How much will it cost to deal with climate change? Not much at all

John Quiggin24 Comments

That’s the headline for my latest piece in Inside Story, along with the short version of my answer. The long answer is that, even with dubious modelling choices and extreme parameter assumptions, Brian Fisher of BAEcon* comes up with estimates of about 2 per cent of GDP, trivial compared to the potential cost.

So, he uses the same presentational trick he’s been using since the first ABARE modelling exercise back in 1996, turning an annual flow into a present value over ten years to make it look bigger.

The truth is that the economic impact of reducing emissions by 45 per cent relative to 2005 levels by 2030 will be so small as to be lost in the noise of statistical revisions and exchange rate effects. By contrast, the costs of doing nothing about climate change are already visible and are only going to get bigger.

Considered in terms of opportunity cost, action to mitigate climate change is a no-brainer, which is why so much intellectual and rhetorical energy has to be used to mount any kind of case against such action.

  • BAEcon is a play on the title of the Bureau of Agricultural Economics, precursor of the Australian Bureau of Agricultural Resource Economics (ABARE) where Brian was Director and I was Chief Research Economist in the 1980s and 1990s. It’s now ABARES having absorbed the Bureau of Rural Sciences.

A half-decent election campaign ?

John Quiggin15 Comments

The first half of the 2019 election campaign was the worst I’ve ever seen, especially relative to the possibility for real debate. Both sides ran continuous attack ads focusing on the opposing leader, playing into the gladiatorial model favoured by the Press Gallery. Labor, in particular, seemed to have forgotten it had any policy offer.

Since Labor’s policy launch, things seem to have improved substantially. The fact that the launch took place at all, rather than being reduced to an end-of-campaign formality (timed to keep public funding flowing as long as possible) was a positive.

After the launch took place, Labor started running two new ads (at least those are the ones I saw), one continuing the attack on Morrison, but the other pushing positive policies and featuring a lot of leading frontbenchers rather than a single leader.

Obviously, the use of a “team” approach, was to some extent a forced move, given Shorten’s lack of popularity, and the switched in message seemed a bit artificial, but it was still an improvement. And, from what I can see, Shorten is doing a lot better in the media now that he is arguing a positive case rather than merely responding to LNP attacks.

The opinion polls have barely moved through the campaign and, taken together, suggest that it will be very hard for the LNP to win a majority, or even a plurality (more than Labor, but not a majority), of seats. The likely outcomes are a narrow Labor majority or a Labor plurality. Given the likely make-up of the crossbench, a plurlaity would almost certainly imply a Labor minority government.

Either outcome would be a good one, particularly in relation to climate policy. As regards Labor’s tax policies, if they can negotiate their way through the Senate, they should be able to do the same with the Reps.

One sentence that says it all

John Quiggin29 Comments

I’ve been generally appalled by the performance of the media in the current election. This article by David Crowe in the Nine/Fairfax papers is the perfect illustration. Asking what is wrong with the current election, Crowe concludes

The fact is that neither leader has inflicted a killer blow against the other.

The idea that an election is a gladiatorial contest between “leaders”, staged for the entertainment of the Press Gallery has never been put more simply and clearly.

The article is entirely in this spirit, referring to a “lack of intensity”, Shorten’s failure to “hammer nails in the coffin” and so on.

The idea that the parties seeking government might have different policies, and that some might be better than others doesn’t even enter Crowe’s thinking. Rather, policies are sources of “messages” which amplify perceived “strengths” or cover up weaknesses.

To be fair, this has been the approach of the parties themselves for most of the past thirty years, running presidential campaigns, while avoiding any policy commitment that might increase their size as a target. That’s what political journalists know how to talk about. But faced with actual policy differences, they are like literature critics trying to review a mathematics article.

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Evidence and conventional wisdom

John Quiggin30 Comments

I’ve been looking over some posts from the bright dawn days of blogging in the early 2000s. One thing that struck me is that some ideas I put forward as unconventional but evidence based, are now fairly widely accepted. In view of the widespread, and justified, concern about a post-truth era, this seems encouraging, and worth investigating. A few examples

  • In this post on equality of opportunity from 2003, I noted that “contrary to popular belief, there is less mobility between income classes in the United States than in European social democracies.” I was drawing on a 1999 book, The Real Worlds of Welfare Capitalism by Goodin, Headey Muffels and Dirven, which I’d reviewed a couple of years previously. In 2009, when I started work on Zombie Economics, I wrote about this again. However, I soon realised I was pushing at an open door. The decline of social mobility in the US had become part of the conventional wisdom.
  • In 2004, some of the first studies of charter schools were coming out, showing that, contrary to the widely-shared expectations of education reformers, they weren’t showing any clear gains in student performance. I wrote about this fairly cautiously, noting that studies of this kind often fail to find any effect. As it turned out, however, the findings were replicated, particularly in the case of for-profit schools. This piece in the Washington Post (which used to be associated in some way with the for-profit testing industry, IIRC) shows how much the tide has turned against charters, and even more against for-profits.
  • Here’s a post on minimum wages, drawing on the work of David Card and Alan Krueger (whose tragic death recently was a big loss to the economics profession). from the early 1990s. By then, the formerly orthodox view that minimum wages had big negative effects on employment was sufficiently out of favour to be revived in Slate (then famous, or notorious, for “contrarian” views that generally tended to support the establishment).
  • Finally, I wrote a couple of mildly snarky pieces about the “Reading Wars” between phonics and whole language. This was one of the relatively rare cases in which the emerging evidence supported the cultural right. It’s pretty hard nowadays to find unequivocal supporters of whole language.

Looking at these examples, there’s a gap of about 10 years between the time the evidence emerged (or at least, emerged prominently enough for me to take notice) and the time the conventional wisdom adjusted. That doesn’t seem too bad. As the great replication crisis has shown, it’s unwise to take too much notice of an individual study on any social science topic.

Unsurprisingly, most of the examples above are cases where the emerging evidence was consistent with my broad political principles (I was never engaged in the Reading Wars, though I mostly lined up against the phonics advocates on other issues). I’d say that’s because most of the evidence we’ve had in the past twenty-five years or so has gone against the beliefs of the political right, who have had to retreat from the triumphalism of the early 1990s. But it’s obviously possible that there is confirmation bias at work. I’d be interested to see suggested examples of evidence shifting the conventional wisdom to the right in this period.

Prematurely right about the global right

John Quiggin11 Comments

I pitched this article about the emergence of a global rightwing movement to the NY Times back in 2015, but the argument wasn’t obvious, and I let it slide. Now I wish I’d tried a little harder to place it.

The proposed nuclear agreement with Iran has seen the Republican party line up with Israeli prime minister Netanhayu to denounce the deal negotiated by the Obama Administration. In itself, this is unsurprising. Bipartisanship in foreign policy, epitomized by the phrase ‘politics stops at the water’s edge’ has been on the wane for years, and is now virtually dead. The GOP celebrated Netanyahu’s recent election victory as a win over the Obama Administration, while the Administration made it clear they would have welcomed the opposite outcome just as warmly.


The alignment between the Republican Party in the US and Netanhayu’s Likud in Israel is an instance of something more significant: a globalization of partisan politics in which political alliances transcend national boundaries. Throughout the English-speaking world, and increasingly beyond it, politics is realigning along the fault line of the US partisan divide.
Until recently, in most Western countries, attitudes to the United States reflected political positions inherited from the Cold War. Conservative parties were strongly supportive of the US government and the US alliance, regardless of whether Republicans or Democrats held office. Those on the radical left were equally strongly opposed to the United States and all its actions, and were indifferent to the nuances of US domestic politics. Centre-left parties contained a wide range of views, and sought to thread a middle path: pro-American but seeking a greater degree of independence.


This position had changed radically by 2007, when conservative Australian Prime Minister John Howard stated that Al Qaeda would welcome an election victory for the Democrats, and for Barack Obama in particular, a remark exploited by the Bush White House. Howard’s conservative successor Tony Abbott followed suit, describing the Obama Administration as ‘the most left-of-center government in at least half a century’ in an interview with the Wall Street Journal.


A similar alignment has emerged between the GOP Conservative Harper government in Canada. The most notable example is the fight over the Keystone XL pipeline, which has become a signature issue both for Harper and for Congressional Republicans.


In the UK, Prime Minister Cameron has maintained the traditional position of a ‘special relationship’ with the US, regardless of partisan alignments. However, the Eurosceptic right, represented by the rapidly growing UK Independence Party and by dissident Tories like former Chancellor of the Exchequer, Nigel Lawson, has formed an alliance with the conservative wing of the GOP. Farage’s attacks on Obama earned him an invitation to the 2015 CPAC conference; the invitation of a foreign politician to such a domestic event is notable in itself.


These attacks on Obama by conservative political leaders are mild compared to those to be found in the conservative media in almost all English-speaking countries. A typical example is a 2010 article by the political editor of the UK Daily Telegraph, Alex Singleton, announcing the end of the ‘special relationship’ between Britain and the US. Singleton announced that since the American people ‘chose to elect an idiot who seems hell bent on insulting their allies’, he would henceforth boycott the United States. His remarks were widely circulated in US conservative circles.


On the left, the same pattern is found in reverse, most notably on the Internet and particularly on social media such as Twitter and YouTube. Reflecting their relatively young and educated audience, these media have a pronounced liberal lean.


In the 20th century era of mass media, the world paid attention to political developments in the United States, but the reverse was not true, except where the issues could be framed in terms of pro-US and anti-US forces. By contrast, the flow of political information in social media goes both ways, and is framed in terms of partisan alignments, with a left-liberal view predominating. For example, video clips of Australian politicians have regularly gone viral in the United States, in recent years. Centre-left politicians, such as former Labor Prime Minister Julia Gillard are nearly always presented favorably, while conservatives like Tony Abbott are targets of derision.


Like other forms of globalization, the rise of global political partisanship is driven in part by technological developments such as the Internet and by the growth of international travel. Equally important, however, is the fact that debates about key political issues such as climate change and equal marriage largely transcend national boundaries. Even on issues of war and peace, traditionally the core business of international politics, the picture is similar. Alliances are now so fluid and temporary that the big divide is not between one side and another, as in the Cold War, but between believers and doubters regarding the use of military power.


For the moment, this globalised partisanship is confined to a politically active minority. Voters in general still think in local or national terms, and are unsympathetic or actively hostile to the idea that foreigners might influence their political choices. But just as with the emergence of polarisation on party lines over recent decades it is quite possible to imagine that this will change.


Voting is largely about choosing candidates who represent “people like me”. Increasingly, this is coming to mean people with similar views and lifestyles, wherever they may live, rather than fellow-citizens on the opposite side of the political and cultural divide. This may be seen from opinion polling showing a sharply rising proportion of political partisans who would be upset if a child married someone of the opposite persuasion. By contrast, only a small proportion of Americans would be upset if a family member married a foreigner.


It remains to be seen how the new era of globalized politics will develop. The partisan divide emerging over Netanyahu clearest instance so far, but it is unlikely to be the last.


http://edition.cnn.com/2007/POLITICS/02/11/obama.comment/index.html?eref=onion
http://www.worldaffairsjournal.org/article/australia%E2%80%99s-next-prime-minister-interview-tony-abbott
http://www.theaustralian.com.au/national-affairs/barack-obama-adding-to-terrorism-crisis-says-john-howard/story-fn59niix-1227064608946.
http://www.huffingtonpost.ca/2014/12/17/canada-washington-republicans-stephen-harper_n_6338868.html

http://dailycaller.com/2014/09/05/ukip-leader-nigel-farage-obama-lowered-americas-standing-in-the-world/

http://www.bloomberg.com/politics/features/2015-03-05/at-cpac-nigel-farage-gets-a-reality-check

http://blogs.telegraph.co.uk/news/alexsingleton/100029555/why-barack-obama-has-made-me-boycott-america/
http://www.nytimes.com/2015/01/28/opinion/how-did-politics-get-so-personal.html
http://www.slate.com/blogs/xx_factor/2014/06/13/pew_report_on_political_polarization_americans_will_accept_a_variety_of.html
https://www.youtube.com/watch?v=mWY_s8yIRfo
http://www.mamamia.com.au/rogue/john-oliver-tony-abbott-video/

My Princeton UP interview on Economics in Two Lessons

John Quiggin20 Comments

You are here: Home / !Post Type / Author Interviews / John Quiggin on Economics in Two Lessons

April 23, 2019

Quiggin_Economics in Two Lessons_S19

Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets. Here, he explains why two-lesson economics means giving up the dogmatism of laissez-faire as well as the reflexive assumption that any economic problem can be solved by government action.

How did you come to write this book?

The idea was to offer a progressive response to Henry Hazlitt’s Economics in One Lesson, a free-market tract that remains in print seventy years after its initial publication. I originally intended it to focus on microeconomic ‘market failures’ like monopoly and air pollution. However, perhaps because the title claimed so much, the project grew to encompass the whole of economics, including macroeconomic issues such as unemployment and the business cycle, and the fundamental question: Who gets what?

What  is the core idea of the book ?

The core idea of the book is the concept of opportunity cost, which I define as follows:

The opportunity cost of anything of value is what you must give up so that you can have it.

Opportunity cost applies at the social level as well.

The social opportunity cost of anything of value is what you and others must give up so that you can have it.

Sometimes but not always, individual and social opportunity cost align as a result of what Adam Smith called the ‘invisible hand’ of the market. The core of economic policy is to determine when social and private opportunity costs differ, and what can be done about it. At least in a qualitative sense, most of the issues in economic policy can be understood with anapplication of opportunity cost reasoning. The technical analysis that forms the basis of most economics courses is only needed if you want to obtain quantitative estimates.

What is the ‘first lesson’ ?

Hazlitt doesn’t spell out his ‘one lesson’ properly, saying only that it is necessary to trace all the economic effects of any act of policy all the way to their conclusions, rather than relying on immediate benefits and surface appearances. This is a restatement of the title of Hazlitt’s main inspiration, Bastiat’s classic nineteenth-century work ‘That which is seen, and unseen’. Hazlitt implicitly assumes that once all the consequences of any act or policy are taken into account, the opportunity costs of government action to change economic outcomes always exceed the benefits.

The central idea underlying the claim made by Bastiat and Hazlitt is that market prices tell us everything we need to know about opportunity costs. This isn’t always true, but the kernel of truth is embodied in Lesson One, as I call it.

Lesson One: Market prices reflect and determine opportunity costs faced by consumers and producers.

The first part of the book shows why Lesson One is so important, and gives applications to a wide range of issues.

So what is Lesson Two ?

Economists have long known that, under conditions of ‘market failure’, market prices may not reflect opportunity costs, and that in these circumstances there is a case for government action to yield improved outcomes. The classic examples include air pollution and other ‘externalities’, monopoly and the exercise of market power, information problems and public goods such as scientific research. This leads directly to my Lesson Two.

Lesson Two: Market prices don’t reflect all the opportunity costs we face as a society.

I originally planned a book in which Lesson Two would have been all about market failure; that book would have been finished much sooner. As I worked on the book, though, I felt dissatisfied. I started to think more about the problems of unemployment and growing inequality, and realised that these were both examples of Lesson Two.

In a recession or depression, markets, and particularly labor markets, don’t properly match supply and demand. This means that prices, and particularly wages reflect or determine opportunity costs.  Looking hard at the data, I concluded that a market economy is in recession, in this sense, as often as not.

As regards the distribution of income and wealth, the market outcome depends on the system of property rights from which it is derived.  The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households. Over recent decades, changes to property rights of all kinds have consistently driven society in the direction of greater inequality.

So, we need Economics in Two Lessons.

Are there really only two lessons, or are there many?

The ‘two lessons’ set out the principles for reasoning about prices and opportunity cost. Any number of implications can be drawn about specific economic issues. Among the lessons drawn in the book are:

* There is such a thing as a free lunch.
* If you want to help poor people, give them money.
* There is no ‘silver lining’ to the destruction caused by war and natural disasters.
* Advertising generally makes us worse off.
* A carbon price would be the best response to climate change (but it’s unlikely to happen any time soon).

There’s plenty more in the book, and plenty more yet to be written.