What do you do with a problem like Adani ?

John Quiggin22 Comments

Having jumped a number of legal hurdles, Adani is now seeking approvals from the Queensland state government, necessary for the Carmichael coalmine/rail/port project to proceed. This presents the government with a nasty dilemma.

On the one hand, refusing approval would be a PR disaster. Adani, and the government’s opponents, would blame obstructive regulation for the failure of the massive bonanza that has been promised. Adani continues to claim that project will give Queensland $22 billion in royalties and taxes, and up to 10 000 jobs, even though its own expert refuted these claims in court.

On the other hand, everyone (even the International Energy Agency, notably until recently for its stubborn faith in the coal of the future) knows that this project is uneconomic, and unlikely to proceed before 2020, if ever. And while the government has said it won’t subsidise the mine, it appears that it may be forced to spend some money on the Abbot Point upgrade.

So, |irony alert on| I have a simple suggestion to resolve the government’s problem. Just ask for a downpayment of, say, 5 per cent of the promised benefits ($1.1 billion). In the unlikely event that Adani pays up, this will be money for jam. If, as is virtually certain, the money isn’t forthcoming, the government can rightly claim to have protected the interests of the Queensland public.|irony alert off|

Taking the question more seriously, the government should seek evidence from Adani that the project has sufficient finance to proceed before issuing any approval. That will be enough to ensure an indefinite delay.

Bracket creep: How to get the answer you want

John Quiggin18 Comments

NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?

We chose 2013 as the starting year because this is when the last change to tax thresholds occurred

Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes

This shows the importance of the starting year.

There’s no need to check the CIS numbers: given the setup, only one answer is possible.

Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.

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Public funding for phlogiston ?

John Quiggin106 Comments

According to the Oz, Queensland LNP Senator Matt Canavan has called for public funding for research promoting his belief that scientists since Arrhenius have been wrong about climate change. He makes this claim on the basis that the overwhelming body of evidence amassed by mainstream science means that “only one side of the debate is heard” (there’s also something about witches). Oddly enough, Canavan goes on to cite some (presumably publicly funded) research on aerosols from the Max Planck Institute which he thinks supports his arguments. The fact that such research gets undertaken and published suggests that there is no problem with the scientific process as regards climate change.

Still, there’s an interesting question here. To what extent should research funding seek to promote research approaches that are regarded by most experts in the relevant field as wrong or discredited?

In fields like economics, the ebb and flow of opinion is such that any temporary appearance of consensus is illusory. When I started studying economics, the dominant Keynesian/market failure school regarded classical economics as a collection of exploded fallacies. Within a decade or so, the position had reversed. Free market microeconomics and New Classical microeconomics became dominant and remained so until the Global Financial Crisis. The position now is best described as confused. Something similar could be said of fields like psychology (another example where plenty of non-specialists have strongly held views)

In the natural sciences, there are a lot more firmly established conclusions, which nonetheless run against the prejudices of many (obviously including Senator Canavan). I don’t see any merit in funding the pet theories and tribal prejudices of politicians. But at the frontiers, there are lots of instances where some particular approach (such as string theory in particle physics) seem to be dominant, at least in part, for sociological reasons. Here it would be desirable to ensure that alternative approaches get a hearing.

Any thoughts?

A quiet word

John Quiggin51 Comments

Apparently, the Director-General of ASIO has been getting in touch, quietly, with a number of government MPs, warning them that their anti-Islamic comments are potentially damaging to national security. They have been complaining about this as an infringement of free speech. Their comments have been made to News Corporation publications (which have published similar comments and could be subject to the same criticism). Julie Bishop has defended ASIO’s actions, but she is in the wrong.

It’s highly unlikely that the MPs in question would have been upset if ASIO had warned off MPs who were seen as being too soft on terrorism. But their hypocrisy doesn’t justify ASIO’s intervention in politics. Both MPs and newspapers are entitled to freedom of speech, and shouldn’t have security officials telling them what to say or not to say.

On the other hand, freedom of speech doesn’t mean freedom from consequences. Having accepted the judgement that government MPs are acting in a manner prejudicial to national security, Turnbull and Bishop can’t sit on their hands. They should be telling the MPs in question to choose between keeping quiet and moving to the cross-benches, where they can say whatever they like without implicating the government.

Won’t anybody think about the sceptics?

John Quiggin50 Comments

Annabel Crabb asks “Who will speak for the sceptics now” and concludes “Watch this space, because it won’t be empty for long”.

In my view, Crabb is relying on two dubious assumptions. The first is that the denialist position adopted under Abbott reflected the “scepticism” of the party base, rather than vice versa. The great majority of “sceptics” are, in fact, credulous believers in what they are told by trusted authority figures, notably including conservative political leaders. Since most LNP voters appear to be happy with the shift to Turnbull, it seems likely that they will adjust their opinions to fit with those of the government. The minority who are seriously unhappy have nowhere else to go.

The second assumption is that any view which is widely held in the general community will inevitably get some political representation. That simply isn’t true. To take a couple of examples, all the evidence I’ve seen suggests strong support (not from the same people, though I’m sure there’s overlap) for the reintroduction of capital punishment and for the renationalisation of the Commonwealth Bank. Those views aren’t represented in the political process and aren’t likely to be.

Coming back to Crabb’s question, if we were going to see a significant backlash against Turnbull on this issue, there would be background leaks from senior ministers, not snarky tweets from insignificant backbenchers. People like Robb, Frydenberg and Dutton, who presumably would prefer the Abbott line, have stayed quiet, as far as I can tell.

The one option for denialists is a minor party run for the Senate. That would create some nasty complications regarding preferences, but wouldn’t really change anything, any more than the election of an LDP senator did last time around.

Climate change and the culture wars

John Quiggin26 Comments

As I’ve argued in a previous post, it seems likely [^1] that the global agreement on reached at COP21 will mark the turning point in efforts to stabilize the global climate. If so, it will mark the defeat of the right in one of the most bitterly contested arenas of their long-running culture war, and also one of the hardest to explain. There’s no obvious reason, apart from tribal hostility to “enviros” why this should have been a culture war battleground at all.[1]

There was, by 1990 or so, a well developed literature on “free market environmentalism” which pushed the idea that environmental problems were the result of inadequate property rights, and that the solution was to create such rights: in this case, tradeable emissions permits. Environmentalists were generally hostile to the idea, preferring direct regulation. Eventually most environmental groups came around to the view that a carbon price was essential to solving the problem. Instead of claiming victory, the right opposed the idea ferociously and effectively, with the result that the policy outcome has included much more intrusive regulation, and much less reliance on markets, than would have been optimal. The oddity of a supposedly market-oriented government in Australia preferring “Direct Action” over price-based policies is by no means unusual.

Has the climate change culture war helped or harmed the right? The harm is obvious enough. The scientific and economic evidence on climate change is so clear cut that mounting a case against it requires a huge amount of willing gullibility (the fact that is labelled “scepticism” is one of the smaller ironies of the story). The result has been a big contribution to the lowering of intellectual standards that allows someone like Donald Trump to become a plausible candidate for the Republican nomination in the US.

The intellectual damage has been particularly severe for libertarians, who have traditionally thought of themselves as the smart, logical types, deriving their policy positions from rigorous deduction. As the case of climate change has shown, you can get any answer you want if you make up your own facts. So, we have the sorry spectacle of self-described libertarians making the kinds of spurious claims, in relation to wind farms, that were once the province of the least credible environmentalists, and demanding the appointment of highly paid government regulators. At the turn of the century, libertarianism had a plausible case to be the way of the future. Now, as far as I can see, it has disappeared from view in the US and survives in Australia only because of the vagaries of the Senate electoral system.

Against that, the struggle to save the planet from dangerous climate change has chewed up a huge amount of energy and effort on the left. Arguably, that has distracted attention from economic issues, and allowed the steady rise of the 1 per cent to go unchallenged. That analysis fits with the widely held view that the culture wars are just a device to keep the rightwing base agitated enough to turn out, losing time after time, but still providing the votes needed to keep pro-rich politicians in office.

[^1]: A Republican win in 2016 would certainly be a major problem. But the momentum is such that it would probably not make much difference. Even if a Republican Administration weakened environmental standards, no one is going to build a new coal-fired power station in the US, knowing that it might have to shut down after the next election.

[^2]: There was, initially, some significant support from fossil fuel interests (notably Exxon) through bodies like the Global Climate Coalition. But that dropped off quite early as most big corporations worked out that they were better off changing their business models to incorporate renewables than fighting to save the old ways of doing things. For at least the last decade, the economic issues have been secondary – it’s all culture war all the time.

Turning the corner

John Quiggin50 Comments

The agreement just announced from the Climate Conference in Paris isn’t by any means, a solution to the problem of avoiding climate change. But, along with other developments over the past year, it signals the fact that the world community has turned the corner on this issue. Barring a catastrophe[^1], the world is now on the path to near-complete decarbonization of the economy by the middle of this century, and to stabilization of the global climate with less than 2 degrees of warming.

The big developments of the past year include:

* An apparent (though small) decline in global CO2 emissions in 2015

* Peak Coal. Not only has global consumption of coal begun to fall, but the pressure to abandon coal, exerted at every stage from the initial financing of mines to the burning of coal in power stations has grown in intensity.

* Continued progress in renewables, notably including the appearance of commercially viable battery storage systems. It’s now obvious that, taking all the costs into account, renewable electricity is cheaper than the fossil fuel alternatives, and capable of completely replacing them.

* The political eclipse of leading denialists, most notably Abbott and Harper, and the disarray of US Republicans on the issue

* Looking at the agreement itself, it’s as ambitious as could reasonably have been hoped. Big points include
– The adoption of 1.5 degrees as a goal towards which efforts will be aimed
– The “ratchet” mechanism of 5 year reviews
– The acceptance that all countries need to act to reduce emissions over time.

Taken together, these developments put the world on a path to steadily more ambitious reductions in greenhouse gas emissions, consistent with stabilization of the global climate at 2 degrees of warming or less.

[^1]: The most obvious possible catastrophe would be a Republican victory in the 2016 US elections. But the momentum for change is such that even four years of unified Republican rule would probably not be enough to stop it.

The economist as Grinch

John Quiggin51 Comments

The Economic Society of Australia has started running a panel in which economists are asked to give their views on policy questions. I wasn’t too happy with the last one, on penalty rates, where I thought the question was ill-posed, and the majority of responses (though by no means all of them) failed to address the basic microeconomics of the issue.

The latest is a more light-hearted one, asking for responses to the proposition

“Giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash.”

Rather than give an opinion, I took the argument to its logical conclusion, as follows

The obvious problem with this claim is that exchanging cash is also inefficient, especially when combined with the generally accepted norm that equals should give presents of equal value. This results in a costly exercise that nets out to zero. Anyone who accepts the stated proposition shoud be in favor of cancelling Xmas and relying on the existing intra-family tax-transfer system

Increasing GST: not worth the effort?

John Quiggin30 Comments

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.