John Quiggin

My piece in today’s Fin compares Greece with some Australian states who also play games to conceal debt. The emerging news (also in today’s NY Times) is that the same banks who facilitate the dodgy debt deals established a CDS market for Greek sovereign debt and some have large short positions (translated from marketspeak: they are betting that the deals they set up will go bad and Greece will default). This can of course be defended as insurance, but it obviously changes your relationship with your bank or financial advisor if they can steer you into a deal and then bet on its failure. The potential for moral hazard in the CDS market has yet to be fully explored, but I think we will get to find out the hard way before too long.

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My column from Thursday’s Fin, with a not so subtle plug for my book.

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On bad arguments for Queensland asset sales, it’s over the fold

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The Bligh’s government’s original case for the asset sales announced in the June budget was that the state’s finances had deteriorated drastically since the previous assessment at the time of the March election, as part of the generally declining outlook for the world economy. That argument has collapsed as the Australian and global economies have strengthened with the result that the Queensland state budget managed a surplus for 2008-09, as opposed to the projected $500 million deficit.

It would be possible to argue for some (though not all) of the proposed privatisations on the grounds of economic efficiency, but of course arguments of this kind are no more (and, given the epic failure of financial markets seen over the past two years) arguably less valid than they were before the crisis, at which time Labor rejected them.

That leaves the argument that the asset sales will improve the state’s finances. Such arguments depend on showing that the value derived from selling the assets exceeds the value realised by keeping them in public ownership. In this opinion piece, Bligh attempts to make such a case, but the arguments involve hopelessly invalid apples-and-oranges comparisons. When a policy is defended by such obviously shoddy arguments, the only reasonable inference is that the correct assessment comes out the wrong way.

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Another section from the forthcoming book. Casting suggestions for the blockbuster movie will be gratefully accepted, along with more prosaic correction of errors, omissions, and of course, compliments. I’m trying to get a nice HTML version, but will see how it goes

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I stopped arguing with self-described “skeptics” on the topic of global warming some time ago, and I don’t intend to start again. I am however interested both in trying to promote sensible policy outcomes and in considering the broader political and cultural implications of the debate. For this purpose, there is no need to argue about hockey sticks, global warming on Mars or any of the other talking points that chew up so much time on the Internets (for anyone who is actually in doubt on any of these points, this is a useful resources

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I’ll start with some facts that are, if not indisputable, at least sufficiently clear that I don’t intend to engage in dispute about them
(i) All major scientific organisations in the world[1] endorse, in broad terms, the analysis of the Intergovernmental Panel on Climate Change which states that the world is getting warmer and that, with high (> 90 per cent) probability, this warming is predominantly due to human action
(ii) Most prominent politicians[2], thinktanks, activists, commentators and bloggers on the political right in Australia, the US and Canada (along with a large section in the UK) reject, or express doubts about, this analysis. The uniformity of views is particularly notable among conservative thinktanks.

The dispute between mainstream science and the political right has now been going on for at least fifteen years, and has already had some profound impacts. At the beginning of this period, the right could plausibly present itself as the pro-science side of the “Science Wars” in which the enemies were the massed forces of leftwing postmodernism (a powerful force, given their near-total control over departments of English literature), sociologists of science and the wilder fringes of the environmental movement. However, this was always a storm in a teacup, ignored by the vast majority of scientists.

By contrast, the current war is being fought for high stakes, with the end result either a disastrous defeat for the institutions of mainstream science or the intellectual discrediting of the entire political right. There has been no significant convergence between the two sides. On the contrary, even as confidence in the mainstream scientific consensus was solidified be the released of the IPPP Fourth Assessment Report in 2007, the rightwing opponents of science were buoyed by the La Nina event of early 2008, which produced a sharp, but temporary drop in temperatures, particularly in the Pacific. Comparisons with the El Nino peak of 1998 enabled them to announce that global warming had stopped, a point which was amplified in vast numbers of opinion pieces, blog posts and public statements, though not, to my knowledge, defended by any peer-reviewed statistical analysis.

Even such an obvious fact as the melting of Arctic ice, confirmed in the most direct fashion possible by the announcement of regular shipping routes around the Pole, with associated territorial claims, has been the subject of endless quibbles (attempts to restate these quibbles in comments will be deleted).

Furthermore, unlike the endless culture war disputes where the debating tactics of the right have been developed, there is a fact of the matter regarding anthropogenic global warming, which will sooner or latter become undeniable. Either global warming will continue, finally confirming the mainstream scientific viewpoint, or it will not.

Given the accumulation of scientific evidence, the odds are pretty strongly in favour of the first outcome. Scientific conclusions supported by a diverse range of independent theory and evidence sometimes turn out to be wrong, but you wouldn’t want to bet on it. Even more rarely, non-scientists with an axe to grind turn out to be right where scientists are wrong, but you really wouldn’t want to bet on that.

This raises the question of why the right has been so keen to double down on this issue. Of course, there’s no organised process by which an anti-science viewpoint on climate change and other issues is agreed on as a central orthodoxy from which dissent is prohibited, but you only have to look at the output of the political right in the English speaking countries to see that this outcome has been realised.

There are many explanations, perhaps so many that the outcome was overdetermined – powerful economic interests such as ExxonMobil, the hubris associated with victories in economic policy and in the Cold War, tribal dislike of environmentalists which translated easily to scientists as a group, and the immunisation to unwelcome evidence associated with the construction of the rightwing intellectual apparatus of thinktanks, talk-radio, Fox News, blogs and so on.

The issue is not going to go away, regardless of the short-term success or failure of attempts to reach a global agreement to stabilise the climate. The more clearly the political right is identified with the anti-science side of this debate, the harder it will be to salvage any of its existing institutions.

In a two-party system, even total intellectual incoherence will not prevent a political party from winning office when its opponents fail. But I’m surprised at the extent to which supporters of free markets have been willing to tie their case to an obvious imposture.

fn1. The only partial exception of which I am aware is the American Association of Petroleum Geologists, which takes an equivocal position
fn2. For reasons of political necessity, some rightwing politicians occasionally make statements endorsing mainstream science on global warming. But only a handful (John McCain being the most prominent) give more than a half-hearted assent, and many (Brendan Nelson is an archetypal example) give different positions depending on the audience and the way the political wind is blowing on the day.

I wrote a piece for the Centre for Policy Development on Public Private Partnerships which was also picked up by the Canberra Times. My favorite bit

The British government, which has nationalised or bailed out large parts of the banking sector is now suggesting that banks may be forced to lend to private investors in public projects under the Private Finance Initiative. In effect, the government will be lending money to itself, while paying the costs of a series of complex transactions (some of them highly vulnerable to exploitation) along the way.

I couldn’t go past this neat headline on a piece by Michael West in the Age

download Men of War

. The central point is that the impending failure of both financier Babcock and Brown and bond insurer FGIC will leave the Vic government holding the risk on a PPP hospital project. Money quote

Maybe the Government ought to have issued its own bonds, with a state guarantee and consequent cheap funding cost, because this now looks like a PPP that lost two of its Ps.

That’s what I thought at the time.The Pacifier ipod

• Mickey’s Christmas Carol psp

BrisConnect is a multibillion enterprise set up to build a series of PPP road and buslink projects in Brisbane. The backers are the usual big names like Macquarie Bank and Deutsche Bank.
Yet a Melbourne woman, named Hang Fe, just bought a 10 per cent stake in BrisConnect and you can do likewise if you have a spare $32 000 sitting around (immediate word of advice:DON’T). Shares in BrisConnect are currently trading at 0.1 cents, so Hang Fe’s investment brought her no less than 32 million of them.

The catch (there’s always a catch, isn’t there) is that these are partly paid “stapled securities” carrying with them an obligation to pay an additional $1 a share next April, and a further $1 in early 2010. For 32 million shares, that comes out at $64 million dollars. But most analysts say the value of fully paid shares will be well below $2, so anyone who pays up will lose a lot of money.

It seems safe to say that, at this point, holding BrisConnect shares makes sense only if you have no other assets the company can seize to enforce the $1 payment. For someone in this position, the shares appear to represent a one-way bet, admittedly at long odds. And, presumably, anyone who is in position to pay will be sure to sell out before the payment is due in April: a problem with partly paid shares of which I was unaware until now.

Since the remaining payments almost certainly won’t be made, the obligation will therefore fall on the underwriters. That in turn raises the question of whether the underwriters will still be around, and in a position to pay up, when the money falls due. That seems fairly likely as regards the payment due in 2009, but much less certain as regards Macquarie in 2010. At that point, the whole thing will presumably fall back into the lap of the Queensland government.

Note: I am Not a Financial Advisor, and I don’t claim an exact understanding of either Brisconnect or the implications of buying partly paid shares when you are already insolvent. So, please seek proper advice before going anywhere near this.

Hat-tip: Rabee Tourky alerted me to this

I’ve done another guest post over at the ABC Unleashed site, on the topic, which we’ve discussed here a few times, of the ratings agencies, their quasi-official role in regulating investment, and their recent catastrophic failures. I’ve reposted it over the fold.

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My piece in Thursday’s Fin caused a modest stir by quoting Karl Marx, offset to some extent by an allusion to Schumpeter. It’s mainly about how to finance infrastructure investment, given that the PPP model looks to be off the table for some years to come.

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As I mentioned a few days ago, using current market exchange rates, Australia now has a higher income per person than the US. Matthew Turner observed the UK passing the US a few months ago and estimated several years ago that the critical value for the Eurozone is around $1.46, which was reached in the last couple of days. I haven’t checked on the GDP comparison, but the yen and franc are also rising

Of course, it would be silly to use these numbers to support a claim that Americans are, on average, worse off than people in other developed countries. The Purchasing Power Parity indexes produced by the International Comparisons Project of the World Bank provide a much better (though far from exact) basis for comparisons of this kind. But, for the many advocates of free markets who’ve used the economic performance of the US as the basis for their case, there’s a big rhetorical problem here. You can, I suppose, argue along the lines “The market values the output of the average American less than that of the average European (or Australian) but analyses prepared by international bureaucrats show that Americans are actually better off, and therefore we should prefer the market to the state”, but it’s not a position I’d want to defend.

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Not that long ago, international comparisons of income levels and so on were always done using market exchange rates. If this were still the standard practice, there would be some surprising news to report. On an exchange rate basis, Australia has a higher GDP per person than does the US (I’d guess the same would be true of more relevant measures like national income per person, though the gap would be a bit smaller because of our greater indebtedness).

Currently US GDP per person is around $US 44000. Australia’s is about $A51 300, which at a market exchange rate of 0.93 converts to about $US47700.

Before we break out the champagne, I’ll point out that these exchange rate comparisons aren’t really useful – this is obvious given that the $US/$a rate was heading for $0.50 not long ago, and is now headng for parity . Standard practice these days is to use a “Purchasing Power Parity” measure, based on the estimated relative cost of a standard bundle of goods and services. The estimated $UA/$A rate is around 0.70 which leaves us a fair way behind the US.

Although PPP estimates are better than those based on market exchange rates, they shouldn’t be treated as exact. They are statistical estimates, with a large margin of error, and the underlying economic theory (revealed preference) implies that even with perfect data, there is always a range of possible values for index numbers like this. Typical international comparisons should be taken to have a margin of error of 10 to 20 per cent.

In passing, a useful tip for students of the economy. If you want a round number estimate of the magnitude of any economic variable, you can approximate GDP as $1 trillion, population as 20 million, and income per person as $50 000. These will be accurate to within 10 per cent for another year or two.

Update In comments, Matthew Turner reminds me that he’s been making this point for years. I think I came up with it independently, but he was certainly first. Interestingly, Matthew calculates that the critical value for the euro/$ exchange rate, at which euro GDP per person exceeds US is $1.46. Yesterday, it hit 1.457.

My column from yesterday’s Fin, comparing the US subprime lending boom with PPPs in Australia, is over the fold.
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While there will doubtless be plenty of discussion of Blair’s contribution on his departure, it might be more useful to take a step further back and re-evaluate Thatcher. When Blair took office, he was generally seen as offering Thatcherism with a human face. Thatcher herself was generally seen,as a successful (counter-) revolutionary and aspirants to the Tory leadership were still competing for her mantle.

Ten years later, the picture is quite different, superficially at least. Brown seems much more Old Labour than Blair, and Cameron is eager to be seen as anything but Thatcherite.
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The appreciation of the euro against the dollar has taken the currency close to its highest value ever around $1.35. By contrast, the rate estimated as Purchasing Power Parity by the Penn World Tables International Comparisons Project (ICP) is around $1.00 for most eurozone countries (It’s 1.10 for Italy, 1.05 for France and Germany, 0.96 for the Netherlands. The price differential between eurozone countries is interesting in itself, but that’s another post).

A gap of this magnitude between market exchange rates and estimated PPP values raises all sorts of problems. For example, using the Penn numbers, income per person in the Netherlands is about 75 per cent of that in the US, and this number is often quoted on the assumption that purchasing-power parity means exactly what it says. But using exchange rates, as would have been standard a couple of decades ago, income per person is a little higher in the Netherlands than in the US. Which of these comparisons, if either, is valid?

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One of the issues that’s been debated at length here is the choice of exchange rates to use in converting different currencies for projections of future economic growth and energy demand. The scenarios developed by the IPCC have used market exchange rates (MER) Ian Castles has argued, in very strong terms, that it’s crucial to use exchange rates adjusted so as to exhibit Purchasing Power Parity (PPP). In my submission, I made a couple of points. First, that there is no uniquely satisfactory method of obtaining PPP exchange rates. Second, and more importantly, the choice doesn’t make much difference to projections of energy use or CO2 emissions, as long as the same values are used consistently. A method like MER, which tends to overstate income differences between poor and rich countries relative to PPP will yield a lower income elasticity of demand for energy. And since MER data have been, until recently more readily available for more countries, there are some practical arguments in favour of using them.

That said, there are a couple of reasons to favour a move to PPP-based scenarios. First, since these are now becoming the norm, continued use of MER numbers is likely to cause confusion. Second, while the crucial numbers regarding emissions aren’t much affected (and any error may be either up or down) other variables, particularly those used in calculations of economic welfare, might be significantly affected.

In this context, it’s unfortunate that the debate has been seized upon by denialists as a basis for attacking the whole IPCC process. The energy that’s gone into pointless disputes could have better been used in a constructive attempt to improve things.

Where does the Stern report come out on all this? Pretty much right in my view. Key quote

efforts are under way to improve the provision of PPP data. The International Comparison Programme (ICP), launched by the World Bank when Nicholas Stern was Chief Economist, is the world’s largest statistical initiative, involving 107 countries and collaboration with the OECD, Eurostat and National Statistical Offices. It produces internationally comparable price levels, economic aggregates in real terms, and Purchasing Power Parity (PPP) estimates that inform users about the relative sizes of markets, the size and structure of economies, and the relative purchasing power of currencies.

In the IPCC SRES scenarios that use MER conversions, it is not clear that the use of MERs biases upwards the projected rates of emissions growth, as the SRES calibration of the past relationship between emissions per head and GDP per head also used GDPs converted at MERs as the metric for economic activity (Holtsmark and Alfsen (2003)). Hence the scenarios are based on a lower estimate of the elasticity of emissions growth per head with respect to (the incorrectly measured) GDP growth per head. As Nakicenovic et al (2003) have argued, the use of MERs in many of the IPCC SRES scenarios is unlikely to have distorted the emissions trajectories much.

I should point out that the World Bank ICP is a successor to the earlier ICP work of Heston and Summers who initiated the idea of systematic PPP comparisons and produced the well-known Penn World Tables. Still, as the quote makes clear, Stern can speak with authority on this topic.

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I’ve been sent a critique of Alan Wood’s piece in the Oz claiming that global warming is a hoax. It’s written by a climate scientist who knows what he is talking about on this issue. Wood obviously doesn’t know or doesn’t care.

I was very disappointed in Wood’s piece. While his economic views are very different from mine, his columns on economic issues are usually rigorous, and if he makes a factual claim, it’s generally reliable. But his standards seem to desert him when he writes on this topic.

The response is in the (now relatively uncommon) form of a point-by-point fisking. Wood’s text is in plain type and the comment’s in italics.

One fairly trivial point is quite revealing. Wood claims, incorrectly, that the Mann “hockey stick” graph was “for a time, incorporated … into the IPCC’s logo.” As the analysis makes clear, the repetition of this bogus factoid indicates that Wood is sourcing his material from the denialist echo chamber, and not doing his own research. This is standard practice for our legion of rightwing hacks (and quite a few lefties as well), but it’s not the kind of thing I’d expect from Alan Wood.

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There’s been quite a bit happening in relation to Public Private Partnerships, most of it suggesting a diminished role for this kind of financing. Queensland has issued new guidelines, partly in response to criticism of the fact that there has so far been only one major PPP project approved (and that only just scraped in). The criticism is understandable: a lot of people in the financial sector are missing out on really big money every time the government decides to go with simple low-cost bond financing. It’s striking though, that the only state with no reason to reduce measured debt levels (Queensland has positive net financial worth) is also the one that has found hardly any PPP offers meeting the value for money criterion. It seems pretty clear that at least some evaluation processes in NSW and elsewhere have been corrupted by the determination of the parties to do a deal regardless of the economics. The recent NSW Parliamentary Public Accounts Committee report on PPPs doesn’t say this, but it certainly raises plenty of concerns about opaque processes.

Meanwhile, in the UK, it seems to be two steps forward and one step back. The nonsensical idea of an all-in-one contract for schools, in which construction is bundled with provision of “soft services” like procurement and HR is mercifully being abandoned, but new forms of PFI/PPP, such as Building Schools for the Future are emerging. The pernicious features of these “innovations” will no doubt become apparent in time, but for the moment, the Blairites are still keen.

The issue of congestion taxes has been raised in several SMH articles recently, and the blogs have been all over it.

This is one of many policy ideas in Australia that make obvious sense, but don’t have any big political interest behind them to offset the natural resistance of the political system to anything new.

Public-Private Partnerships get things pretty much the other way around. In most cases the economic case is weak or worse, but there’s a massive and well-financed lobby that stands to gain hundreds of millions from such deals and is happy to share some of the wealth with pro-PPP politicians, who are more or less guaranteed cushy jobs at megapay after they leave poltics.

George W. Bush’s promise to be “a uniter not a divider” has always seemed like a bad joke. He’s been one of the most polarising Presidents in US history, and this was reflected in opinion polls. As recently as February 2006, Bush managed to score 82 per cent approval among Republicans, while getting nearly 80 per cent disapproval (and mostly strong disapproval) from Democrats.

But the latest Harris poll suggests that Bush might finally be bringing Americans together. His suppport among Republicans has fallen to 67 per cent, and the decline seems to be continuing. A majority (53 per cent) of those who regard themselves as conservative think he is doing a bad job. So maybe Bush can unite us all in agreement on at least one point.

The resignation of Victorian Opposition leader Robert Doyle has produced widespread suggestions that Jeff Kennett should return to politics. While Kennett could scarcely do worse than Doyle, there’s not much reason to suppose he would do a great deal better.

The core of Kennett’s political appeal in the 1990s was the claim that, thanks to Labor’s mismanagement, Victoria was in a state of crisis that could only be remedied by the radical free-market reforms he advocated. Voters bought this story in two successive elections, but had tired of it by 1999, when he was narrowly defeated. Although some claimed at the time that voters had merely intended to “send the government a message”, a string of Labor victories in by-elections suggested the opposite message – once the possibility of getting rid of Kennett became a reality, voters embraced it with enthusiasm.

Kennett’s biggest problem though, is that everything the Bracks government has done can be seen as preparation against a possible Kennett comeback. On the one hand, they’ve been obsessed with avoiding anything that would smack of fiscal irresponsibility. Official debt levels have been held down through expedients like Public-Private Partnerships (the apparent benefits are bogus, but Kennett can scarcely argue this, having been a pioneer of the PPP mania). On the other hand, they’ve restored a lot of the cuts to schools, hospitals and so on made under Kennett. As a result, Bracks can easily run a scare campaign against Kennett, but not vice versa

It’s hard to see Kennett winning in the election due in about six months, though presumably there will be some clawback from the 2002 disaster. In the longer run, anything can happen. But if he comes back, I’d say this implies a commitment to stick out a full parliamentary term as leader, and it’s not obvious that he’d be willing to do this.

As for Doyle, he will only be remembered, if at all, for his irresponsible campaigns in favour of speeding (more precisely, against any effective measures to curb speeding). His departure from politics is long overdue.

More on the souffle question from Rank and Vile

UpdateSo much for that idea

As reader Jonno points out in comments to the previous post on this, the problems with Public Private Partnerships are beginning to become apparent even in the UK where, under the name of the Private Finance Initiative, the idea has been pushed strongly by both Conservative and Labour governments.

This report in the Guardian indicates that the UK Treasury is pulling back from an aspect of the PPP model I’ve long criticised, the bundling of “soft services” like cleaning and catering into contracts for the construction and maintenance of hospitals and schools. The British government is still pushing ahead, under intense pressure from the business interests who benefit from these schemes, but the Treasury Report while unsurprisingly positive in tone, stresses the subsidiary role of the PFI, which is expected to account for between 10 and 15 per cent of total investment in public services.

The NZ Treasury has a paper looking at the advantages and disadvantages of Public-Private Partnerships (PPPs)*. The conclusions are almost exactly what I would have written myself.

This paper argues that:

* there are other ways of obtaining private sector finance without having to enter into a PPP
* most of the advantages of private sector construction and management can also be obtained from conventional procurement methods (under which the project is financed by the government, and construction and operation are contracted out separately), and
* the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail. These are avoided by the periodic competitive re-tendering that is possible under conventional procurement.
The paper concludes that PPPs are worthwhile only if all three of the following conditions are met:

1. The public agency is able to specify outcomes in service level terms, thereby leaving scope for the PPP consortium to innovate and optimize.
2. The public agency is able to specify outcomes in a way that performance can be measured objectively and rewards and sanctions applied.
3. The public agency’s desired outcomes are likely to be durable, given the length of the contract.

The only thing missing is a discussion of the cost of capital. I’ve discussed this issue with NZ Treasury in other contexts, but I’m not sure where they would come out in relation to PPPs

* Acronyms are tricky things. In the post below, PPP means Purchasing Power Parity. And once upon a time, it meant Point-to-Point Protocol, which was used by modems.

A while back, I had an interesting debate with Ian Castles about the significance or otherwise of the choice between market and purchashing-power parity (PPP) exchange rates in the IPCC projections of global warming. You can read a number of contributions from Castles and David Henderson at the Lavoisier Institute website and their main article is published in Energy & Environment”, vol. 14, nos. 2 & 3: 159-85. They argue that the use of market exchange rates understates the income of poor countries and therefore overstates the growth in income and energy use that will occur as they catch up with rich ones.

My criticism is directed at the second part of this claim. I say that if the demand for energy is modelled using market exchange rates, the choice of income aggregate doesn’t matter much. If the income estimate is biased downwards, so will be the estimate of the rate at which energy use grows with income. I make this point in my submission to the Stern Review in the UK.

These debates are inevitably complicated, but someone with the right skills can make them a lot clearer. I can think of no one better than Erwin Diewert, who has been the leading researcher* in the theory of index numbers for the last thirty years (and a big name in other fields). So I asked Erwin for comments and was both surprised and pleased to receive not just comments but a whole paper, not quite by return mail, but after only a few days.

I think it’s fair to summarise by saying that Diewert agrees with my main point, but also agrees with Castles and Henderson that the IPCC should change its modelling approach.

I agree with everything in the comment, but there a couple of points of emphasis I would place differently, as noted in my response . In particular, I stress the importance of consistency. Using PPP numbers for income, then plugging in income elasticities derived from studies using market exchange rates, is a recipe for disaster.

* I should also mention Sidney Afriat who is famous for being both brilliant and esoteric. Afriat has made fundamental contributions to the field.

An all party committee has slammed the Sydney Cross-City tunnel PPP project, and particularly the payment of an up-front fee. By coincidence, I’ll be on Four Corners tomorrow night, saying exactly the same thing.

People who’ve been following the debate about global warming closely will be aware that the economic modelling used in projections of future climate change by the IPCC has been severely criticised by former Australian Statistician Ian Castles and former OECD chief economist David Henderson. The critique emerged in a rather confused form, with a number of letters and opinion pieces before finally being published in contrarian social science journal Energy and Environment. Responses, including mine, have been similarly partial and sporadic.

I’ve finally prepared a full-scale response to the main claim made by Castles and Henderson, that the use of market exchange rates, rather than “Purchasing Power Parity” conversion factors for national currencies, biases estimates of future emissions upwards. My conclusion is that although PPP measures are preferable in comparisons of national welfare, the biases introduced by using market exchange rates are not important in modelling emissions and will, on average, cancel out. You can read it all here.

Update: Ian Castles has sent a response which I’ve posted here. It doesn’t seem to me that Ian responds to my argument except to deny that the MER/PPP issue was the main point of the critique.

I should also note that Holtsmark and Alfsen (2004), whose paper I’ve just found, present much the same argument as mine.

Further update In the comments discussion, a fair degree of common ground has been reached. Ian clarifies that he and Henderson object to MER conversion factors, but not because they bias projections of emissions, saying

I agree that these arguments (about the errors in GDP growth and emissions intensity reductions cancelling one another out) are sound as a first approximation.

Ian makes the valid point that use of MER conversion produces the incorrect conclusion that the energy-intensity of LDCs is about the same as prevailed in developed countries when their income was similar. This could lead to misleading policy inferences, for example with respect to mitigation policy and should be corrected.

I agree with Ian that it is better to use PPP measures consistently, and that the sooner the IPCC does this the better. On the other hand, I think it’s important to make the point that the widely-repeated claims that IPCC projections of emissions are fundamentally erroneous because of the choice of exchange rate are not supported by careful analysis.

Among the many long-running policy debates in which I’ve been involved, the most drawn-out (except maybe for the one about private infrastructure and PPPs) has concerned micro-economic reform and productivity growth. For the last decade or so, the Productivity Commission and others have been claiming that reform has generated a surge in productivity growth, notably multifactor productivity growth (the term ‘multifactor’ refers to the fact that capital as well as labour inputs are taken into account) estimated by the Australian Bureau of Statistics.

One reason the debate is so drawn out is that the ABS presents estimates for ‘productivity cycles’, which are supposed to smooth out year-to-year fluctuations. Until very recently (in fact, until two days ago), the most recent cycle for which estimates were available ended in 1998-99, and this showed strong MFP growth. Arguments that this was a cyclical recovery or the result of increased work intensity were waved away.
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I’ve been involved in the debate over private infrastructure and public-private partnerships for more than a decade, and have accumulated lots of evidence that the public sector generally loses from these deals. One response I get a lot is that the process has matured and that the failures of the 1990s are no longer relevant.

Sydney’s Cross-City tunnel fiasco makes it clear that this is not the case. This deal has all the features that I and others have been criticising for years – secret clauses, restrictions on future planning, closure of alternative routes, crippling penalties for changes and so on. But there’s more. The inclusion of an upfront payment to the RTA, effectively creating a slush fund outside the normal budget process, is an abuse that wasn’t even contemplated a decade ago.

It’s reported Treasury is furious over this and I’m not surprised. They’ve been trying to establish a coherent PPP process, but toll road projects seem to fall outside its scope. But the fundamental problems are, as far as I can see, inherent in the whole concept.

Other recent developments make it clear that we need a moratorium on PPP deals. How can the public interest possibly be protected when any politician or public servant involved in these processes can expect a multi-million dollar sinecure on retirement, provided they don’t upset the applecart? You only have to look at the payrolls of the major players in the industry to see what I mean. Tony Harris, the former Auditor-General who exposed the dodgy accounting behind many of the early schemes is one of the few people involved in the process who doesn’t have a cushy job or consultancy of some kind.