News from the Sunshine State

John Quiggin16 Comments

Two big news items from Queensland in the last 24 hours. Standard & Poors has downgraded the State’s credit rating to AA+ and Anna Bligh has called an early election.

The fact that these two events happened in this order is striking. Until six months ago, a government that had been downgraded in this way would be holding off an election until the last possible day in the hope of burying the bad news, or else would have gone early, before releasing the bad budget news that triggered the downgrade. Now, the government calculates:

* Everyone knows that the state’s finances are a lot weaker than they looked six months ago, and that this has very little to do with the government
* No-one who has been watching the news could possibly place any weight on ratings issued by Standard & Poors (or Moodys – Fitch has been marginally better). If credit rating agencies were subject to election, or to any kind of proper market test, these guys would be out of business. The fact that they aren’t is yet another indication that the global financial sector is in need of reform far more drastic than has been contemplated so far
* The policies ‘demanded’ by S&P to keep the rating (drastic cuts in infrastructure spending) would have been economically disastrous

Coming to the election itself, the uncertainties created by the global financial crisis are such that I’m not going to venture a prediction. Overall, the government has done a reasonable job, but not a great one, and it remains to be seen whether the cumulative impact the ethical troubles of numerous ministers, ex-ministers and backbenchers over the years will come back to haunt them. There are also a bunch of policy decisions (including some good ones, like fluoridation, and not-so-good ones like chickening out on water recycling) that need to be taken into account. And it remains unclear how much progress has been made, and perceived, in fixing the health system. The government’s performance on indigenous issues has been lamentable, but that probably won’t cost them many seats.

On the other side, the opposition moved from being unelectable to conceivably electable with the merger that created the Liberal National Party. But they remain deeply unimpressive. This election will be won, or lost, by Labor.

Hewson hits the mark

John Quiggin60 Comments

John Hewson’s public denunciation of Peter Costello “‘Lazy, disloyal, no balls, unelectable'” is one of the more effective examples of the genre I’ve seen*. At least, it is for me, since it’s exactly consistent with my own judgement. Money quote

I also doubt you have the skills, experience or self-confidence to have accepted the obvious job after losing the last election, namely shadow treasurer. You’d be lost without Treasury. You may have delivered 11 budgets but ask yourself honestly how many of them were actually yours, rather than Treasury’s. I am told Treasury is now drawing a sharp contrast between your little interest and involvement and that of Wayne Swan.

And Hewson gets in a very effective jab at Howard along the way

Both sides of politics know from painful experience that disunity is death- although, like you I’m sure, I found it a bit galling to hear Howard now saying so, having been disloyal to every leader he ever worked for.

* It would have been more effective without the gratuitous reference to testosterone, which doesn’t at all suit an academic/finance type like Hewson.

An argument for emissions trading

John Quiggin26 Comments

With resurgent debate over the relative merits of carbon taxes and emissions trading, attention has turned again to Europe where the market price of emissions permits has fallen sharply as a result of the financial crisis and recession. Most commentators have seen this as a strike against emissions trading, but actually it’s a positive. The big concern about price uncertainty arises when we are very uncertain about the cost of reducing emissions. Under cost uncertainty, setting the emissions target too low could impose unexpectedly high costs on the economy.

What’s happening here is that we are uncertain about the rate of growth of the economy. An emissions target is countercyclical since it imposes a relatively high cost when the economy is strong, and a much smaller cost when the economy is weak. This is a Good Thing.

My view, for what it’s worth, is that a well-designed emissions trading scheme is the best available option. But given the weaknesses of the government’s proposed scheme, I’m prepared to consider alternatives.

Note also that different macroeconomic shocks give different outcomes. Warwick McKibbin has done some work showing that an upward shock to growth in one country will benefit other countries less (and perhaps not at all) under global emissions trading than with a price cap or hybrid policy. That’s because the growing country will demand more emissions permits, pushing up the global price.

It’s easy to see that McKibbin’s modelling result is consistent with the analysis here. By symmetry, a negative shock in one country will harm others less under emissions trading than under the price-based alternatives. And the same logic applies to sectors within countries. It’s easy enough to see then, that for any economy with a fixed aggregate target, or for the world as a whole, emissions trading will tend to reduce the benefits of booms and the cost of slumps.

Framing nationalization

John Quiggin74 Comments

With even Alan Greenspan Smother move and Lindsey Graham now in support, and the alternatives canvassed in the Geithner “plan” thoroughly discredited (even Wall Street hated it), large-scale nationalization of US banks now looks inevitable. But, as Obama has observed, this kind of thing seems alien to US culture.

This looks like a classic Lakoff framing problem. How can the obviously necessary, also be made to seem natural? There have been a couple of approaches so far.

The first is to emphasise that the Federal Deposit Insurance Corporation routinely takes over failed banks. So, as Paul Krugman puts it “nationalization is as American as apple pie“.

The second is to focus on the ultimate goal which is to return the banks to solvency and private ownership. Hence the lovely euphemism coined (I think) by Calculated Risk “preprivatisation”

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Economists agree!

John Quiggin20 Comments

Tim Lambert links to this article by Eric Pooley in Slate’s The Big Moneye which points out that, for all the disagreement among economists regarding the details of climate change policy, there is substantial consensus on the following main points
(i) the cost of action to stabilise atmospheric concentrations of CO2 and other greenhouse gases will be of the order of 1 per cent of GDP
(ii) a strong mitigation policy is preferable to business as usual

There is also widespread, though not universal, support for the view that it is best to act early and strongly rather than waiting for more information.

The article makes the point that the quarrelsome nature of economists obscures the level of consensus and that has certainly been my experience.

Also from experience, I know that quite a few readers of this blog are unwilling to believe that (i) can be right. But the argument from personal incredulity is not a sound basis for reasoning. It’s easy to check that the cost can’t be much more than 10 per cent of GDP (about five years worth of economic growth), which contradicts the common intuition that cheap energy is economically vital. Once you accept that upper bound it seems silly to disagree with the experts on the best estimate in the range 0-10.

Economists criticise the emissions trading plan

John Quiggin21 Comments

I’m one of ten economists who has signed a statement criticising the inadequacies of the Rudd government’s emissions trading scheme. The statement is over the fold.

The weakness of the scheme and the fact that emissions reductions achieved through voluntary action or the newly announced home insulation scheme don’t attract credits have led to a revival of the debate over the merits of a carbon tax, as an alternative to emissions trading. Of course, it is possible to have both, as in hybrid schemes such as that proposed by Warwick McKibbin.

The question of whether to go with a carbon tax, emissions trading or a hybrid turns on two main issues. First, with a tax, or with a hybrid scheme where the emissions price is capped, we get price certainty at the expense of uncertainty about how much emissions will be reduced. With a pure emissions scheme, or a hybrid scheme in which the tax acts as a price floor, we have certainty about achieving at least the target level of emissions reductions, but uncertainty about how high the price might be. As I’ve argued before, the risks of not cutting emissions enough outweigh the risks of setting the price too high.

The other question is more pragmatic. Which approach gives the best chance for Australia to contribute to a global agreement that will actually stabilise the climate. In the past, I’ve been of the view that a pure emissions trading scheme is the way to go in this respect, and I still can’t see that an international agreement is likely to be reached without general adoption of emissions trading schemes. . But there’s no doubt that developments over the past year or so have strengthened the case for making a carbon tax part of the mix.

Now, here’s the release

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Bushfire appeal continues

John Quiggin4 Comments

I’m extending the appeal until this evening (Monday). There were some problems with links which led to a lot of people being unable to find the thread. These have now been fixed, I hope and the total is up to $9425 as of Monday morning. You can record contributions here, or in the original thread.

Update

Ransom video

It’s Monday evening, and the grand total for the appeal is $10,025 which is a marvellous effort. It’s certainly a big achievement for a blogosphere which is so often castigated as being trivial, self-absorbed and so on.

Let’s all give ourselves a pat on the back for this, then resolve to show similar generosity all year around, in public policy as well as private charity, and regardless of whether the suffering we aim to alleviate is spectacular and newsworthy, or grinding and prosaic.

Having reached our target, I’m closing off the appeal, but of course there’s still time to donate to this appeal (details in the post below) and it’s always a good time to give some help to others in need.

AARES after-dinner speech

John Quiggin21 Comments

After-dinner speeches are generally best forgotten after the dinner even when (perhaps particularly when!) they are extremely funny. My speech to the Australian Agricultural and Resource Economics Society dinner wasn’t funny at all (at least not intentionally), but a couple of people asked me to write it up for the blog. So I’ve done it. I didn’t have notes when I talked, so this is not an accurate record, more like a reconstruction of what I meant to say

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