Month: May 2019

Economics in Two Lessons: 21st century cars

John Quiggin74 Comments

My central claim, in writing Economics in Two Lessons, is that most economic policy issues can be understood in terms of opportunity costs and their relationship to prices. I was talking about 21st century (electric and self-driving) cars, and several of the issues that came up illustrated this point very neatly. Among the objections to 21st century cars are the following

  • Since 21st century cars don’t use petrol, governments will lose the revenue needed to fund the road network
  • Self-driving cars will cruise around cities to avoid paying for parking, thereby increasing congestion
  • Because of the limits of AI, self-driving cars will inevitably kill people

The answer to the first two questions is the same. These problems arise because prices don’t reflect opportunity costs. Opportunity costs arise from cars using the road network, reducing access to others, and from the initial construction of the network, consuming land and resources that could be used for other purposes.

Under current conditions, petrol consumption provides a rough proxy for general road use, while parking charges provide a rough proxy for road use in urban areas, shopping precincts and so on. That relationship breaks down with 21st century cars.

But, this is a self-resolving problem. The reason we used petrol taxes and parking charges was because charging for road use was too hard. With 21st century cars, it’s trivially easy. We can set prices exactly equal to opportunity costs, taking account of time-varying congestion and any other factors we want to.

The dangers of 21st century cars can also be understood in terms of opportunity costs. The question isn’t whether they are perfectly safe, but whether they are safer than the next best alternative – the current mix of human drivers, including the large proportion of incompetents, drunk and drugged drivers.

A side issue that has just occurred to me: is it possible to steal a self-driving car with no manual override? It seems a bit like stealing a train.

Obviously

John Quiggin16 Comments

Yesterday I did an interview about the Queensland government’s plans for an infrastructure fund, to which coal companies have been invite to contribute in return for a promise not to increase royalties. I’d prepared on the assumption that the announcement would be about royalties, so I had to do it all on the fly. I thought I’d done OK, and substantively I had, but when I read my comments reported on the ABC, I realised I’d put an “obviously” or “clearly” in just about every sentence.

I didn’t even realise I had this tic. If I’d had the chance to edit it I would have deleted it (I find myself wanting to add “of course”, which I would then also have deleted). I should probably listen to myself on radio to pick up errors like this.

Hits and misses

John Quiggin14 Comments

Looking back at past posts, it’s enjoyable to find those where I went out on a limb and have been proved right by events, or at least supported by subsequent evidence. A couple of examples

It’s less fun when things don’t go as expected. Take Bitcoin as an example. Its uselessness is now even clearer than it was when I started writing about it 2013. Use in legitimate market transactions is almost non-existent, while the darknet illegal markets in which it is the preferred currency are being busted so frequently as to suggest that anyone using them is taking a big risk of losing their money, or worse. Meanwhile, the dream that Bitcoin would justify itself through the magic of blockchain has evaporated. As far as I can tell, cryptocurrencies on the Bitcoin model are the only genuine examples of blockchain technology in actual use (the label has been attached to some other projects for marketing purposes.

I’ve always said that, given the irrationality of markets, no one can predict when Bitcoin will reach its true value of zero, and I was careful to maintain this position when I posted on Bitcoin’s decline below $4000 late last year. Still, I have to admit that I expected this mania finally to come to an end. That hasn’t happened; in fact the price has doubled.

I won’t worry too much about the occasional (or not so occasional) error. My track record is still far better than that of the many pundits who predicted success for the Iraq war and continued claiming imminent victory years after the disaster had become evident. And most of them are still in business, apparently just as credible as ever to their audiences.

Australia isn’t doing its part for the global climate …

John Quiggin35 Comments

… Sooner or later we’ll have to pay our share. That’s the headline for my latest piece in The Guardian. The more important message is in the “standfirst” text that runs before the article proper.

The cost of responding to climate change is trivial compared with the benefits

To spell this out, here are the concluding paras of the article

The good news is that the cost of an emergency response, while large compared with an efficient policy, will be very small in relation to an economy with an annual output, by 2030, of $2tn a year or more. To see this, we can turn to the estimates prepared for the government’s election campaign by Brian Fisher of BAEconomics.

These worst-case numbers, higher than the costs of the most radical emergency measures, amount to around $50bn a year, or 2.5% to 3% of national income. That’s a lot of money – like adding a new program on the scale of the NBN or the submarine contract every year for five to 10 years.

At the same time, it’s small enough that it would barely be noticed against the background of the general fluctuations in the economy. The average household has lost far more from the wage stagnation of the last decade. As far as the government budget is concerned, the likely impact is comparable to that of increasing health expenditures arising from our increased life expectancy and the development of new treatments.

More importantly, the cost of an emergency response to climate change is trivial compared with the benefits of stabilising the global climate at a level that is livable for humans and the natural environment. We are currently shirking our contribution to this global public good, and free riding on the efforts of others. But sooner or later we will have to pay our share.

No Deal Boris

John Quiggin33 Comments

Last time I looked at the Brexit trainwreck, I predicted that May would seek an extension from the EU (which she did) but assumed they would want a concrete commitment to finality, through a referendum (which they didn’t). I ended with the observation

To be clear, “No Deal” doesn’t really mean that. A literal no deal would see Britain reduced to food rationing in a matter of weeks, air travel cancelled immediately and so on. In reality, “No Deal” means a series of emergency deals, cobbled together in circumstances where the EU faces significant but manageable economic costs, while the UK faces catastrophe.

Now May is on the way out, and it appears she will replaced by Boris Johnson, the British politician most hated by the EU. There’s no prospect that he will be able to negotiate a deal, even if he wants to. So, unless he is overridden as May was, a No Deal Brexit is on the cards.

But, contrary to what I wrote above, I think there’s now every prospect of something approaching a literal no deal. Johnson will certainly not be keen to make the kinds of accommodations needed for a manageable No Deal Brexit.

From the EU’s point of view, a few weeks of total chaos, followed by an abject surrender from Johnson, looks a lot more appealing than the same scenario applied to the earnest, if incompetent, Theresa May.

As the not so old English curse (attributed, as is normal in such cases, to ancient Chinese wisdom) has it, “may you live in interesting times”. Johnson is certainly interesting, and is a curse the English have brought on themselves.

Coal finance drying up, one country at a time

John Quiggin54 Comments

In the wake of last Saturday’s defeat, it’s important to remember that Australian politics is just one of many fronts in the struggle to stabilize the global climate and, in particular, to decarbonize electricity supply as rapidly as possible.

An important step in this process has been the push for financial institutions of all kinds: banks (public and private), pension funds, insurers and insurance brokers, corporate financial advisors and so on, to break with fossil fuels, starting with coal-fired electricity and thermal coal.

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What next ?

John Quiggin32 Comments

I’ve had my say on the election, and don’t intend to engage in post-mortems. The only question of interest for me now is: what to do next?

I can’t see any useful contribution I can make to Australian politics for the moment, though I’m happy to take suggestions. Serious policy development is going to be off the agenda for some time, and I’ve got nothing new to say about political strategy or day-to-day politics.

‘But the big issues I’m interested in (climate change, and the choice between socialist and Trumpist futures) are global and long-term. I’m going to spend some time thinking and writing about them. I want to put forward some possible visions for the long term (2050 or 2100) future, while maintaining urgency about the threats we face right now.

Adani’s moment of truth

John Quiggin45 Comments

The political campaign against Adani’s Carmichael mine has failed. That’s a big shift from the last Queensland state election, where the state government gained support in the south-east and held on to it in North Queensland. Obviously, Bob Brown’s convoy was counter-productive, perhaps disastrously so, and this failure will undermine any future direct action campaign in the region.

Given the election outcome, the approvals made by the Federal government will stay in place, and the Queensland state government is under immense (I would judge irresistible) pressure to expedite the remaining processes.

But we have been here before. Most of the approvals[1] needed to begin work were completed in 2016, at a time when both the Queensland and Federal governments were highly supportive (Anna Palaszczuk cut the ribbon at the opening of Adani’s Townsville regional HQ in 2017). At the time, I wrote

In summary, we appear likely to find out what happens when a dog catches the car it has been chasing. Adani and its backers have been denouncing green tape and “lawfare” as the only obstacles to the bonanza they have on offer. Now, the legal and administrative obstacles are gone, so they have only to line up the money, rehire the contractors and announce the starting date. My guess is that this will never happen.

That’s still my guess, three years later. The economics of the scaled down project still don’t stack up, and the problems with finance and contractors are even greater now than in 2016. However, there’s nothing more I can do to influence the outcome, so we will just have to wait and see.

Update: I meant to add that, if the project does go ahead, it will almost certainly involve a substantial injection of public money, which will not be recovered. Adani has plenty of form in this respect.

fn1. Obviously, not all of them. But if Adani had wanted to start work in 2016, they could have done so, and, given bipartisan political support, would certainly have found a way to deal with any remaining clearances. In fact, they announced they would be starting work then, and reannounced it in 2017.