A bad omen ?

Apparently the Mont Pelerin Society is meeting in Sydney. The proceedings are apparently unpublished, which is a pity, since I would be interested to see how, if at all, members have adjusted their views in response to the Global Financial Crisis. In the absence of this, we can all think about the maxim “bad things come in threes”.

The last meeting of which I heard anything[1] was in Reykjavik, at which time the MPS was happy to share in the glory of its proteges such as David Oddson. There was also a meeting in Chile in 1981, notable for producing an endorsement of the Pinochet regime from Hayek The Chilean economy ran into a severe crisis shortly thereafter. So, let’s hope that this meeting passes off uneventfully, and without any nasty aftershocks.

fn1. Google suggests there have been plenty of other meetings, but these are the only ones I heard anything about.

Water, water everywhere …

… but we still can’t water the lawn. As I predicted more than a year ago, the gates have been opened at Wivenhoe Dam, and water saved at substantial cost last year is now flooding down the Brisbane River. Yet, anyone who wanted, for whatever crazy reason, to water their lawn today would be breaching Brisbane’s permanent water restrictions, which forbid watering on Mondays (why Monday? – I have no idea). And watering the lawn between 10 am and 4 pm is never allowed.

It makes sense to require water-efficient sprinklers, taps and so on – investment in such measures now will pay off in a drought. But, when water is plentiful, there should be no restrictions on when and how it is used. That way, restrictions will have more bite when they are actually needed.

Interesting arithmetic

Presumably relying on his Queensland government sources to get their sums right, ABC business reporter Peter Ryan writes

The biggest public share offer in more than a decade is expected to raise more than $5 billion for the Queensland Government … The Government will retain between 25 and 40 per cent of QR and will sell up to 1.68 million shares at between $2.50 and $3.00 a share. Individual investors will pay no more than $2.80 a share.

It’s a good thing all that money will be used to build new schools [1], since some arithmetic lessons are clearly in order. Unless all the shares are sold to institutions at the maximum price, there is no way the revenue can reach $5 billion.

fn1. I’m joking of course. As I and other economists have explained at tiresome length in the past, the sale of income-earning assets cannot, in any meaningful sense, finance social investments like schools and hospitals. The taxes that would (in the absence of asset sales) be required to finance debt for additional investments must be used instead to replace the income lost from the assets that have been sold.

The Guide to the Draft of the Plan to do Something about the Murray

The problems of the Murray Darling Basin have been developing for more than a century. I’ve been working on this issue for 30 years, during which, despite a series of policy initiatives too long to list, the situation in the Basin has got worse in most (not all) respects. So, it’s not surprising that the attempt to provide a comprehensive plan for the future involves a drawn-out process. The big question (which the Risk and Sustainable Management Group at UQ will be addressing in a workshop later this month) is: Have we finally got it right?

My general view is optimistic. If the politics can be negotiated, and if the government is willing to spend around $5 billion on buying back overallocated water rights, we can probably reach a solution that is economically, environmentally and socially sustainable.

The Draft Plan proposes a reduction in water use for irrigation of between 3000 and 4000 Gigalitres (GL). That range reflects two fairly tight constraints. Anything less than 3000 GL won’t achieve environmental sustainability. Anything more would imply unacceptably large impacts on irrigated agriculture.

Here’s the rough arithmetic on the irrigation side, which is broadly consistent with the modelling done by my Group, some of which was used along with research by ABARE in preparing the draft plan. A 30 per cent cut in water use will result in a 15 per cent reduction in the gross value of agricultural output, and a smaller reduction in net returns to farmers.

The big change required to achieve this kind of reduction in water use is a shift from irrigated rice production to dryland agriculture. Since yields on irrigated lands are much higher that will imply a reduction in our total grains output. Still the impact is much smaller than, for example, the effect of the current overvaluation (relative to long-run value) of the Australian dollar.

Importantly, although the changes in the Draft Plan have been referred to as “cuts in allocations” this is incorrect. Although the National Water Initiative proposed cuts where water resources had been over-allocated in the past, the Draft Plan calls for the entire reduction in water use to be treated as a change in government policy, meaning that the Commonwealth will bear the cost. It’s already been made clear that this reduction will be achieved entirely by voluntary buybacks and conservation measures.

While there are some opportunities for conservation, the most cost-effective mechanism in most case is buying back entitlements. Now that the drought has broken, I’d guess the likely price for entitlements will be around $1500/ML suggesting a cost of buyback (or similarly cost-effective conservation) of between $4.5 billion and $6 billion. It’s not clear whether buybacks that have already taken place will be counted towards this. There’s enough money allocated to the National Water Plan/Water for the Future to cover this cost, though most of it is currently earmarked for on-farm works.

Weekend reflections

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. In keeping with my attempts to open up the comments to new contributors , I’d like to redirect discussion, as opposed to substantive new contributions, to the sandpit. As always, civilised discussion and no coarse language please.

The end of the Great War — Crooked Timber

A few days ago, Germany made the final payment on the reparations imposed in the Treaty of Versailles, bringing to an end the formal consequences of the Great War that began in 1914 and continued, in one form or another, throughout the 20th century.[1] Many of the new states that emerged from the war (the USSR, Yugoslavia, Czechoslovakia) have now disappeared, though the consequences of the breakup of the Ottoman Empire and the secret Sykes-Picot Agreement are very much still with us. I don’t really have the basis for a post on this, but I thought this event deserved some kind of acknowledgement anyway.

Over time, the Great War has played a larger and larger role in my thinking about the world. It marked an end to a century of relative peace and to what seemed (at least to the people with whom I’m most in sympathy) like steady progress towards some form of internationalist democratic socialism. From 1914 until 1945 the world spiralled downward into one horror after another: militarism, Nazism and Stalinism, followed by the Hiroshima and Nagasaki bombs and the threat of global annihilation that seemed imminent for much of my lifetime and remains a grave danger.

Despite the emergence of the ever-present nuclear menace, 1945 marked the low point of the 20th century in many ways. At least on the Western side, the peace settlement was far less draconian, and far more successful, than that of 1919. And, for several decades after the end of war, there was fairly steady progress towards a version (scaled-down in important respects, but more ambitious in some others) of those pre-1914 aspirations.

While that progress has stalled, there has, I think, been steady growth of a body of antiwar thinking and feeling that is making it harder, though sadly still not impossible, for governments to mobilise support for war. The horrors of the Great War represent, for me at least, the starting point of such thinking and feeling.

fn1. Hat tip. I saw this in various places, but first as a Facebook update by John Humphries.

Nuclear, again

I’m sure quite a few regular commenters are keen for me to lift my ban on discussions of nuclear power (imposed to prevent the threadjacking effects of this topic). So, I thought I would open it up to all comers with a couple of observations of my own:

(1) Nuclear power isn’t going away any time soon. Nuclear plants generate a lot of power and most of them seem likely to outlive their originally planned operational lifetime. So, there doesn’t seem to be much point in being “anti-nuclear” in the sense of hoping for a world without nuclear energy – that horse bolted decades ago.

(2) Except in China (and maybe India) nuclear power isn’t getting bigger any time soon. Following the failure of Obama’s energy bill and the GFC, the US “nuclear renaissance” is dead in the water, and the same is true in Europe. While residual anti-nuclear sentiment plays a role here, the big problem is economics.

(3) The only plausible path to an Australian nuclear power industry involves the use of modern plant designs and regulatory systems with a proven track record in the US and/or Europe and Japan. Given point (2), that path won’t open up any time soon. So, for the foreseeable future, nuclear isn’t an option for Australia, and there is little or nothing we can, or should, do about it. When there, are, say 50 new plants in the developed world with 5-10 years of operating history behind them, it would make sense for us to take another look. On the most optimistic possible projections, that might happen sometime after 2030.

That’s it from me. I won’t moderate the thread except to delete personal attacks and similar violations of the comment policy.

Crying poor

The Queensland government has cited an alleged financial crisis as one of its spurious justifications for the sale of public assets, but apparently it can find a spare billion or so to spray on yet another sporting event which will almost certainly return little or nothing in revenue. I had my say on the Commonwealth Games bid here and here. The ABC story includes Treasurer Andrew Fraser’s admission that the proceeds of the asset sales, which were supposedly going to finance schools and hospitals, are the source of this luxury expenditure.

I’m happy to say that on this occasion I was accurately quoted in the Oz. The reporter Roseane Barrett did her job properly, and there was no editorial interference, presumably because the story was critical of a Labor government.