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The end of coal

May 23rd, 2015 23 comments

I have a piece in The Conversation, looking at the continued fall in Chinese demand for coal, and a highly relevant IMF study confirming previous findings that, even disregarding climate change, the health costs of burning coal make it more costly than renewables. So, the idea that the path to development lies through coal is a nonsense. The Chinese government has recognised this and acted, and the same will be true in India before too long.

I’ve reprinted over the fold.

Read more…

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Queensland in recession?

May 22nd, 2015 6 comments

There’s been a bit of fuss over the announcement by Queensland Treasurer Curtis Pitt that Gross State Product contracted during the last two quarters of 2014, which were also the last two full quarters under the Newman LNP government. Two quarters of negative growth is a common criterion for declaring a recession, and much of the controversy concerns Pitt’s use of this term. Is it justified. Obviously, the LNP and their allies would like to prove that it is not, and have made vociferous attempts to do so.

Some can be dismissed pretty easily as bluster. Joe Hockey, demonstrating the grasp of quantitative analysis for which he has become famous, declared Pitt’s claim “complete rubbish”. His supporting arguments were a mixture of irrelevance “There’s certainly no evidence of that at a national level” and wishful thinking “the bottom line is, we want Queensland to grow”.

Similarly, the claim I’ve seen quoted by Opposition spokesman Langbroek that the numbers exclude net exports appears to be just plain wrong.

A more serious objection, at least potentially, is that these figures are derived from preliminary Queensland Treasury figures, rather than the ABS numbers due in June. June isn’t far away, and will either confirm the preliminary numbers or not. It will be interesting to see if anyone is willing to eat humble pie.

A more interesting question, to my mind, is whether two quarters of negative growth is a good definition of recession. This article (in the Murdoch Courier-Mail, but authored in part by the excellent Paul Syvret, suggests not.

According to the data released yesterday, Queensland was by strict definition in recession in the latter months of 2014, but it was not one accompanied by waves of retrenchments (outside sections of the resources sector), business failures and plunging consumer sentiment.

Part of the problem here is that the only recession most Australians can remember is that of the early 1990s, long and deep and followed by a jobless recovery. Before that, the recessions of the 1970s and 1980s were also severe. The last time we had a mild recession, of the kind for which the two-quarter rule was proposed, was back in the 1960s.

This is fairly accurately summed up in the same article

in the second half of last year we had gradually rising unemployment, and a more marked slowing in business investment as major resource sector projects tapered off. At the same time public sector investment was dragging on growth as the government concentrated on fiscal consolidation ahead of its planned privatisation and asset recycling program.

To sum up, the numbers are bad enough to demolish any idea that, to the extent that governments have any influence on the economy, the LNP government and its federal counterpart were doing a good job for Queensland in 2014. But we already knew that the economy was slowing down with the end of the mining boom.

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Through the looking glass

May 11th, 2015 17 comments

The New York Times has a piece about Obama’s push to gain “fast-track” authority for the proposed Trans-Pacific Partnership, which would preclude any amendments by Congress after the deal (still secret, except for what Wikileaks has revealed) is announced. The key para, buried a fair way down

To the president, the Trans-Pacific Partnership would counter the economic weight of China and set rules on labor, the environment, intellectual property and investor protections for the growing economies of the Pacific Rim. For members of Congress, it’s about jobs.

shows how differently the debate is playing out in the US compared to other countries involved, such as Australia, and how much leading papers like the New York Times are missing the point

In the Australian debate, it’s generally understood (based on both economic modelling and past experience) that there won’t be much effect on jobs either way, at least not through the direct effects on trade. For the critics (just about everyone on the left), it’s precisely the “rules on labor, the environment, intellectual property and investor protections” that represent the big concerns. All of these rules benefit corporations at the expense of workers, the environment, the free flow of information and national sovereignty. It’s the general strengthening of corporate power, and not the flow of goods, that will harm jobs, wages and working conditions Investor-State Dispute Settlement provisions, for example, have been used to challenge minimum wage laws.

Leading US critics like Elizabeth Warren and the AFL-CIO have raised some of these points, noting (for the benefit of Republicans in particular) that the ISDS provisions will enable unaccountable arbitrators to override US federal and state laws.

The use of trade deals as an instrument of geopolitics is also unwelcome for a country like Australia that needs to balance itself between the US and China. Despite its enthusiastic support for the US and the TPP deal, the conservative government here signed up to join China’s regional infrastructure bank, developed largely in response to China’s exclusion from the TPP.

But US news coverage can’t seem to get out of a frame set by the trade deals of last century, such as NAFTA.

Flogging the dead horse of nuclear power

May 5th, 2015 96 comments

As I anticipated, my post on Tesla’s new battery provoked some pretty hostile responses, most notably from pro-nuclear diehards. I’ve written plenty on this (use the search facility), so rather than repeat myself I’ll make an observation drawing on the previous post.

Ten years ago, solar PV was a faintly hopeful technologica prospect, making a minuscule contribution to electricity generation. Today, it’s a reality that is creating massive disruption for electricity utilities around the world. As I said in the previous post, the availability of even moderately cost-effective storage removes the last big obstacle (more on the economics soon)

By contrast, ten years ago, nuclear energy was a mature technology which seemed to be at the beginning of a renaissance. Today it’s further away, in almost every respect, than it was in 2005. Construction times have blown out, costs have turned out to be twice as high or more than expected, the operating record (thanks to Fukushima) is far worse, and the various new technologies (SMRs, Gen IV) have receded even further.

None of this means that the replacement of fossil fuels with renewables+storage is going to happen under current policy settings. But such a replacement is now clearly feasible, much faster, more reliably and at much lower cost, than attempting to reboot the failed nuclear renaissance.

Backing the nuclear horse was a reasonable choice in 2005. But it’s dead, and flogging it won’t revive it.

Categories: Economics - General, Environment Tags:

Is Powerwall good for coal and nuclear?

May 5th, 2015 74 comments

No one seems to have spelt this point out, but there’s an obvious potential for Powerwall to be used in ways that benefit coal, nuclear and geothermal power, as well as renewables like wind and solar. Advocates of these technologies love to cite the fact that they are “baseload” supplies, but this is a misconception. Because they are costly to turn on and off (or even up and down), these technologies produce too much power at times of little demand (late night and early morning).

If owners of home solar systems, connected to grids with an off-peak excess supply, install battery storage on a large scale, it would make sense to run two cycles per day. The systems (most sensibly oriented west) would charge up from solar panels in the early afternoon, and supply power in the evening. Then they would recharge from the grid in the early morning, and supply power to meet the morning peak associated with getting ready for work, school etc.

What’s the net effect of this. First, obviously, it makes storage a more appealing economic choice for householders. Second, although it reduces costs for any kind of electricity that is not fully dispatchable, the benefits are bigger for renewables for two reasons. First, the variability of these sources is greater. Second, pricing systems, at least those in Australia, are already set up to encourage use of off-peak grid power, whereas current feed-in tariffs discourage solar PV.

From our current starting point, effect of adding more systems with a combination of solar PV and storage will be to reduce total demand for coal-fired power (and, where it exists, nuclear power), and to enable more efficient use of existing capital stock. So, it’s likely to discourage new investment in these sources. However, unless we have a carbon price, or other measures in place, it won’t necessarily accelerate the closure of existing coal-fired plants.

Update A note on the economics: Calculations I’ve seen on the web assumed that lithium batteries have a life of 1000 recharge-discharge cycles, but it appears this number can be improved drastically. These guys are claiming 20 000. More on this soon, I hope.

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Sandpit

May 5th, 2015 17 comments

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).

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Loaves and fishes, again

May 2nd, 2015 20 comments

I expanded my earlier analysis of the Galilee Basin mines in this piece for The Guardian. The really striking number is 483, the number of long-term new jobs the Carmichael mine is estimated to generate in the local (Mackay Isaac Whitsunday) region. That estimate comes from a computable general equilibrium (CGE) modelling exercise by Adani’s own consultants, ACIL Allen. Before the Queensland election, of course, much bigger numbers of 10-20 000 were bandied about. That’s partly a difference of coverage – the bigger numbers envisage, implausibly, that all the proposed mines in the Basin will go ahead, along with rail lines and port expansions.

Also, some of them focus on peak numbers during construction for each project, so that the jobs in question would only last a year or so. But the big difference is that the larger estimates were made using the discredited input-output method, in which each job created directly generates many more indirect jobs. This is an extreme version of the Keynesian multiplier effect, valid during a deep recession. But, as ACIL Allen observes, it makes sense only if you assume that the recession is going to last for the life of the project.

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Loaves and fishes (updated)

April 22nd, 2015 19 comments

Readers who attended Sunday School will remember the story of miracle of the loaves and fishes, performed by Jesus on the Sea of Galilee. A couple of fish and a few loaves of bread proved sufficient to feed a multitude.

Something similar appears to be happening in the Galilee Basin, where large, but economically marginal, coal mines are supposed to produce massive wealth for everyone. The Courier-Mail has a report of a court case in which the Alpha mine, owned by GVK Hancock, is claimed to be capable of generating $44 billion in royalties. The royalty rate in Queensland is 10 per cent for coal prices below $100/tonne (prices above that level will almost certainly never be seen again). At the current price of around $65/tonne, that’s $6.50/tonne. Alpha claims to be able to produce 32 million tonnes a year. If realised, that would make a little over $200 million a year. That is, to realise the amount claimed, the mine would have to produce at its maximum capacity for over 200 years.

But that’s the least of the problems. GVK Hancock’s own estimate of the cash costs of extracting coal is $55/tonne and others are as high as $70/tonne (I don’t know if this includes royalties. So, even at the most optimistic estimates of cost and extraction rates we are looking at a margin of $10/tonne for 32 million tonnes or $320 million a year, out of which a variety of corporate overheads will have to be paid. The capital cost of the project will be at least $10 billion. So, at current prices, the gross return on capital before interest, depreciation and amortisation (and tax, if any is paid) is at most 3.2 per cent, barely equal to the rate of interest on Australian government bonds. Obviously, no sensible lender or equity investor would look at this project.

A similar analysis can be performed for Adani’s Carmichael mine, which has apparently lost the $1 billion in funding proposed to come from the State Bank of India, as well as $300 million in equity promised by the Newman LNP government.

Adani claims cash costs of less than $50/tonne, but this seems very optimistic, being dependent on the assumption that other coal projects will fall over, reducing wages and other input costs. But it has a much higher projected output, around 50-60 million tonnes by 2022. So, it could be generating $900 million a year in EBITDA. But it’s hard to see that covering depreciation and interest on a $10 billion project. And of course, another $10-$20 off the coal price would kill the project completely, taking the lenders’ money with it.

In essence, these projects are being kept on life support in the hope of a recovery in coal prices to levels near those that were prevailing when the projects began. That really would be a miracle

Categories: Economics - General Tags:

Rank Delusions

April 10th, 2015 20 comments

That’s the title of a piece I had in the Chronicle of Higher Education in February. CHE is paywalled, but they kindly agree to let me republish here, after a suitable interval. The article (or at least a near final version) is over the fold.

Read more…

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CO2 emissions levelling out?

April 7th, 2015 236 comments

Preliminary estimates from the International Energy Agency, released in March, suggest that energy-related emissions of CO2[1] were unchanged in 2014 compared to 2013. Countries experiencing notable drops in emissions included China, Britain, Germany and the EU as a whole, but not, of course, Australia[2]

This has happened before, but only in years of global recession, whereas the global growth rate in 2014 was around 3 per cent. Of course, there are plenty of special factors such as a good year for hydro in China. Still, after looking carefully at the numbers, I’ve come to the conclusion that this really does represent, if not the long-sought peak in emissions, at least the end of the link between rising living standards and CO2 emissions.

The most striking feature of 2014 in this context was the behavior of fossil fuel prices. Coal prices had already fallen a long way from their peak levels in the years around the GFC, and they kept on falling through the year, even as coal mines began to close and lots of projects were abandoned. Oil prices remained at historically high levels until the middle of the year but then joined the downward trend, which has continued into 2015. Natural gas is a more complex story, since there isn’t a global market, and I haven’t figured it out yet.

Still, it seems to me that the 2014 outcome is a consistent with a story in which most growth in demand for energy services will be met by a combination of renewables and energy efficiency, and in which coal continues to lose ground to gas. The lack of demand implies that fossil fuel prices are likely to stay permanently below the levels anticipated when most recent projects were initiated.

Behind all this, it seems as if the various piecemeal measures introduced with the aim of switching away from fossil fuels are working better than almost anyone expected, and with minimal economic cost. Hopefully, this will encourage world leaders to set more ambitious targets, consistent with stabilising the global climate at temperatures 2 degrees or less above pre-industrial levels.

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Cognitive biases

April 5th, 2015 28 comments

Ross Gittins cites some interesting questions used by some of my QUT colleagues to assess cognitive biases before undertaking a study of investment behavior. Here you go: Try to answer before reading on or checking comments:

Give me high and low estimates for the average weight of an adult male sperm whale (the largest of the toothed whales) in tonnes. Choose numbers far enough apart to be 90 per cent certain that the true answer lies somewhere between.

Don’t like that one? Try this: give me high and low estimates of the distance to the moon in kilometres. Choose numbers far enough apart to be certain that the true answer lies somewhere between.

Now something more personal. When you buy a Lotto ticket do you feel more encouraged regarding your chances if you choose the number yourself rather than using a computer-generated number?

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Handicapping the Oz-NZ GDP growth race

April 4th, 2015 15 comments

There has been even more media excitement about the fact that New Zealand is currently experiencing more rapid economic growth than Australia. This is largely due to the fact that the two economies are in different phases of the medium term macroeconomic cycle.

However, there is another important factor that needs to be taken into account in making comparisons of this kind. Given access to the same technology, and with similar levels of education, poor countries will grow faster than rich ones, and will eventually converge to similar level of income. There’s a huge literature on this, to which I contributed a little bit back in the 1990s. The key finding is that, on average and under the conditions just stated, we should expect to see a poorer country make up around 2 per cent of the income gap with a richer country each year. That is, convergence will typically take around 50 years (there’s some tricky Zeno-style paradoxes here, which I don’t have room to discuss)

How does this affect comparisons between Australia and New Zealand. The IMF estimates here give income per person of 45138 for Australian and 33626 for New Zealand. So Australia’s income is about 35 per cent above the New Zealand level. The two countries were roughly on a par until the 1970s.

The standard convergence estimate is that NZ should make up about 2 per cent of that gap (or 0.7 per cent of GDP) each year. If the gap is larger, NZ could reasonably be said to be outperforming Australia for the year in question, relative to the standard 50 year timeframe for convergence. If the gap is smaller, NZ is doing worse than par.

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Voting with their feet, and following the business cycle

March 28th, 2015 14 comments

Among the regular themes in the Australian business press is the claim that we are being outperformed, in economic terms, by New Zealand. I collected a bunch of such claims here, and they were even more prevalent (but hard to find now, being pre-Internet) in the late 1980s. I’m seeing the same theme recurring today (too many repetitions to link).

This is a recurring rather than a continuous theme: there are long periods during which Oz-NZ comparisons are absent from the press. So, if you took the Australian press at face value, it would be reasonable to suppose that Australia was becoming relatively poorer than NZ, not continuously, but in a series of downward steps.

In fact to a close approximation, the reverse is the case. But because market economies are cyclical, there are inevitably brief periods when the NZ economy is on an upswing and Australia in a slowdown or recession. It is only at such times that the business press notices New Zealand’s existence.

A point often made at such times is that net migration from NZ to Australia has slowed to a trickle, usually with the implication that this marks the end of the long term movement. In reality, the cyclical nature of net migration has been a marked feature of movement patterns, ever since the beginning of mass migration westward across the Tasman. The starting point was 1973 Closer Economic Relations Trans-Tasman Travel agreement, which coincided with the beginning of New Zealand’s relative decline. The authority here is Jacques Poot, and this 2009 paper sums up the story.

Interestingly, the flow has continued, unabated though still cyclical, despite the Howard government’s move to exclude Kiwis from welfare payments (arising, IIRC, from a dispute over concerns that NZ’s more liberal immigration policy would provide a ‘backdoor’ path to Australia).

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Sandpit

March 23rd, 2015 61 comments

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).

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Bad for the client, bad for the bottom line

March 20th, 2015 21 comments

My report on the NSW governments proposal to sell (they prefer to say “lease”, but it’s a sale) assets and then undertake a large-scale infrastructure program notionally funded by the proceeds cited the former Secretaries of the NSW and Victorian Treasuries the point that selling income-generating assets does not create a ‘bucket of money’ that can be used to fund non-income-generating infrastructure. I made the claim that regardless of their attitude to privatisation, economists (at least when writing honestly on the subject) would agree with this.

My point was proved, twice over, a couple of days ago. The main point was proved when global bank UBS released a research note headed headlined “Bad for the budget, good for the state“. Of course, UBS supports privatisation, but the adverse effect on the budget was obvious.

However, it turns out that a different part of UBS is advising the Baird government on privatisation. A quick call from the Premier’s office produced a revised version of the note with the offending phrase removed. This proved, via the contrapositive, the parenthetical aside in my claim.

The episode raises the question: what reliance can be placed on published reports from firms like UBS cited in support of government policy? Of course, the same question is equally applicable to reports like my own, which more commonly oppose government policy? A few thoughts over the fold.
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Plan B

March 19th, 2015 62 comments

Now that the Senate has rejected Pyne’s university deregulation plan, the obvious question is, what is Plan B? The first, negative answer: there is no acceptable plan that will deliver what the advocates of deregulation wanted, namely a highly stratified system, catering to a smaller minority of the population than at present, and topped by high-status institutions comparable to Yale and Harvard. That’s the US model and, as a system for educating young people, as opposed to generating research and reproducing a tiny elite, it’s been a miserable failure.

The correct way to think about this is to begin with the core objective of the process: to provide young Australians with post-school education that fits them for work in a modern economy and life in a modern society. That leads to two main principles

* A single system encompassing both universities and post-school technical education with easy flow between the two
* Uncapped access with an objective of (near) universal participation in some form of post-school education
* As with school education, the aim should not be stratification by quality, but the provision of a high-quality education for all, with resource allocation based on educational needs, not institutional history or individual wealth

I’ll leave aside, for the moment, the problems of the TAFE sector, though these are, I think, more urgent and difficult than those of the universities.

The big problem with what I’m proposing is that it will require more money for undergraduate education. That’s because the existing system relies on a mixture of student payments (through HECS), government funding and a cross-subsidy from fee-paying overseas students. There’s no substantial scope to get more money from overseas students, so the more domestic students the more thinly that cross-subsidy is spread. Similarly, although more government funding is merited, maintaining existing funding on a per-student basis while expanding numbers is probably too much to hope for. However, a clear focus on the core goal of universal post-school education would help a lot, though it necessarily poses some tough choices.

Broadly speaking, the goal I’m thinking about is to maintain existing teaching resources per student, while expanding access to cover a steadily increasing proportion of the population.

Some ideas are listed below (over the fold)

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A pig in a poke

March 2nd, 2015 28 comments

I’m doing some work on the proposed Trans Pacific Partnership Agreement, currently being negotiated in secret by diplomats and business representatives from 12 countries. Two facts of interest
(a) Australia’s Trade Minister Andrew Robb is claiming that a final agreement might be reached by mid-March. While this looks over-optimistic, it implies there is a near-final text
(b) Obama has sought “fast-track” negotiating authority, but there is no sign that this is going to happen soon, given that quite a few Democrats oppose the deal outright, and many Republicans are hostile to anything that would give Obama more authority.

The idea of “fast track” is that the Administration cuts a deal and Congress is bound (by having agreed to the fast-track rules) to give it a Yes/No vote, with no amendments. The assumption (I think) is that, if amendments were permitted, they would proliferate to the point where the legislation would fail to implement the agreement with other parties, who might then back out. Of course, the result is that Congress is, in effect, buying a pig in a poke. Given the unlikelihood of an outright rejection of such a massive deal, they have to accept whatever Obama puts before them. The flip-side is can no individual Congressperson has to explain why they didn’t seek protection for whatever local ox might be gored by the deal: they can respond that they had no choice.

My question is: Suppose that the final text is agreed and made public before fast-track authority is granted. What would be the chances of Congress agreeing to a Yes/No vote, and what difference would it make? There are a lot of issues to be raised here about international relations, trade agreements and US politics, none of which I have a clear feel for. So, I’d be interested to hear what others think.

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Ernst and Young oversell privatisation

January 22nd, 2015 30 comments

Ernst and Young, leading consultants to the Queensland government have released a report claiming that electricity costs would be lower under privatisation. Although the report was commissioned by private infrastructure lobby group Infrastructure Partners Australia, it’s just a rehash of the same line EY have been pushing for years in similar reports commissioned by pro-privatisation governments. The central claim is that electricity prices have risen more in Queensland and NSW, under corporatisation than in Victoria and SA, under privatisation. What they don’t tell you is that this merely offsets increases imposed in the leadup to privatisation, with the result that retail prices are much the same in all four states, and far higher than when the process of market reform (supposedly to reduce prices through competition) began in the 1990s. Here’s the response I issued:

Media Release

Professor John Quiggin, of the University of Queensland criticised the Ernst and Young report on privatisation of the electricity industry.
The Ernst and Young report ignores the biggest factor leading to higher electricity prices throughout Australia: the failed process of market reform, corporatisation and privatisation of which the LNP government’s asset sales is a part,Professor Quiggin said.
Although the problems have differed from state to state, there is no evidence that states which undertook full scale privatisation in the 1990s have performed any better. South Australia has some of the highest electricity prices in the world, and Victorian prices are comparable to those in NSW and Queensland.

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Strong Choices or Weak Evasions

January 13th, 2015 37 comments

That’s the title of my review of the Queensland LNP proposal to privatise most of the state’s remaining public enterprises. There’s a report here from the Brisbane Times covering most of the main points. I also did an interview on Steve Austin’s ABC show, sandwiched between LNP Treasurer Tim Nicholls and pro-privatisation economist Judith Sloan.You can listen here

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MYEFO

January 6th, 2015 15 comments

Before the release of the Mid-Year Economic and Fiscal Outlook, there was a lot of talk that it would be the beginning of a concerted attempt by the Abbott government to reset the economic narrative. As it turned out, the release coincided with the Martin Place siege, and therefore received hardly any coverage on the day. More significantly, the government has done nothing with the MYEFO statement since its release. Treasurer Hockey issued a media release on the day, and nothing since. Finance Minister Cormann did a couple of media interviews on the day, then nothing. Tony Abbott has been completely silent.

The reason is obvious enough, and has been noted by quite a few commenters already (but I will restate the case anyway). The MYEFO report undermines the government’s policy narrative in several crucial respects. Key elements of that narrative are:

* Debt and deficits are always bad, are now at catastrophic levels and are the product of Labor profligacy
* More labour market reform is needed to prevent a wages explosion resulting in higher unemployment
* The mining sector is the key to Australian prosperity and was unfairly burdened by the carbon and mineral resource rent taxes

Read more…

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Best wishes for 2015

January 2nd, 2015 51 comments

To all my readers. I’ll try to find time for a proper review of 2014 and the prospects for the coming year, but in the meantime feel free to write about your own recollections, hopes and expectations.

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Sandy Hook and Peshawar

December 23rd, 2014 89 comments

A couple of news items that struck me recently

* Two years after the Sandy Hook massacre, a US Federal Appeals Court has ruled that people with a history of mental illness have a constitutional right to gun ownership.

* In the immediate aftermath of the Peshawar massacre, a Pakistani judge granted bail to the alleged planner of the Mumbai massacre, Zaki ur Rehman Lakhvi, a leading figure in the (military-backed) Lashkar e-Taibi terrorist group.

Obviously, these decisions were neither aberrational nor the product of a legal system divorced from any social context. Rather, they reflect deeply ingrained views in the societies from which they emerged. Beyond that point, I don’t have a lot to say, but I’ll be interested to read the views of others.

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The fossil fuel crash of 2014

December 20th, 2014 43 comments

Among the unforeseen (by me, at any rate) events of 2014, the collapse in the price of crude oil may be among the most significant. Prices have fallen from more than $100/barrel in mid-2014 to around $60/barrel today. This follows a more gradual fall in the price of coal. The thermal coal price peaked at $140/tonne in 2011 and has now fallen to around $70/tonne. Prices for metallurgical coal and iron ore have also collapsed.

What should we make of this? The big questions are
(i) to what extent does the price collapse reflect weak demand and to what extent growing supply
(ii) will these low prices be sustained, and if so, what will be the outcome.

The answer to the first question seems to be, a mixture of the two, with some complicated lags. Strong demand growth (briefly interrupted by the GFC) produced high prices which made new projects appear profitable. Now the projects are coming on stream, but demand has weakened. Since both demand and supply are inelastic (not very responsive to prices) in the short run, a moderate oversupply produces a big drop in prices.

Coming to the second point, if we are to reduce emissions of CO2, a necessary precondition is that the price of fossil fuels should fall to the point where it is uneconomic to extract them. Current prices are below the level at which most new oil and coal projects are profitable, so, if they are sustained, we can expected to see a lot of project cancellations and closures (this is already happening with coal to some extent).

The big question is whether sustained low prices will lead to a recovery in demand. There are at least some reasons to hope that it won’t. There’s pressure to reduce coal and oil use coming from many directions, so, even at lower prices, I doubt that we will see a surge in investment in new coal-fired power plants* or a return to oil for uses like heating.

So, the hopeful scenario is one in which the abandonment of new projects brings us the long-awaited advent of Peak (or rather Plateau) Oil and Coal** in the not-too-distant future, giving time for policy to push the global economy in the direction of decarbonization.

* Someone will doubtless point to the case of Germany. But as far as I can tell, the plants that have opened recently were commissioned around 2006, and most proposals made since then have been abandoned.

** Of course, gas is a different story, partly because there is no global market. Gas prices are rising in some places (Australia, for example) and falling in others as trade expands.

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MMT and Russia

December 18th, 2014 196 comments

Whenever I post anything about taxation and public expenditure, it’s a good bet that someone will pop up in the comments section to claim that, according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure. That’s a misunderstanding of the theory, but it’s proved hard to explain this. The current crisis in Russia provides a teachable moment.
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Tell ‘em they’re dreaming

December 15th, 2014 181 comments

The title of a piece in Inside Story on nuclear power in Australia. Readers won’t be surprised to learn that I don’t think it’s feasible in any relevant time frame (say, before 2040). I don’t expect nuclear devotees to be convinced by this (I can’t think of any evidence that would have this effect), but I’d be interested to see someone lay out a plausible timetable to get nuclear built here sooner than my suggested date.

To clarify this, feel free to assume a conversion of both major parties and the majority of the public to a pro-nuclear position, but not to assume away the time needed to generate a legislative and regulatory framework, take proper account of concerns about siting, licensing and so on.

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The socialisation of economists (crosspost from Crooked Timber)

December 10th, 2014 74 comments

I’m following up Henry Farrell’s post on the superiority or otherwise of economists, and Krugman’s piece, also bouncing off Fourcade et al, with a few observations of my own, that don’t amount to anything systematic. My perspective is a bit unusual, at least for the profession as it exists today. I didn’t go to graduate school, and I started out in an Australian civil service job in the low-status[^1] field of agricultural economics.

So, I have long experience as an outsider to the US-dominated global profession. But, largely due to one big piece of good luck early on (as well as the obligatory hard work and general ability), I’ve done pretty well and am now, in most respects, an insider, at least in the Australian context.
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The strengthening economic case for fossil fuel divestment

December 1st, 2014 23 comments

That’s the title of my latest piece in The Conversation. The bottom line

Leaving aside the ethics of divestment and pursuing a purely rational economic analysis, the cold hard numbers of putting money into fossil fuels don’t look good.

Unless universities are willing to bet on the destruction of the planet they have committed themselves to understanding and preserving, divestment from fossil fuels is the only choice they can make. Forward-thinking investors of all kinds would be wise to follow suit.

Categories: Economics - General, Environment Tags:

Coal and China

November 26th, 2014 32 comments

Among the sceptical reactions to China’s part of the joint announcement on climate policy made by the US and China, two were particularly prominent

* The statement didn’t require China to do anything until 2030
* The statement simply reflected “business as usual”

These arguments were almost immediately refuted when China announced, in its http://thediplomat.com/2014/11/in-new-plan-china-eyes-2020-energy-cap/ that it would cap coal consumption at 4.2 billion tonnes by 2020, with total primary energy consumption (including oil and gas) held below 4.8 billion tonnes of coal equivalent. By contrast, in 2013, the estimate was for 4.8 billion tonnes of coal alone. Back in 2010, the US Energy Information Administration was predicting continued growth in Chinese coal assumption to 2035 and beyond.
Read more…

Categories: Economics - General, Environment Tags:

A policy lesson from G20

November 14th, 2014 47 comments

After spending months warning us of terrorists, rioters, and (most fearsome of all) thousands of political minders roaming the streets of the Brisbane CBD, warning us to reconsider our need to travel and giving us a long weekend, Brisbane Lord Mayor Graham Quirk is upset with us for taking off to the beach or staying home and waiting the whole thing out. He has been roundly mocked. It’s now clear enough that, except for high-end hotels and restaurants, G20 is going to be an economic disaster for Brisbane.

There is a broader lesson here. Paying substantial amounts to attract an event where the audience is mostly going to regard the venue as interchangeable with lots of others (car races being a prime example) is almost never going to be a sensible economic policy. The inflow of event visitors will mostly be offset by the deterrence of other potential visitors and by an exodus of locals. And the idea that events like this “put Brisbane on the map” is silly.

We won’t be lining up for another international summit any time soon, but the Commonwealth Games will be in the Gold Coast in 2018. I’m confident that an analysis after the fact will reveal very little to show for the $2 billion we are spending on them.

I’ll qualify the above by saying that it’s a different story with mass participation events. Noosa Triathlon for example, attracted 14 000 participants and 50 000 spectators (mostly family members, I think). The local tourism council tipped in $250k. Assuming a similar amount from Tourism Queensland, that’s a subsidy of $10/head. The event could probably have gone ahead without any subsidy: the main contribution for this kind of event is organizing road closures and crowd safety.

Categories: Economics - General, Sport Tags:

Legal reasoning (crosspost from Crooked Timber)

October 15th, 2014 28 comments

Not surprisingly, the US Supreme Court’s non-decision on equal marriage has caused plenty of debate, including John Holbo’s smackdown of NR’s Matthew Franck.

The discussion got me thinking about the broader problem of legal reasoning, at least in its originalist and textualist forms, and also in precedent-based applications of common law. The assumption in all of these approaches is that by examining (according to some system of rules) what was legislated or decided in the past, lawyers and judges can determine the law as it applies to the case at hand. There are all sorts of well-known difficulties here, such as how words written a century ago should apply to technologies and social structures that did not exist at the time. And it often happens that these approaches produce results that seem unacceptable to most people but for which a legislative or constitutional fix is impossible for some reason.

It’s always seemed to me, though, that there is a much bigger problem with this approach, namely the implicit assumption that “the law” actually exists. That is, it is assumed that, if the appropriate procedure is used to interpret the inherited text, and applied to the problem at hand, it will produce a determinate answer. But why should this be true? The same law might contain contradictory clauses, supported by contradictory arguments, voted in by different majorities, and understood at the time of its passage in contradictory ways. Most notably, the same constitution might grant universal freedoms in one place, while recognising slavery in another.

At a minimum, such contradictions mean that there is no determinate law on the particular points of difference. But the problem is worse than this. The law rarely prescribes an exact answer in a specific case. The standard view of legal reasoning is the principles can be extracted from case law, then applied to new cases. But contradictory laws and contradictory cases produce contradictory principles. The ultimate stopping point is the paradox of entailment: a contradiction implies anything and everything.

I don’t have a fully worked out answer to this problem but I think it underlies a lot of the disquiet so many people feel about legal reasoning (apart from the ordinary disappointment when the answer it produces isn’t the one we want).