Assuming there are no car crashes or political scandals in the next couple of hours, Brisbane-based readers might catch a glimpse of me on the Channel Ten news at 5:00pm, talking about oil prices. Nothing you haven’t already read here on the blog, of course.

he price of oil is stlll around $50, and there’s no reason to expect it to fall in a hurry. In particular, if China revalues the renminbi yuan, as is commonly expected, there will be a corresponding fall in the effective price of oil, both for suppliers and for consumers in China and other countries that revalue, for any given $US price. This probably doesn’t matter much on the supply side – everyone is pumping as hard as they can and will probably keep doing so. But China’s demand is probably quite price sensitive, and a reduction in the price could keep demand higher, even in the face of a slowdown in exports to the US.

The other thought that occurred to me relates to climate change. Although there are a variety of ways in which we could mitigate climate change, the simplest would be to double the price of carbon-based fuels. This would certainly reduce demand significantly in the long run (I’ll try and update this with some estimates soon). On the other hand, there’s a lot of concern about the short-run macroeconomic impacts of such an increase.

Well we’ve seen a doubling of oil prices, and substantial increases in coal and gas prices over the past few years, and any macroeconomic impact is undetectable amid the general noise. The cases aren’t perfectly comparable of course, notably

* the rising price has been driven by increased demand, not imposed exogenously

* the effect of rising market prices is to redistribute income to oil-producing countries, and increase trade deficits. This effect wouldn’t arise with carbon taxes and would be much smaller with tradeable permits

Still, the evidence is against the idea that higher energy prices would bring the economy to a grinding halt. Rather, the response so far seems to be a textbook case of orderly adjustment, as people gradually shift away from gas-guzzling vehicles, look again at energy saving options and so on. So far the response has been small, but over time (if supply declines and prices stay high) more substantial responses can be expected.

My Fin article last week (over the fold) was about telecommunications, and included the statement

It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefitted business at the expense of households.

This point is neatly confirmed by the PC report on National Competition Policy, which shows that households are paying higher prices for nearly all infrastructure prices as a result of reform, mainly because of shifts in costs from households to business.

The PC report notes declining average prices for most infrastructure services. However, as with telecommunications, there was, in most of these cases, a long-standing trend of declining prices before reform began. There’s no evidence to suggest that average prices have fallen faster (or in cases like urban transport, risen less) than would have been the case without reform.

The absence of any net change in average prices, relative to trend means that the effects of infrastructure reform have been almost entirely distributional. The losers have been household consumers of infrastructure services and workers in infrastructure industries. The winners have been senior managers and capital owners in the infrastructure sector and business consumers of infrastructure services. Presumably, businesses have passed on some of the savings to their consumers. And, in the case of publicly owned infrastructure services, households benefit in their capacity as members of the public.

Overall, though, it’s not surprising that there has been little enthusiasm from Australian households for another round of reform. The last round produced plenty of pain, and not much in the way of gain.
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I spent a good deal of my academic time in the 1990s arguing with the Industry Commission (now the Productivity Commission) about their estimates of the benefits of microeconomic reform and, in particular the ‘Hilmer reforms’, enshrined in National Competition Policy. My main target was their estimate that NCP would raise Australia’s national income by 5.5 per cent relative to the level that would be obtained without reforms. I suggested that the likely benefits were less than 1 per cent.

In their latest report, available as a PDF download, the PC splits the difference, claiming a net benefit of 2.5 per cent. Reading a bit more closely, the ground they’ve conceded is even greater. The PC estimates cover not only NCP but the entire program of microeconomic reform including tariff reform, financial deregulation, labour market reform and so on. And, whereas the earlier estimates were for a five-year time frame, with more to come in future, the PC implicitly concedes that Australia’s productivity growth, after rising substantially between 1993-4 and 1998-9 fell back to the historical average rate, or below, from 2000 on.

One point on which the PC is holding its ground is that of work intensity. I’ve argued consistently that the upsurge in measured productivity in the middle and late 1990s was due, at least in part, to increases in the pace and intensity of work. They say

Further, contrary to the contention of some commentators (see, for example, Quiggin 2001), greater work intensity — manifest in longer working hours and an increased pace of work — does not provide a credible explanation for the sustained improvement in Australia’s productivity performance. The impacts of changes in hours worked are explicitly accounted for in measures of productivity growth. And claims that the productivity improvement would be temporary because of an unsustainable pace of work are inconsistent with the extended period of strong productivity growth that has been observed in Australia.

This argument fails because the supporting premise “an extended period of strong productivity growth” is false. As I’ve already observed, above-average productivity growth ceased after 1998-99. This is exactly consistent with a once-off increase in work intensity.

There’s some fancy footwork going on with levels and rates of change here. I’ve asserted that productivity growth based on increased work intensity is unsustainable in the sense that while you can increase work intensity for a few years, the process has to come to a halt. If the higher levels of intensity are maintained, productivity growth will return to its previous rate, but the increase in productivity level will be maintained. A stronger notion of ‘unsustainable’ is that the increase in effort will be reversed, and productivity growth will be below-average until the temporary increase in levels is lost. There is some evidence of a reduction in work intensity over the past few years, but it’s clear that much of the increase in the 1990s has been sustained.

What’s left in the case for microeconomic reform is not the productivity gains that were originally[1] promoted but the proposition that microeconomic reform has contributed to our good macroeconomic performance over the past fifteen years. There are a lot of problems with this claim. Most obviously, we were well into the micro reform push when the 1989-90 recession began. More importantly, our current strong performance seems heavily dependent on low interest rates, and it’s hard to see how these can be sustained with a large trade deficit and an expanding current account deficit. Still, this is one area where I’ve been overly pessimistic in the past, and we’ll just have to wait and see whether we can get back on to a sustainable trade path without a recession or serious slowdown.

fn1. Actually, this isn’t quite right. In the early 1980s, microeconomic reform was promoted on macroeconomic grounds, as providing the increased flexibility that would permit a sustained macro expansion without running into export bottlenecks and current account deficits (at that time, assumed to be unsustainable). These claims were abandoned after the 1989-90 recession and attention focused on productivity growth.

One interesting piece of information in the education debate surfaced yesterday. This was a study of disadvantaged kids undertaken by ACER for the Smith Family, which found that, on average, they underestimated the level of education required for the jobs they hoped to get and, correspondingly, planned to finish education too early. This was true both for boys (who mostly wanted trade jobs) and for girls (who were hoping for professional jobs). You can get the whole study here (PDF).

On the whole, this does not look good for Howard’s suggestion that leaving school at year 10 is a sensible idea. Of course, there are exceptions. If you have a job lined up, with a skilled trade apprenticeship and TAFE entry, this makes sense. But in this rare case, you probably don’t need the PM’s advice. The actual labour market experience, and educational attainment, of people who leave school in Year 10 is, in general, far less favorable than this.

Conversely, if the idea that parents are too concerned with encouraging their kids to go university had any basis, it would presumably be reflected in a decline in the wage premium for university graduates. No such premium decline was observed during the 1990s, despite the huge expansion in graduate numbers. Now that the number of domestic students has been held fixed for nearly a decade, it is likely that the premium is rising.

While Crooked Timber is out of action, I thought I’d tour the sites of those Timberites who maintain individual blogs in addition to posting on CT. There’s a lot of overlap with CT, and too much to describe everything so I just thought I’d give you a sample:

* Eszter has a Flickr album of Chicagoland. I need to look into this.

* Kieran has a review column, including one of The Money Game by ‘Adam Smith’. I got this as a school prize when it first came out way back when, and was really impressed. It played quite a big part in steering me towards economics.

* Over at John and Belle’s they’re debating the hardy perennial: was Communism as bad as Nazism ? I had a go at this a while back. Also, Belle puts in a bid for the Nobel Peace Prize

* Brian is going to a philosophy conference where the usual questions of existence, meaning and so on will be complicated by a union boycott of the main venue

* Daniel is threatening a Welsh-triumphalist post about the Six Nations when we get back on air, but hasn’t gone so far as to reanimate his blog for the purpose.

For the rest of the team, you’ll just have to wait until our hosting negotiations are concluded.

Former blogger James Morrow is setting up a magazine called Investigate. As long-time residents of Ozplogistan will recall, Morrow is fairly firmly on the political right, but he was kind enough to invite me to contribute a dissenting column for the opening issue (and maybe a regular feature). Due to email foulups, the piece I sent him didn’t get through, and it will be thoroughly obsolete by the next issue, so I just thought I’d put it up on the blog for anyone interested – some of it has already appeared in blog post form, but I thought I wrapped it up into a pretty good rant.
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The argument about Voluntary Student Unionism is interestingly summed up by a letter in today’s Age, supporting the government. The writer, an employer, asks us to imagine the outrage that would arise if he told his employees that they had to pay $500 in return for a range of the kinds of services typically provided by student unions.
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Reader Hans van Leeuwen wrote to ask about the Negative Income Tax which is one of those concepts that always seems to be discussed in favorable terms but never makes it on to the policy agenda. The basic idea, due to (or at least put forward by) Milton Friedman is that the tax system should consist of a flat grant and tax levied at a proportional rate on all incomes. The ‘negative’ part comes from the fact that people on low incomes would get money from the government and would therefore pay negative tax.

I’m sympathetic to the general concept, but I think it’s necessary to take the whole tax-welfare system into account. The implied objective then is to make positive transfers to low-income individuals and families while giving everyone roughly the same effective marginal rate of taxation. From this perspective, as the OECD noted the other week, the big problem is high effective marginal rates of taxation for low-income and middle-income families.

This is a difficult problem because, in general, I would like to make the grant component large for families with children (a view shared by government). It’s difficult to do this, apply a common marginal rate and hold the cost to revenue of the initial grant down to an affordable level.

There’s another way in which Howard’s comments suggesting kids should drop out at Year 10 are out of touch with reality. The implied background is one in which parents (and social pressure in general) are increasingly pushing kids to finish year 12 and go on to University. In reality, Australia’s school completion rate[1] peaked in 1992 and the number of new Australian undergraduate enrolments in universities has barely changed since the Howard government was elected. The suggestion that we need even more dropouts is simply bizarre.

In most developed countries, including European countries that do a much better job on technical education than we do, universal high-school completion is either a central policy goal or an established reality. It’s true, as many have pointed out that this implies a need for schools to adopt a broader approach to what is offered in Years 11 and 12, with more technically-oriented courses, and less exclusive focus on traditional preparation for university. Oddly enough, however, most recent criticism of the school curriculum has focused on the fact that they aren’t teaching enough Shakespeare.

fn1. This measure isn’t perfect and the 1992 peak is probably overstated. But the general pattern is clear enough.