I’ve been at the Conference of Economists in Melbourne for the last few days. I econobloggers, Stephen Kirchner and Andrew Leigh[1], as well as Andrew’s co-author Justin Wolfers and lots of old friends and sparring partners. I gave a paper on Learning and Discovery, an attempt with Simon Grant to unravel the knotty problem of unknown unknowns. You can read a more accessible summary here

Olivier Blanchard gave quite an interesting paper on European unemployment, on which I’ll try to comment further. I also found out what’s wrong (and right) with the bootstrap (an econometric technique) and saw an interesting ranking of economics departments, which showed that one of my former homes was ranked #2 in Australia on per capita research output just at the time when it was closed down as part of the reform process.

The Economists’ Voice is one of the more interesting (at least to me) ventures in academic publishing on the Internet. The aim is to provide analysis of economic issues from leading economists, something that has been sorely lacking in recent years[1]. It’s intended to contain deeper analysis than is found on the Op-Ed page of the Wall Street Journal or New York Times, but to be of comparable general interest. Unfortunately, it’s not free but you can get guest access to read particular articles.

Simon Grant and I have an article on the implications of the equity premium, an issue that’s been discussed in various ways on this and other blogs.
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Brad DeLong has a great discussion of the opposing views on the coming dollar crisis.

More soon on this, but my one-sentence take is that the optimists believe that it is possible to generate as much US dollar liquidity as required to prevent a large increase in interest rates (despite a depreciation), without generating domestic inflation in the US. In this, they have recent US history on their side. The pessimists think that, sooner or later, this kind of policy will fail. In this, they have long-term history on their side

My column in today’s Fin (subscription required) has yet more on Telstra, and the general direction of regulation. It’s over the fold
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Professor Bunyip coins a bon mot at my expense, saying in relation to a dispute between Sharon Beder and Leigh Cartwright over the effects of the Reagan tax cuts on revenue that

some of the itchier creatures in John Quiggin’s beard are the intellectual betters by an order of magnitude.

of one participant. Unfortunately, Prof B is not a professor of economics, and he applies the epithet to the wrong party in the dispute[1].
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People are already wondering what effect Hurricane Katrina will have on the US economy. So far, most of the discussion I’ve seen has focused on very simplified Keynesian or GDP-based views of the economy, in which the resources that go into rebuilding New Orleans and the surrounding regions count as a net addition to economic activity.

As far as the national accounts go, this may be right. As the name says, GDP is a gross measure, which means it takes no account of depreciation, including the massive destruction caused by events like hurricanes. Depending on how things like insurance payouts are counted, there could easily be an increase in measured GDP. The main lesson from this is that, if you’re interested in economic welfare, don’t look at GDP.

But I don’t think the old-style Keynesian story, in which a reconstruction effort brings unused resources into use and thereby stimulates more economic activity, is likely to be applicable. I assume any injection of funds will come primarily from the national government, which is already running massive deficits, to the point where its capacity for fiscal stimulus is pretty much exhausted. The impact of any further expenditure will almost certainly offset, in part by cuts to other areas, but even more by tighter monetary policy and upward market pressure on interest rates.

The immediate reaction of oil prices shows how tightly stretched the entire market has become, but I don’t think the effect on supplies will be great enough to have much effect in the medium term (say in six months time). However, that’s just a guess.

The real problem I haven’t seen discussed much so far is what will happen if, as is now predicted, it takes three to six months to pump all the water out of the city of New Orleans. In the absence of well-designed and large-scale intervention, that would imply bankruptcy for the vast majority of private businesses based in the city. This in turn would imply unemployment for many people who might otherwise return, and a whole lot of second-round effects working through supply chains. It’s unclear what kind of economic activity will survive, beyond a tourist market centred on the French Quarter (apparently relatively undamaged).

Even in the best of all possible worlds it would be hard to design a policy response to a disaster of this magnitude and duration. In practice, based on recent past experience, I think we’re likely to see some impressive rhetoric, a lot of gigantic boondoggles as favoured interests cash in on the reconstruction program, but not much effective alleviation of hardship or coherent thinking about sustainable economic recovery.

One of the striking features of industrial relations reform is that as strikes have declined, lockouts have increased. According to a recent ACCIRT study (PDF), most working days lost in long disputes (more than a month) are due to lockouts. The extreme case of the lockout, mass sackings with replacement by new workers on worse conditions is, I think, not covered in these statistics, but is increasingly important[1]. Nothing could give a clearer indication of the inherent bias of the reform process than the resurgence of forms of industrial action that had virtually disappeared for most of the 20th century.

The Gourmet Gate dispute in the UK is a particularly nasty example of the process, and one where international action can make a difference. Gourmet Gate is a subcontractor spun off from British Airways, a company with lots of customers around the world . To support the workers in this dispute, go to Labourstart. There’s more on the dispute from Polly Toynbee, who is pretty pessimistic, but I think underestimates the chance that BA can be shamed into some kind of settlement.

fn1. The classic case was the waterfront dispute, where the new employees were, unsurprisingly left in the lurch when their backers decided to settle with the union.

My column in yesterday’s Fin (over the fold) was about the idea, being argued by The Economist that the low interest rates currently prevailing are the product of monetary expansion rather than a real ‘savings glut’. Today’s Economist puts the point even more bluntly, arguing that capital markets are acting as a barrier to adjustment. It’s certainly striking when a voice of orthodoxy like The Economist reaches the conclusion that financial markets aren’t doing their supposed job.
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Peter Costello has singing economists in his sights. There’s quite a few who need to look out, including Geoff Brennan and me

According the Bureau of Economic Analysis, US household saving was 0.0 per cent of income in June. I was going to boast that we in Australia were doing better, having had negative savings for several years now, but a check over at General Glut’s Globblog informs me that the ABS figure deducts depreciation of privately owned housing (correctly in my view,though others disagree) while the US does not. Both measures omit capital gains, and the validity or otherwise of doing so is central to any assessment of the sustainability of the present economic trajectory.

Regardless of this, the collapse of household saving in the English-speaking countries suggests to me that, with deregulated capital markets, the low real interest rates that have prevailed recently, particularly in the US, are not consistent with any significantly positive savings rate. It follows that such low interest rates can be sustained only so long as someone else is saving: either households without easy access to credit or foreign governments. Business may save some of the time, but low interest rates make borrowing for speculative investment quite attractive I can’t see this lasting too long, and therefore conclude that real interest rates have to rise.