Author: John Quiggin

High Court challenge to Victoria’s water rules

John Quiggin15 Comments
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The South Australian government has announced a High Court challenge to Victorian rules that limit the extent to which trade in water rights can transfer water allocations from one catchment to another, and, in particular, from one state to another. Victoria’s rule limit the extent to which upstream irrigators can be bought out, with the water being allowed to flow downstream to South Australia for irrigation or urban use there, or as an environmental flow.

IANAL, but this would seem to fall under Section 92 of the Constitution which requires free trade between the states. In any case, I hope that the combination of political and legal pressure forces Victoria to drop this rule, which primarily benefits irrigation companies, while harming those Victorian farmers who would like to sell their rights and diversify into some other type of agriculture (those who simply want to get out of agriculture can sell their land and water rights as a package).

The end of the cash nexus?

John Quiggin34 Comments

Tyler Cowen has a short post which covers a number of themes I’ve been going on about for ages, though never with a fully satisfactory analysis. He starts by pointing to work by Michael Mandel suggesting that much of the measured productivity growth in the US has been bogus (see also Matt Yglesias on this). I agree, particularly as regards the financial sector.

More interestingly, Cowen goes on to note that

there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don’t prop up the revenue-generating sectors of the economy as one might have expected.

I agree and I think the implications are profound, if still hard to predict with any accuracy. There has been a huge shift in the location of innovation, with much of it either deriving from, or dependent on, public goods produced outside the market and government sectors, which may be referred to as social production.

Some suggestions, not fully argued, over the fold

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Standard & Poors strike back

John Quiggin116 Comments

Today’s Fin runs a letter from Standard & Poors responding to my column from last week, reprinted here. Unfortunately the letter is paywalled (if anyone would like to email me the text, I’ll make fair use of it), so you’ll just have to take my word that it contains some interesting semantics. For example, the writer takes umbrage at the suggestion that S&P “threatens” governments with the loss of AAA credit ratings, but does not deny that the agency explains to government that certain policies will lead to the preservation of the rating while others will not. (“Nice little state you’ve got here …”)

I’m most interested though, in a claim that, since 1978, the default rate on AAA-rated structured finance offerings has been only 0.5 per cent. Obviously, a statistic like this can mean just about anything, but the claim is surprising to me. AFAIK, the biggest single category of structured finance offerings rated AAA by the agencies were collateralised debt obligations (CDOs) and the vast bulk of these were issued in the last few years. According to Alan Kohler in today’s Business Spectator (I think the ultimate source for this is Gillian Tett in the FT).

Between 2005 and 2007, about $US450 billion of CDOs of asset backed securities were issued. Of those, $US305 billion are in a formal state of default, with those underwritten by Merrill Lynch accounting for the largest proportion, followed by UBS and Citigroup.

The real problem is what has happened after the default. JPMorgan estimates that $US102 billion of the CDOs have been liquidated; the average recovery rate for the super senior tranches – rated AAA – has been 32 per cent. For the ‘mezzanine’ tranches – created from mortgage-backed bonds – the recovery rate is just 5 per cent.

Up to a 95 per cent real loss rate on AAA debt CDOs …

(Note that, although the text is ambiguous, the top mezzanine tranches were typically AAA-rated – the super-senior stuff was supposed to be better than plain old AAA).

The default rate here is over 60 per cent, which is a bit higher than 0.5 per cent, and it’s safe to bet there are more defaults to come. Even assuming that older issues pull the average down, can there really have been anywhere near $60 trillion ($300 billion/0.005) of them issued, as you would need to get the S&P average default rate? Or is this the kind of average that conceals more than it reveals?

Update A kind reader has supplied me with the text, and I’ve selected the relevant bits for reference (OTF). If anyone is still interested, and keen to do an Intertubes meme mashup, we could do a crowdsourced fisking.
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Cherry-picking OK at Washington Post

John Quiggin59 Comments

The blogospheric response to George Will’s recycling of long-refuted talking points on climate change (a good summary here) has produced lots of insights into the way the mainstream media (particularly the Washington Post) works, and some reasons to be less regretful about its seemingly inevitable demise.

I was particularly struck by the opening statement in the latest contribution of WP Ombudsman Andy Alexander who states:

Opinion columnists are free to choose whatever facts bolster their arguments.

Really? Where I come from, citing supporting evidence and ignoring the existence of directly contrary evidence is called “cherry-picking” (when we are being polite).

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Recycling in a digital world

John Quiggin16 Comments
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Agent Cody Banks hd

download It’s Alive III: Island of the Alive

The observation that most of the falsehoods in George Will’s notorious Washington Post column on global warming have appeared in many previous columns, some going back as far as 1992, raises some interesting questions. The obvious ones like “How does this guy justify getting paid” and “Why is this paper still being published” have already been asked, so I thought I’d look a bit more at the question of recycling.

As an opinion columnist, I certainly repeat arguments from time to time, and make no apology for doing so. There’s a lot of noise out there and if you want to be heard, you have to push your viewpoint reasonably hard. At the same time, I try pretty hard not to say the same thing in the same way more than once (at least without acknowledging that I’m doing so), and to update my arguments in the light of new evidence. I may not always succeed, but I don’t think I’ve ever sent the Fin anything as thoroughly dog-eared as Will’s piece (and this is only one of a dozen or more iterations).

To repeat the same tired collection of second-hand talking points decade after decade displays not only intellectual dishonesty but a basic lack of craft values. As an academic, I’m of course more upset about the first, but as an opinion columnist I’m almost as annoyed about the second. As Chris Mooney says, this guy isn’t even phoning it in, and yet he’s regarded as a star.

Will’s talking point “they were predicting an ice age in the 1970s” might have been reasonable back in 1992, considered as a suggestion that we should not jump to conclusions on the basis of limited evidence and analysis. But the factual basis of the claim has long since been shown to be worse than dubious, and after four IPCC reports and thousands of scientific papers, the case for anthropogenic global warming rests on much more evidence than some tentative papers and a few shock headlines in newsmagazines.

Moreover, the switch from newsprint to digital publication has changed things in a couple of important ways. On the one hand, self-plagiarism is now much easier to detect. Anyone with Google can check you it. On the other hand, the justification for repetition is much more limited. When yesterdays brilliant insights lined today’s bird cage, you could be forgiven for repeating them a few months later, for readers who might have missed them the first time. But now that every column is preserved for ever, there’s much less need. And when your column consists largely of a string of tattered talking points that anyone who wants to can already find on the Internet, it has very little justification for existing.

Someone should tell this guy about Godwin’s Law

John Quiggin134 Comments

As if it wasn’t already embarrassing enough to be a rightwinger, here’s Dennis Jensen.

Update Judging by the comments, rightwingers are pretty hard to embarrass (after eight years of Bush, and the complete collapse of their economic ideology, I guess this isn’t so surprising). No-one from the dexter side has showed any inclination to disown Jensen as a crackpot and a goodly number have solemnly refuted the jocular suggestion that a PhD in ceramics might be a little cracked.

Changing course

John Quiggin32 Comments

When a car swerves sharply to avoid an obstacle, anything unsecured inside it continues travelling in its original direction, often with unfortunate consequences. We can see something similar happening with the Rudd government’s fiscal policy. The $42 billion stimulus package is as sharp a swerve as you can imagine, justified by the correct expectation that private investment and consumption demand, along with export demand, is about to collapse, leaving government to fill the gap.

Yet the noises coming out of the Budget process suggest that no one has even noticed this. Lindsay Tanner is still talking about spending cuts, as if the emergency measures of the last week can be put into reverse in only a few months time.

And, despite the disappearance of the forward surpluses that were to pay for them, and of any possible economic rationale for aiding high income earners, the government is still promising to proceed with the tax cuts promised in the utterly different world of 2007. Unlike many economists, I supported the government’s delivery of the first-stage tax cuts, on the basis that, while they were bad policy, nothing had changed since the election to justify repudiating a promise. But now, everything has changed. Like Ross Gittins, I hope the government will summon up the courage to say that tax cuts are off the agenda for the foreseeable future.

Update

I spell out the rationale for this a bit more over the fold

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