John Quiggin

Functional analysis by Rudin. I needed to check something for work but then I saw that Rudin had a proof of the prime number theorem using Riemann’s zeta function. It’s one of the great ironies of mathematics that a simple statement about the integers is most naturally proved by applying abstract analytical techniques to a function of complex numbers, and I decided I had to see how it was done, which entailed working through the theory of Fourier transforms and distributions.

There are ‘elementary’ proofs, most notably by Pal Erdos, that only use ordinary number theory, but elementary does not mean ‘easy’ in this context. I plan to try and work through one of the elementary proofs some time.

This reminds me to mention that my Erdos number is 3 (via Peter Wakker and Peter Fishburn). At a stretch, this blog could be claimed as a collaborative work, in which case all my commentators would obtain an Erdos number of 4 – highly prized in some circles.

*Thanks to my travels, everything is running behind. So I’ve skipped this week’s Word for Wednesday, and put in last weeks Sunday feature instead

I spent much of last week in the Snowy Mountains with my family (the Powerbook came too, of course, so I kept up at least some blogging). It was the first time we’d been back since the devastating fires in January. Large areas are still closed off, and signs of fire are everywhere. Fire is a natural part of the lifecycle of a eucalypt forest, and signs of regeneration were already evident in many of the places we visited. But some of my favorite spots, such as the mountain ash forests around Round Mountain, are probably gone for good. This is the second fire in twenty years and it’s unlikely that new seed has been set. Even if they do come back, it will be decades before they regain anything like their former state.

As is inevitable with such a disaster, fingers have been pointed in all directions, notably at the National Parks and Wildlife Service for not burning off vigorously enough and at global warming for the extreme severity of the drought and hot weather conditions that led to the fire disaster. I’m keeping an open mind on the relationship between drought and global warming. Looking at the way the fire burnt through grassland as well as bush, I’m doubtful that any regime of controlled burning could have mitigated this fire much, unless it was so extreme as to fundamentally change the character of the Park.

Tim Lambert has produced yet more evidence of academic malfeasance by pro-gun economist John Lott. Kevin Drum at Calpundit has more. Since I was convinced long ago that Lott was discredited beyond any hope of redemption, the only point of remaining interest is the collateral damage being incurred by Lott’s allies and defenders.

Obviously, the once-respected American Enterprise Institute, which still employs Lott, is at the top of the list. Having had my own run-in with its current head Karl Zinsmeister, I agree with Brad de Long, whom I cited a while ago saying “Back in the late 1970s, the American Enterprise Institute ranked close to the Brookings Institution as a thinktank you could trust not to deliberately lie to you. Now it has fallen very deeply into the pit indeed”. No doubt some good work is still being done at AEI, but the AEI stamp now detracts from credibility rather than adding to it.

Another casualty is Lott’s Australian co-author, and gun rights advocate, John Whitley, who ended up with his name on an article that Lott himself refused to sign off on when the other party in a dispute pointed out a string of coding errors (Tim Lambert, linked above, has the details).

But the biggest not-so-innocent bystander to be hit by friendly fire is surely the king of the blogworld, Glenn Reynolds of Instapundit. Having cut his blogging teeth on the Bellesiles scandal (the discrediting of a widely-acclaimed piece of research seen as favorable to gun control), and having ferociously attacked those on the anti-gun side who failed to dissociate themselves from Bellesiles, Reynolds has consistently given Lott the benefit of the doubt, and has even, in a dispute between Lott and respected economist Steve Levitt, been implicated in Lott’s slimy manoeuvres (again, see Tim Lambert for the complex and gory details). Clearly all that rhetoric about ‘fact-checking your ass’ only applies to those who come up with the wrong conclusions.

Update Jason Soon reports that Steve Levitt has just been awarded the John Bates Clark medal for the best US economist under 40 (Paul Krugman is a previous winner, and it’s often seen as a harbinger of a future Nobel). So I guess he won’t be too worried by anything Lott and Reynolds have to say about him. Tom Spencer has more.

Ken Parish has had a go at Clive Hamilton over an extract from his new book, Growth Fetish, published at Online Opinion. I think a lot of the debate is either at cross-purposes or misses crucial distinctions.

In essence, Clive restates a critique of growth, as measured by Gross National Product, that goes back to Galbraith’s Affluent Society. The link is sharpened by the fact that Clive, like Galbraith, refers to Gross National Product (GNP) rather than, as is more usual in Australia, Gross Domestic Product (GDP). Ken makes some good points but, in large measure, offers a restatement of the arguments that were put forward in rebuttal to Galbraith and, even more, to 1970s critics of growth like the Club of Rome.

On balance, I agree more with Ken than with Clive, so it’s only fair to begin with a point on which I agree with Clive.

GDP growth is a lousy measure of how well a country is doing, even if we are only interested in relatively narrow economic assessments of welfare, as opposed to social, cultural or spiritual issues. The name gives three reasons why Gross Domestic Product a bad measure of economic welfare.

It’s Gross because depreciation is not subtracted. If we are concerned with measuring economic welfare, even from a narrowly materialist viewpoint, the net measure is relevant and the gross measure is not.

It’s Domestic because it measures the amount produced in Australia, including that which accrues to foreign owners of capital and is paid out as interest or dividends. National Product which is the output accruing to Australian land, capital and labour is more relevant.

Finally, it’s Product, that is, a measure of output that takes no account of inputs. If we increase our product by working harder or longer hours (a point Ken notes), or by consuming more natural resources, we are not necessarily better off. What matters in the end is productivity, not product.

Why then do economists pay so much attention to GDP? The answer is that it’s useful primarily as a measure of economic activity, for short-run macroeconomic management. If GDP is declining, this is a good indication that the economy is in recession and that macro policy needs to be more stimulative. Taking account of things like depreciation, international income transfers and work intensity would reduce the precision of estimates of short-run growth because all things are hard to measure, and would make GDP less useful for its primary purpose. (Of course, this is a Keynesian view – national account statistics like GDP are essentially a product of the Keynesian revolution).

This is a big subject and I’ll try to post more on it as I get time.

As yet another WMD discovery fails to pan out, I’m puzzled by continued claims that the UN failed in its task by not approving the invasion. Whatever arguments Bush may have had for war, the only one he put up to the UNSC was based on WMDs. The evidence put up in support of his case was obviously dodgy at the time and has since proved to be completely spurious. Contrary to repeated claims, it’s now clear that the US has and had no reliable intelligence about the existence and location of WMDs. Some may perhaps exist, but it’s evident that all the claims made by Powell in his UN speech were false.

This leads to the question – why didn’t Bush put up the case for a war of liberation to the UN? There are some obvious difficulties like the attachment of the Chinese to the doctrine of non-interference, but I think the real problem comes when you think about what would be involved in presenting such a case ex ante. As I observed a couple of months ago on this point

A starting point would be an admission by the US government that it actively assisted or passively encouraged Saddam in the commission of his worst single crime – the war of aggression he launched against Iran, in which he made extensive use of chemical weapons. When Blair correctly says that Saddam’s wars have killed more people than were marching in London, he should be remined of this. I don’t say that the past crimes of the US government mean that it should not do anything about Saddam now, but an open declaration of the US role and an apology for US complicity are necessary if the moral case against Saddam is to have any standing.

The second requirement is for some sort of just basis for asserting that a particular leader is a criminal who deserves to be overthrown. We have such a basis in the International Criminal Court, in which Britain is a participant. Blair should demand that Saddam be tried before this court. Of course, a precondition is that the US should drop its own objections.

Third, there is the problem of equal justice.The moral case against Saddam is compromised by US complicity in the occupation of Palestine. If Bush were to demand acceptance by both sides in this dispute of a peace plan similar to that put up by Clinton and back his demand by a threat of sanctions and a willingness to enforce an agreed peace, the moral case against Saddam would be lot stronger.

Finally, there is the problem of multiple agendas. A moral case for war can be made only by forgoing all attempts at seeking strategic or economic side-benefits. Yet many (most) of the US commentators supporting war are pointing to such benefits as a primary or secondary motivation. A moral case would require a clear commitment not to use Iraqi oil to the benefit of the US, not to use Iraqi territory as a base for further military action, not to make side deals with countries like Turkey etc. So far none of this has been forthcoming.

Given that the UN was never presented with a case for a war of liberation, it’s hard to see how the failure to authorise one can be held against them.

Things have been a bit quiet for the last week, with the many holidays. This raises the question – would we better off with more public holidays, and more general observance of those holidays, or with less of both? Feel free to comment on this or anything else (no coarse language and civilised discussion, please).

Update The Message Board at its lively best, as the impact of front loading washing machines on underwear battles for mindshare with the economics of the gold standard

After a period when departures seemed to outnumber arrivals, there are quite a few new blogs. Moreover, the general trend to the left (or rather, to a blogworld more representative of the political views of the Australian population than it was a year or two ago) seems to be continuing. I’ll mention some that I’ve noticed and invite anyone I’ve omitted to email me.

Alerion’s Southerly Buster is an excellent blog, except that my name is misspelt in the blogroll. Alerion is currently running pieces by Jorge Luis Borges, always a worthwhile thing to do. Carl’s Smiling Politely is another new entrant well worth a visit. PineappleTown, another Queensland blog, is mostly links to news reports, but the selection is interesting.

I’ve been noticing a quote, attributed to Keynes, that neatly encapsulates an argument I’ve been putting for some years.

The market can remain irrational longer than you can remain solvent.

The point of this is that, even if you can see a market bubble (or irrational slump) developing, you should not bet that prices will return to normal, for example by selling stocks short. The most sensible course is simply to avoid holding assets that are overpriced (I’ll need to work through the details of this argument formally some time – I guess it’s done in the literature on rational bubbles). Anyway, although the quote is being widely reproduced, I haven’t been able to find an actual citation, and the informal use of “you” leads me to suspect that these are not Keynes’ actual words. If anyone can find the source, I’d be very grateful.

On the same front, I gratefully acknowledge reader Bernhard Walpen, who sent me the full text of the Hayek quote on Pinochet that I mentioned some time ago. Here it is (with emphasis added by me):

Hayek, Friedrich August von, 1981: “En el Momento Actual Nuestra Principal Tarea es Limitar el Poder del Gobierno” [Interview], in: El Mercurio, April 4, 1981, p. D8-D9.

D9: “Bueno, yo le dirla que, como una institución a largo plazo, estoy totalmente en contra de las dictaturas. Pero bien puede ser un sistema necesario en un periodo de transición. A veces es necesario que en un país haya, durante un tiempo, alguna forma de poder dictatorial. Como usted comprenderá, es posible que un dictador gobierne de manera liberal. Y también es posible que una democracia gobierne con una total falta de liberalismo. Y yo, personalmente, prefiero a un dictador liberal y no a un Gobierno democrático carente de liberalismo. Mi impresión particular es – y esto es válido para Sudamérica – que en Chile, por ejemplo, habrá una transición entre un Gobierno dictatorial y un Gobierno liberal. Y en esa transición puede ser necesario mantener algunos poderes dictatoriales, no como algo permanente, sino como un arreglo de transición.”

My Spanish isn’t great, but it’s clear on the one hand that Hayek is endorsing the Pinochet regime [Bernhard's extensive research on Hayek revealed no statement critical of Pinochet], and on the other hand, that he viewed it as a transitional stage in a movement towards a nondictatorial liberal government.

The most natural reading of the phrase I’ve emphasised is that, even without the prospect of transition, Hayek thinks a liberal (that is, free-market) dictatorship is to be preferred to an illiberal democracy. But as with Marxists and the ‘dictatorship of the proletariat’, the tendency is to use the prospect of ultimate transition to an ideal state to avoid a clear commitment for or against a dictatorship of indefinite duration. And, since the Pinochet regime did ultimately give way to a democratic government, it’s probably not sensible to draw firm conclusions on the basis of Hayek’s attitudes in this case.

Update In the comments thread, reader Alan from Southerly Buster provides a good translation. And Brad de Long notes that he has been unable to find a source for the Keynes quote which looks ‘too good to be true’. I agree – it seems like a response to arguments that Keynes would never have encountered, regarding the potential for rational speculators to stabilise markets.

This NYT report on the mess in Afghanistan is worth reading when we are thinking about likely developments in Iraq. The situation in Afghanistan after the fall of the Taliban was, in important respects, considerably more promising than in Iraq. There was not too much trouble in producing a government with wide support, or at least acquiescence, and there was broad pro-American sentiment. All that was needed for a successful outcome was a reasonably comprehensive effort at peacekeeping and nationbuilding.

Instead, apparently to keep a clear field of fire in the hunt for Taliban/Al Qaeda, the Pentagon confined the international peacekeeping force to Kabul and allied itself with local warlords, inevitably becoming the enemy of its clients’ enemies. The result, two years later, is that Afghanistan is in much the same position as it was before the Taliban took over – warlords ruling the provinces and a government whose writ doesn’t run outside the capital, and not even within it at night. The time when US forces can pull out without inducing collapse looks further off now than it did when Kabul fell.

One consequence is that not even the relatively modest sums promised as aid have been delivered. As I recall, the US even forgot its budget allocation until the need to cover bases for the Iraq war focused the mind of the Administration.

This ought to have been comparatively easy, and it’s been comprehensively botched. Watching the mess that was made in Afghanistan was one of the factors that led me to oppose the war with Iraq. Nothing that has happened since the fall of Baghdad has led me to revise my assessment on this score.

From the British Public Finance (published by the Chartered Institute of Public Finance and Accountancy) reports on a British deal in which the private supplier of school services simply walked away, two years into a five-year contract. One would suppose that there was some sort of performance bond to guard against this, but it isn’t discussed.

Some more interesting stories report higher costs due to PFI causing cuts in services and problems with the London Underground PPP.

Even more interesting is the suggestion here that the vogue for the provision of public services by for-profit companies has passed its peak and that interest is now turning to “public interest companies” – a version of what used to be called quangos (I’ll add a link on the etymology of this interesting term when I get time).

Saddam may be gone, but there are still plenty of nasty dictators infesting the world, some of them members of the Axis of Evil and others prominent in the Coalition of the Willing.

Nathan Newman sends the following message:

Here is the first round of what I think needs to be a stronger, pro-active condemnation of authoritarianism of all kinds and nonviolent solidarity movement resisting that authoritarianism as an alternative to Bush’s corporate militarism. And no place better to start than with than Cuba, where a range of left activists are circulating the letter below.

See this post for more.

All wars generate conspiracy theories. The most interesting theory doing the rounds in relation to the war in/on Iraq is based on the struggle between the US dollar and the euro for pre-eminence as an international reserve currency, and, in particular, a basis for trade in oil. Until recently, this theory has been widely circulated among opponents of the war, but a version recently appeared in Newsweek with the implication that the shift to trade in dollars was justified as ‘spoils of war’.

Although the factual details and the supporting analysis vary from version to version, the common factual core is the fact that both Iraq and North Korea have recently switched their reserves from dollars to euros and that Iran is considering following suit. This, rather than weapons of mass destruction, is seen as the real cause of the war. In some accounts, this is tied to the attempt coup, generally welcomed in the US, against Venezuelan President Hugo Chavez who had also undertaken some diversification of foreign exchange holdings. One report, widely circulated on the Internet, includes an anonymous insider who is quoted as saying ‘Saddam sealed his fate when he decided to switch to the Euro in late 2000′.

The North Korean angle can be dismissed fairly quickly. North Korea’s annual trade is roughly comparable with Tasmania’s and its foreign exchange reserves are negligible. Then again, by many accounts, North Korean was something of an afterthought in the Axis of Evil, brought in to replace Syria when it was realised that an all-Muslim Axis would not play well with the world public.
More generally, the focus on Middle Eastern petrodollars is redolent of the 1970s thinking that still dominates much policy debate on both sides of the politicla divide. The characteristic feature of this thinking is an overemphasis on the economic importance of oil. The vast majority of US-dollar denominated assets are held in Europe and (East) Asia, and it is the sentiments of investors in these regions that will determine whether the US remains dominant as a reserve currency. In economic terms, a decision by OPEC to quote in euros rather than dollars would make very little difference.

Before going on to look at the implications of the war for the dollar, it is worth asking ‘does it matter if the dollar is the world’s reserve currency?’ After all, the pound sterling was an important reserve currency until the late 60s, and this did not seem to do much for the British economy.

The US directly benefits from the ‘reserve currency’ status of the dollar through international seignorage, that is, the fact that the US government can print dollar notes for which foreigners, notably in Eastern Europe, are willing to exchange real goods and services. A shift towards the euro would reduce or eliminate this benefit. However, as Lawrence H. Meyer of the US Federal Reserve Board of Governors, has observed, the total benefit of international seignorage is about $US15 billion per year – not much of a motive for a war that has already cost about $US50 billion and is likely to cost much more.

The real issues are subtler and relate to the complex relationship between military power, economic power and the ‘soft power’ of cultural and diplomatic influence. A successful outcome in Iraq may be seen as reinforcing US hegemony and therefore increasing the willingness of market participants, including central banks, to take actions that reduce their own returns but bolster the status of the dollar as a reserve currency.

Taken as a whole, I would argue the Iraqi war has done the opposite. The effect has been to make the US appear dangerous and unpredictable and to increase the desire of most people and governments to constrain its hegemonic power. Moreover, Bush’s willingness to spend vast amounts on war while making yet more dramatic cuts in taxes has strengthened the perception that US debts will sooner or later be repudiated either directly or through inflation.

However, this is not the view in Washington, where military and economic power are still seen as going hand in hand. It’s clear that, in the minds of those formulating US policy, military victories achieved in the face of European opposition will pave the way for continued US economic dominance.

Thus far, the foreign exchange markets don’t seem to agree. Although the $US is still well above its fundamental value, it has declined steadily during the Iraq war, with little regard for whether the war news is good or bad.

Update This piece from the UK Centre for Economic Policy Research considers a wider range of effects including benefits for ‘home’ financial institutions, relaxation of the ‘external constraint’ on macroeconomic policy, the role of the region in international institutions, effects on macroeconomic policy coordination, and the wider consequences of exercising ‘currency hegemony’. They conclude that the impact of the euro replacing the dollar for most international transactions would be

The consequence could be a welfare gain of 0.5% of GDP (annually) for Europe, with a similar loss for the US – as well as the other economic and geopolitical attributes of the ‘hegemonic’ world currency.

On this estimate the cost to the US would be around $50 billion per year, still well below the cost of maintaining military hegemony, which will certainly raise annual US defence expenditure by at least $100 billion per year, while having only a marginal impact on currency hegemony.

Ken Parish essentially sums up my views on the prospect of Kim Beazley being returned as Labor leader. I’ll just focus on one point. The argument that, “given the current focus on foreign policy issues we need someone with a strong background in these issues” is refuted by experience. The 2001 election was fought on foreign policy issues, and Labor was crushed. Another election on foreign policy would be a virtual rerun, especially as the subtext of the Beazley campaign is that he would ensure that “you couldn’t fit a cigarette paper” between Labor and the government on Iraq.

I also think the current assumption of an inevitable Liberal victory is not soundly based. The government may have a big lead, but public support is far from enthusiastic, and could be eroded rapidly by an economic downturn or (less severely, but still substantially) by a bad medium-term outcome in Iraq.

Update I should emphasise that any decline in the government’s popularity is unlikely to be sufficient to deliver Labor victory by default – the only strategy Beazley has. Crean did not make a good start on presenting an alternative, wasting his first year on meaningless internal party reforms. But he has shown more signs of trying to do something positive since then, and I think could produce something worthwhile in response to the next Budget (possibly his last chance, if a double dissolution is held).

Palestinian PM-designate Abu Mazin appears to have succeeded in facing down Arafat over his choice of Cabinet. It still has to be approved by the Palestinian Parliament. Once that happens, Bush is committed to publishing his ‘roadmap’ for peace, which Sharon has already effectively dismissed, proposing a wide range of amendments.

This is the big test for Bush’s Middle East policy. If he pushes ahead and demands that Sharon accept the roadmap without significant change, begins dismantling settlements and so on, there is a fair chance that the resulting shift in public sentiment throughout the Arab world will lead to a successful outcome in Iraq. If not, the hostility to the US that is already evident in Iraq will only intensify – there are a number of possible ways the situation could develop from there, none of them appealing.

But as I argued at the time, if Bush was planning to do something serious about the Israel-Palestine problem, it would have been far more sensible to do it first, then deal with Saddam.

Ken Davidson has a good summary of the various devices that make the Federal Budget about as useful as the annual reports of Enron. The prime examples are the adoption of a confused mixture of accrual and cash accounting and the use of long-term leases as a ‘debt-free’ method of financing.

Gary Sauer-Thompson has an excellent post on the news that the minimal flow through the mouth of the Murray is about to stop altogether. Clearly the only sustainable response is a reduction in the amount used for irrigation. Sharing this around is going to be difficult, especially when some users are still trying to increase the amount they take.

According to this NYT report, an Iraqi scientist has reported to the US that
(a) The Iraqis successfully concealed weapons from the UN but destroyed them just before the war
(b) The Iraqis transferred weapons to Syria
(c) The entire operation was linked to Al Qaeda
(d) He had taken the trouble to bury some samples (not chemical weapons, but precursors)
(e) Jacques Chirac regularly visited the site

OK, I made (e) up. But, in the absence of any actual weapons, items (a) to (d) are so close to today’s wishlist for testimony from a defecting scientist, it’s hard not to see this as someone trying too hard to please. As the NYT report, which has apparently been closely vetted by the US military, notes,

But he has given the Americans information about other unconventional weapons activities, they said, as well as information about Iraqi weapons cooperation with Syria, and with terrorist groups, including Al Qaeda. It was not clear how the scientist knew of such a connection. (Emphasis added)

On a related topic, I haven’t had much good to say about Donald Rumsfeld, but his prompt repudiation of a report that the Pentagon expects to establish permanent bases in Iraq was a piece of good sense. I had meant to post on this report under the heading “I really hope this isn’t true”, and for once my hopes appear to have been realised. As Rumsfeld said, it’s not as though the US is short of bases as it is.

Reader Belinda Weaver points me to the Australian Public Intellectual network and her blog for journalists both of which look interesting. Readers with an NQ connection may be interested in the Magnetic Times, a local paper to which I have occasionally contributed.

According to this NYT, the Pentagon is considering a leasing deal with Boeing for tanker planes. Everything you’d expect in a PPP story is there, including the obligatory reference to “innovative financing”.

I hope everyone is having a great Easter weekend. For anyone who’d like to tell the world about it (or about anything else), here’s your chance to post your thoughts on any topic (no coarse language and civilised discussion, please).

My main reading for the Easter weekend has been the program for the National Folk Festival in Canberra. I’ve had a great time. A quote to remember “Song predates speech” (Frankie Armstrong).

Going to festivals like this always tends to induce the belief that if we would only all be nice to one another and play lots of music the problems of the world would all be solved. This belief is obviously fallacious, but I’m not sure why.

US debt will come back to bite. Australian Financial Review 13 March 2003 An extract:

Banana republic populism actually has it easier in the US than in the Third World because the vast majority of US debt is denominated in US dollars. Rather than resorting to repudiation, the US government can simply print all the dollars it needs and use some of the proceeds to compensate the domestic holders of US public debt (a dwindling proportion as foreigners now hold between $2 and $3 trillion of US debt) …

The world has often seen rulers whose military power is not matched by their financial means. The lesson of history is that those who lend money to such rulers usually regret it.

Update 21/4 Niall Ferguson in the NYT develops the historical parallels in a great deal more detai.

Being AAA is not the top , Australian Financial Review ,27 February 2003. As I observed a few days ago, the mention of AAA credit ratings seems to induce a complete loss of reasoning capacity in Australian politicians. An extract:

the political weight attached to credit ratings is based on an exaggerated respect for the financial institutions that issue them. In the 1980s and 1990s, it was easy to believe that the financial wisdom of firms like Standard & Poors and Moodys vastly exceeded that of spendthrift governments in need of fiscal discipline.

The weaknesses of the ratings agencies have been sharply exposed by the financial crises of the last few years, most of which involved some form of crony capitalism. The Asian crisis caught the ratings agencies almost completely by surprise. Even more striking were the failures on their home turf. Firms like Enron and WorldCom, supposedly scrutinised by sophisticated financial analysts, went broke with scarcely any warning from the credit watchdogs.

Unfortunately, the use of dubious fiscal expedients like off-balance sheet partnerships is not confined to Enron. Most of the reduction in Commonwealth debt has arisen from asset sales. The sale of Telstra, which drastically reduced the net worth of the pubic sector, was the biggest contributor. While less significant in quantitative terms, other fiscal expedients have been even more troublesome. They include sale-and-leaseback arrangements very similar to those that formed the basis of the accounting manipulations employed by Enron.

More generally, the adoption of practices such as reliance on commercial confidentiality, a natural accompaniment of faith in the superiority of financial markets over governments, has led to a reduction in the amount of information about the operations of government that is made available to the public. The decline in the usefulness of the Commonwealth Budget papers is particularly noteworthy.

AAA ratings are all very well, but they are no substitute for accurate, comprehensive and comprehensible public accounts. These have been sorely lacking in Australia in recent years

As I’ve observed in the past, the stockmarket bubble in the United States represented a comprehensive practical refutation of the efficient markets hypothesis. The consequences of this refutation will take a long while to work their way through our thinking, but they will certainly include a diminution of respect for AAA ratings.

Now that the military phase of the war is over, the big question is how long the Coalition forces, including Australian forces, should stay, and how much control they should try to exercise. As Kevin Drum at Calpundit has observed, this is a problem with no good answer. Of course the fact that no serious attempt had been made to answer this question was a major reason for opposing the war in the first place.

I’ll try to develop my arguments in more detail, but I’m basically with Thomas Friedman on this one “we broke it, we own it”. Having asserted the right to dictate political outcomes in Iraq we (the citizens of the occupying powers) now have the responsibility for delivering an outcome that justifies the death and destruction we have caused. This probably means a long and expensive occupation.

No alternative for Telstra, Australian Financial Review ,13 February 2003 . This piece provoked a hysterical letter from Alston, but lots of readers liked it, even if they didn’t agree with the policy conclusion, which was:

The problem neither party will talk about is Telstra’s ownership. Just as in structural terms (Telstra represents an unacceptable combination of natural monopoly communications services and vertically integrated content provision), the current half-private, half-public status is an unsustainable mess, as even the government that created it now admits.

Telstra should be renationalised and the peripheral businesses should be sold off. This could be done in many different ways, including legislation or through a takeover by a newly created government business enterprise.

This simple solution is unthinkable to politicians with a 1990s mindset such as Alston. But in the past few years, Britain in effect has renationalised its rail track network, the US has nationalised airport security and New Zealand has created a new publicly owned bank, among many other instances.

There are good arguments for and against public ownership in particular cases. But in Telstra’s case, to quote Margaret Thatcher, there is no alternative.

There can be few ministers who’ve held on to an industry portfolio as long as Alston, while being derided by almost everyone involved in the industry. He’s even a favorite whipping boy overseas publications like the UK-based Register, which routinely runs headlines like This man must be the biggest luddite in history.

‘Truly this is the sweetest of theologies’, William said, with perfect humility, and I thought he was using that insidious figure of speech that rhetors call irony, which must always be prefaced by the pronunciato, representing its signal and its justification – something that William never did. For which reason the abbot, more inclined to the use of figures of speech, took William literally …

Umberto Eco The Name of the Rose

As in most recent wars, military casualties on the US-led side have been minimal in the war on Iraq. But there is another sense in which the cost in American, British and Australian lives has been high.

The money spent on the war could have been allocated instead to improved health care or public safety measures. The cost-effectiveness of such measures varies a lot, but a fair rule of thumb is that at the margin, health interventions cost about $US5 million per life saved (because of lower costs here, a marginal cost of about $A5 million per life saved is also appropriate for Australia).

So if we assume that the war and occupation will end up costing $100 billion, the opportunity cost is around 20 000 American lives. Assuming Australia spends $1 billion, the opportunity cost here is around 200 lives.

To take a more optimistic view of the question, it’s worth noting that the cost of saving lives through health care and other interventions is far smaller in poor countries like Iraq than in rich countries. So, if the US were prepared to spend another $100 billion* rebuilding (as opposed to occupying) Iraq, and allocate a substantial portion of that to health and education [especially education for women, which has big health benefits], many more than 20 000 lives could be saved. A commitment to reconstruction spending on this scale would go a long way towards justifying the war.

*Of course, for any net benefits to be realised, the money has to be new money from America or other donors, not Iraqi money recycled through American contractors.

This Washington Post article is the first I’ve seen based on extensive interviews with Iraqi civilians (in this case, in Basra) in the absence of the armed forces of either side. For those tempted to believe the official statements of one side or the other, it makes interesting reading. The headline “People in Basra Contest Official View of Siege: Life Was Mostly Normal, Residents Say; Doctors Report Many Civilians Killed” gives a reasonably accurate summary.

Responding to my piece on PPPs in last Thursday’s Fin, Dennis O’Neill of the Australian Council for Infrastructure Development concedes that the obligations associated with PPP are similar to those of sovereign debt, but then says that governments prefer PPPs because they are unwilling to take on additional debt for fear of jeopardising AAA credit ratings.*This makes about as much sense as saying that people who are worried about the size of their mortgage should borrow on their credit cards instead.

At lower credit ratings you could make an argument about transfers of systemic risk (very tenuous in my opinion), but the only question that should affect a AAA rating is the ratio of total obligations (including debt and PPP contractual obligations) to income.

Despite his protestations, O’Neill belongs among the believers in the magic pudding theory of private finance for infrastructure.

* [the letter is not on the Fin website yet, I'll try to post it later].

This is pretty much the antithesis of blogging. I read an article by Will Hutton a few days ago, thought I’d noted down the link and now I can’t find it anywhere. Anyway, Hutton produced statistics to show that the increased public spending of Blair’s second term was producing the desired results – shorter waiting lists, better school performance, lower crime and so on. But I don’t have a link, so you’ll just have to take my word for it.

As I recall, Hutton had a go at the standard free-market line that ‘you don’t solve a problem by throwing money at it’. It’s easy to make fun of this kind of claim. After all, no-one, least of all free-marketeers believes this in relation to their daily lives – there aren’t that many problems that can’t be eased to some extent by a generous application of money.

But I thought that it might be worth exploring the underlying argument a bit further. At its weakest it’s a statement about logical implication, namely that spending more money is neither necessary nor sufficient to bring about better outcomes. This is true, and can be backed up by supporting examples and counterexamples, but it isn’t very helpful. Training is neither necessary nor sufficient for swimmers to win races, but that doesn’t mean it’s a good idea not to train.

A more serious version of the claim rests on the factual claim that the public sector is inefficient compared to the private sector. If true, this means that it would be possible to improve performance without cost, and it raises the possibility that an increase in funds will simply lead to an increase in inefficiency. But most plausible models of public sector inefficiency don’t yield this conclusion.

Finally, there is statistical evidence. Taken in aggregate, statistical evidence produces the commonsense result that, other things equal, more input implies more output. The apparent counterexamples, such as US studies showing no relationship between class size and academic performance, generally don’t stand up to scrutiny very well. (at last, a link!)

Update In the comments thread, Mark Chambers comes to my rescue with this link to the Hutton article.