It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
The news that banks have dramatically increased their fee income yet again will come as no surprise to most of us. Less significant in macro terms, but far more drastic for those affected, has been the atrocious practise of selling tiny debts to loan sharks, who will then sell people’s houses from under them at sheriff’s auctions. Given that these institutions exist only by the grace of the Australian government, it’s time to give them the same kind of message that Telstra received recently.
It’s time to offer the banks an offer they can’t refuse (unless they’re feeling lucky). Either withdraw entirely from the prudential regulation system, and stand on their own credit, or accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.
Thanks to the rain that is still falling heavily, the water stored in Brisbane’s dams has now reached 60 per cent of their capacity. That was to have been the trigger for a relaxation of the (very stringent) water restrictions now in place, but the Water Commission has now decided* that regardless of how much water there is, the restrictions will remain until December.
This strikes me as a very foolish decision. The restrictions are socially very costly, and the risks associated with their removal very small. The construction of the water grid and the existence of a recycling plant (to be used if supplies fall below 40 per cent), combined with a sustained reduction in use, mean that the risk of a sharp decline in availability is small, and the restrictions could always be reimposed if necessary.
On the other hand, there is a significant risk that the water we are saving will end up being released to flow out to sea. The only dam in the system with any significant capacity remaining is Wivenhoe, which was built for flood control. Once it reaches 70 per cent capacity or thereabouts (that would correspond to about 80 per cent for the system as a whole) the operators will have to open the gates. More rain like we are seeing now, combined with an early and heavy wet season, would see this level reached by December or even earlier.
I’m not sure if this decision is related to the restructuring of the water industry, which has been modelled on the approach used for electricity. The electricity reforms have scarcely been an unqualified success and water is a very different commodity, so I’m dubious about the merits of this idea, which looks like a stalking horse for privatisation. Or maybe (though again I can’t see the rationale) the restrictions are being maintained to ensure that the Traveston Dam project isn’t derailed. The only other explanation for the decision is hair-shirt bloody-mindedness, which is plausible enough I suppose. I can’t really connect these dots.
*Elizabeth Nosworthy, identified with the promised relaxation, has been given the boot as Water Commisssioner.
Although I’m among the least tightly focused economists in the academic world, I’ve published almost nothing on macroeconomics – even the few things I have done have not taken a standard macro perspective. So, in the absence of blogging, I think it’s safe to say my name would never have appeared in a Berkeley Graduate Core Macro exam.
Of course, there’s a Gerschenkron-style ‘advantages of backwardness’ story here. Having learned old-style Keynesian macro, and seen it come to grief with the inflationary outburst of the early 1970s, I kept waiting for a macro research program that would both explain the Keynesian Golden Age* I grew up in and show how to restore it in a more sustainable way. None of the contenders of the past thirty years (monetarist, new classical, real business cycle, New Keynesian, central bank eclectic) seemed very promising to me, so I left the field alone.
Now, with no intellectual capital invested, it’s easy for me to pronounce the efforts of the last three decades to be largely misdirected. The harder task will be to identify and get active in the new research program that should succeed it. The work of Akerlof and Shiller is obviously a good place to start.
* Not golden for everyone, of course. Full employment really meant full employment for men, many (not all) poor countries missed out altogether, and environmental costs were often disregarded. But it was precisely during the last years of the Golden Age (the 1960s) that these issues came to the top of the agenda. In my more utopian moments, I dare to hope that, with economic liberalism behind us, we can make big progress on these and other issues.
My introduction to futures markets came in a 1960s TV show called Dobie Gillis, most notable for the ‘beatnik’ character of Maynard G. Krebs, played by Bob Denver, later the eponymous Gilligan of Gilligan’s Island*. In one episode, Dobie’s high school class was assigned to do a fantasy investment exercise, and Dobie along with a cute & smart fellow student chose the egg futures markets. The smart student’s moves always paid off, and Dobie decided to copy them all in real life, building up a huge profit. Finally, the smart student announced she was selling, but Dobie intoxicated with success, decided to keep playing. This went on for a few days of rising prices, but finally when Dobie announced he had held on yet again, the fellow student said, with some horror, “But, Dobie, today is spot day”. The final scene was of the back room of Dobie’s dad’s store, filled to the rafters with the eggs on which Dobie had been forced to take physical delivery.**
Today’s Fin, with a piece by Andrew Leigh*** praising betting markets on events like unemployment rates and so on, brought this episode to mind. It struck me that the case for weak-form market efficiency (the market price incorporates all publicly available information) is much better in a market with a spot date in the near future, as is typical of real betting markets. If you are betting on a race to be run this afternoon at 3, there’s not much point in trying to track movements in the market: you’re better off backing whichever horse is offering the best odds relative to your best estimate of winning probability. More generally, markets with a spot date in the near future ought to be relatively immune to bubbles.
While I’m on the topic, I thought I would repost a piece I wrote before the 2007 elections which, I think, puts a bit of a dent in claims that betting markets really represent the superior wisdom of crowds: in this case, the polls were right long before the pundits and the punters came in last. Of course, one data point doesn’t constitute proof, but supporters of betting markets have made strong claims on the basis of fairly limited data.
No group in the community greeted the election of the Rudd government with more enthusiasm and more relief than the higher education and research sector. The Howard government had treated the sector to a decade of ideologically motivated cutbacks combined with a tribal history which reflected, in large measure, the defeats and slights its members had endured as student politicians in the 1970s and 1980s. The number of places for domestic students was effectively frozen for most of the Howard era, reflecting both a desire to pressure the universities into offering full-fee places and a belief that Australia did not really need a more educated workforce.
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If not for the drastic downward revision of expectations that has taken place since the financial meltdown of September-October 2008, the Budget’s forecasts for global economic conditions would look exceedingly gloomy. As it is, they look to be based on a fairly rosy scenario, in which advanced countries experience a GDP contraction of just under 4 per cent in 2009 before stabilising in 2010 and recovering in 2011.
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In the Sherlock Holmes story, Silver Blaze, the crucial clue was that of the dog that did not bark in the night. In the 2009-10 Budget, tax policy is surely the dog that did not bark. Despite the near-unanimous view of the economics profession that the tax cuts promised at the 2007 election, irresponsible even at the time, should now be scaled back or deferred, the government made no move in this direction, preferring to achieve a somewhat similar outcome by tightening means tests for higher income earners.
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