Not a happy camper

John Quiggin24 Comments

Ross Garnaut has been highly critical of the FTA with the US and the way it has been debated. He has now broadened this criticism into a more generally pessimistic view of the Australian economy. Since Ross has historically been an optimist, this is quite a shift. He points to excessive domestic demand, the current account deficit and signs of incipient inflation, masked by favorable movements in terms of trade.

Garnaut argues that our impending decline is due to the abandonment of microeconomic reform. In my discussion of the Howard government in Robert Manne’s book of the same title, I also observed that microeconomic reform has slowed down substantially under Howard. However, I’m much less of a fan of microeconomic reform than Garnaut – the Kiwis had reform in spades, and it didn’t do them any good. In diagnosing the same imbalances, I’d point to causes such as the deliberate promotion of a boom, then a bubble in the housing market.

In addition, while I don’t believe in mechanistic business cycle models, I think there is some truth to the idea that, the longer an expansion goes on, the more fragile it becomes. A good run of luck breeds complacency, which encourages unsound investments and unwise consumption, and thereby brings about its own downfall. Garnaut rejects this view, saying “no economic expansion is doomed simply on account of its longevity”.

Another language query

John Quiggin5 Comments

Following on the question of whether Alan Woods’ description of me as “quite bright” was high or faint praise (Henry Farrell at Crooked Timber discusses the US-UK division on this), I have another question.

I’ve noticed that the New York Times uses the word “debtor” interchangeably to mean either “person who owes money”, as in this story which refers to debtors in bankruptcy or “person who is owed money”, as in this story on Iraq and this on Mike Tyson.

Is this standard US usage, or just bad subediting?

Greens’ economic policy

John Quiggin68 Comments

Here’s an extract from a piece I’ve been working on which will appear in Adelaide Voices

Having been disappointed in the economic policy offerings of the major parties, it is natural for an economist to look to the offerings of the remaining serious alternative, the Greens (it seems unlikely that the Democrats will manage a serious run), with a mixture of hope and trepidation; hope because the Greens have generally been willing to take a stand and trepidation because the economic policy platforms of minor parties frequently contain large elements of wishful thinking, small-group hobby horses and plain irrationality

It turns out that trepidation is unnecessary. The Greens economic policy is, quite simply, the most coherent and intellectually-defensible document of its kind ever put forward by an Ausralian political party. At the level of broad principles, it begins with the recognition that economic policy must be financially, as well as environmentally and socially, sustainable. Far from seeking cheap popularity by arguing for both tax cuts and increased public expenditure, the Greens have insisted that public sector debt should be matched by adequate capacity to service debt, and that dubious financial expedients like the use of privatisation to reduce measured debt should be avoided.

The policy is just as good in detail as it is in broad outline. The proposed tax policy initiatives, including a return to full capital gains tax, an assault on tax avoidance and a carbon tax, are just the kind of initiatives that Labor ought to be proposing. Unlike the modern Labor party, the Greens have no hesitation in espousing equality as a goal of economic policy.

Sad to say, in most electorates, a vote for the Greens will have purely symbolic significance, and it will be the allocation of second preferences between Liberal and Labor candidates that really counts. Moreover, it is doubtful that many Green voters will be motivated primarily by concerns about economic policy. Nevertheless, anyone who decides to vote for the Greens on the strength of their support for the environment and opposition to war should be encouraged to know that they are also choosing a party with a policy that is economically as well as socially responsible. If only the major parties could claim as much.

I’d be interested in readers’ comments.

Monday Message Board

John Quiggin13 Comments

It’s Monday again, and time for the Monday Message Board. Post your comments on any topic (civilised discussion and no coarse language, please).

Since most of my regular commenters participate in MMB, this is a good time to announce that GG Sedgwick is running the 2004 Blog Comments Award.

There’s no category in the awards for this, but I’ve always believed that this blog has the best comments section in the Oz blogosphere, and one of the best anywhere. Thanks to all those who’ve made it so.

What I’m reading

John Quiggin11 Comments

The Yellow Admiral and Blue at the Mizzen by Patrick O’Brian. These are respectively the 18th and 20th in the Aubrey-Maturin series. I particularly enjoyed Aubrey’s role as a paternalist squire preventing the enclosure of a local commons – almost the only time in the entire series where he is heroic and successful by land.

Blue at the Mizzen brings me to the end of the series, always an ambiguous feeling for me. There’s still a couple I haven’t managed to get hold of, including The Nutmeg of Consolation and The Hundred Days. Perhaps I should set up one of those Amazon wishlists

Big government is good for economic freedom

John Quiggin6 Comments

Over at Marginal Revolution, Alex Tabarrok recently presented a graph showing a positive correlation between UN measures of gender development and the Fraser Institute’s Economic Freedom Index. Of course, Alex presented the usual caveats about causation and correlation, but he concluded “at a minimum the graph indicates that capitalism and gender development are compatible contrary to many radicals”

This prompted me to check out how the Economic Freedom index was calculated. The relevant data is all in a spreadsheet, and shows that the index is computed from about 20 components, all rated as scores out of 10, the first of which is general government consumption spending as a percentage of total consumption. Since the Fraser Institute assumes that government consumption is bad for economic freedom, the score out of 10 is negatively correlated with the raw data.

Looking back at Alex’s post, I thought it likely that high levels of government expenditure would be positively rather than negatively correlated with gender development, which raised the obvious question of the correlation between government consumption expenditure and economic freedom (as defined by the Fraser Institute index). Computing correlations, I found that, although it enters the index negatively, government consumption expenditure has a strong positive correlation (0.42) with economic freedom as estimated by the Fraser Institute. Conversely, the GCE component of the index is negatively correlated (0.43) with the index as a whole. By contrast, items with a strong ideological component, like labour market controls, were very weakly correlated with the aggregate index.
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McKibbin on the Castles-Henderson critique

John Quiggin7 Comments

Warwick McKibbin has a piece in today’s Fin (subscription required) endorsing the Castles-Henderson critique of the modelling behind IPCC projections of CO2 emissions. He refers back to a paper, with David Pearce and Alison Stegman, for the Lowy Institute (PDF file). I’ve read the paper and I think it’s broadly correct. On the other hand, I’ve previously argued that the Castles-Henderson critique is invalid (see also here). So what gives?
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