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Why Jeremy Grantham is Wrong on Australian House Prices
Chris Joye explains.
posted on 08 September 2010 by skirchner in Economics, House Prices
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Peak Oil and the Doomsday Myth
Vaclav Smil has a new book out, Energy Myths and Realities Bringing Science to the Energy Policy Debate. Here is a taste:
There is a finite amount of liquid oil in the Earth’s crust, but estimates of the grand total remain uncertain. Until we explore the entire planet as carefully as we did Oklahoma and Texas, our assessment of global oil reserves will have plenty of room for surprises. Improvements in production also mean that we are now recovering more oil than ever before. And, in addition to our supply of conventional liquid oil, there are vast, untapped reserves of unconventional hydrocarbon fuels, some of which are already being refined for use. A combination of new discoveries, higher recovery rates, and increased use of unconventional resources means that the near-term future of global oil production will not drop off precipitously, as alarmists claim, but will more likely resemble an undulating plateau. Appraisals of the oil future tend to focus on dwindling supply and assume that demand will inexorably grow. But this is not the case. Rising oil prices and economic downturns exert clear downward pressure on demand, and we can reinforce this pressure through more efficient fuel conversions, by promoting sensible alternatives, and, above all, by turning to natural gas. This abundant fuel can do everything oil can, and is already the most important fuel for heating houses and the second most important fuel for generating electricity. The United States already has natural gas reserves sufficient for nearly a century at the current rate of consumption.
posted on 08 September 2010 by skirchner in Economics, Oil
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A ‘Small Australia’ Will Limit Our Creativity
I have an op-ed in today’s SMH arguing that a ‘small Australia’ will not only limit economic progress, but also scientific and cultural creativity:
Like the US, Australia provides an environment in which people and their ideas can flourish. But while the tyranny of distance has receded with advances in communications technology, Australia’s small scale remains an obstacle to economic and other forms of progress. How often do Australian innovators complain about a lack of local commercialisation opportunities and local markets? How often do customers complain of an apparent lack of competition in industries dominated by a small number of companies?
Entrepreneurs, scientists, writers, artists, actors and filmmakers often find Australia too small for their talents. They move to other countries, even if it is with reluctance. While their talents are not lost to the world, Australia is the poorer for them leaving.
Similarly, New Zealanders move to Australia because it provides opportunities that are either non-existent or in insufficient supply in a country with a population no greater than Sydney. Australia’s relatively large and crowded cities are beacons to New Zealanders. While New Zealand enjoys the same institutions and a similar culture to Australia, few Australians would choose to make a new life there. The reluctance is hard to explain with reference to anything other than the limiting effects of scale on life and opportunities in New Zealand.
posted on 07 September 2010 by skirchner in Economics, Population & Migration
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Probability Australia Will Hold Another Election in 2010
16.8%, according to iPredict.
posted on 02 September 2010 by skirchner in Financial Markets, Politics
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Fundamentals of Australian House Price Inflation
There is a lot of ill-informed offshore commentary about Australian house price inflation, with anecdotal reports suggesting that some hedge funds are putting on trades designed to capitalise on what they see as an inevitable Australian house price bust.
We have heard all this before from a local debate about house prices that goes back to at least 2003 and substantially predates international interest in this issue since 2007. In 2005, Robert Shiller declared that Australia had suffered a burst housing bubble the previous year, a proposition that has become even more laughable with the passage of time.
Chris Joye reviews the latest data in his presentation for offshore investors.
posted on 02 September 2010 by skirchner in Economics, Financial Markets, House Prices
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The Broken Windscreen Fallacy
The policies the current caretaker government would like to emulate:
When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy. Other than that, it was a screaming success.
posted on 02 September 2010 by skirchner in Economics, Fiscal Policy
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How Much Stimulus is Too Much?
Richard Epstein wants to know.
posted on 01 September 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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Fiscal Policy After the Election
Tony Makin argues in The Australian that:
Whichever side forms government, it will have to live with the legacy of the fiscal extravagance since October 2008. Just as present budgetary actions have implications for future economic activity, past actions have economic implications for the present and the near future.
Questions that will most likely arise during the term of the next government include the following: Why are long-term interest rates and the cost of obtaining funds from abroad continuing to rise? Why is private investment not improving as expected? Why is future economic growth now likely to be lower than otherwise? Why are inflationary pressures continuing to build?
The answer to each of these questions is the same. It’s either mostly, or partly, due to the excessive fiscal stimulus of the past two years.
My view is that activist fiscal policy in Australia and abroad will have negative consequences through a rather different channel: a negative wealth effect from increased government debt that will weigh on economic growth and consequently lower rather than raise long-term interest rates globally. I made this argument in a recent op-ed. Recent developments in global long-term interest rates have been consistent with this view.
For those interested, I will be discussing these issues as part of a panel at this year’s Australian Conference of Economists on the topic of ‘Monetary-Fiscal Interactions: How to Improve Policy Outcomes.’ Other panellists include Don Brash (ex-RBNZ), Jacopo Cimadomo (ECB), Carl Wash (UCSC) and Jan Libich (La Trobe).
posted on 30 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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Political Insiders and Anti-Gaming Wowsers
There are calls to ban political insiders from election betting markets. Apart from the usual anti-gaming wowsers like Nick Xenophon, I suspect this is motivated by the same mistaken notion of fairness that supports anti-insider trading laws in relation to equity securities. As Henry Manne’s work has shown, anti-insider trading laws are based on a fundamental misunderstanding of the role of markets. Simon Jackman notes that a ban on political insiders would be impractical, but this is no less true of anti-insider trading laws in general.
It is interesting to note that for all the reports of trading by political insiders, prediction markets got the election outcome ‘wrong’ in an ex post sense. While the betting market odds bounced around with the polls, they consistently gave a strong probability to a Labor win, while the polls suggested a tighter contest.
This is not necessarily anomalous, because they measure different things. Polls measure vote shares, but these translate only very loosely into seats won and the ability to form government, so betting markets can quite reasonably imply results that are not obviously supported by the polls. Still, the polls were a better guide to the overall result than the prediction markets on this occasion (have not looked at individual seat markets).
My guess is that political insiders are little better than noise traders. We should be happy to let the market professionals milk them for all their worth.
posted on 26 August 2010 by skirchner in Economics, Financial Markets, Politics
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Low Expectations: Why Financial Markets Didn’t Care About the Election Result
Financial markets usually take federal election outcomes in their stride, an indication that the result is either not a surprise or makes very little difference to expected economic and financial outcomes.
The fact that markets have been just as sanguine when faced with the prospect of a hung parliament for the first time since 1940 implies that markets do not expect public policy outcomes to be appreciably worse under the various options for a minority or (small ‘c’) coalition government than under a majority government. One can only conclude that markets had very low expectations for the public policy outcomes from any majority government and those expectations have not in any way been disappointed by a hung parliament.
posted on 24 August 2010 by skirchner in Economics, Financial Markets, Politics
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The Future of US Housing Finance
Peter Wallison’s gloomy thoughts.
posted on 24 August 2010 by skirchner in Economics, Financial Markets
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Bonfire of Kevin Rudd’s Vanity
Whoever forms government in the wake of Saturday’s federal election, the result is as comprehensive a repudiation of Kevin Rudd and his legacy as one could reasonably hope for. Any suggestion that Kevin Rudd’s liquidation as Prime Minister in June was a net negative for the ALP withstands little scrutiny. It is ill-advised for members of the conservative side of politics to suggest otherwise or confect sympathy over the manner of Rudd’s demise. We should always be thankful to the ALP caucus for taking the action they did in removing a dysfunctional central planner from office. Perhaps the highlight of last night’s election coverage was the ABC’s decision to cut Kevin Rudd off mid-speech as the producers realised that amid the usual profusion of words coming out of his mouth, he had nothing to say. Rudd suffered a 9% primary swing against him in his own seat.
The election result is one that Malcolm Turnbull said could never happen if the Coalition failed to join a bipartisan policy cartel behind Kevin Rudd’s ETS. Malcolm’s stand undoubtedly helped him in Wentworth, where he now sits on a massive 60% of the primary vote. What Malcolm never understood and what Tony Abbott demonstrated was that public opinion on the ETS was not independent of the opposition’s stand on the issue. Ironically, Rudd dropped the ETS for the same reason Malcolm supported it: neither of them wanted to fight an election on the issue.
Any new government will now be hostage to some combination of Greens and rural protectionists. Unfortunately, both have a common interest in frustrating economic and other reforms. While there is now little prospect of good legislation coming out of any new government, it will also be difficult to push bad legislation through such a finely balanced legislative process. Legislative and policy paralysis are underrated as political outcomes and could even set the stage for new elections in which real policy issues might actually be at stake.
posted on 22 August 2010 by skirchner in Politics
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Sydney: Too Many People in 1912?
I have an op-ed in today’s Australian referencing an article in the Sydney Morning Herald from 1912 about how Sydney’s then transport system supposedly could not cope with a population of 700,000.
The text below the fold is a slightly longer version that went out on Friday in the Ideas@TheCentre series. You can subscribe to Ideas@TheCentre here.
continue reading
posted on 19 August 2010 by skirchner in Economics, Population & Migration
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The $389 Billion Third Rail of American Politics
The US Treasury Department convened a conference on the vexed issue of housing finance reform. Remarkably, even the New York Times saw straight through the politics of GSE reform in its reporting on proceedings:
The consensus was that neither Democrats nor Republicans wanted to touch an issue that would dredge up decisions made by both parties over the last decade that looked bad in light of the financial crisis. Fannie and Freddie was now the third rail of American politics.
‘Looked bad’ doesn’t even begin to cover what has been a catastrophic failure of America’s political institutions for which there has been little or no accountability.
The de facto nationalisation of US housing finance through its Congressional-mandated GSEs may have been a catastrophe for the US, yet for PIMCO’s Bill Gross, nothing succeeds like failure:
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the mortgage- finance system…
“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said today at a U.S. Treasury Department conference in Washington. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”
Gross conveniently ignores the fact that the housing GSEs have effectively been on the books of the US government for their entire existence.
posted on 18 August 2010 by skirchner in Economics, Financial Markets
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Rudd’s Way: Working with Australia’s Most Dysfunctional Central Planner
Graeme Dobell reviews Rudd’s Way:
While this column needed a three-part series last year to grapple with the dysfunctional nature of the Rudd experience, Stuart nails it in one paragraph:
‘Rudd appeared unable to delegate. His office was nicknamed the ‘black hole’, because briefs would vanish and nothing would emerge. The government’s agenda appeared to swing suddenly and wildly. One moment there would be frenzied progress on an issue until, if it seemed intractable, it would simply be left in limbo.’
As a columnist for The Canberra Times and author of two previous books on The Kevin, Nick Stuart is an experienced journalist who is a known part of the Canberra milieu. Thus, he could quietly gather the quotes and insights that light up Rudd’s Way. Here’s the acid judgement of a senior public servant on Rudd’s mode of operation:
‘The man’s output is negligible. He gets wound up around the detail, and loses the plot. You’d be concerned if a dep sec (deputy secretary) was working like this, but because he’s PM, he can get away with it.’
Or consider this from a Labor minister, not long after taking office, as the polls were still soaring. The minister complained that Rudd was ‘a bloody perfectionist micro-manager’ who, more seriously, ‘couldn’t give a rat’s about what the party’s policy actually is.‘ Then the minister paused for a long moment before concluding: ‘Thank goodness he’s no good at it; otherwise we’d really be up the creek.‘…
Consider this line last Friday from Verona Burgess, who has spent more years than she wants to remember writing on the machinations and machinery of the Canberra public service: ‘It is difficult to explain to people outside the capital just how loathed Kevin Rudd had become among large sections of the Australian Public Service (let alone the caucus) and why.‘
posted on 18 August 2010 by skirchner in Politics
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What Did They Know and When Did They Know It: Ex-Ante Views on US Housing
Looking through all the after-the-fact wisdom and hand-wringing, a Boston Fed discussion paper examines the ex ante views of economists in relation to the US housing market:
From our review of the pre-crisis housing literature from the early-to-mid-2000s, it is apparent that well-trained and well-respected economists with the best of motives could and did look at the same data and come to vastly different conclusions about the future trajectory of U.S. housing prices. This is not such a surprising observation once one realizes that the state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006.
The paper has mostly fatal implications for the idea that the authorities can actively manage cycles in house prices.
posted on 17 August 2010 by skirchner in Economics, Financial Markets, House Prices
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Australian Equities: A Century of Outperformance
Australian equities offered the highest return and second lowest risk of 19 major markets between 1900 and 2009, according to Credit Suisse.
posted on 15 August 2010 by skirchner in Economics, Financial Markets
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The Making of Dick Smith’s Population Puzzle
In February this year, I was contacted by Dick Smith’s researcher Sarah Gilbert to provide some background for his anti-population growth documentary, Dick Smith’s Population Puzzle. She mentioned a column by Paul Sheehan, which had quoted me making the point that faster population growth required faster economic growth to maintain living standards. No doubt they saw this as a bad thing, but must have finally twigged that I thought it wasn’t, because I heard no more from them, even though Dick and the production crew were on campus a few weeks later and could have easily dropped in to see me. They did interview my UTS colleague Jock Collins, but they obviously didn’t like what he had to say either, because it was not included in the final cut.
Dick later wrote to me taking exception to an op-ed I had written for The Australian, in which I called some of his arguments absurd. I took the opportunity to try and steer Dick in the right direction by referring him to some books by Julian Simon, but he gave no indication he ever bothered to read them.
The documentary screened on the ABC last night. Dick gave significant air time to only one pro-growth advocate, Bernard Salt, but could not help impugning his expertise and motivation. There may be plenty of things wrong with Bernard Salt, but being a historian and working with KPMG are not among them. If Salt is as unqualified as Dick would have us believe, why include him in the documentary? Because Dick has a completely closed-mind on the issue and is uninterested in giving the other side of the argument a fair go.
posted on 13 August 2010 by skirchner in Economics, Population & Migration
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What’s Not to Love About Dutch Disease?
Judith Sloan wants to know. I make similar arguments here.
posted on 12 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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Teaching With Cowen and Tabarrok’s Modern Principles of Economics
I have been using Tyler Cowen and Alex Tabarrok’s Modern Principles of Economics to teach an introductory course in economics to MBA students. Many if not most students study economics as part of vocationally-oriented degrees, without any intention of working as economists or completing further study in economics. Unfortunately, most textbooks are not designed with this in mind. Robert Frank has argued that many courses in economics do the equivalent of teaching language students the pluperfect tense at the expense of basic conversational fluency. Students consequently come away from their economics subjects with the sense that it is an arcane discipline of little real-world relevance, damaging the standing of economics in the community.
By contrast, Cowen and Tabarrok’s textbook is well suited to students who may be studying economics not only for the first time, but also for the last time. It imparts the essential economic insights, without over-burdening students with derivation and optimisation. It is the only text I know of that gives students an appreciation of the coordinating role of markets. The macro part of the text emphasises the role of shocks and real factors in driving the business cycle. Aggregate demand is derived from quantity theory relations rather than aggregate expenditure concepts. It also stresses the limitations of macroeconomic policy instruments.
With the exception of the chapters on monetary and fiscal policy, the text avoids being overly US-centric, reflecting the cosmopolitan sensibility of its authors. The first chapter begins with an Australian example, which is a nice point of entry for Australian students.
Australian faculty can contact Helen Boyd at Palgrave Macmillan (Helen.Boyd [at] macmillan.com.au) for examination copies of the text.
posted on 09 August 2010 by skirchner in Economics
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Penny Dreadful Spec Stock of the Week
Day traders love Fannie Mae:
The big money has ceded the marketplace to individuals who are bold enough, or perhaps foolish enough, to gamble on these stocks for a few hours.
Just don’t hold Fannie Mae too long, Mr. George advised. He predicted the stock would eventually fall to zero. It is difficult to know what other analysts think, since Mr. George is just about the only one who still covers Fannie Mae’s stock. His recommendation is an understated “underperform” — Wall Street code for sell.
“It’s not really a stock anymore — everyone knows this is going to zero,” he said.
posted on 05 August 2010 by skirchner in Economics, Financial Markets
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When Krugman No Longer Feels the Love
Fred Douglass argues that Krugman has lost his battle with those who comment on his blog:
Krugman had also had enough. On July 23, Krugman showed that he was clearly no longer “in love” with his commenters. Now he called them “ranters” and “trolls.“ On July 28, Krugman changed his comment moderation policy. Claiming that “ranters ... say the same thing every time,“ Krugman announced that he was going to throw away posts longer than “three inches.“ His thinking must have been thus: Three inches are sufficient to write “Krugman is brilliant,“ but not sufficient to present a documented and persuasive rebuttal to whichever of Krugman’s standard arguments he was peddling that day.
(HT: Sinclair Davidson)
posted on 05 August 2010 by skirchner in Economics
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Below-the-Line Senate Voting Tool
For those who like to make the major parties work for their vote, here is a handy web site that lets you create customised below-the-line Senate voting tickets that you can print-out and take with you on polling day (just don’t use it as a ballot paper, it won’t count!)
posted on 04 August 2010 by skirchner in Politics
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Did Cheap Credit Fuel the US Housing Boom?
No, according to Ed Glaeser and his co-authors:
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45% of the run-up in home values nationally during that half-decade span. However, if one is going to cherry-pick time periods, it also must be noted that falling real rates during the 2006-2008 price bust simply cannot account for the 10% decline in FHFA indexes those years. There is no convincing evidence from the data that approval rates or down payment requirements can explain most or all of the movement in house prices either.
The authors also note that Robert Shiller’s ‘irrational exuberance’ is a non-explanation:
even if Case and Shiller are correct, and over-optimism was critical, this merely pushes the puzzle back a step. Why were buyers so overly optimistic about prices? Why did that optimism show up during the early years of the past decade and why did it show up in some markets but not others? Irrational expectations are clearly not exogenous, so what explains them? This seems like a pressing topic for future research. Moreover, since we do not understand the process that creates and sustains irrational beliefs, we cannot be confident that a different interest rate policy wouldn’t have stopped the bubble at some earlier stage. It is certainly conceivable that a sharp rise in interest rates in 2004 would have let the air out of the bubble. But this is mere speculation that only highlights the need for further research focusing on the interplay between bubbles, beliefs and credit market conditions.
A more fruitful line of inquiry would be to investigate fundamental factors such as the role of US housing GSEs in distorting the allocation of global capital.
posted on 04 August 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Federal Election Betting Market Probabilities
Simon Jackman provides a handy update on federal election outcome probabilities derived from Centrebet and updated daily at 9am AEST. Along with iPredict, Centrebet is showing a sharp decline in the probability of a Labor win, reflecting recent opinion polls, but also (perfectly legal) inside information:
SENIOR Labor figures have placed significant bets on the outcome of the federal election, with some punting against their own party. A major betting agency said bets had been placed on members of the opposing team to win marginal seats in NSW and Queensland.
Centrebet primary analyst Neil Evans said: ‘'I can’t tell you who but I can tell you this: these are people very high up betting on some of the critical seats and I can tell you they don’t always stay faithful to their party - they swap sides.
‘'They are well-known Labor figures and associates that are punting on these seats. A lot of Labor-connected money has been backing a Coalition win in marginal seats and, to a lesser extent, the Coalition has been doing the reverse.‘’
The Sun-Herald understands the figures include parliamentary staffers, advisers and senior party officials.
posted on 01 August 2010 by skirchner in Financial Markets, Politics
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Bryan Pape, Senate Candidate for NSW
UNE law lecturer Bryan Pape is an independent Senate candidate for New South Wales in this year’s federal election. He is perhaps best known for his High Court challenge to the constitutional validity of some of the Rudd government’s stimulus spending in Pape v The Commissioner of Taxation. The case was described by George Williams, another law academic and would-be ALP candidate as ‘a major victory for the states in the reasoning, it’s one of those very rare High Court decisions you get that’s going to change the way government operates.’
An opportunity to vote for a federalist and champion of states’ rights in the Senate.
posted on 31 July 2010 by skirchner in Politics
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Too Big to Nail: Why There Will Never be an Investigation into Freddie and Fannie
Jonathan Weil asks why there is no investigation into Freddie and Fannie:
Still absent from the government’s agenda is any serious effort to hold anyone accountable for their ruin or investigate why they collapsed.
Back in December 2003, after Freddie disclosed what in retrospect was a relatively mild accounting scandal, its regulator published an exhaustive 185-page report cataloguing the company’s financial-reporting abuses. In May 2006, the same regulator disclosed similar findings about Fannie’s books in a report covering 348 pages.
Strangely, there’s no similar examination under way today by the Federal Housing Finance Agency into the reasons why Fannie and Freddie imploded in 2008, or whether anyone at the companies did anything improper. That’s probably because the agency and its predecessor, the Office of Federal Housing Enterprise Oversight, bear responsibility for letting the companies resume their natural tendency to run amok.
So here we go again. This month Congress passed the 2,323- page Dodd-Frank Act without any clear understanding of why the financial crisis happened—and without doing a thing to address Fannie and Freddie, which were central players. Now the Obama administration says it will deliver a reform proposal to Congress by January on the nation’s housing-finance system, including Fannie and Freddie. Yet the government still hasn’t undertaken any comprehensive inquiry into why these companies blew up and who was at fault.
I can only assume Weil’s column is rhetorical, because it is shriekingly obvious why there will never be an inquiry into the failure of Freddie and Fannie. The two GSEs did exactly what Congress mandated them to do, while Congress also stymied the attempt to reform them in 2004-05. Politicians are not interested in establishing an inquiry that can only lead to one conclusion: they were the authors of the global financial crisis of 2008.
posted on 30 July 2010 by skirchner in Economics, Financial Markets
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Crowding Out and the BER
Crowding out effects were built-in to the BER:
BUILDERS and architects tendering for work under Julia Gillard’s school stimulus program were told to include a “cost escalation” of up to 10 per cent to cover the expected inflationary impact of the scheme.
The hidden cost of the Building the Education Revolution, revealed in documents submitted to a Victorian parliamentary inquiry, suggests that as much as $250 million of taxpayers’ money could have been spent to cover a surge in building material and labour costs created by the state’s $2.5 billion share of the stimulus program.
Contract details provided by an architecture firm reveal it was required by the Victorian Education Department to provide a 7 per cent “contingency fee” and a 10 per cent “cost escalation” in the tenders it submitted for work on four primary schools in Melbourne’s east.
Government sources confirmed last night the department specifically included escalation costs in BER projects “because the stimulus was going to be a significant injection into the market/economy and prices could be expected to increase with greater levels of work being undertaken”.
posted on 29 July 2010 by skirchner in Economics, Fiscal Policy
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Just Enough of Me, Way too Much of You
With both major parties offering to retard economic growth by conditioning immigration on existing policy failures in housing, transport and infrastructure, Imre Salusinszky offers politicians some handy talking points:
From one perspective, it’s a neat trick: you pander to inner-city prejudice by abandoning road construction, then use what you perceive to be outer-suburban bigotry to paper it over.
But in order to prevent further embarrassment, as politicians attempt to source our problems to the fact there are almost three citizens shoehorned into every square kilometre of Australia, here are some talking-points:
* Frustrated you can’t get tickets to the big game? Once we block the reffos, convince people to stop having sex, and move across to a sustainable Australia, everybody will be able to attend the AFL or NRL grand final.
* Sick of waiting around in the morning while other family members use the bathroom? Me too, and I blame the fact there are too many people in Australia.
* Can’t get the job you want? Can’t win the girl you desire? Can’t own the car of your dreams? Have you noticed the common link? That’s right: there’s always some other bastard who already has these things. Too many Australians!
As best as I can tell, the only political party with a pro-immigration policy platform is the libertarian Liberal Democratic Party (you can read their policy here).
posted on 28 July 2010 by skirchner in Economics, Population & Migration
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Greg Mankiw versus Ken Henry on the Role of Economists in Public Policy
The following observation by Greg Mankiw could have been written in response to Ken Henry’s recent lament about the role of economists in public policy:
economists are social scientists, not politicians. And whether they work for the government or have the luxury of merely observing the scene from an ivory tower, the integrity of the profession and the importance of the work involved demand that they be subjected to critical judgment; they must be compelled always to submit their assumptions, data, models, and conclusions to careful scrutiny. The foremost job of economists is not to make the lives of politicians easier, but to think through problems, to examine all the available information about the problems’ causes and potential treatments, and to propose the solutions most likely to work.
This is a simple point, but one that is easy to forget. As Milton Friedman once put it: “The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.“
In a time of economic uncertainty and political turmoil, we economists — both in and out of government — could hardly do better than to follow Friedman’s sage advice.
posted on 24 July 2010 by skirchner in Economics, Fiscal Policy
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The Perfect Job for Kevin Rudd
It keeps him out of the country, it costs us next to nothing, he speaks perfectly impenetrable international bureaucratese and based on experience at Copenhagen he will put the cause of an international agreement on climate change back years if not decades. What’s not to like about Kevin Rudd as UN adviser on climate change?
posted on 22 July 2010 by skirchner in Politics
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We Will Never Build it Before They Come
John Birmingham gets the relationship between population growth and infrastructure:
Our built environment, our urban infrastructure has always lagged at least a decade behind what was required to house and support our population. We don’t build empty cities and wait for them to fill up. It’s more efficient, and less wasteful, to cram our new arrivals into the streets and houses and apartment blocks and schools and offices and factories we already have. Only then do we begin to build the extra capacity we need to service the growth.
posted on 22 July 2010 by skirchner in Economics, Population & Migration
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An Unlikely RBA Research Discussion Paper
Imagine if you will the RBA publishing a Research Discussion Paper that reached the following conclusions:
despite a relatively stable total fiscal impulse the effectiveness of spending shocks in stimulating economic activity has decreased over time. Short-run spending multipliers increased until the late 1980s when they reached values above unity, but they started to decline afterwards to values closer to 0.5 in the current decade. Long-term multipliers show a more than two-fold decline since the 1980s. These results suggest that other components of aggregate demand are increasingly being crowded out by spending based fiscal expansions. In particular, the response of private consumption to government spending shocks has become substantially weaker over time.
rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. We interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances, such that agents may expect a larger fiscal consolidation in the future which depresses private demand and output. We also find that a stronger response of the short-term nominal interest rate goes along with declining spending multipliers. This result is consistent with an increasingly offsetting reaction of monetary policy to the expansionary fiscal shock.
The extract is from a European Central Bank Working Paper and the conclusions reached are in relation to the euro area. Don’t hold your breath waiting for the RBA to publish a similar study of activist fiscal policy in Australia.
posted on 21 July 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Libertarian Paternalism without the Libertarianism
Superannuation system review chair Jeremy Cooper, interviewed by Alan Kohler:
ALAN KOHLER: In fact you call it “libertarian paternalism” in your report. And I must say reading your report it seems to leans toward the paternalism rather than the libertarian.
JEREMY COOPER: Possibly but go back to the original idea it’s very paternalistic. Compulsory superannuation, which really only exists in a very few countries, is very paternalistic.
It’s saying, well unless we force the population to put money away for retirement they’re not going to do it, so we’re going to work out what we think what they’re best interest is and we’re going to force them to hold back wages which would otherwise would be spent on school shoes and petrol and all those important things.
That money is held back by the government, that’s very paternalistic. So to criticise these ideas because they’re paternalistic forgets what the system, what super actually is.
Perhaps the most honest assessment of the motivation behind compulsory super I have heard to date.
posted on 18 July 2010 by skirchner in Economics, Financial Markets
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China’s Underappreciated Boost to Global Resource Supply
China’s contribution to global resource demand is well known, but its important contribution to augmenting global resource supply is underappreciated, frequently misunderstood, and often feared. Concerns over Chinese intentions in relation to commodity production and pricing were readily apparent in the Australian debate over Chinalco’s failed bid for Rio Tinto last year, but have also been raised in relation to other acquisitions.
These issues are examined in a new study, China’s Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities, published by the Peterson Institute and authored by Theodore Moran, a member of the US Director of National Intelligence Advisory Panel on International Business Practices. Rather than just raising abstract concerns, Moran examined the actual record of China’s 16 largest foreign resource procurement arrangements between 1996 and 2006, including several in Australia.
Moran concludes that ‘looking at the effect of Chinese procurement efforts on the structure of the global supplier base for energy and minerals, the empirical record to date suggests a predominant thrust … toward diversification of output and enhanced competition among producers.’ It is for these reasons that competition regulators in Australia, Germany and the United States did not raise significant objections to Chinalco’s proposed increased stake in Rio.
Moran argues that Chinese involvement in the development of rare earth elements (REEs) ‘may constitute a significant exception’ and warrants greater ‘circumspection.’ But even here, concerns have been exaggerated. Despite the name, these elements are not particularly rare. The least abundant REEs are still 200 times more abundant than gold. The idea that REEs are scarce is belied by the fact that low prices have often been the main obstacle to the development of more diversified sources of supply.
Australians tend to see China through the prism of growing export demand and higher commodity prices, although there are also significant benefits to Australia’s terms of trade through the import side of the trade relationship. China’s real long-term significance to the global resource sector may be as a source of the much-needed investment that will increasingly alleviate global supply constraints, putting downward pressure on global commodity prices by boosting output, employment and exports in countries like Australia.
posted on 18 July 2010 by skirchner in Commodity Prices, Economics, Foreign Investment
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Labor Voters More Confident Following the Demise of Kevin Rudd
The 11.1% surge in consumer confidence between June and July shows a clear partisan divide, with confidence on the part of Coalition voters up 19.8% compared to a more modest 3.9% for ALP voters, but this is still a big surge in confidence among Labor voters for a series that has an historical standard deviation of 5.1%. The ~75-80% probability of a Labor victory being priced in betting and prediction markets suggests that Rudd’s demise has significantly improved Labor’s election prospects.
Meanwhile, Frank Brennan thinks we should give Rudd credit just for showing up to work:
Having resigned as prime minister, Rudd had the good grace to turn up to question time, taking his place on the backbench.
posted on 16 July 2010 by skirchner in Economics, Financial Markets, Opinion Polls, Politics
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Consumer Sentiment Surges on the Demise of Kevin Rudd
Consumer confidence surged 11.1% in July, the ‘strongest monthly increase in the Index from a base above the 100 level since records began in the mid–1970s’ according to Westpac. The press release is far too polite to point to the most obvious reason for the surge in confidence, but we can all read between the lines:
Interest rates do not appear to have been the most significant driver of the July result. The confidence of those folks with a mortgage actually rose a little less than tenants or others. As we noted last month the 5.7% fall in the Index in June seemed to be partly driven by concerns about the Budget and tax policy.
Consumer sentiment doesn’t have much independent explanatory power for economic activity once you control for other variables, suggesting that causality runs from activity to sentiment and not the other way around. But that’s just the average effect observable to the econometrician. It does not preclude one off exogenous shifts in sentiment having a significant economic impact. Assuming the new Prime Minister can sustain the boost in confidence, dumping Kevin Rudd may prove to be something close to an economic free lunch. I have not yet seen the break-down by voting intention, but my guess is that it argues against the view that dumping Rudd was a negative from the standpoint of Labor voters.
Arthur Sinodinos notes that Kevin Rudd could destabilise a future Gillard cabinet, arguing against his inclusion in a future government.
posted on 15 July 2010 by skirchner in Economics, Financial Markets, Opinion Polls, Politics
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No Future in Future Funds
I have an op-ed in today’s Australian arguing that improved fiscal responsibility legislation is a better approach to managing the fiscal consequences of terms of trade cycles than sovereign wealth funds such as the existing Future Fund:
a sovereign wealth fund provides no guarantee current revenue will be spent more wisely in the future than it is today.
If governments are unwilling to commit to binding fiscal responsibility legislation that improves on the existing Charter of Budget Honesty, there is no reason to believe greater use of a sovereign wealth fund will lead to better long-term fiscal management.
Part of the op-ed that hit the cutting room floor noted that Australia is not like Norway, Timor Leste or Nauru, dependent on a single export commodity. Australia’s resource endowment and overall economy is much more diversified, making Australia less vulnerable to some of the macroeconomic and other problems associated with dependence on a single commodity export.
posted on 15 July 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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The Inconsistency of Paul Krugman
Don Harding and Jan Libich on why Paul Krugman can’t be taken seriously:
Consistency is one of the touchstones used to evaluate not only arguments but also the people that put forward the arguments. In assessing the person advocating an argument, it is natural to look for coherence over time in their arguments and, secondly, whether the person offers a convincing explanation for a change of view. We apply this framework to evaluate some of Paul Krugman’s macroeconomic analysis…
The contrast between his assessment of 2002/2003 and 2008/2009 is so large and the justification for the changed view so ephemeral that we feel his policy recommendations no longer have the required consistency and coherency.
posted on 13 July 2010 by skirchner in Economics
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Why Richard Epstein Will Never be a Keynesian
From the latest issue of the Harvard Journal of Law and Public Policy:
The decision to save counts as deferred consumption, which has its own multiplier effect. Here it is best to drop the term and just substitute for multiplier effect the traditional concern with gains from trade through voluntary transactions, which typically have positive external effects by creating additional opportunities for others. As one person saves the other invests in long term projects with borrowed capital. The key point is that stable expectations require enforceable contracts and steady and predictable price levels. So long as each person makes informed trades, each of these contracts over time should be a positive sum. Reduce the transaction costs in good Coasean style by supporting stable property relationships and the temporal consumption issue will take care of itself in the same way that all such allocations take care of themselves.
posted on 12 July 2010 by skirchner in Economics
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First They Came for the Light Bulbs…
…and then the appliances:
The Prime Minister’s special taskforce on energy efficiency has concluded its report to hand to Ms Gillard, calling on her to adopt a national energy efficiency target. The target will lead to bans on many energy-sapping appliances being sold in Australia.
Meanwhile, sales of the centrally-planned Rudd Car languish:
The Hybrid Camry, which began rolling off its Melbourne assembly lines six months ago, was expected to attract 10,000 buyers this year, but fewer than 3000 had been registered at the halfway mark, this week’s figures reveal.
A string of record months for vehicle sales and an aggressive marketing campaign by Toyota failed to stimulate demand for the Hybrid Camry, hailed as a new era in Australian manufacturing by Kevin Rudd when he launched it in December, just before he flew to Copenhagen for the ill-fated climate change summit, and the project was granted $35 million from the green car scheme.
posted on 10 July 2010 by skirchner in Economics
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Julian Simon Still Winning Against Peak Oil
We reported on the five-year Tierney-Simmons oil price wager back in 2005. Mark Perry notes that Tierney has all but won his bet against peak oil crankery:
In August of 2005, Houston banking executive Matthew Simmons and New York Times columnist John Tierney each put up $5,000 and made a bet about the price of oil in 2010.
The wager was based on the price of oil in 2010, specifically on the average daily price for the entire year, adjusted for inflation into 2005 dollars. If the inflation-adjusted oil price this year is $200 or more per barrel, Mr. Simmons wins $10,000 plus interest, and if the average price this year is less than $200, Tierney wins the bet.
The bet was made public in Tierney’s New York Times column on August 23, 2005 called “The $10,000.00 Question.“
Julian Simon is still winning from beyond the grave: Julian Simon’s widow put up $2,500 towards Tierney’s $5,000 obligation, to honor the tradition of her husband’s famous wager with Paul Ehrlich.
posted on 08 July 2010 by skirchner in Economics, Oil
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John Birmingham’s After America
I attended the Sydney launch for John Birmingham’s new novel, After America, part of a planned trilogy that follows from Without Warning. In the first instalment, the bulk of the continental US is destroyed on the eve of the Iraq war and the novel speculates about the likely implications for the rest world. Birmingham said that the idea for the first book came from an anti-American rant by a fellow student radical when he was at university. The book is a cautionary tale about what happens when the rest of the world finally gets what it wished for.
Birmingham’s talk did clear up one mystery for me: why he kills off some of his more likeable characters. He randomly pulls names out of a hat to determine who will die. As Birmingham notes, it adds an extra element of unpredictability to the action.
I’m a fan of the speculative fiction genre. As the economist Simon Kuznets once observed, science fiction is a much better guide to the future than the writing of most economists, who consistently sell the future short. Birmingham’s ‘axis of time’ trilogy, first published in 2004, features the ‘flexipad’, effectively anticipating the iPad of 2010. We didn’t need to wait until 2021 for that one.
Birmingham blogs here.
posted on 08 July 2010 by skirchner in Misc
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Mid-Week Linkfest
1. Risk management with Robert Prechter: ‘If I’m wrong, you’re not hurt. If they’re wrong, you’re dead.’ More Prechter here.
2. Rogoff and Reinhart profiled in the NYT.
3. Natural libertarianism and the social psychology of freedom.
posted on 06 July 2010 by skirchner in Economics
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Ken Henry, Then and Now
Niki Sava on the Ken Henry speeches of yore:
KEEP checking the Treasury website. Any day now a speech by Ken Henry, meant to be private, will appear. In it, he will distance himself from the Gillard government, condemn it for its profligacy, for its weakness, for ignoring Treasury advice and for poor policy formulation in the run-up to an election.
It should say something like this: “[Treasury] will be under pressure to respond to the growing number of policy proposals leading up to the calling of an election, and once the election is called.
“At this time, there is a greater than usual risk of the development of policy proposals that are, frankly, bad.“
And: “There is a temptation to think that all problems can be solved by government spending.“
If previous practice is observed, that is what would happen, followed swiftly by the appearance of those supposedly private observations to staff, on the front pages of newspapers.
Then again, maybe not.
But that is what happened in 2007. The quotes above are taken from a speech by Henry in March that year, a few weeks after prime minister John Howard released the $10 billion water security plan to save the Murray Darling Basin.
Here is another Ken Henry speech that time forgot.
posted on 05 July 2010 by skirchner in Economics, Politics
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‘The Full Omelette’: Treasury After the RSPT
The post-RSPT backlash against Treasury:
A key figure in the negotiating team of one of the major mining houses puts it more bluntly: “Clearly Ken Henry was on a mission from God. The fact that Treasury had got religion was not the biggest surprise. What we were especially amazed at was the level of sheer naivete and incompetence. The grasp of fundamental economics—more specifically commercial reality—was barely past what you learn in year 12 at high school.“…
In the end the miners were not provided with Treasury’s modelling until last Wednesday. These were the numbers that, according one insider, had come from “planet Mars”.
“They had made it up and had no idea how to back it up. It was like sitting university professors down to lecture primary school students,“ one of the miners’ advisers claimed yesterday.
posted on 04 July 2010 by skirchner in Economics, Fiscal Policy, Politics
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The Psychopathology of Kevin Rudd
Staff writers at The Australian have compiled a comprehensive psychopathology of former Prime Minister Kevin Rudd, showing him to be every bit as bizarre as former Labor leader Mark Latham. I was particularly struck by this passage:
In April 2008, at the height of his power and popularity, he gave an address to the Sydney Institute annual dinner that completely misjudged his audience.
Many of those there groaned inwardly as Rudd failed to read the occasion or recognise the sheer power in the room.
Rudd did exactly the same thing at the closing dinner of a private CIS function I attended in July 2008, except people groaned outwardly on that occasion. The audience included a large number of the country’s most senior business people. Half way through the speech, the people at my table were looking at each other with a WTF? expression on their face. I could not tell whether the speech was a calculated insult, or whether Rudd sincerely thought the speech was appropriate to the occasion. It was an extraordinary performance in any event.
posted on 04 July 2010 by skirchner in Politics
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More of Matt Ridley’s The Rational Optimist
From Ode magazine:
In 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.
posted on 03 July 2010 by skirchner in Economics
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The Four Horsemen of the Acropolis
Der Spiegel profiles the four German professors valiantly trying to bring down the euro and the bailout of Greece:
The court in Karlsruhe dismissed their request for a court injunction against the Greek bailout. But now that the Constitutional Court is reviewing at length whether to consider their complaint, Schachtschneider believes that it stands a chance of succeeding after all. In any event, he intends to publish the 60-page brief as a legal reference book, thereby going down in the history of the anti-euro movement once again. Hankel is against the idea. He would prefer that the group publish a book that is more accessible to the general public, something along the lines of their 1998 book “Die Euro- Klage. Warum die Währungsunion scheitern muss” (“The Euro Suit: Why the Monetary Union Must Fail”) or the 2001 work “Die Euro-Illusion” (“The Euro Illusion”).
posted on 02 July 2010 by skirchner in Economics, Financial Markets
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The G20: Last Refuge of Political Failure
Former Prime Minister Kevin Rudd, on the eve of his execution:
We have large challenges ahead, not least of which is an upcoming G20 summit in Toronto, at which I am currently scheduled to lead an Australian delegation. This G20 summit will deal with a whole range of fundamental reforms to the financial system, which goes to the interests of the Australian banks and the cost of credit in this country.
These are important national interests to pursue, it is one reason why I’ve decided, apart from others, that its important to resolve this matter of the leadership as a matter of urgency.
Former Treasurer Peter Costello’s farewell speech to the House, after he decided being opposition leader was too much like hard work:
I do not need to say that, from our perspective, a seat at the table which represents 90 per cent of global GDP is a very, very important diplomatic position for us and for our country.
Former Treasurer Peter Costello, explaining why the G20 is very, very important:
BARRIE CASSIDY: All right. Let’s move on to the G20 now and its involvement next weekend under your chairmanship. 90 per cent of the world’s economies under one roof, but could you identify one key result you would like to see emerge from the conference?
PETER COSTELLO: First of all, let’s say, Barrie, this is the biggest financial conference Australia has ever hosted and ever will. This organisation, where Australia not only has a seat at the table, of the 20 most important economies of the world, but is chairing it, that brings together the developed world and the developing world, is important in itself. That’s significant in itself.
Alan Beattie, on how to write-up a G20 communique:
By reporters everywhere
An ineffectual international organisation yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies.
“We are seriously concerned about this most serious outbreak of seriousness,” said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat. “This is a wake-up call to the world. They must take on board the vital message that my organisation exists.”
The director of the body, based in one of New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day. The organisation has sought to justify its almost completely fruitless existence by joining its many fellow talking-shops in highlighting whatever crisis has recently gained most coverage in the global media.
“Governments around the world must come together to combat whatever this year’s worrying situation has turned out to be,” the director said. “It is not yet time to panic, but if it goes on much further without my institution gaining some credit for sounding off on the issue, we will be justified in labelling it a crisis.”
The organisation, whose existence the White House barely acknowledges and to which hardly any member government intends to give more money or extra powers, has long been fighting a war of attrition against its own irrelevance. By making a big deal out of the fact that the world’s most salient topical issue will be placed on its agenda and then issuing a largely derivative annual report on the subject, it hopes to convey the entirely erroneous impression that it has any influence whatsoever on the situation.
The intervention follows a resounding call to action in the communiqué of the Group of [number goes here] countries at their recent summit in a remote place no-one had previously heard of. The G[number goes here] meeting was preceded by the familiar interminable and inconclusive discussions about whether the G[number goes here] was sufficiently representative of the international community, or whether it should be expanded into a G[number plus 1, 2 or higher goes here] including China, India or any other scary emerging market country that attendees cared to name.
The story was given further padding by a study from an ambulance-chasing Washington think-tank, which warned that it would continue to convene media conference calls until its quixotic and politically suicidal plan to ameliorate whatever crisis was gathering had been given respectful though substantially undeserved attention.
posted on 02 July 2010 by skirchner in Economics, Politics
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Top 23 Depression-Peddling Doomsayers
Business Insider rounds-up the usual suspects. I agree with at least one of them: Tim Congdon. As I noted in this op-ed earlier in the year, bond markets were overstating inflation risks at the expense of the more likely scenario of continued ‘stimulus’-induced stagnation.
posted on 02 July 2010 by skirchner in Economics, Financial Markets
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