Archive for September, 2003

Lomborg down under

September 30th, 2003 19 comments

Bjorn Lomborg pushes his usual anti-Kyoto line in the Oz

will be extremely expensive and will have only a negligible effect. The global cost will be large: the estimates from all macro-economic models show a cost of $US150 billion ($224 billion) to $US350 billion every year. At the same time, the effect on extreme weather will be marginal: the climate models show that Kyoto will merely postpone the temperature rise by six years from 2100 to 2106. Most global warming problems will occur in the Third World, yet these countries have many other, more serious, problems with which to contend. For the cost of Kyoto, in 2010, we could permanently solve the biggest problem in the world ö we could permanently provide clean drinking water and sanitation for every person in the world. Should we not deal with the most pressing problems for real people first?

What Lomborg doesn’t say here is that these scary estimates refer only to the case when Kyoto is implemented without emissions trading. With emissions trading, the net cost to the world would be much smaller, but Lomborg says this is politically infeasible because it would require big transfers from rich to poor countries.

In other words, we can’t implement Kyoto efficiently because we would have to give lots of money to poor countries and that’s politically impossible. But, as an alternative to implementing inefficiently we should give lots of money to poor countries.

I’ve pointed out this contradiction ad nauseam, but consistency is not a major issue for Lomborg or for his right-wing employers (the nastiest government in recent Danish history) and promoters.

Categories: Environment Tags:

Conference presentation

September 30th, 2003 3 comments

I’ll be presenting twice at the Economists’ conference today. First, in the morning on “Higher Education: The Last Nationalised Industry?” and then in the afternoon on “Discounting and sustainable management of the Murray-Darling system”. After that I’ll be heading back to Brisbane, stopping along the way at Dubbo zoo and the Parkes radiotelescope. Normal blogging should resume next week.

I plan to post copies of my presentations on my website next week, and to have full papers a bit later.

Categories: Economics - General Tags:

Monday Message Board

September 29th, 2003 26 comments

As another Monday rolls around, I’m in Canberra for the Economists’ Conference. So, I’m suggesting the starter question for this week’s Message Board. What are the big (unanswered or unasked) questions in economics. Feel free to offer comments on the state of other social sciences or, as always, on any topic that takes your fancy (civilised discussion and no coarse language, please).

Categories: Regular Features Tags:

20.14 to 12.12 !

September 27th, 2003 14 comments

What more is there to say?

Categories: Life in General Tags:

Parallel universes

September 27th, 2003 9 comments

According to today’s Oz editorial,

Perhaps journalists at the ABC and Fairfax newspapers are trapped in a parallel universe where they receive and then report information that seems distorted from what the rest of us hear. This is the most charitable explanation of the reporting of United Nations Secretary-General Kofi Annan’s speech to the General Assembly during the week. According to one report, Mr Annan “attacked American foreign policy, warning it could stoke terrorism and global chaos”.

Perhaps it’s the same parallel universe as that inhabited by the Voice of America whose story on the same speech was headlined “Annan Condemns Unilateral Military Action”.

Categories: World Events Tags:


September 27th, 2003 Comments off

I’m writing this in the aftermath of a brief snowstorm, surprising since other parts of NSW have been experiencing record heat. It’s come at the wrong end of my visit to the Snowy Mountains, which has mainly been characterized by wind and rain – not good weather for skiing. Still, it’s very pleasant to look at if you’re inside with a fire. I’m staying at Lake Eucumbene, which is well below the normal snowline. This means that the snow usually melts pretty fast. On the other hand, you get to see things you wouldn’t expect higher up, like the kangaroos coming out from the shelter of the trees and nuzzling through the snow to eat the grass beneath.

Categories: Life in General Tags:

The market for finals tickets

September 26th, 2003 6 comments

The markets for finals tickets provide pretty good evidence on which football code is going to win out in Australia.

Ticket scalping is rife for the AFL Grand Final, despite a Victorian government crackdown. Meanwhile, in the NRL finals, 10 000 tickets have been given away free.

Categories: Life in General Tags:

1500 GL

September 26th, 2003 1 comment

This report, saying that a return of 1500 Gigalitres to the Murray is needed to achieve moderate improvements in ecological conditions is pretty much what was expected. As I argued here, such a reduction in water use is feasible, but expensive and politically tricky. Given the way the process has been set up 1500 GL is likely to be an upper bound for the return of water to the Murray, at least for the next 10 years, the period for which NSW licenses will be allocated.

Categories: Environment Tags:


September 25th, 2003 19 comments

I can’t say I’m eager to say anything positive about Kim Beazley after the fiasco of 2001, but I have to agree with what he has to say here and with the unstated message that it’s time to dump Simon Crean as Labor leader. Beazley attacks the last round of tax cuts, endorsed by Crean, and Crean’s promise not to increase the Medicare levy. (I haven’t been able to confirm the existence of this promise, but it’s implied in various press reports)

Having said that, I don’t retract my endorsement of the Caucus decision to reject Beazley’s leadership challenge. Beazley had the chance to put his thoughts into practice in 2001 and he squibbed it. Not only did he not propose an increase in the Medicare levy, he even vetoed any change to the absurd tax subsidy to private health insurance.

After beating off Beazley’s challenge, Crean needed to get off the fence as far as tax and public spending is concerned but he’s failed to do so. As a result, he remains a purely negative figure as far as the Australian public is concerned. In effect, he’s reproduced Beazley’s small target strategy.

So I’ll modify the ABC (Anybody But Crean) view, and say that Labor should go for ABCEB (Anybody But Crean, Except Beazley).

Categories: Oz Politics Tags:

Bubble or boom

September 25th, 2003 10 comments

My column in today’s Fin (Subscription required) is about the (putative) bubble in housing prices. After noting that virtually all economists think there is a bubble I observe

There is a paradox here. In a country with a longstanding suspicion of market forces, economists have normally been among the few defenders of the market. Even relative sceptics put more weight than the average Australian on seeking rational economic explanations of market outcomes. Yet in the case of the housing boom, ordinary Australians have shown a faith in the market that would put the most devout Chicago economist to shame….

A bad end to the current boom would mark the failure of the separation between monetary policy and prudential regulation introduced following the report of the Wallis Committee. The whole program of financial deregulation would be called into question.

The implications would be even more striking if the current putative bubble turned out to reflect a sustainable increase in underlying values. If the doubling of house prices over a few years is not a bubble, then it is clearly impossible for economists to recognise one when it is in progress. It would be hard to imagine a more triumphant vindication of the efficient markets hypothesis than this.

If anyone has a plausible story as to how the rise in asset prices is sustainable, I’m eager to hear it. Sustainable in this context means that the value of the flow of services from housing should equal the rental cost implied by current prices and reasonable real interest rates.

Categories: Economics - General Tags:

Kant on autarky

September 24th, 2003 9 comments

Leafing idly through Russell’s History of Western Philosophy, I came across this interesting quote (p 683 in the Unwin paperback edition)

Kant gives as an illustration of the categorical imperative that it is wrong to borrow money, because if we all try to do so there would be no money left to borrow

Russell seems to see nothing wrong with this, but it is obvious that the same argument applies to trade of any kind. If I engage in trade, I must be a net buyer of something, say bread. But if everyone tried to be a net buyer of bread, there would be none left. Hence the categorical imperative requires everyone to be self-sufficient.

I assume this constitutes a reductio ad absurdam for Kant’s argument against borrowing. But is it possible to reject the argument against borrowing while accepting the categorical imperative from which it is derived? Any Kantians among the readers of this blog are invited to set me straight on this point.

Update In the comments thread, James Farrell points out that, contrary to the quote from Russell, Kant was talking about borrowing money without the intention of repaying it.

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Categories: Philosophy Tags:


September 23rd, 2003 8 comments

This piece in the NYT reports that Warren Buffett is making a countercyclical move into manufactured housing. Until recently, at least, this form of housing (pejoratively referred to as ‘trailers’) has been very significant in the US – around 20 per cent of all new houses, and up to 50 per cent in rural areas.

This raises a number of questions. First, why there is no comparable development in Australia, where manufactured units are typically used only as holiday accommodation? Is it a matter of building regulations, and if so should we be changing these regulations to bring down housing costs? Or, as the NYT story implies, does this kind of housing degenerate rapidly towards slum status. The rapid decline in the manufactured housing market during the boom of the late 90s seems to support the view that this is a last-resort option.

There’s also a bigger question which I’ve been puzzling over for some time. Real incomes for the bottom 40 per cent or so of US households haven’t risen since the 1970s. At the same time, ownership of items like TVs and washing machines has expanded significantly. That’s not surprising, since the relative price of these items has dropped. But that implies that other relative prices have risen, and housing is an obvious candidate. Has housing quality declined for low-income Americans? If consumption of all items has increased, while income has been constant, the implication is obviously that savings have declined, presumably because of the availability of new forms of credit, and the story also hints at this.

I’d be very interested in any comments and grateful if anyone has useful references on the points I’ve raised.

Categories: Economics - General Tags:

Monday Message Board

September 22nd, 2003 5 comments

I’m on the road for a couple of weeks, first on a short visit to the Snowy Mountains, and then going to the Economists’ conference in Canberra. So postings may be infrequent and erratic (that is, more erratic than usual). I hope readers will fill the gap with their views on any topic (as always, civilised discussion and no coarse language please).

Categories: Regular Features Tags:

Le jour de gloire

September 21st, 2003 13 comments

Another great night last night, with the stirring tune of La Marseillaise announcing a great win for the Lions. I’m sure all right-thinking people, even Swans supporters, will join me in hoping for victory over Collingwood next week.

Categories: Life in General Tags:

Honest, or effective?

September 19th, 2003 23 comments

In the comments thread for my post on Lomborg, I’ve been presented yet again with the widely-reproduced quotation in which Stephen Schneider is supposed to have advocated scientific dishonesty in the interests of environmentalism. In fact, the history of this quote proves exactly the opposite of the point intended by those who use it.

The original quote, was in an interview by Discover Magazine in 1989, where Schneider discussed the problems of dealing with the media. (I’ve looked in vain for the full interview, so I’ll make my usual appeal for help on this).
The relevant paragraph is

On the one hand, as scientists we are ethically bound to the scientific method, in effect promising to tell the truth, the whole truth, and nothing but – which means that we must include all the doubts, the caveats, the ifs, ands, and buts. On the other hand, we are not just scientists but human beings as well. And like most people we’d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change. To do that we need to get some broadbased support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have. This ‘double ethical bind’ we frequently find ourselves in cannot be solved by any formula. Each of us has to decide what the right balance is between being effective and being honest. I hope that means being both.

The first public use of this quote against Simon was by the late Julian Simon (of whom Lomborg is a big fan). Here’s the version he printed, in the APS News, March 1996

Scientist should consider stretching the truth to get some broad base support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention about any doubts we might have… Each of us has to decide what the right balance is between being effective and being honest. (emphasis added)

The section in bold is a complete fabrication and the remainder of the quote has been distorted by omission of key sentences, notably the final one. Schneider demanded and received the right to print a correction.

One might think that having been caught out in this fashion, Simon and his friends would either avoid using this quote or be careful to get it right. Not a bit of it. Both Simon and his numerous followers have continued to use distorted versions of this quote. (I should note that Lomborg used a short version but was careful enough to give the full quote in a footnote). Here for example is John Daly

To capture the public imagination, we have to offer up some scary scenarios, make simplified dramatic statements and little mention of any doubts one might have. Each of us has to decide the right balance between being effective, and being honest.

Note that critical sentences have been omitted or run together with no indication of what has been done.

What’s really interesting about this episode is that Schneider’s opponents are committing exactly the offence of which they accuse him. They are convinced he is a dangerous scaremonger who needs to be exposed in the interest of “making the world a better place”. Unfortunately, their best piece of evidence has a lot of “ifs, ands and buts”. So rather than “tell the truth, the whole truth and nothing but”, they extract the “simplified dramatic statements” and serve them up to “capture the public imagination”. Indeed, “each of us has to decide what the right balance is between being effective and being honest”, and for not of all us does it mean being both.

UpdateAs regards my own reaction to Schneider’s views, I’ll restate what I said the first time I discussed this. “Iâm not a huge fan of Schneider – I find him overly prone to alarmism, and even in the corrected version I think this comes through. But that doesnât justify reproducing quotations from obviously hostile sources without the simple precaution of a Google check.”

Categories: Environment Tags:

War is bad for health

September 19th, 2003 2 comments

Not long after the fall of Baghdad, I wrote a piece for the Fin pointing out that the

The total budget of the USAID, the main US agency for development and humanitarian assistance is $8.7 billion for the coming year. That is, the money already spent on the Iraq war could have doubled USAID’s budget for the next five years.

It seems certain, however, that the war will herald a sustained increase in military expenditure of at least $US100 billion per year. A more reasonable comparison, therefore, is the ambitious proposal of the Commission on Macroeconomics and Health, led by Harvard Economist Jeffrey Sachs. The Commission aimed to achieve, for all a poor countries, a two-thirds reduction of 1990 child mortality levels, a three-fourths reduction of 1990 maternal mortality ratios and an end to the rising prevalence of major diseases, especially HIV/AIDS.

As the Commission pointed out, in addition to the humanitarian benefits of saving as many as 8 million lives per year, reductions in mortality are directly correlated with a reduced frequency of military coups and state collapse. These provide the breeding ground for terrorism and dictatorship and ultimately lead, in many cases, lead to US military intervention. The estimated cost for the Commission’s seemingly-utopian program over the next decade is estimated at between $US 50 billion and $US 100 billion per year.

Now, via Tim Dunlop, there’s a piece fromÊSachs himself saying

The cruelest twist, though, is that the all of the talk about US and UK compassion is accompanied by indifference where compassion is truly needed. Nine months ago, Bush spoke movingly about the tragedy of millions of people with AIDS turned away from African hospitals, because they were too poor to afford the drugs. During those nine months another two million or so Africans died, and the United States accomplished absolutely nothing to change the situation. The president’s much vaunted $15 billion five-year program for AIDS is on paper only.

This year Bush asked for only $200 million for the Global Fund to Fight AIDS, TB, and Malaria, a sum equal to 1.5 days of spending on the US occupying forces in Iraq. The US annual contributions to fight malaria are less than the costs of one day’s occupation, and as a result, 3 million Africans will die needlessly from that preventable and treatable disease.

But who is talking about $87 billion for the 30 million Africans dying from the effects of HIV/AIDS, or the children dying of malaria, or the 15 million AIDS orphans, or the dispossessed of Liberia and Sierra Leone, or the impoverished children of America without medical insurance?

As Atrios notes in the comments thread, Sachs has certainly shown a side of his character no one would have suspected when he was prescribing shock therapy for Russia.

Categories: World Events Tags:

Lomborg, yet again

September 18th, 2003 6 comments

As I won’t be able to make Lomborg’s IPA address, I’ll repost, with marginal changes, an earlier piece setting out my views on him.The only thing that’s changed in the interim is that Lomborg has dropped his earlier pretence of being a leftwinger and repentant greenie, which was, as it were, his unique selling point (thanks to Dave Ricardo for this neat way of putting it). Anyway, here’s my piece.

This will, I promise, be the last thing I post in relation to Lomborg and Kyoto for some time. I want to explain a bit about the development of my ideas and why I’m so strongly pro-Kyoto and anti-Lomborg. I didn’t as ‘Robert Musil’ suggests, reach this position in some kind of green-liberal cocoon. Anyone who knows the ANU economics department, the Australian Bureau of Agricultural and Resource Economics (ABARE) or Townsville, to name a few of my influences, will find this idea laughable.

Rather, I am an environmentalist for the boringly straightforward reason that I love natural environments and want to see them preserved. My favorite environments, reflecting the places I’ve lived most, are the Australian Alps and the Great Barrier Reef. If we get the kind of global warming that seems likely under ‘business as usual’, both will be destroyed or at least radically transformed.

In this context, I think it’s important to take some modest actions now so as to prepare for the need for more substantial reductions in CO2 emissions once the scientific doubts are resolved. If, as is possible but in my view unlikely, it turns out that the problem has been greatly over-estimated, and we have incurred some small economic losses (less than 3 months economic growth) needlessly, it will in my view have been a worthwhile insurance premium. In this context, Kyoto is far from ideal, but it’s the only game in town. The US Administration has given up pretending it has an alternative – it’s talking about adapting to climate change. This is fine for agriculture in the developed world and maybe even in the developing world, but it’s not an option for the Alps or the Reef. So, I’m 100 per cent for Kyoto.

On most other issues, I am, to coin a phrase, a ‘sceptical environmentalist’. That is, I accept the need to take substantial action to control pollution, make agriculture sustainable and so on. But I’ve never believed in the kind of doomsday scenarios postulated in the 1970s by the Club of Rome.

I’m also sceptical in the sense that I try to evaluate each issue on its merits, and to reach my own conclusions, rather than accepting or rejecting environmentalist claims holus-bolus. For example, I’m happy to eat GM food, provided it is properly labelled so I can make my own choices. Similarly, while I doubt that nuclear power is ever going to prove an economically viable energy source, even in the presence of high carbon taxes, I have no problem with mining and exporting uranium, subject to the usual environmental safeguards needed for mining operations in general.

With this background, I began with a very positive attitude towards Lomborg. He seemed to be taking a sensibly optimistic attitude towards environmental problems, pointing to our successes in fixing up pollution problems, the ozone layer and so on, rather than focusing on doomsday scenarios. Then I gradually realised that Lomborg only endorsed past actions to address environmental problems – whenever any issue came up that might involve doing something now, Lomborg always had a reason why we should do nothing. In particular,he came up with an obviously self-contradictory case for doing nothing about global warming, and gave a clearly biased summary of the economic literature on this topic, which I know very well.

After that, I looked at his story about being an environmentalist reluctantly convinced of the truth according to Julian Simon. As I observed a while ago, I first heard this kind of story in Sunday School, and I’ve heard it many times since. It’s almost invariably bogus, and Lomborg is no exception. You don’t need to look far to find errors in Simon’s work as bad as any of those of the Club of Rome, but Lomborg apparently missed them. Going on, I realised that Lomborg’s professed concern for the third world was nothing more than a debating trick – otherwise he wouldn’t have been so quick to dismiss emissions trading with poor countries as politically infeasible.

There’s nothing I hate more than being conned. Lomborg tried to con me, and, for a while, he succeeded. That’s why I’m far more hostile to him than to a forthright opponent of environmentalism like Simon.

Categories: Environment Tags:


September 18th, 2003 15 comments

Poor old Paddy McGuinness, still living somewhere in the twilight years of the Syndey Push, can’t seem to shake the addiction to the politics of victimhood that characterises so much of the Australian (and even more the American) right. In his recent column in praise of Keith Windschuttle and Bjorn Lomborg, he asserted “

Lomborg will not be speaking at any university campus, since these have become hotbeds of political intolerance where unpopular views are shouted down and the speakers often physically attacked

He doesn’t seem to have noticed that Windschuttle (whose quasi-racist views that the Tasmanian Aborigines were responsible for their own extinction by virtue of their degraded morals are far more offensive than anything Lomborg has to say) has repeatedly appeared on University campuses in debates that have been extensively reported in the blogosphere.

More directly to the point, his claim that Lomborg won’t be speaking on Australian campuses is false, a fact which was certainly known to Lomborg’s sponors, the Institute of Public Affairs, which obviously supplied McGuinness with his information. Lomborg will be speaking at the University of Queensland on October 1 (unfortunately, I’ll be in Canberra, at the Conference of Economists). When challenged on this blatant falsehood by Paul Norton of Griffith, the SMH provided the following response

Dr Jennifer Marohasy who provided some of the information about Lomburg to Paddy had the following experience when arranging for him to speak. PAddy did not have this most recent information when he wrote the article. An extract of Dr Marohasy’s email is included here.

When I (Jennifer Marohasy) first broached the idea of him (Lomburg) speaking in Brisbane at the University of Queensland campus my contacts in the Life Sciences Faculty were unhelpful and uninterested – and concerned that such a lecture would be controversial and divisive! Thus we were to hold the lecture at Custom’s House, a University property, but in the city.

However, given the nature of Bjorn Lomborg’s work and the relevance of it to those studying ecology etcetera I ended up going back to the Life Science’s Faculty accusing one of my old PhD supervisors along the lines of your article – and it was throw back at me that I now work for a right wing organisation, politically motivated etcetera etcetera. However, in the end the University did agree to host the lecture and on campus.

The quibble about the Customs House is nonsense. This is the University’s standard venue for speakers of general interest – in the year I’ve been here I’ve attended half a dozen university events there, and spoken at a couple of them. Marohasy knew when she briefed McGuinness that Lomborg could speak at UQ if he wanted to. As Norton points, out in an email, Griffith University wasn’t even asked, although it has regularly hosted speakers whose views could be presumed to be unpopular.

Reading McGuinness’ piece as a whole, the striking feature is the implicit assumption that while it’s OK for Paddy and his friends to dish out the vitriol, it’s blatant victimisation when they get a serve of their own medicine.

Categories: Environment Tags:

Krugman interview

September 17th, 2003 6 comments

If you haven’t already, you should read Calpundit’s interview with Paul Krugman. For regular readers of this blog, there’s nothing new – unsustainable Bush fiscal policies imply financial crisis partly by resolved by inflation, with a consequent increase in interest rates, frequent mention of Argentina etc. But Krugman says it better than I do, and Calpundit shows new possibilities for blogging with a rare instance of primary newsgathering.

Categories: Economics - General Tags:

Managerialism and professionalism, again

September 17th, 2003 4 comments

Linking back to my last post on this topic, Leaderlog has an interesting piece on Why managerialism trumps professionalism. Key point:

Where professionalism at its best is meant to be a mechanism for making things happen with the least interference (which makes a lot of sense in a period of expanding public health and education), when political pressure swings around to preventing things from happening, an internalised ethos is no match for promises of transparency and control.

Categories: Dictionary Tags:

McDonalds and soft power

September 16th, 2003 24 comments

This is the first second draft of my long-promised post on McDonalds and American soft power. I’ve had quite a few useful comments and have incorporate some, still digesting others. More comments much appreciated.

It’s hard to go anywhere in the world without running across American fast food chains like McDonalds and Starbucks, American movies and American sitcoms. This fact has led to lots of dubious inferences.

A particularly egregious example was Thomas Friedman’s Golden Arches Theory of Conflict Prevention, which held that no two countries with a McDonalds would ever fight a war. This theory was presented to the world in Friedman’s 2000 February 1999 bestseller The Lexus and the Olive Tree. A few months later, the USAF was bombing Belgrade, a city with seven McDonalds outlets.

More common than this kind of grand theorising are two inferences, one anti-American and one pro-American. More precisely, I should say “critical of/supportive of American economic and social institutions” since many of those who are most “anti-American” in this sense are domestic American social critics.

The anti-American inference is that America is a trashy and decadent society intent on forcing its low-grade way of life on to the rest of the world. One version of this inference is presented in Naomi Klein’s No Logo, though I’ve oversimplifed her message fairly drastically.

The pro-American inference is that the ubiquity of these American icons is evidence of American ‘soft power’ (a term coined by Joseph Nye in Foreign Policy in 1990) and proves that the rest of the world either loves and aspires to the American way of life or is jealous and hypocritically denounces Americanisation while secretly craving it. One version of this inference is presented by Fouad Adjami (link via Geoff Honnor). Again I’ve (over)simplified a complex argument to extract a central theme. Another reader (Ritu) mentions Fareed Zakaria in this context, raising the point that, in the current environment a Muslim-sounding name is probably an asset for someone writing in praise of American soft power.

Economists are generally suspicious of purely cultural accounts of economic outcomes, preferring to focus on technological issues such as factor endowments and on the effects of income and relative prices on demand patterns. This preference isn’t always right – cultural factors, industrial policies and pure chance have an important role to play – but it’s always worth considering the economic basics.

But there’s a standard economic analysis, dating back to the 1950s, that explains a lot about the prevalence of McDonalds without any need for a notion of ‘soft power’. Nicholas Gruen kindly sent me the following extract from one of his pieces, which I assume arose from debates over Australian car industry policy

In 1961, the economist Linder suggested that product specific scale economies and product differentiation combined with local tastes and transport costs to influence the pattern of trade in manufactures (1961: 87ff See also Kravis, I. B., (1956), “Availability and Other Influences on the Commodity Compositioin of Trade, Journal of Political Economy, Volume LXIV). In particular, he suggested that countries domestically manufacture differentiated products which can be manufactured at economic scale because they appeal to majority home market tastes. At the same time they import products to meet minority tastes. Minority tastes cannot be efficiently served from local manufacture because low levels of demand prevent local manufacturers achieving scale economies. Where these products meet majority tastes in other countries, they can be manufactured there at lower cost and then exported back to countries where they meet minority tastes. The resulting pattern of mass marketing at home and niche marketing abroad is well represented in many markets for manufacturers, not least the market for automobiles

Although I obviously picked up the ideas that were being tossed around during the car policy debate, I didn’t read the Kravis and Linder papers or maybe read them and forgot them [insert PJ O’Rourke drug allusion here] The Kravis-Linder model extends neatly to things like movies and McDonald’s franchises.

The most obvious common characteristic of chain restaurant franchises and movies is that of large fixed costs combined with effectively unlimited scale economies. A Hollywood movie can easily cost $100 million to make (the movie Titanic cost far more in real terms than the ship did), but once it’s made the cost of showing it is trivial. Similarly, a huge amount of expenditure goes into the creation of an instantly recognisable franchise like McDonalds or Starbucks, but the marginal cost of adding an extra outlet is relatively small. For brevity we’ll call both movies and franchise outlets “chain services”.

By contrast, the cost structure of an independent supplier, such as a coffee shop, restaurant or live entertainment venue is much flatter, and costs tend to increase beyond a certain size, rather than decreasing. On the other hand, the independent can tailor the product to a local market. The balance between independent local suppliers and chain services will depend on the amount of local variety or, conversely, on the homogeneity of the market as a whole.

It’s easy to see that the best market for which to produce a product of this kind is the biggest and most homogenous one, which, among the developed countries means America. Although America is not a homogenous society it’s at least as homogenous as any European country and about three times as large. So it’s not surprising that chain services have been most successful in America, to the extent that independent suppliers have been largely eliminated in many markets. Obviously, the optimal type and quality of services is that which matches the tastes of the average American consumer in the given market (which may be segmented but must be large).

Now think about similar markets in other countries. Chain services will be slower to develop, and less successful in competition with local independents because the potential market is smaller. This creates a opportunity for entry by American suppliers of chain services, whose fixed costs have already been paid in the American market, and who can therefore sell at lower prices.

An important consequence is that the market position of American chains is not the same in export markets as in America. Being designed for the American market, the product will not meet local tastes in export markets as closely, so it will be perceived as a low-quality, low-price product. This is most obvious with Starbucks, which is routinely used in America as a trope for luxury consumption (“Starbucks + upscale” gets 17600 hits on Google), while being regarded as distinctly second-rate in Australia. But even McDonalds has a noticeably higher status in America than in its overseas markets.

The big American chain service suppliers have tried to address this problem by tailoring their products more to foreign markets. But the more this is done, the less the cost advantages of multinational operation. Most attempts of this kind have been notably unsuccessful.

The same point applies to movies and particularly to TV, where the minimum efficient scale is lower. As soon as a country gets a big enough and rich enough market, and can establish its own TV industry, home-made shows (including local remakes of successful foreign shows) tend to take the top spots, while cheaper imports are used as filler. The US market is so big that the main networks almost invariably prefer a remake to the use of imported material.

What are the costs and benefits of all this. Obviously, Americans , considered as workers and investors, benefit from the fact that their scale economies give them cost advantages in markets for films, franchise production and so on.

This partly comes at the expense of other exporters. In talking about American ‘soft power’, it’s not often noted that, with some important exceptions such as computers, it’s rare nowadays to encounter American manufactured products outside the US. Looking around my house there’s a French car, some German whitegoods, and heaps of things made in Japan, East and Southeast Asia and even Australia. The only items that are obviously American are the Powerbook and its predecessors, and even they were mostly made in Singapore.

The effects on American consumers are ambiguous, but arguably negative on balance. Although they benefit from having films and chain restaurants tailored precisely to their tastes, they have far fewer alternatives than before the rise of the chains, particularly if their tastes differ a bit from the mean.

By contrast, precisely because the chain product is rather less attractive, consumers in markets outside the US tend to keep alternatives in existence. One of the traps for writers on ‘soft power’ is that, observing the proliferation of McDonalds, Starbucks and so on, they imagine that everyone in the countries they visit is a customer of these enterprises. This is, roughly speaking, true in the US, but the market share for these chains is smaller everywhere else.

A closely parallel analysis applies to language (thanks to Jack Strocchi for raising this point). There are big economies of scale and, as the language with the most (income-weighted) native speakers, English has a natural comparative advantage. So the natural outcome is one where English monoglots can make themselves understood almost anywhere, while non-native speakers of English who wish to function in the global economy must be, at a minimum, bilingual. If, as seems likely, bilinguality has cognitive benefits, as well as the obvious cost of learning a second language, the welfare effects have the same sort of ambiguity as McDonalds – the monoglots have lower cost and more convenience but less variety. [An interesting countertrend to all this is the rise of Spanish in the United States itself – to the point where native English speakers like George and Jeb Bush find it useful to be at least partly bilingual]

Even though a purely cost-based analysis works pretty well, it would be silly to dismiss ‘soft power’ altogether. Clearly, American movies and products do better at times and in places where the American way of life is viewed as cool and desirable. But relative prices are probably more important. Korean cars sell like hotcakes in Australia, but that doesn’t mean that the average Australian wants to move there.

Similarly, American movies sell well because economies of size mean they can have big budgets, and therefore, top-quality special effects and cinematography. That doesn’t mean that the average moviegoer or TV-watcher has any particular opinion about American foreign policy or social structure.

Less sophisticated audiences may be led to assume that the average American has the upper-middle class living standard typically presented in these productions. On the other hand, for middle-class consumers in developed countries, exposure to McDonalds and Starbucks leads to the equally misleading inference that American living standards are far below those prevailing in their own countries.

Categories: Economics - General Tags:


September 16th, 2003 3 comments

Like most people, I suspect, I find the details of international trade negotiations eyeglazingly boring. So, I was as surprised as anybody when the WTO meetings in Cancun suddenly collapsed, with less developed countries walking out en masse.

The immediate cause seems to have been the fact that the meetings focused on liberalised investment rules (pushed by the Europeans) while the poor countries wanted to talk about agricultural barriers and to have their proposal treated equally with a joint EU/US offer.

The underlying cause, in my view, is that the WTO now lacks a real backer, that is, a rich and powerful country or group of countries who want it to play a central role. The UN is backed by the Europeans, the IMF (with occasional qualms) by the US and the World Bank by both. Until recently, the WTO had the backing of the US which was historically the world’s biggest exporter and stood to gain a lot from expanded trade.

But now the US has switched to a strategy of bilateral negotiations like the proposed FTA with Australia where it can extract better terms. Moreover, like most net importers, the US is becoming more protectionist as its trade deficits build up.

Finally, the aggressive overreach by the WTO itself (things like the tuna-dolphin decision, that led to the Seattle explosion a few years ago means that the organisation has few real friends among NGOs and the broader public.

Given that, in the dispute over US steel tariffs, the WTO is bound to rule against the US, and the US seems unlikely to back down, it’s conceivable, though still improbable, that the organisation could collapse completely in the next few years.

Categories: Economics - General Tags:

Waiting for Putin

September 15th, 2003 2 comments

Whether or not the Kyoto Protocol comes into force depends on whether or not the Russian Duman ratifies it. But trying to work out what is going on seems like an exercise in old-style Kremlinology. One Minister they’re all set. Another says it’s months away. It’s not clear whether this is standard interdepartmental argy-bargy (the first minister is environment, the second is economy), angling for some last-minute sweeteners from the EU or something else altogether. Are there still Kremlin-watchers in business and if so can they explain what is going on?

Categories: Environment Tags:


September 15th, 2003 12 comments

I’ll be on ABC Radio National Australia Talks Back tonight, starting about 6:10, debating time limits for unemployment benefits with Peter Saunders (the CIS one).

Categories: Economic policy Tags:

Monday Message Board

September 15th, 2003 8 comments

It’s time again for your comments on any topic – civilised discussion and no coarse language please.

Categories: Regular Features Tags:

What I'm reading

September 14th, 2003 11 comments

Parliament of Whores by PJ O’Rourke. There can be few contemporary writers with more epigones than O’Rourke. Just about every newspaper has one these days (for a while, the AFR had two), and the blogosphere is full of variants on the same riff.

O’Rourke himself was a lot funnier in his National Lampoon days, satirising the Left, not exactly from within, but at least from close-up, than he is as a fully paid-up Republican party animal. Still he can always raise a laugh, which is more than can be said for most of his imitators.

Categories: Books and culture Tags:

The gamut from A to B

September 14th, 2003 1 comment

According to a piece by the Letters Editor of the NYT

We are eager to print all points of view ÷ liberal, conservative and anything in between

Categories: Politics (general) Tags:

Junk science on ozone

September 14th, 2003 10 comments

Reader Robert Parson, from the University of Colorado at Boulder, has kindly supplied a scanned PDF file of the hard-to-obtain Baliunas paper “Ozone and Global Warming: Are the Problems Real?”, which I’ve posted here (2.6MB download). It’s a fascinating illustration of the contrarian technique at work. In particular, it’s noteworthy that Baliunas uses almost exactly the same kinds of arguments on the two issues and, if anything, her case on CFC and ozone seems stronger. Of course, CFC regulation was a live political issue at the time, whereas action on global warming, such as Kyoto, was a relatively distant prospect.

A highlight is Baliunas’ confident assertion that “the ozone hole cannot occur in the Arctic” – a claim that stood up for about three years.

Only a few weeks after Baliunas testified before Congress that the science on all this was unsettled, the Chemistry Nobel was awarded to Paul Crutzen, Sherwood Rowland, and Mario Molina for their work on stratospheric ozone. Rowland and Molina were explicitly cited for proposing the CFC-ozone depletion theory. This killed Republican attempts (by the aptly named Reps DeLay and Doolittle) to stop the phaseout of CFCs, and Baliunas has been very quiet on the ozone issue ever since.

I’ve appended a more detailed version of the story kindly supplied by Robert Parson.

Read more…

Categories: Environment Tags:

Middle East Mess

September 12th, 2003 18 comments

The Israeli Cabinet has decided to exile Yassir Arafat, who, they say, “is an absolute obstacle to the whole process of peace and compromise”. It’s hard to disagree with this. But if that’s the criterion, why isn’t Sharon going into exile as well?

Categories: World Events Tags:

A lesson in statistics

September 11th, 2003 9 comments

Ken Parish supply the expected quibbles for my post on global warming. He illustrates some important statistical fallacies in the process. To support my case that the weather has got no cooler relative to the “the climatic extremes of 1998-2002”, I linked to the NOAA/National Climatic Data Center which showed that during the period since Daly’s post “January-July 2003, the global average land and ocean surface temperature was 0.54¡C (0.97¡F) above the long term mean, third warmest “.

Ken’s response is to go back to the underlying data and perform comparisons between Jan-July 2003 and the corresponding period in 2002, as well as month by month comparisons between 2002 and 2003 . Since the data set consists of deviations from long-term averages, it has no seasonal pattern, and there is, therefore, no justification for this procedure, or for focusing on 2002 when my post referred to the period 1998-2002 (the warmest five-year period on record,). It does, however, mean that the base period for his comparisons includes three of the four warmest months (in deviation terms) in the entire data set, all of which were in early 2002 (you can see them in the graph below). This is a prime example of ‘cherrypicking’.

Ken’s next move is to compare the individual months of June and July 2003 with the corresponding months in 2002, finding them to be cooler by 0.09 and 0.05 degrees respectively, and says “Thus the weather has got cooler since last year, albeit only slightly so far. ” In drawing this conclusion, he ignores the problem of statistical signifiance, which is acute when making pairwise comparisons for periods as a short as a single month. It’s easy to check that, even if you suppose that the data is an average of 1000 independent observations (far too many, given that short-term weather patterns at adjacent points are highly correlated) and that the standard deviation of monthly average temperatures at a given point is 1 degree, the difference found by Ken is statistically, as well as climatically insignificant.

All this might lead you to conclude that you can prove anything with statistics. But in fact, this is one case where you don’t need elaborate statistical analysis. The graph below (taken from NOAA) makes it clear that there is a warming trend that swamps the short-run cycles associated with sunspots and El Nino events.


To end on a positive note, I broadly agree with Ken’s assessment that

If the global average temperature falls back to well below the long-term average by 2006 that would suggest Daly may be correct. On the other hand, if it continues to fall but remains above the long-term average, that will clearly demonstrate the imprint of man-made global warming.

To be more specific, I predict that the average global temperature for 2006, as measured by NOAA, will be above the average for 1971-2000 (the baseline in the chart above) and I promise a retraction if this prediction is not correct.

Categories: Environment Tags: