John Quiggin

It’s time for the Monday message board, where you are invited to post your thoughts on any topic[1]. Civilised discussion and no coarse language please.

fn1. Except for GM foods, the Iraq war and Israel-Palestine. I’ve put up posts specially to accommodate those who want to debate these issues at length. Feel free to comment on whether this a good way to handlle this kind of topic, or to suggest any other innovations you’d like to see on the blog.

Following the model of my long-running GM foods thread, I’m putting up this post for anyone who wants to debate the issues regarding the Israel/Palestine dispute.

I request that debate in this thread be kept civilised with no coarse language or personal abuse – I will delete noncompliant comments and ban repeat offenders. I also request that commenters not raise general issues about the Israel/Palestine dispute when commenting on other posts. If there’s enough interest, and the general tone is constructive I’ll keep this post on the front page as long as discussion continues.

For what it’s worth, my view is that the Clinton/Barak plan was and is about right one and that both Arafat and Sharon are obstacles to peace.

The teams I back seem to be losing pretty steadily at the moment. I’m just back from seeing the Bullets go down by 2 points to West Sydney. Kevin Freeman took a difficult shot to push it into extra time on the buzzer, but missed. Still, there’s plenty of time to turn the season around.

I watched Cry Freedom last night, for the first time since it came out in the late 1980s. It’s a great film, but the scene that stuck with me this time was right at the beginning. The police were clearing a squatter settlement, burning houses, arresting and beating people and so on. The scene shifts to Donald Woods listing to the apartheid government’s news broadcast, which announces that “the raid was a complete success, and many illegals were arrested or gave themselves up”.

The latest US trade data (for August) is out, with a deficit of $US54 billion[1]. This is about 6 per cent of GDP at an annualised rate. Also, the US budget deficit for 2003-4 came in at $413 billion.

But perhaps the most interesting story is one that arose from a relatively obscure decison of the WTO which banned a tax subsidy for US manufacturers that cost the US government around $5 billion a year. For a government in the fiscal position of the US, this ought to have been a small but valuable free gift in the attempt to wind back the deficit.

So what did the US Congress do? It passed a bill that not only replicated the effect of the prohibited subsidy, but extended it by drastically widening the class of firms classed as manufacturers. Getting support proved a little problematic, so the votes were rounded up by inviting every member of Congress to insert their own preferred piece of legislation, assisting every industry from tobacco to tackle boxes (a big tackle box manufacturer is in House Speaker Dennis Hastert’s district). The total cost is estimated at more than $140 billion over ten years[2]. As Senator Charles Grassley argues, largesse distributed as widely as this ceases to be special-interest pork-barreling and becomes more like a comprehensive industry policy

“For all the unfair carping about this bill being a special-interest bill, nearly every member raised narrow-interest provisions. So, if there’s some fault about different provisions coming up, we all share that. We all do it.”

Grassley appears to be right. On this legislation, with the usual negative, carping, exception of John McCain[3], consensus ruled the land. Liberals, centrists and rightwing Republicans all lined up to support the bill.

If I was a holder of US government debt, I’d be getting a bit worried right now. But I’m a notorious pessimist.

As various people have argued, there’s a neo-Bretton Woods system in operation in which Asian central banks (formerly Japan, now China) finance whatever trade and budet deficits the US choose to run. So, there’s no need to fret. World capitalism can safely rely on the good judgement and good will of the Chinese Communist Party.

fn1. Australia is one of a handful of countries with which the US has a bilateral trade surplus. Maybe relevant in considering the FTA.

fn2. There are various offsets from closing tax shelters, which are supposed to balance the cost. But the figures are rubbery, and this was money the government should have gone after in any case.

fn3. Why does he hate America so much?

I’m five years too late, and McNeil PPC has beaten me to the name, but it struck me the other night[1] that iModium.com would have been the ideal name for an Internet/telecom/dotcom IPO in the late 1990s.

fn1. There was no medical reason for this thought, just a random neural connection

For once, there has been a little bit of encouraging news coming out of Iraq. I’ve also been encouraged by some of the reactions I’ve seen.
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As Tim Dunlop notes, the government has already started the process of repudiating its election commitments. This Age report quotes Costello casting doubt on the forecasts used to justify the spending spree, and the Fin (subscription required) gives an even clearer indication that election commitments are likely to be broken, yet again, saying

His comments raise the possibility the coalition may seek to rethink some of its election campaign promises, and the $65 billion of promises since the May budget.

Mr Costello’s warning comes after The Australian Financial Review revealed that without consultation with him, Prime Minister John Howard had opted to announce at his campaign launch all of the $6 billion in spending promises that had been proposed by the Liberal Party campaign office, rather than just one or two as was expected.

it’s safe to say that this leak could only have come from Costello or his office.

I’ll be very interested to see what government supporters have to say about this, and what it implies with respect to the swinging voters who (presumably) took the government on trust as it asked them to, and voted for them on the basis of their stated policies.

Note: Post updated to include AFR quote

It didn’t take long for the government’s FTA chicken’s to come home to roost. Not surprisingly, the US government repeated its earlier statementthat it had serious problems with the amendments introduced by Labor to stop ‘evergreening’ of pharmaceuticals (a device to extend effect patent life using trivial variations on existing patents)[1].

More interesting is that Big Pharma is already acting as if the agreement is set in concrete, heavying the Howard government over its own election promises. All of this is as I predicted, using the arguments of Christopher Pearson. Following Pearson’s summary of the arguments Big Pharma could use against the Labor amendments, I observed

What’s critical to note here is that these points have nothing to do with the specific content of Labor’s amendments. They apply to any legislation concerning the PBS that an Australian government might seek to introduce in the future and, arguably, to any administrative decisions made by Ministers. If Pearson is correct1, the FTA gives the Americans an effective veto power over anything we might attempt to do to improve the functioning of the PBS. It’s notable that Pearson’s points are almost identical to those that have previously been made by critics of the deal, and pooh-poohed by the government.

If there was ever a time for Howard to earn the “Man of Steel” moniker hung on him by George Bush. He should demand an exchange of letters from the US side making it clear that we can take whatever action we deem necessary to protect the PBS. If this isn’t forthcoming, he should walk away from the deal and see what he can get out of the next US Administration, or the one after that if necessary.

fn1. After some hamfisted interventions on other issues, the US did the right thing in waiting until after the election to raise these concerns.

Various comments have suggested that I’ve been too nice, or not nice enough, about Real Business Cycle theory, the main contribution that got Kydland and Prescott their Nobel prize. My remarks weren’t really meant as a careful evaluation, so I’ll offer a slightly more considered view now, with the warning that there are plenty of readers of this blog who know more about dynamic macroeconomic theory than me – they can set me straight in the comments section. Non-economists may want to skip on to the next post.
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I didn’t do much for my reputation as an election tipster with my assessment of the Australian election. But I was just about spot-on in my pre-election prediction, posted at Crooked Timber that,

Whatever the outcome, I expect it will be treated in the international press as something of a referendum on the Iraq war

whereas, in reality, the issue barely came up.

On cue, here’s Glenn Reynolds complaining of inadequate coverage of

an Australian election that was run in no small part as a referendum on the war

Admittedly, Reynolds isn’t “the international press”, and, as he complains, some papers got the story right rather than printing the fantasy he would prefer, though many others have taken the “referendum” line. But his words are so close to my prediction that I feel entitled to a bit of a gloat. Heaven knows, we haven’t got much to gloat about in Australia this week.

More on this from Tim Lambert .

Scott Wickstein notes the second anniversary of the Bali bomb attack, with some personal memories.

I’ve seen various assertions in the last couple of days claiming that cuts in the top marginal rate of taxation have been blocked in the Senate (so, by implication, can now been introduced). I don’t recall this happening, though there have certainly been occasions when the Senate blocked spending cuts or increases in other taxes that were supposed to finance cuts in the top marginal rate. But my memory on these things is not 100 per cent reliable.

Can anyone advise me whether there has in fact been an occasion where the Senate has voted against a reduction in income tax rates (on its own, not as an element of a package)?

The winners of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 2004 are Finn Kydland and Edward C. Prescott for their work on time-consistency in policy and on real-business cycle models. In my view, the time-consistency work is important and has generally been a positive influence on policy makers1].

Real business cycles models were an exciting idea in the 1980s, and continue to influence the way people think about macroeconomics, but haven’t in my view, lived up to their early promise.

One discovery of Prescott’s that I think is very important, but isn’t part of the Nobel citation is the equity premium puzzle, which he discovered jointly with Rajnish Mehra. This is the fact that thegap between the rate of return on equity and the rate of interest on bonds is much greater than can be accounted for by standard arguments about risk. This in turn explains why governments generally lose money from privatisation, as Simon Grant and I have pointed out.

fn1. Some central banks, like the RBNZ under Don Brash took ideas like credible commitment to an extreme, with bad results. But then, in this period, policy makers in NZ took everything to extremes and usually got bad results.

It seems likely though not certain that the government will get exactly half the seats in the Senate, and that the Family First party will get at least one, largely due to preference deals with Labor[1]. As with all new parties, there’s something of a lucky dip quality here. Certainly, it doesn’t appear that FF are the hardline religious rightwingers that they have been represented as. I don’t have any particular knowledge about this group, but I will offer a few thoughts.

First, as I said in relation to Pell and Jensen, the idea that religion and politics ought to be kept separate is in general a silly one. It’s based largely on a misunderstanding of the doctrine of separation of church and state. What this doctrine prohibits is action by the state which favors one religion over others or over those without religious belief. In this context, claims that FF is closely associated with one particular church (Assemblies of God) are troublesome. It seems, however, that even if a lot of its leaders have been associated with AOG, the party is broader than this.

Separation of church and state does not mean that there is anything inherently problematic about people holding, and acting on, political views that are derived directly from their religious beliefs. The problem, where there is one, arises from the content of the beliefs and views. Although I don’t share the belief that we are morally obligated to follow the teachings of Jesus, I am often in agreement with the political views that follow from that belief. On the other hand, I rarely have much sympathy with policy beliefs derived from the Old Testament, for example, those condemning gays.

From what we’ve seen so far, it looks like FF have a mixture of policies, some of which will be appealing to me and most readers of this blog and others not. On the positive side, they are sympathetic torefugees and may help in restoring some much-needed decency in this area of politics. More generally, family values are, in large measure, those of the left. Co-operation rather than self-seeking competition, equal sharing rather than incentives and so on. That hasn’t stopped plenty of poltiicians espousing family values and pursuing anti-family policies, and we will have to wait and see whether FF lives up to its own rhetoric.

The obvious negative is that, for FF, the traditional family is the only option. I imagine the realities of life impinge to the extent that plenty of FF members and supporters have experienced divorce, blended families and so on, but there will obviously be no sympathy for ideas like gay marriage. But this was never going to come up, given that Labor had already opposed it. In general, this is not an area where governments have a lot of direct impact.

Overall, then we shouldn’t despair about FF holding the balance of power in the Senate, though I’m not optimistic they will do much more than blunt the sharpest edge of government policy.

fn1. In addition, there are the Democrats, of whom Andrew Murray is most sympathetic to the Meg Lees view of seeking negotiated improvements to government legislation. This means that, most of the time, the government will be able to get legislation through, perhaps with amendments.

I’m surprised no-one else seems to have mentioned the impact of state-level problems on Labor’s vote in the election. Right across the country, state-level issues ran against Labor. This partly reflects the fact that Labor is in office in every state, and in some cases, has been in office too long. But mostly, it was idiosyncratic stuff, that could have gone either way, but happened to go against Labor – even popular Labor governments ran into strife. Here’s my list

* In Queensland, the CEO of Energex committed suicide during the campaign. Although it was a complex story, it was tied to the failure to prepare properly for the blackouts that followed storms in January, which hurt the government

* In NSW, there were a string of hospital crises

* In Victoria, there was the broken promise over tolls on the Scoresby Freeway

* The Tasmanian forests were a state issue that split the general alliance between Labor and Greens

* The Gallop government in WA seems to be unpopular, though I don’t know the details of this

I don’t think these factors were enough to swing the election, but they could easily have added up to a 1 or 2 per cent swing, making the difference between an easy win for Howard and a narrow one.

One of the first items of business, once the government gets effective control of the Senate (or perhaps earlier) will be the full privatisation of Telstra, ending nearly a decade in the limbo of part-privatisation. Having argued repeatedly that partial privatisation is the worst of all possible worlds and with Labor having dumped my (and Lindsay Tanner’s) preferred option of renationalisation and divestiture, I can’t really complain about this. However, the privatisation process will show some of the reasons why privatising Telstra is a bad idea[1].
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One obvious consequence of the government’s victory and effective control of the Senate will be the repeal of restrictions on media ownership, with the likely consequence of a takeover of the Fairfax papers by one of our great magnates, or perhaps by a foreign buyer[1]. There may also be a renewed attempt to punish the ABC, and even if there is not, the organisation will certainly be cowed. All up, the government is likely to enjoy a pretty supportive mass media.

In this context, it’s not surprising that Ken Parish should be thinking about the role of blogs as a source of balance. Ken says

the blogosphere (along with independent organs like Crikey) might well become a critical and lonely source of independent political analysis and opinion.

And whether the blogosphere rises to that challenge might depend in part on whether at least some blogs manage to evolve beyond the current norm of self-indulgent partisan shrillness and develop something resembling traditional broadsheet media standards of journalistic rigor and objectivity in presenting the facts, together with balanced presentation of a wide range of opinions.

The reference to broadsheets raises for me the question: could a blog-based competitor for the quality dailies be feasible, and if so how? I suspect the answer is “No”, but we mind find out something useful by thinking about it
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In victory or defeat, the sun still shines and the weeks roll on. So, it’s time for the Monday message board. Post your thoughts on any topic. Civilised discussion and no coarse language please.

Some general thoughts on the election outcome.

First, I have to concede immediately that the betting markets got this one right. Unlike polls and pundits, including me, they consistently predicted the return of the government. Before I’m convinced that there’s a real phenomenon here, though, I’d like to see an instance where the betting markets correctly predict a Labor win against the apparent odds[1].

Second, Labor suffered again from holding off too long on key policy issues. The tax policy went OK (but would have done just as well if it had been announced earlier), but the forest policy was clearly a disaster in political terms – the substantive merits are more complex, but precisely for that reason needed more argument and explanation. Instead the whole thing was left until the last few days of the campaign. The Labor planners ought to have been able to work out well in advance whether they could work out a deal which would satisfy the unions while achieving enough protection for the forests to keep the Greens onside. If it couldn’t be done, a political strategy to deal with the consequences needed to be worked out. Instead, they seem to have floated the policy and hoped for the best. This allowed Howard to announce a non-policy in response, without any time for Labor to do anything about it.

Third, and contrary to a lot of post-election claims, the campaign showed that health and education can win elections. The problem for Labor was that Howard was willing to outbid them, putting a heap of money into both bulk billing and state schools, even if it was poorly targeted (in policy rather than electoral terms) and hedged about with all sorts of silliness, like the idea of going through P&Cs. As I said several times during the campaign, Howard’s concessions, on Medicare in particular, mean that he has admitted defeat on the core ideological issue of the size of government.

Fourth, there’s economic management and interest rates. Undoubtedly these were the winning issues for Howard, as he had hoped. Contrary to Ken Parish’s argument, I don’t think you can really separate the two. And it was always going to be hard for Labor to make the case that Howard’s reputation on this score is overblown (I did so here, but I’d hate to try and condense it into a 30-second spot). A big problem here is the continuing memory of Keating, whose exceptional arrogance makes the mistakes of fifteen years ago still powerful electoral ammunition for the government – it’s as if Gough Whitlam had been able to run against the 1961 credit squeeze.

Finally, there’s the prospects for Howard’s next term. It’s clear enough that he will be able to push through the remaining elements of his 1996 program, the full privatisation of Telstra[2] and a final instalment of industrial relations reform. For the rest, his campaign platform was designed to match Labor – he hasn’t got a mandate for anything much in the way of free-market reform. It’s possible that, as on some previous occasions, he’ll repudiate his promises and embark on a new round of radical reforms. But my guess is that this won’t happen. Even the Telstra privatisation will cause a lot of political pain. In any case, there aren’t that many options on the table. Tax reform is unlikely to be affordable, the government is now committed to saving Medicare and bulk billing, and pushing privatisation on to Australia Post seems most unlikely to me.

The big issue is whether we continue to avoid a recession. The imbalances we’ve piled up in terms of household debt, the trade and current account deficits and the inflated price of houses can only be sustained, if at all, with low world interest rates, and those rates depend on the willingness of the Chinese and Japanese central banks to sustain them. As I said on election night, Howard’s reputation as a good manager owes a lot to luck, and luck always runs out in the end. But Howard’s luck has lasted longer than most.

fn1. Does anyone know if there are betting markets for state elections? If so, did the markets predict Bracks over Kennett?

fn2. As Andrew Norton points out, Family First actually opposes privatisation, but the government’s position is strong enough that it will certainly find some way to make a deal.

Well, there’s not much joy in the election results, with the outcome looking a bit worse than the status quo ante. That means another three years of a government that didn’t even deserve a second term, let alone a fourth. Latham ran a pretty good campaign, but couldn’t beat the interest rate scare, and should have bitten the bullet on forest policy much earlier. In addition, the problems of state Labor governments didn’t help.

As for the Liberals, they’ll have an interesting time of it, I think. They’ve made expensive promises, which will be hard to keep and costly to repudiate. And their credibility is now completely tied to low interest rates, something over which they have no real control. As I said in my chapter in The Howard Years

In 1964, Donald Horne described Australia as ‘a lucky country, run by second-rate people who share its luck’. This epigram could be applied, with equal or greater justice, to the Howard government and its term in office, particularly as regards economic policy. Sooner or later, however, this kind of luck will run out.

It hasn’t run out yet, though.

Just about time to break out the red wine, order the pizza and warm up the TV. The hints I’ve seen over at Tim’s about exit polls aren’t encouraging, but we’ll just have to watch and wait.

I’ve just been down to the local school to vote. My totally irrelevant and unscientific observations:

* Voting early(ish). The polling booths have been busy all day. Since the total number of voters can’t change much, it looks as if people are voting earlier than usual

* Return of the true believers. I’ve always had a superstitious belief that attitudes to how-to-vote cards are indicative of something. I saw a string of people walk straight past the Liberal canvasser, which suggests to me that Labor voters are feeling keener than they have for some time.

* I must say it was pleasant to vote the Labor party ticket for once. Next time I’ll go back to my usual practice of carefully ranking all the candidates, but this time I agreed with Labor’s proposed order for the Reps and I trusted the backroom guys to get the preferences right for the Senate.

* Some commenters pointed out that by voting Labor I denied the Greens their allocation of public funding. But I think my defence of their economic policies against the bizarre attacks mounted by the right was worth more than the $2 or so my first preference would have gained them

I’ve been reminded by Blair Fairman (Labor by 6) in comments to the previous post, that I haven’t put up a post calling for election predictions. Actually I did do this right at the start of the campaign but that’s not much use. In the spirit of optimism, I’ll call for predictions to be posted in terms of Labor’s lead over the Coalition in seats (leaving independents and Greens out). The person who is closest will be congratulated (with wild applause if it’s Pete who predicted Labor by 20). Multiple winners are allowed.

Update The winner is Jack Strocchi, who predicted a net gain to the Liberals

In keeping with my Labor party roots, I’ll be down at the local school early to vote, though in the spirit of modernisation, I’ll vote only once. My electorate of Ryan was famously won by Labor at a by-election a few years back, and the local member is thoroughly unappealing, but I don’t suppose there’s any chance of the seat changing hands.

Meanwhile, in the US, Michigan Republicans tried to have Michael Moore prosecuted for encouraging people to vote. He was giving out stunt prizes like clean underwear and noodles to ‘slackers’ who promised to vote and this was, the Republicans claimed, a payment to vote, which is apparently illegal. Police and prosecutors gave the case short shrift, but it reflects a consistent Republican policy of preventing people from voting whenever possible. They hate democracy almost as much as they hate Democrats[1].

Update Jack Strocchi kindly sent me this catalogue of recent crimes against democracy, from the Washington Post a few days ago. I wasn’t aware of any of these particular incidents – there are dozens of others that fit the same pattern.

fn1. Of course, this excludes Southern Democrats like Zell Miller. Virtually all of the old Dixiecrats have joined the Republicans, bringing with them their rich heritage of poll taxes, grandfather clauses and so on.

I’m annoyed that I haven’t received any of the phone or Internet spam being sent out by the Liberals. My concern is that, if they haven’t called me, they may be missing other swinging voters. With any luck, though, their database is sufficiently good to pick out only voters who are genuinely considering the Liberals, then to inundate them with messages night and day.

In the spirit of co-operation, I’d like to point out that not everyone is easily contactable by phone or Internet. A fleet of megaphone trucks, sent out at 5am on Saturday morning, could really have a big impact on the Liberal vote.

I’m working on a review of Doug Henwood’s book, After the New Economy. Brad de Long kindly sent me a copy, and, a mere eight months later, my review is done, at least in draft form. Comments much appreciated.
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Don Arthur, a great but infrequent blogger, has joined the crew at Troppo Armadillo, which will be a great location for him, I think. His first post is a response to my argument that the era of neoliberalism/economic rationalism is over. Don makes a lot of points, and I’m going to start with a relatively easy one. Don says “it’s hard to see a return to the high tariffs of the old Australian settlement”. I agree, but I think the whole notion of the Australian settlement isn’t very useful in relation to the rise and fall of neoliberalism.

What matters is the Keynesian-social democratic settlement adopted after World War II. Australia was one of the leaders in this with the 1945 White Paper Full Employment in Australia, claimed here as

the first time any government apart from totalitarian regimes had unequivocally committed itself to providing work for any person who was willing and able to work

Nevertheless, there was little that was specifically Australian about this settlement.

While Kelly’s name has been widely used, the things he is talking about are more accurately described by Gerard Henderson’s earlier term ‘Federation Trifecta’, consisting of Protection, Arbitration and White Australia[1]. These policies added up to a uniquely Australian policy package in the period before World War II, but their subsequent histories have been very different.
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Quite a few bloggers, and others, have commented on the fact that neither the Iraq war, nor the Free Trade Agreement with the US, both hot topics in the leadup to the election, have played a big role in the campaign. The obvious explanation is that both sides have vulnerabilities that prevent them from raising the issue.
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While I’m busy scanning the electoral tealeaves, quite a few other economists will be anxiously waiting for a phone call from Stockholm. It’s Nobel prize time, and various people have had a go at assessing likely candidates. Brad DeLong says you should pick fields (I think he’s right about this) and goes for the trade trio of Bhagwati-Dixit-Krugman. Tyler Cowen looks at seven candidates. And of course, there’s a betting market

For what it’s worth, I’d like to see Robert Shiller win. However, on Brad’s criterion, it could be argued that he’ll have to wait until “behavioral finance” gets a guernsey. Kahneman’s prize a couple of years ago was in the same general field and this might count against it.

And then, of course there’s Don Luskin