Category: Economics – General

The other shoe

John Quiggin5 Comments

The bailout of the US financial sector through the Troubled Assets Recovery Program (TARP) looks to have been fairly successful on its own terms – the banks have become profitable again and the final estimated loss to the government is relatively small. That doesn’t change the fact that the government took on huge risks for negative returns, without any reason to expect that the future behavior of the banks will change.

But all of that was based on assumptions of an orderly resolution of the mortgage crisis. Those assumptions now look very dubious, as the legal consequences of the practices of the financial sector during the bubble, ranging from sloppiness to outright fraud, manifest themselves.
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A bad omen ?

John Quiggin17 Comments

Apparently the Mont Pelerin Society is meeting in Sydney. The proceedings are apparently unpublished, which is a pity, since I would be interested to see how, if at all, members have adjusted their views in response to the Global Financial Crisis. In the absence of this, we can all think about the maxim “bad things come in threes”.

The last meeting of which I heard anything[1] was in Reykjavik, at which time the MPS was happy to share in the glory of its proteges such as David Oddson. There was also a meeting in Chile in 1981, notable for producing an endorsement of the Pinochet regime from Hayek The Chilean economy ran into a severe crisis shortly thereafter. So, let’s hope that this meeting passes off uneventfully, and without any nasty aftershocks.

fn1. Google suggests there have been plenty of other meetings, but these are the only ones I heard anything about.

Interesting arithmetic

John Quiggin7 Comments

Presumably relying on his Queensland government sources to get their sums right, ABC business reporter Peter Ryan writes

The biggest public share offer in more than a decade is expected to raise more than $5 billion for the Queensland Government … The Government will retain between 25 and 40 per cent of QR and will sell up to 1.68 million shares at between $2.50 and $3.00 a share. Individual investors will pay no more than $2.80 a share.

It’s a good thing all that money will be used to build new schools [1], since some arithmetic lessons are clearly in order. Unless all the shares are sold to institutions at the maximum price, there is no way the revenue can reach $5 billion.

fn1. I’m joking of course. As I and other economists have explained at tiresome length in the past, the sale of income-earning assets cannot, in any meaningful sense, finance social investments like schools and hospitals. The taxes that would (in the absence of asset sales) be required to finance debt for additional investments must be used instead to replace the income lost from the assets that have been sold.

The Guide to the Draft of the Plan to do Something about the Murray

John Quiggin16 Comments

The problems of the Murray Darling Basin have been developing for more than a century. I’ve been working on this issue for 30 years, during which, despite a series of policy initiatives too long to list, the situation in the Basin has got worse in most (not all) respects. So, it’s not surprising that the attempt to provide a comprehensive plan for the future involves a drawn-out process. The big question (which the Risk and Sustainable Management Group at UQ will be addressing in a workshop later this month) is: Have we finally got it right?

My general view is optimistic. If the politics can be negotiated, and if the government is willing to spend around $5 billion on buying back overallocated water rights, we can probably reach a solution that is economically, environmentally and socially sustainable.

The Draft Plan proposes a reduction in water use for irrigation of between 3000 and 4000 Gigalitres (GL). That range reflects two fairly tight constraints. Anything less than 3000 GL won’t achieve environmental sustainability. Anything more would imply unacceptably large impacts on irrigated agriculture.

Here’s the rough arithmetic on the irrigation side, which is broadly consistent with the modelling done by my Group, some of which was used along with research by ABARE in preparing the draft plan. A 30 per cent cut in water use will result in a 15 per cent reduction in the gross value of agricultural output, and a smaller reduction in net returns to farmers.

The big change required to achieve this kind of reduction in water use is a shift from irrigated rice production to dryland agriculture. Since yields on irrigated lands are much higher that will imply a reduction in our total grains output. Still the impact is much smaller than, for example, the effect of the current overvaluation (relative to long-run value) of the Australian dollar.

Importantly, although the changes in the Draft Plan have been referred to as “cuts in allocations” this is incorrect. Although the National Water Initiative proposed cuts where water resources had been over-allocated in the past, the Draft Plan calls for the entire reduction in water use to be treated as a change in government policy, meaning that the Commonwealth will bear the cost. It’s already been made clear that this reduction will be achieved entirely by voluntary buybacks and conservation measures.

While there are some opportunities for conservation, the most cost-effective mechanism in most case is buying back entitlements. Now that the drought has broken, I’d guess the likely price for entitlements will be around $1500/ML suggesting a cost of buyback (or similarly cost-effective conservation) of between $4.5 billion and $6 billion. It’s not clear whether buybacks that have already taken place will be counted towards this. There’s enough money allocated to the National Water Plan/Water for the Future to cover this cost, though most of it is currently earmarked for on-farm works.

The end of the Great War — Crooked Timber

John Quiggin9 Comments

A few days ago, Germany made the final payment on the reparations imposed in the Treaty of Versailles, bringing to an end the formal consequences of the Great War that began in 1914 and continued, in one form or another, throughout the 20th century.[1] Many of the new states that emerged from the war (the USSR, Yugoslavia, Czechoslovakia) have now disappeared, though the consequences of the breakup of the Ottoman Empire and the secret Sykes-Picot Agreement are very much still with us. I don’t really have the basis for a post on this, but I thought this event deserved some kind of acknowledgement anyway.

Over time, the Great War has played a larger and larger role in my thinking about the world. It marked an end to a century of relative peace and to what seemed (at least to the people with whom I’m most in sympathy) like steady progress towards some form of internationalist democratic socialism. From 1914 until 1945 the world spiralled downward into one horror after another: militarism, Nazism and Stalinism, followed by the Hiroshima and Nagasaki bombs and the threat of global annihilation that seemed imminent for much of my lifetime and remains a grave danger.

Despite the emergence of the ever-present nuclear menace, 1945 marked the low point of the 20th century in many ways. At least on the Western side, the peace settlement was far less draconian, and far more successful, than that of 1919. And, for several decades after the end of war, there was fairly steady progress towards a version (scaled-down in important respects, but more ambitious in some others) of those pre-1914 aspirations.

While that progress has stalled, there has, I think, been steady growth of a body of antiwar thinking and feeling that is making it harder, though sadly still not impossible, for governments to mobilise support for war. The horrors of the Great War represent, for me at least, the starting point of such thinking and feeling.

fn1. Hat tip. I saw this in various places, but first as a Facebook update by John Humphries.

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Hayek’s Zombie Idea — Crooked Timber

John Quiggin29 Comments

I’m paying close attention to Amazon rankings just now[1], and it’s striking that both the #1 and #2 spots in “Economics-Theory” are held by FA Hayek’s Road to Serfdom. Whatever your view of Hayek’s work in general, this is truly bizarre, and indicative of the kind of disconnection from reality going on on the political right. On the natural interpretation, shared by everyone in mainstream economics from Samuelson to Stigler, this book, which argued that the policies advocated by the British Labour Party in 1944 would lead to a totalitarian dictatorship, was a piece of misprediction comparable to Glassman and Hassett’s Dow 36000. So what is going on in the minds of the buyers? Are they crazy? Do they actually think that Hayek was proven right after all? Is there a defensible interpretation of Hayek that makes sense?

The answers are “Yes”, “Yes” and “No”. The current sales of Hayek’s book are being driven by Glenn Beck, who claims that Britain is indeed a socialist dictatorship of the kind predicted by Hayek (or was, until the recent election), and that Obama is propelling the US along the Road to Serfdom by making medical care marginally more affordable.

Until the right went completely crazy, the most common claim in support of Hayek was that his predictions had somehow been vindicated by Thatcher’s reaction against the welfare state. Leaving aside the fact that Thatcher’s remodelling of the British economy in the image of the City of London looks a lot less appealing today than it did only a few years ago, this totally misses the point of Hayek’s book. If he had wanted to argue that social democratic policies would reduce the rate of economic growth, and to throw in a bit of hyperbole, he could have called it “The Road to Destitution” or something similar. Hayek wanted to make the much stronger claim that the attempt to implement Labor’s policies would necessarily lead to a loss of personal and political freedom.

The most plausible attempt to extract a defensible claim from The Road to Serfdom is to suggest that it applied to policies of comprehensive and centralised economic planning, which might, on an extreme reading, have been imputed to the Labour Party of 1944. Fortunately, on this account, Labour saw the folly of such ideas and did not attempt to implement them. Even on this charitable account, a book warning against hypothetical policies that might have been, but weren’t, adopted in the early postwar period, and aren’t advocated by anybody nowadays, would be of fairly marginal historical interest. But, as Ed McPhail and Andrew Farrant have shown (I’ve linked to a summary since the article seems to be paywalled) this view can’t really be defended.

Depressingly, most of the rest of the “economic theory Top 20” list, including Wealth of Nations, Free to Choose and the writings of Peter Schiff, suggest that the buyers are the same people buying (if perhaps not reading) Hayek. If people actually read Smith, particularly the Moral Sentiments they might gain something, but these purchases look more like an affirmation of tribal identity than an attempt to learn something.

fn1. Zombie Economics briefly made it into the Economics-theory Top 20, but is now slipping out again.

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Conference like its 1999

John Quiggin19 Comments

A long time ago, I read an article whose author had read through all the leading economics journals from the 1930s. The striking finding was that only a tiny proportion of the articles published in those years concerned the Depression and what to do about it. This struck me as a disastrous state of affairs, and has been one factor in pushing me to comment on the important issues of the day, rather than to a narrow specialisation.

But, having attended the Australian Conference of Economists for the last couple of days, I have to say that a future historian of economic thought will be able to rewrite much the same article about the current crisis. Only a handful of papers presented at the conference have dealt with the crisis, even indirectly, and most of those have concluded that we only need marginal adjustments to our current way of doing things.

The opening plenary session, for example, was on inflation targeting and the main message was that, all things considered, inflation targeting worked pretty well in the Global Financial Crisis. Some tweaks might be needed in the future, but then again they might not. This was the same conclusion as at the Reserve Bank 60th Anniversary meeting earlier this year, and I find it pretty hard to believe.

About the best I can say is that, against this background, my Zombie Economics book stands out.

Universities and stratification

John Quiggin18 Comments

One of the big themes in the debate over university education has been that we should have a more differentiated system, rather than a ‘one-size fits all’ solution. This view is shared by market-oriented reformers and by some traditionalists, who look back nostalgically to the days when each state had one university, catering to a small elite, while the rest went to tech, or teachers college or (for the majority) the school of hard knocks. In the idealised view, universities would compete with diverse offerings, and the informed market choices of consumers (18-year olds and their parents) would produce an ideal outcome.

In reality, the quasi-market policies that have been dominant for the last couple of decades have reduced diversity on all dimensions except one. Before the reforms that began in the 1980s, the tertiary sector included many different types of institutions (unis, CAES, institutes of technology and TAFE), and the 1970-vintage universities consciously sought to provide an innovative alternative to the long-established sandstones. Now, there are just universities and TAFE. Policies encouraging universities to nominate “flagship” programs produced the unsurprising (but apparently unexpected) result that everyone went for MBAs and no-one for pure mathematics. Responsiveness to consumer demand produced plenty of courses in cinema studies and very few in classics. And so on. There are still some attempts at doing things differently, such as the “Melbourne model”, but overall the pattern is one of identical responses to identical incentives.

On the other hand, the reforms have amplified long-standing inequalities in wealth and status between universities. Despite the rhetoric of competition, the relative rankings of Australian universities were determined more than 100 years ago, when the sandstone universities were established, followed by the precursors of the “Dawkins universities”. The reforms did not shake these rankings, but they widened the gap between the sandstones and the 1970-vintage unis – before the reforms, a university was a university, and status differences were much less important.

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‘States rights’ comes to Europe — Crooked Timber

John Quiggin6 Comments

Looking at the Sarkozy government’s attempt at ethnic cleansing of the Roma, The Economist’s Charlemagne had the following observation about

the vociferous protest from the European Parliament. On September 9th it passed a strongly worded resolution denouncing discrimination against the Roma, and singled out the commission for its “late and limited response”. The row thus brings out the contradictions of European democracy: an elected national government finds that its resort to populism is confronted by the European Commission, an appointed body, and by the European Parliament, a distant chamber elected by a minority of voters.

It struck me that you could replace “national” with ” Southern state”, “European Commission” with “US Supreme Court” and “European Parliament” with “US Federal government”, and the analogy with Brown vs Board of Education would be just about perfect (except that it’s the Parliament driving the Commission and not vice versa). Then I noticed that Chris had proposed an almost identical substitution in relation to economic policy here.

This is the first time I can recall the European Parliament playing a key role in a conflict between the central institutions of the EU, such as the Commission and a member state. If the Parliament and Commission prevail, as they should, it seems to me that this will change the effective political structure of the EU, in the direction of a federal democracy. I’d be interested in the thoughts of those closer to the action.

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