CEDA lunch on emissions trading

John Quiggin26 Comments

Yesterday, I spoke at a CEDA (Committee for the Economic Development of Australia) lunch on the topic “What would life be like with an emissions trading system for Australia”. Shorter Quiggin: Much as it is now. Slightly longer version: For the average household, it will be a bit like the GST, with some initial disruption and relative price changes, becoming effectively invisible as carbon costs are factored into prices throughout the economy. Other speakers were Paul Simshauser from Babcock and Brown (owners of electricity generators and other infrastructure) and Stuart Dix from e3 International, a firm with a lot of experience in emissions trading markets.

The audience was similarly made up of likely buyers of emissions credits (Stanwell and other electricity generators), sellers (geothermal and other carbon-free sources) and intermediaries (accounting companies, consulting engineers and so on). They are looking at decisions on the billion-dollar scale over the next few years

A couple of points of interest:

* In addition to the usual free lunch and bottle of wine, speakers were rewarded with 17 trees worth of carbon credits, roughly a year’s worth of CO2 from driving for the average motorist.

* The delusionist idea that the whole thing is a hoax dreamed up by scientists looking for research grants/the UN seeking world domination/the Illuminati didn’t get a mention, even in refutation. Unlike the rightwing commentariat and some senior political figures, serious businesses have concluded that the main game now is how emissions trading should work, not whether we should have it.

Saving up the big stuff?

John Quiggin19 Comments

The Budget announced last night has widely been described (both favorably and otherwise) as “clever”. There are tax cuts across the board, with the biggest proportional benefits going to low-income earners. And there are lots of spending initiatives, particularly targeted at areas where the government is vulnerable because of past cuts. There’s a lot of money for universities (which, unsurprisingly, I welcome) partially reversing the cuts of the Vanstone-Kemp era. And the Commonwealth has resumed funding for dental services ten years afer this was abolished. Similarly, there’s a bit more money for alternative energy, an area that’s been cut in the past.

But (again as lots of people have pointed out) there’s no big idea here. Overall the tax cuts continue a pattern of returning real and nominal bracket creep, leaving the share of national income going to the Commonwealth effectively constant. And the new expenditure that’s been announced consists of lots of little things, some better than others, but none likely to make a fundamental difference to the way people perceive the government.

This Budget would make political sense if the government were cruising towards victory, and just needed to shore up its support. But it seems unlikely to do much to claw back the big lead Labor currently enjoys. Maybe the government is confident of winning on the IR front, and doesn’t think it needs any more than this. But that seems unlikely to me.

My guess is that the government is saving up something big for the election campaign. An obvious area would be climate change, where the Budget had only token measures. Alternatively, we might see a relaunch of the water plan. Finally, although the Budget had plenty of money for transport infrastructure, I was surprised that the Melbourne-Brisbane railway proposal, which was the subject of some pretty confident leaks, didn’t get a run. Maybe the government is planning to go the whole hog and announced support for the plan for an inland rail line from Melbourne to Darwin. This proposal has been kicking around for years, and Melbourne-Brisbane can be seen as the first leg.

Red State

John Quiggin12 Comments

Now that I’ve got the upper hand (for the moment) in the endless struggle with spam, I’ve had time to experiment a bit with layout and so on. I’ve moved back from a blue to a red theme, but I’ve also added a widget in the sidebar that lets you pick your own theme if you prefer something more restful. As always, comments and suggestions will be gratefully accepted.

Hayek on evolution and global warming

John Quiggin43 Comments

I’ve been working on a piece on why so many on the right have embracing delusional thinking about global warming, and I ran across a great quote from Hayek’s Why I am not a Conservative, cited by Jim Henley in relation to the debate currently going on in the US right about evolution and creationism/Intelligent Design. Hayek’s statement reads just as well if you replace “evolution” with “global warming”.

Looking at the NYTimes debate, it’s notable that debate at AEI (at least as reported by the Times) is about whether evolution is or is not politically favorable to conservatism, with ev psychists and Social Darwinists pitted against the Christian right. It’s only in the last para that the reality-based community has anything to cheer for (also quoted by Jim).

As for Mr. Derbyshire, he would not say whether he thought evolutionary theory was good or bad for conservatism; the only thing that mattered was whether it was true. And, he said, if that turns out to be “bad for conservatives, then so much the worse for conservatism.�

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The two-party system

John Quiggin8 Comments

Reading Jonathan Chait on the netroots and (belatedly) Off Center by Jacob Hacker and Paul Pierson,* it strikes me that the real political news of the last six months is the fact that the US now has a standard two-party system, arguably for the first time in its history. From Reconstruction until the final success of Nixon’s Southern strategy in the late 20th century, the fact that the Democratic Party represented the white establishment in the South made such a thing impossible. Under the primary system the two “parties” were little more than state-sanctioned institutional structures to ensure that voters (outside the South) got a choice of exactly two candidates.

From the 1970s onwards, though, this structure was obsolete. Having absorbed (and to some extent having been absorbed by) the white Southern establishment, the Republicans were clearly a party of the right, and started to act like one, requiring ideological unity and party discipline from its members, establishing a supporting apparatus of thinktanks and friendly media outlets and so on. As both Off Center and Chait observe in different ways, attempts by groups like the Democratic Leadership Council and the centrist media establishment to continue playing by the old rules simply ensured that the Republicans could win even when, on the issues, they were clearly pushing a minority position.

The netroots phenomenon is one reaction to this. But even more striking is the fact that the Democrats in Congress now match the kind of party discipline shown by the Republicans. After the 2006 elections, most commentary assumed that the party could not possibly hold together with its slender majorities in both houses, but they have clearly learned the basic dictum of party politics “We must all hang together, or assuredly we shall all hang separately.”
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Weekend reflections

John Quiggin14 Comments

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

Howard caves to unions on IR

John Quiggin14 Comments

Oddly enough, no one seems to have used this headline, but Howard’s announcement that the no-disadvantage test will be revived for workers earning less than $75 000 is a big concession, at least in symbolic terms, to the union campaign against WorkChoices.

We’ll have to wait for details to see whether the concession is as substantial as it appears. As regards the $75 000 limit, it’s fair enough to say that workers on incomes at this level are in a reasonable position to protect their own position in bargains with employers without government intervention. Administratively, though, a distinction like this sounds like it’s going to be something of a nightmare to manage.
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A bit late for May Day

John Quiggin16 Comments

I meant to do a May Day post on Industrial Relations, and particularly Labor’s proposal requiring employers to grant new parents 12 months unpaid leave, in the absence of “reasonable business grounds” for refusal. It’s hard to analyse a policy like this in terms of labour market microeconomics. A standard equilibrium analysis would suggest that some firms might voluntarily offer family-friendly conditions, but the number of such firms would be smaller than the number of employees who would prefer them (since there is less cost and trouble for employers in being family-unfriendly) and this is what we see.

Assuuming there’s a general social consensus in favour of assisting families with children, an obvious question is whether business should be expected to carry some of the burden. As this graph of the profit share of GDP shows, there shouldn’t be a problem of affordability.

Profitsshare

Of course, there will always be marginal firms, but if you can’t make it with profits at current levels, probably you shouldn’t be in business at all.

From the viewpoint of the average member of society, depending mainly on labour income, the case for accepting a substantial profit share rests on the assumption that incentives to seek profit will ultimately benefit everyone. It’s hard to make this case when conditions like parental leave haven’t improved substantially in decades and other conditions, such as rights to weekends and public holidays, are going backwards. The long term interests of business would be better served by a less aggressive pursuit of short-term goals.

Economists lining up on climate change

John Quiggin37 Comments

Today’s Fin includes a full-page ad from five prominent financial market economists, calling for the introduction of a carbon trading scheme to reduce greenhouse gas emissions (paywalled, but it gets a brief mention here in the Oz). Meanwhile, Crikey yesterday ran a piece by another financial market economist, Michael Knox. Knox multiplies the estimated social cost of CO2 emissions from the Stern review ($85/ton of carbon) by total carbon consumption to get an estimated 5.3 per cent of GDP, and concludes (contra Stern) “This means that the cost is not 1 per cent of GDP but 5.3 per cent of GDP.

But Knox has the problem back to front here. He has calculated the cost to the world of Australia’s carbon emissions. Equivalently, this is the revenue that would be raised by a carbon tax of $85/ton, assuming a zero price elasticity of demand.

But the 1 per cent estimate of Stern, with which he is comparing his numbers is the cost of reducing emissions by 50 per cent relative to business as usual. Assuming the policy adopted was a carbon tax, with zero exemptions, the appropriate measure is the welfare triangle of deadweight loss. Knox has instead calculated the rectangle of revenue, a standard mistake for beginners in welfare economics, but a bit surprising to see from a senior financial economist.
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