New on the website III

US debt will come back to bite. Australian Financial Review 13 March 2003 An extract:

Banana republic populism actually has it easier in the US than in the Third World because the vast majority of US debt is denominated in US dollars. Rather than resorting to repudiation, the US government can simply print all the dollars it needs and use some of the proceeds to compensate the domestic holders of US public debt (a dwindling proportion as foreigners now hold between $2 and $3 trillion of US debt) …

The world has often seen rulers whose military power is not matched by their financial means. The lesson of history is that those who lend money to such rulers usually regret it.

Update 21/4 Niall Ferguson in the NYT develops the historical parallels in a great deal more detai.

New on the website II

Being AAA is not the top , Australian Financial Review ,27 February 2003. As I observed a few days ago, the mention of AAA credit ratings seems to induce a complete loss of reasoning capacity in Australian politicians. An extract:

the political weight attached to credit ratings is based on an exaggerated respect for the financial institutions that issue them. In the 1980s and 1990s, it was easy to believe that the financial wisdom of firms like Standard & Poors and Moodys vastly exceeded that of spendthrift governments in need of fiscal discipline.

The weaknesses of the ratings agencies have been sharply exposed by the financial crises of the last few years, most of which involved some form of crony capitalism. The Asian crisis caught the ratings agencies almost completely by surprise. Even more striking were the failures on their home turf. Firms like Enron and WorldCom, supposedly scrutinised by sophisticated financial analysts, went broke with scarcely any warning from the credit watchdogs.

Unfortunately, the use of dubious fiscal expedients like off-balance sheet partnerships is not confined to Enron. Most of the reduction in Commonwealth debt has arisen from asset sales. The sale of Telstra, which drastically reduced the net worth of the pubic sector, was the biggest contributor. While less significant in quantitative terms, other fiscal expedients have been even more troublesome. They include sale-and-leaseback arrangements very similar to those that formed the basis of the accounting manipulations employed by Enron.

More generally, the adoption of practices such as reliance on commercial confidentiality, a natural accompaniment of faith in the superiority of financial markets over governments, has led to a reduction in the amount of information about the operations of government that is made available to the public. The decline in the usefulness of the Commonwealth Budget papers is particularly noteworthy.

AAA ratings are all very well, but they are no substitute for accurate, comprehensive and comprehensible public accounts. These have been sorely lacking in Australia in recent years

As I’ve observed in the past, the stockmarket bubble in the United States represented a comprehensive practical refutation of the efficient markets hypothesis. The consequences of this refutation will take a long while to work their way through our thinking, but they will certainly include a diminution of respect for AAA ratings.

Uninvited guests

Now that the military phase of the war is over, the big question is how long the Coalition forces, including Australian forces, should stay, and how much control they should try to exercise. As Kevin Drum at Calpundit has observed, this is a problem with no good answer. Of course the fact that no serious attempt had been made to answer this question was a major reason for opposing the war in the first place.

I’ll try to develop my arguments in more detail, but I’m basically with Thomas Friedman on this one “we broke it, we own it”. Having asserted the right to dictate political outcomes in Iraq we (the citizens of the occupying powers) now have the responsibility for delivering an outcome that justifies the death and destruction we have caused. This probably means a long and expensive occupation.

New on the website

No alternative for Telstra, Australian Financial Review ,13 February 2003 . This piece provoked a hysterical letter from Alston, but lots of readers liked it, even if they didn’t agree with the policy conclusion, which was:

The problem neither party will talk about is Telstra’s ownership. Just as in structural terms (Telstra represents an unacceptable combination of natural monopoly communications services and vertically integrated content provision), the current half-private, half-public status is an unsustainable mess, as even the government that created it now admits.

Telstra should be renationalised and the peripheral businesses should be sold off. This could be done in many different ways, including legislation or through a takeover by a newly created government business enterprise.

This simple solution is unthinkable to politicians with a 1990s mindset such as Alston. But in the past few years, Britain in effect has renationalised its rail track network, the US has nationalised airport security and New Zealand has created a new publicly owned bank, among many other instances.

There are good arguments for and against public ownership in particular cases. But in Telstra’s case, to quote Margaret Thatcher, there is no alternative.

There can be few ministers who’ve held on to an industry portfolio as long as Alston, while being derided by almost everyone involved in the industry. He’s even a favorite whipping boy overseas publications like the UK-based Register, which routinely runs headlines like This man must be the biggest luddite in history.

Irony alerts in the 14th century

‘Truly this is the sweetest of theologies’, William said, with perfect humility, and I thought he was using that insidious figure of speech that rhetors call irony, which must always be prefaced by the pronunciato, representing its signal and its justification – something that William never did. For which reason the abbot, more inclined to the use of figures of speech, took William literally …

Umberto Eco The Name of the Rose

Lives lost and lives not saved

As in most recent wars, military casualties on the US-led side have been minimal in the war on Iraq. But there is another sense in which the cost in American, British and Australian lives has been high.

The money spent on the war could have been allocated instead to improved health care or public safety measures. The cost-effectiveness of such measures varies a lot, but a fair rule of thumb is that at the margin, health interventions cost about $US5 million per life saved (because of lower costs here, a marginal cost of about $A5 million per life saved is also appropriate for Australia).

So if we assume that the war and occupation will end up costing $100 billion, the opportunity cost is around 20 000 American lives. Assuming Australia spends $1 billion, the opportunity cost here is around 200 lives.

To take a more optimistic view of the question, it’s worth noting that the cost of saving lives through health care and other interventions is far smaller in poor countries like Iraq than in rich countries. So, if the US were prepared to spend another $100 billion* rebuilding (as opposed to occupying) Iraq, and allocate a substantial portion of that to health and education [especially education for women, which has big health benefits], many more than 20 000 lives could be saved. A commitment to reconstruction spending on this scale would go a long way towards justifying the war.

*Of course, for any net benefits to be realised, the money has to be new money from America or other donors, not Iraqi money recycled through American contractors.

One more for the record

This Washington Post article is the first I’ve seen based on extensive interviews with Iraqi civilians (in this case, in Basra) in the absence of the armed forces of either side. For those tempted to believe the official statements of one side or the other, it makes interesting reading. The headline “People in Basra Contest Official View of Siege: Life Was Mostly Normal, Residents Say; Doctors Report Many Civilians Killed” gives a reasonably accurate summary.