Wishing You A Miserable 200th Birthday, Karl Marx

Karl Marx's ideas have led to the death of 100 million people, extreme poverty, immense suffering, and relentless oppression — and you can't even say he's a nice guy.

Marx treated people cruelly, was two-faced, and used racial slurs.  In a 1862 letter, Marx described an opponent as a "Jewish Nigger".  He was also a slob.  "Washing, grooming and changing his linen are things he does rarely, and he is often drunk", a Prussian police spy reported.

Marx had an affair with his life-long family maid Helen Demuth, who was, ironically, never paid for her backbreaking labour.  The affair resulted in a child that Marx refused to acknowledge and was fostered out.  When the child came to visit he was forbidden from using the front door and obliged to only see his mother in the kitchen.

The striking feature of those who claim to support Marx's socialist ideas is that they know practically nothing of Marx the person, who was a monster, and the result of his ideas, which is monstrous societies.

Lenin and Stalin's Soviet Union, Mao's China, and Pol Pot's Cambodia were both oppressive and unsuccessful.  The "people's revolution", the socialising of the means of production directly inspired by Marx, led to the thousands of murders, millions of deaths in famines, and decades of political oppression and economic failure.

Today, Venezuela is the latest socialist catastrophe.  Venezuela, despite having the world's largest known oil reserves, is desperately poor.  Nine in ten Venezuelans go hungry.  Prison inmates desperately forage for dead rats.  Basic prescription drugs are unavailable.  HIV/Aids cases are flooding hospitals because of the lack of contraceptives.  Babies are dying by the thousand.  Crime and murder are spiking.

It is often remarked that socialism is "good in theory, bad in practice".  It's a pretty rubbish theory if in practice it has failed every time it has been tried.

Socialism is built on shoddy intellectual grounds.  Socialism depends on people working for others, with no immediate benefit.  Socialism can only be implemented with coercion and force.  To stop people from private economic, social and political activity, you have to oppress.  That is why, in socialist countries, opposition political parties are banned, dissenters are jailed, and speech is curtailed.

So, what's the record of the system Marx labelled "capitalism"?  The free market has unleashed human flourishing and delivered freedom.  The adoption of markets and free trade in the developing world has lifted a billion people out of poverty in the past 30 years.  Global life expectancy has doubled in the last century from thirty to over sixty years.  Meanwhile, global inequality is declining for the first time since the industrial revolution.

In capitalism, you can pursue you own desires, live as you choose, earn money as please and spend it on what you want.  In socialism, you are inevitably oppressed if not staved.

It's time to kill parallel import restrictions

Abolishing parallel import restrictions on books isn't neoliberal ideology, as Tim Winton, Richard Flanagan and Magda Szubanski claim — it is social justice reform.

It is a reform that would deliver lower book prices to Australians by removing a rent-seeking benefit to the multinational publishing industry.

Currently, Australian booksellers are prevented from importing books manufactured overseas if the book has been published by an Australian copyright holder within 30 days of overseas release.  In effect, Australian publishers are granted a monopoly over any book they choose to publish and are protected immediately from foreign competition.

Parallel import restrictions are an effective tariff on international trade, similar to the archaic tariffs that were abolished under the Hawke-Keating government.  We now have a wealth of evidence to confirm this.

In 1998, the New Zealand government took the brave decision to remove import restrictions on books.  A 2012 review of that reform by Deloitte Access Economics commissioned by the NZ Ministry of Economic Development found that book prices are lower in New Zealand than in Australia and that the changes "had little impact on overall creative effort in the New Zealand book industry".

Australian authors claim the changes will decrease profitability in the Australian market and will result in fewer Australian books being published.  This claim is not backed up by evidence.  The same report found that the number of new New Zealand book titles published annually has remained fairly steady, and that the share of authors in overall employment and income earned by publishers actually increased following the changes.

The Prices Surveillance Authority report 1989, the Australian Competition & Consumer Commission reviews in 1999 and 2001, the comprehensive Productivity Commission report in 2009 and, more recently, the Harper review all found that removing import restrictions would make books cheaper for consumers, and recommended their abolition.  The Harper review's recommendation was accepted by the Turnbull government.

The draft Productivity Commission report into intellectual property recommends that the Australian government abolish parallel import restrictions on books, saying there is no new evidence that changes the case for removing the remaining restrictions and that it is the analogue equivalent of geoblocking.

Reading and literacy are a social good.  Removing these restrictions will mean libraries and schools can order more books, families will be able to buy more books for their kids, university students won't have to struggle to buy textbooks, and local bookstores will be able to compete on a level playing field with Amazon, to the benefit of small businesses and the consumer.

Labor's recent arts policy announcement had a piece both ways but slanted towards taking the side of the publishers without clearly stating its position.

This is a disappointing development as it slows what was rising bipartisanship on the issue.  Labor's student wing, the National Union of Students, launched a campaign against the laws, as they recognise that PIRs make textbooks substantially more expensive for struggling students.  Labor shadow treasurer Chris Bowen brought the proposal to cabinet under the Rudd government and is a known supporter of the changes, along with former Labor ministers Bob Carr and Craig Emerson.

Emerson said of the reform:  "Cheaper books for kids in poor communities is a good social reform."  He also said that multinational book companies put pressure on local authors and publishers to oppose the removal of restrictions.  Authors like Tim Winton are lining up to be that very face.

A famous Australian like Winton is a much gentler face to argue for the status quo than that of a large multinational publishing giant that uses this archaic tariff to make profits at the expense of Australian consumers.

At the recent book industry awards, Richard Flanagan launched an attack on the government's position, with an emotive plea to vote against the Liberal Party.  This is a disappointing worldview from Flanagan to completely dismiss the struggle many Australians face with book prices.

Attempts to derail the government's attempt to abolish parallel import restrictions on books recall the fear campaign ran by Peter Garrett and John Farnham in 1998 when the Howard government abolished parallel imports on CDs.  Did the music industry in Australia die as they suggested it would?  No.  Did CDs almost halve in price?  Yes.

We are in an age of digital disruption where businesses have had to adapt to adjust to a changing consumer climate.  The prominence of Amazon has been around for quite some time.  Australians know they can buy books cheaper from Amazon, and they do.  Yet our retailers have no opportunity to adapt due to import restrictions inflating the price of our books.  When the Prime Minister talks of the needs to be an agile economy, this is exactly the type of reform that does that.

The jig is up.  This is a case of out-of-touch authors teaming up with big business at the expense of the consumer — book-loving Australians.

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Greece should just use bitcoin. Actually, bitcoin can run the country

One of the great lessons of the 2008-09 global financial crisis was the folly of trusting a government-controlled banking system, and of permitting government interference in financial lending.  The current meltdown in Greece is teaching a closely related lesson on the private costs of using government money.  But there is another option:  the Greeks could all use bitcoin.

Governments regularly abuse the trust of their citizens by debasing the currency through printing money or accumulating public debt in order to pay for its spending.  They also abuse that trust by controlling private access to money and its movement (e.g. capital controls), as the Greeks have become painfully aware this past week.

But an economy does not actually need government money — it can, and often has, run on privately issued currencies.  Gold is one example, and up until 1911 Australia had numerous private currencies.  But the best-known newly fledged private money at the moment is bitcoin, which is a crypto-currency.

A crypto-currency is an internet-based electronic money and payments system that is backed not by trust in government, banks, or any organisation, but by trust in mathematics, or, to be precise, in the competitive distributed computation of cryptographic hash functions.  It is, in essence, electronic gold, which is better in many ways than real gold.

When a nation and its economy begins to collapse because of the long-run effects of government abuse, which usually occur to finance government projects such as wars or channeling resources to politically favoured groups, what happens is that the real parts of the economy are driven underground.  A cash economy, or worse, a localised barter economy materialises, which is highly constraining and burdensome.  The economy shrinks as the parts of it that rely on even moderately sophisticated financial intermediation or extended networks of exchange collapse.  The shattered economies of the myriad failed states throughout the 20th century are testimony to this.

But with a crypto-currency, a radically different prospect could in principle occur:  namely a state could collapse, but it would not take the economy with it.  The Greek economy might not necessarily collapse underground, shrinking as it goes, but might instead disappear behind the veil of cryptography, shedding its government parts completely.

This is an intriguing possibility that few seem to have noticed.  It certainly explains the spike in the bitcoin price this week.  But most of the attention seems to be on Greece running out of money, and of the awfulness of the choices that Greek citizens face.  But there is actually a third option:  abandon government money altogether.

The "yes" vote would have Greece stay with the euro, and the "no" vote would invariably require a return to the drachma, or similar.  But a shift to private money, such as bitcoin, completely bypasses the basic problem, which is the mess that the governments, over many years, have made of the Greek economy.

By shifting to a bitcoin economy, individual Greeks would simply cut the government out of the equation as they then got on with their economic lives.  That cuts out its debt and taxes, but also the services the government furnishes.  So it's a form of secession.

Now such an option will be painful for those who have their own economic fates tied to the government, which obviously includes a large number of Greek citizens dependent upon welfare payments, and it would be unpopular among those holding the other side of the Greek public debt.  Plainly, it would be devastating to the extant ruling political classes, both in Athens and in Brussels.

But such a "conscious uncoupling", to use a phrase popularised by Gwyneth Paltrow, would be of enormous benefit to those seeking to produce and work and consume in Greece, and those around the world who wish to trade with them.  In practice, that's a much larger set of people.

Even the credible threat of what Trent Macdonald, in a recent PhD thesis, calls "nonterritorial crypto-secession", in which a large group secedes from the nation state, but without going anywhere or forming a new state, might well be enough to inspire discipline on the political classes.  The prospect that the "blockchain" — the technology platform of bitcoin — might also be used for many other erstwhile functions of government, such as property titling, marriage registry, recording contracts, or coordinating the private production of public goods, and so on, only reinforces this position.

Political scientist J.C. Scott in The Art of Not Being Governed referred to the role of "shatter zones" as places where those who were preyed on by the state could retreat to — the highlands of Zomia in south-east Asia, or the Appalachian mountains in the US, where Confederate deserters went to escape government conscription.  The existence of such shatter zones constrains the depravations of the state.

A crypto-currency is also an escape, a digital shatter zone, but it doesn't involve hiding in the mountains.  You can stay exactly where you are and get on with your business, uncoupled from the state.  And bitcoin and the blockchain are not just about "crypto-secession" but also "crypto-statecraft".  It might be better to exit behind the veil of cryptography and start new parallel institutions than waste energy fighting old ones.  That's a prospect many Greeks might value right now, and which Greek politicians, as well as those the world over, might reasonably fear.

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The ABC debate: we have Mamamia and BuzzFeed, we don't need the ABC anymore

The arguments for a publicly funded ABC are weaker today than they ever have been.

If there ever were a persuasive case for a lavishly taxpayer-funded public broadcaster in Australia, the digital age has fundamentally undermined it.

The digital age has radically reduced — some would say even abolished — the barriers to entry in the media industry.  While you once would have required hefty finance for a printing press, radio or TV transmission towers and studios, citizens now have the capacity to publish and broadcast from their mobile phones.

While the media industry in Australia has unquestionably fallen on hard times, on at least one measure it is stronger than ever before:  diversity.  The lowering of barriers to entry has allowed a thousand flowers to bloom — Australians now have access to news and current affairs from more sources than ever before.  Consider the impact and success of recent arrivals like The Guardian and the Daily Mail, BuzzFeed as well as older players like Crikey, New Matilda and even Mamamia.  This diversity has been replicated in the entertainment space too, and will be substantially augmented when services like Netflix finally arrive in Australia.

Australians of course now also have easy access to the best news and current affairs from around the world.  While many lament the loss of foreign correspondents, their role is far less important in a world where you can instantly access local reports from the region that interests you most.

The resources of government are always limited.  Any expenditure has to be justified, because a dollar spent on public broadcasting is a dollar that can't be spent on health, education, defence — or, ideally, returned to the taxpayer.

The continued justification of the $1 billion of taxpayer funds received by the ABC must rest on it providing a service that no one else can.  This golden age of media diversity begs the question:  what does the ABC provide that no one else can?

Children's entertainment?  Available cheaply online.  International news?  Easily accessible from more sources than ever before.  Coverage of Australian politics and current affairs?  Offered by a more diverse range of perspectives today than ever before.  Rolling 24-hour news coverage?  Sky News.  Lists of Gough Whitlam's most memorable quotes?  That's what BuzzFeed is for.

Arguably the most unique offerings on the ABC are its rural and regional coverage and its emergency services broadcasting.  But these are a tiny fraction of the ABC's activities, and could be much more efficiently delivered by direct grants through a competitive tender process.

The ABC's online services, on the other hand, clearly compete in a very well-serviced market.  There's no shortage of opinion online, and yet the ABC maintains The Drum to cater for this.  The ABC's online news is comprehensive, and also duplicates much of what's on offer from established newspapers.

This is particularly important when the ongoing viability of newspapers depends upon their ability to charge — either through advertising or paywalls — for something the ABC provides at no cost.  The ABC is certainly not responsible for all the woes of traditional media companies, but its competition online is not helping and will continue to threaten the business models of commercial news organisations.

Managing director Mark Scott justifies the ABC's online activities by pointing out their charter requires it.  But the ABC charter was only amended to specify its online scope in 2013, and the ABC's aggressive push online long predates it.  The truth is Scott and his board clearly see the ABC's online activities as central to its ongoing relevance, and were already investing heavily in it absent any encouragement from government.

Scott's recent speech at the University of Melbourne clearly outlines this philosophy.  Scott has been running an impressive rear-guard action to defend the ABC's continued generous taxpayer funding.  In what was perhaps the most blatantly political speech by an ABC managing director, he directly contradicted Communications Minister Malcolm Turnbull's claim that savings can be made from the ABC budget without affecting programming.  The speech was loaded with thinly veiled threats about the political consequences of a democratically elected government altering the ABC's funding in any way.

This leaves the government with little choice but to press ahead with its proposed cuts.  If Turnbull backs down in the face of Scott's attempted intimidation, future ABC managing directors (and the heads of any government agency wishing to defend their turf) will understand that their political interventions will be rewarded.

But these cuts should just be the first step.  The ABC is long overdue for a comprehensive inquiry into the scope — not just the efficiency — of its activities.  Any fair-minded inquiry will demonstrate that much of what the ABC does today is already being done by others.

Energy price increases: hiding behind treasury's Pollyanna forecasts

Lane Crockett of wind farm builder Pacific Hydro accuses ''people such as Richard Wood'' of blaming ''a soft target like (the Renewable Energy Target) RET or carbon pricing for increased energy costs when in fact a majority of these increases have been driven by the policy principles of deregulation''.

He takes refuge in ''official estimates by the Australian Treasury Department, the RET is likely to result in an increase in energy bills of just 2% to 4% by 2020''.

There are three issues here.  First, what are the facts on energy price increases;  secondly, what has caused the increases to date;  and thirdly, what are the likely effects of regulations and taxes such as the renewable energy target and a carbon tax?

Over the decade to December 2010, Sydney's electricity prices more than doubled, those in Brisbane increased by 94% and those in Melbourne and Adelaide, 80% and 64% respectively.  During that period prices in general increased about 33%.

Much the greater part of the increases in electricity prices was due to regulatory sanctioned increases in the line charges of the poles and wire businesses.  These businesses have near monopolies on this element of supply.

Some of that increase may have been regulatory catch-up but this is controversial.  Work by Bruce Mountain and Stephen Littlechild (the latter a former head of the England and Wales regulatory agency) indicates the increases were excessive in Australia.  Mountain and Littlechild assemble information that indicates excessive costs in Australian distribution, especially in the supply monopoly areas of government-owned companies in NSW and Queensland.  Price increases have been lower in Victoria and South Australia, where private ownership brings greater disciplines on costs.

Though line costs and charges have dominated recent electricity price increases, carbon issues will dictate future price increases.

While Australia has no formal carbon tax at present, we do have a range of measures that have a similar affect to such a tax, the most important being the renewable requirements.  The ''20% renewable by 2020'' program sets a de facto carbon price by requiring retailers to incorporate a growing number (45,000 gigawatt hours by 2020) of high cost renewable energy into the electricity mix.  There is also a requirement for a proportion of extremely high cost solar energy as well as for the more common form of renewables, wind, which has a premium cost over coal based electricity of around $70 per MWh.

Unless treasury's Pollyanna forecasts of some imminent technology breakthroughs occur, the 20% renewables requirement by 2020 increases the average wholesale price of electricity by 40%.  This works out at an average carbon tax equivalent on household electricity of $14 per tonne of CO₂.  This in itself is a tax rate on the current household bill that approaches 20%.

On top of this is the government's proposed carbon tax.  Eventually this will need to be in the hundreds of dollars per tonne if it were to accomplish the carbon reduction forcing job intended of it.  But even at $20 per tonne, when combined with the existing renewable scheme it means a doubling of the costs of generation.  For the household this translates into a 50% increase in electricity prices, and perhaps more than this as a result of the investment paralysis the debate has triggered.  In addition there are increases in prices resulting form the higher electricity costs entailed in producing the goods and services we buy.

I have a considerable level of expertise in the energy market and have published many well-regarded books, chapters in books and journal articles on the matter.  I am fully aware of the drivers of price increases to date and the causes of these.  Though businesses dependent for their success on regulations that stymie their competitors may make gains, the costs of the measures driving these particular firms' profits is a loss of income by the rest of the community.

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Here's what isn't happening

There's a lot going on in the Liberal Party at the moment, and, indeed, on the Australian right.  But here's what isn't happening.  There isn't a burgeoning ideological split between conservatives and liberals.  Climate change is not a stalking horse for social conservatism.  And this isn't the old guard rebelling against the new guard.  In both camps there are conservatives and liberals, seasoned parliamentarians, time-servers and first-termers.

Neither is this any sort of "Howard's revenge".  It's a long bow to blame a schism within a party on the one leader who kept it together for a decade.

For the Liberal Party, the emissions trading scheme is a special case.

After the 2007 election, there was much discussion about the future of liberalism and the Liberal Party.  And the debate largely framed in British terms.  Should the post-Howard party saunter down David Cameron's path of moderate economics and moderate greenism, or talk about high tax rates and inflation?

Anyway, it turns out that there are a few problems implementing an Antipodean interpretation of Cameronism.  There appears to have been an assumption that choosing to follow the UK model was a simple as flicking a switch -- just a quick rejig of the Liberal Party's press release template and bang, the Liberals are now greener than the ALP.  Hence Turnbull's recent use of "progressive" -- a word that resonates among Cameron's strategists, but is alien to the Liberal parliamentary party and its supporters.

Campbell's piece shows that Cameron's strategy was more than just adding a tree to the Conservatives logo.  For one thing, he took his party with him, over a period of many years.  And whatever success Cameron is enjoying cannot be isolated from a few pertinent facts:  the Tories have been out of power for a decade, Labour has driven the UK basically into the ground, and the ideological ghost of John Howard is not as strong as the ghost of Margaret Thatcher.

But most importantly:  It's easy for a nominally small government party to be clean and green if all you're talking is about bicycles.  By contrast, the ETS is no small thing.  The ETS Green Paper bragged that the government's scheme would "change the things we produce, the way we produce them, and the things we buy".  The scheme is arguably the largest economic change in Australian history -- an emissions trading scheme is like plopping a entire second economy on top of the first one.

Malcolm Turnbull's camp wants to follow the Cameron model.  Nick Minchin's camp is more diverse.  Not all of the Minchin sceptics are sceptics of the science.  Weirdly, Kevin Rudd got this one right.  Sceptics include those who believe the science but think the scheme is irrevocably flawed (does anyone disagree with that?).  And then there are those in the Minchin camp who even believe the world should take action on climate change, but feel that Rudd's diplomatic strategy of legislating before Copenhagen is a little bit silly.  You might not agree with it, but this is an entirely defensible position.  The entire economy isn't just a bargaining chip to be handed to our diplomats to go off and play with.

Most in the Minchin camp have little interest in climate science, but believe a Liberal Party cannot claim to be liberal if it supports one of the biggest government interventions ever considered by the parliament.  And with its extraordinary concessions, the ETS doesn't even have the redeeming quality of being able to achieve its purported goal:  substantially reducing emissions.  It doesn't even work as an insurance policy.  It has negligible coverage and a massive premium.  The ETS is, simply, a massive tax/corporate-welfare churn.  Its economic cost will inevitably be substantial -- doubly so in the absence of a global deal -- and the Minchinites are betting that cost will be a significant political issue in future elections.

So before a global deal, for many in the parliamentary Liberal Party, opposing the ETS seems like a no-brainer.

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Do taxpayers really need to pay for the ABC any more?

Mark Latham is a fine example of the economic principle of specialisation and the division of labour.  He is an excellent public intellectual but was a woeful politician.  His passion and strong views are ill-suited for Canberra, but make for delightful reading in the op-ed pages of the Australian Financial Review.

Unfortunately, that paper has an extraordinary subscription-only policy and many of his excellent ideas and arguments will be lost.  His recent articles on bad parenting are must reading.  Today he is having a go at the ABC.  There are so many arguments against the ABC that is hard to imagine any new contributions.  Yet Latham manages to produce one.

He does raise the argument that government ownership of the ABC is no longer necessary because the market already provides a very broad spectrum of entertainment and news.

This is, of course, true.  Yet the ABC is able to provide some entertainment that commercial operators would never show.  For example, several years ago the ABC put on, in an early timeslot, the magnificent Angels in America mini-series.

Unfortunately, that sort of thing is rare.  Latham suggests we're getting less quality and more trivia.  He bemoans the flight of quality to subscription media (while writing for the AFR).

His complaint isn't that the ABC is an out-of-touch elitist organisation, but rather that ABC viewers are out-of-touch elitists; ABC employees apparently are "cornball comics".  I don't know -- my understanding is that ABC viewers tend to be AB income group and Liberal voters.

The complaint often heard from Liberals is that the ABC is "our enemies talking to our friends".  Latham tells us that the Rudd government "needs to be tough on trendies but humane to the much abused federal budget".

I agree.  The Rudd government has spent money irresponsibly and the federal budget is a disaster.  It is disgraceful to have planned a budget deficit in peace-time, even if the economy has slowed down.  But it isn't clear that privatising the ABC is the solution to fiscal indiscipline.  The federal government needs to stop spending money, not find new sources of revenue.

But what of the idea of privatising the ABC anyway?  There is an apocryphal story that the great Austrian economist Ludwig von Mises once suggested that he would privatise everything, except the opera.

But Mises also believed that the full costs and benefits of choices should be known to decision makers before they make decisions.  If after a cost-benefit analysis voters and tax-payers still supported subsidy to the opera, or the ABC, or whatever, then a subsidy should be made.

The ABC costs a bit more than seven cents per day, and what are we getting for our money?

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CRU emails reveal a worrying pattern of bad behaviour

Sometime last week the Climatic Research Unit (CRU) at the University of East Anglia was hacked and materials stolen off its server.  That information, including thousands of emails, has been posted on the internet (including at Wikileaks) and has caused a weekend of frantic blogging.  There is more or less a rather juicy scandal brewing.

There is more to this story than the "ho hum, nothing to see here, the making of sausages, and science, shouldn't be seen by the public" attitude being displayed by warmenists.  There is, however, less to the story than the "this proves the greatest scientific fraud in human history" attitude being taken by denialists.

So far, there is no evidence I have seen that suggests the fabrication of the anthropogenic global warming hypothesis.  Certainly, scientists at the CRU are not the only scientists working on climate science.  These emails do not provide a silver bullet to kill off that theory.

Much has been made of an email by Professor Phil Jones, head of the CRU, where he says:  "I've just completed Mike's Nature trick of adding in the real temps to each series for the last 20 years (i.e. from 1981 onwards) and from 1961 for Keith's to hide the decline."  The word "trick" doesn't suggest anything untoward, rather being somewhat clever about some technique.  "Hide" could be a problem.

This email is dated November 16, 1999, so it cannot relate to more recent arguments over the extent of global warming.

It is clear, however, that statements suggesting "the science is settled" can no longer be sustained.  In an email from Mike Kelly to Phil Jones (dated October 26, 2008), we find this gem, "I'll maybe cut the last few points off the filtered curve before I give the talk again as that's trending down as a result of the end effects and the recent cold-ish years."  While on July 5, 2005, Phil Jones wrote:  "The scientific community would come down on me in no uncertain terms if I said the world had cooled from 1998.  OK it has but it is only seven years of data and it isn't statistically significant."

It is possible that plausible explanations can and will be made to explain these sorts of statements.  At the same time the emails do provide evidence of attempts to subvert the peer-review process, refusal to make data available to journals, attempts to manipulate the editorial stance of journals, attempts to avoid releasing data following FOI requests, tax evasion, rejoicing at the deaths of opponents, manipulation of results, apparent misappropriation of grant money, and threats to physically assault rivals.

This is not a good look at all.  Some of this behaviour is bad form, some of it unethical, and some of it potentially illegal.  The destruction of data subject to a freedom-of-information request is illegal.  The CRU has argued that a lot of their early raw data was destroyed because they couldn't store it.  That explanation is, unfortunately, all too plausible.  We live in a world where as recently as 20 years ago, data would have been thrown away for want of storage space.  These irreplaceable and valuable historical documents are likely to have been tossed.  Why then find a 2005 email from Phil Jones:  "If they ever hear there is a Freedom of Information Act now in the UK, I think I'll delete the file rather than send to anyone"?

If this is a global Godwin Grech moment and the incriminating emails have been seeded with misinformation, then they are in the clear.  Since the scandal has broken that argument is yet to be made.  Indeed, several individuals have confirmed the authenticity of emails and condemned the invasion of their privacy.

This incident reflects poorly on academics and universities everywhere.

It is important to remember that the taxpaying public invests a lot of trust and respect in academic processes;  not to mention, money.  The peer-review process, for example, has been held up as the "gold standard" of integrity.  Yet we see numerous emails subverting peer-review.  We see attempts to avoid freedom-of-information requests -- something the media and the public are increasingly impatient about.

We see overall a pattern of poor behaviour.  Some have chosen to represent that behaviour as the workings of elite scientists going about their business.  I am not convinced that the public, whose taxes finance that behaviour, are going to be pleased.  Nor should they be.

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Science of Climate Change is only a Small Part of the Discussion

Upon reading Clive Hamilton's comments in yesterday's Crikey (Hamilton:  denying the coming climate Holocaust, Item 3), I opened up my copy of Martin Gilbert's "The Holocaust:  The Jewish Tragedy" at random to page 230 where I discovered this passage:

A further fifteen thousand German Jews were sent to Kovno, principally from Berlin, Munich, Vienna, Breslau and Frankfurt.

An eye-witness in Kovno, Dr Aharon Peretz, later recalled how, as the deportees were being led along the road which went past the ghetto, towards the Ninth Fort, they could be heard asking the guards, "Is the camp still far?"

They had been told they were being sent to a work camp.  But, Peretz added, "We know were that road led.  It led to the Ninth Fort, to the prepared pits."

But first, the Jews from Germany were kept for three days in underground cellars, with ice-covered walls, and without food or drink.  Only then, frozen and starving, were they ordered to undress, taken to the pits, and shot.

The challenge for Clive Hamilton is to explain how an argument over appropriate policy for the future is equivalent to the Holocaust where millions of people were deliberately put to death.  The Jews and the Gypsies and the homosexuals and the clergymen and the trade-unionists and others of Europe did not die through inaction, but rather they were deliberately and systematically hunted down, and murdered in what can only be described as an industrial scale slaughter.

Hamilton can make as many fancy-pants arguments he likes about "consequentialism" and what-not.  To equate climate change scepticism (however defined -- Kevin Rudd has three different definitions) with the Holocaust is the mark of a moral dwarf.  It is a good thing that Hamilton speaks of morality and the science of climate change, because it turns out there is more to climate change than just the science.

Climate change involves scientific questions, economic questions, technological questions and, yes, moral questions too.  Unfortunately we run out of the science very early in the piece.  Even if we assume, for argument sake, that the IPCC version of the science is correct, that still does not take us very far.  So imagine we know with more than 90 percent confidence that anthropogenic global warming is occurring, what next?  We have exhausted our scientific knowledge already.

The questions, "Should we do anything?" "What should we do?", and "How should we do it?" remain unanswered.  These are not scientific questions at all.  In the first instance there are economic questions, "How much will doing 'something' cost?"

Perhaps it would be cheaper to do nothing and adapt.  Perhaps not.  We simply do not know.  The Australian Treasury modelling does not answer that question;  indeed it doesn't model the actual policy under consideration.

But Hamilton invites us to consider "morality".  So let's raise some of those questions.  Who should pay the costs of fixing the climate change problem assuming that it can be fixed?  Perhaps the industrialised world;  after all it is they who first caused the problem.  But it is the developing world that will benefit most from solving the problem, so perhaps they should pay.  On the other hand, it is previous generations that caused the problem and future generations that will benefit, so why should current generations bear all the costs?

That suggests that the costs of climate change abatement should be financed through some or other long-lived debt instrument that will transfer the burden (as well as the benefits) to future generations.  Should costs be apportioned on an aggregate basis or a per capita basis?  And so on.

There are heaps of unanswered questions and issues beyond the science that so excites the commentariat.  All we really know is that the Australian government and other world governments want some sort of cap and trade scheme, and this is because of the science.  What is lacking is a discussion of the issues beyond the science.  This important consideration has been lost in the name calling.

In simple terms, the science makes up a very small component of our decision making.

All the other aspects of the decision have not been adequately debated, and have not been well explained to the community, and labelling doubters and dissenters as mass-murdering war criminals is not appropriate in a democracy.

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The real costs of Rudd's CPRS are just starting to surface

It looks like Kevin Rudd had a brain explosion last Friday;  climate change denialists are sabotaging the future of humanity by asking tough questions about policy.  In the Prime Minister's view, the opposition are cowardly for not promoting government policy.  Of course, in democracies, the opposition are not supposed to promote policy;  that is the government's job.  That is why Kev lives in the big house and gets the big salary.

Commentators are going to focus on the Prime Minister's attack on "sceptics", as if the only barrier to stopping global warming in its tracks is Barnaby Joyce and Cory Bernardi.

But Rudd's real problem is that his government's climate change policy is incoherent and is becoming ever more expensive.  Rudd has had good mileage criticising markets over the past year.  It seems the neo-liberal belief in markets is all but discredited.  Yet what is his "solution" to climate change?  A new synthetic market in the emissions trading scheme.

Admittedly, Rudd asked a very good questions at the Lowy Institute last Friday, "Where is the evidence basis offered by the new league of world government conspiracy theorists that climate change can be effectively dealt with by market means or by uncoordinated national means?  Answer -- there is none."  Indeed.  But he's off message.  Last December, Wayne Swan and Penny Wong told us that "Australia will make its fair contribution, including by implementing efficient market-based policies to substantially cut domestic emissions in a cost-effective way"?

Swan and Wong wrote that line in the preface to the Treasury modeling for the Carbon Pollution Reduction Scheme.  The report, Australia's Low Pollution Future:  The Economics of Climate Change Mitigation is more quoted than it is read.  Certainly Rudd quoted extensively from the report last Friday.

The Treasury modelling investigates four possible scenarios relative to a reference scenario -- some sort of "business-as-usual" case.  At best it can be considered to be a sophisticated thought experiment and does not constitute a forecast of the actual economy.  The exercise does, however, provide an estimate of the magnitude of the program costs (but not benefits) of introducing a cap and trade system.  None of the four scenarios correspond to the details of the actual policy that the Australian government has introduced.  In addition, the Treasury modelling does not include a) the costs and impact of global warming itself, b) does not well capture any short-term economic adjustment costs, c) does not capture ‘market failures' caused by asymmetric information, externalities, or strategic behaviour, d) does not include transaction costs associated with emission permit allocation, e) does not capture the beneficial consequences of mitigation policy and f) does not capture non-market goods and services.

This list is taken from the Treasury document itself.  Most importantly the Treasury modelling does not dwell very long on the losers from the government's CPRS.  The economy declines relative to the reference case -- that is the policy design.  The losers are shown at page 161 of the Treasury document.

The two poorest states, South Australia and Tasmania fare the least worst.  (There isn't much economic activity already there to be destroyed.) Over the next 40 years the two biggest losers are the resource growth states of Queensland and Western Australia.  The relative decline in WA only occurs after 2040, but Queensland takes the hit early.  You would think that the government would have some explanation for the citizens and voters of Queensland and WA as to why they were bearing the brunt of the CPRS policy.  New South Wales and Victoria aren't far behind;  their residents might want some explanation too.

Another problem with the Prime Minister's argument is jobs.  Rudd says Treasury modelling also demonstrates that all major employment sectors grow over the years to 2020 -- substantially increasing employment from today's levels.  Treasury modelling also projects that clean industries will create sustainable jobs of the future -- in fact by 2050 the renewable electricity sector will be 30 times larger than it is today.

Unfortunately that is not what the Treasury modelling indicates.  At page 151 we read:

... real wages are assumed to adjust in the long run to ensure the labour market remains in equilibrium.  As output slows slightly in response to emission pricing, firms' demand for labour also slows slightly.  In the short run, real wages are assumed to be sticky, taking up to 10 years to adjust, resulting in some temporary unemployment.  However over time, real wage growth slows, demand for labour increases, returning employment to reference case levels ...

The Treasury indicates that Australia will experience "up to 10 years" of "temporary unemployment" before real wages decline.  Treasury forecasts that real wages might decline by anywhere between 5.4% and 11% relative to the reference case.  That is why there is no unemployment;  Treasury assume it away by imagining that real wages fall.  At the same time, Treasury assume the green jobs and green technology into existence.  That is not at all what Rudd told the Lowy Institute.

The CRPS is turning out to be a lot more expensive than first promised.  The government first indicated that it would be "revenue neutral" -- by that they meant self-funding.  The government intended to spend all the money raised.  Now we hear that the CPRS is not revenue neutral and is forecast to run at a loss.  The economic modelling is not as rosy as the government says and the UN is asking for heaps of money at Copenhagen.  No amount of name-calling is going to change the fact that this policy is a lemon and needs to be radically reconsidered.

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Don't demonise the food industry for causing obesity

It is easy to blame big business for a change we don't like.  So Rosemary Stanton's attempt in Crikey to blame the Australian Food and Grocery Council (AFGC) for proposed changes to the emissions trading scheme is understandable.  But wrong.  Instead, the real push to exempt agriculture comes from farmers and Coalition voters in rural seats.

Agriculture and basic food processing are exempt from the European and proposed US ETS schemes.  Yet the current Australian CPRS includes a provision to leave agriculture out for three years, with a view to including it after that period.  If Australian agriculture is included then the Farm Institute estimates the total elimination of profitability for the livestock industry.

But -- in an era when food companies are suddenly now seen as enemies of the public good -- blaming the AFGC makes for a better story.  The proposed Coalition amendments seek to include primary food processing as a trade-exposed industry, and therefore able to access assistance.  Primary food processing is abattoirs and milk processors, it is not the manufacture of breakfast cereal, soft drink or other packaged groceries made by the members of the AFCG.

Stanton says it is absurd to omit food from the ETS because the processing, packaging, transport and storage of processed food creates greenhouse gasses.  Well none of these activities will be exempt, they will pay the carbon tax like everything else and food prices will rise because of it.

But the attack on the carbon footprint of grocery manufacturers is only a hook to get to Stanton's real agenda, demonising the food industry for causing obesity.

Apparently, all this choice is making us fat.  The impressive statistic of obesity costing society $58.2 billion is often seen.  That figure came from a study paid for by a diet drug company and commissioned by an organisation that receives grant money and donations based on government and donors' perception of a massive problem.  Grocery and soft drink companies are not the only ones with a financial stake in this.

According to Stanton, "The more on offer, the more we buy, the more we waist and the more we waste."  But Stanton and most higher-income women are not overweight.  Most Australians are not obese and less than 10% have a BMI over 35, the level the most authoritative studies conclude is where serious health risks increase appreciably.  Most Australians manage to refrain from obesity despite the choice on offer and the supposed pernicious efforts of the food manufacturers.

The real agenda is higher taxes for processed foods.  But there is no evidence that taxing "bad" foods, those high in fat, sugar and salt, does anything other than raise revenue.  The GST already taxes processed food and not fresh food, yet the growth in processed food consumption has continued unabated.  Stanton callously dismisses the effects of a highly regressive tax on the poor without any evidence her approach would do anything other cause greater financial (and nutritional) hardship.

Morbid obesity is a serious health problem that needs targeted resources from the health system to combat.  All the society-wide scatter-gun approaches, such a labelling, taxes, bans and cajoling do not address the serious, and usually multiple, health problems of the extremely fat.

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Government has lowered expectations on labour market success

The cash rate is 3.5% right now.  The market is expecting it to rise to 5% by next November.  That is six 25 basis point increases over the next year.  Each time rates rise, the media will wheel out those individuals who are doing it tough as a result of the rates rise.  This is political Chinese torture for any government.

It is not clear what other choices the RBA governor Glenn Stevens can make.  The preferred RBA inflation measure has risen above the target band of between 2%-3% and has remained above that band since September 2007.  Despite the high levels of underlying inflation, given the state of the global economy many (including myself) have argued that domestic interest rates were too high in 2008.  Once the extent of the economic crisis became evident, the RBA moved quickly to reduce rates.

It is now clear that the global financial crisis has had a mild effect on the Australian economy and the "Go early, go hard, go household" advice to government was inappropriate.  The economy did not collapse as forecast;  unemployment did not rise to 8.5%, or even 6.75%.  The Mid-Year Economic and Fiscal Outlook (MYEFO) invites us to believe that unemployment will still rise another 1%.

In its panic the government has over-stimulated the economy and that fiscal mistake is going to have adverse consequences.  It seems that some minor aspects of the stimulus packages are being recalibrated and delayed and so on.  But that just highlights that the packages were not timely, targeted and temporary.  Some of the temporary spending is now delayed for two years.

The bottom line is that interest rates will have to rise quickly to constrain inflation.  At the same time the government is finding that borrowing costs are somewhat higher than they had expected.  This is adding to the government interest bill even as the government is telling us that debt won't be as high as we had thought.  That translates into us paying more for less money.  We shouldn't be surprised;  government spending routinely delivers less bang for buck than was promised.

The real problem is that the government won't come clean.  Rather than cut the spending the now, it still maintains the myth of "jobs being saved or supported".  Just because the government can imagine a world where unemployment rose dramatically, that doesn't mean that its actions did or could have saved any jobs.  It is obviously hoping that nobody will question its counter-factual.  What is damning, however, is that it has very quietly lowered expectations as to labour market success.  The MYEFO indicates that Australia has a natural rate of unemployment of 5% (that is the non-accelerating inflation rate of unemployment for the cognoscenti).  With unemployment now only at 5.7%, it shouldn't take long before the government can claim to have solved the problem.

The government is also fudging the crowding-out aspects of its policies.  With interest rates rising and the exchange rate appreciating some, perhaps much, displacement is likely to occur.  Yet the government is quoting Glenn Stevens as having suggested that this is not due to fiscal policy.  Stevens, of course, is not in a position to openly criticise fiscal policy;  his actions will be speaking louder than his words over the next year.

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Big Government: A Love Story

Michael Moore's Capitalism:  A Love Story "takes aim" at the capitalist system, as a few dozen supportive reviewers have mindlessly written.  But that's a tough metaphor to uphold.  It's easy to aim when you don't care what you hit.

Moore is interested in Big-C Capitalism.  So after a few stories of families having their homes foreclosed, Moore reveals his thesis.

"Capitalism is a sin", he gets a series of priests to say darkly into the camera;  it's "obscene" and it's "radically evil".  Capitalism is a secular "crime" and spiritually "immoral".

Another priest reflects that he is "really in awe of (pro-capitalism) propaganda", which is funny to hear from a minister of religion.  And a bit rich:  one sequence in Moore's film describes the somewhat icky practice of firms taking out life insurance for their employees, which he tastefully illustrates with lingering shots of a grieving family, as if insurance policies cause cancer.

Moore has always been an awkwardly self-conscious working-class man.  In this instalment, he is also God-fearing.  And his NASCAR-chic populism is now littered with calls to "people power", which, coming from a multimillionaire, are as authentic as the Spice Girls' "girl power".  It's all so laden that there's a good chance he wants to run for office.

In a bizarrely misdirected appeal to authority, Moore quizzes the off-Broadway actor Wallace Shawn, who has "studied history and a bit of economics" about what he reckons is the problem with capitalism.  (The audience Moore hopes will see his film know Shawn from The Princess Bride.  But those who will actually see it know Shawn from My Dinner With Andre.)  Shawn's answer isn't the point:  what possible value could his view add?

But Moore's argument is even more misdirected.  He's justifiably outraged at the bailouts and the way they were pushed through Congress.  Who isn't?  He's angry about the favour-trading relationship between Wall Street and Washington.  Again, who isn't?

But that's not capitalism.  It's corporatism -- a political system with a veneer of free enterprise but where a network of lobbyists, bureaucrats and politicians use the political system to achieve private goals.  Moore would like to add a fourth movement to this symphony -- the unions.  But unless you think of unions as omniscient and beneficent guardians of the public good, doing so wouldn't change the corporatist dynamic.

So when he describes a real outrage -- like a corruption case in Pennsylvania where a corrupt judge funnelled innocent kids into a privately run juvenile detention centre -- he doesn't quite understand who the bad guy actually is:  the politicians and administrators who let it happen.  (After this case, two judges face charges of racketeering, fraud, money laundering, extortion, bribery, and federal tax violations.  Corruption is, after all, against the law.)

And who to blame for the bailouts?  The firms that ask for them, or the politicians that grant them?

For Moore, Barack Obama's election is a spiritual catharsis, an explosion of people power, and a sudden break with the capitalist nightmare.  But the outrages he spent 90 minutes detailing have, if anything, gotten worse under the Obama administration.  The employment pipeline between Goldman Sachs and Treasury has is even busier.  And Obama has graduated from bailing out banks to bailing out car companies.  For Moore, when Bush did this sort of thing, it was capitalism.  When Obama does, it's democracy.

In Capitalism:  A Love Story, Moore can't quite get himself to the problem.  If he did, he'd have to admit that the big activist government of his dreams is actually the cause of his nightmares.

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Enough of the hysteria ... refugees are good for us

Australia has an open-borders arrangement with New Zealand and, despite what they say, we are just not being over-run by Kiwis.  They don't even share our cultural values -- they play rugby union.  It is simply ridiculous to imagine that we will be "over-run" by anyone else.

It is just not credible to label the current hysteria as being an "immigration debate".  The Rudd government's Indonesia policy is a total shambles and but for the magnitude of the human tragedy and loss of life the sight of Rudd being hoist on the petard of hypocrisy would be one of the all-time great moments of schadenfreude.

Refugee policy stupidity is bipartisan; the only party that has had a consistent and sensible approach to illegal immigrants and refugees has been the Greens.  Both the ALP and the Coalition has tried to gain the high moral ground while peddling xenophobia as viable policy.

Australia has a deep and ugly xenophobia running through its psyche.  This manifests itself in many ways:  the Foreign Investment Review Board operates to vet foreign investment, AQIS protects Australia from foreign agriculture and the phobia towards boat arrivals borders on racism.  This all fits into the anti-foreign bias that Bryan Caplan talks about in his book The myth of the rational voter:  Why democracies choose bad policies.  People tend to systematically underestimate the benefits of dealing with foreigners.

This phenomenon goes all the way back to the White Australia Policy and should be seen in the same light.  There are many more visa over stayers in Australia than there are boat people, yet it is the latter who cause all the kerfuffle.  "Illegals" are more likely to have arrived in Australia through Sydney airport from Europe than by boat.  There is almost no discussion of those people -- after all, they are probably good for tourism and picking fruit.

Accepting more refugees and boat people into the country is one of the greatest contributions Australia can make to improving the world around us and enhancing our own living standards.  Rather than accepting people because we have an "obligation" under international law, why not accept people because we have an opportunity to improve living standards?

Most of our foreign aid dollar is probably wasted.  Remittances back home are going to do a lot more for the region (and even beyond) than tax-dollars will ever do.  Allowing more people into Australia to work and improve their lives will have massive spillovers on the lives of their families and friends back home.  Why let Canberra waste our tax-dollars on foreign aid, when people can and want to help themselves?

Perhaps the greatest furphy is the argument about the welfare state.  The notion that refugees come here simply because they want to get on to welfare is often heard.  Milton Friedman once argued that an open borders policy was inconsistent with a welfare state.  Perhaps.  But why define ourselves by welfare;  what about the rule of law, freedom of contract, freedom from persecution and so on?  Our welfare policies have not made us comfortable, rich and prosperous, rather our work-ethic and our "propensity to truck, barter, and exchange one thing for another".

We also hear that terrorists may enter Australia via boat arrivals.  To be sure that is true, by definition.  Many refugees will have opposed their own government and lost; these people are almost always labelled "terrorist".  Had they won, these "freedom fighters" would then not be refugees.  To the extent these people are a menace to Australia that is a matter for the police and criminal justice system.

Fundamentally, the acceptance of refugees is good for Australia.  How often do we hear "We should only take in people who would benefit Australia?"  This simply begs the question, how does accepting people into the country who want to work and make a better life for themselves and their children not benefit Australia?

The great Austrian economists Ludwig von Mises described the market economy as cooperation under the division of labour.  By having more people in Australia there are more people to cooperate with, more people to trade with and more people to grow the market.  As our wealth and economy grows there is more money for the finer things in life.

Of course, we might hear that immigration brings unemployment and infrastructure stress.  But the unemployment argument rests on the lump of labour fallacy.  There isn't a finite amount of work that needs to be shared out amongst more and more people.  The infrastructure argument is just lazy government making excuses for their lack of service provision.  They levy the tax every year, they can provide the services.

The bottom line is this; rather than trying to keep people out, we should be looking to bring people in.  The need for some or other orderly process (we will always have customs) is being hijacked by an anti-migrant and anti-refugee debate.  It is also being morphed into an anti-Muslim debate.  There needs to be leadership on this issue.  All worthwhile reforms are difficult and often require leadership in changing public attitudes.

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My shovel's better than yours

According to the report for the Business Council, Groundwork for Growth, by Port Jackson Partners, only 14 per cent of the $76 billion it regards as stimulus spending was on infrastructure.  That actually overstates the real amount since it includes all those unnecessary school assembly halls, welfare housing, pink batts, "clean" energy and other expensive low productivity expenditures that are oriented towards the ballot box rather than economic efficiency.

Meanwhile, in keeping with political tradition, Infrastructure Minister Albanese and Nationals leader Warren Truss are falling over each other to claim the credit for spending the taxpayers' money.  Mr Truss says the Howard Government identified the spending priorities for which Mr Albanese is busily cutting the ribbons.

Although Mr Albanese claims to have completed 32 major road and rail projects, the "successes" trumpeted most loudly are community centres and bike paths with his press releases over the past fortnight alone listing 20 new cycling initiatives.  Perhaps he is preparing us for the bleak low-carbon future when, other than for the political elites, tax induced fuel price increases will replace the car trip with peddle power and air travel vacations with freewheeling along local roads.

Mr Albanese hits at a plummeting level of "public" infrastructure spending in the Howard years.  Misleadingly this neglects the vast increase in private infrastructure provision as a result of the privatisation reforms that Mr Albanese bitterly opposed.  According to the Port Jackson Partners report, overall economic infrastructure spending averaged about 4 per cent of GDP in the 15 years to 2004 and has since risen, hitting 5 per cent in 2008.  Within that total spending, the private share of infrastructure increased to one half from under a fifth.  In real dollars, engineering construction work over the past three years was threefold its level of the late-1980s/early-1990s.

This shift of infrastructure spending towards the private sector during the past 20 years provided a productivity bonus.  This is because private investment spending must pass a true test of economic necessity, shorn of the political dividends that offer the main justification for bike paths and most public investment.

Even though it identifies an increase in capital expenditure, the Port Jackson Partners report considers we have missed an opportunity to use the global financial crisis to bring increased infrastructure investment.  The report may be correct in its judgement that had we had the "shovel ready" projects, this would have made far better use of public money than the give-aways that it claims accounted for 86 per cent of the stimulus package.  But in discussing broadband it notes a major deficiency of government infrastructure provision.  The National Broadband Network is being planned without proper costing, with unclear objectives and with a likely potential to create an artificial monopoly by shutting out rival technologies like wireless.

This typifies a wider problem with public or subsidised projects.  Those projects are rarely judged with the same rigor as private measures and are always likely to be geared towards less than optimal populist measures.  They will comprise under-patronised regional rail services rather than roads, high priced desalination plants rather than dams, costly and poorly performing windfarms rather than base load power plants.

Instead of having the government identify "shovel ready" projects it is better that the regulatory impediments to private provisions of infrastructure are removed.  The Port Jackson report identifies some of these but fails to recognise the "chilling" effect on new infrastructure provision caused by regulatory controls of agencies like the ACCC and the NCC.  Indeed, the report calls for rather more government intrusion into the management of freight, electricity and water provision.

And this is especially hazardous when the lights are flashing green on government spending increases.

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Ross Gittins' efficient markets furphy

Ross Gittins had a great rant in the Sydney Morning Herald yesterday.  Libertarians and their evil theories, especially the efficient markets hypothesis (EMH), are to blame for the global financial crisis.  Luckily, Australian politicians, econocrats and the public are immune to such silliness and our economy is now much admired around the world.  A fine story to be sure;  such a pity he makes a factual error in the first sentence and it all deteriorates from there.  What Gittins gets right seems to be accidental.

Much of the Australian media have made the argument that Australia is the first country to raise interest rates and Gittins repeats this line.  While Israel is not a G20 member or OECD economy, it also has had to raise rates.  Australia is, at best, the second country to raise rates.  The remainder of the article comprises one smelly orthodoxy after another.

The so-called efficient markets hypothesis is a theory that posits that new information is quickly incorporated into stock prices.  Traders are not going to outperform the market by trading on information that everybody already knows.  It is not at all the theory that markets are efficient.  Economists have be working on that idea and refining their understanding of markets since Adam Smith's time.  The EMH, by contrast, is a relatively new theory and is popularly associated with Chicago University's Eugene Fama.

The EMH does not suggest that there is no role for regulators.  Nor, in contrast to Gittins' claim, do free-market economists suggest there is no role for regulation.  Markets do not develop or prosper in the absence of a legal framework.  Friedrich von Hayek makes much of the importance of the rule of law.  Ludwig von Mises described the market system as being co-operation under the division of labour.  Humans co-operate in order to compete -- the latest economics Nobel winners Elinor Ostrom and Oliver Williamson have shown how co-operation takes on many diverse forms in building up those institutions that facilitate exchange.

Contracts, tort law, prohibitions on various types of fraud, and courts of law are all important mechanisms to ensure that markets work well.  Andrei Shleifer, of Harvard University, and several co-authors have very carefully documented the positive role that regulation and legal structures play in ensuring markets are deep and liquid.  Of course, this is not the argument that any and every regulation adds value, but it does suggest the "free market economists are anarchists" meme is seriously misleading, if not dishonest.  In particular, Shleifer argues that security regulation that enhances market discipline through private contracting and private dispute resolution is superior to regulation that emphasises public enforcement.

What Gittins and his ilk never explain is which regulations are important.  He seems to think that more regulation is the answer.  But what does he have in mind?  Should the US adopt our four pillars policy or, perhaps, re-introduce the Glass-Steagall Act?  What regulation is it exactly that will crisis-proof the economy?

Gittins is correct in arguing that conservative banking practices lead to Australian banks being somewhat immune from the crisis.  Mind you, it is those very same conservative banking practices that have led to substantial criticism of our banks.  The most conservative practice is to not lend money to people who can't pay you back.  That seems fairly sensible and Australian regulators never adopted any policy along those lines.  Unlike our American friends who did adopt such policies and then encouraged banks to securitise and onsell very complex instruments.  To be blunt, people who trade in complex securities they don't understand deserve to go broke.

Australian policy makers have been deregulating and liberalising the economy since the early 1980s.  It is that process that has to weather the storm.  As Gittins says, the important Howard-era reforms to monetary policy independence combined with negative net debt and a budget surplus have served us well.  It is far more sensible to distil the positive lessons of the Australian experience than to grind ideological axes.

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Unemployment more than just a number

The Australian Bureau of Statistics (ABS) announced yesterday that the unemployment rate was 5.7% -- down from 5.8% the month before.  It is probably too early to crack out the bubbly;  that difference is within the margin of error (and the standard error of that estimate is large).  But on the positive side, things could have been much worse.  We believe that flexible labour markets have contributed to keeping the official unemployment rate down.  There are substantial costs associated with sacking staff and naturally business would like to avoid those costs as best it can.  This requires the flexibility to reduce working hours, to "casualise" workers, to job share and the like.  All up markets perform better when they are flexible than when they are not.

The last 15 years or so have seen massive changes in work practices in Australia.  The very notion of a full-time job has been challenged.  The idea that someone works 7.2 hours per day for (about) 254 days a year is still the norm but there is far more diversity in employment now than there ever was before.  This is all good.

Unfortunately, it makes historical comparisons difficult.  There are more people with part-time jobs and it is difficult to compare that over time.  Some people are very happy to work part-time, while others would prefer to work more.  Of course, many full-time employees would like to work less.  The point being that diversity makes generalisation difficult.

To try to better understand what is happening in the labour market we have been looking at the ABS series on Aggregate Hours Worked (table 19 Cat. 6202).  At present that figure is at the long-run trend.  What we have done is create a variable we call the "effective full time unemployment rate".  We calculate this making the assumption that all employees are full-time workers who work 7.2 hours per day for 254 days per year.  We are able to calculate the number of full-time employees that would generate the total number of hours worked.  By comparing this to the ABS data on the size of the Labour Force we are able to calculate what the unemployment rate would have been if all workers were full time employees.  The graph shows a comparison between our measure, the official ABS calculation and the difference between the two measures of unemployment.

The red line is the ABS measure and the pink line is our measure.  To be sure both of these measures are estimated with some error, and have more or less unrealistic underlying assumptions, and the like.  Yet they probably represent the two extremes that the unemployment rate could take on.  The yellow line is the difference between the two.  The point to notice is that the gap has tended to get larger since the mid-1990s.

The exception being the period around 2000;  this saw a massive increase in hours worked and is probably related to the Olympic Games, the Y2K bug and the introduction of the GST.

There are two possible explanations for the gap increasing.  First it may be due to measurement error and data collection and definition changes.  Second it could be due to increased labour market flexibility.

We do not discount the first possibility at all.  Definitions of unemployment have changed over time and errors do occur, but we suspect changing work practices and labour market reform is likely to have played a larger role.

During the economic crisis Australian unemployment has not increased to recession levels.  The current official rate of 5.7% is a massive improvement on what was expected.  Our measure, however, shows something quite different.  The effective full-time unemployment rate based on hours worked is almost at the maximum (13.8%) last seen during the early 1990s recession.  This suggests that but for the labour market liberalisation of the past 15 years or so that unemployment may well have been much higher than we have actually experienced.

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Rudd's stimulus furphy won't create jobs

The government has committed to spending many billions of dollars in stimulating the economy.  An important issue is how we evaluate the effectiveness of that spending.  An obvious measure is the impact on employment;  rather unemployment.  Unemployment is currently 5.8% -- a level last seen in October 2003.  Australian attitudes to unemployment have changed so much that this level is now seen as being high.

It is high;  it is high now and it was high in 2003.  Unfortunately this figure doesn't really tell us much about unemployment at all.  For example, the participation rate may have changed over time, or the definition of unemployment may have changed.

The notion of unemployment is not just an economic construct;  it is a social construct too.  How many people are not working out of the population that can be expected to be working?  Answering this question requires value-judgements as to what constitutes "working", and who can be expected to be working.  As our understanding and acceptance of disability and mental health increases we may decide that certain categories of people may no longer be expected to work.

This gives rise to the criticism that the long-term unemployed are simply being dumped on the disability pension.  Some of this may well happen, but how can we be sure?  Who is the "we" that makes decisions about definitions of unemployment?  The upshot is that the unemployment data are riddled with arbitrary definitions and changes in those definitions over time.  This makes time-series comparisons difficult.

The ABS calculates an Hours Worked variable that is less likely to be distorted by definitional issues, but it may well have other problems.  The good thing about this variable is that more hours worked indicates more economic activity, while fewer hours worked means less economic activity.  Since the middle of last year there has been a substantial drop-off in the number of hours worked in Australia.  This is not unusual or unexpected -- the global economy is in recession and the Australian economy has slowed down quite substantially.

What is interesting, however, is that the last few years Hours Worked has been above the long-term trend and Australia has simply returned to trend.  That doesn't mean that Australia won't overshoot and be below trend, but right now Australian Hours Worked is at the long term trend.  That is the fact -- the interpretation of that fact is going to be contested.

The government is arguing that their stimulus packages have "saved jobs".  But it is difficult to reconcile that statement with the fact that Hours Worked is at the long term trend.  Unless the spending has been so finely calibrated that it has perfectly compensated for a decline in employment it is very unlikely that the stimulus package could deliver this result.  In any event there was little unemployment in those areas the government has targeted vis-à-vis construction and education.

It is far more likely that employers and employees have made use of greater labour market flexibility to negotiate reductions in Hours Worked.  This is far preferable to laying-off staff -- an activity that has substantial fixed costs -- and then re-employing them later.

This is one of the advantages of market flexibility;  it allows individuals to negotiate terms and conditions that suit local and individual needs.  It especially allows them to quickly renegotiate under conditions of unexpected turbulence.  Unfortunately, Australia seems to be moving away from greater flexibility in the labour market.

To the extent that decreased labour market flexibility leads to higher unemployment and fewer hours worked this is not a welfare enhancing reform.  Had the current global financial crisis occurred next year and not in 2007-08 the employment consequences may have dire.  Unemployment at the last recession in the early 90s rose to unacceptable levels and Hours Worked fell dramatically.  So far we have avoided this catastrophe but with increased labour market regulation and government intervention we might not next time.

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Rudd's stimulus package is far from perfect

Kevin Rudd said yesterday that without the government's stimulus package that the unemployment rate would have gone through the roof.

This is good politics as we can never really know what would have happened.  We'll certainly be hearing that line a lot over the next several months -- especially if unemployment does not rise to the forecast 8.5 percent that the government was expecting at the last budget.

Much has been of Treasury minute leaked last week;  especially the view that withdrawing the stimulus package now would lead to greater unemployment.  So not only has the stimulus package prevented an unemployment catastrophe but it continues to do so.  The government can point to the "scoreboard" for confirmation of this story.  In fact Mr Rudd told us yesterday that US unemployment is now 9.7 percent and Canadian unemployment is 8.7 percent.

But what Mr Rudd didn't say yesterday is that the Canadian stimulus package (4.1 percent of 2008 GDP) is almost as large as the Australian package (4.6 percent of 2008 GDP) and the US package is larger at 5.6 percent of 2008 GDP.  In other words the favourable employment outcomes here in Australia cannot only be due to the stimulus package.

An OECD report published last week (3 September) indicates that unemployment has not risen much at all across 29 economies.  Some economies like Spain has seen a massive increase in unemployment as has the US and Canada.  The increase here in Australia is the eleventh highest out of 29 countries.  So we're not quite in the top third but 60 percent of OECD economies have experienced a lower increase in unemployment than did Australia.  To be sure they were starting from a higher base than we were, but many OECD economies routinely experience higher rates of unemployment than do the US, Canada and Australia.

To claim that our low rate of unemployment points to the success of the stimulus package ignores the experience in other OECD economies.  Many of those economies have experienced massive declines in GDP growth and have experienced (so-called) technical recessions, yet the increase in unemployment has not been that large.

In the graph below I have plotted the increase in the unemployment rate (relative to 2007) and the size of the stimulus (as a percentage of 2008 GDP) -- Australia is the large red dot.  The data are all collected from the OECD.

As can be seen the increase in unemployment is much less than the size of the stimulus package would suggest.  If our unemployment rate had grown in line with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent.

So it is not clear that stimulus spending has saved Australian unemployment from going through the roof.  It is far more likely that our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government and is not simply due to governmental quick fixes.

To believe that the stimulus has brought about the excellent economic performance Australian is currently enjoying would be to believe that the Rudd government had developed the perfect stimulus package.  We know, however, that the package was put together hurriedly and that the implementation has been poor.

Let's rather give credit where it is due.

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Some thoughts for a more liberal bill of rights

Let's call a spade a spade, and consider the debate over Australia's Bill of Rights for what it really is:  a political debate on how government power should be limited.  So why not have a liberal, or "free market", Bill of Rights that actually limits the power of government and protects rights that really affect us?

If we are going to have a Bill of Rights -- and there are good arguments why we should not -- it should contain provisions such as these:

• No level of government should be able to acquire an individual's property without compensation.  This currently exists at federal level, but should be extended to state and local governments as well.  Governments take property rights away from property owners all the time -- not just in the obvious way depicted in The Castle, but by imposing limits on what individuals can do with their property, such as heritage restrictions and native vegetation laws.  These regulations impose very real costs, and trample all over the rights of individuals.
• Individuals must be consulted before governments pass laws that adversely affect them.  A similar provision is enshrined in the Charter of Fundamental Rights of the European Union.  Sounds too obvious?  Perhaps, but the Australian government passes a lot of laws, and despite recent attempts to reform the law making process, few potential changes are widely consulted and subject to the sort of scrutiny by those they will affect.
• Budgets must be balanced.  Recognising that future generations have a right not to be burdened with the spending excesses of today, many US states have written into the constitution a requirement that budgets must be balanced.

There are many other possible inclusions.  Any and every tax increase the government wants to burden us with must be approved by a referendum -- again, common in many US states.  Nevada's constitution puts a limit on the amount of days per year their state legislature can sit -- the less time politicians sit in parliament, the less time they have to make bad laws.

The ever growing number of countries instituting "flat" income tax rates recognises the responsibility for citizens to contribute equally to the upkeep of the state, and the right for individuals not to be disproportionately targeted for their money.

These recommendations are undoubtedly contentious -- a Bill of Rights is fundamentally a political issue.  Deep down, what goes into a Bill of Rights reflects the value judgements of those that draft it -- to believe otherwise is naive.

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