The Laffer hypothesis in Australia

John Quiggin34 Comments

I didn’t have time to respond, but the IPA brought Arthur Laffer out to Australia a month or two ago. For those interested, over the fold is a relevant extract from Zombie Economics.

Of rather more concern is the evidence that both the Secretary of the Treasury, John Fraser, and his Deputy for Revenue, Rob Heferen are adherents of the Laffer hypothesis or something very close to it. Fraser gave evidence to the Senate endorsing the Reagan tax cuts (based on Laffer’s hypothesis), while Heferen has claimed that something like 50 per cent of the revenue lost through a company tax cut will be returned through dynamic effects.

Although no issues are ever truly resolved in economics, this informal survey published by Ezra Klein is revealing. Klein asked various people about the tax rate at which revenue would be maximized. His respondents fell into three groups: left/liberal economists, who mostly gave answers around 70 per cent, rightwing pundits with zero credibility who gave answers around 20 per cent, and serious right/centre-right economists, who declined to give a direct answer to the question.

This suggests to me that the debate over the Laffer hypothesis has been won fairly conclusively by the left, and that those on the right would prefer to frame the question in the more defensible (though still, in my opinion, incorrect) claim that we face a long-run trade-off between equality and growth.

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Economics in Two Lessons

John Quiggin6 Comments

I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets.

Bastiat’s argument is implicitly based on the concept of opportunity cost but, since the term wasn’t coined until 1914, he doesn’t use it. Neither, more surprisingly, does Hazlitt. Once this is made explicit, Hazlitt’s rather ponderous, and misleading statement of his “One Lesson”

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

can be boiled down to the much simpler statement “Market prices reflect opportunity cost”. In important respects, this is true, particularly when we consider the problem from the perspective of choices about how to allocate an individual, family or government budget. With fixed aggregate levels of public expenditure, for example, more money for the military means less for schools, and vice versa.

There are plenty of other questions about private and public decisions for which Hazlitt’s One Lesson is useful. Another example is the well-supported finding that the best way to fight poverty is to give money to poor people. This is unsurprising given that poor people themselves will usually have a much better idea of the opportunity costs they face than will those seeking to help them.

But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”. Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”
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Economic policy for the 21st Century

John Quiggin18 Comments

That was the title for the John Freebairn lecture on public policy I gave in Melbourne on Monday (Sorry for not giving any advance notice, I’ve been a bit swamped). Having offered that ambitious title, I decided to confine myself to the subset of policy issues surrounding the knowledge economy, and how it renders the reform agenda of the 1980s obsolete or irrelevant.

I believe there will be a vodcast, but in the meantime here are Mac Keynote and PDF versions of the slides.

The last gasp of (US) neoliberalism

John Quiggin29 Comments

The defeat of the “trade promotion authority” bill in the US Senate marks a big setback for Obama’s attempts to push the (still secret) Trans-Pacific Partnership agreement through Congress. As always, there’s plenty of manoeuvring to come, and the deal may still get up, but even so, it looks like the last gasp for the neoliberalism, in the US sense of the term.
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Through the looking glass

John Quiggin17 Comments

The New York Times has a piece about Obama’s push to gain “fast-track” authority for the proposed Trans-Pacific Partnership, which would preclude any amendments by Congress after the deal (still secret, except for what Wikileaks has revealed) is announced. The key para, buried a fair way down

To the president, the Trans-Pacific Partnership would counter the economic weight of China and set rules on labor, the environment, intellectual property and investor protections for the growing economies of the Pacific Rim. For members of Congress, it’s about jobs.

shows how differently the debate is playing out in the US compared to other countries involved, such as Australia, and how much leading papers like the New York Times are missing the point

In the Australian debate, it’s generally understood (based on both economic modelling and past experience) that there won’t be much effect on jobs either way, at least not through the direct effects on trade. For the critics (just about everyone on the left), it’s precisely the “rules on labor, the environment, intellectual property and investor protections” that represent the big concerns. All of these rules benefit corporations at the expense of workers, the environment, the free flow of information and national sovereignty. It’s the general strengthening of corporate power, and not the flow of goods, that will harm jobs, wages and working conditions Investor-State Dispute Settlement provisions, for example, have been used to challenge minimum wage laws.

Leading US critics like Elizabeth Warren and the AFL-CIO have raised some of these points, noting (for the benefit of Republicans in particular) that the ISDS provisions will enable unaccountable arbitrators to override US federal and state laws.

The use of trade deals as an instrument of geopolitics is also unwelcome for a country like Australia that needs to balance itself between the US and China. Despite its enthusiastic support for the US and the TPP deal, the conservative government here signed up to join China’s regional infrastructure bank, developed largely in response to China’s exclusion from the TPP.

But US news coverage can’t seem to get out of a frame set by the trade deals of last century, such as NAFTA.

Flogging the dead horse of nuclear power

John Quiggin96 Comments

As I anticipated, my post on Tesla’s new battery provoked some pretty hostile responses, most notably from pro-nuclear diehards. I’ve written plenty on this (use the search facility), so rather than repeat myself I’ll make an observation drawing on the previous post.

Ten years ago, solar PV was a faintly hopeful technologica prospect, making a minuscule contribution to electricity generation. Today, it’s a reality that is creating massive disruption for electricity utilities around the world. As I said in the previous post, the availability of even moderately cost-effective storage removes the last big obstacle (more on the economics soon)

By contrast, ten years ago, nuclear energy was a mature technology which seemed to be at the beginning of a renaissance. Today it’s further away, in almost every respect, than it was in 2005. Construction times have blown out, costs have turned out to be twice as high or more than expected, the operating record (thanks to Fukushima) is far worse, and the various new technologies (SMRs, Gen IV) have receded even further.

None of this means that the replacement of fossil fuels with renewables+storage is going to happen under current policy settings. But such a replacement is now clearly feasible, much faster, more reliably and at much lower cost, than attempting to reboot the failed nuclear renaissance.

Backing the nuclear horse was a reasonable choice in 2005. But it’s dead, and flogging it won’t revive it.

Is Powerwall good for coal and nuclear?

John Quiggin74 Comments

No one seems to have spelt this point out, but there’s an obvious potential for Powerwall to be used in ways that benefit coal, nuclear and geothermal power, as well as renewables like wind and solar. Advocates of these technologies love to cite the fact that they are “baseload” supplies, but this is a misconception. Because they are costly to turn on and off (or even up and down), these technologies produce too much power at times of little demand (late night and early morning).

If owners of home solar systems, connected to grids with an off-peak excess supply, install battery storage on a large scale, it would make sense to run two cycles per day. The systems (most sensibly oriented west) would charge up from solar panels in the early afternoon, and supply power in the evening. Then they would recharge from the grid in the early morning, and supply power to meet the morning peak associated with getting ready for work, school etc.

What’s the net effect of this. First, obviously, it makes storage a more appealing economic choice for householders. Second, although it reduces costs for any kind of electricity that is not fully dispatchable, the benefits are bigger for renewables for two reasons. First, the variability of these sources is greater. Second, pricing systems, at least those in Australia, are already set up to encourage use of off-peak grid power, whereas current feed-in tariffs discourage solar PV.

From our current starting point, effect of adding more systems with a combination of solar PV and storage will be to reduce total demand for coal-fired power (and, where it exists, nuclear power), and to enable more efficient use of existing capital stock. So, it’s likely to discourage new investment in these sources. However, unless we have a carbon price, or other measures in place, it won’t necessarily accelerate the closure of existing coal-fired plants.

Update A note on the economics: Calculations I’ve seen on the web assumed that lithium batteries have a life of 1000 recharge-discharge cycles, but it appears this number can be improved drastically. These guys are claiming 20 000. More on this soon, I hope.

Sandpit

John Quiggin17 Comments

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).