John Quiggin

I’ve been very gratified by the number of my fellow economists who’ve come to my defence[1] following the attack on me in the Oz. Among the first was Joshua Gans at Core Economics. I wrote to thank him, but haven’t got around to a public mention. Now that I am around to it, it’s a good opportunity to mention that Core Economics is a great blog, where quite a few of Australia’s leading economists (aka my mates) hang out. Go and read some of the posts.

fn1.* With notably rare exceptions * (I’m (ab)using this blogmeme ironically), any members of the profession who agreed with the hit have kept pretty quiet about it

That’s the title of my piece in the Fin yesterday, reproduced over the fold. Feel free to discuss, but please take anything related to nuclear power straight to the sandpit, and even there, try to avoid repeating the same old points.

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Here’s a new sandpit for lengthy side discussion (general and nuclear-power related), rants on idees fixes and so on.

It’s time again for the Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language. Lengthy side discussions to the sandpits, please.

Got this in my email this morning inviting contributions to a special issue of a journal (I won’t name it)

Dynamic stochastic general equilibrium (DSGE) models have become an established framework of reference in empirical macroeconomics. Because DSGE models combine micro- and macroeconomic theory with formal econometric modeling and inference, they are now widely used in policy analysis and academic discourse to address questions in monetary economics and business cycle research, and to inform policy interventions. The continued success of DSGE models will rest on a sustained ability to meet key challenges and improve upon the main modeling paradigm both in terms of its theoretical foundations and its econometric implementation.

And of course, we can thank DGSE models for predicting that nasty crisis in 2008 and prescribing the policy responses that fixed it so completely. Good think we didn’t have to rely on that old-fashioned Keynesian stuff.

We academics love nothing better than to give each other awards. The Australian Conference of Economists is being held in Canberra this week, and the big social event was the conference dinner on Monday night, where blogger-economists were (as usual) well represented when the gongs were handed out. The “Best Young Economist” award (it says something about the pace of academic life that “Young” = “under 40″) previously won by econbloggers Joshua Gans and Paul Frijters, went this time to Andrew Leigh, who left ANU last year to become MP for Fraser in the ACT. Academia’s loss will be the nation’s gain if Andrew gets to exert some influence over public policy.

I also scored, being chosen for the Distinguished Fellow Award. Looking at the list of previous recipients, it’s a big honour to join them and I’m very grateful to my colleagues in the profession, especially since I’ve argued pretty vigorously with most of them at one time or another. The economics profession has its problems (as I argued in Zombie Economics, we haven’t been too good at learning the lessons of the Global Financial Crisis), but all things considered, it has been a force for good in Australian public policy debates.

Another really bad employment report from the US Bureau of Labor Statistics. Employment has been essentially static for the last couple of months, and most of the ground gained in 2010 has been lost. Unsurprisingly, public sector job cuts are leading the way downwards, as the stimulus fades into memory and austerity proceeds at the state and local level. In this context, it’s hard to know what outcome of the current negotiations over the debt limit would be worse: unconditional surrender to Republican demands for yet more spending cuts, or a failure to pass any legislation, with consequences that remain unclear[1].It’s hard to see US unemployment falling substantially any time soon. The decline in the participation rate (it’s fallen by about 3 percentage points of the population, equal to about 5 per cent of the labor force) means that the standard measure seriously understates the severity of the problem. If employment growth were to resume, lots of people would re-enter the labor market, so that unemployment would not decline fast.

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There are plenty of reasons to be gloomy about the prospects of stabilising the global climate, but there are also some promising developments, so I’ve started a series on this topic. Part 1 on peak gasoline herePart 2 on solar PV here

This post is about energy efficiency, which is often neglected, but is likely to be the biggest single source of emissions reductions over the next few decades. I’m going to define efficiency fairly narrowly, to refer to technologies that deliver essentially the same services using less energy than those they replace: so, for example, I’m including more efficient airconditioners, but not “smart” systems that cut off when demand is high.

The shorter version is

1. With existing technologies or straightforward extensions, it’s possible to double energy efficiency (reduce energy use per unit of energy services by 50 per cent) at relatively low cost and with marginal changes in performance.
2. With rising carbon prices over time, it’s likely that further improvements can be made in many areas

3. Concerns about possible rebound effects (aka the Jevons paradox) are misplaced

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When my wife sent me the link, this ABC story was headlined Treasury head says Australians must work harder. It’s now been changed to “Australians must increase productivity: Treasury head”, which sounds a bit more reasonable, but I think is still a somewhat problematic.

I’ll try to discuss this in detail later, but for now I just want to push a point I’ve been making for a long time, which came up in comments recently. If governments want a simple reform that would improve our economic performance (though maybe not the standard measures of that performance), one of the best things they could do is legislate for six weeks annual leave as a standard employment condition. We have parental leave for parents of new babies, but there’s an equally big problem for parents of school age children trying to deal with the mismatch between school holidays (six weeks over summer, as well as term breaks) and the measly four weeks they are allowed, unchanged since the Whitlam government. And the rest of us could do with more of a break as well.

An extra week’s leave is like a 2 per cent wage increase. If annual leave were increased in a couple of stages to six weeks a year, it would only be necessary to find productivity increases or other offsets of 2 per cent, and, as Martin Parkinson implies, that shouldn’t be too hard.

I’ve been writing series of posts examining the question – what is left of Marxism, as a way to understand the world, and as a way to change it, once it is accepted that capitalism is not going to be overthrown by a working class revolution. The first was about class and the second about crisis. Now for the final instalment: capital.

By the way, the first post got translated into Spanish, here. It’s one of the things that I still find stunning about the Internet that things like this can happen.
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I’ve been travelling and going to meetings, hence slow posting. Light posting for a while to come, but I thought I’d throw in a last minute reminder that there’s still a few hours left in which to support the Queensland Cancer Council and claim a tax deduction in the process.

I’m writing series of posts examining the question – what is left of Marxism, as a way to understand the world, and as a way to change it, once it is accepted that capitalism is not going to be overthrown by a working class revolution. Last time I talked about class. This post is about crisis. As before, the shorter JQ is “there are lots of valuable insights, but there’s a high risk of political paralysis.”

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There are plenty of reasons to be gloomy about the prospects of stabilising the global climate, but there are also some promising developments, so I’ve started a series on this topic.

I’ve been meaning to write this post for a while, but Stephen Lacey at Grist (via David Spratt on Twitter) has done much of the job for me, and better than I could have. The crucial point is that the cost of solar photovoltaic electricity has fallen dramatically and is almost certain to fall further. In particular reaching the point where it is the cheapest large-scale alternative to carbon-fuelled electricity generation, and competitive (at reasonable carbon prices and in favorable locations) with new coal-fired power.

This makes for some fundamental changes in the debate over climate change and mitigation, even as it reaffirms the central point that advocates of mitigation have made all along, namely that, with an appropriate policy response, the costs of drastic reductions in carbon emissions will be modest in relation to national or global income.

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The once unthinkable prospect that US government debt might lose its AAA rating has suddenly become a real possibility. In fact, it now seems about as likely as not. The problem is not so much “can’t pay” but “won’t pay”. The US, like quite a few other countries, has some fairly serious fiscal imbalances, but they aren’t pressing in the short run, and there is plenty of capacity to raise additional revenue or cut spending so as to stabilise the ratio of debt to GDP at a sustainable level.

The problem is that even with a stable debt/GDP ratio the total value of outstanding debt keeps growing and the US Congress requires periodic votes to approve this. They are usually the occasion for some grandstanding, but this time the Republican majority of the House of Representatives is seriously threatening a refusal, unless the Democrats agree to massive (and still unspecified) spending cuts. The due date for raising the debt ceiling passed a while ago, but an actual default is being staved off by some sharp accounting tricks, which will apparently work until 2 August. The other day, to prove they are serious, the Repubs introduced a motion for an increase in the debt ceiling, with the express purpose of voting unanimously against it, which they did.

At this point, loud alarm bells have started ringing for the big ratings agencies, Standard&Poors and Moodys. They will have to decide, well before August, whether to downgrade US government debt and if so by how much.
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I’m going to use this post to put down a summary and some responses to the final Garnaut Review as I read it. Comments welcome, but may become obsolete as the text changes.

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Ten years or so ago, the Australian dollar was worth about 50 US cents on foreign exchange markets. I bet a small amount with a colleague that within five years, $A would have achieved parity. My reasoning was simple, elegant and wrong. By most estimates, the Purchasing Power Parity exchange rate[1] is around $A1.00 = $US0.70, so the Australian dollar was undervalued by around 40 per cent. It seemed to me that, within five years or so, the deviation should have not only been corrected but overshot in the other direction, giving a rate near parity.

I should have considered more carefully the saying, apocryphally attributed to Keynes, that the market can stay irrational longer than you can stay solvent. If deviations from PPP corrected within five years, speculators would bet on this happening, and the deviation would not be sustained at all. So, if PPP is false, it must stay false for long periods.

And that’s what’s happened. The Australian dollar has been above parity for some months now, and shows no sign of falling.

That raises some interesting questions. I’ll put up a few over the fold, and maybe update them as I go

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There are plenty of reasons to be gloomy about the prospects of stabilising the global climate. The failure at Copenhagen (partly, but far from wholly, redressed in the subsequent meeting at Cancun) means that a binding international agreement, let alone an effective international trading scheme, is a long way off. The political right, at least in English-speaking countries, has deepened its commitment to anti-science delusionism. And (regardless of views on its merits) the prospect of a significant contribution from nuclear power has pretty much disappeared, at least for the next decade or so, following Fukushima and the failure of the US ‘nuclear renaissance’.

But there’s also some striking good news. Most important is the arrival of ‘peak gasoline’ in the US. US gasoline consumption peaked in 2006 and was about 8 per cent below the peak in 2010. Consumption per person has fallen more than 10 per cent.
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I had a call from a local business organization asking if I would talk at a breakfast about the carbon tax to be held in a few eeks. The date was fine, so I said yes, then came the kicker – they wanted an economist on each side of the issue. The organizer said they had plenty of economists willing to speak for the tax, but they couldn’t find any willing to speak against it. I gamely offerd to present the case for an emissions trading scheme as opposed to a tax (even though, at the moment, I lean to a tax). But they wanted an actual opponent of any kind of carbon price, who was also an economist. This has proved to be impossible, which is pretty impressive testimony to the quality of the Queensland economics profession, and to the underappreciated fact that economists are among the strongest supporters of good environmental policy.

I’ve been asked quite a few times about chartalism and its recent rebadging as modern monetary theory (MMT). My answer has been that I really should get around to looking into this. However, the issue came up again at Crooked Timber following my post on hard Keynesianism. Looking around, I drew the conclusion that an attempt to define and assess the various versions of MMT would take more time than I had available. So, instead, I thought I would draw up a set of propositions bearing on the claims I made about hard Keynesianism and invite comment from MMT advocates and others as to whether they disagree.  Here they are

1. Except during the period since the GFC, money creation has not been an important source of finance for developed countries

2. Except under extreme conditions like those of the GFC, money creation cannot be used as a significant source of finance for public expenditure without giving rise to inflation and (if persisted with) hyperinflation

3. Government deficits must be financed primarily by the issue of public debt

4. The ratio of public debt to GDP cannot rise indefinitely, since governments will ultimately find it impossible to borrow

5. The larger the deficits governments want to run during deficits, the larger the surpluses they must run in booms

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6.30pm, Friday 6 May 2011
Basement Theatre, Business and Economics Building
Professor John Quiggin, University of Queensland, presents “What have we learned from the Global Financial Crisis?” at the Department of Economics – Melbourne Institute Public Policy Lecture 2011.

Here’s the link

In my post on bin Laden’s death, I noted the spin in a New York Times story suggesting that torture had helped to extract the clues leading to bin Laden’s location, even though the facts reported suggested the opposite. This analysis, also in the NYT, confirms both the spinning and the fact that the evidence produced under brutal torture was deliberately misleading. Given the failure of the Bush Administration to get anywhere near bin Laden, it seems likely that they were in fact misled, deluded by the ancient belief that evidence extracted under torture is the most reliable kind.

It’s noteworthy that the URL for the story is “torture”, but the article itself doesn’t adopt that description and doesn’t even use the word until well after the lede.

Wayne Swan has a Fabian Essay defending the Keynesian credentials of the Rudd and Gillard government. The central argument is sound enough

if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.

But there are a couple of big problems. The first is one of timing. The 2009-10 Budget, which included a large deficit as a Keynesian stimulus, proposed a return to surplus by 2015-16. This was seen at the time as quite ambitious – most developed countries have no obvious path back to surplus.

Nevertheless, by May 2010, with economic conditions much stronger than expected, it seemed as if the government had not been ambitious enough and the target date was brought forward to 2012-13.

Over the past year, however, the economic news, both locally and globally, has mostly been bad, with natural disasters producing short-term shocks, and the US and Europe mired in heavy debt and sluggish recovery. The economy has slowed a bit and tax revenue has fallen short of expectations. Unsurprisingly, on the government’s current policy settings, the return to surplus would be delayed, though probably still ahead of the original 2015-16 target.

From a Keynesian point of view, that’s exactly what should happen. Although the slowdown isn’t enough to justify an active fiscal stimulus, the standard Keynesian prescription would be to allow the automatic stabilizers to work, smoothing the path back to full economic recovery. Unfortunately, that’s not what the government is doing.

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That’s the title of my piece in today’s Fin, an expanded version of my post here earlier this week

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The downfall of the Gaddafi dictatorship now seems certain, despite brutal and bloody attempts at repression. The failure of these attempts kills off what was briefly the conventional wisdom, that dictatorships in the region can hold on if they “don’t blink“. At this point, Gaddafi and his remaining supporters will be lucky if they can make it to The Hague for their trials, rather than sharing the fate of the Ceaucescus.

Now a new conventional wisdom seems to be emerging, at least according to this article in the NY Times. The central idea is that while dictatorships (more accurately perhaps, tyrannies, in the classical sense of monarchs who have seized their thrones with no prior hereditary claim) are doomed, but that monarchies can survive with cosmetic concessions. In particular, on this analysis, the US relationship with the House of Saud can go on more or less as before.

There’s an element of truth here, but the central claim is wishful thinking

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It’s time again for the Monday Message Board to resume. Post comments on any topic. As usual, civilised discussion and no coarse language. Lengthy side discussions to the sandpit, please.

BTW, apologies again for slow response time and 503 errors if you are getting them. I’m looking at shifting to an alternative hosting service.