Picking up the gauntlet

As I mentioned, my Fin article on Thursday was intended as an appeal to those on the “do-nothing” side of the climate debate to take the risk of climate change seriously and abandon silly culture wars, cheap pointscoring and so on. It didn’t take long to elicit a reply in the form of a snarky, anonymous and (of course) hopelessly wrong piece of “gotcha” journalism from the “Cut and Paste” column in the Oz. Tim Lambert does garbage pickup.

Being attacked by The Australian is not something to get upset about. But it does give me a little more incentive to disabuse of their illusions the declining of paper who still believe this worthless gutter press rag to have some value. So, I’m going to add a regular feature pointing out the lies and silly errors that fill the news and opinion pages of The Australian. I’ll try to avoid duplicating Tim’s “War on Science” posts (up to number 60 with the one mentioned above!). I’ll retrospective label the “Factor of Five” post from last week as item 1. Suggested contributions are welcome.

Catallaxy doesn’t like bond markets

Over at Catallaxy, Sinclair Davidson suggests that reductions in carbon emissions should be financed by bonds maturing in 2050, so that the cost is borne by the future beneficiaries[1]. He ends with what is presumably intended as a snark

The real question is how these bonds should be priced? As an opening bid I reckon the ridiculously low discount rate proposed by the Stern Review should be used.

Looking up the latest data, 30-year US government bonds, the closest approximation to a 2050 maturity, are yielding 4.25 per cent. Assuming the Fed manages to hit the midpoint of its 2-3 per cent comfort zone for inflation, that’s a real interest rate of 1.75 per cent. That’s about typical in historical terms – the long run real bond rate has mostly been between 1 and 2 per cent.. Stern doesn’t propose an exact interest rate, but on standard parameters, his proposals imply a real rate of around 2.1 per cent. So, if Stern is ridiculously low, the market bond rate must be positively insane. Perhaps the Catallaxy crew can come up with some libertarian proposals to raise interest rates to a more sensible level.

Update The title was meant as a snark, but in an update, Davidson asserts that “we all know” that the rate of interest on US 30-year bonds is too low. He links to a piece on monetary policy in the mid 2000s, but, as I pointed out above, the current real interest rate is close to the average for the last 120 years. So, Catallaxy really doesn’t like bond markets.

To expand a bit on this point, there is a large literature suggesting that, because of capital market failures, the average rate of return to equity is too high, and the real bond rate is too low. Simon Grant and I have done a lot of work on this issue, and its implications, such as the fact that privatisation is often undesirable. However, correcting the market failure would only raise the bond rate to levels consistent with Stern’s estimates (there’s room to fiddle a bit with the parameters, but Stern’s default choices are pretty plausible).End update

fn1. He includes a suggestion that the bonds should be contingent on exact forecasts of economic environmental outcomes at that date, but I’ll pass over this in silence.

Trans-Atlantic plane wars (crosspost from CT)

My post on the end of US decline, suggesting that the US now has about the influence that would be expected, given its population, relative to other developed countries, attracted a fair bit of criticism from International Relations specialists. In particular, my suggestion that the EU and US typically bargain on relatively equal terms (as would be expected since they are about equal in size and income) was criticised by Kindred Winecoff with a reprise (see also Phil Arena). We could go on for a long while picking examples to suit one case or the other, but as it happens, I can take my best illustration directly from the news headlines appearing at the same time as my post. The World Trade Organization has completed its report on US subsidies to Boeing, following an earlier report on EU subsidies to Airbus. Although the report is not yet publicly available, both sides have received it, and are leaking/spinning like made, each claiming victory. Reading the competing claims, it seems that the WTO has found that that the US subsidies to Boeing have broken the rules (yay, Europe!), but not by nearly as much as EU subsidies to Airbus (yay, USA!).

In terms of the legal dispute, this looks like a win on points for the US side. But in geopolitical terms, it’s the other way around. Not only has Europe bent the rules more, it’s done so without suffering any real consequences, and to much greater effect than the US.

From a standing start in the 1960s, Airbus has taken the lead over Boeing in the commercial aviation market, while the rest of the once vigorous US commercial aviation industry has been wiped out. And, thanks in part to the launch subsidies against which the WTO has ruled, Airbus not only has the jumbo end of the market to itself with the A380, but has been able to counter Boeing’s successful (at least terms of orders) 787 with its own A350 (running only a couple of years behind the B787). Perhaps the WTO ruling will eventually force Airbus to give back some of the money, but as far as the global aviation market is concerned, the deed is done.

While this is only one example, it’s one that ought to give advocates of the US hyperpower theory a lot of pause. If spending more on the military than the rest of the world combined (the disproportion must surely be even larger in relation to military aviation) can’t preserve a position of dominance (or even leadership) in a closely related sector like commercial aviation, it’s hard to believe that it can be of any significant value in relation to other sectors of the economy.

It’s certainly possible to argue that the kind of industrial policy that produced Airbus is economically inefficient, and that the Europeans would have been better off leaving the field to the US. But this kind of argument applies in spades to anyone who wants to claim indirect benefits from military pre-eminence.

Similarly, it’s still possible that Boeing will win, or at least regain parity, in the marketplace. But if so, it will be due to a combination of good commercial judgement and good luck, not because Boeing has benefited from being part of the US military-industrial hyperpower rather than the supposedly outmatched EU.

Coming back to the general question, I’d say that the outcome of negotations where the EU and US appear with opposed agendas depend mainly on such things as the existence or absence of veto points, and the extent to which one side or the other cares about the outcome. Where there are lots of veto points (climate change negotiations or the Multilateral Agreement on Investment) the status quo has an obvious advantaage. Conversely, even a united EU can’t stop the US from going to war if it wants to, and the US couldn’t stop the International Criminal Court or the Law of the Sea convention. The US can often split the UK and sometimes others off to prevent the emergence of a common EU position, but the veto points within the US system often mean that the US itself can’t act one in any coherent fashion.

All of this is a long way from my original post, which was mainly concerned with convergence in economic performance. But it’s certainly been interesting to engage with the very different way IR specialists view the world. This is the kind of experience that you get from blogs, and much less from official academia.

This time it’s personal

The personal experience of the floods and watching the effects of Cyclone Yasi haven’t altered my views on climate change, which are based on a large accumulation of scientific evidence, so that one or two additional data points should have only a marginal confirming effect. But they have changed my personal attitude to those who persist in obstructing action to mitigate climate change. My piece in Thursday’s Fin (over the fold) was a final appeal to any of them still accessible to reason, but I haven’t seen any evidence that it had any effect.
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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(s). As always, civilised discussion and no coarse language please.

Factor of five

The Oz reports Opposition spokesman Greg Hunt, saying that “FAMILIES face electricity price rises of up to $1100 a year” under a carbon price of $30/tonne. Oz reporter James Massola doesn’t check the arithmetic behind this scary claim, so I guess it’s a job for the blogosphere.

Using black coal as the fuel source, a tonne of CO2 is emitted for each MWh generated, so the tax comes out at 3c/kWh. Our hypothetical family would have to use nearly 40 000 kWh each year. The average NSW household uses 7300 Kwh/year, putting Hunt’s claim out by a factor of five. That “up to” is doing an awful lot of work, the kind that would get a commercial advertiser into a lot of trouble with Consumer Affairs.

Assuming Hunt isn’t deliberately lying (and to be fair, he’s one of the best on the Opposition side) how did he get such an absurd number? My guess is that he divided an estimate of total revenue ($16 billion, which looks about right for emissions of 500 million tonnes a year), then divided by the number of households. His mistake of course is to assume that 100 per cent of emissions arise from household use of electricity – the correct figure is about 20 per cent.

Coming back to the average household, the implied cost is around $200/year, which would, in a properly designed scheme, be returned one way or another, either in direct compensation or in offsetting tax cuts.

Fukuyama, f*** yeah (crosspost from CT)

Following up on the end of the Arab exception, I agree, pretty much with commenter Hidari, who says

For better or for worse the immediate future, politically speaking, (by which I mean, the next 30 or 40 years) belongs to the parliamentary democracies.

. Supposing that Tunisia and Egypt manage a transition to some kind of democracy, it seems inevitable that quasi-constitutional monarchies like Jordan and Morocco will respond with further liberalisation and democratisation, for fear of sharing the fate of Ben Ali and Mubarak. Add in Algeria, Iran, Iraq and Lebanon, all of which have elections of some kind, and the dominant mode in the Middle East/North Africa will have been transformed from dictatorship to (admittedly highly imperfect) democracy. The remaining autocracies (Libya, Mauritania Sudan, Syria) and the feudal monarchies of the Arabian peninsula will be seen as the barbaric relics they are, with days that are clearly numbered. Even if things go wrong for one or both of the current revolutions, the idea that these autocratic/monarchical regimes have some kind of durable basis of support is gone for good.

So, how is Fukuyama’s view of the end of history looking?

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