All posts in category Economics

Australian Car Industry – When in a hole stop digging

At Jo Nova’s unthreaded there is a debate going on about Australian car industry. Started up in the post war era, it is currently going through a crisis. In fact, despite large subsidies, it is collapsing. The major messages I want to get across are:-

  • Learn from other countries. Britain in the 1970s for instance.
  • When in a hole, stop digging. If the car industry is failing, throwing money at it might win a few votes, but damage the economy.
  • Australians have the energy, and entrepreneurial skills, in abundance to create new wealth-generating opportunities.
  • Australians (like other countries) are being crippled by the short-sighted hand of Government, who should recognize that do not have the skills, nor the incentives required to create an industrial policy that is of net benefit to the country as a whole.

On making a new start and learning the lessons of Brazil

To successfully start a new car company is virtually impossible in the modern world. In recent decades the successful ones have been in China, but with the help of, and by copying, established marques. Outside of China, there was Proton of Malaysia. There original car was a 1984 Mitsubishi Lancer. That end of the market you do not want to get into – high subsidies and reliant on cheap labour. The last major car company start-up was (I believe) Honda.
Then there are niche markets. McLaren is doing well in the UK, but a midget and building on its F1 base. As the majority of F1 cars are made around Silverstone, it had an advantage of a skilled labour pool and (most importantly) the engineering and design skills.
The alternative is to do what Brazil did. For years it did not allow any imports. There were four foreign car companies building in Brazil (Fiat, Ford, GM and VW). The quality was shocking, models were decades older than Europe and the the companies colluded. VW built a variant of the Ford Escort and the Beetle came off Ford production lines. In 1994, they opened up to imports, but with a 25% import tax. Very quickly 70-80% of the market was imports. So the Brazilians stuck a 70% tax. The response over a decade was for more foreign companies to open assembly plants. Then came Mercosur – the “free-trade” zone covering most of South America. Now there are plants from Renault, Mercedes (mostly the A-class), Audi and Volvo amongst others.
The major problem of taking this route is the restriction of choice. The Mercosur market (including Brazil, Argentina and Mexico) is a number of times bigger than Australia, and last time I looked, had a more limited choice and higher prices than in Europe.
Learn for Australia what the biggest businesses did in the 1980s. Stick to what you are good at. Let the market develop in Australia based on its comparative advantages. That is farming (which you have developed from low margin sheep farming to high margin wine production) and mining. Then there is tourism as well, so long as you don’t let your government tax air travel.
In the longer term there are spin-off industries. In Britain we don’t have much manufacturing, but we have some of the world’s best designers. Oil production is declining, but a disproportionate amount of global off-shore technological expertise is around Aberdeen.
The mistake of most people to associate wealth with making actual things. It is not. Wealth is about creating greater value than the inputs. Assembling everyday, easily reproducible, objects adds very little value, so is confined to the poorest countries. For instance textiles in Bangladesh, or assembly of commodity items in China. The real wealth comes from new ideas, or taking existing processes and doing them more efficiently and/or effectively than anyone else. That is staying ahead of the game.

A readable primer on the economics is Israel Kirzner’s “Competition and Entrepreneurship.”

When in a hole, stop digging. Lessons of the British Experience

Andrew McRae is torn between ending the subsidies and letting the car industry fold.

Hi Andrew,

I can see why you are torn between Government Industrial policy and letting free markets work. I finished high school and went to university during the early Thatcher years and saw both sides. In the 1970s one of the most famous British cars was the MG Midget – a tiny two seater sports car. There were huge protests when production was stopped, with each car costing twice the selling price. Like most of the cars produced in Britain it was unreliable, particularly when compared with the Japanese competition. The country subsidised many industries, spending 5-8% GDP on subsidies. We tried to get into the computers – and failed. The one bright spot was Concord, developed with the French. A phenomenal technological achievement, it cost £4bn (A$40bn+ in todays money) and the few made were virtually given away. It was a case study in how an original government project at low cost with high rewards switches to the opposite. When mooted in the mid-50s, it was to cost £80m with a market for hundreds of planes.

One thing that you must not lose sight of is the existing workers in your car industry. In Britain in the 1970s there were millions employed in manufacturing, whether the car industry, steel, shipbuilding, engineering, or technology assembly lines. Another 250,000 jobs were in coal mining. Many who were made redundant in their 50s never got jobs again. Many others only obtained lower paid unskilled work. There is still incredible bitterness towards the whole Thatcher legacy. But the fault lay not with ending “industrial policy”, with its ever-growing subsidies, but in starting it in the first place. It is the same principle as for the carbon tax. Even assuming the theoretical case was true, the people least qualified to implement the policy are the politicians. Not because they cannot hire the best experts to devise a policy. It is for business and a carbon tax to work you need to make changes, which will hurt people. In manufacturing you need to continually cut jobs and change. With an “optimal” policy to reduce CO2 emissions some jobs need to be destroyed (to get huge benefits) and people suffer hardship. Politicians who are so openly ruthless get voted out pretty quickly, even though they are doing the best for the country. The best long-term interests of the country are the biggest vote losers, if those politicians are advised think short-term and are advised by spin doctors. Yet the interests of a modern developed country are in providing the structures to enable the future wealth-creating opportunities to develop. Australia is probably the pre-eminent example of a country for this to happen, as there are many people with vision, ability and the passion to make things happen, along with the ability to take risks. The crippling disability that they need to overcome is the risk-averse dead-hand of government who cannot see beyond the next set of opinion polls.

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by manicbeancounter on May 27, 2013  •  Permalink
Posted in Australia, Economics, Industrial Policy, Politicians, Transport
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Posted by manicbeancounter on May 27, 2013

http://manicbeancounter.com/2013/05/27/australian-car-industry-when-in-a-hole-stop-digging/

Suyts on Krugman

Suyts quite rightly criticizes Paul Krugman on the Nobel Laureate’s latest ramblings. However, his analysis misses a couple of issues. This is an extended comment.

You are quite right on two issues here, which I believe have been called the ratchet effect and the debt servicing impact.

The first is that it is easy to increase government expenditure, but much more difficult to scale it back as there are entrenched interests to stop the scale back. It is easy to give people welfare benefits or create jobs. But try to take these away and people will fight like crazy to keep them.


The second on debt servicing you demonstrate very well. As total debt goes up, so does the interest on that debt.

There are other issues that should be taken into consideration on the deficit and debt problem.

The first issue is the size of government. When an economy enters recession, the tax receipts fall and expenditure rises. Corporation tax is the first area to go down, followed by income tax as unemployment rises. In expenditure terms, welfare payments will rise along with (possibly) business bail outs. With small government, taxing little and spending little, this impact was small. With large government – in Britain rising nearly 50% of GDP – this effect is large. A 6% decline in GDP perhaps increased the deficit by 6-7% of GDP. Under the Eisenhower administration, a similar decline would worsen government finances by maybe 2% of GDP. Big government exacerbates the size of cyclical swings.

The second issue is the position at the start of downturn. In mid-2008 both USA and Britain had structural deficits – in the USA to finance the wars in Iraq and Afghanistan, in Britain finance a huge increase in public sector pay and capital spending on schools and hospitals. A structural deficit is the measure of the average government deficit over the course of the business cycle. In Britain at the top of the cycle, the actual deficit was around 3% of GDP, with a planned rise to 4%. The structural deficit was probably greater than 4% of GDP in mid-2008 in Britain and maybe slightly smaller in the USA. Below is my estimate of the impact of Britain’s structural deficit in April 2010. I estimated that the structural deficit built up between 2001 and 2008 would in the long-term increase National Debt by 40% of GDP. I was overly optimistic in my assessment.


The third issue is with the classical Keynesian Multiplier. Crude textbook Keynesianism of the 1960s for a closed economy stated

E = C+I+G

Or national expenditure is the sum of Consumption, Investment and Government expenditure.

The theoretical impact of increasing government expenditure on total output, when the economy is at less than full employment, is Y/G. If government expenditure is 10% of national income, then increase G by $1 and Y will increase by $10. If government expenditure is 40% of national income, then increase G by $1 and Y will increase by $2.50. However, crudely put, if the government expenditure does not take up the slack in the economy (the deficit in aggregate demand), then (in an inflation-free economy) the government expenditure “crowds out” private expenditure. Another way of putting the situation, if the economy is not “stuck in a rut” as Keynes assumed in his “General Theory”, but merely reacting to overinvestment (such as a housing bubble), then increased government expenditure will have no effect on total output, but “crowd out” other expenditure. It will also add to the nominal national debt, without adding to total national income, thereby increasing national debt as a percentage of national income, or expanding national income leading to increased tax revenues and thus closing the deficit.

The fourth issue is fiscal tipping points. If the increased government expenditure fails to stimulate the economy, then the result will be a larger structural deficit. If, like some European countries, there is a further contraction then the deficit will increase. In Greece, Spain, Italy and Portugal, this further downturn has led to increased economic risk, pushing up interest rates. This increases short-term debt costs, further increasing the deficit. The only way to stem total collapse is to massively cut public expenditure and increase taxes to not only pay for the debt-financing costs but to rapidly cut the deficit as well. In climate change there has been much spurious talk about possible tipping points in the remote future if certain things come true. But in OECD economies, with some already having gone beyond the fiscal tipping points, many (including Krugman) seem oblivious to the possibility. Should we not use a smidgeon of the precautionary principle in economics , proclaiming austerity as an insurance against severe depression.?

Kevin Marshall


2 Comments
by manicbeancounter on May 7, 2013  •  Permalink
Posted in Credit Crunch, Economics, Government Spending
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Posted by manicbeancounter on May 7, 2013

http://manicbeancounter.com/2013/05/07/suyts-on-krugman/

Is Australia near the fiscal tipping points of Europe?

Although in Australia the current economic situation may seem bad, it is nothing like as dire are Europe.

There is a new issue. After a long period of surpluses in 2009 the government created significant deficits. These do not seem justified by the small slowdown in economic growth. Any ideas?

Using World Bank Data, many of the Eurozone countries have been running large, structural deficits for years. Australia only went into deficit in 2009.


As a result, Australia’s national debt is small relative to GDP compared with the European nations.


The relative problem can be seen from the growth rates. Australia has yet to go into a full year of recession. That is growth of less than zero.


Neither has growth dipped much below the average for 1998 to 2007.

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by manicbeancounter on December 31, 2012  •  Permalink
Posted in Australia, Credit Crunch, Economics
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Posted by manicbeancounter on December 31, 2012

http://manicbeancounter.com/2012/12/31/is-australia-near-the-fiscal-tipping-points-of-europe/

Alcohol Concern’s anti-poor campaign

Although I am not in any way a socialist, I vigorously oppose anything where the poor and weak are made to subsidise the rich and the powerful. I also strongly oppose policy being enacted which will be to the net detriment of society as a whole. This is why I strongly oppose the latest report from Alcohol Concern “Binge – Drinking to get drunk: Influences on young adult drinking behaviours“. Before anybody gets the wrong idea, I support their concern about binge drinking, especially amongst minors. I also believe that if there were ways to improve this situation, then they should be enacted. However, if economic price incentives are involved, then one should also look at the unintended consequences.

The policy proposed is again a minimum price for alcohol. This has long been touted by the last Labour Government, the BMA and David Cameron. Yet none really understand the harm that it will cause to society. The proposal it to impose a minimum retail price per unit of alcohol of about 40p to 50p. This will not affect the cost in the pubs and clubs, where the cheapest pint of standard lager is around twice this level. It will dramatically impact the retail prices, in both small off-licences and the supermarkets. Below are some examples.


The way prices work is that premium products have not just premium prices, but larger profit margins both in absolute and in percentage terms. A minimum price for alcohol will invert this position. Suddenly a 3 litre bottle of cheap cider will have the highest profit margins not just in absolute, but also in percentage terms. This will create very perverse incentives for the retailer. One direct consequence will cause a rise in the price of drinks already over the minimum price. Consider the situation of the cheapest wine at £2.99 per bottle and the more mainstream wine at £4.99.


Even at 50p a unit, the cheap wine is still cheaper than the mainstream one. If the mainstream wine price remained unchanged, then the price premium to the consumer has dropped by 75%. Better quality has less of a premium. The retailer gets the margins reversed. The margin on the premium product goes from being 86% more to 48% less than the cheaper product. It makes sense for the retailer to increase the price. This increase might not be proportional to the cheap wine, but a least to make a greater margin in value terms.

Will the retailer end up making greater profit. This depends on something called elasticity of demand. To make less money on the cheap wine, demand would have to drop by over 72%. To make less money on the mainstream wine, demand would have to drop more than 53%.

Will this be of benefit to the supermarkets? It depends on the elasticity of demand. From Investopedia

Definition of ‘Price Elasticity Of Demand’

A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:



For the cheap wine the elasticity for break-even 72%/50.5% = 1.43

For the mainstream wine the elasticity for break-even 53%/25% = 2.12

Alcohol is well-known for being highly inelastic with respect to demand. That is elasticity measure is much less than 0.5. The supermarkets and the off-licences will make much, much larger profits on sales of cheap booze. With an elasticity of less than 1, consumers will end up spending more on alcohol than before, even though they are buying a smaller quantity. The biggest proportionate impact will be on those least able to afford that price rise. This is a double-hit. The poor spend a larger proportion of their income on alcohol than those on a higher income. They are also more likely to buy the cheaper forms of booze, which will have the larger percentage price rise.

The more equitable solution is to restructure the excise duties. The tax on alcohol should be shifted not just onto a per unit basis, but in such a way that it specifically targets the low-cost booze which is most attractive to minors. Therefore strong ciders (which I like), alchopops, and strong lagers should all have premium rates that are higher than, say, standard strength beers and wine. Weak taste drinks (Vodka, white cider) should have a premium over strong taste drinks such as real ale, whisky, or full-flavoured cider. This bigger added bonus is that there would a net gain in excise taxes, rather than just a gain in VAT receipts.

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by manicbeancounter on November 20, 2012  •  Permalink
Posted in Economics
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Posted by manicbeancounter on November 20, 2012

http://manicbeancounter.com/2012/11/20/alcohol-concerns-anti-poor-campaign/

East Australia High Speed Rail – Opening Comments

Bernd Felsche has been blogging recently on proposals for a High Speed Rail project for Eastern Australia. The details and Phase 1 report are here.

In Britain there has recently been approved a HSR project from London to Birmingham, costing at least £17.1bn (A$26.7bn) for just 190km of track. The estimated cost of A$61bn to A$108bn for around 1644km looks remarkably good value in comparison. However, it is worth studying the underlying assumptions.

The Taxpayers Alliance has made a number of damming criticisms of the UK project. In particular that the actual costs could be nearly three times the estimated if supporting infrastructure improvements are taken into account. Having also looked at the Manchester Congestion Charging Scheme in 2008, I thought it might be worth a perusal.

The basis for the project is the projected demand, so my first comments are population and demand levels.

Initial Thoughts on Population

The study assumes a high level of population growth for Australia as a whole. From the current 23m, population is forecast to be between 30 and 40m in 2056. That is growth of 30% to 74% over 45 years. Taking the mid-point, that is 52.2% growth to 35m. East Australia is forecast to grow 58.3% from 17.8m to 28.2m, leaving growth in the rest of Australia of 30.7% (5.2 to 6.8m).


Map from page iii of Executive Summary, annotated with city population growth projections for 2011 to 2056.

The highest growth in population (using Australian Bureau of Statistics, Population Projections Australia 2006 – 2101, 2008 (Series B forecasts updated)) is projected to be in the Brisbane area. Given that this is the least populated end of the line, these population projections need to be put through a sensitivity analysis. With much lower projections for South East Queensland growth it could be that the northern stretch of the line and one third the estimated cost is not economically justified.

Passenger Growth

From the Executive Summary page iv

The population of the east coast states and territory of Australia is forecast to increase from 18 million people in 2011 to 28 million people by 2056. Over 100 million long distance trips are made on the east coast of Australia each year, and this is forecast to grow to 264 million long-distance trips over the next 45 years.

So population will grow by 58% and long distance trips by 164%. By 2036 (with 35% growth in population), they will have grabbed half the project air market in 2036 for Melbourne to Sydney and Brisbane to Sydney. With such a huge capital outlay how can this be?

Capital Cost

From the Executive Summary

International experience suggests it is unrealistic to expect the capital cost of a HSR network to be recovered.

The reason that the projected fares look so cheap, so that there is not going to be any recovery of the costs in fares. So the

competitive ticket prices, with one way fares (in $2011) from Brisbane to Sydney costing $75–$177; Sydney to Melbourne $99–$197; and $16.50 for daily commuters between Newcastle and Sydney

are no such thing. A quick check on single flights from Melbourne to Sydney reveals prices of $125 economy and $850 business. The HSR will be financed out of taxation to grab market share from air travel.

Kevin Marshall


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by manicbeancounter on October 15, 2012  •  Permalink
Posted in Australia, Economics, High Speed Rail, Manchester Congestion Charge
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Posted by manicbeancounter on October 15, 2012

http://manicbeancounter.com/2012/10/15/east-australia-high-speed-rail-opening-comments/

Electric Cars – toys of the rich, subsidised by the masses

Joanna Nova reports on a new study showing that electric cars produce more CO2 that either petrol or diesel cars if that electricity is produced principally from coal-fired power stations.

The most practical electric car

In Britain there is more a market for electric vehicles, but still puny sales. The European Car of the Year is the Chevrolet Volt, which has a 1.4 petrol engine to accompany the electric motor. At £29,995 it costs 50% more than a similarly-sized Ford Focus diesel, even with the £5,000 government subsidy. In fact, it is more than a similarly-sized Audi, BMW or Mercedes and will not last nearly as long. If you look at the detail, the Volt has a claimed CO2 emission 27 g/km, as against 99 g/km for the best diesels. This takes no account of the CO2 emissions from the power stations. In Britain electricity is mostly from gas, with much of the rest from coal and nuclear.

There is also a question of equity. Domestic electricity has a 5% tax added on. Diesel has over 120% added. So the cost for 100 km (using official figures and 15p per kwh + 5% vat) is £2.66 for the Volt and £6.00 for the equivalent diesel car (combined 67.3mpg and £1.43 per litre). But tax is £0.13 and £3.30, so most of the cost saving is in tax. In the UK the average is 12,000 miles or 19,300km per year. So the tax saving from driving the Volt is up to £610 per annum. Although if you travel that distance per annum there will be a number of long distance journeys. Let us assume half the 12,000 miles is on the petrol engine at 50mpg, with petrol at £1.38. Then the annual tax saving drops to just £70.

The biggest saving for electric car owners is in London, with the congestion charge. Drive 5 days a week for 11 months of the year into London, and the conventional car owner will pay £2,750 a year. Drive an electric car or hybrid and the charge is zero.

So what sort of people would be persuaded to buy such a device? It is the small minority who have money for at least two cars, but want to appear concerned about the environment. They have the open-top sports car for summer days, the luxury car for long journeys, and the Volt for trips to the supermarket or to friend’s houses. It is the new form of conspicuous consumption for the intelligentsia, making the Toyota Prius so last year.

The least practical electric car

Launched this year the Renault Twizy is claimed to be about the cheapest “car” available today. As a car it is also by far the smallest available as well, being more a quadricycle, with no proper doors. The cost is kept low by not including the battery which is rented for at least £48 a month. As the Telegraph concludes, it is an expensive toy. My 12 year old son said he would love one when he saw it in a car showroom recently. But he would soon regret it if he was transported to school in it every day, instead of riding on the top-deck of a bus. At least if his dad forgot to plug it in, it would be small enough for him to push.

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by manicbeancounter on October 11, 2012  •  Permalink
Posted in Climate Change, Economics, Environment
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Posted by manicbeancounter on October 11, 2012

http://manicbeancounter.com/2012/10/11/electric-cars-toys-of-the-rich-subsidised-by-the-masses/

Joseph Stiglitz on the causes of the current crisis

Roger Pielke Jr. takes a critical look (here and here) at a novel theory of the recession from Nobel Laureate Joseph Stiglitz in Vanity Fair, the eminent economics journal. This is an extended version of the comment that I made on the second posting.

The Stiglitz theory would make a bit of sense if it were not for what he misses.

  • Your evidence that other countries, like, Germany, have similar increases in productivity but not the endemic problems.
  • That output per capita is identical in National Income Accounting with income per capita. Therefore, the long term rise in per capita income is a result of increased productivity per capita.
  • Since the start of the industrial revolution, real per capita output has risen (in the wealthy economies) more than 200 times. If there has been no corresponding increase in per capita income, unemployment would be greater than 99%.
  • Stiglitz quite rightly points to the rise in personal debt. He makes no mention of public sector debt. In the USA and in Britain in the period 2000 to 2007 government finances swung from a small structural surplus to significant structural deficit. If deficit-financed investment is expansionary, it was not just the low interest rates that kept the boom going but the fiscal stimuli. Similar structural deficits were present in many European countries like Greece, Portugal and Italy.
  • In the 1990 Japan entered a prolonged slump. In the following decade the economy stagnated despite huge public works investment like Stiglitz advocates. The Japanese national debt spiralled to 300% of GDP, with nothing to show for it, except a lot of fantastic roads to nowhere.
  • Japan was fortunate in that its borrowings are at near zero interest rates. The European economies are not so fortunate. Those European economies with large deficits reached a crisis tipping point when interest rates exceeded 7%. To save the economy, radical contractionary policies have been implemented.

I would therefore contend that Keynesian fiscal expansion in the USA or elsewhere would not only be ineffective (coming on top of other fiscal expansion), but carries a huge risk of making matters dramatically worse. Morally I believe that economic policy-making has a powerful analogy to medical practice. It is not just a matter of diagnosing properly the type and extent of the ailment. It is providing, at a minimum, a remedy for which there is a reasonable expectation that the patient will be better off being treated than not. Like with a GP, an economist has a duty of care in what they advocate, particularly when there are very clear and evident risks. Joseph Stiglitz seems to take no such care.

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by manicbeancounter on January 5, 2012  •  Permalink
Posted in Credit Crunch, Economics
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Posted by manicbeancounter on January 5, 2012

http://manicbeancounter.com/2012/01/05/joseph-stiglitz-on-the-causes-of-the-current-crisis/

Economic v Climate Models

Luboš Motl has a polemical look at the supposed refutation of a sceptics arguments. This is an extended version of my comment.

Might I offer an alternative view of item 30 – economic v climate models?

Economic models are different from climate models. They try to model empirical generalisations and (with a bit of theory & a lot of opinion) try to forecast future trends. They tend to be best over the short term when things are pretty much the same from one year to the next. The consensus of forecasts are pretty useless at predicting discontinuities in trends, such as the credit crunch. At there best their forecasts at little better than the dumb forecast that next period will be the same as last period. In general the accuracy of economic forecasts is inversely proportional to their utility.

Climate models are somewhat different according to Dr MacCracken.

“In physical systems, we do have a theory—make a change and there will be a response in largely understandable and calculatable ways. Models don’t replace theory; their very structure is based on our theoretical understanding, which is why they are called theoretical models. All that the computers do is to very rapidly make the calculations in accord with their theoretical underpinnings, doing so much, much faster than scientists could with pencil and paper.”

The good doctor omits to mention some other factors. It might be the case that climate scientists have all the major components of the climate system (though clouds are a significant problems), but he omits to include measurements. The interplay of complex factors can cause unpredictable outcomes depending on timing and extent, as well as the theory. The climate models, though they have a similarity of theory and extent, come up with widely different forecasts. Even this variation is probably limited by sense-checking the outcomes and making ad hoc adjustments. If the models are basically correct then major turning points should capable of being predicted. The post 1998 stasis in temperatures, the post 2003 stability in sea temperatures and the decline in hurricanes post Katrina are all indicators that models are overly sensitive. The novelty that the models do predict tend not to be there, but the novelties that do exist are not predicted.

If it is the case that climate models are still boldly proclaiming a divergency from trend, whilst economic models have much more modest in their claims, is this not an indicator of climate model’s superiority? It would be if one could discount the various economic incentives. Economic models are funded by competing in institutions. Some are private sector, and some are public sector. For most figures there is forecast verification monthly (e.g. inflation, jobs) or quarterly (growth). If a model were consistently an outlier if would lose standing, as the forecasts are evaluated against each other. If it was more accurate then the press would quote it, being good name placement for the organisation. In the global warming forecasts, there is not even an annual variation. The incentive is either to conform, or to provide more extreme (it is worse than we thought) prognostications. If the model projected basically said “chill-out, it ain’t that bad man”, they authors would be ostracized and called deniers. At a minimum the academics would lose status and ultimately lose out on the bigger research grants.

(A more extreme example is of a major earthquake forecast. “There will not be one today” is a very accurate prediction. In the case of Tokyo area over the last 100 years that would have been wrong only twice, an accuracy of greater than 1 in 10,000).

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by manicbeancounter on September 24, 2011  •  Permalink
Posted in Climate Change, Climate Change Analysis, Economics
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Posted by manicbeancounter on September 24, 2011

http://manicbeancounter.com/2011/09/24/economic-v-climate-models/

Feedbacks in Climate Science and Keynesian Economics

Warren Meyer posts of a parallel between Climate Science and Keynesian Economics. I posted about a subject close to his heart, and central to Keynesianism – Feedbacks. I have also attempted to update on the current debate on feedbacks.

Warren

There is a parallel between Keynes and the CAGW that is close to your heart – feedbacks. Pure Keynesianism is that an increase in government expenditure at less than full employment would have a positive feedback response. Keynes called the feedback measure the multiplier. (The multiplier is the reciprocal of the proportion of Government expenditure to GDP. So if government expenditure was 20% of GDP, then a $1bn fiscal boost would increase output by $5bn.)

By the 1950′s the leading sceptic was Milton Friedman who, in his 1962 book “Capitalism and Freedom”, estimated empirically that the multiplier was about 1 – that is it did not have any impact. Friedman was denounced as a denier and a dinosaur. (At the same time, mainstream economics adapted his verificationist methodology.) Indeed by the end of the 1960s it was generally agreed that the long-term feedback impact of government demand management was negative, as increased government expenditure crowded out the private sector, caused escalating inflation (as economic actors ceased to be fooled by the false signals 0f increased expenditure), slowed economic growth and generally undermined the very structures of the capitalist system. (see Friedman’s Nobel Prize lecture “Inflation and Unemployment“)

Keynesian thinking is that the capitalist economic system is inherently unstable. Stability is only achieved through the guiding hand of government. Keynes contrasted this with a caricature of neoclassical economics, with the macroeconomic system would rapidly come back into equilibrium. Similarly, the climate models assumption of chronic instability is contrasted by an extreme caricature of those who disagree with them. That is the “deniers” are saying that the climate is incredibly stable, with human beings having no influence. In both cases the consequence of this caricaturing is to automatically claim any extreme occurrence as vindification of their perspective.

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by manicbeancounter on September 17, 2011  •  Permalink
Posted in Climate Change Analysis, Economics, Feedbacks
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Posted by manicbeancounter on September 17, 2011

http://manicbeancounter.com/2011/09/17/feedbacks-in-climate-science-and-keynesian-economics/

IPCC & Greenpeace

The Shub Niggurath (Hattip BishopHill) arguments against the IPCC’s SSREN growth figures are complex. The Greenpeace model on which they were based basically took a baseline projection and backcast from there. A cursory look at the figure GDP figures shows that the economic models point to knife-edge scenario. The economic models indicate that the wrong combination of policies, but successfully applied, could cause a global depression for a nigh-on a generation and lead to 330 million less people in 2050 than the do-nothing scenario. But successful combination of policies will have absolutely no economic impact.

Shub examines this table :-

Table 10.3, page 1187, chapter 10 IPCC SRREN

(Page 32 of 106 in Chapter 10. Download available from here)

I have looked at the GDP per capita and population figures.


To see whether the per capita GDP projections are realistic, I have first estimated the implied annual growth rates. The IEA calculates a baseline of around 2% growth to 2030. The German Aerospace Centre then believes growth rates will fall to 1.7% in the following 20 years. Why, I am not sure, but it certainly gives a lower target to aim at. Projecting the 2030 to 2050 growth rate forward to the end of the century gives a GDP per capita (in 2005 constant values) of $56,000. That is a greater than five-fold increase in 93 years.

On a similar basis there are two scenarios examined for climate change policies. In the Category III+IV case, growth rates drop to 0.5% until 2030. It then picks up to 2% per annum. Why a policy that reduces global growth by 75% for 23 years should then cause a rebound is beyond me. However, the impact on living standards is profound. Almost 30% lower by 2030. Even if the higher growth is extrapolated to the end of the century, future generations are still 12% worse off than if nothing was done.

But the Category I+II case makes this global policy disaster seem mild by comparison. Here the assume is that global output per capita will fall year-on-year by 0.5% for nearly a generation. That is falling living standards for 23 years, ending up at little over half what they were in 2007. This scenario will be little changed in 2050 or 2100. Falling living standards mean lower life expectancy and a reduction in population growth. The model reflects this by projecting that these climate change policies will lead to 330 million less people than a do-nothing scenario.

Let us be clear what this table is saying. If the world gets together and successfully implements a set of policies to contain CO2 levels at 440ppm, the global output in 2050 will be 40% lower. There is a downside risk here as well – that this cost will not contain the growth in CO2, or that the alternative power supplies will mean power outages, or that large-scale, long-term government projects tend to massively overrun on costs and under perform on benefits.

Let us hark back to the Stern Review, published in 2006. From the Summary of Conclusions

“Using the results from formal economic models, the Review estimates that if we don’t

act, the overall costs and risks of climate change will be equivalent to losing at least

5% of global GDP each year, now and forever. If a wider range of risks and impacts

is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the

worst impacts of climate change – can be limited to around 1% of global GDP each

year.”

Stern looked at the costs, but not at the impact on economic growth. So even if you accept his alarmist prediction costs of 5% or more of GDP, would you bequeath that to your great grandchildren, or a 40% or more reduction lowering of their living standards along with the risk of the policies being ineffective? Add into the mix that The Stern Review took the more alarming estimates, rather a balanced perspective(1) then the IPCC case for reducing CO2 by more solar panels and wind farms is looking highly irresponsible.

From my own perspective, I would not have thought that the impact of climate mitigation policies could be so harmful to economic growth. If the models are correct that the wrong policies are hugely harmful to economic growth, then due diligence should be applied to any policy proposals. If the economic models from the IPCC are too sensitive to minor changes, then we must ask if their climate models suffer from the same failings.

  1. See for instance Tol & Yohe (WORLD ECONOMICS • Vol. 7 • No. 4• October–December 2006)

Update 27th July.

Have just read through Steve McIntyre’s posting on the report. Unusually for him, he concentrates on the provenance of the report and not on analysing the data.

1 Comment
by manicbeancounter on July 20, 2011  •  Permalink
Posted in Climate Change, Climate Change Analysis, Economics
Tagged , , , ,

Posted by manicbeancounter on July 20, 2011

http://manicbeancounter.com/2011/07/20/ipcc-on-the-knife-edge-renewables-scenarios/

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