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New Old Keynesianism (crosspost from Crooked Timber)

January 23rd, 2014 13 comments

The term “New Old Keynesian” was coined by Tyler Cowen a couple of years ago, to describe the revival of the view that the Keynesian analysis of recessions caused by lack of aggregate demand is relevant, not only in the short run (in this context, the time taken for wage contracts to reset, say 2-3 years) but in the long run (5 years or more) as well. When Cowen was writing, in September 2011, the New Depression could still, just about, be seen as a short run phenomenon[1]. In particular, the anti-Keynesian advocates of austerity in the US, UK and Europe were predicting rapid recovery.

As 2014 begins, it’s clear enough that any theory in which mass unemployment or (in the US case) withdrawal from the labour force can only occur in the short run is inconsistent with the evidence. Given that unions are weaker than they have been for a century or so, and that severe cuts to social welfare benefits have been imposed in most countries, the traditional rightwing explanation that labour market inflexibility [arising from minimum wage laws or unions], is the cause of unemployment, appeals only to ideologues (who are, unfortunately, plentiful).

So, on the face of it, Cowen’s “New Old Keynesianism” looks pretty appealing. But what are the alternatives? Leaving aside anti-Keynesian views for the moment, the terminology suggests four logical possibilities: Old Old Keynesianism, Old New Keynesianism, New Old Keynesianism and New New Keynesianism.

But do these logical possibilities correspond to actual viewpoints, and, if so, whose?

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Austerity in Australia, 1980s style

January 2nd, 2014 50 comments

The Sydney Morning Herald has an editorial praising the expenditure cuts introduced by the Hawke-Keating government in 1986 and 1987, and suggesting that Abbott should copy this example. Apparently, according to the Oz, Hawke and Keating themselves have endorsed this view (I haven’t gone behind the paywall for the full article).

This argument carries a great deal of force, because, as we know, the Hawke-Keating cuts restored the budget to surplus, leading to Keating’s famous declaration that the 1988-89 Budget was “the one that brings home the bacon”. Leading scholars like Alesina and Ardagna have pointed to this exercise as one of the great success stories of “expansionary austerity”.

What’s that you say? The economy fell in a heap in 1989, leading to a decade of deficits and fifteen years of high unemployment? To quote another Keating aphorism, that was “the recession we had to have”. I guess we are about due for another.

Categories: Economic policy Tags:

Abbott vs Science: The case of the Murray Darling Basin

December 19th, 2013 36 comments

I’m travelling at the moment, so updates are a bit erratic. A few days ago, I had a piece in The Guardian looking at the way the Abbott government is rejecting scientific advice on just about everything, notably including the Murray Darling Basin, on which I worked for a good many years. Comment here or there.

Categories: Economic policy, Environment Tags:

After the car industry

December 13th, 2013 60 comments

With the closure of GMH locked in, it seems virtually certain that Toyota will follow the same path in the end, along with most of the supporting components industry. It’s possible that a well-designed policy, combined with a sustained depreciation of the $A, could keep the industry alive (the fact that it survived the end of the high tariff era was largely due to the Button Plan in the 1980s), but this is the Abbott government we’re talking about, so it seems unlikely.

The impending end of the car industry constitutes the effective end of large scale manufacturing in Australia, at least as the term is ordinarily understood. The remaining manufacturing sector consists mainly of basic processing of agricultural and mineral products for export, along with food and beverages for the domestic market. Elaborately transformed manufactures, on which such high hopes were pinned in the 1980s and 1990s have been declining for years, and will be confined to niche markets once we stop exporting automotive products.

An immediate policy implication of the end of car production is that it’s time to drop a bunch of policies whose rationale was to support the domestic industry. The most obvious candidate is the FBT concession, just reinstated by the Abbott government. But there’s also the maintenance of some of the worlds weakest fuel efficiency standards, driven by the desire not to tilt the playing field against Falcons and Commodores. More generally, a whole range of pro-car policies will need to be reassessed, given that they increase our dependence on imports and therefore our vulnerability to terms of trade shocks.

There are direct implications for employment policy, arising from the job losses that are about to take place, and longer term implications for education and training. More on these soon, I hope.

Categories: Economic policy Tags:

The end of GMH

December 12th, 2013 39 comments

Another day, another stuffup from what already looks like the most incompetent government in Australian history. The Abbott government’s treatment of the car industry has been a disaster in policy terms, and just as bad as far as process is concerned. The key policy failure was the decision to retain fringe benefits tax breaks for cars (90 per cent of which are imported) at a cost of $1.8 billion over the forward estimates, while withdrawing Labor’s promise to give a much smaller amount in additional assistance to the remaining domestic manufacturers GMH and Toyota. Assuming Toyota also pulls out, every bit of the FBT concession will be public money sent overseas, with the exception of the slice creamed off by the salary packaging industry.

The policy process was even worse, announcing an inquiry, then pre-empting the result with a combination of leaks (of course, ABC stenographer Chris Uhlmann was happy to provide anonymity for the source) and Parliamentary taunts. Unsurprisingly, the new GM management in the US was sufficiently unimpressed to pull the plug immediately.

For the diehard fans of microeconomic reform, I guess this counts as a win. But even for them, it’s primarily a matter of cultural symbolism. The protection given to the car industry was so small that on a standard economic analysis, the welfare costs are utterly negligible. And of course, the benefits of protection were swamped by the costs of a chronically overvalued $A, which in turn reflects all manner of policy failures, from global financial deregulation to the subsidisation of the coal industry.

Grattan on Growth

November 28th, 2013 52 comments

I’ve been asked a few times about the Grattan Institute’s new report Balancing budgets: tough choices we need. It’s a substantial piece of work, and isn’t driven by a partisan agenda or special interest lobbying. On the other hand, I disagree strongly with the implicit criterion for policy design. This is nowhere spelt out, but the analysis is clearly driven by the following rule: seek policies that maximize GDP growth, subject to the constraint that the poorest (bottom 20 per cent of) households should not be made worse off.

This is most evident in the recommendation to remove the GST exemption for fresh food and use some of the proceeds to compensate the poorest 20 per cent of households. Let’s compare this with the alternative of raising income tax rates for high income earners (say, the top 20 per cent). By design, neither proposal has much net effect on the poorest 20 per cent. But the food tax falls mostly on the middle 60 per cent of households, since the top 20 per cent don’t spend much more on fresh food than the middle income group. It’s true that the cost of raising money through income tax is higher (Grattan uses an estimated cost of 25 per cent of the gross revenue) than for a food tax (5-10 per cent). But let’s spell this out a bit. Suppose you need to raise $500 in net revenue (roughly speaking what you’d get from the food tax for a household spending $100 a week). Would it be better to impose the tax on Gina Rinehart (in which case, taking account of the economic costs of collecting the tax, you’d have to raise an extra $100 or so compared to the food tax) or on one of her employees. If you regard Rinehart as an extreme example, take the choice between taxing a university professor (definitely in the top 20 per cent) or a campus worker such as a gardener or cleaner (not in the top 20 per cent, but normally not in the bottom 20 either, since this group consists almost entirely of people on pensions and benefits).

The fact is that Howard’s tax cuts, mostly carried on by Labor, used the temporary proceeds of the mining boom to permanently increase the after-tax income of the top 20 per cent. That’s the biggest single cause of the budget problems identified by the Grattan Institute, and the first thing that needs to change if we are to fix those problems.

Categories: Economic policy Tags:

Some good news from the US Congress

November 14th, 2013 11 comments

The US Congress is rightly regarded as a dysfunctional mess, blocking vital legislation for trivial partisan reasons. But occasionally, things work out for the best. A variety of critics ranging from left and liberal Democrats to members of the Tea Party appear likely to derail ‘fast track’ authority for Obama to sign the appalling Trans-Pacific Partnership. By contrast, the Abbott government is keen to sign this secret deal and has dropped Labor’s objections to clauses that would allow foreign corporations to sue our government for policies inconsistent with the market liberal ideology that informs the treaty. Let’s hope the whole thing is slowed down until the 2016 election year. If that happens, the pressure to renegotiate the deal, or scrap it altogether, will become intense.

Coincidentally, Wikileaks has published a draft chapter from the agreement, hidden from us by our governments and making clear what everyone knows. This isn’t about trade but about imposing market liberal institutions, including strong intellectual property in pharmaceuticals, copyright and so on.

The productivity zombie

October 3rd, 2013 6 comments

Following on from my previous post on productivity and the eponymous Commission, I have a piece in the Guardian with the stated objective of killing the productivity/micro reform zombie once and for all. Of course, that’s impossible: as watchers of the genre know, there are always more zombies, then sequels and new seasons, then reruns. But I’ll keep on trying.

Categories: Economic policy Tags:

A debate resolved

September 28th, 2013 13 comments

As regular readers will know, I’ve had a long debate[1] with the Productivity Commission on the sources of the supposed ‘productivity surge’ of the 1990s, which, I’ve suggested was primarily the result of increased work intensity and unmeasured increases in working hours at a time of high job insecurity. I was looking back at some of these discussions when Google turned up a Hansard transcript of hearings of the Senate Standing Committee on Economics in 2012. It turns out that the Commission now agrees with me, and has done so for some time. To quote the Commission’s expert witness, Dr Jenny Gordon[2]

There was a very big debate with the former branch head, Dean Parham, who did a lot of work on productivity. He looked at the effect of the reforms and ICT, which is one of the points that Professor Quiggin made, in trying to explain the productivity boom of the 1990s in terms of what actually happened. Professor Quiggin’s main point is that work intensity is important, which is quite hard to measure but, in fact, is a major source of productivity growth. If people work smarter and work harder while they are at work, that will improve productivity. So it is cutting the fat of organisations, I suppose you could call it. The other point is that people are working longer hours. But the way the productivity measurement is done takes account of the hours of work. That is actually data collected through ABS surveys of individuals reporting the hours that they work. So we could measures hours properly. It is hard to measure work intensity. It does appear and it is a source of productivity growth … So we were in full agreement with that. So the debate was settled back in the mid-2000s.

It’s good that we are in agreement this far. I would add though that productivity growth achieved by working harder does not, in general, improve economic welfare. As for “working smarter”, if this is a reference to technological progress, it’s fine. In my experience, however, it’s usually management-speak for “do the same job with less resources, and work out for yourself how to do it”.

More importantly, the key implication of my analysis is that, to achieve sustainable improvements in living standards, we ought to be focusing on getting the macro issues right rather than lining up for another round of microeconomic reform. Increases in work intensity don’t last, as experience since the 1990s has shown. Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology (only a small proportion of which are generated domestically) and through macroeconomic and labour market policies that avoid wasting human potential through unemployment and other forms of social exclusion.

fn1. In the same hearing I cite here, PC Chairman Gary Banks described it as a ‘rich’ and ‘ongoing’ dialogue. I’ve certainly learned a lot from it, and I hope the same for the Commission and any onlookers patient enough to follow it.
fn2. Not particularly germane, but interesting to this post is that Dr Gordon is married to Brian Schmidt, winner of the 2011 Nobel Prize for Physics

Categories: Economic policy Tags:

Buying back toll roads

September 23rd, 2013 91 comments

Reports that the NSW Liberal government is planning to buy back the Cross-City tunnel, following the bankruptcy of the second set of private owners mark an important step in the failure of the private infrastructure program launched in the 1980s with the Sydney Harbour Tunnel[1].

The interesting failure here is not the bankruptcy of the operators but the recognition that the whole idea of imposing tolls on a road designed to divert traffic from the city is nonsense. The most sensible plan, after buying the tunnel is to remove the toll and free road space in the CBD for a variety of initiatives including light rail and cycleways.

Unfortunately, the lessons have not been learned. The new WestConnex project in Sydney is to be a largely private tollway. The proposed East-West link in Melbourne is also a toll road but “is being procured as an Availability Public Private Partnership (PPP), with the State initially retaining tolling and traffic risk.” Whether or not these projects are economically and socially justified, there is no doubt that the use of toll funding will greatly reduce the benefits, leaving more traffic on congested, but untolled, roads.

fn1. A sham deal, which was eventually reconstructed as a publicly owned tunnel with a private operating contract.

Categories: Economic policy Tags:

Saving the salary packaging industry

September 19th, 2013 42 comments

The Abbott government is faced with its first big economic policy decision, a bit sooner than I expected. Going into the election Abbott promised to reverse the Rudd government’s tightening of FBT rules for motor vehicles, at a cost of $1.2 billion over the forward estimates period of 4 years. This was to be funded in part by scrapping $500 million of assistance to the domestic car industry.

Since the great majority of cars in Australia are imported, and since much of the benefit of FBT rorts is dissipated through the inefficiency of the required structuring of salary packages, the reversal of the FBT decision yields only a minimal benefit to the domestic industry. It’s unsurprising therefore, that Holden has announced that, unless the government restores Labor’s assistance policy by Christmas, the company will close down. The general assumption is that the resulting contraction of the supply chain would force Toyota out of domestic production as well, so that the entire industry would shut down.

All of this would be comprehensible if the government was pursuing a consistent free-market line. But no one has tried to pretend that the FBT treatment of cars is anything other than a rort. LNP advertising during the election was all about the damage removing the rort would do to jobs in the salary packaging industry and to employers who depended on the rort to reduce their wage bills. Those employers notably include charities and NGOs which could be aided more efficiently with grants – of course, the LNP is going to cut those grants.

Assuming the government is unwilling to see the car industry close down within its first year of office, the sensible thing would be a double backflip, restoring Labor’s policy. That seems highly unlikely. I’ll also be surprised if the government holds its nerve and lets Holden close. So, I suspect we are going to see a half-baked partial solution which will increase the structural budget deficit relative to any consistent policy, and still only defer the end by a few years.

But, even if we don’t make cars any more, we will, at least, have a salary packaging industry that is the envy of the world.

Categories: Economic policy Tags:

A note on the ineffectiveness of monetary stimulus (updated and corrected)

August 26th, 2013 98 comments

A commenter on the previous post raised the idea, promoted by the “market monetarist” school, that monetary policy is so effective as to make fiscal policy entirely unnecessary, at least when interest rates are above the zero lower bound. My views on this issue were formed by the experience of the late 20th century, and in particular, the recession that began in 1990, following steep increases in interest rates. Having planned a “short, sharp, shock”, the RBA started cutting rates in January 1990.

They didn’t go for 25 basis point moves in those days. Over the period to March 1993, rates were cut by more than 12 percentage points, from 17.5 per cent to 5.25 per cent. Over the same period, unemployment rose from 6 per cent to nearly 11 per cent, a record for the period since the Depression, and stayed around that level well into 1994, until the adoption of the Working Nation package of fiscal stimuuls active labour market policies. As I said in the previous post, tight monetary policy can reliably cause recessions, but expansionary monetary policy in a deep recession is “pushing on a string”.

Update As pointed out by Mark Sadowski in comments, these are nominal rates of interest. To get the real rate, which is more relevant, you need to subtract the expected rate of inflation, which fell from around 7 per cent to around 4 per cent over this period (as measured by surveys, and by the premium for inflation-adjusted Treasury bonds). So, you get a 9 percentage point reduction in the real rate from 10 per cent to 1 per cent. This doesn’t make much difference to the story. Most economists would regard policy as contractionar/expansionary if real interest rates are above/below the long-run neutral level, about 3 per cent. So, we still have a shift from strongly contractionary to moderately expansionary.

However, market monetarists want to argue that the stance of policy should be assessed relative to a policy rule (Taylor rule or NGDP) that already incorporates a prescription of cutting rates when GDP falls and unemployment rises. This doesn’t make a lot of sense to me. It’s like arguing that Obama’s stimulus was actually a contractionary policy because it wasn’t as big as (according to a standard analysis based on Okun’s Law) it should have been. It’s partly a question of semantics, but it’s associated with the claim that, if only rates had been cut even more, we wouldn’t have had the recession, or would have recovered quickly. Having been around at the time, I disagree.

Fiscal multipliers and employment (wonkish)

August 26th, 2013 53 comments

With two weeks to go in the election campaign, we still haven’t seen anything resembling a budget proposal from Tony Abbott and the LNP. Various people have made estimates of the cost of his promises and the cuts likely to be needed to fund those promises and return to surplus. My main concern is that Abbott has locked himself so thoroughly into the rhetoric of surplus that, in the event of a downturn or recession, he will feel compelled to adopt the kinds of austerity measures that have had a disastrous impact in Europe and prevented any real recovery in the US. To make this point properly, we need some numbers. One way to get such numbers is with a macroeconomic model. That gives you some better precision, but often hides the key assumptions. Instead, I will give a very simple Keynesian analysis, yielding back-of-the-envelope estimates.

For illustration, I’ll assume a public expenditure cut of $10 billion a year – the calculation is linear so it can be scaled up or down as needed. In a recession, the fiscal multiplier is likely to be around 1.5 (that’s the value used by Christina Romer when she pushed for a larger fiscal stimulus in 2009, and consistent with recent estimates by the IMF). So, the impact of the cut, when multipliers are taken into account is $15 billion or around 1 per cent of national income (or GDP if you prefer that measure).

Now we can use Okun’s Law to estimate that the cut will raise the unemployment rate by around 0.5 percentage points. Taking participation rates into account, employment will also fall by around 0.5 per cent (about 50 000 jobs).

A bunch of qualifications and observations over the fold

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The failure of austerity in Europe

August 22nd, 2013 30 comments

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

Categories: Economic policy Tags:

NBN: we would have been better off without privatisation

August 22nd, 2013 42 comments

I have (over the fold) a piece in The Guardian, making the fairly obvious point that both the need for a publicly-owned NBN and much of the cost are the result of the decision to privatise Telstra, and to rely on “facility-based competition” to drive new investment.

Add in the failure of electricity reform, PPP toll roads and airport privatisation, and there’s not much in the way of success from the infrastructure reforms of the 1990s. Then, of course, there’s the collapse of the much-feted productivity boom.

And yet Australia is exceptionally prosperous. A little bit of that, particularly in Queensland and WA, is due to the mining boom. But most of it is the simple fact that, by a combination of good luck and good management, we’ve gone 20 years without a recession.

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Reading the economic theories of Rudd and Abbott

August 20th, 2013 53 comments

That’s the headline for my latest piece in Crikey, over the fold

Read more…

Categories: Economic policy, Oz Politics Tags:

I’m underwhelmed …

August 15th, 2013 43 comments

… to put it mildly, by Kevin Rudd’s endorsement of the Coalition/IPA proposals for a variety of tax and policy distortions to subsidise economic activity in Northern Australia.

I get that a certain amount of this kind of thing is to be expected in an election campaign, but I hope we don’t see too much more of it.

Categories: Economic policy, Oz Politics Tags:

We’re only ‘doing it tough’ out of envy

August 14th, 2013 58 comments

That’s the title of my latest piece in Crikey, over the fold

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Categories: Economic policy, Oz Politics Tags:

Labor, hiding its light under a bushel

August 7th, 2013 96 comments

A bit belatedly, a piece I posted on Crikey a couple of days ago, bemoaning Wayne Swan’s failure to tell the story of the government’s success in managing the GFC. His obsessive pursuit of a return to surplus with a fixed target date suggests to me that he never really saw Keynesian fiscal policy as anything other than a once-off emergency measure, and that the credit for the government’s courage in 2009 must go to Ken Henry and Kevin Rudd. Regardless, the government should be winning the economic debate hands down, instead of being on the defensive.

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Categories: Economic policy, Oz Politics Tags:

Oz, NZ and the election

August 5th, 2013 46 comments

Following my earlier discussion of relative economic performance in Australia and NZ, I’ve been chatting with people in the NZ Treasury, and also with some of the macroeconomists in my own department. Its given me a number of research ideas I hope to pursue in the future, both with respect to possible ways the NZ-Oz gap might be bridged and more general implications about macroeconomic theory.

In the circumstances of the election what matters is the suggestion by Tony Abbott and others on the political right that New Zealand is a model for Australia to follow as regards macroeconomic policy. The key point is that NZ had a smaller stimulus than we did, and looks set to return to surplus a little earlier, though of course we know how unreliable such projections can be.

If, like Abbott, Hockey and (on even-numbered days) Robb[1], you regard budget surpluses as the paramount measure of good economic performance, there’s a case to be made here. But if you think that employment and economic growth are more important, Australia looks a whole lot better, as you can see from the graphs below.

Standard economic theory suggests that, when two countries have access to the same technology, comparable education systems, free labour and capital movements and so on, any initial differences in income levels should gradually be evened out. Instead, the Oz-NZ gap has widened since the GFC. Anyone who could seriously suggest NZ as an economic model should not be entrusted with the management of our economy.

OzNZ002
NZandothers

fn1. Not to mention Peter Costello and Wayne Swan, who seemed to view the stimulus that saved us from recession as an embarrassing departure from normality.

Categories: Economic policy, Oz Politics Tags:

Doublethink on triple-A

July 30th, 2013 27 comments

Which politician, holding a senior frontbench economic position, made the following sensible observation

I remind you that Lehman Brothers, the collapse of Lehman Brothers, which started this global financial crisis, on that very day, they still had a AAA credit rating. What does a AAA credit rating really amount to? What I’m saying is you can’t place enormous store in the rating agencies. They do get things very badly wrong, and they totally missed those major firms and economies that were driving and the reason for the GFC.

Unfortunately, the same one who said only a few months ago that our

commitment to returning the Budget to a real surplus in a timely fashion and retaining Australia’s AAA rating is paramount.

Answer over the fold

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Oz & NZ

July 28th, 2013 35 comments

For a variety of reasons, I’ve been looking at the relative economic performance of Australia and New Zealand over the postwar period. For most of the 20th century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, NZ has declined greatly relative to Australia. On the latest Penn World Table figures, income per person is about 70 per cent of the Australian level. Over most of this period, NZ has been governed by radical advocates of the free market[1]. As part of my research, I’m collecting some of their claims about NZ economic performance, relative to Australia and the OECD. I’ve listed some over the fold (links a bit scrappy, as some predate the rise of the interwebs). Further contributions welcome, as would any interesting examples of more accurate assessments (I have some already).

Read more…

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Rent-seeking rampant

July 19th, 2013 86 comments

The Rudd government’s proposal to tighten up documentation requirements for the very generous tax concessions provided for people who receive motor cars as a fringe benefit has produced some striking examples of rent-seeking from the Australian right, notably including Catallaxy and the Australian Financial Review. Catallaxy has a string of posts defending this rort.

The Fin gives lots of space to bleating rent-seekers, while imputing to “academics” the opinion that this is a subsidy. I guess that’s fair enough, given that the Fin regards basic science as a matter of academic opinion, while treating the failed dogmas of the 1980s as proven facts. And, of course, the Opposition has promised to oppose the measure, while weaselling out on the question of whether it would reverse the changes if elected.

This really is a test for Rudd. If he wants to refute the oft-repeated claim that he is all spin and no substance, this is his first chance, and one of the best he is going to get.

The failure of electricity market reform

June 19th, 2013 58 comments

As many readers will be aware, The Guardian now has an Australian edition, and I’ve just published an opinion piece in their Comment is Free section, looking at What lies behind the power price increases in Australia?. While there are plenty of factors, they are tied together by the misconceived reform of the industry undertaken in the early 1990s. Concluding paras

he free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly. The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.

Equally importantly, even though the COAG reforms coincided with the emergence of global concerns about climate change, the reform process took no account of the possibility of carbon pricing, and made no provision for renewable energy. In particular, the assumption that households could be regarded purely as consumers failed to consider the possibility of solar rooftops, or of any interactions between households and energy suppliers to promote energy conservation.

Fixing this mess will take many years. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.

I’m hoping to write more on how to fix the system soon, perhaps even making a submission to the Newman government’s inquiry on the subject.

Categories: Economic policy Tags:

Worst graph ever?

June 17th, 2013 6 comments

I just downloaded the Queensland government’s paper announcing, but not spelling out, a 30-year electricity strategy to be developed in the course of this year. I started with healthy scepticism about this, but scepticism turned to bemusement when, on page 5, I ran into one of the worst graphs I have ever seen.

EnergyGraph

This graph, taking up half a page, contains a total of six data points (energy intensity and gross state product for three states). The relevant data, such as it is, is contained in the three yellow bars. The legend describes them as “Electricity use (KwH) per $ of state product”, while the axis label claims that the measure is “Energy use (Mj) per $ of state product” Since a joule is a watt-second, it’s easy to check that a kilowatt-hour is 3.6 megajoules, but the difference isn’t large enough to work out which one is correct. It’s a fair bet, though not sure, that the quantity being measured is electricity use, and not all energy use. The only information conveyed is the unsurprising fact that Queensland’s economy is more electricity-intensive (or maybe more energy intensive) than those of NSW and Victoria.[1]

The real joke, though, is the second measure, of total state product. This is of no interest at all, since it just reports the well known fact that NSW has a larger economy than those of Victoria and Queensland. But the thing that would make Edward Tufte turn in his grave (if he were dead, which Wikipedia tells me he is not) is that this irrelevant information is reported in a line graph, making it appear that there is some sort of relevant order here.

The rest of the graphics are almost, but not quite, as bad. There’s an amusing one describing the “engagement and accountability model”. Three Venn-style intersecting circles representing market, government and customer are overlaid with an equilateral triangle, the vertices of which are labelled “Engaged”, “Efficient” and “Effective”. All stakeholders are invited by the government to “get on board and challenge current thinking”.

Eager as usual to be a team player, I’ll be contributing some thoughts on the failure of electricity market reform to the Guardian, hopefully appearing tomorrow. I will certainly challenge current thinking and look forward to being welcomed on board by the Newman government.

fn1. Since no more explanation is given, I’ll take a stab at explaining the significance of these numbers. Assuming the Kwh measure is correct, and taking an average price of 15c/KwH, electricity amounts to around 3.3 per cent (0.15*0.22) of the total Queensland economy. That sounds about right to em.

Costello again

May 11th, 2013 33 comments

The Final Report of the Queensland Commission of Audit, headed by Peter Costello, has been released. It largely abandons the claims made in the Interim Report, suggesting that the state’s fiscal problems are the result of irresponsibility on the part of the previous government. To its credit, the Commission identifies the real problem, namely, the long-term tendency for the share of expenditure going to human services such as health and education to rise over time. Since these services are largely provided or funded by governments, they can’t be provided, on the scale people would like, without increasing taxation.

Unfortunately, that’s where the credit stops. The core of the problem, identified by William Baumol in 1967, is that, for obvious technological reasons, productivity in these services tends to grow more slowly than in other sectors, most notably goods-producing sectors. The Commission’s proposed solution is breathtaking in its simplicity – if we could raise the rate of productivity growth in the human services sector, the problem would go away. Yes, and if wishes were horses, beggars would ride.

My response, which got a run in today’s Courier-Mail, is here.

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Decarbonising Australia (updated)

May 7th, 2013 214 comments

I’ve been meaning to post about the Australian Energy Market Operator’s report on the feasibility of a 100 per cent renewable electricity supply system for Australia (H/T commenter Ben). In the meantime, Brian Bahnisch at LP has done a detailed summary, so I’ll refer you there and make a few points of my own.

First, this study should kill off, once and for all, claims made here and in many other places (notably, at Brave New Climate) that the intermittency of renewable electricity is an insuperable problem.[1] The AEMO is the body that manages the electricity market on a minute-to-minute basis, so it has the expertise to assess this claim, unlike the many amateurs who have tried their hands. And, since it might have to do the job, it has no reason to understate the difficulties of a renewables-based system.

Second, the estimate cost of $111 to $133 per megawatt-hour represents an increase of $60-80/MwH on current wholesale prices, or 6-8c/Kwh on retail prices. That’s much less than the increase we’ve seen thanks to the mishandling of electricity market reform. If we wound back those costs, we could actually end up with both 100 per cent renewables and cheaper electricity.

Third, although the study envisages a role for electric vehicles, it doesn’t present a full-scale program for decarbonization. But once you have a scalable, fully renewable electricity supply, everything else is comparatively easy.

Finally, if we take Tony Abbott at his word in wanting direct action to deal with climate change, this report provides him with a blueprint. If we want to, we can eliminate the great majority of domestic CO2 emissions simply by mandating renewable technology and electric vehicles. The cost would be substantial in dollar terms ($250 billion for the electricity component). But, over a couple of decades, it would be a barely detectable deduction from growth in national income.

Update As it turns out, there’s a response at Brave New Climate from Martin Nicholson. Nicholson reports on a study of his own, in which nuclear is included in the mix. On Nicholson’s estimates, this substantially reduces capital costs, a point of which he makes a big deal. But obviously, renewables have much lower operating costs and Nicholson estimates the levelised cost for his system at $124/MWh to $126/MWh. As he says:

As this is in the middle of the AEMO range, wholesale prices are likely to be similar with or without nuclear

Given that very few current-generation nuclear plants have been built, cost estimates for nuclear are speculative. The obvious inference for Australia is that we should push along with renewables, and take a “wait and see” position on nuclear, observing developments in the UK, US, France and China. If they can deliver nuclear safely and at low cost, we can add it to the mix (say, after 2030).

Sadly, I think most of the BNC readership are locked into a position that nuclear must be the answer, which requires them to believe that renewables won’t work. Even a comprehensive demonstration that renewables can deliver a 100 per cent solution at a cost comparable with optimistic estimates for nuclear isn’t going to shift them.end update

fn1. This is part of a rhetorical manoeuvre aimed at pushing the conclusion that nuclear is the only feasible zero-carbon option. Once it’s admitted that 100 per cent renewable electricity is feasible, nuclear advocates need to present a case based on comparative costs. In the Australian context, it will be very hard to make that case, given the need to set up a complete nuclear infrastructure from scratch.

Categories: Economic policy, Environment Tags:

Fantasy budget

May 6th, 2013 64 comments

Crikey asked me to write 1000 words or so on my ideal budget. I didn’t respond exactly in those terms, looking instead at the strategy for the medium term. Crikey ran it today, and I’m doing the same (over the page).

Read more…

Categories: Economic policy Tags:

Gillard gets it right

May 1st, 2013 61 comments

Ever since the Hawke government announced the “Trilogy” commitments in 1984, promising no increase in the revenue and expenditure shares of national income, Australian politics has been, in effect, a conspiracy of silence about the central issue of economic policy, that of the appropriate balance of private and public expenditure. The steady growth in demand for services like health and education has ensured that no reduction in the public sector share has been feasible, while the market liberal dogma enshrined in the Trilogy has prevented any increase.

In retrospect, it’s striking that Hawke’s commitment came just after the reintroduction of Medicare, funded (in part) by a levy on all incomes. Medicare’s success has made it politically untouchable. On the other hand, it has been assumed (though without much supporting evidence) that any increase in taxation (not matched by offsetting cuts) is politically impossible.

The Gillard-Swan government was, until yesterday, ruled by this doctrine. With their unfortunate habit of making categorical commitments out of aspirations, both Gillard and Swan had repeatedly ruled out a levy to fund the National Disability Insurance Scheme (by contrast, “conservative” state premiers like Newman were happy with the idea) But, as a recent Grattan Institute report has made clear, there is no way of meeting the needs for health and education without a substantial increase in revenue (as well as cuts in low-priority direct expenditures and tax expenditures).

So Gillard has announced a proposal for a 0.5 percentage point increase in the Medicare levy, raising $3 billion a year. Abbott has equivocated so far, but has stated his support for the NDIS, which leaves him no honest options except to go along.

If we could achieve consensus on paying for improved services through higher taxation in this case, we might finally have a serious debate about what, as a community, we are willing to pay for.

Categories: Economic policy Tags:

Costello Report: first look

May 1st, 2013 36 comments

The full version of the Costello Commission of Audit Report has finally been released, along with the Newman government’s responses. As it turns out, the “Interim” report was the Commission’s last word on most of the big issues, such as the state’s debt position and fiscal outlook. The Final Report consists of

* A general discussion of the role of government, which is just a restatement of the market liberal orthodoxy of the 1980s and 1990s, proposing privatisation, competitive tendering and contracting and so on
* The specific claim that Queensland can deal with the problem of rising demand for health, education and similar services in coming decades by permanently raising the rate of productivity growth in those sectors.
* Detailed discussion of all areas of government activity.

Of these, the second is the important one. The fact that productivity grows more slowly in human services than in other sectors of the economy, and that this implies relative growth of the public sector, has been known since the work of Baumol in the 1960s. This pattern is unlikely to be changed by the kinds of measures being proposed by the Commission.

Categories: Economic policy Tags: