How to pay for the floods

John Quiggin73 Comments

The floods in Queensland and other states have destroyed a lot of public infrastructure that will need to be rebuilt, as well as damaging crops and reducing output in other industries. In most cases, if the infrastructure made sense in the first place, it makes sense to replace it, which raises the question of how to pay for it. The proposals Gillard seems likely to announce, centred on a one-off levy sound about right to me. As I argued a while back, the rebuilding is likely to raise the level of economic activity, as measured by GDP, which is the relevant measure for macroeconomic and fiscal policy. So, if the settings were about right before, it makes sense to pay for the rebuilding now, through a once-off levy, so that the net macroeconomic impact is approximately neutral.

On the other hand, the government should not seek to offset the loss in revenue associated with lost output and profits during the flood, or from flood relief expenditure. This should be concentrated in 2010-2011, and therefore should not affect the timetable for return to surplus very much. I assume (but am not absolutely certain) that the government has accepted this.

Another bonus is that the appalling “cash for clunkers” scheme is dead for good. I won’t count this as an actual saving, since it seemed unlikely ever to happen, but it’s good to have this confirmed.

One size fits nobody? — Crooked Timber

John Quiggin14 Comments

Much recent discussion of the future of the euro, most notably that of Paul Krugman, has started from the idea that Europe is not an optimal currency area, and that a ‘one-size fits all’ monetary policy is therefore bound to lead to the kinds of problems we are now observing. At any given time, some countries would benefit from a more expansionary policy and others from a more contractionary policy, so the effect of monetary union is an unsatisfactory splitting of the difference.

Without resolving that issue in general terms, I want to argue that this is not an accurate description of the current state of the eurozone. It’s true that Germany is doing a lot better than the eurozone as a whole, and the peripheral countries a lot worse. So, the optimal policy for Germany alone would be tighter than for the rest of the eurozone. The peripheral countries might benefit from an even more expansionary policy (though that’s not as clear to me as it seems to be to others. A heavily indebted country that undertakes monetary expansion is likely to find it hard to sell bonds denominated in its own currency).

But when you look at the actual policies of the ECB, including Trichet’s recent threat to raise interest rates, it’s hard to see that this policy is optimal for any EU country, even Germany.

Particularly in GDP terms, Germany’s recovery has not been that strong, and an expansion based on exports could easily be derailed by the kind of currency appreciation that would follow an interest rate rise, or even a really credible commitment to hold inflation down. And given the difficulties of handing out explicit haircuts, a modest amount of inflation seems likely to be a low-risk way of easing debt burdens without endangering the (largely German and French, and also UK) banks that hold a lot of the debt.

To say that the problem is the ECB rather than the euro is, for some purposes, a distinction without a difference. But in other respects it is critical. If the optimal currency area analysis is correct then a breakup of the euro is probably inevitable and the big question is how to manage it. On the other hand, on the analysis offered here, the ECB must, in the end, be bluffing. Faced with the end of the currency it has been set up to manage, the ECB must eventually back down on everything else, including its inflation targets. The problem on this analysis is how to broker the politics of pushing the ECB towards large-scale quantitative easing and a higher inflation target.

This is, of course, complicated by the fact that, as discussed in a number of the contributions to a recent Crooked Timber seminar , the actual policies being pursued and advocated by Germany don’t necessarily correspond to any reasonable conception of Germany’s national interest. In particular (and by no means uniquely to Germany) policies that are primarily driven by the interests of banks have become the basis of a popular backlash against other scapegoats – in this case the citizens of the peripheral economies who are on the hook for failures of the financial sector. Until that’s understood, the disastrous policies of the ECB will continue to go unchallenged.

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Well, at least that’s settled

John Quiggin56 Comments

Looking back over the blog can be a bit dispiriting. Many of the arguments we are having now were being conducted, in much the same terms, back in 2002. There is, however, at least one exception, even if it’s a relatively minor one. When I started, I included a category “Mac and other computers”, planned to express my position as a member of the beleaguered but enthusiastic minority of Macintosh users.

I’m posting this in a Starbucks in Washington DC[1] and every customer in the store, including me obviously, is working on either a MacBook or an iPhone. That’s fairly typical of my recent experience, so I think I can safely say that this issue has been settled. Of course, now that Apple is no longer the underdog, there are plenty of reasons for concern about its corporate policies, but those are more related to issues like Intellectual “property”

So, this is the last post in the “Mac and other computers” category. If only I could say the same for “Boneheaded stupidity”.

fn1. Not the kind of place I’d ever go in Australia, but decent independent coffee shops are just about non-existent here.

Zombie Economics – the movie

John Quiggin35 Comments

When I signed the contract with Princeton UP for Zombie Economics, I read the section covering movie rights, and had fun chatting about which of my friends would be best suited to play Dynamic Stochastic General Equilibrium, Trickle Down (yes, yes, I know!) and so on. Then I found out that Freakonomics actually has been made into a movie, and of course, I wanted the same. But, even in the century of the mashup, it doesn’t seem likely that a polemical economics text could be made watchable just by adding zombies (though I thought the mash worked pretty well in print).

Instead, how about starting with a comic-horror zombie movie, then making the apocalyptic zombie-generating event a financial-economic crisis? That seemed much more promising, and I starting working out the treatment in my head. All was going well until I realized that I was stealing all my best ideas from Charlie Stross. I emailed Charlie, and he said to go right ahead, so I thought at least it would be fun for a blog post.

Over the fold some of the scenes I’ve sketched so far – feel free to make suggestions which I will then feel free to steal in the unlikely event that this goes any further.

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Water policy after the flood

John Quiggin202 Comments

There’s already some finger-pointing about the management of Brisbane’s dams in the weeks leading up to the flood. I don’t want to deal with that while the emergency continues, but I will make a couple of suggestions regarding future policy in Brisbane and elsewhere

* The historical statistics on the frequency of severe rainfall events (both droughts and floods) have proved to be of little value. Everywhere in Australia, we need to work on the assumption that extreme events will be more common in the future than they were in the (pre-2000) past.[1]

* As regards Wivenhoe Dam, we need a much more cautious approach to flood mitigation, going into wet seasons with a substantially larger reserve capacity. This in turn will reduce Wivenhoe’s usefulness as a water supply source, and buffer against drought.

* One response that is immediately available to us is to turn on the water recycling plant, built at great expense during the drought and never used. Current policy is to turn it on when average dam levels are at 40 per cent. This trigger should be raised significantly. As a very rough guide, it appears that when our dams are at 100 per cent of normal we currently have enough storage for four years supply. If instead we cut the maximum to three years supply (75 per cent0, we could (roughly) cancel the impact on supply by turning on the recycling plant at 65 per cent (40+25)

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Flooded

John Quiggin47 Comments

I’m still on the other side of the planet, but the news from Brisbane is bad and seems to be getting worse. Fortunately, my family and I are all out of harm’s way. Unfortunately, that’s meant we’ve suffered a fair bit of property damage, and won’t be able to do anything about it for some time. I’ll probably be off-air for a while. We’ve had some very successul appeals for help in relation to past disasters here, but I’m not in a position to run one this time. Feel free to use this thread for offers of help to those affected, and any useful insights. Please, no pointscoring or social/political debates – there will be time for that later on.

Economical arithmetic* — Crooked Timber

John Quiggin38 Comments

I’m at the American Economic Association meeting in Denver, and just attended a panel of the great and serious discussing the US budget deficit. The numbers are pretty impressive – on current projections, US government expenditure (properly measured) is likely to be around 25 per cent of national income (around 3 trillion/year) and the default budget deficit is around 10 per cent of national income. While current and former CBO directors went over the usual options, it struck me that I had seen those numbers before.

Roughly speaking, the share of US national income going to the top 1 per cent of the income distribution has risen from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability of the financial sector. As I’ve argued before, this payment to the top percentile can be seen as a kind of tax paid by the population as a whole for the benefits of living in the kind of economy that has developed over the past few decades of financialisation. (Please check irony alerts before responding!)

Clearly, any attempt to claw back some of this money to fill the budget hole would have what economists call “incentive effects”. More precisely, it would necessitate a big contraction of the financial sector. Judging by the reaction of the assembled experts when I raised this point (all declined to respond), this is literally unthinkable.

  • I’m alluding to Richard Feynmann’s joke that, in view of the size of budgets, we should talk about “economical” rather than “astronomical” numbers.
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The significance of agnotology

John Quiggin119 Comments

A year or so ago, there was a lot of fuss around the talking point, originating with Richard Lindzen of MIT that “There has been no statistically significant warming since 1995?”At the time, I observed that this meant nothing more than “given the variability in the data, we need at least 15 observations to reject the null hypothesis at 95 per cent confidence”. Thus, it was totally unwarranted to slide, as Lindzen and others did, from “no statistically significant warming” to “no significant warming” or even, in Lindzen’s case “warming has ceased for the past fourteen years”. Sad to say, most of the “sceptics” who profess to “make up their own mind” on the issues, are either too lazy or lack the mental equipment to learn the basic statistics needed to understand this point, and therefore unthinkingly repeated Lindzen’s claim. But, to anyone who understood the issues, it was obvious that a couple more observations in line with the observed warming of recent decades would be enough to bring the trend to statistical significance.

With 2010 over, we now have 16 observations starting in 1995, and (unsurprisingly to anyone who followed the argument thus far) the upward trend is now statistically significant at the 5 per cent level[1] That is, if climate change since 1995 (the time of the first IPCC report, and well after Lindzen announced himself as a sceptic) had been purely random, the odds against such an upward trend would be better than 20 to 1 against.

The obvious question is whether Lindzen will now concede that his claim, and the inference he drew from it, has been falsified, and that warming has not in fact ceased as he suggested. I’m willing to bet that what we see is evasion, obfuscation of or outright silence, not only from Lindzen, but from all of those who parroted his claim.

fn1. My estimates based on the Hadley data used by Lindzen gives an estimated trend of 0.012 degrees a year, with a t-value of 2.45.