John Quiggin

For no particular reason, I’ve been very busy in the past few days, commenting on this and that.

There’s this piece on the recently announced (but still secret) Trans-Pacific Partnership Agreement.

Also, this SMH article by Clancy Yeates, citing my criticisms of the Productivity Commission case against penalty rates.

And, Campus Morning Mail links to my criticism of the bodies representing and regulating post-school education.

I have a piece up in The Drum, making the point that most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate. Unsurprisingly, it’s provoked some vociferous, if mostly incoherent, responses from Bitcoin fans.

Yes.

This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

Four years ago, I put forward a comprehensive plan for US policy on the Middle East (reproduced in full over the fold). Looking back from 2015, I think it’s clear that it would have yielded better outcomes all round than the actual policy of the Obama Administration, or any alternative put forward in the US policy debate. Not only that, but it needs no updating in the light of events, and will (almost certainly) be just as appropriate in ten years’ time as it is now.

Feel free to agree or disagree.

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First, there’s the Australian Skills Quality Authority, which is supposed to regulate the quality of vocational education. AQSA’s performance makes the Greyhound Racing Queensland Board look good

In 2012, when I wrote a report on vocational education, it was common knowledge that the for-profit education sector was comprehensively rotten, particularly in Victoria where the push to privatisation began. This ABC report suggests that ASQA was on the case. But three years later, the only thing that has changed is that the rot has spread nationwide. All the big names in the industry – Evocca, Aspire and so on – are engaged in practices like using laptops as inducement to recruit low-income students who have no chance of either completing their courses or repaying their HECS-HELP debts. There’s no surprise here – it’s exactly the business model of US for-profits like the University of Phoenix.

The right solution is to stop giving any public money to for-profit education businesses. But, in the current market liberal environment that would probably fall afoul of competition policy. So, my suggestion is to cap the amount any publicly funded institution can spend on marketing to Australian students. Ideally the cap would be well below the amount currently being wasted by universities and other public providers competing against each other with our money. That in turn would be far below the rake-off being taken by the recruiters on whom the for-profits depend.

In the meantime, AQSA is a proven failure. It needs to be scrapped and its functions turned over to a body with some real teeth and a willingness to defend the interests of students and the public purse, rather than being a captive of the industry it is supposed to regulate. A joint investigation by the ACCC and the Auditor-General would be a good start.

Next, Universities Australia, the Go8 and the other Vice-Chancellors’ clubs. Fresh from the fee deregulation debacle, they’ve turned their attention to the question of how we should allocate research training places (such as PhD programs).

In the case of fee deregulation, the VC groups were uniformly wrong, not to mention tin-eared. This time, we have the odd spectacle of the Go8 directly opposing UA, even though one is a subset of the other. The Go8 want to stop departments with poor research records, based on the “Excellence in Research Assessment” from getting funding for research training places. UA is opposed, making the point that ERA is not “fit for purpose”.

In the abstract, I have some sympathy for both sides of this argument but in practice it just looks like special pleading on both sides – UA wanting to keep something for all its members, and the Go8 lobbying for special treatment.

But the real problem is the one I identified in the deregulation debacle. The VC groups claim to speak for universities, but exclude all but 40-odd of the people who work and study in them. In the present case, wouldn’t the perspectives of research students and the academics who supervise them be more useful than those of VCs and administrators? To repeat, we need to replace UA with a body that represents students and staff as well as top management.

And, while we’re at it, how about dropping the linguistic abomination of names like Universities Australia[1]? Even knowing nothing else about the group, a name like this reeks of the worst kind of 1990s managerialism.

[^1] Are there any grammar experts who can give a name to the part of speech represented by “Australia” in this title? It’s not known to Standard English, I’m pretty sure.

Among the winners of the Economics Nobel [1] two of the most interesting are George Akerlof and Robert Shiller. Their book Animal Spirits provided me with much of the intellectual stimulus to write my own Zombie Economics. Their latest has the intriguing title Phishing for Phools: The Economics of Manipulation and Deception.

The central theme is simple. We are all prone to errors in reasoning. Given the complexity of the world, and the finiteness of our reasoning capacity, it could scarcely be otherwise. This obviously leads to decisions that differ from the perfect optimality assumed in simplistic versions of economics.

More importantly, markets create opportunities for others to exploit and amplify our errors in reasoning. Advertising uses all sorts of device to encourage us to make decisions that we would not make if we gave careful and rational consideration to our choices. The entire credit card industry relies for its profitability on the fact that cardholders don’t (as is almost always sensible) pay off their balances every month. And so on.

As Akerlof and Shiller observe, the fact that markets systematically amplify reasoning failures undermines the standard claims about the optimality of market processes.

The proposed policy responses are a bit limited, focusing mainly on regulation and consumer protection. Still, the book is well worth reading.

An interesting side point is an argument that the harms of alcohol, a notorious source of suboptimal decisions, have been greatly underestimated.

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Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.

… has blown for any notion of “sane Republicans”. Comment seems superfluous, but I will repost some older pieces, going back to 2004, which I think stand up pretty well

Science versus the Republicans
Ignorance is strength
Has vaccination become a partisan issue?

Here’s another draft extract from my book-in-progress, Economics in Two Lessons, looking at income distribution. The entire draft section on this topic is available here. And the introduction, describing the general approach of the book is here.

Praise is welcome, and useful criticism even more so. As a reminder, this is an extract. If you think a crucial point has been missed, point it out, but bear in mind that it may be addressed elsewhere in the book.

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As has happened before, I was travelling when the Prime Ministership suddenly changed hands. I’m still on holiday, though I briefly appeared before the South Australian Royal Commission on the Nuclear Fuel Cycle yesterday. But even without following the news closely, it’s easy enough to see that the Turnbull LNP government is basically the Abbott government with the gratuitous culture war element removed.

On climate change, for example, we’ve seen the end of attempts to kill the highly successful Clean Energy Finance Corporation, but no major change to the absurdly misnamed “Direct Action” policy, and a doubling down on Abbott’s support for coal from newly promoted minister Josh Frydenberg.

In particular, contrary to suggestions that Turnbull is going to push for a more “market liberal” approach, Frydenberg is still touting the idea of subsidising the Adani Carmichael boondoggle. I doubt that anything will come of this (on this score, the supposed deal with Downer EDI to build Adani’s railroad seems to have quietly died), but it’s indicative of the government’s position. And the new coalition deal, handing over water policy to Barnaby Joyce, amounts to a repudiation of everything Turnbull stood for when he was Water Minister under Howard.

The abandonment of the culture wars looks like something of a double-edged sword. On the one hand, it was obviously necessary, given the extent to which Abbott’s absurdities discredited the whole enterprise. On the other hand, much of the LNP base and commentariat are so committed to culture war politics that they will have grave difficulty in supporting Turnbull even if they want to: most of their usual lines against inner city elites, latte liberals and so on are far more applicable to their own new leader than to Labor and the Greens.

My success as a pundit is notoriously mixed. Still, I find it hard to see how Turnbull can sustain his initial bounce in the polls without taking tougher decisions than those he has been willing to make so far.

I have a piece in The Economist climate blog, making the point that the risk of catastrophic climate change has been ignored by “lukewarmists” like Bjorn Lomborg and Jim Manzi.

Malcolm Turnbull’s coup against Abbott has been the subject of much commentary, and I didn’t have anything to add. But now it’s time to look beyond the juggling of Cabinet positions and to consider some of the long term implications. Turnbull’s rise takes off the table, or radically changes the politics of, a number of issues that would have been central to an Abbott election campaign. Most obviously, there are the issues (climate change, equal marriage, republicanism) where Turnbull is known to agree with Labor but has said he will stick with Abbott’s policies. Obviously, Turnbull can’t run hard on these. It remains to be seen whether Labor can make political mileage out of the contradictions involved.

The ground Turnbull wants to fight on is that of economic liberalism, primarily as represented by the so-called Free Trade Agreements with Korea, Japan and, most importantly, China.

Turnbull has the near-unanimous support of the elites on these deals, even though it’s hard to find even a single economist who would support them with any enthusiasm. Anyone who has looked seriously at the issue understands that the trade aspect of these agreements is trivial. What matters are the side clauses on issues like Investor-State Dispute Settlement procedures, intellectual property, environmental protection and so forth. Unfortunately, political journalists, as a class, don’t do much thinking.

Here, for example, is Laurie Oakes, asserting that

>Labor needs to end up supporting this trade deal. That is the bottom line

but not providing a single argument in favour. In typical “Insider” style, Oakes says

The government charge that Labor is sabotaging jobs would not be a difficult one to sustain.

without worrying about whether this charge is actually true (it isn’t).

In the case of CHAFTA (the unlovely acronym for the China deal), the big problem is not in the agreement itself, but in a “Memorandum of Understanding”, which provides for circumstances under which a Chinese company can import its own workforce, without labour market testing (that is, even if there are Australians willing and able to fill the jobs) and without matching existing conditions.
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Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

Update \ I thought I’d repost this a year on, and reopen the discussion 10 September 2015

Reader ZM points me to a paper with this title, by Graham Turner of the University of Melbourne. Not only does Turner answer “Yes”, he gives a date: 2015. That’s a pretty big call to be making, given that 2015 is less than four months away.

The abstract reads:

The Limits to Growth “standard run” (or business-as-usual, BAU) scenario produced about forty years ago aligns well with historical data that has been updated in this paper. The BAU scenario results in collapse of the global economy and environment (where standards of living fall at rates faster than they have historically risen due to disruption of normal economic functions), subsequently forcing population down. Although the modelled fall in population occurs after about 2030—with death rates rising from 2020 onward, reversing contemporary trends—the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. Given this imminent timing, a further issue this paper raises is whether the current economic difficulties of the global financial crisis are potentially related to mechanisms of breakdown in the Limits to Growth BAU scenario. In particular, contemporary peak oil issues and analysis of net energy, or energy return on (energy) invested, support the Limits to Growth modelling of resource constraints underlying the collapse.

A central part of the argument, citing Simmons is that critics of LtG wrongly interpeted the original model as projecting a collapse beginning in 2000, whereas the correct date is 2015.

I’ve been over this issue in all sorts of ways (see here and here for example, or search on Peak Oil). So readers won’t be surprised to learn that I don’t buy this story. I won’t bother to argue further: unless the collapse is even more rapid than Turner projects, I’ll be around to eat humble pie in 2016 when the downturn in output (and the corresponding upsurge in oil prices) should be well under way.

Given that I’m a Pollyanna compared to lots of commenters here, I’d be interested to see if anyone is willing to back Turner on this, say by projecting a decline of 5 per cent or more in world industrial output per capita in (or about) 2015, continuing with a sharply declining trend thereafter. [minor clarifications added, 5/9]

A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.

Bernie Fraser has just resigned as Chairman of the Climate Change Authority, of which I’m a Member. His chairmanship marked the culmination of a long career of public service, in which Bernie served as both Secretary of the Treasury and Governor of the Reserve Bank. Over many years, I’ve sometimes agreed and sometimes disagreed with Bernie on particular policy issues, but I’ve always found him to be committed to serving the Australian people and to a broad and humane view of our collective interests. At a personal level, he’s a great person to deal with and work with. He will be a big loss to the Authority, but we have made arrangements to carry on our work.

One of my Twitter followers asked for a post on which people might write appreciative comments, and here it is. If you want to discuss anything else (climate change policy, macro policy in the 1980s and 1990s, the future of the CCA) I’ll be opening a sandpit for this purpose.

The Oz is pushing hard for the China-Australia Free Trade Agreement. Support for the deal was (AFAICT) the only significant output from the “National Reform Summit” held by the Oz and AFR a week or so ago. This raises a few points of interest.

* Until very recently, bilateral trade deals of any kind were seen as the antithesis of free-market reform. Reformers favored either unilateral removal of trade barriers or global deals through the World Trade Organization. Admittedly, the latter is clearly a forlorn hope, but what happened to unilateral free trade

* Second, it ought to be clear by now that “reform” means “whatever the Oz and IPA wants”. For example, tax reform doesn’t mean taxing mineral rents or carbon externalities or tax-dodging trusts and shell companies. In essence, it means taxing food and giving the proceeds to the rich. Anyone concerned with good policy should stop using this word in a positive sense

* Most importantly, “Free Trade Agreements” are nothing of the kind. The key to the China deal is the expansion of the 457 system to allow for 100 per cent overseas workforces. Even if you think that’s a good idea, it should be addressed in the context of immigration policy. There’s a startling contradiction between this stuff and Joe Hockey’s high profile persecution of Chinese buyers who are allegedly pushing up the price of Sydney houses.

* The same is true of the other FTA’s this government has signed, and even more so of the proposed TPP. At most, the trade component of these deals consists of Australia selling its domestic policy sovereignty to foreign governments in return for the removal of their trade barriers.

Here’s another excerpt from my book-in-progress, Economics in Two Lessons. Rather than work sequentially, I’m jumping between:

Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.

and

Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

In the section over the fold, I’m looking at how opportunity cost reasoning applies to policies that change the distribution of income, wealth and other entitlements.

As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.

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It’s often hard to get an idea of the scale at which different technologies are operating. For example, there’s a lot of discussion about Carbon Capture and Sequestration (CCS or ‘clean coal’), though less than there used to be. To get an idea of current and near-future prospects for CCS in the power sector, I went to the Global CCS Institute list of large-scale projects. The site says

Large-scale CCS projects in the power sector are now a reality, demonstrated by:
* The world’s first large-scale power sector CCS project – the Boundary Dam Integrated Carbon Capture and Sequestration Demonstration Project in Canada (CO2 capture capacity of 1 Mtpa) – becoming operational in October 2014
* Commissioning activities on a new-build 582 megawatt (MW) power plant beginning at the Kemper County Energy Facility in Mississippi (US, CO2 capture capacity of 3 Mtpa) with CO2 capture expected to commence in the first half of 2016
* The Petra Nova Carbon Capture Project at the W.A. Parish power plant near Houston, Texas (US, CO2 capture capacity of 1.4 Mtpa) entering construction in July 2014, with CO2 capture anticipated by the end of 2016.

Tactfully ignoring the fact that the Kemper project has turned out to be a disaster, I thought I would scale this against an option that we can all comprehend, shutting down the brown coal power station at Hazelwood. According to this article, Hazelwood generates 15.7 million tonnes of CO2 per annum, or about three times the total from all CCS Power projects now in operation or under construction.

Looking further down the page, there’s a summary of all the CCS projects currently at any stage of consideration anywhere in the world

Globally, there are 14 large-scale CCS projects in operation, with a further eight under construction. The 22 projects in operation or under construction represents a doubling since the start of this decade. The total CO2 capture capacity of these 22 projects is around 40 million tonnes per annum.

There are another 14 large-scale CCS projects at the most advanced stage of development planning, the Concept Definition (or Define) stage, with a total CO2 capture capacity of around 20 million tonnes per annum. A further 15 large-scale CCS projects are in earlier stages of development planning (the Evaluate and Identify stages) and have a total CO2 capture capacity of around 30 million tonnes per annum.

So, if all of these projects were successfully completed, they would offset the emissions of six Hazelwood-sized plants. It gets worse. Many of these projects serve only to reduce the “fugitive” emissions from oil and gas fields, and most rely for their viability on using the captured CO2 in oil fields, to push more oil to the surface (enhanced oil recovery).

It’s time to bury the myth of CCS once and for all.

were implemented on schedule, the impact over the next fifteen years would be negated if we allowed Hazelwood to continue operating over that period.

There’s been a lot of commentary on a recent study by the Replication Project that attempted to replicate 100 published studies in psychology, all of which found statistically significant effects of some kind. The results were pretty dismal. Only about one-third of the replications observed a statistically significant effect, and the average effect size was about half that originally reported.

Unfortunately, most of the discussion of this study I’ve seen, notably in the New York Times, has missed the key point, namely the problem of publication bias. The big problem is that, under standard 20th century procedures, research reports will only be published if the effect observed is “statistically significant”, which, broadly speaking means that the average value of the observed effect is more than twice as large as the estimated standard error. According to the standard classical hypothesis testing theory, the probability that such an effect will be observed by chance, when in reality there is no effect, is less than 5 per cent.

There are two problems here, traditionally called Type I and Type II error. The classical hypothesis testing focuses on reducing Type I error, the possibility of finding an effect when none exists in reality, to 5 per cent. Unfortunately, when you do lots of tests, you get 5 per cent of a large number. If all the original studies were Type I errors, we’d expect only 5 per cent to survive replication.

In fact, the outcome observed in the Replication Study is entirely consistent with the possibility that all the failed replications are subject to Type II error, that is, failure to demonstrate an effect that is there in reality

I’m going to illustrate this with a numerical example[^1].

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The Queensland government is going ahead with (or, more hopefully, going through the motions of) the process for expansion of the Abbot Point coal terminal. A Draft Environmental Impact Statement has just been released, and there is a call for comments here

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Hardly anyone bothered to pay attention to the “National Reform Summit” put on by the Oz and the Fin the other day. The word “reform” tells us everything we need to know about this event: yet more invocations of the exhausted policy agenda of the 1980s, all with the implicit message that we need to work harder. Both Jeff Sparrow at Overland and Ben Eltham at New Matilda have pieces today making this point.

“Reform”, meaning “change for the better” was always a problematic concept, but it was a useful word, and we don’t have a good alternative. I don’t think a single replacement is feasible, but I’d like to try out some alternatives, and call for other suggestions

“Redesign” and “restructuring” are reasonably neutral and can be used to indicate a wide range of policy changes, without assuming anything specific. For example, “retirement income policy redesign”.

“Liberalisation” describes a wide range of things for which “reform” is commonly used, for example “drug law liberalisation” or “financial market liberalisation”. This gives a pretty clear indication of the general line of policy change, without the approval implicit in “reform” (except to the extent that support for liberalization in general is assumed).

What is lacking is a good single word term for what was the primary connotation of “reform” until the 1980s, namely, policy changes along social democratic lines. Any suggestions?

The Abbott government is copping plenty of flak (metaphor used advisedly) over its obvious politicking with respect to the construction of a new class of guided-missile frigate for the Royal Australian Navy. The project with total costs touted at $90 billion is promised to create lots of jobs in South Australia, perhaps replacing those when the same government, in its free-market incarnation, welcome the death of the car industry.

Rather than pile on, I’ll ask a question which, from past experience, I know is bound to annoy many. What are these things supposed to do?

As far as I can tell, guided-missile frigates are supposed to shoot down aircraft and missiles, but this seems, on the face of things, to be an absurd proposition. Pitting an effectively stationary boat, costing the better part of a billion dollars, against missiles (fired from land or from aircraft), travelling at the speed of sound or more, and costing a million dollars apiece, seems like a hopelessly lopsided contest.

Of course, it’s just about impossible to test this proposition. AFAIK, the only conflict in which surface ships have actually engaged in combat with aircraft using missiles was the Falklands, more than thirty years ago. That didn’t appear decisive: the Royal Navy managed a win against the air force of a Third World country, but took some heavy losses in the process. But technology has advanced a long way since then, and there’s no way of testing which side of such conflicts it now favours. So, naval advocates can make up whatever claims they like about the capabilities of the ships we keep on buying.

Of course, the fact that there has been so little naval warfare in the last 70 years or so seems to me to be a very strong argument for spending less on money on warships.

Readers will be aware that I think war is almost always disastrous for both sides, that most military spending is wasteful and harmful, but that I know this to be a minority view. Even given that, the case against spending money on navies (and particularly surface fleets) seems so overwhelming to me that I’m amazed to find hardly anyone in agreement.

… by Martin Ferguson’s emergence as an enemy of the Labor Party and the trade union movement? I’m certainly not. Ten years ago, reviewing Michael Thompson’s Labor without Class, to which Ferguson contributed a laudatory foreword, I wrote

The obvious inference from Thompson’s book is not that Labor should change its position but that he, and others who share his views, should join the Liberals.

In 2009, looking at political nepotism in general, I said,

People like Belinda Neal and Martin Ferguson would never have made it into Parliament on their own merits, and would probably have been on the other side if not for their family ties

In between, I noted Ferguson’s support for John Howard’s climate do-nothingism as an argument against the hereditary principle in politics.

My record as a political prognosticator is notoriously mixed, but I got this one right.

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

One of the big benefits of blogging for me is the chance to try out my ideas on an audience I couldn’t easily reach (or at least hear back from) in any other way. That’s particularly true when I’m writing a book, which is always a difficult process for me. My last post, on the opportunity cost of war produced a great comments thread. Particularly useful was a discussion, started by Chris Bertram at Crooked Timber, of the oft-heard claim that war stimulates scientific and technological progress. I’ve used my response, along with points appropriated from commenters to draft a new section for the book, pointing out how this claim ignores the problem of opportunity cost.

As always, comments of (nearly) all kinds are appreciated, and useful ones may be recycled.

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I have a piece up at the Drum, looking at how the three-word slogan approach of the Abbott government helps to explain their budget problems. Text is over the fold

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The US National Oceanic and Atmospheric Administration just reported that the global mean temperature for July 2015 was the highest for any month since record keeping began in 1880. That follows a string of record-breaking months. And with a major El Nino well under way, it seems highly likely that more record high temperatures will follow.

To anyone with a sceptical attitude to factual assertions, this evidence would appear to cast grave doubt on the claim that the world is experiencing a “hiatus” or “pause” in global warming. On the face of it, either the supposed “hiatus” never occurred, or it has now ended.

So, it’s natural to ask whether such sceptical attitudes have been observed among those who describe themselves as “global warming sceptics”. I would be genuinely glad to find examples, since it would imply some possibility of serious discussion, as opposed to a restatement of tribal shibboleths.

Are any sceptical sceptics reading this? Has anyone else noticed any? Or are self-described “sceptics” only sceptical about things they don’t want to believe.