It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. In keeping with my attempts to open up the comments to new contributors , I’d like to redirect discussion, as opposed to substantive new contributions, to the sandpit(s). As always, civilised discussion and no coarse language please.
Remembrance Day
Over the fold is the piece I wrote for the Fin which ran yesterday, on Remembrance Day. I wasn’t entirely satisfied with the last couple of paras, referring to the present and future, so I need to spell them out a bit more.
First, while I was, in 2002, a fairly enthusiastic supporter of the decision to go to war in Afghanistan, subsequent events and the evolution of my own thinking have led me to qualify that view, and to conclude, in particular, that Australia should withdraw its troops in the near future.
First, some general thoughts
* War is justified only in self-defence (including collective self-defence), and only to the extent that there is a reasonable expectation that going to war will yield a better outcome than not doing so
* Even when war is justified by self-defence, it should not be used as a pretext for securing benefits that go beyond restoration of the status quo ante bellum (bearing in mind that war changes things, so exact restoration is often not feasible).
* Political and public thinking is biased in favor of the belief that military force is an effective way to deal with political problems and a successful use of military force (even if justified) reinforces this bias. So it is important to create whatever institutional constraints are possible, such as requirements for Parliamentary approval of decisions to go to war
* Even when justified ex ante, war is unpredictable and likely to go badly. The idea that having started on a war that has turned out badly, we should “see it through” is a mistake
Coming to Afghanistan, I think the self-defence case is clear-cut. The US was attacked by terrorists trained in and led from Afghanistan, by a group supported by the Taliban government. It’s possible to make a hypothetical case that absent the incompetence and malice of the Bush Administration (backed by Blair and Howard in the decision to start a new war in Iraq) that there was a reasonable expectation of success. However, I observe with some discomfort that much the same case is put forward by many on the left who backed the Iraq war, where, however, the self-defence case was a transparent sham. In any case, we are past the point where continuing the war can be expected to produce benefits for either Afghanistan or the world. It would be better to withdraw and spend some of the money saved as a result (many times Afghanistan’s annual national income) on aid.
Finally, I concluded my post by saying “On this Remembrance Day, we should honour the sacrifice of all those who died by giving up, once and for all, the belief that war should be part of our national policy.” To be clear, I am not a pacifist and do not oppose fighting in self-defence. The idea that “war should be part of our national policy” means to me, that the use or threat of military force can and should be used to advance our perceived national interest. This idea, which forms the basis of military policy in most countries, appears to to both morally wrong and factually false.
Bligh and Fraser sell Port of Brisbane … to themselves
According to the Brisbane Times, the Bligh government has just sold the Port of Brisbane to a consortium led by the Queensland Investment Corporation. This must have been a tough negotiation, given that the QIC website states
As a Queensland GOC, QIC’s shareholding Ministers are the Honourable Anna Bligh MP, Premier and Minister for the Arts, and the Honourable Andrew Fraser MP, Treasurer and Minister for Employment and Economic Development
Note: As with the QR sale, it looks as if the government has retained about $1.3 billion of debt in the Port of Brisbane Corporation, which now has no assets, so the net proceeds will be less than half the announced price of $2.3 billion.
Balance sheets (updated)
I just took a look at the share offer document for QR National, and discovered the interesting fact that the company has only $500 million in debt. Looking at the 2009-10 accounts, QR had debt of $7 billion. Of this, $4.3 billion in debt was allocated to QR National, when QR was restructured.
The offer document shows that this was followed by
a restructure of borrowings under which $4.3bn of borrowings from QTC will be transferred to the State under Transfer Notice for nil consideration prior to Settlement (emphasis added)
That is, to sweeten the sale offer, the government has taken $4.3 billion of QR debt onto its own books. It looks as if the government will only sell about 60 per cent of the shares and the price will be at the low end of the indicative range, so the cash proceeds of the IPO will be something like $3.6 billion. That is, it appears that the additional debt taken on by the state as part of the sale will offset nearly all of the sale proceeds assuming a good outcome, and will more than offset the proceeds if the IPO goes poorly. To be sure, the state will still have 40 per cent equity in QR National worth about $2.4 billion, as it did before, but it does not appear that there will be any money at all for schools and hospitals, even on the spurious cash accounting favored by the government.
I’m now fairly confident my analysis is correct. However, I’d welcome correction from anyone who has better info.
Postscript: Another way of looking at this is that the old QR had a gearing ratio of about 65 per cent, so the government’s equity was equal to about 35 per cent of the total capital value. Having taken all the debt onto its own books, the government will sell about the same proportion of the company (now all equity), so its net worth is essentially unchanged, as is the financial position of the general government sector. All that has happened is that QR’s debt has been converted into private equity.
Work for the Dole — Crooked Timber
Faced with a sharp rise in unemployment since 2008, the Con-Lib government in Britain has diagnosed an epidemic of laziness, and announced measures to push the “work-shy” back into jobs. In particular, they’ve announced that those deemed not to be looking hard enough for work will be forced to undertake unpaid part-time work for community organizations.
Stripped of the punitive rhetoric, this is a cut down job-creation scheme, partly paid for by the unpaid labor of the participants. It’s hard enough to make job creation work well as a counter to unemployment, without adding in this kind of thing.
Australia has been there and done that. Following the discovery in the late 1990s that it played well with focus groups, John Howard (conservative PM) introduced a program explicitly called Work for the Dole and targeted initially at the young unemployed. It was a political success, but didn’t have any evident effects on unemployment. This evaluation of Work for the Dole and other programs suggests that it performed much less well than the explicit job creation and wage subsidy programs it replaced. Strikingly, given that the UK government is supposed to be on an austerity drive, the cost in the late 1990s was $2000-3000 per participant (around 1000 stg), on top of the benefit payment for which they were working.
But at least Howard’s moves came quite a few years into an expansion when it could credibly be claimed that there were jobs available for people willing to look hard enough. For a government that is busy creating unemployment to start attacking the “work-shy” requires a truly impressive level of hypocrisy.
Monday Message Board
It’s time again, once again, for the Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language. Lengthy side discussions to the sandpit, please.
Yet more zombies — Crooked Timber
After finishing Zombie Economics, and confident that it would soar to the top of the best-seller lists, I had the idea of a franchise-style list of sequels – Vampire Econ (on the financial sector), Cyborg Econ (the market and the mixed economy) and so on. Now, though, I’m thinking I could spend a lifetime on the zombie ideas that dominate the political right.
One of the most tenacious has been the DDT myth, that the writings of Rachel Carson led to a global ban on the use of DDT[1], bringing to an end a program that was on the verge of eradicating malaria[2], and causing the death of millions[3]. I thought that Tim Lambert and I had finally administered the coup de grace with this piece in Prospect a while back, after which some of the leading promoters of the myth (such as [[Roger Bate]] and his [[Africa Fighting Malaria]] group) appeared to have given up and moved on to other projects.
But zombies are hard to kill, especially for such reliable sources of misinformation as Britain’s Channel Four. C4 has just run a documentary by Stewart Brand, entitled What the Green Movement Got Wrong in which the DDT myth was repeated in its full glory. Amusingly, Brand made the plea ‘I want to see an environment movement that can admit when it’s wrong’. When challenged by George Monbiot on his glaring errors of fact, Brand exhibited the familiar pattern of weasel words and blame-shifting, followed by silence.
Meanwhile, two of the AFM crew, Richard Tren and Donald Roberts have published a pro-DDT book. The Reuters report on the book says that it comes Six years after the insect killer DDT was globally outlawed on grounds of environmental damage. This is confusing to say the least, given that claims about the dire effects of the supposed ban were around long before this and that the same groups were celebrating the supposed reversal of the ban by WHO in 2006. Actually, both the Stockholm Convention which came into effect in 2004 and the “new” WHO position were little more than different spins on the long-standing consensus that DDT should be banned in agricultural use but retained in anti-malarial use until it can be replaced by cost-effective alternatives. The Reuters report notes that “Tren is a “free market lobbyist who has previously criticised tobacco control”.
Update The original version of this post referred to Richard Tren as a “tobacco lobbyist”. This claim was false. I withdraw it and apologise to Mr Tren.fn1. DDT has never been banned in anti-malarial use
fn2. The attempt to eradicate malaria through DDT failed because of the development of resistance, long before environmentalist concerns about DDT
fn3. The DDT ban myth was largely popularised by the tobacco industry, seeking to pressure WHO out of anti-smoking campaigns in poor industry. Those pushing the myths are the active agents or unwitting dupes of an industry that has indeed killed millions
An even more durable zombie than the efficient markets hypothesis
QE2 — Crooked Timber
The US Federal Reserve has announced its long-awaited renewal of quantitative easing (cutely labelled QE2). It’s $600 billion of new money to buy US Treasury notes with an average duration of five years, along with recycling of some money from the mortgage bailouts, also into T-note purchases. That sounds like a lot, but the reaction from Brad DeLong (endorsed by Paul Krugman) has been a big yawn. With the five-year bond rate at just over 1 per cent, the amount the private sector would demand to hold these bonds (that is, the annual interest payment) is about $7 billion, which is rounding error in the context of the current crisis.
I had been thinking that the Fed might take the much riskier (and politically trickier) step of buying corporate bonds. That would seem more likely to promote investment, but would obviously involve a good deal of winner-picking, with the associated potential for (real or perceived) corruption.
But what is really needed here is fiscal stimulus focused on job creation, combined with a long-term plan for fiscal consolidation (that is, higher taxes and/or lower expenditure). Instead, what the US appears likely to get is a permanent tax cut for the rich, partly offset by lots of job-destroying nickel-and-dime cuts in current expenditure. Many of these cuts will prove to be counterproductive or unsustainable in the long run.
Framing and farming
My column in last week’s Fin was about the communication and policy failures surrounding the release of the draft plan for the Murray Darling Basin. I still hope that a solution can be salvaged, but the release was a fiasco.
No one will be forced out
Accidents of timing sometimes work out in interesting ways. Early this year, the Risk and Sustainable Management Group at the University of Queensland, which I lead, planned a workshop to review the draft plan for the management of the Murray-Darling Basin, then due for release in July. The rather optimistic title was ‘Water policy in the Murray-Darling Basin: Have we finally got it right?’ and the idea was to allow leading economists and scientists, with the hindsight of a few months, to review the plan and its reception.
Instead, because of delays to the election, the workshop was held only a couple of weeks after the release of the ‘Guide to the Draft Plan’, copies of which were still smouldering on the steps of community halls around the Basin. In this context, the sub-title ‘Have we finally got it right’ took on a tone of sardonic irony.
Surprisingly, though, the consensus of the workshop was that, in substantive terms, the draft plan did mostly get it right. Many of the problems we have seen are the result of poor communication and an excessive bureaucratic reliance on the provisions of the 2007 Water Act, under which the report was required. Others could be addressed with sensible government policy responses to the problems inevitable in dealing with the consequences of decades of largely failed policies.
The big communication problem was the media framing of the plan in terms of ‘cuts’ to water entitlements and allocations, resulting in a string of news stories of farmers saying their businesses would be ruined by cuts of the magnitude envisaged in the plan. The presentation of the draft plan by the Murray Darling Basin Authority did little to challenge this framing. As a result, the Gillard government was left to play catch-up, protesting that it had already committed itself to ensure that water would be acquired only through voluntary participation in purchases or water-saving investments.
The discussion of economic impacts was similarly misleading and similarly poorly handled. Model estimates of changes in employment levels were translated as ‘jobs lost’, when in reality they mean nothing of the kind. The most direct impacts will be on the number of irrigation farm operators. Given reliance on voluntary buybacks, the number of operators who will lose their jobs, or be forced off the land, can be precisely estimated at zero. The reduction in employment will primarily take the form of operators choosing to sell their water entitlements to fund either retirement or a shift into other industries.
For most towns and cities in the region, the ‘job loss’ estimates will be similarly notional. Total population in the Basin is growing, and so is employment. A small change up or down in projected employment growth over a decade or so is little more than a modelling artifact.
These purely notional estimates serve to distract attention from the more important results, focusing on the minority of communities in the Basin where a contraction in irrigated agriculture is likely to produce a reduction in total employment or to exacerbate existing adverse trends.
Communication failures are never the whole story. The government should have had, at the ready, a regional development package that would address both unmet needs in regional Australia as a whole and the specific needs of communities in decline, regardless of the cause of this decline.
Instead, policy responses have been narrowly focused on irrigators and irrigation infrastructure. Billions of dollars have been allocated to projects to improve the efficiency of irrigation, despite evidence that very little water is ultimately lost to the system through processes such as leakage and seepage, which mostly return water to rivers and groundwater systems. If even a fraction of this sum were allocated to improvements in social infrastructure, it could generate enough new jobs and social returns to more than offset the adverse impacts of a contraction in irrigated agriculture.
A solution to the environmental, economic and social problems of the Murray Darling Basin is within our reach. A combination of voluntary repurchase of excess water entitlements and investment in social infrastructure could be funded from the $10 billion already on the table for the Water for the Future initiative. Success or failure will tell us a lot about the capacity of the Gillard government to deliver meaningful reform.
Zombies on Econtalk
I’ve done a podcast discussion with Russ Roberts for EconTalk. There’s also a transcript of the highlights, great for people who lack the time/ to listen to a long podcast.
Although we are pretty much at opposite ends of the spectrum as conventionally viewed (Roberts is a George Mason prof and Chicago PhD and EconTalk is published at the EconLib site) we found quite a few areas of agreement, and had a constructive discussion on the points of disagreement.[1] That’s partly because Russ is a good host, but also because, as Matt Yglesias noted in a tweet not so long ago, my critique of ideas like the EMH is very similar to that of Austrian-inclined critics like Amar Bhide[2]. I plan to have more to say about this.
fn1. I also got a review from Arnold Kling on the same site, which began “I agree with some of it, which might be considered a rave review.”
fn2. I’ve retweeted this, but I don’t know how to hyperlink to it
John Quiggin 