The big yellow grader, one last time

John Quiggin29 Comments

Adani is getting on with the job of building its Carmichael coal mine as opponents prepare for a renewed campaign of protests.

That’s the lead in this SMH story about the Carmichael mine. But the picture released is the same yellow grader that’s been there for months.

This is a puzzle. On the one hand, Adani’s pronouncements exude confidence that the mine will be shipping coal within a couple of years. That was reinforced in a recent interview with Gautam Adani himself.

On the other hand, the company is showing no signs of urgency about getting to work. They’ve advertised only four jobs on their portal this month, after cutting lots of staff last year. And there’s been no announcement regarding contractors, consulting engineers and so forth, even though all their previous partners have either been sacked or walked away.

Given the subsidies Adani has recieved in India, the project might just be financially viable. But if so, why isn’t the corporation rushing to get it done while the political stars are aligned.

Adani again

John Quiggin25 Comments

In pointing out that Adani’s Carmichael mine wasn’t viable without government help, I focused on the possibility of a concessional loan from Australia’s Export Finance Insurance Corporation. As commenters have pointed out, Adani (a prominent crony of Indian PM Modi) looks like being able to charge above-market prices for electricity in India. I’m not clear whether this helps much to make the Carmichael project viable. Over the fold, an exchange I had with Charles Worringham.

In other news, it seems likely that Adani will move fairly slowly even after the environmental clearances come through. They’ve announced on their Facebook page that they are filling “more than 50” positions for pre-project work, and there are a dozen or so HQ jobs listed on their jobs portal. That’s a long way short of their announcements in January that they were ready to start digging the moment they got the go-ahead.

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Can globalization be reversed (wonkish)

John Quiggin22 Comments

The term “globalization” came into widespread use in the 1990s, about the same time as Fukuyama’s End of History. As that timing suggests, globalization was presented as an unstoppable force, which would break down borders of all kinds allowing goods, ideas, people and especially capital to move freely around the world. The main focus was on financial markets, and the assumption was that only market liberal institutions would survive.

The first explicit reaction against globalization to gain popular attention in the developed world[1] was the Battle of Seattle in 1999, but the process, and the neoliberal ideology on which it rested, didn’t face any serious challenge until the Global Financial Crisis of 2008. The Crisis destroyed Neoliberalism as a political project with positive appeal, but its institutions have remained in place through inertia.

Now, however, globalization is finally facing serious threats, most immediately from the nationalist[1] right, seeking to restrict movement of people and goods across national borders. There hasn’t yet been any serious challenge to financial globalization, but faith in the wisdom and beneficence of financial markets has disappeared.

An obvious question here is: can globalization be reversed? My short answer is: within current political limits globalization can be reversed least partially in the case of trade, but can only be slowed in the case of movements of people. I’m still thinking about financial flows.

Starting with trade, the reaction to Trump’s various trade wars has shown that the 21st century system of world trade based on complex supply chains involving many different countries is quite fragile. An across-the-board tariff rate of 10 per cent, the level that prevailed in 1960, would render supply chains with multiple border crossings uneconomic. The more likely pattern, again as illustrated by Trump, would involve a lot of unpredictable variation.

If Trump’s tariffs are maintained, and met with retaliation, the obvious response will be to return to the simplified supply chains of the 20th century. Manufactured goods would be produced in a single jurisdiction (maybe using imported raw materials, which are rarely subject to tariffs) either for domestic consumption or for export as finished products.

Moderate tariffs won’t, however, be enough to produce substantial import replacement of the kind needed to make (for example) American manufacturing great again. The force of comparative advantage is too strong for that. A return to something like Smoot-Hawley tariff scales (up to 60 per cent) would be needed. This seems to be outside the limits of what could happen political, given the increase in consumer prices that would result. However, any judgement about political limits has to be taken with a grain of salt these days.

What should we think about the costs and benefits of such a transition? Breaking down complex supply chains involves some obvious losses in efficiency. It’s hard to estimate how large they are on a continuing basis, but there would certainly be some big economic losses in the transition.

The current system enables US companies to hire subcontractors with exploitative labor practices, they can, as Naomi Klein pointed out in No Logo, be put under pressure to fix things. If most production was undertaken by firms in poor countries, there would be less of an opportunity for such pressure.

Complex supply chains also facilitate tax evasion through transfer pricing. However, this problem is due at least as much to the operations of the financial system as to the organization of physical production.

A lot depends on the specifics of tariff structures. Trump’s moves so far have been largely random, and the responses have been targeted at causing political pain for Trump rather than as part of a coherent strategy. In these circumstances, the reversal of globalization in trade is likely to cause more harm than good.

fn1. Nationalism in this context means something like “dominant identity nationalism” where dominant identity is a placeholder for those considered to be “real” members of the nation concerned,for example, white Christians in the US case. I plan to write more on this, but may not get around to it for a while.

fn1. A commenter at Crooked Timber points out that the Zapatista rebellion in Mexico (1994) was prompted by the signing of NAFTA

Keynes and Versailles, 100 years on

John Quiggin4 Comments

The 100th anniversary of the Treaty of Versailles is coming back. I have a piece in The National Interest which ran under the headline (selected by the subeditor, as is usual), America Needs to Reexamine Its Wartime Relationships. Keynes first came to public attention with his critique of the Versailles Settlement, The Economic Consequences of the Peace, whith foreshadowed, in important respects, The General Theory of Employment, Interest and Money.

I argue that the rise, fall and rise again of the standing of Keynesian macroeconomics runs in parallel with views on the justifiability of the terms imposed at Versailles and more generally of the use of war as a policy instrument.

Explaining Adani: why would a billionaire persist with a mine that will probably lose money?

John Quiggin32 Comments

That’s the title of my latest piece in The Conversation, republished on the ABC website. Possible answers

So what could be going on? Perhaps Gautam Adani is willing to lose a large share of his wealth simply to show he can’t be pushed around. Alternatively, as on numerous previous occasions, his promises of an imminent start to work may prove to be baseless.
The third, and most worrying, possibility is that the political pressure to deliver the promised Adani jobs will lead to a large infusion of public money, all of which will be lost.
The $900 million Adani sought from the Northern Australia Infrastructure Facility in 2017 would be enough to keep the project going for a couple of years, without the need for Mr Adani to risk his own money. It now appears that a similar sum might be sought from the Export Finance and Insurance Corporation.

Economics in Two Lessons: 21st century cars

John Quiggin74 Comments

My central claim, in writing Economics in Two Lessons, is that most economic policy issues can be understood in terms of opportunity costs and their relationship to prices. I was talking about 21st century (electric and self-driving) cars, and several of the issues that came up illustrated this point very neatly. Among the objections to 21st century cars are the following

  • Since 21st century cars don’t use petrol, governments will lose the revenue needed to fund the road network
  • Self-driving cars will cruise around cities to avoid paying for parking, thereby increasing congestion
  • Because of the limits of AI, self-driving cars will inevitably kill people

The answer to the first two questions is the same. These problems arise because prices don’t reflect opportunity costs. Opportunity costs arise from cars using the road network, reducing access to others, and from the initial construction of the network, consuming land and resources that could be used for other purposes.

Under current conditions, petrol consumption provides a rough proxy for general road use, while parking charges provide a rough proxy for road use in urban areas, shopping precincts and so on. That relationship breaks down with 21st century cars.

But, this is a self-resolving problem. The reason we used petrol taxes and parking charges was because charging for road use was too hard. With 21st century cars, it’s trivially easy. We can set prices exactly equal to opportunity costs, taking account of time-varying congestion and any other factors we want to.

The dangers of 21st century cars can also be understood in terms of opportunity costs. The question isn’t whether they are perfectly safe, but whether they are safer than the next best alternative – the current mix of human drivers, including the large proportion of incompetents, drunk and drugged drivers.

A side issue that has just occurred to me: is it possible to steal a self-driving car with no manual override? It seems a bit like stealing a train.

Obviously

John Quiggin16 Comments

Yesterday I did an interview about the Queensland government’s plans for an infrastructure fund, to which coal companies have been invite to contribute in return for a promise not to increase royalties. I’d prepared on the assumption that the announcement would be about royalties, so I had to do it all on the fly. I thought I’d done OK, and substantively I had, but when I read my comments reported on the ABC, I realised I’d put an “obviously” or “clearly” in just about every sentence.

I didn’t even realise I had this tic. If I’d had the chance to edit it I would have deleted it (I find myself wanting to add “of course”, which I would then also have deleted). I should probably listen to myself on radio to pick up errors like this.

Hits and misses

John Quiggin14 Comments

Looking back at past posts, it’s enjoyable to find those where I went out on a limb and have been proved right by events, or at least supported by subsequent evidence. A couple of examples

It’s less fun when things don’t go as expected. Take Bitcoin as an example. Its uselessness is now even clearer than it was when I started writing about it 2013. Use in legitimate market transactions is almost non-existent, while the darknet illegal markets in which it is the preferred currency are being busted so frequently as to suggest that anyone using them is taking a big risk of losing their money, or worse. Meanwhile, the dream that Bitcoin would justify itself through the magic of blockchain has evaporated. As far as I can tell, cryptocurrencies on the Bitcoin model are the only genuine examples of blockchain technology in actual use (the label has been attached to some other projects for marketing purposes.

I’ve always said that, given the irrationality of markets, no one can predict when Bitcoin will reach its true value of zero, and I was careful to maintain this position when I posted on Bitcoin’s decline below $4000 late last year. Still, I have to admit that I expected this mania finally to come to an end. That hasn’t happened; in fact the price has doubled.

I won’t worry too much about the occasional (or not so occasional) error. My track record is still far better than that of the many pundits who predicted success for the Iraq war and continued claiming imminent victory years after the disaster had become evident. And most of them are still in business, apparently just as credible as ever to their audiences.

Australia isn’t doing its part for the global climate …

John Quiggin35 Comments

… Sooner or later we’ll have to pay our share. That’s the headline for my latest piece in The Guardian. The more important message is in the “standfirst” text that runs before the article proper.

The cost of responding to climate change is trivial compared with the benefits

To spell this out, here are the concluding paras of the article

The good news is that the cost of an emergency response, while large compared with an efficient policy, will be very small in relation to an economy with an annual output, by 2030, of $2tn a year or more. To see this, we can turn to the estimates prepared for the government’s election campaign by Brian Fisher of BAEconomics.

These worst-case numbers, higher than the costs of the most radical emergency measures, amount to around $50bn a year, or 2.5% to 3% of national income. That’s a lot of money – like adding a new program on the scale of the NBN or the submarine contract every year for five to 10 years.

At the same time, it’s small enough that it would barely be noticed against the background of the general fluctuations in the economy. The average household has lost far more from the wage stagnation of the last decade. As far as the government budget is concerned, the likely impact is comparable to that of increasing health expenditures arising from our increased life expectancy and the development of new treatments.

More importantly, the cost of an emergency response to climate change is trivial compared with the benefits of stabilising the global climate at a level that is livable for humans and the natural environment. We are currently shirking our contribution to this global public good, and free riding on the efforts of others. But sooner or later we will have to pay our share.