1500 GL

This report, saying that a return of 1500 Gigalitres to the Murray is needed to achieve moderate improvements in ecological conditions is pretty much what was expected. As I argued here, such a reduction in water use is feasible, but expensive and politically tricky. Given the way the process has been set up 1500 GL is likely to be an upper bound for the return of water to the Murray, at least for the next 10 years, the period for which NSW licenses will be allocated.

ABCEB

I can’t say I’m eager to say anything positive about Kim Beazley after the fiasco of 2001, but I have to agree with what he has to say here and with the unstated message that it’s time to dump Simon Crean as Labor leader. Beazley attacks the last round of tax cuts, endorsed by Crean, and Crean’s promise not to increase the Medicare levy. (I haven’t been able to confirm the existence of this promise, but it’s implied in various press reports)

Having said that, I don’t retract my endorsement of the Caucus decision to reject Beazley’s leadership challenge. Beazley had the chance to put his thoughts into practice in 2001 and he squibbed it. Not only did he not propose an increase in the Medicare levy, he even vetoed any change to the absurd tax subsidy to private health insurance.

After beating off Beazley’s challenge, Crean needed to get off the fence as far as tax and public spending is concerned but he’s failed to do so. As a result, he remains a purely negative figure as far as the Australian public is concerned. In effect, he’s reproduced Beazley’s small target strategy.

So I’ll modify the ABC (Anybody But Crean) view, and say that Labor should go for ABCEB (Anybody But Crean, Except Beazley).

Bubble or boom

My column in today’s Fin (Subscription required) is about the (putative) bubble in housing prices. After noting that virtually all economists think there is a bubble I observe

There is a paradox here. In a country with a longstanding suspicion of market forces, economists have normally been among the few defenders of the market. Even relative sceptics put more weight than the average Australian on seeking rational economic explanations of market outcomes. Yet in the case of the housing boom, ordinary Australians have shown a faith in the market that would put the most devout Chicago economist to shame….

A bad end to the current boom would mark the failure of the separation between monetary policy and prudential regulation introduced following the report of the Wallis Committee. The whole program of financial deregulation would be called into question.

The implications would be even more striking if the current putative bubble turned out to reflect a sustainable increase in underlying values. If the doubling of house prices over a few years is not a bubble, then it is clearly impossible for economists to recognise one when it is in progress. It would be hard to imagine a more triumphant vindication of the efficient markets hypothesis than this.

If anyone has a plausible story as to how the rise in asset prices is sustainable, I’m eager to hear it. Sustainable in this context means that the value of the flow of services from housing should equal the rental cost implied by current prices and reasonable real interest rates.

Kant on autarky

Leafing idly through Russell’s History of Western Philosophy, I came across this interesting quote (p 683 in the Unwin paperback edition)

Kant gives as an illustration of the categorical imperative that it is wrong to borrow money, because if we all try to do so there would be no money left to borrow

Russell seems to see nothing wrong with this, but it is obvious that the same argument applies to trade of any kind. If I engage in trade, I must be a net buyer of something, say bread. But if everyone tried to be a net buyer of bread, there would be none left. Hence the categorical imperative requires everyone to be self-sufficient.

I assume this constitutes a reductio ad absurdam for Kant’s argument against borrowing. But is it possible to reject the argument against borrowing while accepting the categorical imperative from which it is derived? Any Kantians among the readers of this blog are invited to set me straight on this point.

Update In the comments thread, James Farrell points out that, contrary to the quote from Russell, Kant was talking about borrowing money without the intention of repaying it.

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Trailers?

This piece in the NYT reports that Warren Buffett is making a countercyclical move into manufactured housing. Until recently, at least, this form of housing (pejoratively referred to as ‘trailers’) has been very significant in the US – around 20 per cent of all new houses, and up to 50 per cent in rural areas.

This raises a number of questions. First, why there is no comparable development in Australia, where manufactured units are typically used only as holiday accommodation? Is it a matter of building regulations, and if so should we be changing these regulations to bring down housing costs? Or, as the NYT story implies, does this kind of housing degenerate rapidly towards slum status. The rapid decline in the manufactured housing market during the boom of the late 90s seems to support the view that this is a last-resort option.

There’s also a bigger question which I’ve been puzzling over for some time. Real incomes for the bottom 40 per cent or so of US households haven’t risen since the 1970s. At the same time, ownership of items like TVs and washing machines has expanded significantly. That’s not surprising, since the relative price of these items has dropped. But that implies that other relative prices have risen, and housing is an obvious candidate. Has housing quality declined for low-income Americans? If consumption of all items has increased, while income has been constant, the implication is obviously that savings have declined, presumably because of the availability of new forms of credit, and the story also hints at this.

I’d be very interested in any comments and grateful if anyone has useful references on the points I’ve raised.

Monday Message Board

I’m on the road for a couple of weeks, first on a short visit to the Snowy Mountains, and then going to the Economists’ conference in Canberra. So postings may be infrequent and erratic (that is, more erratic than usual). I hope readers will fill the gap with their views on any topic (as always, civilised discussion and no coarse language please).