The Liberal brand

The Liberal party finally has something to celebrate, with their most senior elected official, Brisbane Lord Mayor Campbell Newman winning re-election easily and the Liberals getting a majority on the City Council for the first time in many years. But despite this story in the Oz, the news is not all good for the Liberal brand.

* Newman’s success was largely a reflection of his personal popularity. A good point for the Libs is that this popularity is largely due to his promise to fix traffic congestion through road and tunnel projects, an issue the Liberals probably have an advantage on in general. A less good point is that it remains to be seen if the plans will work – this approach hasn’t been hugely successful elsewhere

* In Townsville, Labor copped a hiding but the conservative candidate Les Tyrell didn’t run under the Liberal label

* In the Gold Coast mayoral election, the Liberal Party spent a fortune but their candidate finished third with 26 per cent of the vote. There’s an outside chance that he could get up thanks to the vagaries of preferences but it looks pretty unlikely. Joe Hockey calls this a “great result” but if so, I’d hate to see a bad one.

All of this is relevant to the issue of whether the Liberals and Nationals should merge under a new name. I suggested the day after the election that this was inevitable, and copped some flak for it, but the idea of a merger is certainly alive now.

The remaining objection to a merger with a new name is that it would lose the value attached to the Liberal “brand”. My reading of the council election results is that this value is either zero or negative. Popular conservative candidates can win without the Liberal name. On the other hand, even in natural Liberal territory like the Gold Coast, the party label alone can barely attract a quarter of the votes even with a big advertising push.

Given general agreement that the obvious choices of NatLib and LibNat are uninspiring at best, I’ll throw it open to readers to suggest a new name for the merged party. The winning entry as judged by me will be announced in a later post.

The one-hoss shay

The Fed’s bailout of Wall Street investment bank Bear Stearns has, unsurprisingly, been discussed in terms of the domino theory. A more appropriate metaphor is The Wonderful One-Hoss Shay . This was a carriage constructed on the theory that a system always fails at its weakest spot.

he way t’ fix it, uz I maintain, Is only jest T’ make that place uz strong uz the rest”.

On the Fed’s current approach, the system is unbreakable, provided that “too big to fail” protection is extended to every significant firm in the system. The result of this protection is that the kind of crisis where the failure of one firm leads to a cascade of failures elsewhere is prevented. But then

First a shiver, and then a thrill, Then something decidedly like a spill,– And the parson was sitting upon a rock, At half-past nine by the meet’n’-house clock,– Just the hour of the Earthquake shock!

–What do you think the parson found, When he got up and stared around? The poor old chaise in a heap or mound, As if it had been to the mill and ground! You see, of course, if you ‘re not a dunce, How it went to pieces all at once,– All at once, and nothing first,– Just as bubbles do when they burst.

Peter Cullen has died

Peter Cullen, a leading figure in Australia’s water policy debate for many years, has died at the age of 65. I knew Peter mainly through his work, which made a huge contribution to improving public understanding of the problems we face in managing scarce water resources, and of the possibly policy responses, and through the establishment of the Wentworth Group, which was a big step forward My occasional social interactions with him were always enjoyable. He will be much missed.

Dead heats and democracy

I can’t resist a racing metaphor to describe the problem that’s now facing the US Democrats, but one that is a more-or-less generic problem for democracy. In any system of government, there is a problem of succession, which has a large contingent element. In monarchies, for example, the absence of an adult male heir can produce crises of all kinds (in England, this problem recurred in different forms for all the Tudors from Henry VIII onward). Dictators rarely nominate a capable successor until the last possible moment, so their sudden death often brings about the collapse of the regime. To avoid this, it’s common to see a quasi-hereditary succession which rarely works well for more than one generation.

In democracy, unexpectedly close election results can cause big problems, since there is always a range of uncertainty in which normally unimportant procedural decisions or rule violations become critical. Obvious recent examples include the Bush-Gore race in 2000, the Mexican election of 2006, the recent election in Kenya and now the Democratic nomination race. Such close races inevitably produce a lot of bitterness and can lead to disaster. At the moment it seemed as if the threatened breakdown of democracy in Kenya has been averted, but it’s by no means certain that the power-sharing agreement there will hold. And it’s far from clear that the closeness of the race between Obama and Clinton won’t produce a vicious contest that sinks the eventual winner.

It’s tempting, and sometimes correct, to argue that the sharp divisions that emerge at times like these were there all along. But often this is no more valid than the kind of analysis which ascribes civil strife to “ancient ethnic hatreds” when these are, in reality, little more than rationalisations of contemporary power politics. Certainly, in the case of the Democratic nomination, it’s clear that the vast majority of Democrats would be happy with either candidate and likely that the majority would prefer an immediate end, regardless of the choice, to a continued contest.

Rather than reflecting deeper underlying problems, to a large extent, these succession crises really are problems of institutional design. Some kinds of institutions manage succession problems better than others. Confining attention to democratic systems (broadly defined), I’d argue that there are substantial benefits to simple and definite procedures. If US national elections (including primaries) were based on popular vote (whether first-past-the-post or instant runoff) the likelihood of a result so close as to permit serious dispute would be very small. By contrast, when the result is reached from 50 state ballots, each operating under local and variable rules, the only surprise is that crises can be averted.

The truth will set you free?

There’s been a lot of discussion here about genetically modified foods and related issues. My view has been that the current state of scientific evidence does not support a general ban on GM foods but that consumers may reasonably want to be informed about whether the food they are consuming has been produced using technologies they may object to, either on ethical grounds, or because they are unconvinced about the safety of GM technology. In this respect, I’ve been very critical of Monsanto, which pushed hard to get GM foods onto the US market without any labelling requirement. Among other things, I thought this likely to be a counterproductive strategy, intensifying hostility to GM technology.

Some of my more free-market readers have argued against me on labelling suggesting that, if consumers want this information, market processes will ensure the emergence of a GM-free label. Thinking about it in the abstract, this will be true if the consumer preference for non-GM food is strong enough. And if consumers don’t care at all, then labelling won’t make any difference. There’s an intermediate zone where the choice of labelling regime might make a difference, and this has led me to support compulsory labelling.

These speculations can now be confronted with some real-world experience, with some very interesting results. As well as GM foods, Monsanto markets Posilac, a synthetic version of bovine growth hormone for cows that increases milk yields. Farmers producing milk without Posilac have advertised the fact, and have been very successful in capturing market share.

As a result, Monsanto, through a front group, Afact, is now lobbying legislatures to ban the advertising of non-BST milk. Their argument is that, since there is no scientifically demosntrable difference between the two products, advertising the way in which they are produced can only mislead consumers. So now it’s the pro-GM side who are arguing for intervention to suppress information they think consumers can’t handle.

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Two economies

The Australian economy is still booming, but the shadow of the global credit crisis is growing longer every day. Some items

* Most observers now agree the US is in recession
* With negative real interest rates in the US for terms up to five years (you can actually buy negative-rate inflation-protected bonds) commodity price inflation seems bound to continue. This is good for the Oz economy while it lasts
* It now seems clear that someting like half of all subprime mortgages will eventually go into default (many have already been foreclosed and 20 per cent are currently delinquent
Much the same is true for Alt-A and other limited-doc loans. The big question now is whether mortgages guaranteed by the quasi-public Fannie Mae and Freddie Mac are in fact secure. As with all implicit guarantees, the assumption that the Federal government stands behind these corporations is marvellously effective until it is actually tested.

Can we keep on growing while all these processes and more work themselves out? I don’t know and I doubt that the Reserve Bank does either. But if I were setting monetary policy, I’d be very cautious about any further increase in interest rates.