For a variety of reasons, I’ve been looking at the relative economic performance of Australia and New Zealand over the postwar period. For most of the 20th century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, NZ has declined greatly relative to Australia. On the latest Penn World Table figures, income per person is about 70 per cent of the Australian level. Over most of this period, NZ has been governed by radical advocates of the free market[1]. As part of my research, I’m collecting some of their claims about NZ economic performance, relative to Australia and the OECD. I’ve listed some over the fold (links a bit scrappy, as some predate the rise of the interwebs). Further contributions welcome, as would any interesting examples of more accurate assessments (I have some already).
Category: Economic policy
Rent-seeking rampant
The Rudd government’s proposal to tighten up documentation requirements for the very generous tax concessions provided for people who receive motor cars as a fringe benefit has produced some striking examples of rent-seeking from the Australian right, notably including Catallaxy and the Australian Financial Review. Catallaxy has a string of posts defending this rort.
The Fin gives lots of space to bleating rent-seekers, while imputing to “academics” the opinion that this is a subsidy. I guess that’s fair enough, given that the Fin regards basic science as a matter of academic opinion, while treating the failed dogmas of the 1980s as proven facts. And, of course, the Opposition has promised to oppose the measure, while weaselling out on the question of whether it would reverse the changes if elected.
This really is a test for Rudd. If he wants to refute the oft-repeated claim that he is all spin and no substance, this is his first chance, and one of the best he is going to get.
The failure of electricity market reform
As many readers will be aware, The Guardian now has an Australian edition, and I’ve just published an opinion piece in their Comment is Free section, looking at What lies behind the power price increases in Australia?. While there are plenty of factors, they are tied together by the misconceived reform of the industry undertaken in the early 1990s. Concluding paras
he free market assumptions of the reformers were simply inapplicable to a network industry like electricity, where every participant interact with one another through a distribution and transmission system that has all the characteristics of a natural monopoly. The assumption that a combination of profit-driven investment and regulation in the public interest could resolve these contradictions has proved unfounded.
Equally importantly, even though the COAG reforms coincided with the emergence of global concerns about climate change, the reform process took no account of the possibility of carbon pricing, and made no provision for renewable energy. In particular, the assumption that households could be regarded purely as consumers failed to consider the possibility of solar rooftops, or of any interactions between households and energy suppliers to promote energy conservation.
Fixing this mess will take many years. But the first step is to admit that electricity reform has been a failure, and to re-examine the whole system without any ideological preconceptions.
I’m hoping to write more on how to fix the system soon, perhaps even making a submission to the Newman government’s inquiry on the subject.
Worst graph ever?
I just downloaded the Queensland government’s paper announcing, but not spelling out, a 30-year electricity strategy to be developed in the course of this year. I started with healthy scepticism about this, but scepticism turned to bemusement when, on page 5, I ran into one of the worst graphs I have ever seen.
This graph, taking up half a page, contains a total of six data points (energy intensity and gross state product for three states). The relevant data, such as it is, is contained in the three yellow bars. The legend describes them as “Electricity use (KwH) per $ of state product”, while the axis label claims that the measure is “Energy use (Mj) per $ of state product” Since a joule is a watt-second, it’s easy to check that a kilowatt-hour is 3.6 megajoules, but the difference isn’t large enough to work out which one is correct. It’s a fair bet, though not sure, that the quantity being measured is electricity use, and not all energy use. The only information conveyed is the unsurprising fact that Queensland’s economy is more electricity-intensive (or maybe more energy intensive) than those of NSW and Victoria.[1]
The real joke, though, is the second measure, of total state product. This is of no interest at all, since it just reports the well known fact that NSW has a larger economy than those of Victoria and Queensland. But the thing that would make Edward Tufte turn in his grave (if he were dead, which Wikipedia tells me he is not) is that this irrelevant information is reported in a line graph, making it appear that there is some sort of relevant order here.
The rest of the graphics are almost, but not quite, as bad. There’s an amusing one describing the “engagement and accountability model”. Three Venn-style intersecting circles representing market, government and customer are overlaid with an equilateral triangle, the vertices of which are labelled “Engaged”, “Efficient” and “Effective”. All stakeholders are invited by the government to “get on board and challenge current thinking”.
Eager as usual to be a team player, I’ll be contributing some thoughts on the failure of electricity market reform to the Guardian, hopefully appearing tomorrow. I will certainly challenge current thinking and look forward to being welcomed on board by the Newman government.
fn1. Since no more explanation is given, I’ll take a stab at explaining the significance of these numbers. Assuming the Kwh measure is correct, and taking an average price of 15c/KwH, electricity amounts to around 3.3 per cent (0.15*0.22) of the total Queensland economy. That sounds about right to em.
Costello again
The Final Report of the Queensland Commission of Audit, headed by Peter Costello, has been released. It largely abandons the claims made in the Interim Report, suggesting that the state’s fiscal problems are the result of irresponsibility on the part of the previous government. To its credit, the Commission identifies the real problem, namely, the long-term tendency for the share of expenditure going to human services such as health and education to rise over time. Since these services are largely provided or funded by governments, they can’t be provided, on the scale people would like, without increasing taxation.
Unfortunately, that’s where the credit stops. The core of the problem, identified by William Baumol in 1967, is that, for obvious technological reasons, productivity in these services tends to grow more slowly than in other sectors, most notably goods-producing sectors. The Commission’s proposed solution is breathtaking in its simplicity – if we could raise the rate of productivity growth in the human services sector, the problem would go away. Yes, and if wishes were horses, beggars would ride.
My response, which got a run in today’s Courier-Mail, is here.
Decarbonising Australia (updated)
I’ve been meaning to post about the Australian Energy Market Operator’s report on the feasibility of a 100 per cent renewable electricity supply system for Australia (H/T commenter Ben). In the meantime, Brian Bahnisch at LP has done a detailed summary, so I’ll refer you there and make a few points of my own.
First, this study should kill off, once and for all, claims made here and in many other places (notably, at Brave New Climate) that the intermittency of renewable electricity is an insuperable problem.[1] The AEMO is the body that manages the electricity market on a minute-to-minute basis, so it has the expertise to assess this claim, unlike the many amateurs who have tried their hands. And, since it might have to do the job, it has no reason to understate the difficulties of a renewables-based system.
Second, the estimate cost of $111 to $133 per megawatt-hour represents an increase of $60-80/MwH on current wholesale prices, or 6-8c/Kwh on retail prices. That’s much less than the increase we’ve seen thanks to the mishandling of electricity market reform. If we wound back those costs, we could actually end up with both 100 per cent renewables and cheaper electricity.
Third, although the study envisages a role for electric vehicles, it doesn’t present a full-scale program for decarbonization. But once you have a scalable, fully renewable electricity supply, everything else is comparatively easy.
Finally, if we take Tony Abbott at his word in wanting direct action to deal with climate change, this report provides him with a blueprint. If we want to, we can eliminate the great majority of domestic CO2 emissions simply by mandating renewable technology and electric vehicles. The cost would be substantial in dollar terms ($250 billion for the electricity component). But, over a couple of decades, it would be a barely detectable deduction from growth in national income.
Update As it turns out, there’s a response at Brave New Climate from Martin Nicholson. Nicholson reports on a study of his own, in which nuclear is included in the mix. On Nicholson’s estimates, this substantially reduces capital costs, a point of which he makes a big deal. But obviously, renewables have much lower operating costs and Nicholson estimates the levelised cost for his system at $124/MWh to $126/MWh. As he says:
As this is in the middle of the AEMO range, wholesale prices are likely to be similar with or without nuclear
Given that very few current-generation nuclear plants have been built, cost estimates for nuclear are speculative. The obvious inference for Australia is that we should push along with renewables, and take a “wait and see” position on nuclear, observing developments in the UK, US, France and China. If they can deliver nuclear safely and at low cost, we can add it to the mix (say, after 2030).
Sadly, I think most of the BNC readership are locked into a position that nuclear must be the answer, which requires them to believe that renewables won’t work. Even a comprehensive demonstration that renewables can deliver a 100 per cent solution at a cost comparable with optimistic estimates for nuclear isn’t going to shift them.end update
fn1. This is part of a rhetorical manoeuvre aimed at pushing the conclusion that nuclear is the only feasible zero-carbon option. Once it’s admitted that 100 per cent renewable electricity is feasible, nuclear advocates need to present a case based on comparative costs. In the Australian context, it will be very hard to make that case, given the need to set up a complete nuclear infrastructure from scratch.
Fantasy budget
Crikey asked me to write 1000 words or so on my ideal budget. I didn’t respond exactly in those terms, looking instead at the strategy for the medium term. Crikey ran it today, and I’m doing the same (over the page).
Gillard gets it right
Ever since the Hawke government announced the “Trilogy” commitments in 1984, promising no increase in the revenue and expenditure shares of national income, Australian politics has been, in effect, a conspiracy of silence about the central issue of economic policy, that of the appropriate balance of private and public expenditure. The steady growth in demand for services like health and education has ensured that no reduction in the public sector share has been feasible, while the market liberal dogma enshrined in the Trilogy has prevented any increase.
In retrospect, it’s striking that Hawke’s commitment came just after the reintroduction of Medicare, funded (in part) by a levy on all incomes. Medicare’s success has made it politically untouchable. On the other hand, it has been assumed (though without much supporting evidence) that any increase in taxation (not matched by offsetting cuts) is politically impossible.
The Gillard-Swan government was, until yesterday, ruled by this doctrine. With their unfortunate habit of making categorical commitments out of aspirations, both Gillard and Swan had repeatedly ruled out a levy to fund the National Disability Insurance Scheme (by contrast, “conservative” state premiers like Newman were happy with the idea) But, as a recent Grattan Institute report has made clear, there is no way of meeting the needs for health and education without a substantial increase in revenue (as well as cuts in low-priority direct expenditures and tax expenditures).
So Gillard has announced a proposal for a 0.5 percentage point increase in the Medicare levy, raising $3 billion a year. Abbott has equivocated so far, but has stated his support for the NDIS, which leaves him no honest options except to go along.
If we could achieve consensus on paying for improved services through higher taxation in this case, we might finally have a serious debate about what, as a community, we are willing to pay for.
Costello Report: first look
The full version of the Costello Commission of Audit Report has finally been released, along with the Newman government’s responses. As it turns out, the “Interim” report was the Commission’s last word on most of the big issues, such as the state’s debt position and fiscal outlook. The Final Report consists of
* A general discussion of the role of government, which is just a restatement of the market liberal orthodoxy of the 1980s and 1990s, proposing privatisation, competitive tendering and contracting and so on
* The specific claim that Queensland can deal with the problem of rising demand for health, education and similar services in coming decades by permanently raising the rate of productivity growth in those sectors.
* Detailed discussion of all areas of government activity.
Of these, the second is the important one. The fact that productivity grows more slowly in human services than in other sectors of the economy, and that this implies relative growth of the public sector, has been known since the work of Baumol in the 1960s. This pattern is unlikely to be changed by the kinds of measures being proposed by the Commission.
MRRT
I appeared at a Senate inquiry into the Minerals Resource Rent Tax yesterday. Given the virtual certainty that the tax will be abolished after the election, I tried to focus on the future. Here’s my opening statement
John Quiggin 