Slow blogging, part VI

John Quiggin

I’m only just getting around to catching up on what other bloggers have been doing in my absence, and I can report that everyone over at Catallaxy is in top form. My jet lag is such that I’m bound to mix up the contributors to this collective blog, but I’ll go ahead anyway.

I enjoyed Jason Soon’s debunking of ‘sceptics’ on the subjects of global warming and evolution. I must have missed the arrival of Sarah Strasser but she has an excellent account of recent developments in relation to technical devices used to back up ‘global zoning’ schemes of price discrimination. Andrew Norton has some acute cultural comment. You’ve probably all read this already but, if not, go to it.

Fannie and Freddie

John Quiggin1 Comment

This light-hearted piece by Daniel Akst from the NYT raises a lot of important points about prudential regulation, quangos and related issues.

For those not familiar with the cute nomenclature of US financial markets, Fannie (Mae) was a nickname for the “Federal National Mortgage Association”, but now appears to be its official business name. Freddie (Mac) was the Federal Mortgage Acceptance Corporation, or something like that. Both are stockholder owned corporations, established with a special government charter.

In other words, these are quangos in the original sense of “quasi-non-government organisations”,private business organisations, established with effective government backing, to perform what would normally be regarded as public functions.

Among the many problems with quangos, the one emphasised in this article is the implicit guarantee from governments to bail them out if they get into too much trouble. A very similar system applies to banks under the Australian system of prudential regulation. As I observed here

Most Australians would be even more surprised to discover that there is no public guarantee of bank deposits. Under current policies, the government does not guarantee deposits, but does nothing to dispel the general belief that such deposits are absolutely safe.

As Akst observes, this kind of implicit guarantee is the worst of all possible worlds. Governments should either
(i) withdraw the guarantee;
(ii) charge a commercially-sound fee, as in deposit insurance schemes; or
(iii) take ownership of the enterprise
Akst suggests taking Fannie and Freddie into public ownership, getting their books in order and then privatising them without the implicit guarantee. This is probably the best strategy in this case.

Monday Message Board

John Quiggin12 Comments

If I can overcome the jet lag that’s causing me to scramble names in my posts, and generally to operate in something of a fog, I’ll be back to normal blogging this week. To start the week off in the traditional fashion, it’s time for Monday Message Board, where you can post your comments on any topic (civilised discussion and no coarse language, please).

DDT

John Quiggin5 Comments

Ken Parish gives a generally approving link to a piece of junk science claiming that bans on DDT inspired by Rachel Carson’s Silent Spring have caused the deaths of millions of third world residents. He also gives a link to a more balanced piece which gives cautious support to limited use of DDT in anti-malaria campaigns in poor countries (the only use that is currently legal, although there is widespread illegal use as an agricultural insecticide). While noting that not all of Carson’s 1962 claims about the dangers of DDT have stood up to subsequent scrutiny, the author dismisses right-wing conspiracy theories like those in the first link, and makes the point that Carson was campaigning against the use of DDT as a broad-spectrum insecticide, not as an anti-malarial. As the author notes

Soaking the biota in DDT like it was bubble bath, standard practice at the time Silent Spring was written, was a bad thing and Carson was right to condemn it.

As this piece makes clear, the main reason for the abandonment of DDT as the core component in anti-malaria campaigns was the growth of resistance, which was of course exacerbated by indiscriminate use. The ban on DDT use in developed countries, to the extent it had any effect, slowed the general rise of resistant species, and therefore increased the effectiveness of DDT in its anti-malarial use.

The main advantage of DDT is that it is cheap and persistent. Persistence is also one of the main disadvantages, along with broad-spectrum effects. For poor countries, and for the specific purpose of anti-malaria campaigns, the benefits arguably outweigh the costs, and this is why DDT continues to be used in these countries.

The question of when the extra cost of alternative pesticides is sufficiently small to justify abandoning DDT, or sufficiently large to justify readopting it in countries that have abandoned it, is an important one that needs careful analysis. The cause of rational debate is not assisted by propaganda pieces like the one Ken cited.

Note This version has been edited in response to points made by Ken in the comments thread.

What I'm reading

John Quiggin7 Comments

The Wealth of Man by Peter Jay. Among other claims to fame, Jay was one of the writers of Yes, Minister and this book has both the strengths and weaknesses of the series.** In essence, it’s a public choice view of the world. This is conducive to telling a convincing story, as long as you don’t worry too much about what’s being left out. In Jay’s story, private initiative is the key to progress and governments are at there best when they keep in the background setting the rules, and defending producers against internal and external predators.

To tell the story this way, you have to leave out some pretty important chapters, or, as in Jay’s case, report them and disregard. While reading about the Mesopotamian civilisations based on gigantic irrigation systems and the Roman road system that enabled rapid communication from Scotland to Syria, I was waiting for some sort of discussion of public goods, but this is not a category for Jay.

In fact, it would be quite plausible, though a drastic oversimplification, to tell a story in which the main engine of progress is the appropriate choice of public goods. Military grandeur, monarchical display and religious edifices like pyramids and cathedrals soak up capital, while schools and transport infrastructure generate high returns. In 18th century England, even the allocation to religion was turned to good account with clergymen like Priestley and Stone discovering oxygen and aspirin instead of writing devotional tracts.

I also read and very much enjoyed Isabel Allende’s memoir of Chile My Invented Country.

**A totally erroneous claim. As James Wright Russell points out, it was Antony Jay. What’s annoying here is that I had doubts about my recollection on this, and relied on Google, which produced this link, referring to “co-writers Jonathan Lynn and Peter Jayâs 1980-1982 series Yes Minister, said to be the favourite series of then Prime Minister, Margaret Thatcher. ” What’s really annoying is that I have a DVD of the series, so I could easily have done a more reliable check.

Working more and enjoying it less?

John Quiggin4 Comments

This piece from the Economist covers some of the same points I’ve been making about work intensity (here and here. The summary is that the UK and France have approximately equal GDP per person. French output per hour is 20 per cent higher than British, but this is cancelled out by higher British employment rates and higher average hours per person.

I’ve argued in the past, that improvements in GDP achieved by longer hours and greater work intensity are largely illusory and the Economist largely goes along with this. On the other hand, higher employment rates are generally a positive way to achieve higher output, at least if the alternative is unemployment, rather than, for example, participation in full-time education.

A very similar analysis applies to the US, except that US productivity is about equal to that in France and other European countries, so higher employment rates and longer hours translate into higher GDP per person.

A final point is that the greater inequality in the US and the UK imply that the average (median) person falls further short of average (mean) income than in Europe.

Back in Oz

John Quiggin3 Comments

Hi everybody, I’m back in Oz today and back blogging. Before I settle back in, I’ll give my impressions of Montreal. In economic terms, it was hard to figure out. On the one hand there were lots of fairly derelict-looking buildings and many not-so-derelict ones had “A Louer” (“To Let”) signs. On the other hand, there was new construction going on all over the place. Similarly, while there was a general air of prosperity, particular in the CBD, beggars and homeless people were considerably more evident than in DC. I’m not clear whether this is reflects a dual economy, or the early stages of recovery from a prolonged slump, or just the hazards of the random snapshot approach.

The city is overwhelmingly francophone and has apparently become significantly more so in recent decades owing to the language policies of the Parti Quebecois. However, at least in shops and so on, everyone switched to fluent English as soon as they’d heard a sample of my French.

The efficient markets hypothesis goes berserk

John Quiggin12 Comments

Keneth Miles, Brad de Long and a lot of slashdotters have been all over this report that the Pentagon was on the verge of setting up a futures market in terror attacks.

Apparently, the genius behind this idea is Admiral Poindexter of Iran-contra fame.

Leaving aside the obvious points about moral hazard and insider trading that have already been made, I’m impressed that the most magical version of the efficient markets hypothesis, in which markets can divine the future better than any individual, still holds sway in Washington in the wake of the bubble. Perhaps these guys have been in some sort of bunker since 1999. I wouldn’t be surprised to learn that they planned to run the thing over the Internet, have an IPO and use the billions of dollars they made to fund the Defense budget.

Oil and Economics

John Quiggin24 Comments

The issue of oil is still coming up as one of the issues regarding the war in Iraq, and US relations with the Middle East more generally. To get a bit of perspective on this it’s useful to look at some numbers. Currently world oil production is about 80 million barrels each day, of which the US consumes about 20 million. This is about a third of total energy consumption. (a useful conversion factor, if I have it right is that a million barrels of oil yields about 5 terajoules of energy, which is about the output of 10 1000MW power plants).

Saudi Arabia typically produces about 8 million barrels per day, but has the flexibility to range between about 6 and 10. Prewar Iraq was producing around 3 million barrels per day. An optimistic outlook is that a functional government there could produce up to 6 million barrels per day.

There are various ways of looking at this, which I’ll discuss, but a convenient starting point is to focus on a change of 3 million barrels a day in the supply-demand balance. This is the amount of extra Iraqi oil in the optimistic scenario, and was the amount that Saddam could have cut off at short notice if he’d been left in place and in unfettered control of Iraqi oil. It’s also a pretty good measure of Saudi capacity to swing the oil market around.

3 million barrels a day is equal to 15 per cent of US oil consumption and about 5 per cent of US energy consumption. Over the short run, say a year, it would be easy to meet such a shortfall by drawing on stocks (including the ‘strategic reserve’) and by modest rationing measures like ‘odds and evens’. To look at the longer-term economic impact, it’s best to think what tax change would be required to yield this kind of reduction in use. I’ll assume the medium-term elasticity of demand for oil products is about 0.5, which implies that a 30 per cent tax would be needed. Some more rough calculations, available on request, suggest that the economic welfare cost of such a tax would be around $10 billion per year. (This assumes that the price is right to start with. It seems more likely that gasoline is undertaxed in the US, relative to the social costs of car use, and that a tax would be welfare-improving.)

Clearly the cost of domestic action to reduce US oil demand by 3 million barrels a day is a lot less than the cost of the Iraq war (amortised over any plausible time span) or the continuing cost of an expanded military.

The upshot of all this is that any* analysis of the war that places heavy weight on the role of oil implies that the US has adopted a policy adverse to its own interests. This could be because the Administration doesn’t understand the issues, because it thinks a war would be more popular than a petrol tax or because it is acting at the behest of oil industry interest groups. Alternatively, it might be better to conclude that oil (Iraqi or Saudi) was not one of the primary motives for war.

* I leave aside the idea that Iraq is supposed to serve as a springboard for an invasion of Saudi Arabia. If the US wanted to invade Saudi Arabia, it could do so easily, with no need for a springboard, and 9/11 provided the best pretext that’s ever likely to arise.

Monday Message Board

John Quiggin7 Comments

I’m on the move again, to Montreal, so I don’t know when I’ll next be able to post. In the meantime, there’s the home-made fun and entertainment of the Monday Message Board. Post your views on any topic (civilised discussion and no coarse language, please!).

Suggested discussion starter: Collective blogs – is the whole more than the sum of its parts?