Longtime reader Jack Strocchi sent me this piece from the Times, reprinted in the Oz, with the headline “Carbon crash hits Europe’s emission trading scheme”. The main point is that, with the economic downturn, the price of carbon permits has fallen. The author concludes that this proves the need for a carbon tax rather than an emissions trading scheme.
This is a fine example of the fallacy of “petitio principii” or, in English, begging the question. This does not (yet) mean what TV commentators seem to think, namely “begging me to raise the question”.* Rather it refers to an argument in support of a proposition which assumes the truth of the proposition in advance. Clearly, if price instability is, in itself, evidence that a program has failed, then you need a program with fixed prices, that is a tax.
The main argument for a carbon tax rather than a trading scheme is that, if there is a lot of uncertainty about the cost of reducing emissions, and not much uncertainty about the damage caused by climate change, a fixed price for emissions (that is, a tax) will get closer to the optimal outcome than a fixed quantity.
But what’s happening here is completely different. The demand for emissions has fallen due to the economic slowdown. The reduction in price offsets the adverse impact of the trading scheme on firms that are already facing hard times. Equally, if the economy booms, the price of permits will rise. This is a clear case when a fixed quantity trading scheme performs better than a tax.
* Of course, meaning is defined by usage, so if a word or phrase is used in a particular way long enough, that becomes the meaning. But “begging the question” in its traditional sense is a useful phrase for which we have no good substitute. For the TV usage, “raising the question” is perfectly adequate.
My article in yesterday’s Fin, over the fold was about the need to prepare for rising unemployment
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It’s time (on time for once) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
BrisConnect is a multibillion enterprise set up to build a series of PPP road and buslink projects in Brisbane. The backers are the usual big names like Macquarie Bank and Deutsche Bank.
Yet a Melbourne woman, named Hang Fe, just bought a 10 per cent stake in BrisConnect and you can do likewise if you have a spare $32 000 sitting around (immediate word of advice:DON’T). Shares in BrisConnect are currently trading at 0.1 cents, so Hang Fe’s investment brought her no less than 32 million of them.
The catch (there’s always a catch, isn’t there) is that these are partly paid “stapled securities” carrying with them an obligation to pay an additional $1 a share next April, and a further $1 in early 2010. For 32 million shares, that comes out at $64 million dollars. But most analysts say the value of fully paid shares will be well below $2, so anyone who pays up will lose a lot of money.
It seems safe to say that, at this point, holding BrisConnect shares makes sense only if you have no other assets the company can seize to enforce the $1 payment. For someone in this position, the shares appear to represent a one-way bet, admittedly at long odds. And, presumably, anyone who is in position to pay will be sure to sell out before the payment is due in April: a problem with partly paid shares of which I was unaware until now.
Since the remaining payments almost certainly won’t be made, the obligation will therefore fall on the underwriters. That in turn raises the question of whether the underwriters will still be around, and in a position to pay up, when the money falls due. That seems fairly likely as regards the payment due in 2009, but much less certain as regards Macquarie in 2010. At that point, the whole thing will presumably fall back into the lap of the Queensland government.
Note: I am Not a Financial Advisor, and I don’t claim an exact understanding of either Brisconnect or the implications of buying partly paid shares when you are already insolvent. So, please seek proper advice before going anywhere near this.
Hat-tip: Rabee Tourky alerted me to this
Here’s a post on the credit crisis from my colleague, Rabee Tourky
In a Minneapolis Fed. research paper Chari, Christiano, and Kehoe
examine three claims about the way the financial crisis is affecting the economy as a whole and argue using a number of graphs that all three claims are in fact myths.
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It’s an analysis familiar to most on the Left. Support for laissez-faire is a hypocritical pretence, typified by Republicans who denounce a universal health care scheme as “socialist” while backing huge handouts for wealthy sugar producers.
For cultural and historical reasons, the United States has never had a proper socialist party of any significance. Instead
the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings.
In America, socialism is un-American. Instead, Americans merely do rent-seeking — bending government for the benefit of private factions.
As I say, familiar stuff. But it’s mildly surprising to see it coming from George Will.
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The Centre for Policy Development, based in Sydney, runs a series called “Common Ground” in which people who might be expected to be opposed (for example, because of their party-political alignment) explore issues where they have some views in common. On Wed 26 November, they’ll have Bob Carr and Pru Goward on climate change.
Venue is Customs House, at 5:30 for 6
You can register to attend online, or RSVP by email to email@example.com.
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It’s time once again for the Monday Message Board. Today, I’m particularly interested to learn if readers are finding the site more responsive following the migration to an accelerated server (of course, feel free to post on any topic, but a brief comment on this point much appreciated). As usual no civilised discussion and no coarse language.*
*I hope that the coarse language I have directed at my screen when it displays 503 errors and similar is a thing of the past now.
Back when I was a high school debater, my team once had to take the negative position on the topic ‘Australian democracy is dying’. With the Vietnam war at its worst, conscription of 18-year olds (old enough to die, but in those days too young to vote) a big issue, and a conservative government that had been in office since before my classmates and I were born, it didn’t seem likely that we were going to carry the audience with Panglossian rhetoric. So, we decided to argue instead that Australian democracy couldn’t be dying because it was already dead. The resulting debate was somewhat farcical, as we rushed to agree with every piece of gloomy evidence raised by the affirmative side, and pile on with our own. We won easily, but I gave up debating not too long after that.
I’m reminded of this episode by a piece by Robert Kagan, criticising the idea that American power is declining. In effect, Kagan argues that, while things might seem bad for American power just now, they’ve actually been terrible for decades. Unchallenged economic dominance had already been lost by 1960, when the US share of the world economy (around half in the immediate aftermath of WWII) had fallen to 24 per cent. The international image of the US was trashed by Vietnam and other disasters of the 1960s. Military failures are nothing new. So, those who, decade after decade, proclaim that America is in decline have simply forgotten how bad things were in the past.
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Supporters of social democratic and labour parties have had plenty of experience of seeing their parties in office. Despite some substantial achievements there has been plenty of disillusionment, particularly in the case of coalition governments with centrist or liberal parties. Time after time, the promise of radical transformation has faded to hard slog for modest reforms or even (particularly in times of crisis) capitulation to the demands of capitalist orthodoxy.
By contrast, explicitly libertarian parties have hardly ever scored enough votes to elect candidates, let alone form governments. But now, thanks to New Zealand’s multi-member proportional system, a new government, led by the National Party, has been formed in which the ACT (Association of Consumers and Taxpayers) party (with a bit over 3 per cent of the vote) holds a couple of ministries. ACT was the subject of some enthusiastic commentary in open threads here, and an op-ed piece by John Roskam of IPA in the Fin (paywalled, maybe someone can find a link). They combine libertarian economic policies with the now standard accompaniments of climate change delusionism and coded law-and-order rhetoric.
Unsurprisingly, given the circumstances, the first announcement of the new government was that the longstanding requirement under the Public Finance Act for budget surpluses over the cycle was to be abandoned. At this stage, declining tax revenues are the main factor, but large-scale Keynesian stimulus is going to be needed, and soon.
Labour’s guarantee of bank deposits looks certain to be retained, and there’s every likelihood that more intervention, maybe even nationalisation, will be needed before the financial crisis is resolved.
As far as I can tell, ACT has had to settle for a review of public expenditure (plus the ministers’ jobs) as its price for participation in a government which seems likely to be forced in the direction of interventionism. It will be interesting to see how long they last.