Author Archive

Private infrastructure finance and secular stagnation (crosspost from Crooked Timber)

November 20th, 2015 31 comments

For most of my academic career, I’ve been working on (more precisely, trying to demolish) the idea of private investment in public infrastructure, exemplified by the Private Finance Initiative in the UK and the Public Private Partnerships program in Australia. Here’s my first published article on the subject, from 1996. I conclude that

The current enthusiasm for private infrastructure, like the enthusiasm for public ownership which it replaced, has been based more on ideological beliefs in the virtues of one sector and the vices of the other than on any systematic economic analysis …Analysis of the relative performance of the private and public sector in different phases of infrastructure provision suggests that, in most cases, the private sector will be most efficient in the construction phase but the public sector will be best equipped to handle the risks associated with ownership.

Twenty years later, this analysis seems finally to have been validated. The UK Auditor-General recently reported that

Analysis of the 2012-13 Whole of Government Accounts (WGA) implies that the effective interest rate of all private finance deals (7%–8%) is double that of all government borrowing (3%–4%)

As a result of the excess costs, and some spectacular failures, bipartisan enthusiasm for the PFI has finally turned to disillusionment. Here’s the Telegraph, correctly putting much of the blame on New Labour. And, for balance, here’s the Guardian. There hasn’t been a similar admission of failure in Australia, but the flow of PPP projects has greatly diminished, and most new ones rely on a substantial component of public capital.

Unfortunately, the failure of private finance hasn’t led governments to resume the high levels of public investment that prevailed in the Keynesian era of the 1950s and 1960s. So, even with central bank lending rates at zero, there has been no real recovery in infrastructure investment. Apart from the direct effect of lower investment, there’s a strong case that infrastructure investment increases the returns from private investment in general and therefore stimulates growth.

Read more…

Categories: Economics - General Tags:

Nothing learned, nothing forgotten

November 19th, 2015 58 comments

I haven’t posted on the recent terror attacks, or the various responses, because I have nothing new to say, and nothing old to repeat that hasn’t been said, or repeated, better by others. It appears that no one has learned anything in the decade or so since the Iraq war began. This 2003 post from the Onion just needs the dates changed to be applicable (or not, for those who support the side being satirised here) to the current debate.

Having said all this, have I learned anything myself? The Iraq war turned me from being a liberal interventionist (though opposed in the case of Iraq) to a strongly anti-war viewpoint.

By December 2005, I had this to say[^1]

It would be a salutory effort to look over the wars, revolutions and civil strife of the last sixty years and see how many of the participants got an outcome (taking account of war casualties and so on) better than the worst they could conceivably have obtained through negotiation and peaceful agitation. Given the massively negative-sum nature of war, I suspect the answer is “Few, if any”.

The ten years since 2005 have confirmed me in the rightness of my views[^2]. But since the same is true of nearly everyone on all sides, that’s not very helpful.
Read more…

Categories: World Events Tags:

A global climate deal without Australia

November 18th, 2015 25 comments

Over the last few weeks, there have been quite a few reports that the US, Japan, Australia and Korea are negotiating an agreement that would greatly reduce the availability of concessional funding for new coal projects. Recent reports, though, suggest that the US and Japan will make an agreement on their owmsn ter, leaving Australia (and perhaps also Korea) to go its own way. That has some pretty big implications for the Turnbull government and its position at the Paris Conference.

National and international development banks and export credit agencies, including Export-Import Banks in (South) Korea and the US, the Japanese Bank for International Cooperation[1] and the Export Finance Insurance Corporation in Australia have been a major source of finance for coal plants in developing countries like the Phillipines and Vietnam. With Chinese coal demand having peaked, and India shifting emphasis to renewables, the coal industry is counting on rapid demand growth in countries like these.

The reported US-Japan deal would eliminate funding for coal-plants that don’t use supercritical technology, and would require ultra-supercritical technology for all but the poorest countries.[2] Apparently, Korea has proposed weaker restrictions, and Australia weaker still. But rather than split the difference, Politico reports that the US and Japan will make a deal without Australia and Korea.

As far as I can tell, we are still in the stage of preliminary posturing. Some sort of compromise, or perhaps capitulation, may be reached. But if the US-Japan deal goes ahead without us, that will be a pretty clear signal that Turnbull is going to stick with Abbott’s anti-climate policies.

If such an outcome is possible in these talks, it’s also possible in Paris. Until now, I’ve assumed that the imperative for a global deal is such that even Australia’s weak proposals, and rejection of any credible policy, will be treated as acceptable. But now that Harper is gone in Canada, and Japan is working with the US, Australia is unlikely to find much backing for a recalcitrant position. While Korea might hold out on export financing, it is unlikely to want to be seen as sabotaging the entire agreement.

Hopefully, this is one of those situations where the export finance negotiations are still on a dynamic set under Abbott. Hopefully, Turnbull can see that the merits of being a global citizen in good standing, notably including continued friendly relations with Obama, outweigh any grumbles he might face from the LNP right.

Update An agreement has been reached. It looks pretty close to capitulation by Australia, though the government extracted enough concessions to call it a compromise. (Hat Tip: Cambo in comments).

fn1. I wasn’t clear about Australia’s involvement, since we don’t export or finance power plants, AFAICT. It appears that the agreement was formally made by the OECD, which requires unanimity. That makes the threat by the US and Japan to go it alone even more significant, I think.
fn2. Despite the impressive sounding name, ultra-supercritical plants still emit a lot of CO2, only about 10 per cent less than the subcritical plants they replace.

Categories: Environment Tags:


November 17th, 2015 32 comments

A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.

Categories: Regular Features Tags:

Monday Message Board

November 17th, 2015 52 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.

Categories: Regular Features Tags:

Oz and the Anglosphere

November 11th, 2015 17 comments

Here’s a piece for Inside Story, pointing out the rest of the English speaking world is doing worse than Australia, and that New Zealand, in particular, should never be used as a model in anything to do with economic policy.

Categories: Economic policy Tags:

The moral case for renewables

November 11th, 2015 6 comments
Categories: Environment Tags:

Armistice Day

November 11th, 2015 42 comments

As Armistice Day comes around again, I find it more and more difficult to avoid despair. Each new war seems even more brutal and pointless than the last, bringing nothing but ruin and destruction to all concerned. And yet, opposition to war in general, or even to involvement in any particular war, is increasingly being seen as unpatriotic.

My annual ritual of writing a post on this day hasn’t helped at all. I’ve repeatedly had it explained to me by learned commenters that the mass slaughter of 1914 to 1918 (and, by implication, the even more massive slaughter that followed it over the 20th century) was a right and necessary response to German imperialism, or that it must be understood in its historical context. I need only change a few place names, and substitute different enemies, to hear the voices of our present leaders, explaining the need for our armed forces to deliver more death and destruction, because “we must do something”. The fact that our current enemies are of our own direct creation, and that a decade or more of these wars has succeeded only it making matters worse, seems irrelevant.

Just about the only consolation is the fact that the scale and loss of life from war has been decreasing over time. Large areas of the world once riven by war now seem to be free of it, or nearly so.

Against that, however, is the ever-present shadow of nuclear cataclysm. The world has managed to survive, permanently within a few minutes of catastrophe, for 70 years now. But can that continue indefinitely? when belief in the rightness of war and the need for military strength is such a powerful force among ordinary people, and even stronger among the rulers who have the power to launch these weapons. Without radical changes in thinking, it seems almost certain that nuclear weapons will be used, sooner or later. Even a limited nuclear war, between India and Pakistan for example, would be a disaster as bad or worse than the World Wars of the 20th century.

Categories: Life in General Tags:

Are recessions abnormal (crosspost from Crooked Timber)

November 9th, 2015 14 comments

I’m on to the macroeconomics section of my book in progress, Economics in Two Lessons. The key point of this section is that, whereas the academic economics profession has wasted most of the last thirty years on the project of founding macroeconomics on (some near approximation of) standard neoclassical microeconomics, the validity of the core results of neoclassical microeconomics depend on the assumption that the economy is operating at full employment[^1]. This observation isn’t original – it was why Keynes saw his theory as saving capitalism from itself. Even the title I used in this post on the macro foundations of microeconomics turns out to be a reinvention of the wheel.

Having noted the importance of the full employment assumption in the abstract, how relevant is it? If the economy is, with notably rare exceptions, at, or close enough to, full employment, then it seems safe enough for economists to continue, as the profession has for 40 years or so, to treat macroeconomics as a special subfield with little relevance to the rest of the discipline.

To put the question simply, are recessions abnormal?

Read more…

Categories: Economics in Two Lessons Tags:

Monday Message Board

November 9th, 2015 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.

Categories: Regular Features Tags:

Grattan Institute advocates cutting university research funding

November 2nd, 2015 44 comments

Andrew Norton of the Grattan Institute has received quite a bit of attention for a piece arguing that universities don’t need additional funding because money intended to fund teaching is going to support research instead. Norton suggests that the funding going to research is around $2 billion a year

University research matters to Australia, but the evidence that it improves teaching is less clear. Direct spending on teaching, by contrast, is far more likely to ensure that universities offer the high-quality courses students want.

The obvious question is, if university research is important to Australia, won’t cutting $2 billion (or some substantial component of it) from research funding harm our national interest. As the quote above shows, Norton merely asserts that redirecting funding from research to teaching will benefit teaching.

The core of Norton’s piece is a misuse of accounting categories. The implicit claim that, since university funding is allocated on a per-student basis, it must be intended entirely for teaching. The further implicit assumption is that the only research that should be undertaken is that explicitly funded through bodies like the Australian Research Council.

But this has historically never been the case. In Australia, and (as far as I know) in every other country, university academics are expected to undertake research as part of their duties, whether or not they have grant funding. The standard proportion, which hasn’t changed in my 30+ year involvement in the system is 80 per cent teaching (and associated service), 20 per cent research, which appears to be exactly the proportion cited by Norton.

It’s true that more transparency in the allocation of resources between teaching and research would be a good thing, if it were feasible. But as the travails of exercises like the Excellence for Research in Australia process have found, this is easier said than done.

Read more…

Categories: Economics - General Tags:

For-profit education: plenty of blame to go around

October 30th, 2015 33 comments

Success has a thousand parents, failure is an orphan. The truth of that proverb is illustrated by the blame game now going on around the disaster that is for-profit Vocational Education and Training (VET) in Australia. In the last couple of weeks, I’ve seen dozens of different stories illustrating the extent of the failure. The Oz alone has at least ten.

Reading these stories, it’s clear that this isn’t a matter of bad apples or abuse of the rules. The for-profit sector as a whole is delivering abysmally poor results while chewing up billions of public dollars.

Unsurprisingly, Labor is blaming the government for allowing this to happen. Equally unsurprisingly the Oz is running the line, pushed by Minister Simon Birmingham that it’s all the fault of the ALP who extended the FEE-HELP scheme to the VET sector in the first place.

I had to check back on the history, which reveals that this was actually an initiative of the Howard LNP government, announced in its final year, implemented by the Rudd Labor government, and carried on by the Gillard and Abbott governments. Victorian governments of both parties led the charge at the state level. So, there’s plenty of blame to go around.

But, that’s history. The real problem is that no one is willing to admit the obvious lesson, already evident from the US; for-profit education, funded by public subsidies, is a recipe for disaster.

I should concede though, that Birmingham is already edging towards the right answer, saying that he is and not as keen as he was to extend subsidies to bachelor and sub-bachelor courses at private colleges.

Another piece of good news is that the ACCC and Auditor-General are finally getting their teeth into this, doing what should have been done by the supposed regulator, the Australian Skills Quality Authority, which has been asleep at the wheel ever since it was established.

But no amount of tightening up at the edges can fix this problem. The only solution is to abandon subsidies to for-profit providers and put a serious effort into restoring and upgrading the TAFE system.

Finally, a blast from the past. Back in 2012, ACPET, the for-profit VET lobby group cited me as saying

“I think we will continue to see many examples of (dodgy) educational institutions. They are going to be much more common than examples of successful profit driven training or educational enterprises”.

The report in question (paywalled) concluded by quoting me as saying

The only solution is ultimately for the federal government to take over this area [of VET] and to then have a much more robust accreditation system for private providers than we have, and a much more sceptical one”

ACPET suggested that my position was reminiscent of the Flat Earth Society. At this point, I’d say the Flat Earth Society has at least as much credibility as ACPET.

Categories: Economic policy Tags:

No New Coal Mines

October 29th, 2015 42 comments

Along with 60 other Australians, mostly more eminent than me, I’ve signed an open letter to world leaders calling for a moratorium on new coal mines and coal mine expansions. The letter focuses particularly on Adani’s proposed Carmichael mine but it’s important to be clear that this is part of a global movement to stop new coal mines everywhere in the world.

The underlying reasoning isn’t spelt out but ought to be clear enough. If we are to stabilize greenhouse gas concentrations at 450 ppm or below, as the world’s leaders have already agreed we should, it is necessary for carbon dioxide emissions to peak soon, and decline to zero over the next 30 years or so. Given that burning coal creates major health hazards in addition to C02 emissions, coal burning needs to eliminated even more rapidly. That means first, that no new coal mine can expect to work for an operating life of more than 30 years, and second that any new coal mine must be offset be additional closures of existing coal mines. Once these factors are taken into account, it’s essentially impossible for new coal mines to make economic sense within the constraints imposed by a limited carbon budget. Certainly, that’s the case for Carmichael, which is a massive boondoggle keeping alive only in the hope of extracting some form of government assistance or compensation.

Categories: Environment Tags:

Labour Lords Resign the Whip (crosspost from Crooked Timber)

October 28th, 2015 8 comments

I don’t have much to say about this, but I couldn’t resist the multiple absurdities embodied in the title. For those who haven’t heard anything about this, two appointed members of the House of Lords (Warner and Grabiner) have announced that they will no longer follow the direction of the Labour Party on how to vote, and a third (Mandelson) has made noises suggesting he may go the same way. This is a result of the party’s leadership election, in which the members a (nominally, at least) democratic socialist party chose a (nominally at least) democratic socialist leader.

Categories: World Events Tags:

Flogging a live horse

October 25th, 2015 49 comments

A while back, I mentioned in passing the failure of the Queensland Greyhound Racing Board to do anything about notorious industry practices such as live baiting and the slaughter and dumping of dogs that failed to run fast enough. But, even if these practices were well known, the perpetrators made some effort to hide them. By contrast, the practice of whipping racehorses to make them run faster is open and unchallenged. Can there be any justification for this beyond “it’s always been done this way”?

Obviously, there’s no inherent interest in the absolute speed attained by the horses, just in the race between them. There’s no obvious reason why a race without whips would be any less interesting. And if we wanted to see the horses go as fast as possible, we’d allow the use of stimulant drugs.

Apparently, defenders of the practice have made the claim that it doesn’t hurt the horses. That’s ludicrous on the face of it – if it didn’t hurt obviously it wouldn’t work – and has been shown to be untrue.

I’d be interested to know about the legal position. Again on the face of things, whipping horses would seem to be illegal cruelty to animals. Is there a special exemption, or has the proposition never been tested?

Categories: Life in General Tags:


October 23rd, 2015 32 comments

Former Minister Eric Abetz was in the Oz the other day, complaining that

How often, for example, have I had to put up with the tag of ‘religious Right’ or ‘far Right’, whereas you hardly ever hear it of the ‘religious Left’ or the ‘irreligious Left’ or the ‘far Left’ or the ‘extreme Left’ when talking about the Australian Greens or vast elements of the Australian Labor Party,

That reminded me that I needed to update my testimonial list with one from Michael Stutchbury, then at the Oz. It’s appropriately placed on the far right of the page.

Categories: Metablogging Tags:

Worthwhile Canadian Initiative (crosspost from Crooked Timber)

October 20th, 2015 48 comments

I’m writing from the other side of the planet, but there are enough Oz-related links to offer some thoughts on the Canadian election result.

First, taken in conjunction with the recent removal of Australian Prime Minister Tony Abbott, this is a big win for the planet. Abbott and Harper were the only two world leaders who were clearly climate denialists (despite some official denial-denialism) and now they are both gone. That leaves only the US Republican Party as a serious political force dominated by denial (of course, a big “only”). The chance for a decent agreement coming out of the Paris conference in December has improved significantly

Second, as the UK election also showed, the combination of multiple parties and First Past the Post voting is highly unpredictable. If things had shaken out a little differently, Harper might have managed it back into some kind of minority government, or we could be seeing the NDP rather than the Liberals winning on the basis of strategic voting. Applying this to the UK example, the idea that Cameron’s victory was in some sense inevitable is fallacious. Had a few things gone differently, we could all be talking about the mysterious appeal of Ed Miliband.

Third, the supposed dark magic of Oz spinmeister Lynton Crosby did Harper no good. If anything, Crosby’s dog whistle strategy motivated the majority to vote strategically against Harper. But I suspect that people like Crosby are better at selling themselves to politicians than at selling politicians to the public.

Categories: World Events Tags:

Locke’s Road to Serfdom

October 19th, 2015 20 comments

The second instalment[^1] of my critique of Locke’s propertarian liberalism is up at Jacobin. I’m looking at an obvious (but, AFAICT, rarely asked) question about Locke’s theory: if land is acquired through agricultural labor, how is it that agricultural laborers have mostly been landless? The answer is simple: thanks to slavery and serfdom, it’s the owners of the laborers who acquire the property. To quote Locke

the grass my horse has bit; the turfs my servant has cut … become my property

Locke’s political practice in the Americas was consistent with his theory. In his Constitution of the Carolinas, he suggested the creation of “leetmen” — a hereditary class of landless laborers, tied to specific areas, and bound to work for aristocratic landowners. As I observe (the point isn’t original)

Locke didn’t really need a new word for this institution. The founding figure of classical liberalism was proposing, literally rather than metaphorically, a Road to Serfdom.

[^1]: I’ve done with Locke, but I’m planning a third instalment on Jefferson, his most important successor.

Categories: Philosophy Tags:

Populism, Patrimonialism and US politics (crosspost from Crooked Timber)

October 17th, 2015 22 comments

Nuance is nearly always appealing to academics. For a long time, that was true of my approach to economic issues, particularly including income distribution. When presented with simplistic populist solutions to inequality like “Make the rich pay!”, I was inclined to responses along the lines of “It’s more complicated than that”.

A big problem with “Make the rich pay!” is that with the kind of income distribution that prevailed in the mid-to-late 20th century, any change to income tax that would raise significant revenue would have to apply to the top quintile (20 per cent) of the income distribution. People in the top quintile of the income distribution mostly derive their income from (typically professional or para-professional) employment, don’t think of themselves as rich, and aren’t, in general, seen this way by others. So, the slogan didn’t match the implied policy.

But with the rise of the patrimonial society that’s largely ceased to be the case. The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income, considerably more than the total revenue of the Federal government. Within that group, the top 0.1 per cent have done better than everyone else, and the top 0.01 per cent even better.

So, taxing the 1 per cent more makes sense. I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality. And while I was drafting this post, the NY Times came out with an article that reached broadly the same conclusion as mine.

There’s nothing inherently ludicrous in the suggestion that the very rich should pay most or all of the costs of sustaining a system that benefits them so greatly[^1]. And, as in the 1920s, the very rich are different from everyone else. Their wealth is derived primarily from capital, or from control over capital (as business owners or from the financial sector). And, while most of the current cohort of ultra-wealthy did not inherit large fortunes, that’s an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently. As Piketty demonstrates, a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.

Read more…

Thinking the unthinkable

October 16th, 2015 24 comments

Thirty odd years ago, Richard Cockett wrote a classic analysis of the role of UK think tanks, most notably the Institute of Economic Affairs, in the economic counter-revolution that ushered in the present era of market liberalism. The crucial “unthinkable” idea put forward by the thinktanks was that profit-driven firms might do a better job of providing a variety of services that were then part of the public sector. This contrasted with the dominant view that any failings of the public sector were the result of specific problems such as poor management that could be overcome by better oversight, organizational restructuring and so on.

The resulting policies of privatisation, corporatisation, competitive tendering and contracting, PPPs and so on have transformed the public sector. Their success has also transformed the public debate, rendering their own ideas as part of the common sense[1] of the political class, and making other ideas unthinkable.

The case of for-profit education provides an example. There is now overwhelming evidence that for-profit education has been a disastrous failure wherever it has been tried, and particularly where for-profit firms can gain access to public funds through policies designed to enhance “consumer choice”. Here are some recent examples:

* A New York Times report pointing out that for-profit universities are getting millions of dollars in public funds every month despite a sustained track record of fraud and failure

* One of many reports from Sweden, until recently the poster child for the for-profit sector, now in a state of crisis, with declining performance an growing inequality

* A Senate Committee report, describing “rampant abuse, accelerating costs, and doubling of bad debt” under the FEE-HELP scheme for vocational education

The common element is that the abuses are well known and long-standing, but the proposed remedy is more of the regulation that has failed in the past. The unthinkable option is to shut off the flow of public funds to the for-profit sector and return to the combination of public and non-profit provision that has worked so well in the past.

Of course, once this unthinkable thought is allowed into public debate, the entire premise of National Competition Policy, based on the idea that “contestable” markets are invariably good for the public, would be cast into question. That would open up a reassessment of reforms in electricity, telecommunications, water, health and many other services provided successfully by the public sector over the course of the 20th century.

Read more…

Categories: Economic policy Tags:

Adani out of excuses

October 15th, 2015 55 comments

Environment Minister Greg Hunt has just given approval to Adani’s proposed Carmichael coal mine in the Galilee Basin. This decision is sure to be challenged in court, but presumably the lawyers have been over the decision carefully, to fix up the errors that saw Hunt’s earlier approval overturned.

Assuming the decision stands up, Adani will be in the position of the dog that catches the car it’s been chasing. Adani and its advocates, like the Institute of Public Affairs, have been telling anyone who’ll listen that their marvellous project is being held up by “green tape”. The reality is that the project is as dead as a doornail.

No one will buy the coal it produces at a price that covers even the marginal cost of extraction. No bank will fund the deal: in fact, almost every potential financial institution that might provide funds has already announced a refusal (something almost unprecedented in the world of finance). Adani’s existing bankers, the Coommonwealth, walked away recently (or, in Adani’s telling, was pushed). All the contractors working on the project have been sacked, mostly without any public announcement

Most recently, Adani’s announcement of a proposed contract with Downer EDI has fallen into limbo. The contracts were supposed to be signed by 30 September, but nothing has happened. There’s a reference in the announcement to environmental approvals, so perhaps the contract will go ahead now, but, based on past form, this seems unlikely.

Adani would have done better, in PR terms, to pull the plug when the courts overturned Hunt’s initial approval. Perhaps they have a secret plan to salvage something from this mess, but it’s hard to see how this can work.

Categories: Economics - General, Environment Tags:

TANSTAAFL: What about “free” TV, radio and Internet content?

October 11th, 2015 35 comments

Another excerpt from my book in progress, Economics in Two Lessons. There’s a partial draft here if you want to read it in context. I could spend a lot more time on the topic of advertising, but much of the ground has been covered in Akerlof & Shiller’s latest Phishing for Phools. As always, both praise and useful criticism are very welcome.

Read more…

Categories: Economics in Two Lessons Tags:

Lots of different things

October 6th, 2015 61 comments

For no particular reason, I’ve been very busy in the past few days, commenting on this and that.

There’s this piece on the recently announced (but still secret) Trans-Pacific Partnership Agreement.

Also, this SMH article by Clancy Yeates, citing my criticisms of the Productivity Commission case against penalty rates.

And, Campus Morning Mail links to my criticism of the bodies representing and regulating post-school education.

Categories: Economic policy Tags:

Bitcoin: a waste of energy

October 6th, 2015 51 comments

I have a piece up in The Drum, making the point that most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate. Unsurprisingly, it’s provoked some vociferous, if mostly incoherent, responses from Bitcoin fans.

Categories: Economics - General Tags:

Would a significant increase in the top (US) marginal income tax rate substantially alter income inequality?

October 5th, 2015 38 comments


This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

My comprehensive plan for US policy on the Middle East

October 4th, 2015 38 comments

Four years ago, I put forward a comprehensive plan for US policy on the Middle East (reproduced in full over the fold). Looking back from 2015, I think it’s clear that it would have yielded better outcomes all round than the actual policy of the Obama Administration, or any alternative put forward in the US policy debate. Not only that, but it needs no updating in the light of events, and will (almost certainly) be just as appropriate in ten years’ time as it is now.

Feel free to agree or disagree.

Read more…

Categories: World Events Tags:

Some post-school education bodies we could do without

October 1st, 2015 39 comments

First, there’s the Australian Skills Quality Authority, which is supposed to regulate the quality of vocational education. AQSA’s performance makes the Greyhound Racing Queensland Board look good

In 2012, when I wrote a report on vocational education, it was common knowledge that the for-profit education sector was comprehensively rotten, particularly in Victoria where the push to privatisation began. This ABC report suggests that ASQA was on the case. But three years later, the only thing that has changed is that the rot has spread nationwide. All the big names in the industry – Evocca, Aspire and so on – are engaged in practices like using laptops as inducement to recruit low-income students who have no chance of either completing their courses or repaying their HECS-HELP debts. There’s no surprise here – it’s exactly the business model of US for-profits like the University of Phoenix.

The right solution is to stop giving any public money to for-profit education businesses. But, in the current market liberal environment that would probably fall afoul of competition policy. So, my suggestion is to cap the amount any publicly funded institution can spend on marketing to Australian students. Ideally the cap would be well below the amount currently being wasted by universities and other public providers competing against each other with our money. That in turn would be far below the rake-off being taken by the recruiters on whom the for-profits depend.

In the meantime, AQSA is a proven failure. It needs to be scrapped and its functions turned over to a body with some real teeth and a willingness to defend the interests of students and the public purse, rather than being a captive of the industry it is supposed to regulate. A joint investigation by the ACCC and the Auditor-General would be a good start.

Next, Universities Australia, the Go8 and the other Vice-Chancellors’ clubs. Fresh from the fee deregulation debacle, they’ve turned their attention to the question of how we should allocate research training places (such as PhD programs).

In the case of fee deregulation, the VC groups were uniformly wrong, not to mention tin-eared. This time, we have the odd spectacle of the Go8 directly opposing UA, even though one is a subset of the other. The Go8 want to stop departments with poor research records, based on the “Excellence in Research Assessment” from getting funding for research training places. UA is opposed, making the point that ERA is not “fit for purpose”.

In the abstract, I have some sympathy for both sides of this argument but in practice it just looks like special pleading on both sides – UA wanting to keep something for all its members, and the Go8 lobbying for special treatment.

But the real problem is the one I identified in the deregulation debacle. The VC groups claim to speak for universities, but exclude all but 40-odd of the people who work and study in them. In the present case, wouldn’t the perspectives of research students and the academics who supervise them be more useful than those of VCs and administrators? To repeat, we need to replace UA with a body that represents students and staff as well as top management.

And, while we’re at it, how about dropping the linguistic abomination of names like Universities Australia[1]? Even knowing nothing else about the group, a name like this reeks of the worst kind of 1990s managerialism.

[^1] Are there any grammar experts who can give a name to the part of speech represented by “Australia” in this title? It’s not known to Standard English, I’m pretty sure.

Categories: Economic policy Tags:

Bookplug: Phishing for Phools, Classical Greece, Luck in Politics

September 30th, 2015 19 comments

Among the winners of the Economics Nobel [1] two of the most interesting are George Akerlof and Robert Shiller. Their book Animal Spirits provided me with much of the intellectual stimulus to write my own Zombie Economics. Their latest has the intriguing title Phishing for Phools: The Economics of Manipulation and Deception.

The central theme is simple. We are all prone to errors in reasoning. Given the complexity of the world, and the finiteness of our reasoning capacity, it could scarcely be otherwise. This obviously leads to decisions that differ from the perfect optimality assumed in simplistic versions of economics.

More importantly, markets create opportunities for others to exploit and amplify our errors in reasoning. Advertising uses all sorts of device to encourage us to make decisions that we would not make if we gave careful and rational consideration to our choices. The entire credit card industry relies for its profitability on the fact that cardholders don’t (as is almost always sensible) pay off their balances every month. And so on.

As Akerlof and Shiller observe, the fact that markets systematically amplify reasoning failures undermines the standard claims about the optimality of market processes.

The proposed policy responses are a bit limited, focusing mainly on regulation and consumer protection. Still, the book is well worth reading.

An interesting side point is an argument that the harms of alcohol, a notorious source of suboptimal decisions, have been greatly underestimated.

Read more…

Categories: Books and culture Tags:

Monday Message Board

September 28th, 2015 37 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.

Categories: Regular Features Tags:


September 27th, 2015 27 comments

A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.

Categories: Regular Features Tags: