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Prisoner’s Dilemmas, ethics & courage.

The Prisoner’s Dilemma is a key idea of modern game theory. It describes the difficulties of sustaining cooperation when individuals have reasons to defect from a cooperative agreement. This paradigm has even been used to define ethical behaviour.   Kant’s Categorical Imperative requires that for a moral maxim to be ethical (for an individual) it must be both universalizable  (everyone must, in principle, be able to live in accord with it) and the individual must will  (want) to live in a world where the maxim obtains.   Thus, if there are two moral choices: act non-selfishly (to achieve a good social outcome)  or act selfishly (to gain individual benefit) then the CI is generally consistent with acting non-selfishly.  It is certainly universalizable (everyone could live with this maxim) and individuals would want to live in a world where everyone acts non-selfishly (even if, in fact, they did not act non-selfishly).

For example, the citizens of the world would be better-off if all countries mitigated climate change-inducing carbon emissions.   Individually, however,  each citizen would be better off if they didn’t mitigate irrespective of what others do.  Libertarians and Australia’s IPA advocate the immoral action of non-mitigating  - it is the self-interested “defect” option in this Prisoner’s Dilemma.   More moral citizens advocate addressing climate change because we would all be better-off if every country mitigated so that, even if they didn’t in fact mitigate, the moral stance is to mitigate because we would prefer to live in a world where everybody did.  Indeed the difference in viewpoint here is that the moral citizens see the Prisoner’s Dilemma as an obstruction that limits worthwhile action whereas the immoral, self-interested libertarian types see it as a sound reason for doing nothing. The libertarians don’t see game theory strategic interdependencies 0- individuals make choices which suit themselves without adverse social consequences emerging.

In negotiating situations, where agents are confronting some evil, one can either act with courage (and everyone gains) or be a silent coward (and hope that others will act courageously in the face of your cowardice). The ethical stance, according to the CI, is to act courageously.   Of course it is difficult to put your neck on the line when you see widespread cowardice around you.  Indeed acting courageously in the face of widespread cowardice might convey to others that you are a bit of a crazy and that might be true.  In other situations the courage required simply reflects the risk that others will not act morally and you will find yourself stranded. That the moral stance is to be courageous is true even if the cowards discreetly praise your moral behaviour and make discreet, constructive suggestions on how you should stick your neck out further.  They gain possible advantages at your cost.  Such cowards are typically non-repentant and see their self-interest as simply human nature whereas those who see part of the reason for existence as arising from collective goals see such inaction as cowardice.

In short solidarity in seeking a worthwhile outcome facilitates an ethical equilibrium.  Some may not judge that the objective as not worthwhile and need not be unethical.  But those who understand that the outcome as desirable but defect for reasons of private self-interest are unethical cowards.

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High Wired update: Climate of opinion

(From The Australian).

Blood on the floor in the dismal science: La Trobe economics professor Harry Clarke is calling it a “bloodbath”. The university is proposing to cut its economics school from 28 staff to just 10. And now everyone needs to bid for the positions that are left, including four professors battling it out over just one professorial position in the new structure. The news prompted sympathy from RMIT economist Sinclair Davidson who blogged, “There are some fine academic economists at La Trobe and there are tough times ahead for them. This is not a good time to be looking for an economics job. The public service is retrenching across highwired@theaustralian.com.au and sign up for the High Wired newsletter

An opportunity for rivals: The scale of the cuts and the seniority (three professors and three associate professors will be going) suggests La Trobe doesn’t seem to care much about maintaining its economics research profile. La Trobe economics rated a “3” on ERA, with only the Go8 and the excellent UTS recording better results. In Victoria, La Trobe is neck and neck with rival Deakin, which also scored a 3. La Trobe says its changes will ensure the discipline’s long term sustainability, but the danger is that La Trobe will end up with only a token presence and no profile, meaning students wanting the breadth that economics offers, as opposed to the more narrow utility of business and finance, will shun La Trobe as the natural alternative to Melbourne or Monash, and instead go to Deakin. On the positive side HW hears that Deakin, Swinburne and RMIT are all looking to build in economics, which is still the discipline that brings the most street cred to any business school or faculty. HW isn’t sure this is the best way for La Trobe to attract high ATAR students to its business faculty, but then maybe the target is vocationally focused students. Isn’t that Victoria University’s market? And aren’t they doing well. Not. It is the same market the fast moving privates will target come 2016. Gulp. (802)

Taxpayer assistance to a tax evader

Uneconomic inter-firm loans and rampant transfer pricing but massive subsidies from the Australian Government to a foreign-based multi-national. What a farce.

http://www.theage.com.au/business/glencore-tax-bill-on-15b-income-zip-zilch-zero-20140626-3awg0.html (544)

Pricing the ABC’s shows

The suggestion that the ABC should levy pay-for-view charges on the TV shows that it records wouldn’t win top grades from the viewpoint of standard economics.  To the extent that the marginal cost of supplying an extra copy of a show to a customer is zero the ideal charge for gaining an extra customer is also zero – it should be provided for free with costs being met from the public purse via taxes.  It is a standard public goods argument.  If it was sought to implement a “viewer pays” policy then the more sensible way of recovering costs would be to levy a fixed charge per year from gaining access to the recorded shows – then the shows are being treated as a club good rather than a pure public good.   I do favour a fixed licence charge for gaining access to the ABC but never a per use charge.

The idea of charging per view is an instance of right-wing ideology and culture wars fanaticism dominating good economic sense.  The same type of nonsense gets recycled periodically over proposals to use the private sector to provide weather/meteorological information. For general weather information the proposal is just as silly as the proposal to charge for individual TV shows.

Is the publicity given to this per view pricing policy yet another expression of the self-interest of The Australian newspaper?  Its a major obsession to penalise the ABC presumably because the ABC provides a much better quality news and entertainment service than the trash Murdoch media does.  Along with The Australian’s trash promotion of campaigns too limit plain packaging and to deny the reality of climate change the attacks on the ABC have become a repeated theme.  The Australian might argue that the ABC gets unfair public funding which disadvantages those private media suppliers who must make a buck.  There is some truth to this but The Australian anyway services a different market to the ABC. The Australian services primarily  - the right-wing loony market of cretinous IPA/libertarian types.  The ABC has a more balanced view of the world.

I’ll wait to see if the wonky economics of Henry Ergas and Judith Sloan can latch onto this one.

http://www.theaustralian.com.au/media/broadcast/allow-abc-to-charge-for-content-review/story-fna045gd-1226965706900 (625)

Diminishing economics training at La Trobe University

La Trobe University’s “Future Ready” restructuring commenced over the last 2 days.  My School of Economics was dished out its medicine today.

The current School will become part of a Department of Finance and Economics (the lack of alphabetical ordering in the 2 components is significant). Proposed staff cuts in economics are from 28 to 10 faculty.  Is that a bloodbath or a restructuring?

The current four professors in the School will be reduced to 1, the 5 Associate Professors will be cut to 2 with smaller cuts as academic level decreases – the only faculty member guaranteed a position in the new structure is an “Associate Lecturer”.  Everyone else must lodge a request for a position in the diminished structure.

This will certainly save money for La Trobe because cuts are concentrated among the more expensive top positions.   Of course this also means discarding the strongest CVs and those with most teaching and research experience. I cannot understand however how a cohesive academic program can be developed with so few positions.  In my view the minimum viable number would be 18 faculty but as staff are already fully employed in terms of the university’s own workload model the optimal figure is above that.   How can a business area in Australia function effectively without a strong economics presence?  In addition, in my view, the economics area should be a separate department. As there are still opportunities to revisit the structural changes proposed these changes to the proposed plans should be a target.

I am unsure how to respond myself.  I currently supervise 2 PhDs and am supposed to teach two courses next semester as well as help with a third.  The decisions today were a bombshell for me because my sense of the value of an economics qualification is strong and I see these moves as undermining that.

The Australian makes some brief general comments. I’ll add more if I see them.

http://www.theaustralian.com.au/higher-education/dewar-group-dreams-up-policy-purgatory/story-e6frgcjx-1226964618620

Here is a more recent article on the devastating cuts to economics at La Trobe. One question to reasonably ask is where the evidence is for a switch away from economics at other Australian universities? This is now an explicitly stated rationale for the cuts. There is a difference between a collapse in demand and a shift toward a service role for economics. This shift occurred at La Trobe 10 years ago. It is also difficult to understand how moves that have taken away core units from the economics curriculum after 2011, that have occurred at La Trobe, have anything at all to do with a collapse in demand. Finally, one can ask whether students at non-G8 universities are to be denied access to professional training in economics.

http://www.theaustralian.com.au/higher-education/la-trobe-to-rationalise-economics/story-e6frgcjx-1226968068994 (2585)

Plain packaging policies and poor journalism

Henry Ergas is at it again! He follows the stable of extreme right commentators at The Australian (Judith Sloan, Sinclair Davidson, Christian Kerr, Adam Creighton) attacking the plain packaging legislation and providing support for big tobacco. The campaign seems timed to influence the adoption of plain packaging in the UK. It is of course exactly what the big tobacco companies seek.  Interestingly Ergas links his critique to climate denialism! There is a link – Ergas has foolish views both on plain packaging and on climate policies.

Underlying all these claims  is the view from a  a tobacco industry (InfoView)  sponsored data base that from calendar year 2012 to calendar year 2013 smoking volumes increased by 0.26% (that is slightly more than one quarter of 1%).  Other industry sources (EuroMonitor) and the British American Tobacco report for 2012/2013 contradict this claim – both suggest volumes fell – the EuroMonitor data base suggests they fell significantly.   BAT suggests higher Australian profits because higher prices offset the effects of reduced volumes. Yes, reduced volumes!

Given the events now unfolding at my university and the decidedly insecure basis of my continued employment I have problems responding to much at all these days but let me make three comments:

1. Suppose the strange claim by InfoView is correct. The increase in consumption of cigarettes at 0.26% was less than one-sixth of the population growth rate in that year.  Per capita consumption of cigarettes apparently fell 1.5% on the basis of the data Ergas is relying on. There is no evidence at all that plain packaging is encouraging extra smoking as Ergas claims.

2. Why would you ever condemn a policy anyway on the basis of one years data (again assuming the data is correct and that the other two sources are wrong)? In 2010 there was a 25% increase in excise and a very striking reduction in consumption in the following year. In addition there were restocking effects and shortages prior to the introduction of plain packaging and smokers presumably increased their purchases in anticipation of the 2013 excise hike.  In short lots of things were going on that might explain a moderation in the rate of decline in smoking in the particular year 2013. If I had to evaluate the impact of a tax cut by looking at unemployment effects in the year following the cut without accounting for other issues I would be ridiculed.  Why the preposterous weight placed on a single negligible piece of evidence that does not show a per capita decline in smoking, is contradicted by other industry data and which does not reflect a lot of things going on in these markets?

3. The Ergas claim that there has been a major switch to cheaper brands which are consumed in greater volumes because of price falls is exaggerated. Market shares of the major brands have remained stable despite caprice increases that exceed the 2013 excise price hike. Cheaper brands have also increased in price.

The initial evidence – short-term and inadequate as it is suggests that plain packaging is helping to reduce smoking in Australians.  I’ll try to find time over the coming weeks to set these views out more fully.   In particular I’d like to sort out why this campaign in The Australian is being implemented.  Is it a disinterested search for the truth and, if so, why the trash methodology?

Update: The Kouk on The Australian’s trash journalism.

http://thekouk.com/blog/the-australian-sinks-to-a-new-low-on-tobacco.html#.U6YcYRap3Ro

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Photos on WordPress.

Its tough posting photos on WordPress. Works then doesn’t.

These are photos I took on my last day in Cairns posted in my Facebook “Photo Page”.  Can they be accessed via WordPress?

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Ultra-zooms bleg

A friend I met in Cairns (who is a expert photographer with premium Nikon equipment and lenses) showed me his “travel camera” a relatively cheap “ultra zoom” made by Fujifilm. Ultra zooms are point-and-shoot cameras with a fixed lens that offer 50X and even 60X magnifications. These are equivalent to telephoto lengths in excess of 1200mm for a standard full-frame DSLR camera. The ultra zoom cameras sell in the US for less than $400 and weigh in total about 600 grams. Continue reading Ultra-zooms bleg (865)

Emissions Reduction Fund analytics

There is a widespread misperception that the Emissions Reduction Fund (ERF) cannot, in principle, work to effectively reduce carbon emissions. An example is in today’s article in The Saturday.  Basic environmental economics on the equivalence between taxes and pollution subsidy policies shows that this is wrong. It is also wrong to dismiss the ERF scheme as a “non-market” based scheme. It is just as much a market-based scheme as the carbon tax provided that subsidies are allocated to the low cost pollution abaters.

Economists look at carbon polluters and focus on the costs that these polluters face in cutting their last tonne of carbon emissions. To use jargon this is the marginal cost of cutting emissions (the marginal abatement cost or MAC).  If a tax per tone of emissions t is imposed on emissions from a firm with a certain MAC then, if t > MAC, the firm will abate since it is cheaper to do so for these marginal emissions than to pay the tax.   In fact firms will abate up to the point where t= MAC.  If instead the government provides a subsidy on emissions reduction s and offers to pay this subsidy to those who offer to cut their emissions at a cost to the government of less than s then firms will offer to cut their emissions and receive the subsidy provided s > MAC.  They make money by doing this because they pay less for abating than they receive from the subsidy.  Again they will cut their emissions up to the point where s=MAC.

Comparing the tax and subsidy schemes it is clear that both are market based and that both yield the same level of emissions reduction for t=s. A tax of $25/tonne on carbon emissions will yield the same level of emissions reduction as a subsidy paid to polluters of up to $25/tonne.

That the carbon tax was fixed in amount where the pollution subsidy under the ERF is determined implicitly by the budget to be spent reducing emissions changes nothing in principle provided that, as is the case, those who seek subsidies are those facing the lowest MACs.

Why then the popular opposition among economists to the ERF in favour of the carbon tax?  There are several reasons:

1. Fiscal.  The emissions tax potentially yields large amounts of revenue to the government whereas the ERF scheme costs the government revenue.  There are two responses to this claim. First the carbon tax scheme as introduced by the Labor Government was designed to be revenue neutral so consumers and many producers were offered benefits that compensated for the tax.   Thus, as introduced, the carbon tax would not have yielded any revenue.  One could counter argue that times have changed and that these offsets should not now be paid because of looming public sector deficits. That presumably was what Ross Garnaut had in mind when he claimed the other day that restoring the carbon tax and abolishing the ERF could deal with the Government’s fiscal woes if the Senate rejects its program of social welfare cuts and charge increases.  Even doing this it is easy to show (joint work I have done with Rob Waschik and Iain Fraser does this) that the revenues paid under the ERF to firms are much smaller than the revenues transferred to government by a carbon tax for all but very high (exceeding 90%) levels of abatement.  It doesn’t seem to me that the fiscal arguments against the ERF are compelling. Another possible source of non-equivalence could stem from double dividend benefits from a carbon tax.

Another claimed fiscal disadvantage of an ERF could stem from the fact that it does not yield the double dividend benefits of a carbon tax.  The claim is that carbon taxes punish a bad activity and yield an additional benefit by permitting the reduction of more distorting taxes such as income taxes on labour.  UI think now the consensus is that such double dividend benefits are either negligible or small.  The difficulty is that extra costs imposed by a carbon tax in any event reduce real incomes  which obliterates any benefit from improved tax efficiency.  That said the ERF is funded by taxes on income so, even if the absolute scale of the ERF is not great, its “excess burden” (or deadweight loss)  costs on the tax-payer should be accounted for.

2. Implementation.  There are difficulties of implementing an ERF.  Both tax and ERF schemes require monitoring of current emission levels to check that carbon emission laws are being met. But the ERF requires also that an emissions baseline be determined which determines the size of the subsidy payments to be paid.  These will depend on the difference between baseline emissions and current emissions.  The difficulty here is to make sure that polluters are not “gaming” the ERF scheme by exaggerating initial emissions in order to get higher subsidy payments.  Even without gaming issues the issue is to determine the genuine level of emissions reduction that occurs as a result of the ERF.  Emissions by coal-fired electricity generators have fallen in recent years not because of carbon charges but because of falling electricity demands.  In addition generators switched to using less polluting gas even before carbon pricing was introduced.  It would be unattractive if payments to carbon polluters were made for emissions reductions that would have occurred anyway.  Such issues do not arise with a carbon tax since a firm’s tax liability depends only on its actual emissions – there is no benefit to a firm in fudging a baseline or gaining an unwarranted advantage from a switch to gas.  While touch unwarranted payments to firms are unattractive I do not think that, again, they provide an overwhelming case against the ERF scheme given the comparatively small scale of aggregate subsidy payments.

Other issues of implementing the ERF concern selecting the least cost emitters too subsidise.  This is proposed to be done by a reverse auction where those who can abate emissions at low cost will get the subsidies.  Potentially it seems to me this can work provided firms do not collude and provided they bid a price for abatement that is close to their MAC.  Again it seems to me a detail rather than an overwhelming criticism of the ERF.

3. Time frame.  There are considerable difficulties in understanding the issue of whether firms will sustain emissions reductions.  The current ERF is scheduled to run for 5 years and presumably the Government assumes emissions reductions made during this 5 year period will be sustained into the future.  There are real issues here of the credibility of the ERF scheme.  Will firms cut emissions now in response to an emissions subsidy which compensates them for the extra costs they will occur over such a short-term time horizon?  At least the longer-term future for the ERF needs to be spelt out.

4. Non-equivalence arguments.  Environmental economics texts such as the well-known work of Baumol and Oates (BO) point out that the model outlined above suggesting that tax and subsidy policies are equivalent (in the sense that if s=t the same emissions are produced) are wrong.   BO point out that under a subsidy scheme there are reduced incentives for high polluting firms that would exit an industry under a carbon tax to in fact exit under a subsidy policy.  The reason is that their value is boosted by payments for emissions reductions. BO also point out that firms may in fact enter an industry to secure ERF type benefits.  Neither of these outcomes seems realistic in Australia where firms engaging in such behaviour would certainly expect a prompt regulatory response.  I don’t regard this as a real problem.

5. Political.  Many citizens distrust the Government on climate change.  There are many climate change “skeptics” (more accurately, “delusionists”)  in the Government and among its group of major advisors.  This is probably the major reason for disbelieving in the ERF’s efficacy and it is reasonable given the Government’s track record.

In my view the problem with the current Abbott Government policy is not its use of an ERF rather than a carbon tax to reduce emissions to 5% below those of year 200 by 2020 but the fact that this target is so miserly.  We are shamed by the intended actions of the Obama administration and by the intended actions in countries such as China and Indonesia. But to dismiss the ERF wrongly when it could potentially address climate issues is foolish.

Caution: I am working on this material.  Subject to revision.

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Right-wing think tanks & the press

Groups such as the  Institute of Public Affairs play a dominant role in providing newspaper commentary in Australia, particularly via the Murdoch press but also in some of the better quality Fairfax papers.  Partly, no doubt, when it comes to papers like The Australian this is so because the propietor endorses the views.  But I wonder too whether it is also because groups such as the IPA provide a way of getting copy on an outsourced basis at much lower cost than using full-time journalists.  The newspapers are experiencing well-known financial problems and a major cost is full-time journalism. It is better to get copy from those with an ideological axe to grind who are willing to accept low rates of pay in order to get their ideology across.  In support of this I notice Fairfax also publishes a lot of stuff from the IPA and both Fairfax/Newscorp publish outsourced material from groups such as the Australia Institute. Rupert Murdoch’s notoriously fickle politics might make sense if you assume his attention is mainly on the bottom line – he likes to back winners but also keeps his journalism bills down.

Of course this suggests that social democrats could make a bigger impact if they combined to form a think tank that supplied copy on a regular basis to the media.  To some extent groups such as the Australia Institute and the non-aligned Grattan Institute do this but I think not as effectively as the IPA although I certainly believe the quality of the research done at Grattan far exceeds the low level prejudice generated by the IPA

http://www.ipa.org.au/people (1053)

Some sound practical advice for university administrators

Ways to create and then cover up a massive blunder.  Ignore expert advice and go with your gut feelings and prejudices.  Push to one side anyone who opposes you.  Make sure that everyone who participates in the blunder is well-compensated.  Only admit at the very end that you got it catastrophically wrong.  Use creative accounting to make your case and drag your heels when objections to the accounting arise.  Make sure you have moved on to a new position in a new university before the blunder is discovered.  Then repeat the above at a higher salary.

http://www.businessspectator.com.au/article/2014/5/29/leadership/five-ways-cover-massive-blunder (814)

Amanda & the university “brats”

Amanda Vanstone makes two key points in her op-ed this morning:

(i) That university students free ride on the community by having most (about 60%) of the costs of their education paid for by taxpayers in general (including those who do not benefit from tertiary education).
(ii) That these subsidies mainly go to the wealthier sections of the community since, on average, it is these wealthier students who end up going to university.

I think she is partly right too that the current mob of protesters look like an unattractive looking bunch of spoiled brats. They don’t offer logic or arguments only adolescent slogans.

Setting low education costs can be justified if there are externalities from having a well-educated community in terms of less crime, better social decision-making and so on. The fees then cover the private benefits students get in terms of better incomes. This sort of perspective suggest a lower charge for all students attending university – irrespective of their income. 60% average subsidies suggest these external benefits are quite hefty. It might be hard – but I imagine not impossible – to come up with a solid justification for them. It is certainly crazy to seek “free education” since then people will be consuming an expensive service that yields social benefits less than the cost of delivering the service.

Another argument for subsidies is based on an equal opportunity starting point in society. This seems a much stronger argument to me. People irrespective of their socio-economic background should have the chance to attend a university if their abilities are great enough. But this does not seem to steer things in the direction of the current HECs. Rather it suggests giving targeted scholarships to those from economically disadvantaged backgrounds or perhaps highly concessional HECs arrangements for such students.

I guess a final argument that can be advanced is that education is not primarily an investment in an individual’s human capital but is a basic right that enhances a community’s sense of intellectual well-being.  As an economist I have only limited respect for these types of arguments –  current trends in the universities seem to me to suggest a diminishing role for promoting learning in general.  The universities are primarily unadorned degree factories. This is one of the reasons the protesting students appear to be such barbarians – they have not, in fact, received much of an education.

HECs is an intervention that helps people fund their educations in capital markets that don’t work well but the scheme doesn’t substantially address the inequality issue.

I am pessimistic about the future of the Australian universities on the basis of what I have seen as they have evolved over the last 30 years. The rise of managerialism and the “dumbing-down” of curricula are doing far more damage to the community than changes in the way fees are levied. But that is a topic for another post.

http://www.theage.com.au/comment/memo-to-uni-fees-protesters-stop-being-selfish-thugs-and-bullies-20140523-zrm0j.html (1629)

Cut GGE stocks not rates of GGE emission

Climate policies should target the control of stocks of greenhouse gas emissions (GGEs) in the atmosphere not the flow rates at which people are adding to these stocks.  It is a simple point – heating effects depend on the stocks not on the rate at which these stocks are being added to.  The point can be made simply by supposing a country agrees to a 90% reduction in GGE flows by 2050 which is the normal way policy objectives are set. That country could then do nothing at at all about GGEs until 2049 and then in that final year close down all coal-fired power stations and introduce a punitive carbon tax of say $200/tonne in that final year. It could even pre-announce such policies so that firms would not be subject to unexpected shocks and could be prepared for the sudden transition. The net effect is that the country would have added enormously to carbon emissions from 2014 to 2049 (it is these stocks which determine warming effects*) but would still be meeting its emission control objectives.   Clearly the appropriate target is not to reduce flows but to restrict the volume of GGEs a country is adding to the atmosphere.  Doing otherwise is to fudge the intent of GGE restriction policies.

I wonder if, on a less dramatic scale than this hypothetical example,  the Government’s Emission Reduction Fund policies are in fact seeking to do. To allow lots of pollution and then, in the 11th hour, to introduce carbon control policies that meet the miserly objective of a 5% cut over year 2000 levels by 2020. Or is it just a matter of postponing real action and eventually back-flipping to do almost nothing because “money is scarce” or some other phoney argument.

http://www.smh.com.au/federal-politics/political-news/budget-analysis-shows-climatechange-commitments-to-be-left-to-the-11th-hour-20140525-38wvx.html

* Indeed that it is stocks which matter not flows provides one argument for a carbon tax rather than an ETS.  Getting the wrong annual flow by setting a tax wrongly isn’t very costly if you can adjust the tax in future years. Policy-makers can still hit stock objectives by increasing the tax if emissions are being cut too slowly.  In addition tax policies provide a measure of carbon price stability that is useful for public and private sector planning. To be clear this is only one reason favouring a tax.  There are also many arguments for an ETS – it can be used to reflect a nations’s contributions to emission’s stock reduction, achieves exact cutback targets etc.  On balance I prefer an ETS although, of course, either a tax or an ETS outperforms the current Government’s emissions subsidy scheme. .

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Henry Ergas on universities

Henry Ergas has strolled through the corridors of a university and then claimed to understand it all - universities comprise lazy academics, incompetent, with no interest in teaching. It is the standard conservative, anti-academic view from someone employed (I believe) as an academic in a publicly-funded university.

http://www.theaustralian.com.au/opinion/columnists/creating-mayhem-more-fun-but-revolting-radicals-miss-serious-issue/story-fn7078da-1226921940480

But Henry, it isn’t only wealthy, Che Guevara-types who are damaged by huge fees but also many young people from modest and middle-income backgrounds.   How much did you pay for your education?  I wouldn’t have been able to attend university without a scholarship. Henry, did you pay all of your costs?  A loan scene doesn’t avoid a price – it only delivers a less painful way of paying that price.

Your views on inactivity in the universities are just wrong and outdated. Education and teaching are central priorities and have been for several decades. But that is just my claim just as your views are a claim. You provide no evidence to justify your impressions.  Why do Australian universities do so well in international rankings if they are so poor? Why do we attract so many international students? Is this  export success story based on wrong information? Your judgement about academics being intellectually feeble likewise reflects pure prejudice partly because many of them don’t take you very seriously. Most academics regard your politics (and your propensity to dominate verbal exchanges with long rambling monologues) with well-deserved disgust.  You are wrong about professors regarding teaching undergraduates as only a burden.  It is simply untrue – good researchers are invariably good teachers since the two things go together.

Based on your prejudiced and uninformed view of the universities as being in a crisis situation you advocate revolutionary reforms. But the main difficulty the universities face these days is a funding shortfall and that is a consequence of the types of attitudes you uncritically advance. But you don’t like public spending or taxes do you? I mean not you personally (since you have relied on such funding) but the general issue of principle you espouse.

You say HECs fees don’t deter educational participation but then inconsistently voice concerns about “price gouging”.  Why worry about the latter if…. oh forget it Henry.

Why Henry do you get paid to write this nonsense?  Your fantasies are dangerous, wrong and based on your ideology not on evidence. (1177)

Free markets in higher education promote inequality

(Provisional thoughts)

There are two factors that determine participation in higher education: The level of fees charged for the service and the high school entry scores (ATARs) that determine eligibility to join particular programs – this is a price even if the price is funded by HECs.  Education, at least in elite G8 universities, is in excess demand at present  with more people wanting to go to university than there are positions. With current fees, excess demands are accommodated in such elite institutions by setting minimum ATAR scores which “ration” entry to those with the highest ATARs.   With higher fees being charged as a consequence of liberalisation the numbers applying to enter universities will fall but numbers actually achieving entry will increase because of the higher price being offered to the university suppliers. This must mean that admission standards will decline.  Academic institutions, particularly elite institutions, will be happy to accommodate more students because they are offered a higher price but entry standards must fall as entry becomes determined more by price than it is by academic standards. Elite institutions will be dumbed down.

How pronounced will these trends be?  That depends on how close domestic fees are to fees that charged to international students  which, in turn, will reflect international education costs.  In addition it matters how  these international fees are to the level that would maximise returns to Australian universities.   With a straightforward profit-maximisation agenda local fees can treble to about the level that universities can extract from foreign students.  The only question then is how large these international prices are to levels that would maximise returns to local universities?

Given that Australia is a significant exporter of higher education services it seems likely that Australian higher education costs are lower than those prevailing in comparable institutions internationally.   In this case, fees with liberalisation will overall meet demands locally for education entirely on the basis of price with no need at all to rely on entry scores.  Local universities will be willing to supply more positions than local students demand with any gap being filled by international students.  Adjustments towards this outcome are likely to involve fewer local students going to university and those who do gain entry doing solely on the basis of their ability to pay higher fees.  The quality of student intake into courses will decline and those who do gain entry will be the sons-and-daughters of the well-to-do.  Any excess supply of positions will be taken up by foreign students.  This is a slight exaggeration since the universities will mask these efforts by offering a raft of scholarships to conceal their intent but the general thrust will be in the direction of maximising returns.

Non-elite universities currently experience lower demands for their offerings and often currently set lower ATAR admission standards.  Following price liberalisation there are likely to be two effects on non-elite institutions.  These non-elite institutions will experience increased demands for entry by able students who simply cannot afford the high prices charged by the elite institutions.  This will be a positive effect on the institution as a whole since having high ATAR students will provide positive external benefits for other students.  On the other hand with fee increases there will be fewer low ATAR students who can afford entry into these non-elite institutions, a negative effect. The negative effects here are likely to exceed the positive effects if it is this case that low-ATAR students come from low income backgrounds. In addition high ATAR students from poorer backgrounds will tend to concentrate in non-elite universities – they will provide external benefits but at a private cost.

The upshot of the Kemp-Norton-Pine reforms seems to me to be a university system that places greater emphasis on parental wealth and less on student abilities.  Overall it is profoundly regressive. It takes Australia backwards. Earning a good income on the basis on your skills and hard work is a good thing. Doing the same because your parents could fund you through elite institutions with lower academic standards is less socially desirable.

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Emissions Reduction Fund is now definitely revealed to be a bad joke

I saw this morning that total planned funding for the government’s ERF of $2-55b will not be increased after 4 years. This is to be TOTAL funding through to 2023/2024.

This pathetically weak scheme is now revealed to be more than weak – it is a bad joke. There is no way targets of 5% reductions in emissions over year 2000 levels will be met by 2020.

In terms of the overall budget this is a “small potatoes” issue. But the Abbott Government is clearly walking away from any serious attempt to reduce carbon emissions.

http://www.misaustralia.com.au/p/national/budget/environment_organisations_lose_out_4hBpgmcE5vdJDndPYR0i8N (918)

Reforming economics teaching

I have a fair bit of sympathy with some of the complaints in this The Guardian article about economics teaching. We do need to teach more about institutions and we do need to be more pluralist. Economics is much more than a quantitative methods “hurdle-jumping” contest though, to be clear, quantitative methods are very important.

http://www.theguardian.com/business/2014/may/11/after-crash-need-revolution-in-economics-teaching-chang-aldred

But I have far stronger complaints about the role of untrained administrators “dumbing-down” business curricula by leaving out virtually all economics and statistical training and replacing such with courses involving low level, non-analytical nonsense and psycho-babble. This is a crime that will take years to undo and will lead to many students ending up with poor business educations and making poor business decisions. A business curriculum which doesn’t teach how consumers and firms make their decisions, how public goods should be supplied, how levels of employment, economic activity and interest rates are determined, what determines international trade  and how externality issues should be addressed is inevitably of low usefulness.  Finance courses which teach people investment analysis without teaching the basic consumption-smoothing rationale for lending and borrowing is likewise of limited worth.   Finance grew out of microeconomics and indeed is inter-temporal microeconomics.  Separating finance from microeconomics and teaching finance to students who don’t understand government budgeting and interest rate/exchange rate determination is a waste of intellectual endeavour.  Students who study marketing without knowing some consumer demand theory know only a fragment of what determines consumer behaviour. Students who study “human resource management” without having a basic course in labour economics likewise know very little.

Finally, it is ironical that those administrators and business academics who so vehemently detest economics training often themselves need of a sound economics education.  Their poor decision making skills that downgrade curricula and worsen the financial position of universities are often the result of poor economic decision making.

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Cairns bleg

I am thinking about buying a home unit in Cairns north Queensland.  I like the tropic climate – particularly as an escape from the Melbourne winter but also because I like the mix of natural habitats that lie in and around Cairns – from Port Douglas and the Daintree to the Atherton Tablelands.  I probably would want to live in Cairns rather than an outlying area though I might consider Mareeba, Mossman or Port Douglas.  I probably would want to live in reasonable proximity to urban facilities, restaurants and so on and particularly the airport.  I want a unit as I want to be able to lock up and leave. Cheap air tickets to Cairns from Melbourne – around $256 return – along with relatively inexpensive real estate are an attraction.  I’d probably continue to spend the summer and spring in Melbourne.

I’ve spent a few days checking out the options via the web and will probably visit the area in June to have a careful look around.

I’d be interested to hear views of any people with experience of Cairns as a place to live in. What’s it like to live there for extended periods?  Any problems? What are good parts of Cairns to live in? Why does the real estate there seem so inexpensive?

If you don’t want to post a comment online you can email me or use the FB message service.

Many thanks. (1063)

A case for increasing (or at least indexing) the petrol excise

There never was any strong reason for John Howard pegging the petrol excise at 38 cents per litre and plenty of sound reasons for at least indexing it with respect to inflation.  The tax provides a rough (and admittedly imperfect) tax on congestion and fuel-induced air pollution and provides quite a reasonable application of the benefits (or “user pays”) principle of taxation in relation to funding of new roads and the maintenance of existing roads – those who use lots of petrol, particularly heavy vehicles, should pay much of these costs.  An excise also provides motorists to think forward and shift away from liquid fuels which will inevitably become more expensive. Finally, in terms of deadweight losses (or “excess burdens”) a tax on fuels has only moderate inefficiency costs because the demand for fuel is relatively price inelastic.   To achieve these desired features in a growing economy subject to inflation the tax should grow with the economy and not be set in stone.

I therefore support moves to revisit the setting off the excise. The tax yield from the fuel excise has fallen by about 40% which costs the government around $5b.  Increasing the tax by 20 cents and then indexing it to inflation would recoup much of the revenue lost because of the Howard decision to reindex the tax and would cut the size of the underlying structural deficit facing the economy by about 1/3.

Longer term one would hope that road use charges related directly to congestion, pollution and road damages would be introduced.  These are better ways of taxing externalities than a rough fuel excise. But still I think the fuel excise should be retained.  It is a broad-based tax that still would have the desirable properties mentioned of generating relatively low efficiency costs and of forcing us all to shift our allegiance away from fossil fuel-based energy sources.

The inevitable cry will be that such a tax is regressive and that it falls on the poor.  The Grattan Institute have begun this very standard sort of moan that is raised whenever any efficiency-based reform (e.g. congestion pricing) is proposed. What matters is the overall incidence of the tax-transfer system not the equity character of a small part of the tax base.  Of course the level of excise in Australia is low relative to excises in most European countries.

http://www.theguardian.com/world/2014/may/07/drivers-excise-hit-cabinet-searches-budget-savings

Update: 8/5/14. It seems that a 3 cent increase in the levy will happen.  I don’t think, however, this would raise $1b as this article suggests.  More like $500m. (1243)

Water provides a source of comparative advantage

The problem of water shortages around the world is not due to the fact that the total volume of water available is inadequate. The problem is that the world’s water supplies are distributed very unevenly. Moreover it is difficult to directly trade water internationally because it is bulky and heavy.  Products which are relatively water intensive can, however, be traded.  This helps to indirectly allocate water resources to where they are most needed and improves the global efficiency of water use.

This paper by Peter Debare shows that water is a source of comparative advantage in the sense that relatively water abundant countries do tend to export water-intensive goods.  Thus water is indirectly traded internationally through trade in goods which are more=or-less water intensive. Comparative advantage in water therefore undoes some of the effects of an uneven distribution of water globally. But water contributes much less to the pattern of international trade than other productive factors such as labour and capital.  Hence changing water supplies due to climate change should cause only moderate disruptions to international trade.  For example,  if Australia experienced a 10% drop in precipitation due to climate change, Debare calculates that overall Australian exports would fall by 5.2%. Not negligible from Australia’s perspective but not catastrophic either.

It is a fine paper. I’d suggest that the failure generally to price water at its scarcity value limits the comparative advantage role that water plays in world trade and also limits the ameliorative role that such comparative advantage might play in mitigating the effects of climate change. Of course we also want water priced efficiently to achieve sound patterns of water use and prompt adaptations to climate change even in the absence of international trade.

http://pubs.aeaweb.org/doi/pdfplus/10.1257/app.6.2.32 (880)