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Greens' economic policy

July 27th, 2004

Here’s an extract from a piece I’ve been working on which will appear in Adelaide Voices

Having been disappointed in the economic policy offerings of the major parties, it is natural for an economist to look to the offerings of the remaining serious alternative, the Greens (it seems unlikely that the Democrats will manage a serious run), with a mixture of hope and trepidation; hope because the Greens have generally been willing to take a stand and trepidation because the economic policy platforms of minor parties frequently contain large elements of wishful thinking, small-group hobby horses and plain irrationality

It turns out that trepidation is unnecessary. The Greens economic policy is, quite simply, the most coherent and intellectually-defensible document of its kind ever put forward by an Ausralian political party. At the level of broad principles, it begins with the recognition that economic policy must be financially, as well as environmentally and socially, sustainable. Far from seeking cheap popularity by arguing for both tax cuts and increased public expenditure, the Greens have insisted that public sector debt should be matched by adequate capacity to service debt, and that dubious financial expedients like the use of privatisation to reduce measured debt should be avoided.

The policy is just as good in detail as it is in broad outline. The proposed tax policy initiatives, including a return to full capital gains tax, an assault on tax avoidance and a carbon tax, are just the kind of initiatives that Labor ought to be proposing. Unlike the modern Labor party, the Greens have no hesitation in espousing equality as a goal of economic policy.

Sad to say, in most electorates, a vote for the Greens will have purely symbolic significance, and it will be the allocation of second preferences between Liberal and Labor candidates that really counts. Moreover, it is doubtful that many Green voters will be motivated primarily by concerns about economic policy. Nevertheless, anyone who decides to vote for the Greens on the strength of their support for the environment and opposition to war should be encouraged to know that they are also choosing a party with a policy that is economically as well as socially responsible. If only the major parties could claim as much.

I’d be interested in readers’ comments.

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  1. bugner
    July 28th, 2004 at 22:24 | #1

    jq endorsing the greens’ economic policy – holy hell, this man goes to further extremes to flaunt his political fashion conscious. timt nailed it.

  2. observa
    July 29th, 2004 at 02:20 | #2

    Generally the Greens are quantity/mandate/legislative control freaks and hence their attraction for John Q, who should know better. You can be a Market Green John and work through the price carrot, as I have broadly outlined previously. You simply set up a different constitutional marketplace, from among the many we have tried, largely as a result of the science of muddling through.

    Now I have heard you argue that Labor, in order to find a spare $8bill, in order to fund an election program, should tackle things like capital gains, trusts and company vehicle concessions and the like. All this is tinkering at the edges of what is an income tax act that is now beyond the comprehension of any individual. Much avoidance is due to disguising income, or inflating business expenses by personal expenditure. We should get rid of this nonsense which has passed its use-by date.

    Let me put some rough figures around my idea of consumption/resource taxing and see how it might affect things. Suppose a take home pay now of $600/week becomes a gross pay of $800/week under a nil income tax regime. This is about right, because despite progressive marginal taxing, the average rate would be approx 25% of the gross. So our wage earner now gets $800 in his pocket instead of $600, but the snag is that fuel for his car is now say $3/L instead of $1/L now. He normally uses about $50 worth a week today, but in this brave new world he now faces a bill of $150/week. Now what will this rational consumer do? Will he downsize to a manual Mitsubishi Mirage(which we use at work for a site runabout)which returns 6.3L/100km around town, or like a friend in a large company automatic Ford, continue to consume 14.8L/100km around town? Perhaps our man likes changing his own oil in the car at $15 for 5L and a throwaway container nowadays. Suppose in a new market environment he has to pay $45 for the five litre container of oil. If he walks to the local servo and fills it up from a bulk container, he saves $3 on the container and gets back say $7 for his old oil to be recycled, which he previously poured down the sewer gully trap. I wonder how his family would deal with a tripling of their electricity bill at home? Do you think we’d have any more need for a Greensmart Housing Code set of regulations? Perhaps he might borrow to install a solar system, which now has a payback period of 10 yrs instead of 20yrs previously. You don’t need to mandate a damn thing to make people do the right thing if the price is right. Get with it John, you should be a market green with your background. So should we all.

  3. July 29th, 2004 at 04:29 | #3

    Fyodor, thank you, but your comments on markets are mostly a restatement of the theory and your faith in it. I commend to you my example of the 1987 crash as an empirical test of the theory, and an illustration of how markets can work in reality.

    On trading volumes, a couple of rough criteria:
    (1) The volume of currency trades that prevailed before currencies were floated: in 1973, $10-20 billion per day, by the early nineties $1200 billion per day.
    (2) The productive value of your average enterprise only changes by, let’s say, 5-20% a year (ballpark estimate), so its shares only need to be turned over once every few years in order for the market to fulfill its useful function of efficiently allocating investment. Instead, even in 1993 global financial trading turned over the equivalent of the global stock of tradable assets in 24 days. Figures are from Greider, One World, Ready or Not.

    On speculators, if speculation is so fast that it dramatically destabilises the markets (witness 1987 crash, 1997 currency meltdown, dotcom bubble, etc. etc.), then speculation is damaging and causes inefficiency.

    If, as well, speculators siphon off a substantial fraction of wealth from the productive economy, then they are parasitic as well.

    The point of my comment on GDP is not to argue against material production, but to point out that GDP is a quite inadequate and distorting measure of material welfare because, as I said, it makes no distinction between useful, useless and harmful. A car crash does not contribute to our welfare, but its cost is added to the GDP. Likewise pollution, disasters etc. This is not defensible accounting – you need to use subtraction as well as addition.

    On market history, Cuba, North Korea, Menzies etc. in Fyodor’s and subsequent discussion, generally the conventional indicators (GDP growth, unemployment, inflation) were more favourable through the fifties and sixties, when market intervention was more overt, than in the past two decades of deregulation – i.e. equal or higher GDP growth rate, low inflation, much lower unemployment and much lower current account deficit (Figures from official sources via Stephen Bell’s Ungoverning Australia).

    You can read more about my book Economia at http://www.geoffdavies.com

  4. John Quiggin
    July 29th, 2004 at 07:53 | #4

    Thanks for the Wikipedia entry, Michael! Fame, at last.

  5. Fyodor
    July 29th, 2004 at 09:38 | #5

    Geoff Davies,

    This may surprise you, but you’re not the first person to discover that markets stuff things up every so often. That’s because markets are full of fallible people subject to all the usual foibles (microeconomic assumptions notwithstanding) that come with being human. It’s thus no surprise that markets don’t get it right all of the time. However, they do get it right most of the time, and the economic riches that surround us (including this medium) are testament and proof of their power and efficiency. This is not untested theory and unsubstantiated dogma. Look around you.

    Your comments about trading volumes and speculation don’t add anything beyond your previous effort, and further reinforce my suspicion that you don’t seem to appreciate how markets work. It’s not as if everybody can sit down once every five years to work out what BHP is worth, exchange stock then part ways for another five years. Get real! If I want to sell my stock NOW, where do I go?

    I think your approach to data is somewhat suspect. Are your figures for forex adjusted for inflation, the increase in trade and financial flows or for the substantial increase in currencies switching from fixed to floating rates over the period? Moreover, you state that “…in 1993 global financial trading turned over the equivalent of the global stock of tradable assets in 24 days”. But you don’t state what goes into the “global stock of tradable assets”. Stock markets rarely turn over more than 150% of their value in ONE YEAR – the ASX has been averaging 50% or thereabouts for the past few years. I think you’ve included currencies and financial derivatives, which really does complicate the data.

    Your commentary on speculation is becoming curiously subjunctive and circular: if speculators cause market crashes, they are bad. Jeez, how could one defeat that logic? Well, what if markets don’t exist without speculators? Sure, we might not get crashes, but we’d lose out on the (much greater) positive contribution of markets.

    “If, as well, speculators siphon off a substantial fraction of wealth from the productive economy, then they are parasitic as well.” Why? How much wealth do they “siphon” off, and where does it go? You seem to assume that speculators exist in some dissociated world (“Specworld”?) where they don’t spend money on ordinary goods and services. They’re ordinary people like you and me. I can assure you, they’re not transporting all of their siphoned-off booty to Mongo.

    But it’s the final paragraph which really shows your true colours. Things were better in the old days, yadda yadda. Take me back 50 years, Kathleen. You’re really John Winston Howard, aren’t you? [P.S. that was a joke - I wouldn't wish that on anyone]

  6. July 29th, 2004 at 10:10 | #6

    Does anyone else than Fyodor have any comment, hopefully more constructive? With a willingness to explore the issues, and wIthout the desire to instantly patronise, pigeonhole and dismiss, without the presumption of my knowledge and motives, despite not having seen my arguments, of which I necessarily give only small samples here?

  7. ML
    July 29th, 2004 at 11:19 | #7

    I sympathise, Geoff. I didn’t get any reaction at all to this, posted in the efficient markets discussion on 23 July, and hopefully seen as relevant here.

    “Isn’t it (the EMH discussion) all the wrong question? Sure the market might act as the best (least-worst) clearing house for those who wish to participate, imperfectly informed, within its assumptions. And government is often good value for money within its assumptions.But if the assumptions of the market and government are both grossly and increasingly wrong in terms of the whole (i.e., the externalities are big compared to what is treated (always true for social externalities, now gigantic for environmental externalities),so what? Don’t markets and governments become necessary but, as currently run, far from sufficient? And so, the better markets/governments work as currently constituted, aren’t we optimising the sub-system and therefore sub-optimising the system?

    Posted by ml at July 26, 2004 02:19 PM ”

    I have been attracted to this board because of the tone of John sets concerning, as I see it, an outlook which seeks to be humane and ethical but also clear (seeking to avoid logical fallacies, etc). These three areas don’t intersect that often!

    That said, everyone has to decide when they post where their own stance is between the poles of encouraging the disinterested search for truth and riding their own hobby horse/pushing their own barrow. (Should just about be able to unmix those metaphors!) And surely even inadvertent and mild ad hominem asides are worth avoiding where possible.

  8. Another Jo
    July 30th, 2004 at 13:51 | #8

    I have read this thread with interest and it would seem that there is generally a belief that totally free markets work best for everyone. I would dispute that as it is apparent to me that markets are only really sucessful for the predators at the top of the food chain and are a disaster for the environment.

    Having seen the widening gulf between rich and poor in this country and the US & UK I think that we have a responsibility to create an economic paradigm that is inclusive of as large a sector of the community as possible and then to see that anyone who is left out is at least not homeless.

    We need to ensure that the chosen paradigm will protect the environment and allow for intergenerational equity as well.

    The Greens are at least looking for that paradigm which is more than can be said for anyone else.

  9. Fyodor
    July 30th, 2004 at 17:30 | #9

    Another Jo,

    This debate seems to turn around economic systems which work best for society and, by extension, the environment our society inhabits.

    Geoff Davies and others have thought a lot about this subject and come up with some alternative ideas, but we really only have two models of economic distribution: those based around markets and private enterprise, and those dependent on some authority – i.e. a government, democratically legitimate or not – to distribute resources.

    The history of governments running economic systems (i.e. “socialism”) is not great [in fact it's lousy if you take the socialist extremes of any "communist" country], either for economic welfare (i.e. the capacity of individuals to accumulate capital and purchase goods and services) or the environment. You stated that markets are a disaster for the environment. I suggest you consider what the Soviets and Chinese did to their environment before you condemn free markets.

    The solution we’re at now is an economy essentially given over to private enterprise, with considerable regulation and wealth transfer overlaying it. This currently does a pretty good [though not perfect!] job of giving most people a good standard of living [actually, an absolutely fantastic standard in absolute and relative terms, if you take an historical perspective] and protecting the environment.

    Most of the criticism aimed at the Greens’ economic platform concerns the extent of control they intend to influence over private enterprise. They’re not adding anything new to the debate, simply proposing to impose more government control on markets. Some people (e.g. me) object to that because it is, in their view, likely to do more harm to the economy than good.

    Where the Greens are due some credit – and JQ has done us a service by highlighting this – is that they have been honest and rigorous enough to be: 1) reasonably transparent with their policy platform; and 2) rigorous and consistent in the articulation of that platform. You don’t get this from either of the mainstream parties.

    I happen to disagree with the Greens, but they’ve done a better job than I expected.

  10. August 1st, 2004 at 07:25 | #10

    Fyodor, we do not have to be confined to the old dichotomy of unfettered markets versus centralised control, if we are open to new ideas. To keep insisting on that dichotomy is to be as doctinaire as old hard “lefties”, as some people here put it.

    Nor need we be confined to overlaying a few redistribution bandaids on markets that still favour the big sharks, regardless of the failures of socialism.

    The present system, I contend, contains mechanisms that pump wealth to the rich. Those mechanisms are neither inevitable nor ordained by heaven – they are human creations. I don’t see any practical or moral justification for them, apart from “it’s all we know how to do”. Some of those mechanisms are well-recognised by some, but at least one (debt-burdened money) seems to have escaped the notice of most people, including most economists.

    The alternative to the old dichotomy is to manage the markets DIFFERENTLY than they have been managed to date (they have been managed, explicitly, by stealth or by default, because they are human creations). The judicious way to manage them is through financial incentives – already a well-established practice, if haphazardly applied. If markets, so managed, could deliver us material sufficiency, access to a decent livelihood for everyone, and a flourishing living environment around us, then we wouldn’t need the social-welfare or environmental bandaids.

    Who is to do the managing? Well, politics, broadly conceived, is just the process by which we reach collective decisions. There’s no alternative. If we don’t like the way that’s been done so far, then we’d better do something about that too.

    You know, it’s very easy to say “It can’t be done”. And if that’s all we say, we’ll be right. Alternatively, we could take on the challange to provide our children with a hopeful future.

  11. August 1st, 2004 at 10:49 | #11

    Who is to do the managing? Well, politics, broadly conceived, is just the process by which we reach collective decisions.

    Thus speaketh the incipient totalitarian, with his grand scheme for taking away individual economic freedoms and replacing them with decisions by the ‘collective’. Geoff, I don’t care if this sort of system that you are suggesting can be made to work – it inevitably leads to a world in which no decision can be made by an individual without interference by do-gooders and special-interest groups. If you like, it’s economic rationalism gone too far.

  12. Another Jo
    August 1st, 2004 at 13:38 | #12

    TimT
    If you really want to see something that will threaten your economic freedoms and harm, perhaps even destroy the economy you should look at the words of the Association for the Study of Peak Oil Production. In public they say that demand for oil will not exceed supply but in private they say that Saudi Arabia will need to increase supply by 3m barrels a day by the end of the year and if this does not happen “it will be very difficult. We will have difficult times”(Fahtih Birol – chief economist of the International Energy Agency)

    Is such an increase in production possible? Probably not and indeed according to some informed sources it is completely impossible.

    I am sure that everyone reading this list will understand the strain that rising demand and falling supply will create and also understand the way that our economy is totally meshed and dependent on cheap oil

    This is where the totalitarian will find his niche and I’ll bet it will not be a “do gooder” or a “collective” running it – it will probably be a dictatorship.

    Please note I have not mentioned the “H” word or the “N” word

  13. August 1st, 2004 at 19:58 | #13

    Another Jo, I take it you agree with me then that for the nation’s good we should switch to nuclear power?

  14. Fyodor
    August 2nd, 2004 at 10:05 | #14

    Geoff Davies,

    It’s not my intention to close off debate on this issue. I genuinely wish you all the luck in discovering new ways of running an economy, but I don’t think you’re there yet. Your suggestion that we manage markets “differently” through “financial incentives” determined via “politics” only reinforces my earlier point about the narrow range of options we face. Your solution is essentially more government control of markets and economic institutions.

    The problem with this solution is that governments don’t do a great job of determining what people want and need, then delivering it to them. Markets tend to do it better, most of the time, and excessive control and regulation distorts their ability to do this efficiently.

    Exceedingly clever and insightful people look at markets, see chaos and inequity, and assume they would do it better if only they were in control. We had 70 years of that in the Soviet Union, and the lesson should have been learned by now.

  15. Fyodor
    August 2nd, 2004 at 10:18 | #15

    Another Jo,

    We’ve had umpteen oil “crises” before, and this time is no different.

    If demand for oil increases relative to a fixed level of supply, the price of oil will rise until those demanding oil reduce their consumption and/or switch to alternative energy sources. If supply is not fixed, we produce more. Where’s the problem?

    Please don’t tell me we can’t produce more. There are plenty of oil companies out there ready to deliver you more oil. We are a very long way from a genuine oil crisis.

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