My post a week or so ago considering (and ultimately rejecting) the hypothesis that the 2004 election might be a good one for the Democrats to lose raised plenty of eyebrows, but the ensuing debate helped to sharpen up my thinking on the underlying issue, that of the unsustainability of current US fiscal policy and the appropriate Democrat response.

In the original post drew the conclusion that the only campaign strategy that would give a Democrat, once elected, any real chance of prevailing over a Republican congress, was that (supported by Dean, Gephardt, Kucinich and Sharpton) of repealing the entire Bush tax cut and starting from scratch. To the extent that primary voters considered this issue, they didn’t see it this way. With the possible exception of Lieberman, Kerry was the candidate most supportive of the tax cuts.

Like Bush, Kerry promises to cut the deficit in half over four years. He proposes to scrap the cuts for those earning more than $200 000, but to expand them for ‘middle-class families’, a group normally taken to include about 95 per cent of the population[1]. When other spending proposals are taken into account, the Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution) estimates that Kerry’s proposals will yield a net increase in the deficit of $165 billion over four years , or $40 billion a year. (Of course, Bush will almost certainly spend more once the unbudgeted costs of higher defense spending and even more tax cuts are factored in). As I show below, this is relative to a baseline of around $550 billion.

I think it’s safe to say this won’t happen. The problem for Kerry, then, is when to discover the deficit. There are three basic options:

fn1. It’s evidence of the startling lopsidedness of the Bush tax cuts, and the explosion of income inequality over the past two decades, that there is, nonetheless, a substantial revenue gain from repealing the cuts for the rich and ultra-rich. About half the benefits of the Bush tax cuts go to those on incomes over $200 000 per year.

UpdateBrad de Long points to Kerry’s appointment of Roger Altman as his budget priorities advise as evidence that Kerry will choose Option 1. Kevin Drum is underwhelmed. He supports Option 2 and expects Opinion 3.
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Before I argue that the Borda voting system is fatally defective, it may be worth considering what kinds of weaknesses could justify such a verdict. We know from Arrow’s Impossibility Theorem that any nontrivial voting system will encourage strategic/insincere voting in some circumstances and will not always elect the right candidate (unless ‘right’ is defined to coincide with the outcome of the voting system in question). So a fatal defect must be a lot worse than this. I claim that the Borda voting system is so vulnerable to strategic manipulation that it would be completely unworkable, provided only that there are no restrictions on candidacy.

Note: I did a Google before writing this and couldn’t find anything similar, but of course, when I checked again after doing the work, I found this almost perfect anticipation of my counter-example. But having done the work, I thought I’d post it anyway.
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I didn’t get around to posting on the recent higher education reforms at the time, but they seem to be working out pretty much as I expected. In particular, the outcome of HECS flexibility is that (nearly) all universities are raising charges across the board by the full 25 per cent allowed under the policy. The explanation is simple. The top universities want the money and all the others need it too desperately to forgo it. Given that there is a lot of unfilled demand, and that the changes to repayment rules have lowered the effective cost to students (particularly those who don’t expect to earn lots of money after uni), there’s no economic reason not to increase charges.

The exceptions to the general pattern are essentially ideological and fall into two classes. First, some universities that oppose the whole idea have refused to increase charges, effectively betting on a change of government before the new charges apply. This group particularly includes those who see themselves as serving relatively low-income communities. If the government is re-elected, though, I expect most of them will raise charges over the next few years and mostly by the full 25 per cent.

Second, some universities that support the changes have made token exceptions, for example by selecting a few ‘socially desirable’ courses and offering free or low-cost entry to those courses. As regards these exceptions, three points are worth noting
1. In every case I’ve seen, the number of places affected is small or negligible
2. The discounts have nothing to do with any notion of responsiveness to student demand
3. This is just a rebranding of the existing practice of offering scholarships to appeal to currently dominant ideology

Looking at the substantive merits of the policy, I’d regard it as a second-best option. The match between HECS contributions and net social cost was pretty good before the increases, so an increase in the government contribution would have been a preferable policy. But since that wasn’t going to happen on an adequate scale, there was no real alternative to higher charges.

This has been just about the perfect Brisbane Saturday night for me. The temperature is a balmy 20 or so, with the gentlest of breezes. We caught the CityCat downriver to Southbank and cheered the Bullets to a one-point win over minor premiers the Sydney Kings, the winning margin coming from a three-point shot on the final buzzer by Ben Walker. The game made no difference to finals placings, but that doesn’t worry me at all. Then back upriver and home. It doesn’t get much better.

The notion that Jews are collectively responsible for the death of Christ may seem too silly for words, but it is obviously still taken seriously enough to require refutation, not surprisingly in view of the immense human suffering it has caused. My question is, has anyone ever suggested that Italians are collectively responsible?

To answer the obvious quibble, the term “Roman” referred, at the time in question, to any (free) inhabitant of Italy (Roman citizenship was extended to the whole of Italy in 89BC), and Pontius Pilate himself was of Samnite rather than specifically Roman origin.

I know from experience that irony is too dangerous for use in blogs. So, at the risk of boring 95 per cent of readers, let me be absolutely clear on my own position. I don’t think anyone now living can properly be blamed or praised for the actions of putative ancestors 2000 years ago. I also don’t believe we have, or are ever likely to obtain, sufficient evidence to attribute responsibility for the death of Jesus to any person or group.

The news that British spies bugged the office of Kofi Annan during the Iraq debate has a number of implications. First, for me, this is the point at which Tony Blair should go. The whole idea of going to the UN for authority to invade Iraq was his, not Bush’s, and now it’s clear that it was corrupt from the beginning. I won’t argue this in detail – no doubt a lot of people already thought he should go, and others still won’t be convinced.

The main point I want to make is that it’s time for Britain to get out of the spy game. More than any other democratic country, Britain is addicted to spies and their natural counterpart, Official Secrets. From Burgess and McLean to the present day, the spies have been a constant cause of embarrassment and worse. On the other hand, there’s no evidence that they’ve ever found out anything that was both useful and sufficiently reliable to act on (in this context, I’m excluding wartime codebreaking, which is always useful since, at a minimum, it disrupts enemy communications).

This isn’t a matter of bad luck, or even incompetence. Standard game-theoretic reasoning shows that, outside the zero-sum case of war, there’s unlikely to be a net benefit from actions like bugging offices. The problem is simple. If I bug your office and you don’t suspect me, I can gain potentially valuable information that you don’t want me to have. But if you suspect me, and I don’t suspect that you suspect, you can use my bugs to mislead me. As with all game theoretic reasoning, you can iterate this as many times as you like, but the end result is that the net value of information derived from bugging is zero. On the other hand, the costs of the activity are substantial. In an environment where bugging is routine, everyone learns to communicate in various forms of code, and decoding is costly and prone to error.

He’s often been dismissed as hopelessly naive, but US Secretary of State Henry Stimson was right when he shut down the State Department’s cryptanalytic office saying “Gentlemen don’t read each other’s mail.”
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If you want to see what’s wrong with copyright and the concept of intellectual property, it’s hard to go past the obstacles being put up by James Joyce’s grandson Stephen to recitations of Ulysses on the 100th anniversary of Bloomsday (June 16 2004) in Dublin. Thanks to the extension of copyright to 70 years beyond the author’s death by the European Union in 1995, Joyce has absolute control over his grandfather’s work until 2011. It’s hard to imagine any moral sense in which Ulysses belongs more to an obstreporous descendant of the author than to the city that inspired it.

The issues are completely obscured by the use of the term ‘intellectual property’ which makes it appear that ideas belong to an owner in the same way that a car or a block of land does. This term, enshrined in mountains of legislation and treaties deserves about the same amount of respect as the contrary slogan ‘information wants to be free’ (if anything less so, since the latter is a half-truth, while the former is a falsehood)

In economic terms, the idea of copyright is to balance the interests of the public in the free dissemination of what is, once it is produced, a naturally public good (and therefore ‘wants to be free’), with the need to encourage authors to create works in the first place. The example of Ulysses shows how far we have got the balance wrong. Does anyone seriously believe that Joyce was motivated, even in the slightest, by the prospect of enriching a grandchild who hadn’t even been born at the time. (Of course, he would have needed extraordinary foresight to predict the successive extensions of copyright that would make this possible).

Even taking a forward-looking view, what kind of benefit do authors today get from the sale of copyrights extending up to a century after their death. For a publisher evaluating commercial investments of this kind, a 10 per cent discount rate would be on the low side, but this would be enough to ensure that royalties received 70 years in the future would be discounted by a factor of 1000. From the social viewpoint, on the other hand, the future costs of restricted access to copyrighted works should be discounted at a much lower rate, perhaps 3 per cent, which would imply that costs incurred 70 years in the future should be discounted by a factor of around 8.

All of this is particularly relevant to Australians, as we are one of the few countries still enjoying the benefits of the ‘life + 50 years’ rule, and have therefore been of particular value to public-domain exercises like the Gutenberg project.. Our government has just signed a so-called Free Trade Agreement with the United States. It does little or nothing to free trade, but a lot to protect monopoly rights, including an extension of copyright to life +70 years. Fortunately this needs legislation, which may be rejected. Given that the Irish have signed away their public domain rights, and we are still clinging to ours, the Bloomsday centenary would be an appropriate occasion for celebrating them.

I’ve received a guest post from Brett McLean which includes reference to a topic that’s been mentioned several times in comments, – the possibility that world oil output has peaked or will shortly do so. I plan to have my say on this before too long.

h3. Brett’s post.

The Treasurer, Peter Costello has repackaged and relaunched his Intergenerational Report in the last few days.   The essence of Costello‚s case is that the demographic changes caused by reducing fertility will have profound economic implications as the baby boomer crest moves into retirement, and in 40 years the proportion of the population over 65 to be double that of today at 25%, thus putting an intolerable burden on Government spending programs in Health and Disability and Pensions.    

Costello‚s discussion paper released on 25th February lists four choices to address this: raise taxes (to over 40% personal income tax); Cut back government spending; Run large deficits; and its preferred option increase the size of the economy through labour force participation.   Hence, Costello‚s plans to modify superannuation rules and create incentives for people to retire later.  

All these treasury projections are built on a series of economic growth assumptions which ultimately boil down to one single assumption. That productivity will grow at around its 30-year average of 1.75 percent per year, and this is where the Treasurer‚s planning could become seriously unstuck, because coming at us potentially in the same timeframe the world may very well start to run out of cheap oil.  

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I was getting badly behind on my website, so I called in some help from our local (UQ Economics) webmaster Craig Mosely. So far he’s eliminated the backlog of newspaper articles, putting up articles from September 2003 to January 2004. Responsibility for the uninspired webpage design is still mine.

Please visit , read the articles and give me comments, either on the substance of the articles or on the organization and layout of the site.

It’s not unusual for a politician, faced with an unfavorable poll result, to say something like “the only poll that counts is the one election day”. And we all know that poll questions can be slanted to give the desired result, and correspondingly dismissed by those who don’t like the pollster’s choice of question. But I can’t recall a previous occasion on which a pollster has dismissed the results of his own polling, particularly when we are talking about a margin of 72 to 9. Yet, if we are to believe the editorial in today’s Oz, that’s exactly what Sol Lebovic of Newspoll did when his polling produced a result unfavorable to his client’s campaing for lower taxes. (thanks to reader Jethro for pointingthis piece out).

As discussed in more detail below, when asked whether they preferred a tax cut or more spending on health and education, the answer was 72 to 9 in favour of more spending. The same poll found 50 per cent of respondents believing that the top marginal rate was too high. In an editorial with the astounding (in view of the data) heading, Cutting income tax is a political winner, the Oz calls this a conundrum and cites Lebovic as saying

voters may be giving the “socially acceptable” answer on what they want the Government to do with the surplus.

The Oz goes on to say

In other words, while their consciences may be uneasy about cutting back the welfare state, their gut instincts are telling them we should be cutting back taxes. Mr Howard and Mr Latham would be well advised to respect the voters’ instincts.

It’s not clear whether Lebovic would accept this gloss, which suggests that his poll results should be discarded whenever they disagree with someone’s gut instincts (note that the claims about the instincts of the voters are baseless – the Oz editorial writer is expressing their own gut instincts and those of the political elite).

Lebovic is of course, correct to say that survey respondents often give socially acceptable, rather than accurate, answers. For example, surveys find that far more households take National Geographic than National Inquirer, but circulation figures tell a different story. Unfortunately for the Oz, it’s not a good basis for a political campaign if the viewpoint expressed is so socially unacceptable that only 9 per cent of people will confess to holding it. Moreover, voting is itself an expressive act. Someone who would secretly like a tax cut but doesn’t want to admit can’t actually secure the tax cut for themselves by voting that way – they only get the cut if a majority agrees with it.

A second problem, which undermines the idea of a ‘conundrum’ is that of the shifting majority. 72 per cent of people favored more health and education spending while 50 per cent said the top rate is too high – the number giving both responses could be as small as 22 per cent.

More importantly, there’s no necessary contradiction here. People might support cuts in income tax but think that health and education spending are more important. They could resolve the implied problem for the budget either by favoring a higher deficit, or by making up the difference somewhere else, for example through a higher rate of GST ( a suggestion raised in the previous comments thread by James Farrell) or lower defence spending.

Finally, it’s worth observing that the gut instincts of the voter have been tested in a number of recent state elections. Kerry Chikarovski went to the voters offering a literal fistful of dollars and was buried under a Labor landslide. Jeff Kennett cut services and was defeated by a Labor Party widely viewed as unelectable.

The Oz is grasping at straws when it claims that the overwhelming rejection of its policy line by respondents to its own poll is some sort of pretence. If I were Sol Lebovic, I’d be asking for more respectful treatment of my results.