I’ve been very critical of the Queensland government’s proposed asset sales, which, I think, will worsen the fiscal position of the state in the long term. But, the combination of economic downturn associated with the global recession and continuing needs for infrastructure expenditure mean that the government is right to point out the problems and to state the need for politically unpalatable responses. I don’t have the resources of the Treasury, which means, among other things, that I can’t tell how big the problem is now, given that there has been a substantial recovery since the budget in June. So, I’ll just list some possible responses, some of which can be undertaken unilaterally, others requiring co-operation among the states, and, last but not least, action required from the Commonwealth government.
My column from yesterday’s Fin
On bad arguments for Queensland asset sales, it’s over the fold
Bookblogging: The failure of micro-based macro
Work on my book-in-progress has been slowed by other commitments, such as work on Queensland privatisation (hopefully this will get me in the right frame of mind for the privatisation chapter), but I’m still moving forward. Here’s a section on the GFC and the failure of the micro-foundations approach to macroeconomics. As always, comments much appreciated
A bit more on Queensland asset sales
Updated: Following some criticisms by the Queensland Treasurer, I’ve updated the estimates to exclude gains made by the Port of Brisbane on the sale of its shareholding in Brisbane Airport. Obviously, there are other adjustments that ought to be made to get a proper comparison between the interest savings from privatisation and the income foregone. Treasury has the resources to do this, but instead has chosen to present a totally invalid apples-and-oranges comparison between current year dividends and projected whole of government interest savings
I have a piece in today’s Fin criticising the Bligh government’s case for asset sales. I will probably post it here tomorrow. In the meantime I’ve picked up and confirmed a bit of additional information.
(i) Although the estimated sale price is $15 billion, about $7.5 billion will go to repaying debt held within the Government Business Enterprises themselves. That’s currently being covered out of the revenue of the GBEs, so this debt repayment will make no difference to the fiscal position of the government. The net return to general government is also about $7.5 billion, and it’s only this money that can be used to repay general government debt.[1]
(ii) The estimated interest saving from a AAA rating is $266 million over four years
(iii) The Port of Brisbane and QR[1] produced pretax profits of $553 million in the last reporting year. These state-owned enterprises don’t pay tax to the Commonwealth, but make tax-equivalent payments to the state so it’s pretax income that is relevant.
Port of Brisbane: Pretax 2009 $332 million [3]
QR: Pretax 2008 $221 million
This provides a simple basis for assessing the short-term fiscal impact of privatisation. The gain from privatisation, assuming the sale took place now, the estimated price is realised, the risk-adjusted interest rate is 6.5 per cent and sale costs are ignored would consist of
(a) interest savings from debt repayment, 6.5 per cent of $7.5 billion or $490 million
(b) savings from the AAA rating, $66 million per year
for a total of $551 million per year
So, the short-term effect of privatisation is roughly neutral. In the long term, it seems likely that returns would grow at least in line with inflation, while interest savings would remain fixed in nominal terms. Hence, privatisation would result in a long-term fiscal loss.
Perhaps there is a case for privatisation that would outweigh these fiscal losses, but, if so, the government hasn’t put it forward.
fn1. The alternative would be to do a whole-of-government comparison, taking account of all debt repayments and using Earnings Before Interest and Tax (EBIT) as the comparator.
fn2. Note that this calculation does not include Queensland Motorways or Forestry Queensland. These organisations roughly broke even in the most recent period, but they hold assets that can be expected to grow steadily (and, in the case of forests, literally) in value in future years.
fn3. This excludes a $275 million profit on the sale of shares in Brisbane Airport, but includes other valuation gains, which have been earned consistently in recent years.
Libertarians and delusionism
This post from TokyoTom deplores the fact that (TT excepted) supporters of the Austrian School, and for that matter libertarians in general, are almost universally committed to delusional views on climate science. The obvious question is why. As TT points out, there are plenty of political opportunities to use climate change to attack subsidies and other existing interventions. And the fact that the environmental movement has shifted (mostly) from profound suspicion of markets to enthusiastic support for market-based policies such as carbon taxes and cap and trade seems like a big win. Most obviously, emissions trading relies on property rights and Austrians are supposed to like property rights.
On the other hand, given the near-universal rejection of mainstream climate science, we can draw one of only three conclusions
(a) Austrians/libertarians are characterized by delusional belief in their own intellectual superiority, to the point where they think they can produce an analysis of complex scientific problems superior to that of actual scientists, in their spare time and with limited or no scientific training in the relevant disciplines, reaching a startling degree of unanimity for self-described “sceptics”
(b) Austrians/libertarians don’t understand their own theory and falsely believe that, if mainstream climate science is right, their own views must be wrong
(c) Austrians/libertarians do understand their own theory and correctly believe that, if mainstream climate science is right, their own views must be wrong
While (a) clearly has some validity, most of the comments on climate science made here by self-described Austrians and libertarians suggest that either (b) or (c) is true. But which?
Monday Message Board
It’s time, once again for the Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language.
Unforgivable, at least by me
The SuperFreakonomics chapter on global cooling is still being kicked from one end of the blogosphere to another, with error after tired delusionist error being pointed out. Most of the time, it’s just sloppy contrarianism of the type you might expect from people who hang around with rightwingers a lot and are in a rush to produce a controversial book. But there is one point that, coming from Steve Levitt, I find unforgivable. Before pointing it out, I’ll quote what I said about Freakonomics when it came out, in a post entitled “Getting the data to talk”
what Levitt has taken from the economics profession is not so much a body of theory to be applied, as a set of tools for empirical analysis and an unflinching willingness to look at social and policy issues without regard to social norms or received wisdom. More importantly, he’s combined all this with creative flair and an impressive capacity to see the right way of teasing compelling conclusions out of refractory data.
Looking back, I still think this judgement stands up as regards Freakonomics, which makes the tragedy of Superfreakonomics all the greater.
Weekend reflections
It’s time again for weekend reflections, which makes space for longer than usual comments on any topic.
Bligh’s bad arguments for privatisation
The Bligh’s government’s original case for the asset sales announced in the June budget was that the state’s finances had deteriorated drastically since the previous assessment at the time of the March election, as part of the generally declining outlook for the world economy. That argument has collapsed as the Australian and global economies have strengthened with the result that the Queensland state budget managed a surplus for 2008-09, as opposed to the projected $500 million deficit.
It would be possible to argue for some (though not all) of the proposed privatisations on the grounds of economic efficiency, but of course arguments of this kind are no more (and, given the epic failure of financial markets seen over the past two years) arguably less valid than they were before the crisis, at which time Labor rejected them.
That leaves the argument that the asset sales will improve the state’s finances. Such arguments depend on showing that the value derived from selling the assets exceeds the value realised by keeping them in public ownership. In this opinion piece, Bligh attempts to make such a case, but the arguments involve hopelessly invalid apples-and-oranges comparisons. When a policy is defended by such obviously shoddy arguments, the only reasonable inference is that the correct assessment comes out the wrong way.
Buying the Grand Final
A few days ago, I suggested, a little tongue-in-cheek that the money wasted on Gold Coast car races would be better spent buying a major football grand final. It turns out, that’s precisely what the Bligh government is trying to do, and offering much less than the cost of the car race. Nathan Rees is not happy.
John Quiggin 