Economics in Two Lessons: Chapter 1

February 19th, 2018 No comments

Thanks to everyone who commented on the draft introduction to my book, Economics in Two Lessons. The revised introduction is here. Feel free to make further comments on it if you wish.

Moving along, here’s the draft of Chapter 1. Again, I welcome comments, criticism and encouragement.

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Monday Message Board

February 19th, 2018 6 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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Economics in Two Lessons

February 16th, 2018 17 comments

I’ve finally committed to delivering a manuscript of my long-overdue book Economics in Two Lessons. As part of the process, I’m going to post the chapters, one at a time, and ask for comments, criticism, encouragement and so on. To begin at the beginning, here’s the Introduction.


February 12th, 2018 9 comments

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

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Monday Message Board

February 12th, 2018 23 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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Bitcoin kills the efficient market hypothesis (now with full article)

February 9th, 2018 33 comments

I have a piece in the New York Times looking at the implications for the bitcoin bubble for economic theory and, in particular, for the (Strong) Efficient (Financial) Markets Hypothesis (EMH) which states that prices determined in financial markets reflect all the available information about the value of any asset. If that’s true then governments can’t improve on a policy of allocating investment to those assets with the highest market return, which can be achieved by letting private capital markets determine all investment decisions.

Bitcoins have no inherent usefulness, being a record of pointless calculations. They are useless as a currency (their putative purpose) and are now being promoted as a store of value on the basis of scarcity alone. This leaves supporters of the EMH with a dilemma.

If Bitcoins are indeed worthless, then financial markets should price them at zero. But the introduction of futures trading actually boosted the price in the short run. Even after recent declines, there’s no sign that prices will reach zero any time soon.

On the other hand, if Bitcoins are valuable simply because people value them, then asset prices are entirely arbitrary. The same argument can be applied to any financial asset.

Dean Baker at CEPR has a nice followup, making the obvious but crucial point that, since financial services are an intermediate input to production, we want the financial sector to be as small as possible, consistent with doing its essential tasks. As the experience of the mid-20th century shows, a market economy can function perfectly well with a financial sector much smaller than the one we have today. As Bitcoin shows, the massive expansion since then is nothing but wasteful speculation. The financial sector should be cut down to (a small fraction of its present) size.

Read more…

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No new coal mines

February 9th, 2018 15 comments

It’s just been announced that Aurizon is not pursuing its application to the Northern Australia Infrastructure Facility to build a rail line to the Galilee Basin, essentially because the company hasn’t been able to secure any commitments from putative customers (most obviously Adani and GVK Hancock but also Clive Palmer and others). This is great news. It’s now highly unlikely that coal mining in the Galilee Basin will go ahead any time soon.

Opening the Galilee Basin would have been a huge disaster, so it made attention to focus attention on Adani, as the leading proponent, and secondarily on Aurizon and GVK Hancock. But, with this threat apparently staved off, a more comprehensive policy is needed.

Fortunately, we already have one. The Australia Institute has, for some time, been proposing a moratorium on new coal mines. That allows for a gradual winding down of the industry and gives more protection to existing jobs than there would be if new, competing, mines were allowed to open.

Politically, there’s a precedent, with Labor’s “three mines” policy on uranium. That was a fudge, of course, but it was clearly within the export power of the Commonwealth and it didn’t create any big problems with sovereign risk.

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A thought experiment

February 7th, 2018 43 comments

Suppose that the Constitution had made judges subject to the same eligibility requirements as MPs. How would the High Court have ruled in the cases that came before it?

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The NFF doesn’t understand the difference between argument and abuse

February 6th, 2018 15 comments

I can remember when the @NationalFarmers Federation was an intellectual force to be reckoned with. Now, its response to a detailed critique of the Murray Darling Basin Plan is lame abuse. It reminds me of this classic Monty Python skit

The Murray Darling Basin Plan is not delivering …

February 5th, 2018 17 comments

there’s no more time to waste.

That’s the headline for a piece in The Conversation I’ve signed along with a dozen or so prominent scientists and economists who have worked for many years on the problems of the Murray Darling Basin. It’s been released along with a Declaration, reproduced over the fold.

Read more…

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Monday Message Board

February 5th, 2018 29 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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Greens back renationalisation

February 3rd, 2018 12 comments

The Greens have announced a policy of renationalising the electricity grid, starting with transmission. Since that’s exactly what I proposed last year, it’s no surprise that I agree.

The crucial aspect of the policy is that it should begin with a reduction in the allowable rate of return to a level comparable with the long-term government bond rate. This ensures that the assets can be reacquired at their true value rather than paying the premium invariably associated with regulated rates of return based on spurious market comparators.

On a more snarky note, I can’t resist the observation that these assets were never fully privatised in the literal sense of the term. Rather, in many cases, they were sold to foreign governments operating through sovereign wealth funds.

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Three gigs at the Senate

February 2nd, 2018 5 comments

I’ve appeared (or rather, been heard by teleconference) at two Senate inquiries this week, one on the Northern Australia Infrastructure Facility and one on the problems of the TAFE system. In addition, i completed a submission to the inquiry into the Future of Work and Workers, which is now available on the inquiry website.

The Future of Work submission was about the way in which technology and labor market institutions have interacted to generate the “gig” economy of insecure employment, continuously threatened by technological disruption. The key point is that decades of anti-union and anti-worker legislation and state action have created a situation where technological change is likely to harm rather than help workers. A summary is over the fold
Read more…

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Renationalisation needs to break with corporatisation

January 29th, 2018 39 comments

My latest Guardian article is headlined The core of the argument is that, to make a success of renationalisation, we need to do more than buy back privatised enterprises, and run them as publicly owned corporations. We need a different model. A starting point would be the statutory authority model used in Australia with great success, before the Hawke-Keating government adopted the corporatised model as a step towards privatisation.

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Monday Message Board

January 29th, 2018 19 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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There are more important issues than …

January 26th, 2018 31 comments

… whatever issue on which I want to avoid justifying my firmly held, but indefensible, position.

One of the rhetorical tricks I’ve noticed becoming increasingly common (though I may just have been sensitized to it) is opposition to some proposal, based on the claim that “there are more important issues to discuss”. Here’s a typical example from right wing culture warrior, Kevin Donnelly, campaigning against equal marriage in the leadup to the recent postal survey. Before commencing a lengthy diatribe against gay activism, Safe Schools, alcoholic and abusive parents, surrogacy and so on that barely mentions the topic of marriage, Donnelly says

about 98 per cent of Australians identify as heterosexual and according to the 2011 census figures only 1 per cent of Australian couples are same-sex, with surveys suggesting only a minority want same-sex marriage. There are more important issues to worry about.

If Donnelly believes the issue is unimportant, why is he writing about it? Why not just leave it up to the good sense of the majority of Australians, as the rhetoric of the plebiscite suggested? Why not focus his attention on problems like protecting children from the effects of alcoholism and domestic violence.

The answer is, of course, that Donnelly has no case, or none he is able to make publicly, but nonetheless is very concerned to stop equal marriage. In the absence of a case, he must resort to diversions. So, rather than explain why gay people should be denied the right to marry, he starts off by saying the issue is too unimportant to bother with.

Of course, there are plenty of questions that are too trivial to bother with, and the sensible response is not to bother with them. If pressed, one could reasonably respond “this issue isn’t worth my time, I’ll just go with whatever the majority decides”, but this is hardly ever done.

The only case where this trope is at least possibly justified is as an admonition to political allies not to be diverted into big efforts on trivial issues, when there are more important problems to deal with. Again, though, this only makes sense for someone who is themselves indifferent regarding whether and how these issues are resolved.

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Bitcoin’s zero-sum game

January 23rd, 2018 23 comments

That’s the title of my latest piece in Inside Story. Nothing that will surprise anyone who’s been paying attention to what I’ve written on this, so I’ll just cite the conclusion

Since bitcoins are not useful as a medium of exchange, or desirable in themselves, their true value is zero. The highest price at which bitcoins have traded is around $20,000. At the time of writing, the market price is halfway between that level and zero. Pay your money (or not) and take your chances.

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January 22nd, 2018 3 comments

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

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Monday Message Board

January 22nd, 2018 15 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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A taxonomy of never-Trumpers

January 21st, 2018 14 comments

I’m a sucker for taxonomies, and Ross Douthat has quite a good one in the New York Times

Like any strange and quarrelsome sect, the church of anti-Trump conservatism has divided and subdivided since Donald Trump’s election. Some members have apostatized and joined the ranks of Trumpists; others have marched leftward, with anti-Trumpism as a gateway drug to wokeness. There is a faction that is notionally skeptical of Trump but functionally anti-anti-Trump, a faction that insists it’s just calling “balls and strikes” and a faction screaming that the president rigged the game and needs to be thrown out.

What’s interesting is that, from my observation, he has the factions about right in order of size. The group who have gone left is probably smaller than its ranking suggests, but contains most of what was left of serious thought on the conservative/libertarian side of politics. The smallest group, and the one treated most dismissively, consists of those who have remained politicaly conservative while being unremittingly hostile to Trump. Its members are either out of active politics already (like the Bushes) or are kicking Trump on the way out (like Corker and Flake). By 2020, it will probably be an empty set. That obviously raises the question of what will remain of the conservative movement when and if Trump is defeated.

A point of purely sporting interest is to classify Douthat himself. I’d say, some mixture of “anti-anti-Trump” and “balls and strikes”. The main part of his column, arguing that Trump is more of a joke than a menace, is consistent with this, I think.

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The failure of vocational education and training policy in Australia

January 18th, 2018 15 comments

I mentioned a while ago that I was making a submission to a Senate inquiry into Vocational Education and Training in South Australia. My submission has now been published on the Committee website with the title “The failure of vocational education and training policy in Australia”

I was a bit surprised to be told it was Submission Number 1, but it turns out they’ve only published two so far. The other one, from Dr Gavin Moodie makes most of the same points as mine.

As I mentioned the inquiry appears to have been called as a stunt to embarrass the SA Labor government, but it has provided an opportunity to bring the Senate’s attention to the continuing bipartisan failure of vocational education policy. To restate my key points, they were

* The impact of decades of cuts in public support for vocational training
* The disastrous effects of subsidising for-profit providers
* The goal of universal participation in post-school education and training
* Integration of technical/vocational and university education

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Monday Message Board

January 15th, 2018 24 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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Bad drivers should have their cars driven by robots (now with link)

January 14th, 2018 40 comments

A while ago I had one of those “Someone on the Internet is Wrong” arguments with the authors of an article arguing that we would need massively more evidence before we could conclude that autonomous cars are safer than those driven by humans. Rather than dig back to find those arguments again, I thought I’d <a href="http://I thought I'd link to this Bloomberg piece and, in particular the following passage”>link to this Bloomberg piece and, in particular the following passage

GM’s autonomous test cars were in 22 accidents in California last year, according to data from the state’s Department of Motor Vehicles … In a November interview, GM President Dan Ammann attributed the accidents to testing in a dense urban environment and noted the company’s cars weren’t at fault in any of the incidents.

Suppose that in any crash between autonomous cars and humans, each is equally likely to be at fault. What is the probability of seeing 22 crashes caused by humans and none by autonomous cars. Obviously, it’s the same as that of a fair coin showing 22 heads in a row, which is 2^-22 or about 1 in 10 million.

Of course, the drivers involved in the crashes aren’t likely to be a random sample of the population. As is standard in such things, the 80/20 rule applies: 20 per cent of drivers are responsible for 80 per cent of crashes and traffic infringements. THe 80/20 rule is derived from a Pareto distribution, and we can apply it a second time to say that 20 per cent of the remaining 80 per cent of drivers are responsible for 80 per cent of the remaining 20 per cent of crashes. That is, 36 per cent of drivers are responsible for 96 per cent of crashes. On that basis, it’s perfectly possible that the remaining 64 per cent of good drivers are as good as autonomous cars or even better.

It might also be argued that autonomous vehicles may fail in defensive driving, that is, in reducing harm in a crash caused by the failure of another driver.

Still, it seems pretty clear that autonomous cars are a lot better than the drivers responsible for most crashes and infringements. It isn’t that hard to identify a lot of these drivers before they kill themselves someone else, since prior driving record variables, particularly a driver’s prior traffic citation history, are the most consistent and powerful predictors of subsequent accident risk. Now that cars don’t need steering wheels or pedals any more, there’s no obvious reason to put people with bad driving records back in charge of them. Bad drivers should have their cars driven by robots.

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The Rise and Fall of Keynesianism after the GFC

January 9th, 2018 17 comments

International Studies Quarterly has just published a symposium responding to a paper by Henry Farrell and me, which has been released from behind the paywall for the occasion. Our paper has the fairly self-explanatory title “Consensus, Dissensus, and Economic Ideas: Economic Crisis and the Rise and Fall of Keynesianism ” In our paper we looked at the resurgence of fiscal Keynesianism in the immediate aftermath of the Global Financial Crisis and of the successful counterthrust leading to the adoption of austerity policies in the US and Europe.

The symposium has comments from a multidisciplinary group of political scientists, sociologists and economists: Abraham Newman, Andrew Baker, Elizabeth Popp Berman, Paul Krugman, Stephen K. Nelson along with a response from us. It’s great to get these different disciplinary perspectives all in one place, since they all have key pieces of the puzzle, and we are very happy they have chosen to engage with us.

Decarbonizing the economy is easy and cheap

January 8th, 2018 43 comments

Since I wrote my post on good climate news for 2017, a couple of news items have caught my eye

* Britain now generates twice as much electricity from wind as from coal, and around 30 per cent from renewables in total
* More than half the vehicles sold in Norway are now electric or plug in hybrid

My thoughts on these examples over the fold:

TL;DR version: These examples show that, at least for developed countries, massive reductions in CO2 emissions are feasible right now, with no discernible effect on living standards.

Read more…

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January 8th, 2018 2 comments

A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

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Monday Message Board

January 8th, 2018 21 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

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Why “extremely unlikely” climate events matter

January 5th, 2018 19 comments

I’ve just been advised that my latest article “The importance of ‘extremely unlikely’ events: Tail risk and the costs of climate change” has come out online in The Australian Journal of Agricultural and Resource Economics. For those who can use it, the DOI is 10.1111/1467-8489.12238. For everyone else, here’s a link to a pre-publication version. The main points are

* The IPCC convention is to use the phrase “extremely unlikely” to refer to outcomes (in particular, values of climate sensitivity) in the range of 0–5 per cent.
* Most of the risks against which we act to protect and insure ourselves (for example, car crashes, premature death in any given year) are “extremely unlikely” by this definition
* Around half, or even more, of the expected welfare loss from climate change arises from the worst-case 5 per cent of high values for climate sensitivity.

Nothing really startling here, but it’s the other side of the coin to the contrarian suggestion that since there’s a 5 per cent probability that global warming will turn out not to be a problem, we should do nothing.

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The predictable, and predicted, failure of electricity market reform

January 4th, 2018 18 comments

David Blowers from the Grattan Institute has a piece in The Conversation (also on the ABC) headlined A high price for policy failure: the ten-year story of spiralling electricity bills. It’s not bad, and is notable for the observation that

History may judge the introduction of competition to the retail electricity market as an expensive mistake.

I don’t think we need to wait for history; in fact, we didn’t need to wait until 2017.

Most of the problems that have subsequently emerged were evident when I first addressed this issue in a paper in 2001., published in the Economic and Labor Relations Review

Here’s my conclusion

The National Electricity Market is still developing. Some problems that have emerged in the early stages such as the disparity between the substantial price reductions for large customers and the largely unchanged prices paid by households will fade away as the market matures. Other issues such as the structure of the industry and the degree of horizontal and vertical integration will be resolved by a mixture of market processes and regulatory interventions.

Some problems, however, are likely to become more rather than less acute. The Australian National Electricity Market commenced operation in a period of oversupply so that problems of market power and excessive prices have not emerged until recently. It remains unclear whether an electricity auction market can produce adequate incentives for investment while generating appropriate prices for consumers. Similar problems are emerging in relation to the regulated monopoly component of the industry, the transmission and distribution sector. Regulators must set prices that do not reward inefficiency or allow monopoly profits, but nevertheless provide appropriate incentives for new investment. This is a delicate balance.

In the longer term, the problem of the environmental impact of an industry relying predominantly on carbon-based fuels remains to be addressed. A market solution would involve the creation of emissions credits that could be traded along with electricity in national markets. Although limited steps have been taken in this direction, much remains to be done.

Categories: Economic policy Tags:

Some good news on the global climate

January 3rd, 2018 8 comments

I’ve published a couple of articles recently on climate issues. One, in Inside Story, is an expansion of a post here, making the case that 2017 was a good year for climate policy globally. One more item to add to the list: India’s additions of coal-fired generation capacity are running at the slowest pace since 2006.

The other, in New Matilda, was about the (lousy) economics of the Adani coal mine-rail-port project. It’s part of a series on the struggle against the mine by indigenous Wangan and Jagalingou (W&J) people. Publication has been a bit slow, so my article doesn’t keep up with all the latest events, which seem likely to ensure that this disastrous project won’t proceed. The most important has been the split between Adani and its main contractor EDI Downer, one of a handful of companies with the expertise to run a mine on this scale. Adani’s current claim that it will operate the mine itself seems untenable, according to everything I’ve read.

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