Two economies

John Quiggin71 Comments

The Australian economy is still booming, but the shadow of the global credit crisis is growing longer every day. Some items

* Most observers now agree the US is in recession
* With negative real interest rates in the US for terms up to five years (you can actually buy negative-rate inflation-protected bonds) commodity price inflation seems bound to continue. This is good for the Oz economy while it lasts
* It now seems clear that someting like half of all subprime mortgages will eventually go into default (many have already been foreclosed and 20 per cent are currently delinquent
Much the same is true for Alt-A and other limited-doc loans. The big question now is whether mortgages guaranteed by the quasi-public Fannie Mae and Freddie Mac are in fact secure. As with all implicit guarantees, the assumption that the Federal government stands behind these corporations is marvellously effective until it is actually tested.

Can we keep on growing while all these processes and more work themselves out? I don’t know and I doubt that the Reserve Bank does either. But if I were setting monetary policy, I’d be very cautious about any further increase in interest rates.

After the ratings agencies

John Quiggin53 Comments

Among the likely casualties of the emerging financial crisis, the ratings agencies (Moody’s, Standard & Poor’s, Fitch) have to be near the top of the list. The crisis has exposed fundamental weaknesses in the way in which ratings are determined and adjusted. The privileged position held by these agencies can no longer be justified. it’s far from clear how these problems could be resolved, but I’ve set out some tentative thoughts below.

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Do we need a (surface) navy ?

John Quiggin92 Comments

The government has just scrapped one of the many troubled defence projects it inherited: the Sea Sprite helicopter. It may yet cancel Brendan Nelson’s Super Hornets. But with budget pressure still tight, it might be worth looking at more radical options. The obvious candidate is to abandon the long-standing tradition that our armed forces should include a surface navy.

It’s been argued ever since the development of the submarine in the late 19th century and the airplane in the early 20th (along with torpedoes and mines) that surface fleets were obsolete, being vulnerable to much cheaper attackers. This argument has been repeatedly vindicated by events, and just as repeatedly ignored by the makers of defence policy.

Update: My point is pretty much proved by this report that the Navy has dropped the ball on training and retaining submarine crews. By contrast, the general tone of many comments seems to be based on the notion “why not have it all?” with no consideration of budget constraints, let alone benefit-cost analysis.
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The Republican War on Science: Tierney and Bethell

John Quiggin152 Comments

One of the big problems with talking about what Chris Mooney has called The Republican War on Science is that, on the Republican side, the case against science is rarely laid out explicitly. On a whole range of issues (evolution, passive smoking, climate change, the breast-cancer abortion link, CFCs and the ozone layer and so on) Republicans attack scientists, reject the conclusions of mainstream science and promote political talking points over peer-reviewed research. But they rarely present a coherent critique that would explain why, on so many different issues, they feel its appropriate to rely on their own politically-based judgements and reject those of mainstream science. And of course many of them are unwilling to admit that they are at war with science, preferring to set up their own alternative set of scientific institutions and experts, journals and so on.

So it’s good to see a clear statement of the Republican critique of science from John Tierney in this NY Times blog piece promoting global warming “skepticism”. The core quote is

climate is so complicated, and cuts across so many scientific disciplines, that it’s impossible to know which discrepancies or which variables are really important.
Considering how many false alarms have been raised previously by scientists (the “population crisis,� the “energy crisis,� the “cancer epidemic� from synthetic chemicals), I wouldn’t be surprised if the predictions of global warming turn out to be wrong or greatly exaggerated. Scientists are prone to herd thinking — informational cascades– and this danger is particularly acute when they have to rely on so many people outside their field to assess a topic as large as climate change.

Both this quote and the rest of Tierney’s article are notable for the way in which he treats science as inseparable from politics, and makes no distinction between scientific research and the kind of newspaper polemic he produces. Like most Republicans, Tierney takes a triumphalist view of the experience of the last thirty years or so, as showing that he and other Republicans have been proved right, and their opponents, including scientists, have been proved wrong. Hence, he argues, he is entitled to prefer his own political judgements to the judgements (inevitably equally political) of scientists.

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Gitmo and Gulag

John Quiggin39 Comments

My namesake, Canadian terrorism expert Tom Quiggin, takes a look at the Guantanamo Bay trials, and notes their adherence to the principles laid down by Stalin’s chief prosecutor, Andrey Vyshinsky.

Quiggin notes that

According to Col. Morris Davis, who is a former chief prosecutor of the military commissions, it appears that the plan was made ahead of time to have no acquittals, no matter what the evidence was to reveal. General counsel William Haynes is quoted as saying (according to Col. Davis) “We can’t have acquittals. If we’ve been holding these guys for so long, how can we explain letting them get off? … We’ve got to have convictions.”

As Australian readers will recall, Davis resigned his position in disgust after the only trial to reach court, that of David Hicks, was shut down after the Australian government intervened to secure a plea bargain, with Hicks pleading guilty in return for a sentence that saw him returned to Australia then kept in prison just long enough to ensure his silence for the election.

Hicks’ guilty plea led to his being described by the Howard government’s fan club as a “self-confessed terrorist”. Of course, the same description applies to many of those convicted in Stalin’s show trials, where charges of sabotage and terrorism were a routine part of the rap sheet (as with all show trials, some may even have been guilty, but their confessions prove nothing).

The other shoe

John Quiggin21 Comments

There’s been a fair bit of discussion of the recent announcement of Volume Two of The Fabrication of Australian History: The “Stolen Generation”.

What doesn’t seem to have been mentioned is that the topic of this book bears no relation to the Volume Two that was announced in 2002, with a projected publication date of 2003, dealing with frontier violence in Queensland. In 2006, it was due out “within the next twelve months”. There was also to be a Volume 3 on Western Australian due out in 2004, of which nothing has been heard for quite a few years. His most recent statement on the subject, in May 2007, suggested that a multi-volume work would be forthcoming “eventually“.

Searching Windschuttle’s site it appears that none of the vast body of material he claims to have amassed on these topics has ever been published. In fact, he barely seems to have mentioned Queensland in recent years, apart from briefly restating his longstanding, and long-refuted attack on Henry Reynolds’ estimates of frontier deaths.

At this point, Windschuttle ought either to put up or shut up.

A lot or a little, part 2

John Quiggin7 Comments

This CT post on Stiglitz and the cost of the Iraq war reminded me to get going on one I’ve had planned for some time, as a follow-up to this one where I pointed out that the $500 billion in aid given to Africa over the past fifty years or so is not, as is usually implied, a very large sum, but rather a pitifully small one, when considered in relation to the number of people involved, and the time over which the aggregate is taken.

What are the sums of money worth paying attention to in terms of economic magnitude. I’d say the relevant order of magnitude is around 1 per cent of national income[1], say from 0.5 per cent to 5 per cent. Smaller amounts are important if you’re directly concerned with the issue at hand, but are impossible detect amid the general background noise of fluctuations in income and expenditure. Anything larger than 5 per cent will force itself on our attention, whether we will it or not.

To get an idea of the amounts we’re talking about, US national income is currently about 12 trillion a year, so 1 per cent is $120 billion a year. A permanent flow of $120 billion a year can service around $6 trillion in debt at an interest rate of 4 per cent, so a permanent 1 per cent loss in income is equivalent to a reduction in wealth by $6 trillion.

For the world as a whole, income is around $50 trillion, so the corresponding figures are $500 billion and $25 trillion.

What kinds of policies and events fit into this scale?
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