Author: John Quiggin

Privatising infrastructure investment

John Quiggin13 Comments

In an article on privatisation in the Fin a couple of weeks ago, I observed that

it was hoped that private ownership would impose capital market discipline on investment decisions … The public sector has been far from perfect in the planning and implementation of infrastructure investment decisions. But public sector failings pale into insignificance compared with the disastrous bubble and bust when investment decisions in the Internet and telecommunications sectors were entrusted to the wisdom of private capital markets. The energy sector has been little better. Enron was just one example of investment decisions being driven by market manipulation and rent-seeking.

In the case of monopolies the most important single regulatory decisions relate to prices charged to consumers or for third-party access. With privately owned monopolies, there is an inherent conflict here. If the price is set too high, consumers will suffer. If they are too low, investment will be inadequate. As regulator, the government has a conflict of interes. On the one hand, regulation is supposed to set efficient prices. On the other hand, as representatives of consumers, governments have an incentive to fix prices at inefficiently low levels.

Public ownership Îinternalises the externalityâ and balances the incentives facing governments. If prices are set below the socially efficient level, the benefit to consumers is offset by a loss in revenue. The converse is true if prices are set too high.

I’m just wishing I had run this last Thursday, just before the big US blackout, which appears to be due primarily to inadequate/poorly co-ordinated investment in transmission.

The Bush miracle ?

John Quiggin7 Comments

I got this graph of US productivity growth from Brad de Long Productivity_2003-08-09.gif , and it struck me that it’s only after 2000 that there is any real action here. As Brad says, in a normal postwar recession, we would have expected a decline in productivity growth (and maybe even negative growth) arising from labor hoarding – this was the name given to the propensity of employers to keep workers on through economic downturns. Since most employers now engage in large-scale layoffs even during booms, it’s not surprising that labor hoarding is no longer an issue.

Still, given the triumphalist rhetoric that came out of the US throughout the Clinton administration, the productivity growth for this period was remarkably unimpressive. One possible explanation for the contradiction is that the graph shows changes in output per hour worked whereas most attention in the 1990s was focused on output per worker, which was rising with increasing working hours.

In any case, if productivity growth had declined in 2001 as usual, there would have been no story in this picture. For those who attribute economic outcomes to political leadership, the obvious explanation is that Bush has produced an economic miracle.

I don’t believe in miracles, and I also think there’s a problem with Brad’s analysis in which rapid productivity and slack demand produce rising unemployment. US demand for manufactured goods (which is still the most important single part of nonfarm business product) has risen since 2000, but the increase has been met almost entirely by imports. Hence, US manufacturing output has been roughly constant and hours worked have fallen by about 15 per cent. If US productivity was really rising as fast as the graph suggests, there should have been a fair bit of import displacement, especially since the dollar began depreciating a year ago.

Perhaps there are long lags in the process of adjustment to a depreciation (Australian readers of a certain age will recall the endless wait for the “J-curve”).

But I prefer some combination of the explanations I put forward in my post on productivity. In particular, there’s the problem of factor composition. The present recession is unusual because it has been characterised by massive overinvestment. With output growth weak, capital productivity has fallen.

In these circumstances, the best way to assess the underlying productivity trend is to look at multifactor productivity. Unfortunately the data is only published annually and the most recent estimates, from the Bureau of Labor Statistics are for the change from 2000 to 2001. As would be expected from the discussion above they show a rise in labor productivity and a decline in capital productivity. The net impact was that

From 2000 to 2001, multifactor productivity fell 1.0 percent in both the
private business sector and the private nonfarm business sector

. This was the first fall since 1991. I’d expect some recovery in capital productivity to have taken place since then, since investment has been weak, but it seems unlikely that MFP growth for the period since 2000 has been more than marginally positive.

I think we’ll have to put the Bush miracle in the shed with all the others.

Further reading

John Quiggin

Thanks to everyone who made suggestions, I’ve managed to put together a reasonably good set of further reading for my chapter on the Howard government’s economic policy. Further suggestions are still welcome of course.

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Corruption

John Quiggin10 Comments

Ken Parish links to my post on the ethanal business (it ought to be a scandal, but it clearly isn’t) and says

I regard the Howard government as possibly the worst Australia has ever seen, certainly since the Second World War.

on account of its corruption and continuous reliance on divisive wedge politics. I’ll leave wedge politics for later and focus on corruption.

On this score, my fear is that the Howard government will turn out to be “average: worse than the last one and better than the next one”.

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Word for Wednesday: productivity

John Quiggin10 Comments

In a vague sense, productivity means the ratio of outputs to inputs. Improvements in productivity arise from improvements in technology or new and better ways of organising production. Productivity can also decline if productive effort is diverted to wasteful ends, which may happen for a variety o reasons.

In m yexperience, most of the time, reported short-term changes in productivity are spurious, in a sense I’ll try to make more precise below. In thinking about this, I came up with the following proposed test/definition for an increase in productivity (it would also apply, with modification, to a reduction)

A change in productivity is sustainable if additional inputs of labour, capital etc could be added and would generate additional output at the new, higher level of productivity

The idea of this definition is to rule out as many as possible of the sources of spurious productivity gains, including

  • factor composition biases, such as the gain in average productivity from closing the weakest plants in an industry/economy
  • relative factor intensity biases, such as gains in labour productivity from an increase in the capital-labour ratio
  • factor use intensity biases, such as labor hoarding during recessions and work intensification arising from microeconomic reform

The most famous case of factor composition bias was the Thatcher productivity miracle, achieved primarily through plant colsures. Factor intensity bias is a chronic problem, which has been addressed through the construction of measures of multifactor productivity. Increased work intensity was the main source of the Australian productivity miracle in the 1990s.

(Since miracles are invariably spurious, I’ve avoided putting scare quotes around the term.)

FTA redux

John Quiggin4 Comments

A few days ago former Liberal hatchetman Michael Baume had an opinion piece (subscription required ?) in the Fin, denouncing ‘scaremongers’ who suggested that the US wanted to scrap the Pharmaceuticals Benefit Scheme as part of the proposed Free Trade Agreement, and quoting a string of official denials.

In today’s Fin, I read that the US is demanding ‘reform’ of the PBS. Anyone who has experienced reform in the last decade will be able to fill in the details.

This kind of dishonesty is par for the course in the pro-FTA camp. Alan Oxley of AUSTA has adopted precisely the same rhetorical slide. As I pointed out in my debate with Wolfgang Kasper onthis topic a few months ago

The Austra submission to the Senate Inquiry into the FTA denies any intention to ‘dismantle’ the scheme, but notes, ominously, that ‘there are features of the scheme that discourage investment by drug companies in Australia. Austa supports measures in the FTA which encourage more investment and job growth in Australia’. It is safe to conclude that the ‘features’ seen as discouraging investment and job growth are the same ones that provide Australians with access to affordable drugs.

What surprises me is not the dishonesty, but the belief that this kind of thing will take people in, when the facts are so easily available.

Ethanol

John Quiggin8 Comments

Margo Kingston has collected all the facts on the snap decision to impose excise on ethanol imports to the benefit of Australian ethanol producer Manildra.

Howard will undoubtedly get away with this, but until a few years ago, misleading Parliament over a decision involving more than a hundred million dollars, to the benefit of a party crony, would have been exceptionally politically damaging. As late as the 1980s, ministerial careers were ruined over far smaller sins.

Many factors have contributed to this, and standards declined markedly in the later part of the Hawke-Keating government, but undoubtedly public acquiescence in the ‘children overboard’ lies has been a big factor. Once it’s clear that you can lie about a policy issue, be caught, and still get away with it, the temptation to lie about money becomes overwhelming. It’s a safe bet that at least some of those involved in this process will end up with cushy post-political jobs as a result (see Reith, Wooldridge etc).

Update I am obviously hopelessly behind the times. Manildra has already hired Howard’s former chief of staff.

Sceptics in the White House

John Quiggin4 Comments

This Salon article has a pretty good roundup of the organisations promoting global warming “scepticism”, including funding sources.

For those more interested in the real science on this topic, I’ve run across an excellent hyperlinked resource entitled The Discovery of Global Warming. While the title makes the author’s viewpoint pretty clear, the treatment is admirably balanced. a very short summary

In the summer of 1988, the hottest on record, scientists’ claims that the Earth’s warming was already detectable focused public concern. But the many scientific uncertainties, and the sheer complexity of climate, made for vehement political debate over what actions, if any, governments should take.

Scientists intensified their research, organizing programs on an international scale. The world’s governments created a panel to give the best possible advice, negotiated among thousands of officials and climate experts. Around the end of the century the panel managed to establish a consensus with only a few dissenters. They announced that although the climate system was so complex that complete certainty would never be reached, it was much more likely than not that our civilization faced severe global warming.

I was particularly interested in the treatment of solar variability, a topic that’s been debated at length in the blogosphere.

The crucial para

The import of the claim that solar variations influenced climate was now reversed. Critics had used the claim to attack regulation of greenhouse gases. But if the planet reacted with such extreme sensitivity to almost imperceptible changes in the radiation arriving from the sun, the planet had to be comparably sensitive to greenhouse gas interference with the radiation once it entered the atmosphere.

All the essays are extensively hyperlinked, and the references are both extensive and wide-ranging.