Category: Economic policy

My evidence on the carbon price

John Quiggin44 Comments

Last week I appeared, by videolink, before the Senate Committee on New Taxes, to talk about the government’s carbon price and compensation package. I made some dot points, over the fold.

The inquiry was interesting, with one Senator insisting that the carbon price was different from the GST because, under the GST, businesses could claim their inputs and therefore didn’t have to pay anything. I tried to suggest that this was only true for businesses that didn’t add any value (it is, after all, a value added tax), but to no avail.

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Inequality is bad for (almost) everyone

John Quiggin30 Comments

Yves Smith, whose Naked Capitalism blog is essential reading, is guestblogging for Glenn Greenwald this week. Her latest post sums up a lot of evidence on the adverse effects of inequality, and includes a reference to a post of mine. In summary, the huge growth of inequality in the US has harmed everyone below the 90th percentile of the income distribution in the obvious way – they get a smaller share of a cake that isn’t growing very fast, and has been shrinking since the crisis began

But even people above that level, but outside the top 1 per cent are worse off in important ways. They’ve maintained or increased their share of national income, but they aren’t rich enough to insulate themselves fully from the adverse consequences of living in a highly unequal society. Yves sums up a bunch of the evidence on thsi.

Finally, there are those in the top 1 per cent of the income distribution, now pulling in 25 per cent of all income. Members of this group can, if they choose, ignore the collapse of the society outside their gated communities, and focus on enjoying the wealth they extract from it. On recent evidence, that’s what they (or at least their political representatives) are doing, while also managing a very effective set of divide and rule tactics for the rest of the population.

What to do about the ratings agencies

John Quiggin66 Comments

S&P’s decision to downgrade US Treasury bonds from AAA to AA+ has elicited various reactions, some of which I’ll doubtless repeat here. Obviously, S&P has no particular expertise (apparently it couldn’t even get the arithmetic right) and based on its historical and continuing performance, its opinions ought to carry no particular weight with anybody (they say so themselves, when under pressure over obvious cases of misrating, asserting that they are merely offering an opinion).

On the other hand, it’s also pretty obvious (and even more so after the Repubs successful use of the debt ceiling to force Obama to abandon any call for tax increases along with the cuts they both wanted) that the US has some fairly intractable problems in dealing with its (technically quite manageable, but still substantial) public debt. Finally, as I said last time I discussed this, a decision of this kind (including a decision to maintain AAA ratings) is inherently political

There are two reasons why S&P’s choice of rating matters more than, say, my own opinions on the matter
* First, a lot of investors still pay attention to ratings agencies, for whatever reason
* Much more importantly, agency ratings are embedded in global regulations concerning prudent management of investment. If a second major agency were to join S&P in downgrading, large numbers of institutions would be debarred, under existing rules, from investing in Treasury bonds

That’s clearly unsustainable, so what will happen?

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Believing Barry O’Farrell could cost you “up to” 100 IQ points

John Quiggin25 Comments

The NSW government has released a a frothing at the mouth press release claiming that a carbon price will devastate the economy. As Mary McCarthy would say, every single word in it is a lie, including “a” and “the”. Top billing has to go to that old favorite of shonky advertisers “up to”, as in a carbon price will ” force up electricity prices for NSW households by up to $498 a year.” The Commonwealth Treasury modelling, which I’ve checked, gives an average cost increase of $3.30 or about $170 a year.

Although the analysis is attributed to NSW Treasury, they apparently weren’t hackish enough for the government, which had to go to Frontier Economics to get the answers they wanted. I’m waiting to see the report, but in the meantime, my reactions to the press statement are over the fold

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Don’t look at the bank behind the curtain

John Quiggin19 Comments

The political impregnability of Rupert Murdoch and NewsCorp has always been one of those facts about the world that seemed regrettable but eternal. By contrast, the ability of the banks to emerge from their near-destruction of the world economy richer and more politically powerful than ever before certainly took me by surprise when it happened (partly motivating my change in title from “Dead Ideas” to “Zombie Economics”). John Emerson pointed out the other day that the head of risk management at Lehman Brothers, arguably the most egregious individual failure among the thousands of examples, was just appointed to a senior position at the World Bank.

But now it seems there is just a chance that the curtain might be swept away from even these wizards. The emerging theme in commentary is the corrupt culture of impunity represented by the press hacking scandal, MP expenses and the banks (here’s UK Labour leader Ed Miliband pulling them all together).

If Labor could tie the Conservative-Liberal austerity package to the protection of the systemically corrupt banking system, they would have the chance to put Nu Labour behind them (I noticed Blair has already credited Brown with killing the brand). Instead of putting all the burden on the public at large, they could force those who benefited from the bubble to pay for the cleanup. The two main groups are the creditors who lent irresponsibly, counting on a bailout and should now take a long-overdue haircut and high-income earners who benefited, either directly or indirectly, from the huge inflation in financial sector income.

I know it seems hopelessly naive to think the banks could ever be brought to heel. But they were, for decades after the Depression. And as impregnable as they look today, Newscorp looked just as impregnable three weeks ago, as did the CPSU and the apartheid regime in South Africa thirty years ago.

Of course this spring moment won’t last long. But perhaps there is enough momentum that it won’t be exhausted by Murdoch alone.
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How to create a world-class university

John Quiggin37 Comments

The Grattan Institute is advertising a lecture on “How to create a world-class university” by Andrew Hamilton, VC of Oxford and previously Provost at Yale. As the ad says, “Hamilton has been a leader in two universities that are world class by any measure”.

Still, if we take his experience as representative the obvious answer to the question is of how to create a world-class university is “found it in 1700, or preferably earlier”. Hamilton may have some significant achievements, but the creation of a world class university doesn’t appear to be among them.

That’s a snark, but it conceals a serious point. The fact is that (with a handful of marginal exceptions) the leading universities in most developed countries, including the US, UK and Australia, are those that were leading universities in 1900. There is very little evidence to suggest that anything done by a vice-chancellor or provost can achieve more than marginal improvements in the relative ranking of a new university. Conversely (and I won’t name the Australian examples I have in mind) even spectacularly bad management can’t do much to damage a university that has been around for 100 years or more.

That in turn means that common assumptions about the benefits of competition in the university sector are almost entirely wrong. In the absence of effective market mechanisms by which well-run firms prosper and grow while badly-run firms shrink and die, competition is essentially meaningless.

The expansion of competition between Australian universities has led to huge spending on marketing and advertising, and the growth of a large supporting bureaucracy, but it’s done nothing to improve standards.

Carbon tax – instant reax

John Quiggin48 Comments

The proposed carbon tax is a substantial improvement on the heavily compromised emissions trading scheme agreed between the Rudd government and the Opposition under Malcolm Turnbull. Although there is substantial compensation for emissions-intensive industry it is temporary and based on historic emissions level, so that the incentive to reduce emissions is not compromised. The design of the compensation package for households is also welcome.

The government has avoided the temptation to pretend that everyone will be better off, and has taken the reasonable position that high income households do not need to be compensated for the introduction of necessary reforms. This has permitted the very welcome measure of raising the income tax threshold and thereby taking more than a million low-income workers out of the income tax system.

While the primary focus of the package is, correctly, on the imposition of a price on carbon emissions, there are a range of supporting measures designed to encourage energy efficiency and innovation. On the whole, these seem more carefully designed than the measures introduced under previous governments.

Giving up on the Murray Darling Basin

John Quiggin15 Comments

The Risk and Sustainable Management Group, which I lead at the University of Queensland, launched our Annual Report for 2010 last night (link to large PDF coming soon). I’ll quote from the Foreword

As 2009 drew to a close, it seemed reasonable to expect that 2010 would see a resolution of the Australian political debate over the two environmental issues central to the work of the Risk and Sustainable Management Group: climate change and the management of the Murray–Darling Basin.

In the event, neither of these issues was resolved. The bipartisan agreement in support of an emissions trading scheme collapsed, and the policy was abandoned by the government. Following the August 2010 election, the government restated its support for a carbon price, but the main short-term focus was on the idea of a carbon tax.

Developments in water policy were equally confused. Under the Water Act 2007, passed by the Commonwealth Parliament with bipartisan support, the Murray Darling Basin Authority (MDBA) was required to produce a plan for the sustainable management of the Basin. The release of the Basin Plan was delayed by the election. The MDBA produced a Guide to the Proposed Basin Plan in October 2010 which met with a very hostile response, with copies of the Guide being burned at public meetings of irrigators. The Draft Plan is still under development.

I’m feeling a bit more hopeful about carbon prices than when I wrote that. Labor, Greens and the Independents seem to be holding together, and the public debate shows some increasing recognition that Abbott is an opportunistic hack and that while preferring prejudice to science may make for good talkback radio, it is not a good basis for public policy.

By contrast, the situation regarding the Murray Darling Basin has gone from bad to worse to pretty much hopeless. We had everything needed for a plan that made just about everyone better off: more water for the environment, a good deal for farmers who wanted to switch out of irrigation, no compulsory acquisition, and enough spare money sloshing into country towns to more than offset any reduction in agricultural output. Instead, the process was spectacularly mishandled, most notably by the Murray Darling Basin Authority, who managed to scare everyone into thinking the government was about to confiscate their water. That handed power back to the most reactionary irrigator lobby groups who just want to stay on the old, unsustainable, path as long as possible, while extracting as much money as they can from the public purse. The release yesterday of the Windsor Report suggests that they will get their wish. The central point of the report is that the government should abandon all “non-strategic” purchases of water, while pouring even more money into so-called “water-saving” schemes, which will cost 5-10 billion while delivering little if any additional water.

Perhaps there is a way back from this but I can’t see it at present. For the next couple of years, at least, I plan to give up (or at least scale down) my work on the Basin and focus on more tractable problems like stabilising the global climate, saving the Great Barrier Reef and fixing financial markets.