Month: October 2008

Treasury on the cost of saving the planet

John Quiggin57 Comments

I’ve been too busy to do more than read the summary of the Treasury’s estimates of the cost of an measures to reduce greenhouse gas emissions, most importantly an emissions trading scheme. Of course, there have been quite a few exercises of this kind, but what’s striking about this one is that it looks at a much wider (and more realistic, if we want to save the planet) range of options, going all the way to a 90 per cent reduction in emissions relative to 2000 levels, achieved by 2050. This is a contract and converge scenario where all countries accept a common emissions entitlement per person.

Treasury estimates that, under this scenario, GNP per person in Australia will average $78 000 in 2050 compared to $50 000 at present. By contrast in the reference scenario which has an 88 per cent increase in emissions, 2050 GNP is estimated at $83 000, or about 6 per cent higher (I don’t think this takes account of costs avoided through climate mitigation).

When I get a bit of time, I’ll report more on the details and assumptions. But the quibbles coming from predictable rentseekers, and their tame consultants, look like just that, quibbles.

Treasury’s estimates are, not surprisingly, quite consistent with the arguments I’ve made for a long time on this blog. That’s because any competent economist doing the analysis must come up with estimates of a comparable order of magnitude. If you want to make the case that saving the planet requires reducing living standards, or even a big reduction in the rate of growth of living standards, you need either to invent a whole new economics or wave your hands vigorously enough to conceal the fact that you don’t have any economic analysis to support you.

Meanwhile in a galaxy far, far away …

John Quiggin70 Comments

This story about the IMF rescue package for Ukraine (second of many, after Iceland) quotes Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London as saying

`The money is only half of the issue, conditionality is key. We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.”

Mr Ash, just returned from a six-week holiday on Mars, was reading from his prepared boilerplate script and had yet not been advised of the recent nationalisation of the Royal Bank of Scotland.

(found in today’s AFR)

What does it all mean?

John Quiggin21 Comments

There’s been a bit of discussion about what Alan Greenspan really conceded in his recent testimony. Although Greenspan was less opaque than usual, I won’t try to second-guess him any further, and will instead ask again what the crisis means for the way we think about economics and the economy. There are two big economic ideas that look substantially less appealing in the light of the current crisis.

The first is the macroeconomic hypothesis, often called the Great Moderation which combines the empirical observation that the frequency and severity of recessions declined greatly from 1990 to the recent past with the explanation that “the deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle”.

The second is the microeconomic idea, central to much of modern finance theory called the Efficient Markets Hypothesis. In its most relevant form, the EMH states that prices observed in asset markets (for stocks, bonds, foreign exchange and so on), reflect all known information, and provide the best possible estimate of the value of earnings that assets will generate.

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Greenspan concedes

John Quiggin82 Comments

There’s been a fair bit of debate about what, if anything, the current crisis means for economic policy and political philosophy more generally. A lot of this has been hung up on issues of terminology, which I will do my best to avoid here and in future.

Coming to substance, quite a few people have argued that the crisis doesn’t really signify very much, and that, once it is resolved, things will return to pretty much the way they were a couple of years ago. I disagree.

This concession of error by Alan Greenspan is, I think, pretty strong evidence against the view that the crisis is not so significant, in policy or ideological terms.
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Diminishing publication lags

John Quiggin7 Comments

Since I’ve started blogging, I’ve been very interested in the relationship between technical and cultural innovation. Among other things, I make the point that this is now a two-way street: the development of the Internet is driven as much by cultural innovations, like the manifold uses of blogs, as by technical innovation, and in many cases it’s hard to distinguish between the two.

I gave a presentation on this at the Centre of Excellence for Creative Industries and Innovation (CCi) Conference a few months ago, and was invited to turn it into a paper for a special issue of a new journal, Cultural Science.

I was very favorably impressed by the issue when it came out, and also by the interval between submission and publication, which was quite a bit shorter than I’ve experienced in the past. To be precise …

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Steve Keen on debt

John Quiggin51 Comments

There’s been a lot of discussion recently about Steve Keen‘s work on debt, presented (among other places) in this paper for the Centre for Policy Development last year. I made some comments at the time, as follows:

I’m generally in sympathy with the arguments presented here. However, having made similar arguments for a long time and having been continually surprised by the durability of the asset price boom/bubble let me offer a couple of counterarguments/cautions:

(1) The increase in house prices can be partially explained (on the supply side) by the increase in the size/quality of the average/median house and, particularly in the last decade, by increases in the cost of labour and materials

(2) On the demand side, given the above and the fixity of land, some increase in prices would be expected as a result of population growth and income growth. If you suppose that housing is a superior good, this would imply that the value of houses should grow faster than GDP, and probably that debt would also rise relative to GDP.

(3) Looking at the big picture of the rise in debt, it has gone on for so long (40+ years) that it must cast some doubt on arguments based on the claim that bubbles always burst. I still think the arguments are valid, but the objection can’t just be dismissed

(4) A fuller version of the optimistic story would say that credit markets have become steadily more efficient with the result that households are able to manage much larger volumes of debt. A plausible version of this story might include the concession that the debt growth of the past decade has outrun the capacity of households and markets to manage it, implying the need for a painful correction as is now happening in the US, but also allowing for a continued upward trend in, or stabilisation of, debt/income ratios.

On balance, having thought through all this, I still think the story in Steve Keen’s piece is the right one. But it’s important to confront the opposing argument in its strongest possible form.

Obviously, the opposing arguments I wanted Keen to respond to look a lot weaker now. Whatever qualifications I might still want to make, Keen got the basic points right, and those who are criticising him now should concede this.