Glenn Hubbard has resigned as chairman of the White House Council of Economic Advisers to be replaced by Greg Mankiw. Mankiw was a somewhat surprising (until this news) signatory of the recent economists’ statement endorsing the Bush tax cuts, and has written papers taking a relatively relaxed view of government debt (it’s a sign of the times that this is a crucial qualification for a Republican CEA chairman).

I’m a big admirer of Mankiw’s work, which I’ve cited on many occasions, most notably in relation to the ‘equity premium puzzle’. I’m also, in a very distant sense, a co-author: one of my pieces was reproduced in the Australian edition of his bestselling textbook. But I don’t think he’s made a wise decision in taking the CEA job. It’s one thing to reject scaremongering about current levels of government debt (about 50 per cent of GDP in the US). It’s quite another to be pushed into the position of advocating fiscal policies that are already fiscally unsustainability and are only likely to get worse over the next couple of years.

There’s not much more boring than Federal-State financial relations. However, the issue is important, and not well understood, so I’m going to post about it anyway, picking up one of the most common misconceptions.

Dennis Shanahan writes in today’s Oz

Three years ago the states signed up to a new financial agreement which gave them access to the funds from the GST. The full income stream from the GST won’t be available for all the states until 2007, but the money has begun to go into state coffers and will continue to do so on an increasing basis.

This is what the states wanted, a growth tax, and they got it. Now, as the money starts to roll in, the states are fighting a rearguard action to maintain all the old commonwealth funding buffers and avoid whatever responsibility they can.

Wrong, wrong wrong! The states have yet to see one extra cent from the GST. They’re still operating under a guarantee that they would no worse under the new tax system than under the agreement it replaced. Even when the GST revenue exceeds the guarantee the states will be no better off, partly because the guarantee was inadequate to meet the needs of growth and partly because any action here can be offset by cuts in specific purpose grants and other transfers.

All of this is important because, in the Australian system it is the Commonwealth that collects all the taxes and the States that provide all the services that matter. This ‘vertical fiscal imbalance’ means that Commonwealth governments have an inbuilt bias towards cutting taxes. The States have an inbuilt bias towards spending money, but since the Commonwealth has the fiscal whip hand, it’s Commonwealth biases that matter. This is one structural reason why both taxes and public spending are too low in Australia, compared to what the public would prefer, what economic analysis would imply is desirable and what other developed countries actually do.

I just saw a poster advertising Heath Ledger in the new film of Ned Kelly. Terrible casting – he doesn’t look a bit like me!

One of the great legends of Australian journalism concerns a provincial newspaper which began its editorial on the Russian Revolution with the sententious observation “This newspaper has often warned the Czar …”.

A few days ago, I undertook my own exercise in warning the Czar asking

If Bush supports democratic elections in a postwar Iraq, and intends to hold them after dealing with Saddam, why not say so now, unequivocally and publicly, at the same time as proposing his UN resolution ?

Now according to this WashPost report Bush has done pretty much what I suggested, including a commitment to a democratic Palestinian state.

I got this link via Ken Parish who correctly observes that this constitutes a clear rejection of the idea of some form of US-controlled government – my earlier post was responding to an earlier WP report quoting unnamed ‘officials’ as rejecting ‘democratization’. Whether this was kite-flying or misinformation, it’s now been repudiated.

Obviously, Bush’s speech strengthens the case for war, though it’s not, in itself decisive. If war is to be avoided,the Iraqi government must make rapid substantial progress on compliance and disarmament starting with the destruction of the Al Samoud (?) missiles.

While it may be bad news for the unconditional opponents of war, Bush’s long-overdue commitment to democracy is a vindication of those who have resisted a rush to war without a clear statement of the grounds for war and of explicit war aims. It’s a pity it wasn’t made six or twelve months ago, but better late than never.

Thanks to c8to for setting me up with a new comments script, which seems to be working. The archived pages should still give access to the Haloscan comments when and if they are back on line.

As numerous correspondents have told me, I need to bite the bullet and move to MT. Soon, I promise!

Update 27/2 20:15 AET As was inevitable, I guess, the new script is having some teething problems. I ran into a bunch of errors when I tried to use a public Windows machine to read the blog. Thanks to c8to again, I’ve fixed some problems, and the counter now seems to be working (at last on Safari and IE Mac). I’d very much appreciate feedback on what’s working and what isn’t.

Live-in game shows (often called ‘reality TV’ for no reason I can fathom) are all the rage and it seems we’re in for more. The Survivor sub-genre is harmless fun – Gladiators set in exotic locations – but the boom seems to be in variants on the ‘mating game’.

The aim appears to be to make each show more creepily disgusting than the lost, but the obvious routes of simple depravity (Chains of Love) and grossout (Fear Factor) don’t seem to work. The most successful theme (Who wants to Marry a Millionaire etc) seems to be to get as close as possible to inducing the contestants to prostitute themselves without crossing the line into reality (where, of course, this can be arranged for much less money and with less loss of self-respect on both sides than in the TV version). And we now have nasty versions of Candid Camera, as in Joe Millionaire.

So here’s my suggested ‘ultimate reality TV’, at least as far as the ‘mating game’ sub-genre goes. The show is sold to participants as a ripoff of The Bachelor etc, with a number of participants seeking to be the last one left to receive an offer of marriage. The trick is that after the game is complete, the Bachelor or Bachelorette is told that, to win the prize, they have to make the offer to the first person they rejected. [The Bachelors/Bachelorettes would be screened to ensure that they would be the type to accept the offer]. The episodes are then shown in reverse, starting with the one in which the trick (but not the identity of the bride/groom) is revealed, and working backwards, with each episode introducing a more unappealing candidate than the last, and the final episode revealing the lucky bride/groom for the first time. With luck, this would be literally the ultimate in games of this kind.

Haloscan is down up down again! So I’m pushing ahead with my attempts to implement a replacement.

This Washington Post report on the cost of war confirms the rough estimate I made three months ago – William Nordhaus came out with a detailed study yielding a similar number not long after.

The other interesting number is the $2.1 billion the Pentagon says it has spent so far. This demolishes the claim that we must have war now because of the logistical demands of mobilisation. If the US decided to wait six months it could clearly do so at very little extra cost. Given the chance of securing additional allies, and the avoidance of more desperate bargains like that just made with Turkey, the US would probably save money.

Looking at the state of telecommunications policy in Australia, you might imagine that Communications Minister Richard Alston is spending all his time in front of that nice plasma screen Telstra loaned him to improve his insight into telecommunications policy. But in fact he spends a lot of time writing to the papers to blast all who disagree with him. The Australian Computer Society has been a regular recipient, as this Register report shows.

And he responded vigorously to my piece in the Fin last week claiming that I do not have a ‘skerrick of evidence’ for my suggestion that the suppression of the inquiry into Telstra’s structure was a response to pressure from Telstra, concerned that the evidence would be unfavourable to its commercial interests and share price. When the government first moved to curtail the inquiry, on December 19 2002, the chair of the inquiry Christopher Pyne, said it ‘would be damaging for Telstra if it dragged on too long’. Among other reports on the reaction of Telstra and its shareholders, the AFR (Government cuts short Telstra break-up inquiry, 20/12/02 ) noted “it is believed the company’s fury about the inquiry is understood by the government.” [I’ll try to provide links for this post soon.]

Anyone who followed the economic policy debate in the late 1980s, will remember the phrase “elaborately transformed manufactures”. One of the claims about microeconomic reform was that it would lead to the development of a strong manufacturing export sector to replace the import-competing sector that was contracting rapidly as a result of reductions in tariff protection.

Some early figures on manufacturing exports looked promising until it was discovered that the statistical definition of “manufactures” included things like meat and flour. So attention was focused on “elaborately transformed manufactures (ETMs)”. Despite the impressive name, this does not refer solely to high-tech products. In fact, virtually anything that you would naturally think of as a manufactured product would qualify. The Australian Bureau of Statistics gives as its examples “clothing, motor vehicles, machinery, paint ”

Throughout the late 1980s, the growth rate of ETM exports was impressive – as much as 30 per cent in some years. But, as the catchphrase of the day had it “albeit from a low base”. Since ETM exports had been virtually zero in the 1970s, the total value of exports was still small even after several years of rapid growth. But the assumption was that growth would continue and offset the loss of jobs in the import-competing sector.

ETMs were a favorite of the Hawke-Keating government and I hadn’t heard much about them since 1996, but I didn’t know whether this reflected the change of government or the lack of any real news. Checking the data, which you can find in a PDF file here, the answer is the latter. ETM exports grew to between 20 and 25 per cent of total exports of goods (a bit under 20 per cent of exports including services) in 1993-94 and have remained around the same level ever since. The biggest single item is exports of cars, which are effectively subsidised through schemes in which exports can be used to offset concessional imports of parts.

Exports of $25 billion to $30 billion* are not to be sneezed at, and without them the contraction of manufacturing employment would have been even more rapid. Nevertheless, optimistic rhetoric about the growth of a strong ETM sector forming the core of an export-oriented economy has not been converted into reality.

*Since the figure above is gross, the net contribution to GDP will be smaller (by the value of inputs) as will the net contribution to the current account (by the value of imported inputs).