John Quiggin

The New Zealand Labour government has confirmed that it will renationalise the country’s rail network. The Blair government in Britain did the same thing last year. In both cases, the decision reflected the failure of the private operator to deliver the expected outcomes rather than an ideological commitment to public ownership.

It is becoming increasingly clear that attempts to determine the optimal role of the public sector on the basis of an a priori ideology, such as old-style socialism or neoliberalism, are bound to result in bad policy decisions.

Brian Weatherson announces

A New Blog!

A new group blog, Crooked Timber, has just been born. So far the group is Chris Bertram, Henry Farrell, Maria Farrell, Kieran Healy and moi.

There will be others appearing on the scene in the near future – to a first approximation Crooked Timber will be a broad-based leftie academic blog. But we’re open-minded about what counts as leftie, and as what counts as academic. To mangle a cliche or two, the party is meant to be more prominent than the party line. It’s a very exciting project, and I was rather honoured to be asked to join it.

Brian’s first entry joins the Nozick debate, with partial endorsement of the argument I presented against Nozick.

Ken Parish links to various critiques of Nozick’s arguments in support of libertarianism. Broadly speaking, Nozick claims that libertarianism is right not because it produces good outcomes (he doesn’t argue one way of the other on this) but because a requirement for just process implies that property rights should be inviolable. Nozick’s position has been criticized in various ways, often focusing on the fact that he never specifies a just starting point. I want to present a different argument: that given any plausible starting point, Nozick’s approach leads to the conclusion that the status quo, including taxes, regulations and other government interventions is just. I illustrate this point with a story.

Read more…

This CS Monitor story reports that morale among US troops in Iraq has “hit rock bottom”. I used to use this phrase in relation to the university I worked at during the Kemp-Vanstone era, but then realised it was a mistaken metaphor, since it implies a zero level. In fact, no matter how low morale is, it can always go lower.

In relation to Iraq, the inapplicbility of the metaphor the current situation is clear. The griping reported in the story is nothing compared to, say, Vietnam, where desertion and ‘fragging’ (murder of officers, with the weapon of choice being a fragmentation grenade) were routine events [there was an isolated case of this kind during the Iraq war, but nothing since].

But it’s hard to see any alternative to a long occupation or any way that morale among the occupying forces can go, other than down. For a successful war of liberation, what was needed was multilateral support, ideally including support from Islamic countries willing to supply peacekeeping forces, and an internationally recognised alternative government ready to take over in a relatively short period.

It’s time, once again, for the (original and best!) Monday Message Board, where you get to comment on any topic (civilised discussion and no coarse language please).

Maureen Dowd has never really got back into her groove since the end of the Clinton culture wars, a topic she made her own. This NYT column (reproduced in today’s SMH), criticises the Bush administration as suffering from attention deficit disorder. The same metaphor was circulating in the blog world nearly a year ago, as this post illustrates.

Godel, Escher, Bach: An Eternal Golden Braid, one of the books recommended to me by readers, and, until now, a surprising omission on my part. I’m enjoying it very much. I’m also reading Gensler’s Introduction to Logic (‘You should have done that before you started blogging’, I hear you all say), from which I’m hoping to tighten up my understanding of modal logic.

Today I went to Southbank to see the Bonnard exhibition at the Queensland Art Gallery. As a successor to the Impressionists, Bonnard was among the last painters who filled the role created by the 19th century notion of the artist in a fairly unselfconscious fashion, making some innovations in technique without adopting innovation for its own sake. After about 1910, we get the disaster of ‘modern art’, based on the assumption that formal innovations are necessary to artistic greatness and that success in the game of ‘epater le bourgeois’ (shock the middle-classes) is the test of sufficiency.

Finally, this afternoon I took my son and a friend to see ‘The Matrix Reloaded’. Good fun, in a RoadRunner vs Wile E Coyote kind of way, but, as so often, a good argument against sequels.

Gianna has taken the (as far as I know unique) step of moving from MT back to Blogger. She hasn’t being deliberately contrary, as is evidenced by the fact that she’s joined the trend to an open mike posting, my most successful (well, my only successful) technical innovation in blogging.

As part of my research on higher ed, I checked out statistics on student numbers and other things collected by DEST. A particularly striking figure is that on commencements by non-overseas students. This series rises steadily until 1996 (to about 230 000) then stops.

Here’s the table

Commencements are a more sensitive indicator of responses to policy changes than student numbers, and this certainly tells the story of human capital investment under the present government, or at least in the Kemp period covered by the data set.

Over the same period, the number of Full-Time Equivalent academic staff actually declined, continuing a decline in staff-student ratios that began under Labor (the picture is worse than it looks at first glance because overseas student numbers have been rising).

So, we’ve got a smaller proportion of the population going to university, and receiving a lower-quality education. This is the same story as we got from reform of school education in the early 1990s notably under the Kennett and Olsen governments. Whatever short-run improvements in measured productivity have been extracted from micro-economic reform will be more than offset by lower investment in human capital.

In a post from the dim dark past (June 28, 2003) Chris Sheil wrote

Although Iâm only very new to this medium, it is obvious that the dynamism of blogosphere is incredible. Most blog-hosts seem to feel a need to add at least one fresh post to their site each day to retain their readership. If the issue upon which they post is hot, comments will come a-flying, links will come a-pinging and, before you know it, the debate will become a control freakâs nightmare. In the case of a hot issue, it is simply not possible to have an influence at every point where the matter begins breaking. The difficulty of contributing is then compounded by the press of fresh posts, which usually means comment windows close in a day or three or four, as the posts slip into the archives.

I’ve been frustrated by this, especially as I’m finding that time pressure (aka having a life) is slowing down my responses and my posting more generally. So I’m going to try a new approach, for a while, of which this post is an instance, responding to news stories and other blogs on a scale of weeks rather than hours. Perhaps this will produce more considered responses, perhaps not.

In another attempt to reduce pressure for immediacy, I removed my hit counter when I shifted to MT. On the other hand, I now get email alerts of new comments, so I don’t know how much this has done to reduce the compulsive aspect of blogging.

My first order of books from Amazon, largely selected on the basis of recommendations from readers, has just arrived. A couple arrived a few days earlier, including Economical Writing by Deirdre McCloskey, which I have already read. Very enjoyable, though I can’t bring myself to accept her advice to abandon the “roadmap” para which ends the introduction to all my articles. Her view is that it’s meaningless until you’ve read the article, and useless once you have done so. I agree with this if you only read the article once. But I find this kind of para useful when rereading my own articles and those of others.

Anyway, thanks to all who made suggestions and a reminder that I’m always keen to get recommendations for reading on almost any topic.

In a piece worthy of Bjorn Lomborg, perennial environmental Pollyanna Alan Moran quotes stats in yesterday’s Fin (subscription required) to prove that everything is roses with the Murray-Darling and that the the sacred property rights of irrigators should not be interfered with. Here’s an extract

Upstream of Morgan in South Australia, salinity levels have been reduced over the past 20 years, and now are at the levels observed in 1938 when salinity was first measured.

Hence, for 1500 kilometres, the river’s agriculture has not adversely affected salinity, which is evident only for the last 200 kms in South Australia.

Similarly, there is no data to support claims that river usage is threatening to eradicate native animals and plants. In fact, the Murray Darling Basin Commission has only recently embarked on a systematic appraisal of the environmental health of the system.

Hence there is little evidence to justify a need for drastically curtailing productive agricultural uses of the river to bolster environmental flows designed, for example, to flush out salt and increase floods of forested areas.

Yet a chorus of voices wants Murray Darling water to be redirected from productive uses to such flows. Simon Crean has endorsed plans to divert 1500 gigalitres, some 20 per cent of the irrigators’ water in the Murray system, to environmental flows.

There are so many distortions here that it’s hard to know where to begin. But the biggest one, and a standard Lomborg tactic, is that Moran tries to argue against environmental policies by pointing to improvements generated by those very policies. As the Murray-Darling Basin Commission points out, significant reductions in salinity have been achieved only since 1990, when a Cap was imposed halting growth in extractions and thereby restricting rights previously exercised or assumed by irrigators (these rights are and were various and complex, and can’t be treated as inalienable private property rights in the simplistic fashion posited by Moran). I’ll be posting more on this in the future as my research gets into higher gear.

My column in today’s AFR (subscription required) is about financing renewed investment in universities. Here’s an extract.

What is needed is a large-scale capital injection. In a budgetary environment still dominated by cash accounting, this is unlikely to be provided out of general revenue. However, there is one big asset associated with the university sector that could be used to finance new investment. The student debt accumulated under HECS amounts to between $5 billion and $10 billion, depending on how it is valued.

This debt is treated as an asset of the commonwealth but it ought to be regarded as a contribution to the university system from graduates. Bonds secured against the HECS debt and serviced by the associated flow of HECS repayments could be used to finance new investment in higher education, repairing the shortfalls of the past decade. To ensure equitable access to funds, universities could be aggregated into funding groups, each representing a mix of university types (old-established sandstones, former institutes of technology, former CAEs, regional universities and so on) with different endowments of assets.

Although borrowing against the HECS debt would provide a flow of investment funds in the medium term, it would not change the fact that, ultimately, public expenditure must be financed by taxation. HECS repayments used to service higher education bonds would not be paid into general revenue as at present.

More than any other activity undertaken by society, education embodies the obligations of each generation to the next. Explicit recognition of student contributions as a basis for future investment in education, rather than a mere user charge for consumption of current services, would contribute to social cohesion as well as yielding a social return as high or higher than any alternative investment available to governments or individuals.

Update Andrew Norton disputes my claim about social cohesion. I don’t see a need to change what I’ve written in response.

As with most terms ending in ‘ism’, and therefore imputing an ideological framework, ‘managerialism’ is more often used pejoratively than favorably. Where it is dominant,, ideology appears as common sense and requires no name. The standard assumption, backed up by the existence of university departments of management and business schools generating thousands of MBAs every year, is that management is a science on a par with physics, or at least with economics. As Thomas Frank observes in his One Market Under God‘the management literature as a whole serves primarily as a PR exercise to legitimate management.

Where managerialism needs a name, the choice is usually one that conceals or obfuscates the role and interests of managers as a class. The most important examples are ‘the New Public Administration’ in the public sector and ‘shareholder value’ in the private sector. ‘Shareholder value’ is of particular interest in the way it represents managers as the mere agents of the shareholder principals.

The central doctrine of managerialism is that the differences between such organisations as, for example, a university and a motor-vehicle company, are less important than the similarities, and that the performance of all organisations can be optimised by the application of generic management skills and theory. It follows that the crucial element of institutional reform is the removal of obstacles to ‘the right to manage’.

The rise of managerialism has gone hand in hand with that of the radical program of market-oriented reforms variously referred to as Thatcherism, economic rationalism and neoliberalism. (Despite very different histories, all these terms are now generally used in a pejorative sense). Managerialism may appear inconsistent with traditional free-market thinking in which the ideal form of organisation is that of competitive markets supplied by small firms, in which the manager is also the owner. However, managerialism is entirely consistent with the dominant strand in the neoliberal approach to public policy, which takes the corporation, rather than the small owner-managed firm, as the model for all forms of economic and social organisation.

In particular, managerialism and neoliberalism are at one in their rejection of notions of professionalism. Both managerialists and neoliberals reject as special pleading the idea that there is any fundamental difference between, say, the operations of a hospital and the manufacturing and marketing of soft drinks. In both cases, it is claimed the optimal policy is to design organisations that respond directly to consumer demand, and to operate such institutions using the generic management techniques applicable to corporations of all kind.
The main features of managerialist policy are incessant organisational restructuring,,sharpening of incentives, and expansion in the number, power and remuneration of senior managers, with a corresponding downgrading of the role of skilled workers, and particularly of professionals.

Ross Gittins is excellent, as usual, in his latest piece on the housing bubble. He points out that most unit investors have put their own homes up as collateral and stand to lose them if prices decline sharply (say by 40 per cent). But I have a quibble about his conclusion, saying that, if this happens

the Howard Government’s reputation as incomparable economic managers might be looking pretty tarnished.

If so, it would have only itself to blame. Why? Because it left open the negative-gearing loophole on which this whole rocky edifice has been built. And then it compounded its failure by halving the tax on capital gains. I call that asking for a property boom. As Gittins explains, negative gearing involves taking tax-deductible losses on rental property in the hope of getting a capital gain taxed at half the normal rate.

The fundamental problem here is not the tax deductibility of losses but the concessional treatment of capital gains. In principle, at least, losses should be tax deductible. The practical problems are those of bogus losses and avoidance/evasion of tax on the associated income. But where possible, it is better to tackle these problems directly than to make particular categories of loss nondeductible.

The government certainly deserves blame for the decision, taken at the height of the dotcom mania, to halve the rate of capital gains tax. But Labor must share the blame for going along with this. As I wrote at the beginning of 2000.

Unfortunately, the Labor Party has decided that it can win the next election on the basis of the government’s difficulties with the GST, while proposing little more than cosmetic changes if elected.

Whether this is a viable political strategy is not for me to say. But it has already had disastrous effects on tax policy. In order to clear the way for a opportunistic campaign on the GST issue, Labor aided and abetted the government in destroying one of the Hawke-Keating government’s most important reforms, the taxation of capital gains on the same basis as other incomes.

The implementation problems associated with the GST will pale into insignificance compared to those that will arise from this cynical deal. The tax avoidance industry and the courts will be kept busy for years dealing with attempts to convert taxable income into capital gains. Moreover, the policy will favour heavily leveraged speculative investments at the expense of real investments generating taxable income. The danger of a speculative bubble, leading to an asset price boom and slump, will be enhanced. …. (emphasis added)
(The mysterious, and not entirely accurate, term ‘negative gearing’ can be parsed as follows. ‘Gearing’ refers to the ratio of debt to equity, which is approximately proportional to the ratio of interest payments to net returns. If interest payments exceed gross returns, net returns become negative, and the ratio becomes meaningless).

I’ve appended a bit more of the article below for anyone interested

Read more…

After discussing the absurdity of the capital-rich United States being by far the world’s biggest borrower and biggest debtor, Brad de Long observes

it is a Dark Night of the Soul for us neoclassical economists who believe in the long run and in the even partial rationality of international capital flows.

I went through the necessary loss of faith a few years ago. As I observed last October

If you accept that the $US has to depreciate at some time, then holding bonds denominated in $US, and receiving interest rates lower than those obtainable in other currencies, is a dumb idea. Unless you think either that European governments are likely to default on their debt or that euroland is poised for inflation, eurobonds are a better bet, and similarly for Australian government bonds denominated in $A. But I’ve given up even the residual belief in the efficient markets hypothesis that would lead me to try and work out a coherent explanation of perverse asset prices. (Emphasis added)

Despite the stunning contrary evidence of the past five years, residual belief in the idea of efficient capital markets continues to shape the thinking of most economists (including me, when I let myself be guided by instinct rather than careful reasoning). Only when we have freed ourselves of this incubus will we able to make progress in understanding the global economy. Because this is akin to a loss of religious faith it will be a difficult and painful process.

As I mentioned a while ago, I’m using the blog as a database of snippets that seem likely to be useful, but need to be cut from articles for space or other reasons. Comments are appreciated as always

The recent higher education policy paper Backing Australia’s Future has estimated that students are currently contributing about 25 per cent of the cost of their education. However, this is a gross under-estimate. It involves an overstatement of the subsidy associated with HECS, ignores the tax deductions that would apply for alternative investments, and fails to take account of the cross-subsidies inherent in the university system, from undergraduate education to research and supervision of graduate students (far from recognising these cross-subsidies, Backing Australia’s Future tries to claim that research funding Îsupports individual [undergraduate] studentsâ.)
For undergraduate students in areas like commerce and business, the contribution is closer to 100 per cent of the resources allocated to them than 25 per cent. For law students the contribution may already exceed 100 per cent, and will certainly do so under new proposed arrangements.

I haven’t had time to comment on events in the Middle East since a relatively optimistic post on Israel/Palestine a couple of weeks ago. Since then we’ve had a full cycle of pessimism and optimism, with things currently looking as good as they have in a long time – a ceasefire from the main militant/terrorist groups and the withdrawal of Israel troops/Zionist occupation forces from much of Gaza (readers take their pick regarding preferred terminology. But as the pessimists, notably including regular commentator PM Lawrence will no doubt point out, we’ve been here before and gone nowhere but backwards.

In Iraq, things are turning out much as I thought they would before the war, though the extent of looting has surprised me. Some pro-war commentators gloated when it was reported that many of the treasures of the National Museum had been removed for safe keeping before the fall of Baghdad, and that the total loss was ‘only’ 6000 items rather than the 60 000 initially estimated. This seems bizarre to me, in view of the fact that it was also reported about the same time that Iraq’s main nuclear facility had also been looted. The absence of any attempt to secure this facility is a pretty clear indication that the Administration knew there weren’t any weapons there, but the resulting spread of radioactive material is still a disaster.

The central question now is whether, having largely conceded that the pretext for the war was incorrect, if not bogus, the Coalition will deliver on the promise implicit in claims about a war of liberation, that is, a genuinely democratic and prosperous Iraq. I opposed the war because I did not think Bush would deliver, but I still hope to be proved wrong.

The SMH has the news that Malcom Turnbull has managed to interest Wizard Home Loans in the idea of home equity loans. I was a member of the academic panel of the PMs Task Force, organised by Turnbull looking into this idea. Most of the actual work was done by Christopher Joye, a livewire young economist who’s currently with the Menzies Institute.

The home equity proposal has been widely criticised as likely to further inflate the housing bubble. This is only true if financial institutions are willing to buy equity at inflated prices, as opposed to lending to individuals.I commented on all this in my most recent opinion piece in the Fin, which I have now posted on the Website. An excerpt

The home equity proposal put forward by the Taskforce may also be seen as a kind of insurance [against falling house prices]. Instead of paying a cash premium, homebuyers would forgo part of any possible gains in return for sharing the risk of declining prices with an equity partner. Once again the willingness, or otherwise, of banks to enter such deals may be seen as a financial market judgement about the sustainability of current prices.

It now appears that Turnbull is going to put his money where his mouth is on this one.

Also on the website is a piece on road safety from 5 June much of which I roadtested here on the blog before taking it out for a spin in print. Thanks again to everyone who commented.

Update The SMH story has caused a bit of a fuss about whether it is (or would be) appropriate to use the results of publicly-sponsored research in this way. I don’t see a problem myself. In any case, I got the following email from Malcolm Turnbull indicating that the issue may be moot

The SMH story is quite a beat up I am afraid. The position is that Wizard is keen to investigate whether a commercial product can be developed which implements some of the ideas in the MRC paper. I have not offered to finance Wizard products nor, as the story stated, am I negotiating to do so.