The economic year ahead , Australian Financial Review , 2 January 2003

My predictions for 2003 with a look back at my record for 2002.

As regards the Australian economy, I have, like many others, been surprised by the length and strength of the bubble in housing prices. Fortunately, having learned from past experience that it is easier to diagnose a bubble than to tell when it will burst, I refrained from making any prediction about the timing of the bubble’s inevitable end.

It now seems clear, however, that the period of rapidly rising prices has come to an end. The optimistic view is that the boom will be followed by a plateau, rather than a collapse. However, as the Japanese experience suggests, a long period of stagnation can be just as painful as a short sharp shock. Prices are well above their equilibrium real values and, at current prices, the housing stock is well in excess of total demand. While it is impossible to predict the course of this adjustment, it is safe to predict that it will be unpleasant, at least for the housing and construction industries.

The big question for Australia is whether the strong performance of the past couple of years is a fortuitous by-product of the real estate bubble or a reflection of underlying economic strength resulting from microeconomic reform. I lean to the former explanation, and therefore to the view that a slowdown in housing and construction is likely to be transmitted to the broader economy.

Ay caramba!

A couple of days ago, I noted the normally equable Brad DeLong saying that the US was on the path to national bankruptcy. Here’s some similar observations from
Paul Krugman

If the administration gets what it wants, within a decade — or perhaps sooner — the United States will have budget fundamentals comparable to Brazil’s a year ago. The ratios of debt and deficits to G.D.P. won’t be all that high by historical standards, but the bond market will look ahead and see that things don’t add up: the rich have been promised low tax rates, middle-class baby boomers have been promised pensions and medical care, and the government can’t meet all those promises while paying interest on its debt. Fears that the government will solve its problem by inflating away its debt will drive up interest rates, worsening the deficit, and things will spiral out of control.

Ho hum, you may say, Krugman never has a good word for the Bushies. But Hal Varian is as moderate and reasonable as they come, and his piece starts

ALAN GREENSPAN, the Federal Reserve chairman, called the latest forecasts of budget deficits “sobering.” A better word might be “shocking.”

and ends

What will happen if nothing is done? If deficits continue to accumulate, the temptation to print money to pay our debts will become almost irresistible. Inflation is all too tempting as an “easy” way to avoid the political pain associated with tax increases or budget cuts.

All a president needs is a pliable Federal Reserve Board, and this can probably be arranged sometime in the next 10 or 15 years. Inflating away the debt is not pretty, but it may well end up being the most politically expedient solution to the burden of accumulated deficits.

Varian in turn quotes work by Auerbach, Gale, Orszag, Potter, highly respected economists associated with the Brookings Foundation (Democratic-leaning but centrist rather than left-liberal). Analysing projections from August 2002 (that is, without either an Iraq war or the latest Bush budget) they estimate a 10-year deficit of $5 trillion averaging about 4 per cent of GDP. The 2003 Budget and Iraq imply another $300 to $400 billion in annual deficits (3 to 4 per cent of GDP), suggesting a budget deficit well in excess of the 5 per cent rate generally regarded as signalling a descent into unsustainability.

According to this report, Saddam has developed missiles that have a range of 180km when he is limited by UN resolutions to a range of 150km. This isn’t important in itself, but it could be critical in the way that things play out from now on. Despite the noise Blair and Howard are already making, the breach won’t be sufficient to justify immediate war in the eyes of anyone who isn’t already committed to it. On the other hand, it is a clear breach.

The obvious next step is a UN resolution demanding that Saddam destroy the missiles. I expect this will be passed because it gives a lot of UN members a potential escape from their dilemmas. If there is a resolution and Saddam doesn’t destroy the missiles, all those who have been on the fence will be able to support a war. On the other hand, if he does destroy the missiles, the position of the doves will be greatly strengthened. So the French have a strong incentive to support a resolution of this kind – they clearly
(a) are not fundamentally opposed to war
(b) do not want to be seen to bow to the US

A clear-cut demand will suit them very well in resolving the difficult position they are now in.

Blair needs a UN vote and this provides an obvious basis. And I suspect, given the difficulty of his current position, he would not be terribly upset if Saddam did destroy the missiles and put war off the agenda for a while . He could reasonably claim victory, in that British and US pressure was producing the desired outcomes (all this applies for Howard too, of course).

The people who will be unenthusiastic about this are those who want either war at any price or peace at any price. In principle, both parties should be confident that Saddam will jump the way they want, but he is too unpredictable for this.

The two Kevins (Drum and Batcho) have some related thoughts.

My piece in today’s Fin (Subscription required) is my reaction to Alston’s suppression of the Telstra inquiry and his lame defence of the status quo printed on Tuesday. As regular readers will know, I hate being conned (particularly being conned into pointless extra work during the summer break) and I say so, vigorously.

In his Oz piece yesterday, Keith Windschuttle exhibits a pattern that has become the norm, making accusations against his opponents that apply as well, or better, to himself. He begins

[Michael] Duffy also observed ( The Daily Telegraph , December 21) that intellectuals on the Left “have always had a remarkable ability to switch arguments as soon as they sense they are losing”. The co-editor of the National Museum’s anthology, Bain Attwood, confirmed this ( The Australian , January 6) when he claimed there was nothing new about my rebuttal of the Aboriginal genocide thesis. Academic historians had already abandoned the concept of overt genocide for more focused, local analyses, he said, citing the work of Reynolds, Ryan and Dirk Moses.

Hence my book was no expose. “It’s just old news from a tabloid historian. Only those ignorant of the academic historiography – or unwilling to go and read it – could believe otherwise.” Moses himself followed Attwood ( The Australian , January 13), arguing that since I was “unable to describe historical writing accurately”, no one should trust anything I say.

True, Reynolds has admitted the colonial authorities did not intend genocide, which I acknowledged in my conference paper and twice in my book. Instead, however, Reynolds claims it was the Tasmanian settlers who wanted to exterminate them, which is why I devoted my longest chapter to analysing and disproving this claim.

But in relation to Reynolds, it’s Windschuttle who’s switching away from a lost argument,and misrepresening Attwood in the process. In his National Museum piece, he was asserting that Reynolds had made, then abandoned a claim of genocide.

Despite their denials, the very fact that the orthodox school has at last been publicly subjected to some sceptical questioning has already, in this brief period, led some of its practitioners to abandon some of their more outlandish claims. These developments include:

· Whereas Lyndall Ryan was still claiming in 1996 that the Tasmanian Aborigines were ‘victims of a conscious policy of genocide’, Henry Reynolds now disagrees. In his latest book, An Indelible Stain? , he has conceded that what happened to the Aborigines in Tasmania did not amount to genocide. [6] (emphasis added)

Windschuttle complains that Ryan has had a long time to answer his criticisms, but the clock is ticking for him too. His misrepresentation of Reynolds is one of a number of points where he’s been accused of error. So far his response on most points has been nothing but bluster.

In the spirit of practising what I preach, I will concede that I overstated the significance of Windschuttle’s misquotation of Lyndall Ryan (running two paras together and shifting the footnotes). However, I still think that
(i) When quoting someone’s words against them, no unacknowledged change is acceptable [added emphasis should be noted, omissions indicated with ellipses etc]. When a misquotation is identified in a case of this kind, and the person misquoted objects, they should have the benefit of any doubt
(ii) the effect of Windschuttle’s change was to strengthen a perception of deliberate dishonesty as opposed to sloppiness.

At the time of bin Laden’s first audio message, I wrote that I didn’t believe it

First, Al-Jazeera produces what is supposed to be a handwritten message from bin Laden, and now an audiotape, assessed by US authorities as ‘probably genuine’. If someone can smuggle a tape recorder into and out of whatever hole bin Laden is hiding in, why not a videocamera ? That would prove he’s alive, which seems to be the object of the exercise. I prefer the hypothesis that someone is producing spurious evidence of bin Laden’s survival and that the US is playing along, either because they’re the ones producing it, or for some other obscure motive. Of course, even if the evidence is spurious, bin Laden could still be alive.

Now bin Laden resurfaces, again without video, and sings in tune with Bush, saying that he’s arm-in-arm with Saddam or at least with the Iraqi people. This would certainly explain the first tape as “establishing character”. If it hadn’t been for that tape, no-one would believe that the current one was anything but a CIA forgery.

Unfortunately, we still can’t be absolutely sure that the tape isn’t genuine. After all, if he’s alive, bin Laden almost certainly wants war even more than Bush does. And, if he’s dead, the same would go for the surviving Al Qaeda leadership, who might also have produced such a tape.

Andrew Norton replies further in the debate over the question of whether too many people are undertaking tertiary education. He raises quite a few points, to which I want to respond by setting out my view of the key issues. I’m going to focus exclusively on the instrumental view of education as a way of preparing people for the labour market – I’ll took about broader issues later (I hope).

My starting point is that the general trend of technology is to increase the demand for relatively skilled labour. This isn’t true always and everywhere, but it holds on average for any timescale from a decade to a century. So the proper question isn’t whether there are too many people getting tertiary education (or finishing high school, or whatever). It’s whether the growth in the number of people getting more education has temporarily outstripped the growth in demand for more educated workers. The signal that this is happening will normally be a compression in the wage distribution, more particularly a decline in the wage premium associated with higher levels of education. We haven’t seen any sign of this so far, if anything the reverse (of course, labour markets are complex and this outcome could result from other factors, such as the decline of unions).

In the long run though, we can assume that the labour market will demand more and more educated workers. A worrying possibility is that we might run out of people capable of benefiting from further education. Norton raises this point, specifically mentioning

high university drop-out rates for the weaker Year 12 students that would make up the bulk of any expansion in the system (suggesting it may simply be beyond many of them).

There’s no doubt that weaker students are struggling at present. But I don’t think we can conclude that we have reached the bottom of the barrel in terms of student ability. A far simpler explanation is that massive cuts in resources per student (about 50 per cent in universities over the last decade) have had the effect you would expect, with the weaker students suffering most.

This is clearest at the secondary level, where school completion rates fell sharply after cuts introduced by the Kennett government in Victoria and the Olsen government in South Australia. This outcome can’t be explained by a weaker student body, since the denominator in the completion rate is the entire age group. And some European countries are already managing school completion rates close to 100 per cent, with standards comparable to ours. The US has also had a norm of high-school completion for many years (hence the term ‘dropout’, which would have made no sense in Australia until very recently), though standards are variable.

Perhaps at some point we will run up against inherent limits in the intellectual capacity of the population. At the moment though, I’m more worried by the incapacity of those making education policy to accept that in this as in all other economic activities, lower inputs means lower outcomes.

My last AFR Op-ed for 2002, was The best case for Telstra, 19 December
Key sentence

Paradoxically, in the process of arguing for the privatisation of Telstra, the Howard government has provided some of the sharpest formulations of the case for renationalisation of Telstra’s core telecommunications business.

I’ll be having my say on Telstra again in tomorrow’s Fin.

The Great Bunyip hunt is on again. On 5 December, Tim Blair stirred the possums and other billabong beasts by posting a one-liner saying,
“IMRE, er, I mean Professor Bunyip – is back! “

This passed without mention, but along with a few other things, it left me with the view that Imre Saluszinsky is the best candidate for Bunyiphood we have – after all, how many born-again conservative academic Lennie Lower fans are there in Australia (I qualify on my own somewhat eccentric definition of “conservative”, but it isn’t me, honestly).

So when, commenting one of Ken Parish’s posts, I made the Freudian slip of typing “Imre” rather than “Bunyip”, I thought I’d do my own bit of stirring and leave it unchanged to see what happened.

Now Jason Soon has jumped into the fray, saying

Though I don’t have first hand confirmation of my guess, I do strongly believe (with literally close to 100% certainty) I know who the Bunyip is now, based on something that the Bunyip himself wrote in a relatively recent post. However, his secret is safe with me, the rest of Ozplogistan will have to continue their speculations.

Jason implies, but carefully doesn’t say, that his candidate is not Imre.

The standard secret identity question is ‘Have you ever seen them together’. Given that bloggers are virtual creatures, we can’t physically locate them, but we can expect that the pseudonymous identity won’t refer to the secret true identity and vice versa.

So let’s Google “Bunyip + Imre” and see what we get. That brings up this post where Professor Bunyip mentions an email from Imre to Tim Blair. The pseudonymous Professor refers to his putative alter-ego as “the Professor”, leaving the reader in a whirl of postmodern confusion.

A second Google hit, here starts

Imre Salusinszky hits a six

Both of these are from the very early days of Bunyip’s career. A boringly prosaic explanation is that Prof Bunyip, as a neophyte blogger, took a few weeks to realise that you don’t use a pseudonym to plug your real self, unless you want to be called a ‘sock puppet’, a cruel fate for a ferocious denizen of the deep. A more appealing interpretation is that these posts and Tim’s one-liner are all part of an elaborate prank. If so, I hope we don’t have to wait too long for the denouement.

Update Be sure to read the comments thread where, at least according to several well-informed commentators, the truth is revealed!