What I’m reading

I’ve just finished Who Rules? How government retains control in a privatised economy by Michael Keating. Keating’s basic analysis, with which I agree, is that governments are facing a problem of rising demands and bounded state capacity. Hence, wherever possible, they are economising on capacity, for example by using regulation rather than direct public provision of goods and services. Thus, the reforms of the 1980s and 1990s are seen, not as cutting back government but as making it more effective. An obvious inference is that, if the size of the public sector, relative to the economy as a whole, has remained roughly constant for the past 25 years, and the effectiveness of the state has been enhanced, then government is playing a larger role than before, contrary to the hopes of neoliberals and the fears of social democrats. I think this is broadly correct.

Not surprisingly, Keating has a more favourable view of the reforms, many of which he helped to implement, than I do. On almost every point, I felt he was a little too supportive of the reform agenda and a little too dismissive of the critics[1]. Still, it’s an important contribution to the debate, and well worth reading.

fn1. Interestingly, I get quoted a few times, but mainly for criticisms of the pre-reform status quo, such as the observation that industry policy in the era of tariff protection was ad hoc and incoherent.

PPPs and renegotiation: Citylink and Scoresby

One of the big questions about Public Private Partnerships is what happens, when the deal needs to be renegotiated in some way, 10, 20 or 30 years after it was signed. This story about changes to an interchange affecting CityLink in Melbourne is of interest. The deal is being financed in part by replacing some payments due to be made by Transurban (the Citylink operator) with a smaller upfront payment. The financial arrangements are too complex to permit a clear assessment, but one point is striking.

Last year Transport Minister Peter Batchelor said the Government wanted $200 million for the upgrade. Transurban said it wanted to pay only $150 million – the eventual figure.

So, starting with a a $50 million gap between the initial positions, Transurban got the whole $50 million and the public got nothing.

Related to this is an interesting kerfuffle over the Scoresby (Mitcham-Frankston) motorway. As many will remember, the Bracks government initially promised not to impose tolls, then reneged, copping a lot of flak in the process. The Opposition leader, Doyle, has promised to renegotiate and remove the toll. This has presented the Bracks government with interesting incentives. Usually governments involved in PPPS want to stress what a good deal they have got for the public, in terms of the toll revenue that has been promised the private ownership. But now the situation has been reversed. Faced with Doyle’s promise, the government and its agencies commissioned a PwC report[1] which said that scrapping the tolls would cost $7 billion, with a cost of $4.5 billion for buying out the project. By contrast, construction cost is about $2.5 billion plus “other financial costs” of $1.3 billion.

It appears from these reports that the value of the tolls that have been alienated is nearly three times the cost of building the road[2]. Of course, the government’s report has been produced under pressure to make the repurchase option look as unfavorable as possible. But then, the vast majority of published analyses of PPP projects suffer from the opposite bias.

What’s even more striking about this is that, in PPP circles, the Mitcham-Frankston project is being touted as a huge success, evidence that we are finally getting these things right. Something does not add up here.

fn1. The conclusions have been released, but the interesting bits like the traffic projections are, as usual, commercial-in-confidence. At least, when I asked for them, that’s what I was told.

fn2. Using the $4.5 billion buyback cost and accepting that some of the “other financial costs” would be incurred under standard procurement would give a less extreme result. But the $7 billion number is the one the government has been touting.

Habib and proceeds of crime

As Mamdouh Habib returns from Guantanamo Bay, released without charge after three years, Attorney-General Philip Ruddock is suggesting that the government may seek to stop him selling his story, using legislation that prevents people gaining income from the proceeds of crime.

Contrary to some other commentators, I hope Habib sells his story and that the government makes good on its threat of legal action. I’d be very interested to see what information the government has on this man, whom they have effectively labelled a terrorist, and left to rot, first in Egyptian torture chambers and then in Guantanamo Bay. If they can show, even on the balance of probabilities, that Habib is a terrorist, then he shouldn’t get any money from media organisations, though he should still be free to tell his side of the story without payment.

And now that the issue has been raised, the heat is on the government. If they don’t act, it can reasonably be inferred that it’s because they couldn’t win, and given his statements on this and previous occasions, Ruddock should resign[1].

fn1. Fat chance, I know. But the presence of Ruddock and others like him is the main reason I’ll never be reconciled to this government, no matter how lame the opposition.

The Everquest Economy (crossposted at Crooked Timber)

The Economist has an interesting piece on the interaction between the economy in massively multiplayer games and that of the real world. The classic study of this question is Castronova’s analysis of the economy of Norrath, the setting for Everquest. Among various features of Norrath’s economy, one of the most interesting is trade with Earth through the sale of game items (weapons and so forth) via private treaty or on eBay[1]. This enables Castronova to estimate that the wage in Norrath is $US3.42 an hour, a figure that has some interesting implications.

At the Creative Commons conference last week, I heard a story to the effect that when the owners of one of these games tried to prohibit item trading they were sued and, in the course of litigation discovered that the plaintiff ran a sweatshop in Mexico where workers participated in the game solely to collect salable items. Clearly as long as the wage is below $3.42 there’s an arbitrage opportunity here. More technically sophisticated arbitrageurs have replaced human workers by scripted agents, working with multiple connections. Either way, arbitrage opportunities can’t last for ever, and are likely to be resolved either by intervention or inflation

The positive economics of all this are interesting enough. But how about policy analysis? Who benefits and who loses from this kind of trade, and do the benefits outweigh the costs?
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Responding to the critics, part 2

Today’s Fin (subscription only) has a couple of letters responding to my review of Lomborg’s “Global Crises, Global Solutions
. One from Brent Howard takes the Copenhagen panel to task over their approach to discounting the future costs of global warming. I agree, and will maybe post more on this later. The other, from Rajat Sood, is odd. He doesn’t address the main review at all, focusing instead on my summary of The Sceptical Environmentalist. Sood denies my initial claim that Lomborg did not argue that the scientific evidence on global warming was wrong, focusing instead on the idea that it would be better to spend money on aid projects. (full letter over the fold) I expected the review to be attacked from various directions, but this one surprised me.

In response, I can’t do much better than quote Lomborg himself

Let us agree that human activity is changing our climate and that global warming will have serious, negative impacts. Nonetheless, all the information from the UN climate panel, the IPCC, tells us that it will not end civilisation … The end-of-civilisation argument is counterproductive to a serious public discourse on our actions. We do have a choice. We can make climate change our first priority, or choose to do other good first.

If we go ahead with Kyoto, the cost will be more than $150bn (£80bn) each year, yet the effect will first be in 2100, and will be only marginal. This should be compared with spending the $150bn each year on the most effective measures outlined in the Copenhagen Consensus, saving millions of lives. The UN estimates that for just half the cost of Kyoto we could give all third world inhabitants access to the basics like health, education and sanitation.

It’s true that Lomborg spends some time in his book discussing arguments that the threat of global warming may be overstated in scientific terms, but (wisely) he doesn’t rely on any of them.Here are a couple more sources, favourable and hostile, giving broadly similar summaries of Lomborg’s position.
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Responding to the critics, part 1

The Economists’ Voice has printed a comment by Thomas Grennes on my article on the US trade deficit. The abstract

John Quiggins’ article, “The Unsustainability of U.S.Trade Deficits” ignores the gains from international borrowing and lending and the gains from trading according to comparative advantage.

isn’t very informative, but he mainly argues against the idea of a zero current account deficit. Grennes misses my point fairly comprehensively. Here’s my draft response

Thomas Grennes’ letter ‘Neither Borrower nor Lender Be’, in response to my article on The Unsustainability of the US Trade Deficit illustrates my observation that ‘much analysis confuses the current account deficit and the goods and services deficit’. As stated in the summary, ‘Although substantial current account deficits can be sustained indefinitely, large deficits in goods and services trade cannot be. Even to stabilise the current account deficit, the United States must restore balance in goods and services trade within a decade or so.’ Grennes ignores this, and focuses entirely on the current account balance.

Grennes suggests that ‘a zero current account balance implies neither borrowing nor lending, and a zero balance appears to be what Quiggin advocates.’ In fact, I examine the adjustment needed to stabilise the current account at its current (historically high) level of 5 per cent of GDP, and show that this requires a fairly rapid return to balance or surplus on the trade account.

Even in the world of web-based journal publishing, it will probably take a month or two for this to get through the publishing process, so comments and suggested improvements are most welcome.

Pinochet’s private pensions

For twenty-five years or so, the privatised pension scheme introduced in Chile under the Pinochet regime by his labour minister, Jose Pinera, has been touted as a model for the world to follow. It’s been particularly influential in the US debate over social security privatisation but has also had some influence in Australia, which has a somewhat similar setup, though we arrived at it by a different route – Chile scrapped its defined-benefit state pension scheme, keeping a basic safety net, Australia started with a means-tested flat-rate pension, but has tried to expand private superannuation since the 1980s

Now the New York Times reports that the Chilean scheme is not delivering the promised benefits . Lots of people are getting less than they would have under the old scheme and large numbers are falling back on the government safety net. Fees have chewed up as much as a third of contributions.

Why has this bad news taken so long to emerge. Complaints about fees have been around almost since the start, but right through the 1980s, they were ignored becuase investment returns were exceptionally high. This in turn reflects the fact that Pinera had the good luck or good judgement to start the scheme when the stock market was at an all-time low, thanks to a financial crisis (in retrospect the first of many cases where financial market darlings got into trouble). The economy recovered and the stock market boomed. Once gross returns fell back to normal levels, the bite taken out by fees became unbearable.
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