Wednesday, January 22, 2020

Climate change: we can't stop it by refusing to change

After Donald Horne's book in the 1960s, we all know we live in the Lucky Country. What we've forgotten until now, however, is the qualification Horne added: "Australia is a lucky country run mainly by second-rate people." We haven't been feeling so lucky this burning, smoky summer. But our present leader, Scott Morrison, has certainly been looking second rate.

This summer we've had our Pearl Harbour moment. Just as the Japanese bombing of Hawaii in 1941 stopped Americans viewing World War II as some distant threat, so our season of unprecedented drought, heatwaves, bushfires and smoke haze has woken us up to the present reality of global warming.

There we were thinking climate change would be a problem for our children and grandchildren – who, we hoped, wouldn't remember our refusal in 2013 to pay a bit more for electricity so as to reduce greenhouse gas emissions.

Now we realise it's a problem – a frightening problem – for us. One likely at least to continue for the rest of our lives at its present level of harm and unpleasantness, and more likely get much worse in the years ahead unless something decisive is done by all the major economies, including us, to reduce net emissions to zero over the next 30 years and stop us cooking.

It's a wake-up moment not just for us, however, but for the entire rich world. They've been watching in fascinated horror as global warming has punished the Aussies for their repeated refusal to take it seriously.

Ostensibly, Morrison has realised we need to change course. "We want to reduce emissions and do the best job we possibly can and get better and better at it," he said when it dawned on him we were holding him responsible for the fires regardless of what the constitution says about them being a state responsibility.

"In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said. But then he started adding qualifications. "We're going to do it without a carbon tax, without putting up electricity prices and without shutting down traditional industries upon which regional Australians depend for their very livelihood."

Really? Sounds like he's promising us all the benefits without any of the costs. Nothing needs to change to make things much better. Which, in this age of cynicism and distrust of our lengthening string of second-rate leaders, makes you fear all that's changed is the marketing spiel.

What we need is a leader great enough to seize our Pearl Harbour moment and turn it into a Port Arthur moment – the moment when a prime minister exercises true leadership and uses the horrible reality of death and destruction to win public support for big changes to stop such things becoming regular events.

John Howard, Morrison's role model and mentor, saw such an opportunity and seized it. He did so not because it offered political gain, but because it was a leader's duty to deliver something great for those he led. He did so knowing it would prompt great resistance from within the Coalition. But with the public behind him and his political opponents unlikely to oppose him, that was a risk he was prepared to take.

Just the same conditions apply to Morrison's decision on whether to turn us from laggards to leaders in the global effort to halt the rise in average temperatures to less than 2 degrees. Has he the courage to stand up to the noisy minority of climate change deniers in the Coalition, who are now so badly out of step with public opinion?

There's a central lesson to be learnt from this appalling summer. The dichotomy Morrison has so far relied on – the environment versus the economy – is false. "We'd love to help the environment, but not if that involves a cost to the economy."

Sorry, since the economy sits within the natural environment, anything that damages the environment also imposes loss – of property, businesses, jobs, wellbeing, lives and health – on the economy and the humans who constitute it.

It follows that, in our obsession with the cost of fighting climate change, we can no longer ignore the far greater cost of not fighting it. The one option that's not available is no change. We can refuse to change, but nature will change things whether we like it or not.

The economy is always changing, as some industries expand and other contract. Jobs are continuously being lost in some fields and created in others. This is the very process by which we've become far more prosperous over the past two centuries.

So the notion that our steaming coal industry can be preserved in aspic is laughable. Its days are numbered. But we don't have to kill it, the rest of the world will do that for us as – like us – they increasingly turn to renewable energy and away from fossil fuels. Business can see that; Morrison professes not to.

Second-rate leaders throw in their lot with those who fear losing from change, letting the rest of us suffer while they attempt to resist the irresistible. First-rate leaders seek out ways we can benefit from that change, restoring the luck of the Lucky Country. How? Watch this space.
Read more >>

Monday, January 20, 2020

RBA should stop pretending there's any more it can usefully do

Every institution – even, as we’ve learnt to our sorrow, the Christian church – is tempted to put its own interests ahead of its duty to the greater good. Now it’s time for the Reserve Bank to examine its own conscience. If it cuts interest rates again in a fortnight’s time, in whose interests will it be acting?

Many of the Reserve’s immediate customers in the financial markets expect it to cut the official interest rate at its meeting early next month and then again a few months later, at which point the rate will be down to its "effective lower bound" – 0.25 per cent – and it will be time for it to move to using purchases of government bonds to lower the risk-free rate of interest more widely in a program of "quantitative easing".

That’s what its market customers expect of it and it will be tempted to comply, showing it’s still at the wheel, in charge of steering the economy, doing all it can to get things moving and keeping itself at the centre of the macro-economic action.

What could be wrong with that? Just that it’s unlikely to do any good, and could do more harm than good. It’s hard to see that yet another tiny interest-rate cut will do anything of consequence to stimulate spending.

Rates are already so exceptionally low it’s clear that it’s not the cost of capital that’s making businesses reluctant to invest in expanding their production capacity. Whatever their reasons for hesitating, cutting rates further won’t change anything.

Moving to households, the record level of household debt does much to discourage them from borrowing to buy goods and services and so boost economic activity. Interest-rate movements mainly affect discretionary spending on household durables (cars, white goods, lounge suites etc), but sales of these are in the doldrums despite already super-low rates. So, again, another cut is unlikely to change that.

In justifying recent rate cuts, the Reserve has relied heavily on the expected consequent fall in our exchange rate, which should stimulate the economy by making our export and import-competing industries more price competitive internationally.

And the reverse is also true: if we leave our rates well above the low levels of the big advanced economies, the dollar will appreciate and make our industries less price competitive. However, that argument’s of little relevance by now, and we shouldn’t be encouraging a beggar-thy-neighbour game of competitive devaluations.

But even if further rate cuts, and quantitative easing after that, will do little to boost demand, surely they couldn’t do any harm? Don’t be too sure of that. They’d hurt those who rely on interest income from financial investments – though bank interest rates could hardly fall any further.

Speaking of banks, the closer interest rates get to the floorboards, the more their profits are squeezed. If you don’t see that as a worry, you should: when lending becomes unprofitable banks become reluctant to lend. Sound good to you?

There may also be some truth in the argument that whereas in normal times news of an interest-rate cut boosts the confidence of consumers and businesses, at times like this they’re a sign the economy isn’t travelling well and new commitments should be delayed.

But here’s the biggest reason further rate cuts would do more harm than good: the clear evidence that, since the cuts began and prudential supervision was relaxed, house prices in Melbourne and Sydney have resumed their upward climb.

This is an appalling development. Getting our households even more heavily indebted is a cheap price to pay for scraping the last bit of monetary stimulus off the bottom of the barrel? Making first-home ownership even more unaffordable for our young people is just something we have to live with?

The one thing we know is that while "monetary policy" has lost its ability to stimulate demand for goods and services, its ability to stimulate demand for assets - such as houses, commercial property and shares - most of it fuelled by rising debt, continues unabated.

When in the 1970s we switched from using the budget to using interest rates to manage demand, we little realised that the serious side-effect of monetary stimulus was rising asset prices and rising debt.

Essentially, Australians buy and sell our houses among ourselves, bidding up the price of that little-changing stock of houses. Then we tell ourselves we’re all getting richer. Why is this anything other than damaging self-delusion? Why should the Reserve Bank be one of its chief promoters?

It’s time for Reserve governor Dr Philip Lowe to stop doing more harm than good and turn the management of demand back to the people we elected to run the economy.
Read more >>

Saturday, January 18, 2020

Populist revolt around the world making economists rethink

It’s often said that the failure of conventional economics revealed by the global financial crisis has prompted no serious effort to find a new economic theory that actually works. Look closer, however, and you see economists stirring themselves to lift their game.

That’s the view of a noted American economist and critic of his profession, Professor Dani Rodrik, of Harvard, in an article published this week by Project Syndicate.

Rodrik says the populist backlash sweeping the advanced economies in recent years – think Trump, Brexit and Pauline Hanson – has produced some soul searching in the discipline. It is, after all, a backlash against the austerity policies, free-trade deals, financial deregulation and labour market deregulation that economists urged on the politicians (and only in retrospect realised how naive they’d been and how misused by pollies with other agendas).

In consequence of this rethink, “the economics profession is gradually changing for the better”, according to Rodrik. But the transformation extends beyond thinking about economic policy.

Within the discipline there’s finally a reckoning with the hierarchical practices (reverence for seniority and high-status universities) and the macho seminar culture (where anyone who says something silly or unorthodox is brutally shot down) that have produced an inhospitable environment for women and minorities.

According to a survey of its members conducted last year by the American Economic Association, nearly half of female economists felt discriminated against or treated unfairly on account of their gender. Nearly a third of non-white economists felt they’d been treated unfairly because of their ethnicity.

Rodrik, an Egyptian American, thinks the bad policy advice and the inhospitality towards anyone not an old white male may be related. “A profession that is less diverse and less open to different identities is more likely to exhibit groupthink and hubris,” he says.

“If it is to generate ideas to help society achieve inclusive prosperity [and so not push outsiders into the arms of populist politicians with no real answers to the problems being reacted against] it will have to start by becoming more inclusive itself.”

The new face of the discipline was on display at its annual meeting in San Diego early this month. The sessions that attracted the greatest attention were the more than a dozen focusing on gender and diversity.

Also discussed was a new book by the Nobel laureate Angus Deaton and Anne Case, Deaths of Despair. Their research shows how a particular set of economic ideas privileging the supposed “free market”, along with an obsession with material indicators such as aggregate productivity and gross domestic product, have fuelled an epidemic of suicide, drug overdose and alcoholism among America’s (often jobless) working class.

Capitalism is no longer delivering for these people (many of whom switched their votes to get Trump over the line) and economics is, at the very least, complicit, Rodrik observes.

In a panel session at the annual meeting that Rodrik helped organise, Economics for Inclusive Prosperity (note that buzzword inclusive), several new strands of thinking were discussed that are, he claims, “taking over the discipline”.

One was the need to expand economists’ focus from average levels of prosperity (which often look okay) to the distribution of that increased income between top, middle and bottom (which often doesn’t).

Another strand of thought was the non-economic dimensions that are equally fundamental to wellbeing – such as dignity, autonomy, health and political rights – damage to which economists have tended to ignore.

“How economists talk about, say, trade agreements or deregulation may well change when they take such additional considerations seriously,” he says.

“This will require new economic indicators. One proposal that goes part of the way is for government agencies to produce distributional national accounts [something our Australian Bureau of Statistics has been working on].”

Mainstream economists have long claimed their theories and models to be “value-free”. This is self-delusion on a grand scale. In a paper presented to the panel session by Professor Samuel Bowles, of the Santa Fe Institute, and Professor Wendy Carlin, of University College, London, they boldly stated the bleeding obvious.

They argued that every policy paradigm has embedded within it not just a theory about how the economy works, but also a set of ethical values about what the good life entails. Neo-liberalism, for instance, presumes individualistic, amoral individuals and a free market that delivers efficiency, thanks to “complete contracts” (those that leave the other party no room to cheat you, but such contracts don’t exist) and few instances of “market failure” (where, for various reasons, the market fails to work the way the theory says it will).

Clearly, such assumptions go a long way towards explaining why economists failed to foresee that deregulation of the financial system and permissive supervision of it would lead eventually to collapse and deep recession.

Bowles and Carlin said what we needed was a new theory that integrates egalitarian, democratic and sustainability “norms” of acceptable behaviour (the ethical side) with a model of the economy as is really operates today (that is, which would incorporate the insights of behavioural economics).

Such a paradigm would place the community alongside the economists’ conventional dichotomy between the market and the government. And it would include policies such as wealth taxes, broader access to insurance to reduce people’s exposure to risks, workplace rights, reform of corporate governance (none of the convenient fiction that shareholders’ rights trump all others), and a substantial weakening of intellectual property rights (which have devolved from a device to encourage innovation to a prime source of big business rent-seeking).

Professor Luigi Zingales, of Chicago University’s business school, criticised economists for foisting their own preferences on the public. They tended to place greater value on certain outcomes (such as economic efficiency) rather than others (such as the distribution of income) and they fall prey to groupthink and to fetishising particular economic models over others.

I can’t say I’m convinced a revolution in economists’ thinking is imminent, but it’s a start.
Read more >>

Monday, January 6, 2020

Is Morrison the man who killed the Aussie summer?

This is the summer from hell. I can’t imagine anyone is enjoying their break – not with the quadruple whammy of drought, heatwaves, bushfires and smoke haze we’re experiencing. If it happens again next summer – or the one after – as it very well could, can you imagine the political doghouse Scott Morrison and his Coalition parties will be in?

Morrison is already bearing most of the ire of people displaced by the fires. So much so that he’s learned not to show up to offer his commiserations. But is it really his fault? No. Just one of the six prime ministers we’ve had over the past two decades can hardly take all the blame.

In any case, Morrison is right to protest that nothing Australia could have done by itself could have stopped the deterioration in climate we’re seeing. The only solution is global, so all the big, rich economies – particularly the Americans, less so the Europeans – must share the blame for the continuing rise in average temperatures.

And even the biggest developing economies – China and India, particularly – could have done more to reduce the intensity of their emissions (emissions per dollar of GDP) without abandoning their efforts to raise their living standards to some higher fraction of those we have long enjoyed.

But Morrison doesn’t escape the responsibility of leadership as easily as that. For one thing, it’s his side of politics that’s done most to sabotage the limited and belated efforts Australia has made, since the defeat of the Howard government, to contribute to the global effort to reduce greenhouse gas emissions.

And you have to go back to John Howard’s refusal to ratify the Kyoto agreement of 1997 to find an instance of Australia actively disrupting efforts to reach international agreement on stronger action, to match the shamefully destructive contribution Angus Taylor made at the conference in Madrid last month by insisting that Australia be allowed to use an accounting trick to shirk its responsibilities.

For any Australian leader to claim, hand-on-heart, to have done all they reasonably could to reduce global warming, they have to be able to say they committed us to a disproportionate reduction in our emissions, so as to have the moral authority to press the bigger players to do more. None of our leaders can say that, least of all Howard and Morrison.

And then there’s the law of politics that says if it's fair enough for the government of the day to claim the credit when things go well – even when the seeds of that success were sown by an earlier administration – it’s equally fair for the government of the day to cop the blame when the neglect of earlier administrations finally hits the fan, as it has this summer.

Not Morrison nor any of his predecessors can honestly claim to have been caught unawares by what’s happening before our eyes and noses. The CSIRO has been warning for at least a decade of just this concurrence of adverse and costly events – in lives and health, as well as property – as the planet warms.

At last year’s election, the climate change deniers demanded to be told the economic cost of stepping up our contribution to reducing global warming. The more sensible among us should have been demanding to be told the economic cost of allowing global warming to roll on. We’re finding that out as we speak, but doing so the hard way.

It’s tempting to wonder whether, in his heart of hearts, Morrison is himself a climate-change denier. But that hardly matters. These days, what politicians truly believe doesn’t have much bearing on what they do and say. Conviction politics is dead. These days, politicians seek out the position that, while sitting easily with their heartland supporters, is likely to give them the greatest short-term advantage over their political opponents.

Whatever he believes, Morrison is too cagey to come out as a denier. Like Malcolm Turnbull before him, he’s bound hand-and-foot by the deniers in his own party and the Nationals. So, until now, his safest position has been to say he accepts the science, while falsely claiming to be comfortably on target to reach the (inadequate) emissions reduction we committed to in the Paris agreement.

There are two approaches to the “wicked” problem of global warming: mitigation (reducing emissions) and adaptation (changing in response to whatever warming we get). The greenies have seen these as in conflict and frowned on efforts to adapt. But Morrison and his predecessors have been so bound up by their deniers that they haven’t wanted to talk about even such issues as getting set to cope with much worse bushfire seasons. No excuses for that, Scott.
Read more >>

Saturday, January 4, 2020

how we caught the economic growth bug, but may shake it off


Do you realise that the great god of mammon, Gross Domestic Product, has really only been worshipped in Australia for 60 years last month? Its high priests at the Australian Bureau of Statistics have been celebrating the anniversary.

Sixty years may see a long time to you, but not to me. And not when you remember that the study of economics, in its recognisable form, started with the publication of Adam Smith’s Wealth of Nations in 1776.

GDP is the most closely watched bottom line of the "national accounts" for the Australian economy.

So what do GDP and the national accounts measure, where did they come from and are they as all-important as our economists, business people and politicians seem to think, or is GDP the source of our problems, as many environmentalists and sociologists seem to think?

What GDP measures can be described in several ways. I usually say it measures the value of all the goods and services produced in Australia during a period.

But because workers and businesses join together to produce goods and services in order to earn income, it’s equally true to say that GDP is a measure of the nation’s income during a period.

And since income is used to buy things, it’s also true that GDP measures the nation’s expenditure (but only after you subtract our spending on imports and add foreigners’ spending on our exports).

Now some qualifications.

GDP measures the value of goods and services bought and sold in the market place, plus the goods and services supplied by governments but paid for by our taxes. This means GDP doesn’t include the (considerable) value of all the goods and services – meals and so forth – produced in the home without money changing hands.

Economists (and economic journalists) make so much fuss about the quarterly ups and downs of GDP – is the economy growing or contracting, is it growing faster or slower? – it’s easy to assume that economic growth is something they’ve always obsessed about.

In truth, it’s a relatively recent preoccupation – suggesting it’s a habit we may one day grow out of. You see this more clearly when you consider the origins of GDP and the national accounts it springs from.

The 60-year anniversary is of the move to quarterly estimates of the growth in GDP in September quarter, 1959. It’s hard to be obsessive about something when you don’t get regular reports on how it’s going.

Fact is, until the Great Depression of the 1930s, economists were preoccupied with studying how markets worked ("micro-economics") and gave little thought to how the economy as a whole worked ("macro-economics"), let alone how fast it was growing.

In his recent history of the federal Treasury, Paul Tilley noted that it was just a department full of bookkeepers until the upheavals of the Depression caused its political masters to ask questions about what they should be doing that it couldn’t answer. That’s when Treasury became macro-economists.

It was the failure of "neo-classical" economics to provide an effective response to the Depression that led to the ascendancy of an Englishman who did have answers, John Maynard Keynes. At the heart of the ensuing the "Keynesian revolution" in economics was the notion that there was such a thing as the macro economy and that it was the responsibility of governments to "manage" that economy, ending its slump and getting workers back to work.

Once you started thinking like that, it became obvious that, to manage the economy effectively, you needed to measure it and track the changes in it over time.

The first economists to start developing a systematic and internally consistent way of measuring the economy, in the early 1930s, were Simon Kuznets in the United States and Colin Clark in Britain. Clark, a disciple of Keynes, moved to Australia in 1938 and spent the rest of his life as an adviser to the Queensland government.

For some years after World War II, our Treasury issued annual, out-of-date estimates of the size of GDP and its components.

The Keynesian economists’ preoccupation then was not with growth as such, but with keeping the economy at "full employment" – in those days defined an unemployment rate of less than 2 per cent – which, admittedly, did require it to be growing pretty quickly. In those days, however, GDP was used more as an aid to the short-run stabilisation of the business cycle – "demand management".

Paul Samuelson’s legendary introductory textbook, first published in 1947, which "brought Keynesian economics into the classroom", didn’t have an entry for "growth" until its sixth edition in 1964.

It was only about then that people became preoccupied with economic growth, as indicated by the growth in GDP.

The critics are right to point out the many respects in which GDP falls short as a measure of human wellbeing. But, though it’s true many people treat GDP as though it is such a measure, it was never designed to be used as such.

I agree with the critics that there’s more to life than economic growth and that politicians and economists should give less attention to growth and more to the many less tangible, less well-measured social factors that also affect our wellbeing.

It’s true, too, that GDP was developed before we became conscious of the need for economic activity to be ecologically sustainable – which the present hellish summer reminds us it certainly isn’t at present. In this sense, GDP is no longer "fit for purpose".

It’s wrong, however, to conclude that continuing growth in GDP is incompatible with ecological sustainability. People say that because they don’t understand what drives the "growth" that GDP measures (hint: improved productivity).

We can have unending growth in GDP and sustainable use of natural resources (which is what the environmentalists care about) by changing the way economic activity is organised – including by getting all our energy from renewable sources.
Read more >>

Wednesday, January 1, 2020

Government on the cheap leaves us burningly reliant on charity

As the cast were taking their bows at the end of a show before Christmas, one of them stepped forward to say that, as we left, we’d be approached by people with buckets collecting for the NSW Rural Fire Service. Normally I’d reach for my wallet – I’d done so a few weeks earlier when they were collecting for an actors’ charity – but this time I declined.

Like Victoria’s Country Fire Authority, the RFS is staffed by volunteers. Why did they need donations? Presumably, to help cover the cost of needed equipment or incidental expenses. Really? What’s happened to the state government’s cheque book? And don’t I remember hearing that the RFS had had its funding cut?

No one believes every worthy cause should be funded by the government so that private charity becomes redundant. And it’s true the federal government partially subsidises donations by making them tax-deductible. But where do you draw the line between what the government should cover and what can be left to the generosity – or otherwise – of private citizens?

The more I think about it, the more I realise that, as part of their commitment to Smaller Government and lower taxes, governments have been quietly shifting the dividing line between what the government pays for and what should depend on charity.

All governments have been doing it. State governments, for instance, have long left country (but not city) fire-fighting to volunteers. And have long underfunded the upkeep of public schools, believing parents and citizens can be left to make up the shortfall. But it’s been a particular trick of the federal Coalition government as it struggles to return its budget to surplus when there are expensive, vote-buying tax cuts to be covered.

If you’re wondering why, despite his contrition at having taken an overseas break his spin doctors tried to keep secret, and his freely dispensed “thoughts and prayers”, Scott Morrison remained adamant for so long that all that was needed was already being done to help the firefighters, it’s because he knows that too much generosity on the feds’ part could see his precious budget surplus whittled down to nothingness.

Since its election in 2013, this government has been insistent that the budget should be returned to surplus by cutting government spending, not by explicit increases in taxes (hidden tax increases caused by bracket creep are okay, of course, because the punters don’t notice ’em).

Its first budget in 2014 was a long-term plan to improve the budget by what the bureaucrats call “cost-shifting”. Much of the cost of health and education was to be shifted onto the states’ budgets. Some was to be moved to your household’s budget via the $7 charge for visits to the doctor.

That budget was so badly received most of those plans were reversed. But Finance Minister Mathias Cormann and his accountants have continued to limit the growth in government spending by penny-pinching in ways that voters wouldn’t notice or object to.

They’ve got welfare dependency to “its lowest level in 30 years” not by getting the unemployed into jobs, but by using petty excuses to suspend people’s dole payments. How do these unfortunates live without money to live on? They fall back on their families or go cap-in-hand to the Salvos or Vinnies. Get it? The feds are cost-shifting to charities – the same community groups whose grants they’ve cut back.

According to a recent survey of its members’ staffs by the Australian Council of Social Service, 76 per cent of staff dealing with housing the homeless reported an increase in demand, as did 71 per cent of those providing financial counselling and support (aka money). Respondents to the survey said the unmet demand naturally had adverse impacts on the community. Where people fall through the cracks they can end up in hospitals or the justice system (cost-shifting to the states).

I’ve been reading about how many small country towns are relying on newly formed charities for their supply of water. More broadly, the desire to limit government spending encourages politicians to ignore reports warning of looming troubles and push problems off into the future. Some of the foreseen problems fail to materialise, but many eventually reach crisis point and can no longer be ignored.

The aged care royal commission is revealing the shocking results of one attempt to keep government small by relying on for-profit providers, underspending on the provision of home-care packages and on policing institutions’ adherence to the rules.

Which brings us back to our truly heroic volunteer firefighters. Morrison’s reluctant decision to pay them $300 a day for a maximum of 20 days is the least he can do to acknowledge their loss of income (or annual leave) while serving their communities.

His reluctance – and anxiety to emphasise it’s not a payment of wages – is understandable, however. Behavioural economics is clear that paying people to do what they formerly did without payment can kill the motivation to donate your services for noble reasons. Morrison has stressed that this response to a problem of unprecedented severity shouldn’t be seen as setting a precedent.

Good luck with that. If climate change is making drought, heatwaves and bushfires bigger and more frequent, the horrific events of this summer will become a regular occurrence – meaning the days of leaving bushfire fighting to unpaid volunteers are numbered.
Read more >>