The “People’s Budget” that doesn’t add up

John Quiggin23 Comments

The LNP government in Queensland is launching a massive and expensive campaign to persuade voters to accept the sale of publicly owned assets. This follows an earlier campaign by the Bligh-Fraser Labor government (remember how well that worked out!) and looks likely to make the same claims, with the additional (self-contradictory) claim that the Labor government, whose policies the LNP is now adopting, drove the state to dangerous levels of debt. In particular, the LNP campaign repeats the central error of Labor’s, namely the claim that selling assets provides a way to fund public expenditure without taxation.

Technology moves own. Whereas Labor gave us a printed pamphlet (reproduced on the web), the LNP offers an interactive website where we can make our own choices. This would in principle, be quite a useful contribution to public debate. If it were available generally, it would be possible for voters to weigh up various proposed initiatives, and assess whether new public services are worth the revenue measures that would be required to fund them.

Unfortunately, but unsurprisingly, this version is rigged. The website claims that it is necessary to reduce gross public debt by $25-30 billion and offers three ways to do so: raising taxes, cutting spending or selling assets. The more we do of one, the less we have to do of the others. I assume (and will check later) that the amounts listed for the tax and spending measures are derived from the forward estimates (four years). By contrast, the asset sales are a once-off measure.

The real dishonesty in the setup comes at the end. If we do want the government wants and agree to all the proposed asset sales, the estimated proceeds are $34 billion. The reward is a $1.7 billion saving in interest, which we are then invited to spend on desirable things.

There’s just one problem. The calculation has omitted the fact that, if we don’t own public enterprises any more, we forgo their earnings. Fortunately, there’s a relatively easy fix. The 2013-14 Budget Paper 2 has a section devoted to public non-financial corporations. The total Earnings Before Interest and Tax of these enterprises was $3.7 billion. Of this sum, $1.2 billion was paid to the state in dividends, about $500 million in tax-equivalent payments (state-owned enterprises aren’t subject to company tax, but make these payments in the interests of competitive neutrality) and the rest was either paid in interest on debt or retained to finance future investment.

How much will the public lose from the asset sales?. Most obviously, we will lose the dividends, which virtually wipe out the proposed interest savings. The tax equivalent payments are a loss to us as Queensland citizens, but (assuming the private owners pay similar rates of tax, which is not guaranteed) are offset by a corresponding benefit to the Commonwealth. And the debt calculation almost certainly includes the debt held by these enterprise, so part of interest we save is has already been covered by their earnings which will no longer be available. Finally, retained earnings contribute to future growth and are a real loss when an asset is sold.

So, if we sold everything, we would forgo $3.7 billion in income, far more than the $1.7 billion the government suggests we can gain. However, a close reading of the options indicates that the proposal isn’t for a complete sale. Electricity transmission and distribution assets are going to be retained, with some form of private participation. This is supposed to save $28 billion, whereas an outright sale would fetch more,

Still, an honest presentation of the proposal would have the asset sale yielding a net loss of up to $2 billion. Like its predecessor the LNP proposes to cash in the proceeds of privatisation and ignore the loss of revenue it entails

Asset sales, yet again

John Quiggin18 Comments

Among the most unkillable of zombie ideas is the belief that governments can solve their fiscal problems by selling assets. What’s particularly surprising about this belief is that it is most strongly held by the kind of politician who likes to talk as if government and household budgets are exactly the same. But would anyone suggest to a household struggling to make ends meet that it would be a good idea to cash in the super, or sell the house and rent it back from the new owners, in order to pay off the credit card? The advice of course, would be to get your expenditure and income in line before addressing the debt problem.

I’ve written yet another paper making this point, which, along with my recent post on capital recycling, got a run from Paul Syvret in the Courier-Mail. Nothing new for those who’ve been paying attention, but, clearly, lots of people haven’t been.

Derp, a 20 year history

John Quiggin220 Comments

Noah Smith’s classic definition of “derp” as “the constant repetition of strong priors” was developed with particular reference to solar energy, to refer to people who’ve taken the view, at some point in the past, that solar energy can’t work, and who are neither willing to change their minds, whatever the evidence, nor to state their views once and for all and remain silent thereafter.

The classic illustration of this would have to be Ted Trainer of the University of New South Wales. For the past 20 years, he’s been writing and rewriting the same paper, showing that renewables can’t possibly sustain a consumer society. Here’s a version from 1995, and from 2003, and here’s the latest.

What’s striking is that, while the numbers change dramatically, the conclusions don’t. The 1995 report says, in essence, that solar PV is totally unaffordable for all practical purposes. [1] So, our only hope is to embrace a massively simpler lifestyle,

The most recent version, written at a time when cheap solar power is a reality, has much less scary numbers. He estimates that the capital investment required for decarbonization of the economy would amount to 11 per cent of GDP. That’s still an over-estimate but it’s in the right ballpark. Trainer rightly observes that this number far exceeds current investment levels and is unlikely to be attained. But, unlikely as it may be, it would certainly be chosen if people accepted Turner’s conclusion that the only alternative was to live in huts with peat roofs.

And, over time, the insistence on negativity about renewables has led Trainer to promote views that are the opposite of his original concerns about simplicity For quite a few years, his work was published primarily at pro-nuclear site, Brave New Climate[2].

If Ted Trainer actually wants to help save the planet it’s time for him to abandon the campaign against renewables and urge society to accept the relative modest reduction in the rate of growth of income needed to decarbonize energy supply. Once the prospect of massive extinction has been staved off, we will have plenty of tiem to think about a simpler lifestyle.

fn1. As an illustration, the cost of a system to charge an electric car is estimated at $350 000, an estimate that is supposed to take account of optimistic projections of efficiency gains. These systems haven’t quite arrived yet (as usual, there are a bunch of technical difficulties to be overcome) but it appears they will soon be on the market for less than $10000. These systems have an obvious potential to resolve the problem of mismatch between peak PV availability at midday and peak demand in the evening, and may therefore reduce the conflict associated with the idea of a “utility death spiral”/

fn2. BNC ran into the same problem. In his eagerness to push the idea that nuclear power is the only way to save the planet from global warming, Barry Brook ran slabs of anti-renewable nonsense from climate delusionists such as Peter Lang.

Reviewing the Commission of Audit, in advance

John Quiggin6 Comments

Just about every incoming conservative government since the 1980s has instituted a Commission of Audit report on taking office. These Commissions are pieces of political theatre rather than serious attempts to examine the whole of the government’s operations – given a small secretariat and a short period in which to work, it could hardly be otherwise. The conclusions are entirely predictable: the outgoing Labor government left a financial disaster; drastic action is needed, mostly consisting of measures the new government has always favored but which it chose not to mention (or to disavow explicitly) during the election campaign; there will be pain, but we will all be better off in the long run

What’s less predictable is the use that the government makes of the report. In general, this depends on the polls. If the government is riding high, the report is released in a blaze of publicity and the new government’s first budget contains deep cuts. The idea is that an expenditure of political capital early makes room for sweeteners in the leadup to the next election. On the other hand, if things are already going badly (eg the Baillieu government in Victoria) the report may be suppressed altogether. The middle path is to keep the report under wraps until close to Budget day, when the choices about how to respond have to be made in any case.

That’s the way the Abbott government has gone. The Audit Commission finished its interim report (usually the most important one) in February and its final report in March, but neither has seen the light of day.

So, I’m preparing a ‘review’ of the report based on a combination of past precedent and the leaks emanating from the Treasurer’s office. It’s surprisingly easy, and it struck me that I could enhance my productivity by turning the review into a template which could then be used for generations to come. Just plug in the names of the new PM and Treasurer, the LNP credentials of the Commissioners, the number of billions in the shock-horror headline number and so on. The section on policy recommendations would be easiest of all. Just start with the standard list of 1980s micro=reform and fiscal policy agenda items (along with my standard rebuttal), then delete those already implemented, add back any that have been repealed, and voila, the job would be done. It seems as if this could all be done in MS Word, but maybe a report generator is what I need. Would anyone care to help me with the tech aspects?

‘Recycling’ publicly owned capital assets

John Quiggin14 Comments

I tend to be a little bit behind on buzzwords, but suddenly I’m hearing this one all the time. The politically toxic idea of privatising public assets is being repackaged as ‘recycling’. The idea is that the public sells one asset, and uses it to buy another.

There is one version of this idea that is, at least arguably, sensible. Suppose the public sector has a greater capacity to bear the demand risk associated with some kinds of projects (for example, ports) and that this risk is greatest in the early years of operation, after which revenue streams become predictable. Suppose also that the public sector wants to keep its gearing ratio (debt to assets) low for one reason or another. Then it would make sense to undertake development in the following sequence. The government decides a new port is needed and contracts for its construction on a fixed price basis (with rewards and penalties for early or late completion). When the port is built, it is operated as a government business enterprise until the demand risk settles down. Then it is sold and the proceeds are used to build a new port, or some other piece of income-generating infrastructure. So, at any given time, construction companies are bearing construction risk, the government is bearing demand risk and the private sector owns and operates various ‘mature’ assets. This process of recycling can, in principle, be carried on indefinitely

There are arguments for and against this kind of recycling, but they are irrelevant to the proposals actually on the table, which involve selling income generating assets and notionally allocating the proceeds to projects that generate no income. For example, according to Warren Truss, the NSW government

have sold the Port of Botany and they have raised a lot of money from that which is now being put into road systems. They’re interested in selling the Port of Newcastle and that is be used to revitalise the central city of Newcastle.

It seems highly unlikely that the road systems can be recycled to fund new investment, let alone a revitalised central city. This isn’t recycling in the proper sense of a sustainable process – it’s melting down your tools for scrap, and using the money to pay the rent.

Recycling’ public assets is a one-way trip to the fiscal scrapyard

Freedom of speech (if you’re a boss or a bigot)

John Quiggin87 Comments

Hard on the heels of the fiasco over the “Bolt clause” in the government’s proposed changes to the Racial Discrimination Act[1] comes the news that the government is prohibiting public servants in the Department of Prime Minister and Cabinet from criticising it in any medium, even anonymously, and urging colleagues to dob in violators. Except for the handful of people who took the government’s talk about free speech seriously, there’s no surprise here. But I’d like to respond to this from the “Freedom Commissioner”, Tim Wilson of the IPA, who says

“Ultimately public servants voluntarily and knowingly choose to accept these limits on their conduct when they accept employment”.

On the contrary, it seems clear from the report that, at a minimum, the interpretation of existing rules (allowing free comment in general, but not on matters related to your own work) is being tightened. For example, the kinds of comments made by Greg Jericho under the pseudonym Grog’s Gamut, which were considered acceptable in the past, now appear to be proscribed.

More generally,it’s important to remember that Wilson, like all propertarians, is no friend of free speech. Propertarians may oppose governmentally imposed restrictions on the speech of people who have no dealings with the government, but the standard position is that any employer, or landlord should be free to sack or evict, anyone they don’t like for any reason, including their political views. Of course (echoing Anatole France) the position is one of majestic equality. If you don’t like the views of your boss, or landlord, you’re entirely free to quit your job, or move out (but not of course to sleep under a bridge).

As for the government, the principle applying to public servants apply equally to pensioners, road users, beneficiaries of national defence and so on (that is, everyone). You knew what you signed up for when you decided to stay here, rather than doing the decent libertarian thing and seasteading or moving to Mars. So, if the government chooses to impose conditions on your political activity, you’ve got no right to complain.

Update It’s been pointed out in comments that the directive, from the Department of Prime Minister and Cabinet applies only to staff in that department and not, as I originally read it, to the Commonwealth Public Service as a whole. It appears to be a tightening of existing restrictions, but not, as I suggested above, a wholesale removal of freedom of political opinion. I’ve edited the post accordingly.

Even though the original post was overstated, the general trend is clear, as Jeff Sparrow points out here. The government is seeking to remove any restrictions on the speech of its powerful friends, while tightening restrictions on its enemies, in keeping with its general tribalist approach to politics.

fn1. So-called because the aim was to create room for racially offensive lies by people the government likes (such as Bolt) while ruling out lies the government dislikes, such as the Holocaust revisionism of Fredrick Toben. It turns out that drawing a legally watertight distinction between Bolt and Toben is more difficult than the government expected.

Why nuclear power worked once in France and might work again in China

John Quiggin181 Comments

That’s the question I looked at a while back in this piece in the National Interest, which I was too busy to post about at the time. TNI’s headline, which I didn’t pick, is the more definitive ‘China Can Make Nuclear Power Work‘. The key point is that, when France embarked on a crash program to implement nuclear energy in the early 1970s, all the right ingredients were in place: a centralised state in which a skilled technocratic elite could push projects through without much regard to public opinion, the ability to fix on a single standardised design, low real interest rates and preferential access to capital, and the ability to fix pricing structures that eliminated much of the risk in the enterprise.

Over time, these factors were eroded, with the result that as the program progressed, the cost per megawatt of French nuclear plants tripled in real terms. As the Flamanville fiasco has shown, whatever the secret of French success 40 years ago, it has been well and truly lost now. And the picture is equally bleak for nuclear power in other developed countries. New nuclear power is far more expensive than renewables, even after making every possible allowance for the costs of intermittency, the various subsidies available, and so on. That’s why, despite the vast range of different policy settings and market structures in developed countries, the construction of new nuclear plants has been abandoned almost everywhere.

But China today looks, in many respects, like France in the 1970s, a technocratic state-capitalist society with the capacity to decide on, and implement, large scale projects with little regard to anyone who might object. If nuclear power can be made to work anywhere, it’s probably in China.

Obviously, pro-nuclear commenters like Hermit and Will Boisvert are welcome to have their say on this one.

Inequality is caused by ideology, not technology

John Quiggin63 Comments

I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

while technology explains the decline of the middle and working classes relative to the professional and managerial class, even this latter group has barely maintained its share of national income since the 1980s. The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years, far outpacing the professional and managerial class as a whole.

This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialities.

Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

On the same day as this came out, Paul Krugman was demolishing another version of the argument, the zombie idea that current high unemployment in the US is due to a “skills gap” which apparently emerged on the day Lehman Brothers collapsed.