pass those costs onto consumers, can reduce waste and can seek less polluting technologies.  The sky will not fall in. Incidentally the proposed emissions trading scheme sets a maximum price for emissions that limits the scale of required firm adjustments.  Big business should stop behaving like rent seekers with a belly ache.

Wednesday, August 20, 2008

Taking a break from routine in Sydney

I am taking a brief respite in Sydney for a few days. I am presenting my paper 'Some Economics of Adaptation to Climate Change' (based on this and this) in the Agricultural and Resource Economics Department at the University of Sydney on Friday 22nd August from 3-00 to 5-00 pm in the R.D. Watt Building. Readers can contact the Department if they wish to attend. I can be contacted via this Department.

I have been thinking generally about climate change adaptation issues and have started to get involved in some urban issues and, more directly than in the past, on issues in agriculture. Melbourne has a fascinating early climate change adaptation proposal that focuses on reversing 'heat island' effects, recycling stormwater (Melbourne faces dramatic water shortages) as well as policies for handling sea level change. The proposals for agriculture involving recognising the good aspects of climate change - the gains should come prior to 2050 before carbon concentrations really start to bite - and accounting for the net costs that will occur thereafter. Many of the agricultural adaptations will develop endogenously as farmers respond myopically to market forces and do not call for policy action. Others such as R&D and urging uptake of new technologies require a policy push as do any sought-after structural assistance programs.

On water the proposals of Young and McColl make a great deal of sense to me. The difficulty of managing water resources is reduced to a measurement problem with the environment and agriculture taking fixed proportions of what is available after basic flows in systems such as the Murray-Darling are guaranteed.

More on these things when I return - I am drafting a paper on these issues at present.

Large US bank to fail claims Rogoff as RBA scrambles to reverse tough stance

Former chief economist at the IMF Kenneth Rogoff claims the world is only midway through a major financial crisis with the worst yet to come.  He forecasts a major US bank will fail as the bloated US financial sector restructures.  I wonder if Australia's RBA have made the same inference with their recently unprecedented moves to preannounce an interest rate decrease with a veiled warning to the oligopolistic banks that they must pass on the decrease.  It is worrying and I would not be buying bank shares at present.

For the life of me I cannot understand why the RBA could not persuade the ACCC to reject the St George-Westpac merger.  As I have previously argued this merger should have been rejected and the 'four pillars' policy strengthened not weakened.  Bank customers in Australia are getting a bad deal at the expense of bank shareholders.

Interestingly, Rogoff rejects US Federal Reserve moves that have cut interest rates to only 2% arguing they willl be severely inflationary.  Australian official rates have been a long way above this which accounts for the strength, until quite recently, in the Australian dollar.   The RBA remain concerned with inflation and continue to the concerned with a possible wages explosion under Labor as interest rates are eased.

Tuesday, August 19, 2008

Medium term climate forecasts – tell the truth & promote understanding

I recently posted on the foolish claims of Andrew Bolt that climate change had ceased in 1998. Among the points I made was that Bolt had used work of a certain German institute to back his claims when elementary care would have showed Bolt that, although this institute had argued that the rate of growth in warming might undergo a temporary slowing - the rate of increase was expected to resume and in no way rejected claims that long run climate was driven by atmospheric CO2 levels.

The distinction between medium term climatic trends and longer-term trends are beautifully discussed in the current NewScientist. The editorial to this issue argues that medium term climate forecasts – forecasts over the next 10 years or so - are a function of oceanic temperature oscillations whereas, yes, longer-term changes are driven by CO2 concentrations.

Short-term trends do suggest a future moderation in the rate of temperature increase but this implies nothing at all about longer-term temperature changes which are still inexorably forecast to continue to rise. NewScientist’s argument is that such short-term forecasts should be accurately reported even if sloppy commentators such as Andrew Bolt use this information to try to dispel the anthropogenic global warming hypothesis. Who could sensibly disagree? If temperatures do take a temporary dip this might create a slowing in impulses to manage climate but it is better to try to educate the public on the distinction between medium and long-term trends.

Long-term trends are driven by CO2 concentrations but medium term trends – whether the drought will continue to impact adversely on the Murray-Darling Basin – is a function of what is happening in the oceans. It takes a long time for the temperature of the oceans to change so the ability to predict what will happen iks not an impossibility. Most of the medium term climate on earth results from energy exchanges between oceans and atmosphere rather than overall changes in the temperature of the planet. The drought in Australia is then attributable to low water temperatures north ofr Australia and the expected duration of the drought can be understood by understanding these slowly involving temperatures.

I recommend the NewScientist article – a good read.

Sunday, August 17, 2008

Winning isn't everything

Joshua Gans is 'over the moon' because his daughter won a sports event. With some qualifications he asserts winning is everything. Its a very American attitude and one I don't agree with particularly in relation to kids sport where I think the key objective for the vast majority of kids is to participate - to enjoy participating in a healthy activity. Assuming Joshua's type of elation feeds back into the incentives influencing sports participation decisions by youth it seems to me unhealthy for those who don't really need to win and don't in fact win. The key reward from sport is to the individual in terms of enhanced individual physical potentiality not their ability to rank themselves ahead of other competitors.

Nor, for that matter, am I overly concerned with the signalling function of education - the important issue is to add value not to order students 1,2,...N. Again the ordering is irrelevant because it does not map into something that reflects significant value in any field of life. From an individualistic perspective the point is to realise individual potential not to be ahead of the other guy.

For the same reasons I try not to be particularly interested in social star rankings based on power and wealth. Trying to have more money than the next guy is the source of 'rat race' externalities in work effort while the pursuit of power helps create that class of psychopaths who have miserable lives (they can never be happy themselves) and impose misery on their subordinates in business and administration.

Winning isn't everything. The point is to enjoy yourself - to realise your own potential - and not to concern yourself unduly with how you compare with others in terms of running races - either sporting or economic. This is, of course, an ideal and difficult to achieve.

Wednesday, August 13, 2008

Taxing Sin: some economics of smoking, gambling & booze (revision 1)

This is a draft of a paper I am preparing. Comments very appreciated.


There is a long history of governments taxing activities they disapprove of. In 1604, England’s King James I concluded that tobacco smoking was ‘a custom loathsome to the eye, hateful to the nose, harmful to the brain, dangerous to the lung’ (Brandt (2007, p. 21)). He responded by increasing the import duty on tobacco by 4000 per cent – an early hefty tax on ‘sin’. This was a severe response but non-tax restrictions at this time in history were more severe. In Turkey, Sultan Murad IV had pipes driven through the noses of those found smoking either immediately before or after their beheading! Indeed, Murad IV would patrol the streets and, if he saw a soldier using tobacco or alcohol, would kill the soldier on the spot with his mace.

Despite these discouragements alcohol consumption, smoking and gambling continued to flourish even though they remain heavily restricted in modern times. In Australia, cigarette taxes amount to about $5 on a 20 pack. Alcohol is taxed in various ways. Full strength beer is taxed at $38 per litre of alcohol, spirits at $60-42 per litre alcohol while wine is taxed on its value (ATO, 2008). These charges add significantly to the cost of having a drink. Finally, gambling taxes, particularly those imposed on the most popular form of legal gambling in Australia, namely on gaming machines, provide 9.5 per cent of ‘own source’ state government revenue (Commonwealth Grants Commission, 2008).

Taxes on sin goods need not target sin

Taxes can be levied on ‘sin goods’ on grounds that have nothing to do with their claimed propensity to corrupt morals. Since taxes are needed to fund public spending, one way of selecting them is to find goods yielding much tax revenue but which impose low distortionary costs. Frank Ramsey (1927) showed the best way to do this was to levy taxes on goods in inelastic demand. Cigarettes, alcohol and activities, such as compulsive gambling, have inelastic demands because they are addictive. Taxing sin goods therefore yields good revenues while not impacting much on economic activity.

These revenue objectives provide part of the explanation for current taxes on sin. Tobacco demand elasticities lie between -0.25 to -0.5 so a 10 per cent tax increases tax revenues by 5 to 7.5 per cent (Chaloupka et al., 2001). Price elasticities for alcoholic beverages are around -0.6 so a 10 per cent tax augments revenues by 4 per cent (Selvanathan et al., 2004). The evidence on gambling is mixed since, as has been known from Suits (1979), the demand for gambling on such things as horse racing is probably elastic suggesting a limited ability to yield tax revenues. But with respect to repetitive gambling activities such as gaming machines – these are more addictive - work by this author suggests relatively inelastic demands and good revenue yields.

While governments are often accused of hypocrisy in seeking revenues rather than the moral good in taxing sin, a sensible view is that they are following recommendations of public economists who advocate such taxes when demand elasticities are low. Of course governments are using the fact that these goods are perceived as ‘sinful’ as low resistance ways of accessing revenues. However if the demand for sin goods is inelastic, policies designed to yield revenue do so because the policies will be ineffective in reducing sin (Johnson & Meier, 1990).

Externalities

Another reason for taxing sin goods arises from the externalities associated with their consumption. These are costs imposed on non-consumers by the consumption by others.

For example, cigarette smoking has dangerous effects on bystanders who inhale secondary smoke. Evidence suggests that exposure to such smoke is the most dangerous environmental exposure confronted by US citizens (NCI, 1999). This is, for example, a health concern for non-smokers married to smokers - lung cancer risks of a non-smoking spouse increase by 20-30 per cent and heart disease risks by 23 per cent (Hirayama, 1981). There are also specific dangers to children from passive smoking including increased risks of respiratory disease (DHHS, 2006). There are also damages to workers if co-workers or customers smoke in their workplace.

Excessive alcohol consumption is associated with violence, particularly within the family, while excessive alcohol consumption is the largest single cause of deaths on our roads. Around 28.5 per cent of road deaths among those aged under 65 are due to alcohol. This is a particular problem for young drivers. A driver aged 20+ who has consumed 6 standard drinks has 12 times the chance of a fatal car crash than a sober driver while, for drivers aged 16-19, the risk is 100-times that of a sober driver (Phelps, 1997).

Other alcohol-linked externalities include foetal alcohol syndrome inflicted on infants when mothers consume alcohol during pregnancy (Clarke, 2008). This reduces infant IQ.

Finally, although only 2.1% of Australians are ‘problem gamblers’, five times this percentage (comprising mainly family and work colleagues) are adversely impacted by gambling (Productivity Commission, 1999). These social costs take a terrible toll through interpersonal conflicts generated and problems in workplace performance.

Nevertheless externality arguments for taxing cigarettes, alcohol and gambling are often weaker than public finance reasons because externalities are associated with misuse rather than use per se and often have relatively low cost. The external costs associated with cigarettes are estimated at 40 cents US per pack (Gruber, 2002) and, while this is not negligible, it is dwarfed by private mortality costs of smoking for men of $222 US per pack (Viscusi and Hersch, 2007).

A more effective way of addressing externalities is often to restrict specific activities related to the external damages rather than penalising consumption generally.

For example, with respect to smoking, a better policy to reduce passive smoking damages is to restrict smoking in certain situations rather than taxing smoking per se. This is the motivation for banning smoking in the workforce, in entertainment venues and even in private cars with non-smoking occupants. The latter reform was initiated in South Australia but has now either been introduced elsewhere or is about to be. Smoking in the home that causes damage to children can be discouraged by using ‘moral suasion’ arguments which articulate the health implications for children and others of secondary tobacco smoke.

Likewise, while drinking is the major cause of traffic fatalities, the issue is not drinking per se but drinking before driving. Taxing alcohol at moderate levels will reduce this but the more sensible way to tackle accident externalities is to provide information on accident risks, particularly among adolescents, and to rigorously punish those who threaten life by driving while intoxicated. Booze buses that randomly check for intoxicated motorists, with particularly stringent restrictions on young drivers, are a more effective way of tackling this specific behaviour than low taxes on alcohol. The option of setting very high taxes on use penalises the 74 per cent of Australians who consume alcohol at levels that impose low social costs (Clarke, 2008).

With respect to gambling there are significant social costs linked to the fact that problem gamblers move inevitably towards financial ruin – the ‘gambler’s ruin’ – and end up drawing unreasonably on family and employer resources. Families are destroyed and innocent children experience deprivation as a consequence. Here the harm is excessive gambling which can be controlled if the extent of gambling can be constrained. A difficulty is that problem gamblers have relatively inelastic demands so taxes to significantly reduce gambling need to be high. Society has made the judgement that most gamblers derive significant recreational benefits at low social cost from gambling so that hefty taxes alone would again cut into the innocent pleasures of many. Better policies would target specifically problem gambling.

Several approaches have been developed. The first protects citizens from the excessive gambling that creates externalities by using electronic player cards for repetitive forms of gaming (Dickerson, 2003). These cards are issued on the usual 100 point ID requirements of a cash card. They limit the money an individual can pre-commit to gambling. For most players preferred expenditures would be within regulated limits but, for problem gamblers, such devices limit losses. This approach is currently under consideration in Victoria and other states. Another policy that limits problem gambling is the self-exclusion option that gamblers can now exercise in all states. Gamblers who, between gambling sessions, recognise that they face self-control issues with respect to gambling can elect to have themselves excluded from gambling venues.

These policies reduce costs faced by the consumers themselves, an issue we turn to.

Taxing internalities

Apart from public revenue and externality reasons for restricting sin goods a further motivation is to reduce costs consumers impose on themselves. The main issues are whether such interventions are warranted and, if so, whether taxes are the best restriction.

Historically opposition to sin goods has been based on claimed ‘moral’ costs. Smoking has long been linked to ‘illicit’ sex. This dates at least to images of flimsily dressed wenches rolling cigars on their naked thighs in the cigar factory featured in Bizet’s opera Carmen. Alcohol too has long been viewed as destructive of work ethics and family attachments. It is commonly portrayed as a lever that promotes illicit seduction of the innocent. Gambling is often seen with standard ‘materialist’ misconceptions as a degenerate ‘service’ activity that yields no useful physical output. Indeed Alexander Pope in his Rape of the Lock gives an eloquent picture of a degraded gambling woman and the corrupting influence the practice had on her. Veblen (1899) argued that gamblers impute causality into games of pure chance – psychologists term this the illusion of control - thereby making society more stupid.

For the most part, these activities are not regarded nowadays as ‘sinful’ in a narrow moral sense. Instead they are seen as costly to the individual because they imply private health and psychological costs from licit drug consumption or financial ruin from gambling.

The health costs identified go beyond the damage bills accruing to governments. They even exceed the total health costs that accrue to governments and the individuals concerned, reflecting also loss of life and increased morbidity.

Intervening to restrict consumption raises charges of ‘wowserism’ with governments disallowing free choices. Two sub-claims support this criticism. First, that governments may not have better information than private citizens and, second, that even if citizens do hold mistaken views, that they are entitled to be wrong and it is better for them to make their own mistakes. Indeed, the claim is often that government intervention to ‘protect people from themselves’ has the moral hazard consequence of creating more dangerous, risk-taking behaviours.

Some argue that interventions to limit consumption of sin goods can be justified by considering within-person externalities or internalities (Gruber, 2002/03) arising because individuals do not account adequately for the costs of actions on their future selves. The thesis is that individual decision making is time inconsistent with today’s ‘self’ being impatient but tomorrow’s ‘self’ being patient. Planning for the distant future is ‘reasoned’ and involves low impulsiveness but short-term responses are driven by the myopic emotions. Thus agents assess risky activities by hyperbolically discounting (Ainslie, 2001) with short-term impulsiveness and long-term rationality ‘fighting it out’. Paternalist policy seeks to help the dispassionate self gain control over the emotionally-driven choices considered by a conflicted individual.

Short-term selves are supposed to be strong among adolescents who engage in socially desirable experimentation to help them define adult roles but who thereby become susceptible to risky pursuits such as drugs and gambling.

In Australia almost everyone who takes up smoking does so when young: the average age of initiating smoking is 15.9 years (ABS, 2006). Such adolescents apply high rates of discount to longer-term costs of smoking. Even if they do correctly identify these costs they substantially overestimate their ability to quit the habit. These high rates of discount decline with age so when individuals are in their mid-twenties they are less impulsive and risk-loving. They then regret their decision to initiate smoking (most smokers do regret initiating the habit!) but find it unexpectedly difficult to quit. There is again a case for intervention to limit consumption.

Similarly excessive drinking, including ‘binge drinking’, is often initiated during adolescence when neuroscientists tell us that the regions of the brain involved in executive control and motivation are underdeveloped. Moreover, the vulnerability to alcoholism is greatest among those initiating drinking early in life but those with difficulties making decisions at any age - those suffering depression, anxiety, ADHD and schizophrenia - tend to be alcohol abusers (Clarke, 2008). There is again a case for limiting consumption.

These arguments are strengthened by recent evidence suggesting specific damages to brain development from consumption of alcohol (White, 2003) and tobacco (Krystal et al., 2005) during adolescence. Also relevant are internalised damages associated with drink-driving by youth that impose drastic internalised costs.

Finally, problem gambling begins at early ages. About 33 per cent of problem gamblers began betting before they were 10 years of age with 47 per cent beginning between 11 to 18 years. These youth often have co-occurring alcohol, cigarette and other drug problems that, with gambling, are correlated with impulsivity and low cognitive control (Petry, 2005).

The ethical debate concerning the case for paternalism with respect to sin goods seems academic at least with respect to youth who make flawed decisions. It remains however to ask whether tax policies are the appropriate means of initiating restrictions.

Young people have limited incomes so their demand for such things as cigarettes and alcohol are relatively price elastic. To this extent taxes will impact on consumption choices although it is doubtful that they would ever be the only policy instrument used in this context.

For example with respect to tobacco smoking, a 10 per cent increase in price leads to only a modest 2.4 to 4.7 per cent increase in cessation probabilities among US youth with uncertain impacts on smoking initiation (Chaloupka, 2001; Taurus et al, 2001). Increasing taxes to high levels provides stronger effects but encourages substitution of injurious home-grown tobaccos (‘chop chop’ home grown causes fungal infections of the lung) and the intensification of smoking through ‘puffing harder’. A 1 per cent increase in price provides a 0.4 per cent increase in smoking intensity and a new range of more dangerous adenocarcinomas lower in the lungs (Adda et al, 2006; Henschke et al, 2002).

With respect to youth there is a case for an infinite tax on smoking, alcohol and gambling activities by prohibiting them. Minimum pack sizes, bans on advertising and bans on smoking in entertainment venues are also ways of curbing youth consumption. Bans on selling to youth backed by stringent penalties and penalties on purchasing are also effective. Negative advertising that emphasises current costs of smoking and alcohol in terms of lost physical fitness provide disincentives for youth that are more tailored and carry greater clout than modest tax hikes.

At best, taxes will be one component of a package of policies that seek to restrict the consumption of sin goods by youth and by citizens more generally.

Final comments

Economists seeking to limit external and privately-borne costs of sin goods should devise policies that target problem areas as directly as possible. General policies that have broad impacts will generate by-product costs on non-targeted groups and bring about harmful substitutions that may lead to additional harm through unintended consequences. Taxes on sin reduce costly externalities and high personal health costs but are not the sole way of advancing this objective.

A strong argument for taxing sin goods is that the taxes yield revenue without distorting economic activity greatly and with low political flack. Such taxes do help restrict the damages consumers of sin impose on others and on themselves but almost always need to be supplemented by other policies to have significant impacts.

References

J. Adda, & F. Cornaglia, ‘The Effect of Bans and Taxes on Passive Smoking’, Institute for the Study of Labour (IZA), Discussion Paper No. 2191, 2006.

G. Ainslie, Breakdown of Will, Cambridge University Press, 2001.

Australian Bureau of Statistics, Tobacco Smoking in Australia – A Snapshot 2004-05, ABS Canberra, 2006

Australian Taxation Office, Excise Tariff Working Pages, Canberra, 2008.

A. M. Brandt, The Cigarette Century, Perseus, New York, 2007.

F. Chaloupka, M. Wakefield & C. Czart, ‘Taxing Tobacco’ in R. Rabin & S. Sugarman (eds) Regulating Tobacco, Oxford University Press, 2001,

H. Clarke, ‘The Economist’s Way of Thinking about Alcohol Policy’, Agenda, 15, 2008, 27-41.

M. Dickerson, ‘What if there were no problem gamblers’, mimeo, 2003.

Commonwealth Grants Commission, Gambling Taxation, Commonwealth of Australia, 2008.

J. Gruber, ‘Smoking internalities’, Regulation, Winter, 2002-2003, 52-57.

C. Henschke & P. McCarthy, Lung Cancer, Norton 2002.

T. Hirayama, ‘Non-smoking wives of heavy smokers have a higher risk of lung cancer: a study from Japan’, British Medical Journal, 1981, 282: 183–185.

C. Johnson & K. Meier, ‘The wages of sin: Taxing America’s legal vices’, Western Political Quarterly, 43, 3, 1990, 577-595.

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Tuesday, August 12, 2008

Animal rights & joys of libertarian dismissal of such

This Inside-Out China blog posting pours scorn on the notion of animal rights much to the delight of Jason Soon at Catallaxy. The Chinese sometimes have an insensitive way of dealing with animals but I am not surprised that libertarians oppose criticisms of people's rights to do with non-human life what they like. It accords with their 'anything goes' philosophy - to do otherwise would be interfering with their precious individual rights and to offer what are essentially paternalistically imposed moral restrictions on such rights. Libertarians see themselves as having the right to bear arms and to kill and maim provided they do not offend Pigou - who only considered human suffering in his analysis of external costs. Who could criticise?

But yes obviously I do criticise. I am not a vegetarian but a carnivore. However I resolutely oppose cruelty to animals and find despicable the killing of sentient beings for sport and the casual disregard of animal suffering and death. I assert the almost universally agreed on proposition that animals do have rights. That this is the case is obvious – even libertarians will dislike the callous cruelty displayed in the Chinese clip. Thus by consensus animals do have rights – the question is where to draw the line on such rights. My line is somewhere short of giving animals the same rights as humans but certainly to give them more rights than displayed by the Chinese sadists in the clip or those assigned by the nitwits at the Inside-out China blog.

When we kill animals for their food or other products it should be a painless death and animal lives should not be a monotone stream of suffering. In fact, for me, things go well beyond this – to the extent that animals derive pleasure from their existence – evidence convinces me they are capable of such enjoyment – I am happier, so as an economist I am interested in promoting as far as it is possible a joyous life for animals as well as humans. Animal utilities enter into my social welfare function.

In my view there is value to the notion of animal rights. The libertarian opponents of animal rights are 'barking out' an ideology that reflects their defective reason, their callous disregard for non-human suffering and their posturing to defend foolish values that promotes laissez faire in clearly inappropriate situations.

BTW look at the discussion that follows the post mentioned at Catallaxy. This site was once one of the better blogs in Australia. What has happened?

Update: For those of you too lazy to read the Inside-Out China blog article I refer to I excerpt some bits:
'Western folk, to a greater or lesser degree, believe animals have rights. ....They empathize with animals. They value animals as contributing something to our environment greater than their immediate utility to humans. I don't. I feel the same way about gorillas as most Westerners feel about chickens. Dolphins? Yum. Dogs? Can't eat my fill. And don't even get me started on minke whales, the cockroaches of the ocean.
...... there was far too much human suffering going on for me to give up any of my concern or empathy for animals...... Who cares about cattle when real people, human beings, are dying like cattle?

....If Western people want non-Westerners to be nicer to animals, they should support things that create and spread wealth—for example, free trade and globalization. .... Once China's per-capita GDP gets high enough, Chinese, like WASPS, may love animals, too'. (my bold)
In short who cares about animals - they have no legitimate rights once it is acknowledged that 'we' humans are suffering. If you want us to stop being cruel improve our well-being. This is the article that commenter libertarian Jason Soon says he recommended because it was 'well-written'. Note the view of minke whales and animals generally. This argument is not the reason libertarians defend the right to have guns and to hunt and kill animals for sport. That's just good old-fashioned 'doin' your own thing' and who could be paternalistic enough to want to deny that? Me, for one.