Archive for May, 2004

Can wars be won ?

May 17th, 2004 19 comments

I’m reading How Democracies Lose Small Wars by Gil Merom. The main thesis is that domestic unwillingness to countenance brutality has caused democracies to lose small wars against militarily inferior insurgent movements since 1945. To make the argument, it’s necessary to show that, when these pressures weren’t so severe, victory in war generally went to the stronger party.

Merom presents a number of examples including the Athenian destruction of Melos, Cromwell’s war in Ireland, the Roman suppression of the Jewish revolt, German operations in SW Africa, Saddam vs the Kurds and Shiites, China and Tibet, Indonesia and East Timor and the Germans and Japanese in World War II. Merom argues that, in all these cases, unscrupulous brutality proved successful.

Yet in every case cited by Merom, a long-term view yields the opposite outcome. The Athenians lost the war and their hegemonic power, as of course did the Germans and Japanese in World War II. Ireland, East Timor and Israel are independent states, identifying in each case with the side described by Merom as the losers – Tibet isn’t yet, but I’m happy to predict it will become so. And then, of course, there’s Saddam.
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Categories: General Tags:

Monday Message Board

May 17th, 2004 5 comments

Time as usual for the Monday Message Board. Post your thoughts on any topic (civilised discussion and no coarse language).

Categories: Regular Features Tags:

What I'm reading

May 16th, 2004 1 comment

The Small House at Allington

by Trollope. I’ve always found this the least satisfying of the Barsetshire novels, defying the conventions of the “happy-ending” romantic novel, but without the Romantic desperation of, say, the Brontes. When her fiancee, Adolphus Crosbie dumps her, as a result of the discovery that her expected inheritance will not be forthcoming, the heroine, Lily Dale, does not, as would be expected in a romantic novel, accept the man who truly loves her, but abandons all hope of marriage. But the introduction to the Folio edition, by Margaret Markwick, supplies the missing motivation, arguing that the real meaning of the text is that Lily had a full sexual relationship with Crosbie, regarding herself as his wife from the moment of their engagement. Hence, in line with romantic convention, she can never marry again.

Of course, Trollope couldn’t say this explicitly, or even in a generally-accepted code, but Markwick suggests that at least some of his Victorian readers would have got the point. By contrast, we expect, nowadays, to have such things spelt out for us.

Categories: Books and culture, Regular Features Tags:

The Voice of Yoof, Part 2

May 16th, 2004 3 comments

Optimization Prime is a new group blog. The pun in the title, presumably due to Justin Gundlach should be self-explanatory to members of Gen Y and their parents- the members of the group are all in the former category, I think. My biggest criticism is that comments don’t appear to have been implemented yet, though this should be easy in what looks like a Movable Type set.

Among some interesting posts, Maggie McConnell cites a report that Hallmark is developing a line of greeting cards for gay weddings. This raises a more general point about capitalism as a solvent of traditional social order, going back at least to Schumpeter, which I’ll try to develop some other time.

Categories: Metablogging Tags:

Computers and convergence

May 16th, 2004 4 comments

When I first studied economics ( a long, long time ago) the textbook explanation of why income differed between countries was based on capital. In the simplest version (for example, that of Harrod and Domar), rich countries had a bigger stock of capital than poor countries, and the problem was one of accumulating sufficient capital to catch up. In more sophisticated versions, rich countries had more modern capital stocks, and therefore benefited from embodied technological progress.

Even when I was a student, this kind of thinking was already being superseded by notions such as human capital theory [1]. Still, I’ve never seen a really convincing refutation. It strikes me that computers and the Internet provide one, at least as far as differences among developed countries are concerned.
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Categories: Economics - General Tags:

Reinventing the wheel in social network theory

May 15th, 2004 10 comments

I was thinking idly about Erdos numbers, and it suddenly struck me that I could easily prove the necessity of a couple of ‘stylised facts'[1] about the associated networks. It’s well-known that the collaboration network for mathematicians contains one big component, traditionally derived by starting with Pal Erdos. The same is true of the network generated by sexual relationships. Although there is no generally agreed starting point here, it is a sobering thought that a relatively short chain would almost certainly connect most of us with both George Bush and Saddam Hussein.
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Categories: Science Tags:

Zarqawi again

May 14th, 2004 4 comments

The report that abu Musab al-Zarqawi personally committed the brutal murder of Nicholas Berg raises a number of thoughts for me. The murder and the knowledge of its videotape were bad enough (I’ve seen the still photos published in the papers, but have not looked for the video or for photos showing the actual murder). Giving the murderer a name seems to make things even worse, though it’s hard to say why this should be. There are, though, some important issues that need to be raised.
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Categories: World Events Tags:

Children are the future*

May 14th, 2004 19 comments

Turning from the short-term politics of the budget, what does it do for Australia’s long-run future? At least one commentator has raised this question, and I’ve been asked in other contexts, so it’s probably time to organise my thoughts.

Most of the discussion of long-term issues has been framed by the Treasury Reports on Intergenerational Equity, which have not been very satisfactory. They’ve done their analysis primarily in terms of the “aging of the population”, which leads to a focus on retirement incomes and nursing homes. The retirement income problem is much overblown, as many analysts have pointed out. Health care is an issue but, as I’ll argue in a later post, thinking about it in terms of an aging population is highly misleading.

More importantly, this way of looking at the problem leads Treasury to ignore education almost entirely[1]. After all, if you’re thinking in terms of an aging population, it’s natural to ignore kids. But in reality the demographic change we’re looking at includes not only an increase in the length of lifetime but an extension of the initial period in which education is the main activity. Statistics on “working-age population” typically look at people aged 15-65. But in the current economy, the age at which people typically begin their first “real” job (as opposed to part-time jobs in conjunction with school or uni) is now in the early 20s. A substantial increase in education, along with a need for steadily higher standards, is going to cost a lot of money.
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Categories: Economic policy, Oz Politics Tags:

Too clever by half ?

May 13th, 2004 15 comments

That’s my view of Costello in general[1]. And I think it may be true of the election budget he brought down on Tuesday night. The tight targeting of large lumps of cash was fairly transparent, and made it easy for Labor to get coverage for the converse observation, that lots of people, and crucial government services got nothing. The Courier-Mail is about as negative as I’ve ever seen in the immediate wake of a budget, running photo stories on a low-income student who gets nothing, and a mother-of-two who says the whole thing is a “vote-buying exercise”. The Oz has a series of negative stories.

Howard actually gets a better run in the Fairfax press, with both the SMH and the Fin running on a blunder made by Latham, who mistakenly said he wouldn’t benefit from the Budget (as a high-income earner he gets a tax cut). But this is the kind of story, beloved by journalists, that leaves the general public cold. The only time this kind of thing has any impact is when the person concerned is already on the ropes.

It’s now up to Latham to make a convincing response. He doesn’t need to present an alternative Budget but he does not some concrete alternatives. A good starting point would be promising to wind back the tax cuts for the top 20 per cent of income-earners, in order to fund an across-the-board reduction. I’m pleased to see that this is still on the table.


Latham’s reply seems to me to have hit most of the right points.

More significantly, perhaps the Channel 9 news ran a story on Labor’s promise to fund pneumococcal vaccine, which had the government playing catch-up. This news story isn’t nearly as damaging as the version I saw on TV. but the government is faced with a nasty choice here. I can’t recall an instance where a Budget decision has been changed, during Budget week and in response to Opposition pressure, but that’s what looks like happening. The fact that Costello rolled Abbott (who lobbied for the vaccine funding) in the Budget process only makes the whole thing more piquant.

fn1. I’m sure quite a few people would have the same view of me. But if it takes one to know one, this only strengthens my assessment of Costello.

Categories: Economic policy, Oz Politics Tags:

The budget and democracy

May 12th, 2004 19 comments

Is Costello’s budget good or bad for Australian democracy? I’ve been critical of the exceptional reliance on lumpsum payments, which certainly looks like bribery. But this is a presentational trick Australians ought to be able to see through (if not, the adage about getting the government you deserve applies). Leaving this trick aside the Budget is clearly based on the premises that:

* what people need is money in their pockets rather than better publicly-funded health and education

* we need to redistribute income towards households with children and away from those without

* at least for households without children, tax cuts for ‘middle-income earners’ (that is, everyone with incomes over $50 000) are more important than for those with incomes less than $50 000[1].

Labor will presumably accept the second of these premises, and merely argue that it could do a better job of implementation. But that leaves plenty of room for disagreement on the first and third points. So, if Labor takes up the challenge, we might for once be faced with a real choice, something we haven’t really had for many years[2]. I’ll post on what some elements of that strategy should be in the near future.

fn1. As the scare quotes around ‘middle-income earners’ indicate, only around 20 per cent of all income-earners make this much money. And to get the full benefit of the tax cuts, you’ll need an income of at least 70 000 in 2005.

fn2. Neither Beazley in 1998 and 2001, nor Howard in 1996 nor Peacock in 1990 offered positive alternative to the government. Hewson certainly put up a radical strategy in 1993, but his radicalism consisted largely in being more Keatingesque than Keating.

Categories: Philosophy Tags:

The ticking bomb problem

May 12th, 2004 24 comments

In response to the exposure of widespread torture of Coalition prisoners in Iraq and elsewhere, it’s inevitable that the “ticking bomb” problem should be raised. As Harry Clarke asks in the comments to this thread

‘You hold a terrorist who knows the location of a defusable bomb which, if exploded, will kill x million people. Do you have the right to torture him/her to find the bomb?’

Instead of offering an answer to this question, I’m going to look at a question that follows immediately, but doesn’t seem to have been asked. Suppose that you have used torture to extract information from a prisoner in the belief (correct or not) that doing so was justified by a “ticking bomb” situation. What should you do next?

My answer is that you should turn yourself in, and plead guilty to the relevant criminal charges. I think this answer can be defended from a wide variety of perspectives, but I’ll take an intuitive one first. If the situation is grave enough to warrant resort to torture, it’s certainly grave enough to justify losing your job and going to jail.

In consequentialist terms, it’s desirable in general that laws against torture should be obeyed. Since few people will want to follow your example (particularly if they can’t plead a ticking bomb in mitigation) your action in such a case will undermine the law less than if you committed torture and got away with it. Other theories will, I think, give the same answer.

Turning from individual ethics to law and public policy what this means is that laws against torture should be enforced in all cases. A plea in mitigation might be considered in cases like the one described above – an urgent and immediate danger, followed by a voluntary confession. In any case where a confession is not made, no claims about mitigating circumstances should be admitted.

Since, to my knowledge, no torturer has ever made an immediate and voluntary confession, the practical impact is that the ticking bomb scenario should be disregarded in any consideration of the legal and political response to torture.

Categories: Philosophy Tags:

The Budget Part II

May 11th, 2004 5 comments

I’ve now had a chance to look at Budget Paper 2, and I think it might be more accurate to replace the observation “Nothing much for education, and nothing at all for health” with “Nothing or less than nothing for most areas of education and health”.

The Budget Papers have literally dozens of descriptions of “measures” in which the expenditure item is either a row of dashes (the government has left the program alone) or a row of negatives (the program hasn’t been abolished, but expenditure has been cut).

Now, there may well be areas of spending which ought to be cut. But a search of the Budget speech reveals only seven occurrences of the word “cut”. Five refer to tax cuts, one to income cut-offs for eligibility for Family Tax Benefit and one to not “cutting and running” in Iraq. There’s no hint of any cuts on the expenditure side.

Categories: Economic policy Tags:

Tax fallacies from Peter Saunders

May 11th, 2004 21 comments

While I’m on the topic of tax and public expenditure, this is a good opportunity to refute some spurious claims made by Peter Saunders of the CIS in a piece in the Oz recently. This isn’t too hard, since the claims have been made quite a few times before, and I’ve refuted them quite a few times previously, a task that becomes a bit frustrating after a while.

First, Saunders says

The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today.

As I pointed out in my 1998 book Taxing Times

The tax reforms of the 1980s abolished the old top tax bracket, for which a marginal tax rate of 60 per cent was applied. An inevitable effect was that the former second-highest rate now became the top rate, even though it was lowered from 49 per cent to 47 per cent. Hence, even though taxes on high and middle incomes have been cut, the top marginal rate is now reached at a lower income, expressed as a proportion of average weekly earnings.
Even sillier comparisons are made with the tax system applicable in the 1950s. For example the Treasurer, Mr. Costello argues for reform on the basis that, in the 1950s, only people with incomes equal to 19 times average earnings paid the top marginal rate of taxation, whereas today people with incomes equal to one and half times average earnings pay the top rate. The ratio of tax revenue to GDP has, of course, risen since the 1950s, in Australia as in every other developed country. But the dominant effect arises from reductions in the progressivity of the income tax system. The current income tax system contrasts dramatically with that of the 1950s which had 29 brackets and a top rate of 67 per cent. Obviously in a system with so many brackets, very few people will have in incomes in the highest bracket.

The Parliamentary Library has a useful article on this topic, which shows how the increase in proportions paying the top rate was mainly driven by the reduction in the number of brackets. More detailed info is available from NATSEM (PDF file). Combining this with AWE data, I estimate that the 47 per cent rate applied at around 1.2 times Average Weekly Earnings in 1974 and about 1.4 times average weekly earnings in 1984, scarcely any different from today.

The main difference was in the very high rates applying to high incomes (the real target of Saunders’ concern, I suspect). The top rate in 1974 was 67 per cent, and it did not apply until income reached 40 000 per year, 5 times the threshold for the 48 per cent rate. Upper-income earners were taxed much more heavily in the past than they are today (though of course it’s necessary to take account of avoidance and evasion when considering actual rates of tax).

Second Saunders compares rates between countries saying

Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down).

But this ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security[1]. By contrast, in most of the other countries mentioned by Saunders, these taxes are large. In Germany, for example The employer and employee each make a contribution of 21% (2004)This point has been made so often it’s hard to believe that Saunders is unaware of it.

fn1. It’s also necessary to take account of compulsory superannuation contributions in Australia. But unlike social security schemes in other countries, this is pure forced saving – there is no pooling of contributions in the accumulation schemes that are now standard (except for politicians). So although there’s compulsion used here, it should not be regarded as taxation.

Categories: Economic policy Tags:

The Budget: The good, the bad and the ugly

May 11th, 2004 2 comments

I’ve just watched the Budget speech, and seen the immediate wrapups, but haven’t yet had time to read the Budget Papers (late night ahead, as I have to go on Life Matters tomorrow to discuss it). Here’s my instant reaction in three categories

h5. The Good

* Howard’s attempt to reinstate the cultural dominance of the single-income family has been dumped, with lots of assistance for families following the model preferred by most Australian households with dependent children, that if one full-time and one part-time job.

* The baby bonus has been dumped, and Labor’s idea for a replacement stolen.

h5. The Bad

* Nothing much for education, and nothing at all for health. Costello spent the entire health section of the speech on two initiatives that would barely get coverage if they were issued as a press release by the Minister for Health, one on equipment costs for people managing diabetes and the other on a cochlear implant for which there are currently 130 people on the waiting list. Of course, if you’re one of the people affected, this will be welcome use, but for the other 19.9 million of us, there’s nothing here. In particular, the obviously unsatisfactory measures taken so far to arrest the decline of Medicare were touted as if they were the answer to the problem

* Regressive changes to the tax scales, with significant benefits for those on high incomes and nothing for anyone below $50 000. The large segment of the population on below-average incomes, but without dependent children or ineligible for family tax benefit gets nothing at all from the Budget except another round of bracket creep.

h5. The Ugly

* Resort to vote-buying lump-sum handouts on a scale I can’t previously recall. Obviously this is a reaction to last year’s “sandwich and milkshake”, but it’s very dangerous stuff. The Fistful of Dollars rides again.

* The announcement in the 2004-05 Budget of a raid on the 2003-04 Budget, to finance the first instalment of the handouts mentioned above. As far as I know, this is absolutely unprecedented. Since the amount raided is almost exactly equal to the projected surplus for 2004-05, it would be more accurate to describe the Budget as being in balance rather than in surplus.

Categories: Economic policy Tags:


May 11th, 2004 2 comments

I’ve been meaning for a long time to collect my thoughts about US interest rates, and where they are and should be going. As is often the case, I’m largely in agreement with Paul Krugman, at least as far as long-term rates are concerned. On the other hand, I’m a bit more hawkish in relation to short-term rates than Brad DeLong, with whom I agree on a lot of things.

I’m planning on reworking this piece as I have new thoughts, and in response to comments. so please treat it as a work in progress.

Warning: long and boring (but maybe scary) post over the fold.
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Categories: Economics - General Tags:

Time to repeal Godwin's Law ?

May 10th, 2004 6 comments

What kind of America-hating lefty would seize on an isolated incident like this

Three weeks ago in Highland Park, Texas, Mrs Dolly Kelton was arrested and handcuffed for failing to pay a traffic ticket after her car was stopped for having an expired registration. I doubt that Mrs Kelton was a threat to the safety of the arresting officer. She is 97 years old.

then follow up with this

We handcuff her… because some Western societies, and America in particular, use these procedures as a way of softening up the accused by humiliation and to underline the power of the authorities.

What kind of slippery-slope argument do you think is going to follow?
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Categories: World Events Tags:

The inevitability of corruption

May 10th, 2004 17 comments

Over the course of the Iraq war, a lot of opponents of the war have made a big noise about corruption among US contractors, the most common target being Halliburton. More recently, the pro-war blogosphere has been in an uproar over the ‘discovery’ that Saddam bribed a range of officials, including some in the UN, so that he could get kickbacks from the sale of oil, which was supposed to be used solely for the purchase of food and other essential imports. There has been a sense of baffled rage that no-one is much interested in pursuing these ‘discoveries’.

The scare quotes around ‘discovery’ reflect the fact that everyone who was paying any attention knew about this all along, and, indeed could deduce it from first principles. For example, in a piece on financing the reconstruction of Iraq written in May 2003, I observed

A return to normal output would yield gross income of around $US 20 billion per year at current prices, but most of this money was already being spent under the Food-for-oil program and most of it be needed for the same purpose in future. About 25 per cent of the money was taken to pay interest on debts associated with reparations for the 1991 War. If these were forgiven, some additional money would become available. In addition, it appears that Saddam managed to cream off $1 billion to $2 billion per year. If this were returned to the Iraqi people in general, it would make a small but positive contribution.

I didn’t bother to point it out, but it was obvious that Saddam could only get his cut by bribing those on the other side of the deal, that is, employees of the UN, the oil companies and the governments involved.

In the same piece, I made the point that the US contractors doing the work in Iraq were bound to charge a lot and deliver little, so that the cost of reconstruction would be far beyond the minuscule amounts that had then been budgeted. The appropriate response was not to complain about corruption but to accept reality and the need to spend a lot more money.

Iin both cases, it was, or ought to have been, obvious that the policy in question would produce corruption. That was why the US and UK initially tried to keep sanctions much tighter, with the result that thousands of Iraqi children died of starvation or inadequate medical treatment. Those who supported the Oil-for-Food program, knew, or ought to have known, that Saddam would take a large cut, and supported it anyway. Those who supported large-scale expenditure on reconstruction after the war knew, or ought to have known, that unscrupulous contractors would make a fortune, and supported it anywar. I’m happy to admit to supporting both policies, and to accepting corruption as one of the inevitable costs.

Having said all that, corruption is a crime and those guilty of it should be punished. But, unless you favor starving Iraqi children or doing nothing about reconstruction, trying to use either Halliburton or ‘UNSCAM’ to score points regarding the desirability or otherwise of the war is just silly.
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Categories: World Events Tags:


May 10th, 2004 9 comments

This NYT story gives a pretty clear indication of how the Bush Administration’s abhorrence of abuse and torture will be manifested:

* A short spell in jail for those silly enough to be caught on camera or caught holding one
* A reprimand and no future promotion[1] for their immediate superiors
* No consequences for those who set up the system
* A new coat of paint for Abu Ghraib

I hope the Muslim world is more favourably impressed than I am.

fn1. As far as I can tell, this is what is meant by the NYT description of the reprimands as ‘career-ending’.

Categories: World Events Tags:

Monday Message Board

May 10th, 2004 8 comments

Time for the Monday Message Board. Post your thoughts on any topic (civilised discussion and no coarse language). My suggested discussion starter: Which season is best?

Categories: Regular Features Tags:

Sorry to be right

May 8th, 2004 11 comments

Like most commentators, I’ve made some correct predictions about Iraq and some incorrect ones. In my case, I’ve mostly erred on the side of pessimism, which I think is appropriate with regard to war – more disasters have been caused by excessive eagerness to go to war than by excessive reluctance. This prediction, made about a week into the Iraq war, seemed a bit over the top in the subsequent months, during which very little evidence emerged to support it. In retrospect, however, it turns out to be almost[1] entirely accurate.

Given the increasing frequency of references to Northern Ireland and Guantanamo Bay it’s reasonable to assume that torture of prisoners classed as ‘terrorist suspects’ will begin within the next few weeks, if it hasn’t started already. This will be denied with great vehemence, then, when it comes out, defended as an inevitable response to Saddam’s evil methods.

fn1. To be fair, while the response of the Bush Administration has been pretty much as expected (I forgot to mention the standard intermediate step of blaming it all on ‘a few bad apples’), and plenty of right-wing commentators have treated the whole thing as good dirty fun, some supporters of the war have been genuinely horrified. Sgt Stryker, (following correspondent BruceR) makes the same suggestion as I have previously, to “level Abu Ghraib, as the Bastille of the modern world that it is, send any prisoners worth keeping to other facilities, release the rest, and then offer substantial recompense for Iraqis, one and all, who claim to have been wrongfully imprisoned/abused in custody while there” . Sgt Stryker also proposes dissolving the army units involved.

Categories: World Events Tags:

More on the FTA

May 8th, 2004 5 comments

Kim Weatherall has lots of good stuff, particularly on IP issues.

The social desirablity of social democracy

May 8th, 2004 9 comments

Recent opinion polls have shown overwhelming majorities in favour of devoting any additional resources to improvements in public services, particularly health and education, rather than to tax cuts. Discussing these results, Andrew Norton notes that some people may be “giving the socially acceptable answer, rather than what they really want” (see also here. I think he’s probably right, and I certainly hope so.

The reason I think Norton is probably right is that the majorities are so overwhelming (75-22 in this Nielsen poll and even more in others) that a fair number of people in the majority (people on above-average incomes with below-average needs for services) would almost certainly be worse off in a narrow personal sense. While some of these may be consistently altruistic, others may want to appear altruistic in a poll but might actually prefer the cash. Taking account of these responses would produce a less lopsided majority for services, but still a majority, as is shown by Labor’s electoral dominance at the state level.

The reason I hope he’s right is that it means that social democracy has won the public debate, at least for the moment. After all, if everyone believed that tax cuts would benefit, not merely a subset of high-income earners but the entire community, then the socially acceptable answer would be to support tax cuts. That certainly seemed to be the way things worked during the tax revolt of the 1970s and 1980s. At that time, opposing tax cuts was socially unacceptable. Well into the 1990s, I was regarded as wildly heretical for advocating higher taxes. Obviously, this has changed, though the political parties have been slower to catch up than the commentariat.
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How to deal with the Axis of Evil

May 7th, 2004 5 comments

The other day, I saw in the list of WashPost Oped pieces one by James Dobbins entitled Time to Deal with Iran. No sooner had I seen the headline than I had my refutation ready, wondering what kind of neocon fruitcake would advocate compounding the problems we already have by taking on the Iranians. Didn’t Dobbin know, I wondered, that the US had already exhausted its reserves of troops, money and political credit? Being cautious, though, I decided I might as well read the article before writing my riposte.

It turns out that Dobbin means “Time to Cut a Deal with iran”. He makes a very strong case that this is the sensible course of action and that Iranian good offices with the Shiites would help build support for an interim government. But it struck me as a curious inversion of the domino theory that was one of the justifications for the war. The idea was that 100 000 or more US troops in the Middle East would scare neighbouring governments, particularly those of Iran and Syria, into good behavior. Instead, the help of the Iranians is needed to discourage attacks on the troops.

Coming to Syria, it was initially assumed that US complaints about “foreign fighters”[1] coming into Iraq from Syria were sabre-rattling, creating an implicit pretext for a subsequent invasion. It now seems more likely that Syria has been handed a bargaining chip – if the Syrian government seals its borders effectively, there’ll be no more complaints from the US about Assad junior’s unlovely regime.

fn1. There’s no evidence of large numbers of foreign fighters. But the classic role of a country like Syria in this context would be that of a safe haven for domestic Iraqi insurgents when the pressure gets too heavy inside Iraq.
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Categories: World Events Tags:

Are high oil prices here to stay ?

May 7th, 2004 8 comments

Paul Krugman has a piece on oil. This is as good a time as any to put up a long post I’ve been working on about oil and whether it’s finally going to run short, points on which I broadly agree with Krugman.
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Categories: Economics - General, Environment Tags:

Fallacy of the Commons

May 6th, 2004 17 comments

Like Jon Mandle, I was repulsed by Garrett Hardin’s 1974 article Lifeboat Ethics: The Case Against Helping the Poor The idea that large sections of humanity were doomed and should be abandoned forthwith was quite popular at the time. The Paddock brothers prominently advocated a policy of “triage”, cutting off aid immediately to countries like India which were, they argued, doomed to starvation in any case. Judging by this 1996 interview, Hardin (who died last year) didn’t change his views much over time.

Having reacted against this piece by Hardin, I was glad to discover that his more famous contribution to the environment debate, the Tragedy of the Commons was, in historical terms, a load of tripe.
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Categories: Environment Tags:

What I saw at the Senate Roundtable

May 6th, 2004 9 comments

The Senate Committee on the FTA held a roundtable meeting to which I was invited along with a fairly high-powered panel (listed below). Apart from the Andy Stoeckel and Lee Davis of the CIE, who were, naturally enough, defending the work they did for DFAT and Alan Oxley of Austa, the main pro-FTA lobby group, the evidence was almost uniformly against the FTA. Although there were a lot of different perspectives, there was, in the end, agreement on the point that the net welfare effects of the FTA on merchandise trade were sufficiently close to zero to be disregarded. Since these are the only effects for which economists have more-or-less reliable measuring techniques, this was somewhat discouraging, but it indicates that the terms in which the FTA have been discussed so far have missed the point.

The real issues relate to questions like services, intellectual property, the interaction between politics and economics, the US and Asia and so on. These are complicated, but most of the evidence suggested that the FTA will be a net negative, unless, like Oxley, you think that tying ourselves as closely as possible to the US is the optimal response to all these issues.

For what it’s worth the discussion reinforced the view I reached (with some assistance from Ken Parish) when the FTA came out .

The politics of this seem entirely straightforward for Labor. Hardly anyone in Labors constituency has anything obvious to gain from the deal (in fact, the immediate benefits for anyone in Australia are trivial and the indirect benefits entirely speculative) Latham has already alienated anyone who objects to standing up to the Americans. OTOH, the majority of the Labor base who objected to the Iraq war can see that Howard hasn’t even managed to secure fair treatment in return for our loyal support of the US, let alone any favours…the [standard] procedures for examining the treaty mean that nothing will come before Parliament until after the next election. It seems to me that this makes things even better for Labor. Rather than rejecting the treaty outright, they can say that, when elected, they will demand a renegotiation of the treaty (the fact that the US will also have an election complicates the issue, but mostly in a way favorable to this claim – for example, a statement by Bush that the terms of the agreement are ironclad can’t bind his successor).

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Categories: Economic policy Tags:

The Voice of Yoof

May 6th, 2004 3 comments

Without a trace of knowing postmodernist irony (or is that Gen X?), the publishers of The Backbench lobbed an email into my inbox advertising their new website, offering “Gen Y opinions on current affairs” .

I was prepared for the worst, but the website is well-presented (with the exception of an article on blogs that unaccountably lacks hyperlinks) and the pieces I sampled seemed thoughtful, well-argued, and entirely free of generation-game cliches. Go and have a look for yourselves.

Categories: Oz Politics Tags:

Tired but happy

May 5th, 2004 2 comments

After a fairly high-pressure trip to Sydney and Canberra, I’m back in beautiful Brisbane, having arrived just in time for karate training with my son. Thanks to the latter I’m too tired to write much, but I should be back on deck soon.

Categories: Life in General Tags:

Last refuge of the incompetent

May 4th, 2004 15 comments

Confirming my view that the generation game is, for journalists, the last refuge of the incompetent, Richard Neville lets off a spray on behalf of the Boomers against Gen X. A typical para

Around the time US snipers were taking aim from the rooftop of Falluja’s last functioning hospital, and images of their infant victims started to appear on websites, an old-fashioned student demo erupted in Sydney.

At last, I thought, the era of the zombie workaholic is over. It’s back to reality, instead of back to reality TV.

But no, these respectable ruffians in branded chinos were holed up in a vice-chancellor’s office to protest against the rising costs of education. No posters of dead Iraqi babies. The students have a point about the fees, but why can’t they get upset about other people’s problems?

I hate to break it to Richard who was, perhaps, a bit out of it at the time, but a large proportion of student protests in the 60s and 70s were about internal university issues, and a lot more were about the issue of the draft, directly relevant to those protesting against it. Quite a few of those attending probably wore Levis jeans and, some, as cool kids at high school, had probably made life a misery for those unfortunate enough to have parents who thought that King Gee was good enough. Finally, contrary to what Neville implies[1], there were loads of young people at the marches I attended in protest against the Iraq war.

Of course, this piece produced the appropriate response from outraged GenXers on the letters page, which only encourages hacks like Neville to reach for this piece of boilerplate next time they have nothing worthwhile to write. I’ve been bombarded with generational cliches since I was old enough to turn on a TV set. I look forward to a time when the idea that you can classify a person by the date on their birth certificate is accepted only in the astrology columns.

Update 06/05More on this from Ken Parish and I should also acknowledge Geoff Honnor who beat me to the punch on this one. Paul Watson recognises the silliness of Neville’s attempts to define Gen X on the basis of a sample apparently provided by his daughter’s affluent boyfriends, but doesn’t yet concede that it’s the whole idea of defining generations that’s absurd.

fn1. The story makes it pretty clear that Neville himself hasn’t been to an antiwar march for quite some time, and is relying on what he sees on TV.

Categories: Life in General Tags:

The FTA and the equity premium

May 3rd, 2004 47 comments

As indicated in my previous post on the FTA, the revised CIE study on the effects of the proposed Free Trade Agreement between the US and Australia has most of the benefits coming from investment liberalization. The estimated impacts on merchandise trade are now so small that a modest adjustment to the elasticities would turn the estimated gains to losses. As the report says (p98) “A high Armington elasticity implies that imports (from any source) are highly substitutable for local production, thus raising the prospect of trade diversion and income losses.”

Nearly all the gains proposed for the FTA therefore arise either from hypothetical dynamic productivity gains (the services gains are also mainly from this source) or from the supposed reduction in the risk premium for equity arising from capital market liberalisation. I’ve had my say on the dynamic gains hypothesis before, so I’ll focus on the equity premium.

First, as these results indicate, the equity premium is a really big deal. In the modelling present here, a reduction of 5 basis points (0.05 percentage points) in the equity premium induces a permanent increase in GNP of around 0.5 percentage points. The analysis assumes linearity as far as the gap between Australian and US equity returns is concerned, so we can take it further and say that reducing our equity premium to be equal to that in the US would raise GNP by around 12 per cent. Pushing the linear extrapolation further (further than it will go, but a reasonable first approximation), eliminating the equity premium altogether would raise GNP by around 60 per cent. I’ve done calculations in the past with very similar results, so I have no problem with any of this.

The difficulty is in the assumption that capital market liberalisation will reduce the equity premium and will have no offsetting adverse effects. The proposed changes are tiny by comparison with the floating of the dollar and the associated removal of exchange controls over the 1970s and 1980s, not to mention the associated domestic liberalisation. Yet there is no convincing evidence that these changes had any net effect on the risk premium for equity. Australian regulators who have to use a risk premium in estimating the cost of capital have looked at this issue repeatedly, and none has yet been willing to base decisions on the assumption that the risk premium for equity has declined recently, relative to the 20th century as a whole.

Then there’s the question of offsetting effects. The most important changes relax restrictions on takeovers. The analysis here is based on the assumption that such restrictions are necessarily harmful. Yet there’s ample evidence at every level to contradict this[1]. The takeover boom in Australia in the 1980s, led by the entrepreneurs was cheered at the time by economic commentators using precisely the reasoning of the CIE. It’s clear in retrospect, though, that the entrepreneurs, and the “white knights” who opposed them, dissipated vast quantities of capital in the 1980s. In fact, the mid-1990s increase in multifactor productivity was due, in part, to the unwinding of the bad investment decisions made in the 80s.

Finally, there’s a question about process here. Comparing this report with the estimates made by the CIE in 2001 before the FTA was negotiated, it’s apparent that the trade gains have declined significantly, as would be expected given the unfavorable nature of the agreement. The response has been to add in hypothetical benefits so great that the aggregate estimated benefit is actually higher than before. Meanwhile, obviously negative aspects of the agreement, such as the extension of copyright and the changes to the PBS have been put in the “too-hard” basket. The fact that the observable choices have consistently favored the FTA supports the view that, in more technical areas like the choice of elasticities, there has probably been a similar tendency to make favorable rather than unfavorable assumptions. Thus, the dubious analysis of capital market liberalisation casts doubt on the analysis as a whole.

fn1. It’s true, as Harry Clarke pointed out a while ago, that the strongest finding is that takeovers are bad for shareholders in the acquiring firm. This implies that we ought to be willing to sell our own assets while discouraging overseas acquisitions by Australian companies. While I can see the logic in this, I’m not willing to push this argument to its logical conclusion.
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Categories: Economic policy Tags: