I’m still working through the backlog that built up while I finished my book manuscript. In the process, I forgot to post my Fin column from Thursday 25 March, which points out that we will, sooner or later, need more tax revenue. Here it is
Category: Economics – General
How many Australians ?
I’ve been meaning, for a while, to write a post about Australia’s population, and the announcement that a new position of Minister for Population has been created is a good place to start. It takes some of the edge off what would have been my first complaint, namely that policy decisions implying a large increase in population have been taken without any real public debate. This has been a bipartisan process, driven by increases in net overseas migration which took off under Howard (reaching about 200 000 a year) and have continued under Rudd (reaching nearly 300 000).
However, the figures are distorted by the increase in numbers of overseas students arriving here. According to demographer Peter MacDonald, the long-run intake is around 180 000, and hasn’t changed nearly as much as the net arrivals figure would suggest. However, a substantial number of overseas students are seeking permanent residence from the outset. Gaming the system in this respect had become a more or less overt racket, until recent policy changes, and it remains to be seen if these policy changes are effective. Leaving aside such manipulation, a significant number of people who arrive here as students are likely to seek to remain in Australia for one reason or another, for example because they meet and marry an Australian resident, or simply because they make lots of friends and like the place.
The consensus has broken down, now that the Opposition is promising a cut in migration and doing a little rewriting of history in the process, as with Senator Scott Morrison’s disingenuous reference to an average intake of 125 000 under the Coalition, an average that conceals a rising trend.
For practical purposes, population policy in Australia means immigration policy (as Madonna King points out here, the fact that Tony Burke is combining the population portfolio with agriculture, fisheries and forestry, rather than with immigration, makes very little sense). Unfortunately, there are few issues surrounded by more misconceptions, on both sides, than immigration.
A bit more on solar PV
I wanted to develop a few more points on solar PV. Like quite a few commenters, I think subsidies for rooftop solar PV installations are not a first-best policy option, and probably not even second-best. But the fact remains that a relatively modest subsidy is enough to make this a reasonably attractive choice (in comments to the previous post, Uncle Milton describes it as ‘marginal’, which is about right – at the margin, there’s just enough to make it an appealing option for suitably located households).
It doesn’t look so good as public policy. Assuming 6 KWh/day, the energy saving is around 2MWh/year, which, if it displaced brown coal would save about 2.5 tonnes/year. If the public subsidy is $5000, and the real annual interest rate faced by the government is 4 per cent, that’s about $100/tonne.
There are certainly better options than trying to achieve a large proportion of our emissions reduction goals through an approach like this. But lets suppose that the kind of political noise being made by Tony Abbott and others forces us into a high-cost winner-picking approach. Now suppose we decide to reduce emissions by 500 million tonnes a year (about 90 per cent of existing emissions), using approaches that are, on average as efficient as residential rooftop PV, that is, at an average cost of $100/tonne. The cost would be $50 billion a year or about 4 per cent of GDP, that is, about 2 years worth of annual growth in income per person.
In other words, even using highly inefficient approaches, the cost of climate stabilization would be marginal in comparison to the ordinary fluctuations in GDP associated with the business cycle, let alone the variations in personal income (IIRC, the coefficient of variation is more than 20 per cent).
This is a point that seems to be resisted vigorously both by advocates of ‘business as usual’, and by lots of people who think that the existing order of things is doomed by virtue of necessary increases in the cost of energy. The arithmetic above shows that this can’t be true[1], but I doubt that I will convince to many people of that.
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Going solar
The Rudd government’s ventures in subsidising energy-saving measures such as home insulation haven’t exactly covered it in glory. It’s not alone in this respect. The Howard government had similar problems, and Spain had a huge boom and bust in solar photovoltaics. The common feature in all of these cases was that the schemes got into difficulty because take-up was much more enthusiastic than was expected. This in turn reflects the fact that the economics of these measures, particularly solar PV, are improving fast.
I recently got solar PV installed on my roof, and the deal (available from Origin here), though not the cheapest on the market, was very attractive. A modest upfront payment, and monthly payments that are substantially offset by the cost savings, especially when the system is exporting back to the grid and attracting the feed-in tariff. And it is just so cool to open the meter box and watch the wheel turning backwards and the numbers going down.
What’s wrong with Austrian Economics
In my email today I got an invitation to a conference on Austrian Economics in the 21st century, to be held in Argentina. Details here for those interested. What struck me was the list of topics, namely
– Economics
– Epistemology
– Methodoly (sic)
– Political Philosophy
– Readings on the Austrian School of Economics
That is, 80 per cent of the conference is to be devoted to meta-economic issues of one kind or another, and only 20 per cent to the entire field of economics (much of which will probably also be taken up with meta-discussion). A focus on meta-issues is a characteristic problem for heterodox schools of all kinds, but Austrian economics takes it to an absurd extreme. At some point, surely, they need to stop worrying about methodology and history of thought and start actually doing some economics.
Leaving aside the obvious silliness of worrying about epistemology in the context of a massive financial crisis, there’s the irony of holding the conference in Argentina, something of a poster child for failed free-market policies (admittedly, before that it was a poster child for failed protectionist policies). Surely the conference could manage a theme on what went wrong in Argentina and how Austrians would do things better next time.
Greece: Haven’t we seen this movie before
My piece in today’s Fin compares Greece with some Australian states who also play games to conceal debt. The emerging news (also in today’s NY Times) is that the same banks who facilitate the dodgy debt deals established a CDS market for Greek sovereign debt and some have large short positions (translated from marketspeak: they are betting that the deals they set up will go bad and Greece will default). This can of course be defended as insurance, but it obviously changes your relationship with your bank or financial advisor if they can steer you into a deal and then bet on its failure. The potential for moral hazard in the CDS market has yet to be fully explored, but I think we will get to find out the hard way before too long.
Central banks could learn more from experience
My column from last week’s Fin, over the fold
My response to Monckton’s conspiracy theory
As we’ve been discussing, my invitation to debate Lord Monckton was withdrawn before I could make a decision on it. But, for those interested, my column in yesterday’s Fin presents my thoughts on Monckton’s key claim: that the scientific literature on climate change is a gigantic fraud, cooked up in the service of a conspiracy to inaugurate a communist world government at Copenhagen.
Nuclear power and Australia
There’s been a bit of discussion about nuclear power lately, but it tends very much to the abstract. I thought I would look into the question of when, if ever, nuclear power might be a reasonable option for Australia to consider, and how we should go about it.
An obvious starting point is the Switkowski report commissioned by the Howard government, which I’ve uploaded here. There are three main points which allow me to provide an answer to the question, at least for the next decade or so.
(i) In the absence of a substantial carbon price nuclear power is not competitive with coal
(ii) First-of-a-kind (FOAK) nuclear plants are likely to be very expensive (above $80/MWh), not competitive with wind or gas (even with CCS)
The estimate is that ‘settled down’ long run costs could be $40-$65/ MWh, which is competitive with wind and cheaper (for the moment) than other renewables.
Let’s take “settled down” to refer to a design with at least 5 examples completed and operating in developed countries, at least some of them built on greenfield sites (that is, not next to existing nuclear power plants which already have a lot of the necessary infrastructure). It seems clear that these minimal conditions can’t be met before 2025 at the earliest. The US, which has been attempting for a decade to restart its nuclear industries is still at the pilot stage, exploring a number of technologies, and offering to subsidise the construction of three plant designs for each major option. Most of the proposals are on existing sites, only six have reached the point of a plant actually being ordered, and none is anywhere near starting construction. Given a sharp acceleration in progress, the emergence of a highly successful design and a lot of new orders towards the end of this decade, the 2025 date might just be reached.
That suggests that Australia should forget about nuclear power entirely for at least the next five years. If things are going well for nuclear, and not so well for renewables, that would be the time to start setting up regulatory structures, looking for sites and so on.
Column and bookplug
My column from Thursday’s Fin, with a not so subtle plug for my book.
John Quiggin 