Real business cycle theory

Various comments have suggested that I’ve been too nice, or not nice enough, about Real Business Cycle theory, the main contribution that got Kydland and Prescott their Nobel prize. My remarks weren’t really meant as a careful evaluation, so I’ll offer a slightly more considered view now, with the warning that there are plenty of readers of this blog who know more about dynamic macroeconomic theory than me – they can set me straight in the comments section. Non-economists may want to skip on to the next post.
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Predictable Instapundit

I didn’t do much for my reputation as an election tipster with my assessment of the Australian election. But I was just about spot-on in my pre-election prediction, posted at Crooked Timber that,

Whatever the outcome, I expect it will be treated in the international press as something of a referendum on the Iraq war

whereas, in reality, the issue barely came up.

On cue, here’s Glenn Reynolds complaining of inadequate coverage of

an Australian election that was run in no small part as a referendum on the war

Admittedly, Reynolds isn’t “the international press”, and, as he complains, some papers got the story right rather than printing the fantasy he would prefer, though many others have taken the “referendum” line. But his words are so close to my prediction that I feel entitled to a bit of a gloat. Heaven knows, we haven’t got much to gloat about in Australia this week.

More on this from Tim Lambert .

Information request

I’ve seen various assertions in the last couple of days claiming that cuts in the top marginal rate of taxation have been blocked in the Senate (so, by implication, can now been introduced). I don’t recall this happening, though there have certainly been occasions when the Senate blocked spending cuts or increases in other taxes that were supposed to finance cuts in the top marginal rate. But my memory on these things is not 100 per cent reliable.

Can anyone advise me whether there has in fact been an occasion where the Senate has voted against a reduction in income tax rates (on its own, not as an element of a package)?

Nobels for Kydland and Prescott

The winners of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 2004 are Finn Kydland and Edward C. Prescott for their work on time-consistency in policy and on real-business cycle models. In my view, the time-consistency work is important and has generally been a positive influence on policy makers1].

Real business cycles models were an exciting idea in the 1980s, and continue to influence the way people think about macroeconomics, but haven’t in my view, lived up to their early promise.

One discovery of Prescott’s that I think is very important, but isn’t part of the Nobel citation is the equity premium puzzle, which he discovered jointly with Rajnish Mehra. This is the fact that thegap between the rate of return on equity and the rate of interest on bonds is much greater than can be accounted for by standard arguments about risk. This in turn explains why governments generally lose money from privatisation, as Simon Grant and I have pointed out.

fn1. Some central banks, like the RBNZ under Don Brash took ideas like credible commitment to an extreme, with bad results. But then, in this period, policy makers in NZ took everything to extremes and usually got bad results.

Family First

It seems likely though not certain that the government will get exactly half the seats in the Senate, and that the Family First party will get at least one, largely due to preference deals with Labor[1]. As with all new parties, there’s something of a lucky dip quality here. Certainly, it doesn’t appear that FF are the hardline religious rightwingers that they have been represented as. I don’t have any particular knowledge about this group, but I will offer a few thoughts.

First, as I said in relation to Pell and Jensen, the idea that religion and politics ought to be kept separate is in general a silly one. It’s based largely on a misunderstanding of the doctrine of separation of church and state. What this doctrine prohibits is action by the state which favors one religion over others or over those without religious belief. In this context, claims that FF is closely associated with one particular church (Assemblies of God) are troublesome. It seems, however, that even if a lot of its leaders have been associated with AOG, the party is broader than this.

Separation of church and state does not mean that there is anything inherently problematic about people holding, and acting on, political views that are derived directly from their religious beliefs. The problem, where there is one, arises from the content of the beliefs and views. Although I don’t share the belief that we are morally obligated to follow the teachings of Jesus, I am often in agreement with the political views that follow from that belief. On the other hand, I rarely have much sympathy with policy beliefs derived from the Old Testament, for example, those condemning gays.

From what we’ve seen so far, it looks like FF have a mixture of policies, some of which will be appealing to me and most readers of this blog and others not. On the positive side, they are sympathetic torefugees and may help in restoring some much-needed decency in this area of politics. More generally, family values are, in large measure, those of the left. Co-operation rather than self-seeking competition, equal sharing rather than incentives and so on. That hasn’t stopped plenty of poltiicians espousing family values and pursuing anti-family policies, and we will have to wait and see whether FF lives up to its own rhetoric.

The obvious negative is that, for FF, the traditional family is the only option. I imagine the realities of life impinge to the extent that plenty of FF members and supporters have experienced divorce, blended families and so on, but there will obviously be no sympathy for ideas like gay marriage. But this was never going to come up, given that Labor had already opposed it. In general, this is not an area where governments have a lot of direct impact.

Overall, then we shouldn’t despair about FF holding the balance of power in the Senate, though I’m not optimistic they will do much more than blunt the sharpest edge of government policy.

fn1. In addition, there are the Democrats, of whom Andrew Murray is most sympathetic to the Meg Lees view of seeking negotiated improvements to government legislation. This means that, most of the time, the government will be able to get legislation through, perhaps with amendments.

Excuses, excuses

I’m surprised no-one else seems to have mentioned the impact of state-level problems on Labor’s vote in the election. Right across the country, state-level issues ran against Labor. This partly reflects the fact that Labor is in office in every state, and in some cases, has been in office too long. But mostly, it was idiosyncratic stuff, that could have gone either way, but happened to go against Labor – even popular Labor governments ran into strife. Here’s my list

* In Queensland, the CEO of Energex committed suicide during the campaign. Although it was a complex story, it was tied to the failure to prepare properly for the blackouts that followed storms in January, which hurt the government

* In NSW, there were a string of hospital crises

* In Victoria, there was the broken promise over tolls on the Scoresby Freeway

* The Tasmanian forests were a state issue that split the general alliance between Labor and Greens

* The Gallop government in WA seems to be unpopular, though I don’t know the details of this

I don’t think these factors were enough to swing the election, but they could easily have added up to a 1 or 2 per cent swing, making the difference between an easy win for Howard and a narrow one.

Telstra

One of the first items of business, once the government gets effective control of the Senate (or perhaps earlier) will be the full privatisation of Telstra, ending nearly a decade in the limbo of part-privatisation. Having argued repeatedly that partial privatisation is the worst of all possible worlds and with Labor having dumped my (and Lindsay Tanner’s) preferred option of renationalisation and divestiture, I can’t really complain about this. However, the privatisation process will show some of the reasons why privatising Telstra is a bad idea[1].
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A blog newsdaily ?

One obvious consequence of the government’s victory and effective control of the Senate will be the repeal of restrictions on media ownership, with the likely consequence of a takeover of the Fairfax papers by one of our great magnates, or perhaps by a foreign buyer[1]. There may also be a renewed attempt to punish the ABC, and even if there is not, the organisation will certainly be cowed. All up, the government is likely to enjoy a pretty supportive mass media.

In this context, it’s not surprising that Ken Parish should be thinking about the role of blogs as a source of balance. Ken says

the blogosphere (along with independent organs like Crikey) might well become a critical and lonely source of independent political analysis and opinion.

And whether the blogosphere rises to that challenge might depend in part on whether at least some blogs manage to evolve beyond the current norm of self-indulgent partisan shrillness and develop something resembling traditional broadsheet media standards of journalistic rigor and objectivity in presenting the facts, together with balanced presentation of a wide range of opinions.

The reference to broadsheets raises for me the question: could a blog-based competitor for the quality dailies be feasible, and if so how? I suspect the answer is “No”, but we mind find out something useful by thinking about it
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