An anti-market argument from authority

John Quiggin42 Comments

Miranda Devine’s latest piece on Kyoto (sent to me by Jack Strocchi) adds a couple of new (or newish) talking points to the debate. The first is the claim that New Zealand faces a “cost blowout” of $1 billion as a result of the treaty. As far as I can tell, this is a beat-up. The government had calculated that under existing policies, New Zealand would meet its Kyoto commitments with a bit left over that could be traded on international carbon emission credits markets. Now it looks as if they won’t, which means either changing the policies, buying credits or repudiating the commitments. Its hard to see how the availability of the second option makes NZ any worse off.

What’s more interesting is that Devine attacks not merely the carbon emissions market established under Kyoto, but the whole idea of emissions trading. This is fairly surprising since the whole thrust of environmental policy under the Howard and Keating governments, including the current government’s negotiating position on Kyoto, has been to encourage the used of market-based instruments, of which emissions trading systems are an archetypal example. Although problems can emerge with naive application of this kind of policy, it’s generally the right direction in which to go. The development of tradeable water rights in the Murray-Darling system and elsewhere is a prominent example of both the benefits and some potential pitfalls.
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Crooked Timber lunch

John Quiggin

Today is my last day in DC and I had a very enjoyable lunch with several members of my group blog, Crooked Timber. The group was me, Henry Farrell, Maria Farrell, John Holbo and Micah Schwartzman, making one of the largest collections of Timberites in one place ever to take place. I also met bloggers Russell Arben Fox and Daniel Drezner, both in town for the American Political Science Association. I’ve had an enjoyable and productive time here, but I’ll be very glad to be back in Oz, and home in Brisbane.

Katrina, Kobe and Kyoto

John Quiggin53 Comments

The still-developing disaster of Hurricane Katrina has some obvious parallels with the Kobe earthquake ten years ago. Both were predictable (and widely predicted) events. The damage from Kobe took years to fix, and it’s already obvious that the same will be true of Katrina.

Equally significantly, weaknesses in the state response to Kobe had big psychological impacts in Japan. The earthquake came at a time when the Japanese economy was recovering from the bursting of a huge property bubble, but when triumphalist rhetoric about the strengths of the Japanese state, and the inevitable dominance of Japanese ways of doing business, was stronger even than during the 1980s. The failure of the initial government response to the disaster and the mismanagement and pork-barrelling that characterised the reconstruction effort went a long way towards reducing confidence.
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Simplifying taxes

John Quiggin46 Comments

In addition to spurious claims about the burden of the top marginal tax rate, one of the standard complaints about taxation in Australia concerns the excessive length of the tax code. There’s a fairly typical example in this SMH piece (sent to me by Jack Strocchi). Let’s start with Phil Ruthven, who says that all federal taxes could be replaced with a simple 10 per cent tax on all revenues (I assume this refers to gross turnover of businesses). He might be right, but such a tax would be economically disastrous. It’s sometimes referred to as a cascade tax, since it applies to the same item each time it moves down the processing chain, creating massive distortions. It is in fact, the same as the Easytax, proposed by Pauline Hanson a few years back, though she proposed only a 2 per cent rate. I analysed it in this post a while back.

A more defensible, but still incorrect claim is that the complexity of the tax code is generated primarily by concessions. I’ll respond to this in a later post.

Katrina and the economy

John Quiggin34 Comments

People are already wondering what effect Hurricane Katrina will have on the US economy. So far, most of the discussion I’ve seen has focused on very simplified Keynesian or GDP-based views of the economy, in which the resources that go into rebuilding New Orleans and the surrounding regions count as a net addition to economic activity.

As far as the national accounts go, this may be right. As the name says, GDP is a gross measure, which means it takes no account of depreciation, including the massive destruction caused by events like hurricanes. Depending on how things like insurance payouts are counted, there could easily be an increase in measured GDP. The main lesson from this is that, if you’re interested in economic welfare, don’t look at GDP.

But I don’t think the old-style Keynesian story, in which a reconstruction effort brings unused resources into use and thereby stimulates more economic activity, is likely to be applicable. I assume any injection of funds will come primarily from the national government, which is already running massive deficits, to the point where its capacity for fiscal stimulus is pretty much exhausted. The impact of any further expenditure will almost certainly offset, in part by cuts to other areas, but even more by tighter monetary policy and upward market pressure on interest rates.

The immediate reaction of oil prices shows how tightly stretched the entire market has become, but I don’t think the effect on supplies will be great enough to have much effect in the medium term (say in six months time). However, that’s just a guess.

The real problem I haven’t seen discussed much so far is what will happen if, as is now predicted, it takes three to six months to pump all the water out of the city of New Orleans. In the absence of well-designed and large-scale intervention, that would imply bankruptcy for the vast majority of private businesses based in the city. This in turn would imply unemployment for many people who might otherwise return, and a whole lot of second-round effects working through supply chains. It’s unclear what kind of economic activity will survive, beyond a tourist market centred on the French Quarter (apparently relatively undamaged).

Even in the best of all possible worlds it would be hard to design a policy response to a disaster of this magnitude and duration. In practice, based on recent past experience, I think we’re likely to see some impressive rhetoric, a lot of gigantic boondoggles as favoured interests cash in on the reconstruction program, but not much effective alleviation of hardship or coherent thinking about sustainable economic recovery.

Back on air

John Quiggin17 Comments

I’m back on air now, after my longest time in some years out of Internet contact, in upstate New York, where I’ve been visiting my friend and colleague Bob Chambers by the shores of beautiful Lake Skaneateles. We spent a few days tossing ideas for new papers around, and generally getting away from day-to-day pressures. I’m now back in DC (Maryland actually) and glad to be turning homeward, though, as usual, I’ve had a very pleasant stay here.

I can see that I’ve missed more news than usual over such a period, and it will take me a bit of time to absorb it all. I’ll start by expressing my best wishes to the people of New Orleans and other areas affected by Hurricane Katrina. I lived in cyclone-prone areas for quite a few years, but never experienced anything worse than a category 3, which was scary enough for me.

I’ll try to post soon on the economic consequences of all this. Most notable is the fact that a local disruption like this could push the price of oil over $US70/barrel. The guys who predicted $100/barrel not long ago must be feeling pleased with themselves.

As for the Australian political news, it’s startling, but I’ll wait until I’m better-informed before I say anything about it. Feel free to jump in with your own interpretations.