I’ve got quite a few events coming up in the next couple of weeks.
* On 13 and 14 May, I’m running a workshop at the University of Queensland on Epistemic & Personal Transformation: Dealing with the Unknowable and Unimaginable. Details here.
* On Thursday 16 May, I’ll be at ANU for the official Australian launch of Economics in Two Lessons. Details are here. If campaigning permits, Andrew Leigh will say a few words about the book. There will be a launch at Avid Reader in Brisbane in late June (date tbd), and in Sydney and Melbourne a bit later
* On Wednesday 22 May, I’ll be delivering the Keith Hancock lecture for the Academy of the Social Sciences in Australia, at the University of Queensland. Topic is The Future of Work. Details here.
* I’m doing a number of radio interviews related to Economics in Two Lessons. I talked to Radio SER in Sydney yesterday. On Saturday 18 May, at 7:45 am, I’ll talk to Geraldine Doogue on Saturday extra, then on Wednesday 15 May to Steve Austin on ABC Radio Brisbane Drive.
That’s the headline for my latest piece in Inside Story, along with the short version of my answer. The long answer is that, even with dubious modelling choices and extreme parameter assumptions, Brian Fisher of BAEcon* comes up with estimates of about 2 per cent of GDP, trivial compared to the potential cost.
The truth is that the economic impact of reducing emissions by 45 per cent relative to 2005 levels by 2030 will be so small as to be lost in the noise of statistical revisions and exchange rate effects. By contrast, the costs of doing nothing about climate change are already visible and are only going to get bigger.
Considered in terms of opportunity cost, action to mitigate climate change is a no-brainer, which is why so much intellectual and rhetorical energy has to be used to mount any kind of case against such action.
BAEcon is a play on the title of the Bureau of Agricultural Economics, precursor of the Australian Bureau of Agricultural Resource Economics (ABARE) where Brian was Director and I was Chief Research Economist in the 1980s and 1990s. It’s now ABARES having absorbed the Bureau of Rural Sciences.
Eryk Bagshaw, recently appointed economics correspondent for Fairfax, is certainly aware of that. In fact, mentions it right near the end of this scare story about the effects of Labor’s rejection of the second-stage of the Morrison government’s legislated tax cuts. But that didn’t stop the Fairfax subeditor running his article under the headline “Average full-time workers to be $1000 a year worse off under Labor”
To spell it out, the trick here is that Bagshaw is looking at workers who earn between $90,000 [the arithmetic mean of wages for full time workers} and $120,000. He estimates that there are about 1.6 million such workers. That’s a bit over 10 per cent of the workforce (about 13 million people). As he admits, the median full time wage is well below this, and the median wage for all workers lower again. Once pensioners and welfare recipients are taken into account, it’s evident that Bagshaw’s “average workers” are well towards the top end of the income distribution.
This is amusing since I had a previous run-in with Bagshaw over this very issue of headlines. On that occasion, Bagshaw was scathing about a sloppily written ACTU press release, which ended up with a totally inaccurate headline. I don’t think a defence of innocent error is available here. Bagshaw’s story is written in a way that would lead any casual reader to make the same inference as the subeditor. Moreover, there’s no obvious reason why workers receiving between $90K and $120K should be of more interest than any decile of the workforce. Certainly they aren’t average in any meaningful sense. So, without the misleading phrasing, the story would probably have been spiked.
The concept of opportunity cost “The opportunity cost of anything of value is what you must give up so that you can have it.” is the central theme of my book Economics in Two Lessons, due out in the US on 19 April and hopefully in Australia soon after that. My central claim is that two lessons based on opportunity cost and their relationship to market prices provide a framework within which almost any problem in economic policy can usefully be considered.
That’s not the way economics is usually taught (opportunity cost gets a brief nod before the focus moves on to supply and demand). So, I was impressed to see Bill Shorten use the term in relation to climate change inaction. Not only that but he used it correctly! Here’s Bill, quoted in the SMH
Opposition Leader Bill Shorten defended the new policy by urging voters to consider the cost of inaction on climate change, saying “There is a huge opportunity cost when we don’t take action,”
Perhaps I shouldn’t be surprised. Labor’s Shadow Assistant Treasurer is Andrew Leigh, a fine economist who has had nice things to say about my book. And Labor has been listening to Richard Holden, who is, I think, the brightest young economist we have right now.
Surprising or not, it’s great to see a return of economic literacy to public debate, after years dominated by vapid slogans.
The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation. In this context, the value of the net increase in money issue is referred to as seigniorage. To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.
A crucial question is: what is the scope for seigniorage? In particular (expressing things in MMT terms), is the scope for seigniorage sufficient to permit the introduction of ambitious programs like a Green New Deal without the need for higher taxes to prevent inflation.
The recent episode of Quantitative Expansion in the US provides some evidence here. Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.
How much is “substantial”?
According to the St Louis Fed,
the monetary base grew from around $800 billion to just over $4
trillion between 2008 and 2016. That’s an increase of $3.2 trillion,
which is a lot of money. Expressed in terms of GDP, though, it doesn’t
seem quite as large. Over eight years, $3.2 trillion is $400 billion a
year or around 2 per cent of US GDP ($20 trillion).