Month: April 2004

Science vs the right: Part 2 (Australia)

John Quiggin86 Comments

Update 30/4As this one still seems to be alive, having veered from the Murray to libertarianism to the appropriate mode of address for yours truly, I thought I’d move it back up to the top of the page

The most important representative of party-line science in Australia is the Institute of Public Affairs[1], which models its approach closely on that of rightwing thinktanks in the US[2]. It has promoted critics of scientific research on passive smoking , funded by the tobacco industry, (for an IPA defence of this practice, read here), critics of scientific research on global warming (funded by the fossil fuel industry), and has more generally bagged scientists and research organisations whose research produces commercially inconvenient findings. Targets have included the World Health Organization, the National Health and Medical Research Council and of course, the International Panel on Climate Change, as well as many individual scientists.

The mode is identical to that of Milloy and Tech Central Station. Where the general scientific basis is strong (as in arguments about the safety of GM foods) opponents are assailed as anti-scientific irrationalists. Where it is weak (as in the cases of smoking and global warming) the IPA demands equal time for sceptics, even sceptics who have done no original research and have no relevant qualifications. The strategy is one of selective citation of evidence that supports a predetermined outcome, mixed with protestations of support for open inquiry and the scientific method. As far as I know, the IPA has never found a case where the evidence supports more environmental regulation, or even a continuation of existing regulations.

The latest target of the IPA, and one close to home for me[3], is the sustainable management of the Murray-Darling Basin.
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Googling the capital markets

John Quiggin8 Comments

The Google IPO has now been announced, and there are some more figures to analyze. In addition, I wanted to talk a bit about the option, suggested by one of the commenters on Kevin Drum’s blog of arbitraging by short-selling overpriced dotcoms and buying those with more reasonable valuations.

Looking at this NYT report, that doesn’t seem likely to be an option.

In 2003, Google reported an operating profit of $340 million on sales of $960 million. But the 2003 figure appears to understate the company’s cash profit margin, since it includes very high expenses related to stock options that will probably decline in future years. On a cash basis, Google had an operating profit of $570 million in 2003, and an operating margin of 62 percent.

Given those figures, Google will easily command a market valuation of at least $30 billion, and perhaps much more. EBay, which had an operating profit of $660 million on sales of $2.2 billion last year, is valued at $54 billion; Yahoo, with sales of $1.6 billion and operating cash flow $428 million, is valued at $36 billion.

I’m not an accountant, but I think the “operating profit” referred to here is EBITDA (earnings before interest, tax, depreciation and amortisation): in any case, it’s more than the profit accruing to owners of equity. So it appears that all of these well-established businesses are valued at more than 100 times annual earnings.

As I recall, the ratio for profitable companies during the hyperbubble was around 400, so some progress has been made. But these values still look bubbly to me. To match an investment in 10-year bonds, without allowing for any risk premium or for the inevitable increase in long-term interest rates, all these companies need to more than quadruple their earnings, then maintain those earnings for at least 20 years. Maybe Google can do this, and maybe Yahoo can do it, but it’s most unlikely that both of them can.

At one time, I would have tried hard to think of an explanation consistent with some notion of aggregate market rationality, in which capital markets allocate capital to its most productive us. In the light of the evidence of the last ten years – the dotcom bubble, the US dollar bubble, the (still continuing) bond bubble – I no longer bother. Capital markets are driven by fashion (in this case, the continuing desire to be part of the Internet happening, in the face of mounting evidence that it provides almost exclusively public goods), fear and greed. On average, capital markets do a better job than Soviet central planners, but I think they do less well than the mixed economy that was dominant during the postwar Golden Age.

Eventually, no doubt, reality will prevail. If I knew that was going to happen within the next twelve months, I’d be shorting the remnants of the dotcom sector for all I was worth. But, as Keynes apparently didn’t say, the market can stay irrational longer than you can stay solvent.

The FTA

John Quiggin9 Comments

I’ll be participating in a Senate Roundtable on the proposed FTA with the United States next week, and things have been livened up with the release of a new study from the Centre for International Economics with the following optimistic bottom line

The most probable effect on macroeconomic welfare after a decade, as represented by real gross national product (GNP), is an increase of $5.6 billion per year above what it might otherwise be.

Not surprisingly I think this is estimate is way of the mark (warning: big JPEG coming up).
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Brooks makes sense

John Quiggin2 Comments

Like nearly everyone else, I’ve been deeply disappointed by David Brooks’ Op-ed columns in the NYT. But it’s not only out of a sense of fairness that I’m giving a favorable link to his latest – it’s not only good relative to the other stuff he’s written but better than most other commentary[1]. Referring to the debates over the Clarke and Woodward books, occurring at a time when Iraq looks like sliding into chaos, he says

This is like pausing during the second day of Gettysburg to debate the wisdom of the Missouri Compromise.

Right though this is, it’s obviously helpful to the Republicans, as is the observation that

many Americans have decided that it’s time to persevere and win.

But his final para raises the real issue

Over the next weeks, U.S. forces are going to jump from the fires of unilateralism to the frying pan of multilateralism. What’s going to happen when our generals want to take on some insurgents but Brahimi and the sovereign Iraqi appointees say no?   

Brooks might want to ponder the point that the Bush Administration appears to have no answer to the question he has posed here. They have set up rules that let them ignore the supposedly sovereign government they plan to establish, but it’s obvious that any such action will bring the whole structure crashing around their ears.

fn1. Obligatory blogplugging: That’s old-media commentary, of course. This whole post is a subtle reminder that blogs, including this one, have already moved on from point-scoring and asked the questions that are now being raised by Brooks.

50 per cent

John Quiggin4 Comments

One of the most pleasant aspect of being a Research Fellow is guest lectures. I give guest lectures in a number of different courses, ranging over several faculties and sometimes different universities. This gives me all the things I like about teaching, including (since a change is as good as a holiday) generally attentive audiences, and a chance to present material that’s not the standard textbook, but not new or rigorous enough to justify an academic seminar. On the other hand, all the unpleasant stuff – booking rooms, litigious students complaining about their grades, administrators trying to promote customer-centric shareholder value in a dynamic enterprising university, and so on – is taken care of for me.

I tend to do most of my guest lectures around mid-semester, since this is what fits the standard course structure best, and I’ve got quite a heavy load (by my very relaxed standards) this week. I’m just between lectures, then rushing off to a seminar in town[1], but I thought I’d pass on the reaction to my lecture today on the economics higher education.

I started with the human capital and screening theories. I’m a violent partisan of human capital theory and opponent of screening theory, and didn’t try to hide this, but my success rate in convincing the students was, based on a small sample, only 50 per cent.

One student came up to me at the end and said “Thank you. I learned a lot”. Another came up to the lecturer responsible for the course and asked “Will this be on the exam?”.

fn1. For those interested, it’s The US-Australia free trade agreement: folly or our future? at a meeting of the Australian Institute for International Relations from 6-7.30pm, April 28 at 46 George Street, Brisbane. For details, contact Colin Kennard (telephone 3371 2454, email c.kennard@uq.edu.au).

An interesting nondenial

John Quiggin14 Comments

From ABC News (slightly rearranged for readability)

Prime Minister John Howard’s office has denied allegations that he took instructions from broadcaster Alan Jones to reappoint Professor David Flint as head of the Australian Broadcasting Authority (ABA). ..Rival broadcaster John Laws has aired an allegation that Mr Jones told him he had pressured the Prime Minister to have Professor Flint reappointed. John Laws said on Southern Cross radio in Sydney this morning that he was at a dinner party with Mr Jones and others on November 28, 2000, when Mr Jones warned him not to criticise Professor Flint…. “Alan Jones then went on to say in fact, ‘I was so determined to have David Flint reelected that I personally went to Kirribilli House and instructed John Howard to reappoint David Flint or he would not have the support of Alan Jones in the forthcoming election’,”

“The Prime Minister does not take instructions from anybody in the media about appointments or indeed anyone else in the discharge of his responsibilities as Prime Minister,”

the spokeswoman said.

He has no knowledge of any conversation that may have taken place between Mr Laws and Mr Jones at a dinner party.”

Now suppose that (most improbably) a videotape turns up showing Alan Jones telling Howard that he should reappoint Flint or lose his (Jones’) support. Howard could perfectly plausibly say that he doesn’t take orders (instructions) from Jones, and that he was going to reappoint Flint anyway. And of course, there’s no reason to suppose that Howard has any knowledge of what Jones said to Laws. No-one ever suggested he did.

Update 29/4 It didn’t take long for the nondenial quoted above to be subject to the same kind of close reading I offered – people are used to the need for this kind of thing now. After a pointless round of “not to my recollection” and “I don’t recall”, Howard has finally produced a clear denial.

I specifically deny any conversation remotely resembling what has been alleged,” Mr Howard said.

“If somebody approached me, somebody from the media with a threat that they would withdraw support from me if I didn’t do such and such I would to use the Australian vernacular tell them to get lost.”

The only problem is that Laws has witnesses who recall Jones’ statement to him. Of course, it’s entirely possible that Jones lied to Laws when he claimed to have spoken to Howard. Equally, it’s possible that Jones and Howard are both lying now. In the light of his thirty years in political life, are there any readers who have sufficient faith in Mr Howard’s word that they are willing to dismiss out of hand a second-hand report from a dinner party three years ago?