Here comes the big one

John Quiggin53 Comments

My column in last week’s Fin was about the spreading crisis in financial markets. In the same week, we saw the first indication* that the crisis was spreading to the market for credit derivatives. The possibility of a full-scale financial crisis arising from these markets, which financial market bears have been talking about for years. Whereas the losses from sub-prime loans and related derivatives markets are likely to be in the hundreds of billions, the nominal volume of outstanding contracts in the credit derivatives markets is in the tens of trillions, and interest rate swaps are in hundreds of trillions.

Such amounts cannot possibly be repaid by anybody, so a breakdown in these markets would imply either wholesale bankruptcy or a government rescue involving the abrogation of existing contracts on a scale unprecedented in history. Either way, as noted in the article, large classes of financial assets, and the associated financial markets, may simply disappear. Hundreds of trillions of dollars in derivative contracts may be unwound, reversing the explosion of asset and transaction volumes over the three decades since the Bretton Woods system of financial controls broke down in the 1970s.

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Guest post on welfare quarantining

John Quiggin35 Comments

With the problems of indigenous Australia at the forefront of national attention, it’s time to look again at the Howard government’s Intervention policy, and try to assess what has worked or is likely to and what has not. Already the Rudd government has reinstated the permit system – whatever the merits of the system its abolition was an ideologically-motivated piece of mischief in a package that was supposed to be about protecting children. Another difficult issue is the extent to which individual and community benefits should be conditional on requirements that might be imposed by the government or negotiated with community leaders. One particular aspect of this is the policy of quarantining some portion of welfare benefits in a manner similar to the US policy of giving aid through food stamp. I’ve attached a piece by Bree Blakeman and Nanni Concu, who are currently living in an Aboriginal homeland in East Arnhem Land, which raises a number of problems with this policy. I found it very thought-provoking and I hope that it will help to inform the debate.
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Q&A on mandates

John Quiggin25 Comments

The culture wars must really be over when I’m getting my ideas favorably cited by Janet Albrechtsen. Admittedly it’s prefaced by “even leftwing academics like John Quiggin …”, but her opening para follows my analysis almost exactly, and I agree with her on the point of principle.

Albrechtsen is quoting this Online Opinion piece on mandates, in which I argue that the idea that a government with a majority in the House of Representatives has a mandate obliging the Senate to pass legislation implementing its election policies is misconceived. Since both houses are elected, and since no party in recent decades has received a majority of first-preference votes for the Lower House, there’s no general reason why the views of a majority of Senators should be regarded as less legitimate than those of a majority in the Lower House.

Albrechtsen applies this argument to defend the decision of the Senate to delay, or maybe block altogether, the government’s legislation repealing WorkChoices. While she’s right in rejecting the mandate idea, there are still some good reasons why the Senate should not block this legislation.

The first relates to the lame-duck nature of the current Senate, half of which will be replaced in July with the senators we elected in November. If we had fixed terms for both houses, this kind of nonsense would be avoided, but as it is, I think there’s a case that the outgoing Senate would be wise to take some account of the results of the election, in which the Coalition lost its Senate majority in an election where WorkChoices was a key issue. It doesn’t make much sense to hold up transitional legislation preparing for changes that can be shown to have majority support in the new Senate.

The more relevant point though is political. You don’t need to count seats in the House of Representatives, or parse the text of Labor’s policy statement, to know that the Australian electorate rejected WorkChoices at the last election, and that they haven’t changed their minds since then. If the Coalition parties choose to ignore that fact, they’ll pay a steep political price, as they should, in future elections for both House and Senate. That’s how the mandate of the people is delivered in modern Australian democracy.

One-percenters underbid by McKinsey

John Quiggin89 Comments

I’ve put up quite a few posts supporting the conclusion of the Stern review that large cuts in C02 emissions could be achieved at very modest economic cost. Mostly, the analysis has focused on policies aimed at reducing developed country emissions by 30 per cent by 2020 and 60 per cent by 2050, and the typical conclusion is that the cost would be around 1 per cent of national income. For Australia, at current income levels that would be about $10 billion per year. Today’s news reports a study by McKinsey estimating a much smaller cost, around $3 billion per year. I haven’t seen the report yet but a quick Google found a similar study for the US.

I suspect the report is over-optimistic in the sense that it estimates the cost of doing the job in the most technically efficient fashion, whereas any feasible policy to induce adoption of the necessary measures will have higher costs. But it’s easy to show that the order of magnitude estimate must be approximately right. You can see this by looking at an absolute upper bound assuming we just replace all energy generation by expensive but feasible sources like solar (given the costs of generation, the extra cost required for large grids and pumped storage to smooth out supply variability is a rounding error here). That cost is no more than 10 per cent of income. Taking account of the obvious adjustment responses such reduced consumption in response to higher energy prices implies an even tighter bound, maybe 5 per cent of income.

The most important criticism to be made here is that it is increasingly evident that a 60 per cent reduction in emissions by 2050 may well not be enough. That suggests that, after exhausting the easy options to improve energy efficiency, substitute away from energy intensive activities and so on, there will be a residual 40 per cent of energy demand, almost entirely electricity, that has to be delivered with less than half the emissions of current best practice. Taking Australia’s current consumption of around 250 Twh/year, that’s 100 TwH at a cost of maybe $25 billion a year (=25c/Kwh) or 2.5 per cent of GDP.
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Sorry

John Quiggin52 Comments

I watched the opening of Parliament this morning, and the speeches by Rudd and Nelson. Like lots of others I was moved by the occasion, and hopeful that we as a nation can finally make good on the spirit of reconciliation. Rudd’s speech was the best I’ve seen from him, and the promise of co-operation on this issue was inspiring. Nelson was rather defensive, but much of this was probably necessary to secure the unanimous vote in favour of the motion, and his willingness to participate in a joint effort with the government is welcome. Bob Hawke, Gough Whitlam, Malcolm Fraser and Paul Keating were all present.

Hard though it was to get to this point, that was the easy bit. It’s going to take a lot of resources, and a willingness to ignore ideological shibboleths of all kinds, if we are to achieve the kinds of improvements in health, education and general living standards promised today by Rudd and Nelson.

Sir Sir Sir Sir Sir Ninian

John Quiggin18 Comments

Following up on the silly idea being floated in the Murdoch press that John Howard might be made a Knight of the Garter (surely Alexander Downer would be a more appropriate choice!), I discovered the interesting fact that Ninian Stephen is a knight five times over (KG, AK, GCMG, GCVO, KBE)[1].

Fine judge and Governor-General as Ninian Stephen was, I find this a bit excessive, and something of a reductio ad absurdam on the whole business of knighthoods.

fn1 For those who don’t recall, AK was Malcolm Fraser’s shortlived notion of adding knighthoods to the Order of Australia, and the rest are British honours – he got the KBE in 1970, three more on becoming GG and the Garter in 1994. My guess is that, if he hadn’t had already had the handle “Sir Ninian”, the other awards would have been more controversial, and might not have happened.

fn2 I should note that academics like myself are not exactly innocent here, and some even string together multiple titles, particularly in Europe.

Quick links

John Quiggin9 Comments

I’ve been too busy to post on a lot of things so I thought I’d just post some quick links with minimal comment. Some very important, and some not.

* One measure of the death toll in the wars launched by Saddam and then by Bush is the number of Iraqi widows, estimated at between one and two million. Widows are largely excluded from paid work and many are in a desperate position.

* A while ago I pointed out that the paperless office is finally on the way to reality. Today’s NY Times takes the story a bit further.

* What have the unions ever done for us

* Finally, some real progress in the struggle against malaria.