Yuan for the money?

My latest read of the Economist had a particularly disturbing but compelling argument that it is only a matter of time before the Yuan will be the Worlds reserve currency. The article describes it as an overdue change, although I get the impression that it is not desirable, but inevitable and the alternatives eventually being virtually disastrous. I don't like it, but I realize now that it will probably happen, maybe before 2020. My preference is of course the Aussie dollar, but the chances are quite remote.

High Dollar - Manifest Destiny

Article about the falling US $, and our exceptional acceptance of such leads me to believe that the OZ may actually be a good candidate for a future reserve currency.

I think perhaps we could purchase bankrupt far north eastern states rather than expecting them to secede from the US, to make our country's size commensurate with its stability and superior political and financial systems.

Pricing Signals

There are really not enough of these in the world. Consider these situations:

1) Person who is on a phone plan does not have a direct cost feedback even if the bill goes up to alarming 6 figure sums.

2) A farmer gets their bill for water, but doesn't know how much their neighbours could have gained by buying it, nor if he could have gained more money selling it than keeping it.

3) Consumers cannot gauge how much petrol is costing them for the car air-conditioner or to get to the petrol station with the cheaper petrol.

4) Polluting coal burning power stations don't know how much local residents would be willing to pay to shut it down or modernise it. Nor how long they would be willing to put up with blackouts to achieve that.

5) Consumers considering whether to hang up their worn clothes or put them in the wash + dryer + ironing. What is the cost/benefit analysis.

At what resolution do pricing signals benefit cost/benefit analysis the most. Would a computer that could make calculations about every single activity throughout your day and have an indicator go off regarding your most inefficient activity be useful?

Would it tell me that (buying and) drinking a can of orange softdrink is the most inefficient because a) it costs a fair amount per calorie
b) They are empty calories that could actually reduce your life expectancy.
c) Sugars will stick to and damage your teeth leading to much higher dental bills.
d) contains preservative 211 which is dodgy at the best of times.
e) contains no caffeine so is ineffective at improving concentration.
f) actually dehydrates you to some extent.
g) is energy intensive to create, can, store and refrigerate, compared to alternatives such as coffee or water.

Suffice to say that any improved pricing signals about anything we care about is a net benefit to resource allocation. Whether it is the environmental cost of the ghg's associated with activity or the amount of money an STD call costs, if there is an efficient market to generate a price which reflects all known information and demand, resources WILL be allocated better. Thus money spent on strategic pre-fire season burn-offs in the outback of Australia may be way, way more efficient than investing the same amount in solar panels or planting trees. Being that people will spend the money anyway, pricing signals cut the wastage for everyone's benefit.

The main danger is not that we will be less efficient ignoring/underutilising cheap fossil fuels, but that we will completely ignore cost/benefit analysis and spend the money in a way which makes us feel good, or which buys our vote without even being in line with the goal central to what the money is being spent on. Thus European countries may use the money on pointless subsidies, Americans may give tax breaks on hand-picked industries. Thus, without even giving themselves a chance at meeting self-imposed targets, they are busy regulating in a way which will reduce their growth prospects.

My latest Environmental turn-around

My current global warming/climate change opinion can be summed up as the opposite of what I had summed up previously as my opinion, although in truth there is no facts previously accepted that I no longer hold true nor visa versa.

To sum up: Previously I believed this: Anthropogenic Global Warming is a fact but we shouldn't do anything about it.

Now - I believe that Global Warming is a scientific assertion with little predictive value. However, it has high *proscriptive* value ie. there is value of various kinds in acting against Green House Gases.

The issue to me is that the value of science to predict is that you can adjust what you do to optimise for that prediction. If you know a cyclone is heading your way, you can batten down the hatches - the three to ten day forecasts of cyclones is very valuable. The prediction that my house might be threatened by a storm surge in ten years time is valueless both in a future discounting sense, and in a probability sense.

The idea that there is proscriptive "value" in what climate scientists say comes from the fact that there is benefit in being able to say, "all other things being equal, it is unequivocally better to reduce ghg's!"
This is the same proscriptive value as economists saying "We should reduce trade barriers" among the many correctly proscriptive things experts say in their fields without being able to valuably predict the future (eg. what stocks will go up.)
We do not know how many generations it will take to see the benefits of doing so. It is entirely possible that the next several generations will suffer more by attempting, or even succeeding in a large way to reduce ghg's. It is not a thing that can be predicted. Nor can things that actually make a significant difference - costs associated with actual extreme wheather events. We will be lucky to even have right the most basic easiest question of the next 40 years - will global average temperatures go up steadily, go down steadily, go up and down like a yo-yo or what? Most bets are that it will go up but with several peaks and troughs on the way to confuse things and correctly make a mockery of experts' authority on the matter.

Democracy - a counterexample

Back a few entries where I was discussing democracy, the general assumption is that many people who are able to independently check policy before voting on it will more likely get the right decision than a particular individual or expert could.

The corollary is that the more democracy and the more direct the democracy, the better general decisions will be made.

A counter-example to this corollary is immigration and trade policy. Democracies have a notorious habit of restricting immigration and trade when the economy deteriorates. Even though the concept is that as citizens, we have the right to make bad choices, and pay for them, democracies continue to make the wrong call due to the primacy of perception over facts in the political game. The causal relationship between restricting trade/immigration and a worsening economy is ignored over a very strong human instict to blame externalities over any systemic internal cause.

Thus people continue to promote fallacies such as "reducing immigration helps our unemployment rate" and "restricting imports helps our unemployment rate".

Maybe I am wrong. Maybe democratic countries will leave tariffs and immigration quotas untouched, while autocratic countries will clamp down on trade/immigration during the current downturn. I would be surprised.

A democratised stimulus

The latest payments as part of the stimulus, which as far as I can tell are indiscriminate cash quantities for just about everyone registered with the Govern-mint, have an appeal to me even as it mindbogglingly blows my mind thinking about future taxes required to pay it back eventually.

Essentially, instead of bailing out whatever, or dictating prices for bread, etc. it empowers the individuals acting independently. If they deposit it in the bank, it strengthens that bank's capital in a way that bailouts couldn't. We will have more that we can decide to donate for disaster relief, improve our individual bottom line such that fear of destitution is allayed, without it being enough to feel that we are rich and can be reckless. Of course fools and their moneys are soon parted, which means the money should eventually concentrate in the hands of the less foolish. Eventually it should filter through to profits or income to someone who will then pay tax.

It neither attempts to save those that have lost everything in the crunch, nor does it punish those that profited from payouts from entities requiring bail-outs. WE decide who is deserving of our measured piece of this stimulus.

As a counter-cyclical plan from a government that has been very conservative through a boom, it is almost masterful. To get the impression that this sort of thing can be done at any other time for any other reason, is foolishness.

Immigration Model

The immigration quota system in Australia is like a control valve. I have been violently against import quotas for goods because of the highly impractical nature of doing that and the pointlessness. However with permanent migrants, it is a form of population growth planning which if not completely admirable, does help stability. Opening the valve to double the flow will still be controlled and very desirable.

Increase Refugee and Immigrant quotas!

The 2006/07 migration program has 144,000 regular migrants and 13,000 humanitarian migrants - both rates are at record high levels - much higher than under Labor. Is it wrong to want people with skills who will make good citizens?

This rate might seem high, but Australia has a capacity for it to be much higher(1). Talk of skills and citizenship potential is a pointless diversion. Migrants and refugees select themselves quite well. Refugees from anywhere are often skilled. What is the point of a trained accountant when he becomes dispossessed because of war? Let more refugees in and let our flexible job market (and world best help programs here) sort it out. Labour moves to where it is needed in Australia, and short-term training fills many skills gaps quite nicely. It is pointless to dwell on importing skills of which there is a world-wide shortage. Rely on the flexibility and mobility of labour here to do the best we can with what we have got (and are getting). More important than new entrants showing citizenship skills, is Australia demonstrating that it is an excellent world citizen. Increasing refugee intake is a win-win in this case. Refugees bring a range of (fairly random) skill-sets which are lapped up by the businesses that require that - even if what is required is keen unskilled workers. It is the less keen that are unemployed in Australia. At the same time, on the international stage, we are shown to be model world citizens if we are progressive and generous in our quota of refugees.

(1) It appears 144k is about 10% more than the previous year. 13k refugees is about 20-30% increase. These increases were made quietly and in a bipartisan fashion. No attempt by either party has been made to advertise or attack this gradual policy shift. The public only needs to continue to give "permission" to the governments to increase these quotas, such as not to tempt them to partisanise the issue.

What our energy policy should be

There has been a lot of talk about what our energy policy should include. Running themes are global warming, energy security, privatisation of utilities, subsidies and taxes.

- Global Warming: (*disclaimer: Carbon strategy should be about one countries standing and reputation to achieve things cheaply while others spend heaps with nothing to show for it. Therefore other countries (and global) failure is as much a positive as meeting domestic targets*)A dual strategy of long term goals, GHG metering and measuring in the short term. I see no economic harm in signing treaties that are not binding, such as Kyoto. We should also not fear "exporting" our emissions to third world countries. This will help them develop in a market-friendly way, and they may be better able to adjust to sea rises etc. with less fatalities/burdens. (We should be) Reducing subsidies on carbon intensive energy sources but not be tempted to waste money on new subsidies (on solar/wind). Subsidies are way less efficient than direct investments in the carbon market. When the carbon market becomes more trustworthy, this will be the cheapest way to meet targets. Carbon taxes and reducing fossil fuel subsidies will be the cheapest way to reduce emissions in the long term.

- Energy Security: The absolute highest security must surround all fissile materials handled in Australia. The biggest security risk to the world is nuclear blackmail and mega-terrorism. With such a bright future for nuclear, one must not forget its security-risk implications which dwarf its cost per KW as an associated input cost. As far as energy imports go, ethanol from Brazil is preferable to oil from the middle-east, and subsidies should not be used to favour domestic energy sources, but only to favour lower risk sources if at all.

- Privatisation of Utilities: Retail energy supply should definitely be privatised, but associated infrastructure MUST remain Nationalised (NB. price controls on infrastructure access count as near-nationalised). Privatised energy supply is the only way to account for demand/supply unbalances fairly (if this unfairly punishes the poor, the poor should be singled out and helped. No point rewarding the rich with cheaper power just to marginally help the poor)

Marconomics

Dr. Clam, quite flatteringly suggested future Giant robot leaders would be well versed in "marconomics" and therefore avoid the pitfalls of democracies and Holy Roman empires. Somewhere in between Microeconomics and Macroeconomics, is the space where policy matters. A good starting point would be the privatisation/nationalisation axioms. Good Marconomic policy is choosing policies that are shown to work in our grand global experiment that is the rise of nations. Also to have an experimental mindset about new policies.

"Overshoot" Theory

This is my theory about oil prices principally, but it works equally well for prices for a range of other stuff. My theory is to do with pricing as a tool for matching supply and demand, coupled with profits being used to invest in increased capacity, coupled with the long-term average price being a fairly simple function of the cost of extraction. Thus the long term average price is fairly independent of demand and supply. Thus as it runs out, it is the increased cost of extraction of a depleted resource that will determine higher average prices, rather than the discrepancy between supply and demand. That particular increase in cost doesn't appear to exist in the places which have the most oil left.

Thus the supply curve is still behind the demand curve. Capacity is increasing financed with the profits. The Supply will catch up with demand because the profits have nowhere else useful to go other than increased capacity. The (long) delay is because the profits have to build up, the capacity needs time to ramp up. But the march is unstoppable. When the supply and demand curves intersect, prices will undershoot their long term average.

Privatisation/Nationalisation Axioms

* - Continuous Spectrum. For any "Stuff" there is a continuum of policy of ownership from Government-owned monopoly all the way to unregulated competitive private ownership. Some markers being Highly regulated private monopoly, Government owned but some private subcontracting, majority owned near-monopoly competing with private enterprises, Government services competing in a fairly level field with private. Conveniently economists can come to a consensensus on where on the spectrum a policy puts itself.

* - Independent nation-states able to individually pursue and experiment with policies without being able to impose such policy on other countries or be imposed on from the UN or other supranational entity.

* - The judgement on policy is essentially which country does well in a typical competitive environment in the ideal where the policy concerned is the only point of difference.

* - There is little or no interdependence between different "stuff" being privatised. ie. if A is privatised, and B is privatised, the net effect will be approximately the sum of the effects of each.

* - Price controls on "Stuff" which is nominally privatised has the effect of removing a large chunk of control from private interests and should be considered in the nationalisation end of the spectrum.

Iran

I have had a lot to say about the middle-east with specific reference to Iran in Kraus Rohde's Blog. I may seem to be completely in the camp which believes they truly are "Axis of Evil". In some sense again I agree with Dawk-ins in that it is religion is the problem there. But as Dawkins may believe that it is the essence of the belief in God that is the root problem, I differ in that the problem to me is that the leaders of the church there are the leaders of the country. This elevates the leadership to a "God" status in themselves, at least to their subjects, and to me demonstrates the virtues of separating state powers from religious powers.

But there is one thing that apparently they are leaders in. Some time ago, they decided that citizens could buy and sell kidneys. This has resulted in almost completely eliminating waiting lists and reducing renal-related deaths. This is certainly preferable to the situation highlighted by a Dutch reality show about the agony of waiting for donors.

Where's the figures?

This article states confidently that Australia's emissions grow at twice the rate of other rich countries but was there a link to the data? Does any bloody news service that rants about global warming ever make the data demonstrating latest trends that they mention available? Nope. Where does this place Australia in its notional Kyoto targets that we didn't sign? Until the latest (but not linked) figures we appeared on target. I am quite for the concept of exporting emmissions to exempt developing countries like Indonesia etc. This may invoke a much more rapid transfer of real wealth to the third world, as we tax our Carbon highly, and they can remain exempt gaining a competitive advantage. And the nice thing about competitive advantage is that it isn't a "freebie" like aid, grants, tarriffs or oil resources. They still have to work hard and competitively to take advantage of the advantage.

On the latest posturing of "players" in the "global warming" game, there appears little prospect of (global) emmissions reductions for at least a couple of decades. Plus the moral hazard is just too great. I reckon if (global) emmissions are at 120% of current emmissions by 2030, we will be doing well. The only thing left to guesswork is who everyone is going to blame.

The Budget

I remember now I was going to say something about the Australian Budget. In the two extremes, the superannuation co-contribution policy built up over the last few budgets is nothing short of pure genius. I may need to explain why this is so but it is a little long-winded. On the other extreme, the resumption and expansion of solar cell subsidies is throwing good money in the bin. The amount of carbon reductions per dollar spent is pathetically small + it distorts the green economy such that private enterprise will flourish chasing the subsidy and not the underlying carbon reduction goal.

Unfortunately, the government has not specified how it will achieve desired higher unemployment for those complaining about the worker "shortage". Even the labor party has twisted the problem around by saying it is a "skill" shortage. It is not. There is just not enough of the trained unemployed like we had in the Keating era.

Public vs Private - MILITARY

It is surprising that in all my years, I haven't seen an Economist article debating whether defence forces should be privatised and to what extent. Klaus Rohde touches an aspect in Private wars. In my own experience the first time I really thought about was after reading "Green Mars" (Kim Stanley Robertson) a future history novel in which the security arms of multinational companies became huge private armies. Two questions I ask myself are
- What examples of private armies in the world have been shown to be more effective than the standard sort? and
- Should we presume that privatised armies will allocate resources more efficiently, and therefore be more cost effective, or even decisive in situations where resources are subject to extensive competition?

The standard analogical analysis by the Economist leads one to believe that it is more efficient to list those things which shouldn't be privatised because it is a very short list.

As an answer to my first question, a small army of terrorists (these are almost exclusively privately run but funded by sponsoring Governments) can often "defeat" (ie. send packing to go home) a much larger, modern conventional army. I would expect that private "security" companies may have greater success at sticking out a long protracted conflict, and at a much smaller cost in say Iraq.

As an answer to my second question, there is extensive competition for human resources in a conflict situation. These are allocated much more efficiently in a terrorist organisation than in conventional armies. Western world organisations don't seem to be in the market for humans who will readily give up their life to kill for political reasons, but perhaps private security organisations from those countries are recruiting from the same pool of "brave fanatics".

Vote Labor???

We need a higher unemployment rate. It's not just that I like Kevin Rudd somewhat, and that the economic action is concentrated in water trading (and carbon trading). I am being selfish in this instance because a higher unemployment rate is good for small business owners. Ok, so it's not so good for the country as a whole, nor for the newly unemployed, but quite frankly, that's their problem. Kevin Rudd's IR policies are not laid down in stone, but the noises are in the direction of winding back selected workchoice legislation. What would be typical in Australian election campaigns is that the wind back is "minimalised" by the policy wonks. This is a strategy to maximise votes. Why advertise a complete windback when any windback more than the Liberals are promising will achieve the vote of the interested individual.
The "Labour supply shortfall" is an illusion based on the "lump of labour" fallacy. Low unemployment rates have the tendency to give that illusion. The difficulty in finding employees is real, and scaring (all the other) employers away from hiring is the only realistic avenue to making it easier. The unfair dismissal legislation is the obvious choice for a minimalist windback. This will scare the bejeepers out of most small businesses from employing (or even to dismissing while it is still legal) while my own analysis shows these fears to be somewhat overplayed or irrational. This is why on balance it would play in my individual favour.

Dream time for water trading enthusiast

First they wanted to build pipes to Brisbane, now they are resurrecting the NQ to Darling-Murray system diversion scheme. The latter scheme kind of Bypasses Brisbane a bit but on paper seems to be slightly cheaper. There is also talk of a network of pipes between Queensland's dams. All of this is enough to make the mouth of a water-trading enthusiast.. well... WATER. It is hard to trade water allocations between places that don't have a cheap transference of actual water (ie. a pipe) between them. After years that recycled water has been free, it now is seen as valuable, and therefore worth spending money on. With a water allocation trading structure, infrastructure ideas suddenly find a way to fund themselves. Why would North Queenslanders be happy for their excess water to go to greedy southern areas? For the money of course!

More dumb climate change stuff

Realclimate has become too tedious to follow up on anymore and I'm getting a gist of what it is that bugs me. The climate scientists in general pin a great deal of importance obviously on science and the scientific method (at least that which specifically concerns climate per se). Firstly, I don't believe that the all the answers to important questions lay in the cup of reason, and secondly, I find the scope of the science limiting when they are only dealing with the science of the physical earth rather than the associated political science, economic science, biological feedbacks, game theory etc. For instance if one only argues about whether the science is factual in "an inconvenient truth", it misses the point that everything other than the science is "selling" to a certain point of view and way of thinking. Movies like "an inconvenient truth", "supersize me" and "farenheit 9/11" I do not consider to be documentaries, but "brainwashing" through subliminal messages embedded in otherwise factual footage. I must admit I have not found any sites which take a multi-denominational science analysis of it. "the Economist" comes close, by assuming that the world will act on climate change, whether for good or ill, and is analysing the most cost effective ways of going about it. It, like me, has left aside the question of whether we "should" do anything as a moot question, for the majority seems to have made up their mind, both individually and collectively as countries to act one way or another.

RealClimate:)

False economies:(. Having posted several times in the realclimate forum, I sense a culture, one feature of which is economic naivety. When anyone new posts, many forum contributors feel that you are either for them or against them. For a serious answer to a challenge, it seems that you have to structure it such that you take their "climate world view" as gospel for a starting point.
So far, my challenge to the scientists there to the scientific validity of attributing deaths due to weather events (demonstrably a chaotic system) to changes in climate remains unanswered. Causality is on tenuous ground here, unlike geologic temperature records, extreme weather event statistics are available for an infinitesmally small time period. It is impossible to know whether extreme weather events (drought,floods,hurricanes) are more or less prevalent in previous times of higher CO2 and temperatures. If ocean temperatures were deterministically generating them, they should be more easily forecast year by year using ocean thermometers than they are. It is entirely plausible that high enough temperatures may suppress more extreme events than are caused.