Roderick
Rod joined Economists at Large in 2007 when we reviewed the economic analysis of Melbourne’s Channel Deepening Project. Since then, Rod has been the lead researcher and author of a number of reports published by Economists at Large. He is also a prolific and vitriolic blogger when something arouses his ire. See his full profile under the About Us section of the Ecolarge website.
Posts by Roderick
It may be their story but we need the full story
May 16th
(Note – I wrote this just before going to Lao for several weeks and forgetting to post it. It relates to this Minerals Council ad, which I can’t find a better copy of:
)
Obviously the full page newspaper ads put out by the Minerals Council of Australia (MCA) detailing their members’ tax payments recently tells “their story”. It’s their money paying for the ad, so there is nothing wrong with them telling their story – that the mining industry has paid company tax and royalties at levels five times higher than ten years ago. But there are two sides to every story, so here’s some of the other side – unfortunately I don’t have the means to fund a series of full-page ads.
- This increase in payments comes about as world prices for minerals have reached historic levels and Australian mining output has increased. It does not represent large increases in royalty or tax rates.
- In fact rates of corporate tax faced by the mining industry are lower than for most industries, around 13% (TAI 2011).
- Royalties aren’t really a tax – they’re price we sell our minerals to mining companies. If our minerals are worth more, the miners should pay us more for them. Royalty figures are not related to changes in market value but set by state Government by regulation and the major movement in rates of payments have not kept pace with market prices.
- Mining companies receive large tax breaks, such as fuel rebates, accelerated depreciation and tax deductions on exploration activities and these are not reflected in the picture painted in the ad.
- While the mining boom brings prosperity to some, it is driving up the exchange rate and increasing costs of skilled labour for other industries, such as manufacturing, agriculture and tourism – industries that are far larger employers.
Clearly there is a need to tell both sides of the complex story of the Australian minerals industry and its contribution to our economy. But telling this story is difficult as information regarding mining royalties and taxes is difficult to access, involving different federal and state departments.
As part of the Publish What You Pay (PWYP) coalition, Economists at Large is working with industry, governments and regulators to encourage revenue transparency in the mining industry.
One important step forward in understanding the full story of the mining industry has been taken with the commencement of Australia’s pilot of the Extractive Industries Transparency Initiative (EITI). The EITI is a voluntary global standard for revenue transparency in the extractives sector that requires signatory governments to disclose payments they receive from mining, oil and gas companies and for those companies to publish what they pay so that any discrepancies can be identified.
PWYP members and aboriginal groups are sitting down with the MCA and some of its members as well as Federal and State Government reps as part of a multi-stakeholder group to work out what information should be reported as part of the pilot. We are calling for the pilot to include payments from governments to companies such as concessions and subsidies to also be reported in order to ensure a more accurate picture of the financial flows emerges..
Perhaps if this happens we’ll be a step closer to getting the full story about the contribution of mining makes to our national economy and Australia’s future?
Grand (Prix) Theft Auto – Melbourne Grand Prix economic update
Mar 3rd
Its that time of year again – when Victoria hands over the park and the money to Bernie Ecclestone, Bernie demands more, taxpayers complain and the Vic government bends over. Our review of the Grand Prix economic assessment has been getting some attention, with Rod on Save Albert Park’s 3CR radio show, ABC local radio and a letter in The Age.
Under cost benefit analysis the GP has a negative net present value for Victoria – this hasn’t been contested for years. The fig leaf of economic credibility the GP is given by its supporters is its value in promoting Melbourne to global TV viewers. Tourism Victoria claims this has a value of $35.6 million, referencing a 2009 commissioned report by Comperio Research (whose website has been “under construction” for at least a year). The Comperio report has never been released, so last week we launched Ecolarge’s first Freedom of Information application. We’re looking forward to comparing it with an independent report by F1 industry watchers Formula Money which suggests Melbourne gets a mere $262,000 worth of exposure. Stay tuned!
Tarrawonga coal proposal economic assessment review
Mar 2nd
We recently assisted the Maules Creek Community Council with another submission – this time reviewing the economic appendix of the Tarrawonga Coal extension proposal. The economic assessment fails to make a convincing case for the project. Like assessment of other coal proposals in the region, net present value is overstated due to problems with scope of analysis and inadequate consideration of externalities. The impact analysis inappropriately uses input-output modelling. Another poor report that lends weight to our push for a revised assessment process.
Here’s the review: Ecolarge Feb 2012 Tarrawonga submission FINAL.1
Boggabri Coal – PAC up yer’ economics, ya wont be needin’ none
Feb 21st
We are disappointed to read the NSW Planning Assessment Commission’s (PAC) report on the Boggabri Coal project, giving the open-cut mine the green light. Last year we made several submissions relating to this project on behalf of the Maules Creek Community Council, pointing out the shortcomings of the economic assessment of the mine.
What’s disappointing is that the PAC don’t seem to have understood our submissions. On page 51 of their report they repeat the original economic assessment’s claims of a net present value of $1,362 million, emphasising that this figure includes $234 million of external employment benefits. Not only have these figures have been repudiated by us, but also by the ANU’s Prof Jeff Bennett.
In a report commissioned by neighbouring coal project proponents, Aston Resources, Prof Bennett says:
Where the shareholders are not citizens, their mine benefits are expatriated and should not be included in the BCA. Careful attention should therefore be given to the register of shareholders and adjustments made to the producer surplus benefit calculation. (Bennett, 2011 p3)
But the figure the PAC quote makes no consideration of this requirement – and the Boggabri Coal project is wholly owned by Japanese energy corporation Idemitsu. More recent assessments of coal mines include adjustments to reflect foreign ownership, reducing the claimed benefits by billions.
The PAC clearly haven’t considered the part of Prof Bennett’s report where he emphasises:
[The] inclusion of the employment benefit as a component of the EIA is not recommended. Their inclusion would overstate the extent of proposal benefits. (Bennett, 2011)
If you reduce the NPV of the project by the benefits that flow overseas and the discredited employment externality figure, the value of the project will be reduced to the extent that the uncertainties surrounding the valuation of environmental and health externalities really matter. But the PAC don’t realise this:
While the Commission acknowledges that many costs, particularly the externalities, have not been quantified in this instance, the Commission is largely satisfied that the regional and statewide benefits identified would be significantly greater than the likely costs of mining.
How can they know? How can they be “largely satisfied” that one number that has never been publically calculated can be greater than a series of numbers that have never been quantified?
Furthermore, the PAC seem to give weight to the input-output modelling in the original assessment, despite the ABS and just about everyone else acknowledging that:
While their ease of use makes I–O multipliers a popular tool for economic impact analysis, they are based on limiting assumptions that results in multipliers being a biased estimator of the benefits or costs of a project. (ABS, 2011)
I–O models lack resource constraints and fail to capture significant welfare (consumer and environmental) impacts. They always produce a positive gain to the economy, however disastrous the event. (Abelson, 2011)
Let’s be clear about this: Large, open-cut, foreign-owned coal mines are of uncertain economic value to Australia. Their value is uncertain because economic assessments do not fully and transparently consider the implications of foreign ownership and externalities. Input-output modelling of these mines produces a biased picture of their impact on employment and output.
We agree with parts of the mining industry that mining assessment needs to be changed. The PAC’s lack of understanding of economic issues and hook-line-and-sinker acceptance of the original Boggabri economic assessment shows why economic assessment must be brought out of the darkness of appendices and into the public light.
References:
ABS. (2011). Australian National Accounts: Input-Output Tables – Electronic Publication, Final release 2006-07 tables. Australian Bureau of Statistics. Retrieved from http://www.abs.gov.au/AUSSTATS/abs@.nsf/Previousproducts/5209.0.55.001Main Features4Final release 2006-07 tables?opendocument&tabname=Summary&prodno=5209.0.55.001&issue=Final release 2006-07 tables&num=&view=
Abelson, P. (2011). Evaluating Major Events and Avoiding the Mercantilist Fallacy. Economic Papers: Journal of the Economic Society of Australia, 30(1), 48-59. doi:10.1111/j.1759-3441.2011.00096.x
Bennett, J. (2011). Maules Creek Coal Project Economic Impact Assessment: A review. Research Evaluation. A review commissioned by Aston Resources, proponents of the Maules Creek Coal Project Proposal. Retrieved from https://majorprojects.affinitylive.com/public/d70ab9717ed8449eafa6b1e7d8e4cea5/Appendix G Bennet Peer Review_lowres.pdf
Queensland: lobbyists one day, premier the next
Feb 17th
Two interesting articles in the Australian Financial Review this week show that neither industry nor politicians understand what’s wrong with the mining assessment process. The stories were focussed on Queensland, but they’re relevant nation-wide. Industry reps got their side in on Monday and the AFR covered Anna Bligh’s reply the next day. The positions taken are predictable, but it’s a shame the AFR didn’t dig a little deeper into the story, and you only have to look at the work we did on Queensland coal issues late last year to see there is a lot more to it.
Monday’s article “Delay in Qld mine approvals triples” (paywalled) discusses that the time taken for mining assessment in Queensland has increased substantially. In what could be in a dog-bites-man script, a roll-call of Queensland coal lobbyists and executives lament the state of the mining assessment process, tell us it’s costing us royalties and threaten to go overseas. Yawn. Coal exec and former Labor state treasurer, Keith De Lacy, said that:
Macarthur Coal’s first mine, Coppabella, started operations in 1998, only 15 months after the resource was first identified. A similar project now would take five to seven years to pass the approvals process….
…It now costs $2 million to $3 million to undertake an environmental impact statement (EIS) which was no longer just about the environment but worker and community impacts.
Coal billionaire Clive Palmer suggests in a similar vein:
“The whole environmental system needs to be fixed. The whole government approvals [process] needs to be addressed.”
The next day Anna Bligh defended her government’s record and said that:
The Labor government would always strike a balance between development and the environment.
For once I agree with Clive: the system does need fixing, but not in the way he and Keith might think.
In 1998 when Coppabella was starting, the project had, no doubt, huge local environmental impact, but probably little impact on the wider Queensland economy and population. I imagine the project helped diversify Queensland’s economy, improved our current account deficit and enriched Macarthur’s then largely Australian shareholders. In these circumstances getting environmental and safety approvals are really all that is required to ensure development in the public interest.
But times have changed and the system has changed too. Mining projects now have major effects on the economy, communities and the environment. Skilled labour markets are tight, the exchange rate is at all-time post-float highs and the sheer number of mining projects are creating ever greater impacts on rural and even urban communities. As these impacts have increased, more and more appendices have been added to environmental impact statements, as Mr de Lacy points out. We’ve reviewed several of these for community groups in NSW and Qld and the economic appendix usually comes in at around appendix Q. Appendix-ferking-Q!
While the economic appendix may come late in the EIS, it is important. This is the only chance the public and decision makers have to consider if a mining project is in their best interests. Ten years into a mining boom, a boom with different terms of trade and investment characteristics than any Australian boom before it, such decisions are no longer as easy as they were when Coppabella began. Mr Palmer’s own China First coal project economic assessment showed that that project alone would REDUCE Queensland manufacturing jobs by 2,215 and 192 jobs in agriculture.
I agree with Messrs De Lacy and Palmer, that the place to debate the economic and community impacts of mining projects is not the late appendices of an EIS and that bureaucratic delay is not a good way to manage the effects of the mining boom. Ms Bligh doesn’t seem to understand that assessment is about more than balancing financial “good” with environmental “bad”; that there are many impacts of individual projects and cumulative mining development that governments should be taking seriously.
But the way forward is not a red-tape-cutting and fast-tracking race, as suggested by opposition leader Campbell Newman later in Monday’s article. Instead, we need to move to a system that seriously assesses the economic and social issues rather than tacking them onto the environmental “approvals process”. This system needs to ask if projects are in the public interest. Is the pace of development appropriate? How can we compensate affected parties to ensure all are better off?
These are the most important issues that should be addressed first and with the utmost transparency. At present, they’re debated only in obscure appendices and submissions by consultants of interest groups, far behind issues like the health of local stygofauna. Then again, stygofauna are more interesting and cuter than most economic consultants.
Adam Smith vs Kim Kardashian: Can classical economics explain the modern celebrity?
Feb 8th
(UPDATED – See NW’s response at bottom)
As I sat down to breakfast the other morning I was confronted with a difficult choice of reading material. On the one hand was Adam Smith’s Wealth of Nations, the foundation of classical economics (I’m trying to become the only person I know who’s actually read it) and on the other was Kim [Kardashian’s] SHOCK BABY NEWS in New Weekly (bought by a house guest, I swear).
With some reluctance I opted for the former and opened almost straight to the following passage:
There are some very agreeable and beautiful talents of which the possession commands a certain sort of admiration; but of which the exercise for the sake of gain is considered, whether from reason or prejudice, as a sort of public prostitution. The pecuniary recompense, therefore, of those who exercise them in this manner must be sufficient, not only to pay for the time, labour, and expense of acquiring the talents, but for the discredit which attends the employment of them as the means of subsistence. The exorbitant rewards of players, opera-singers, opera-dancers, etc., are founded upon those two principles; the rarity and beauty of the talents, and the discredit of employing them in this manner. It seems absurd at first sight that we should despise their persons and yet reward their talents with the most profuse liberality. While we do one, however, we must of necessity do the other. Should the public opinion or prejudice ever alter with regard to such occupations, their pecuniary recompense would quickly diminish. More people would apply to them, and the competition would quickly reduce the price of labour. Such talents, though far from being common, are by no means so rare as is imagined. Many people possess them in great perfection, who disdain to make this use of them; and many more are capable of acquiring them if anything could be made honourably by them. (p209 Penguin Classics edition)
This was Smith’s take on entertainers and celebrities! I decided to explore New Weekly to see if classical economics could explain the rise of Kim Kardashian. I read all I could: “Kim’s Baby Bombshell: The desperate reality star wants to adopt a needy child to repair her image” and “Christmas with the Kardashians: The klan come together for their annual Christmas Eve bash”, all in the name of research.
Whether or not Kim has any particular talent, agreeable or beautiful, is difficult to tell from NW. A Google video search of some of the seamier sections of the internet found a few interesting techniques, but as Smith suggested, nothing that many people don’t possess in great perfection. But unlike in the 1770s, and despite these videos and sidebar stories about “Kim’s latest divorce scandal”, the readers of NW don’t seem to consider Kim and other celebs to be public prostitutes. Far from it. In fact, they pander sickeningly to her every move – like giving her 2y.o. nephew Labradors named Lois and Vuitton.
Yet despite ambiguous talent and public prejudice seemingly altered, we learn that Kim earned $600,000 for hosting a party in Las Vegas, bewilderingly named Tao. (Her knowledge of Chinese philosophy and religion is also unclear.) So what could explain this mystery? I revised Smith’s 5 factors explaining the wages of labour:
- The agreeableness or disagreeableness of the employment – doesn’t seem so bad
- The difficulty and expense of learning [the skills] – don’t seem hard
- The constancy or inconstancy of employment – haven’t heard of celeb off-season
- The small or great trust which must be reposed in those who excercise [these skills] – she’s not steering an oil tanker!
- The probability or improbability of success [in the field]
This fifth point does seem a strong one – if you set out to become a celebrity of no particular style, the chances of success are pretty slim. Ironically, Smith listed lawyers among the professions with little chance of success:
Put your son apprentice to a shoemaker, there is little doubt of his learning to make a pair of shoes; but send him to study the law, it is at least twenty to one if ever he makes such proficiency as will enable him to live by the business. (p208)
Whichever flavour of economics you like, Wealth of Nations is an amazing work, thought provoking and powerfully written. 240 years later it is still influential and well worth a read, but I don’t think it can explain Kim Kardashian. For that matter, neither can I.
UPDATE!!! New Weekly confirm our analysis via Twitter:
Believe us, we’ve spent months trying to understand the phenomenon. So far wisdom has proven elusive!
Victorian Carbon Comedy Continues!
Jan 25th
Last year I blogged about some of the Victorian government’s ridiculous claims relating to carbon pricing. I was upset that the Victorian government had made sensational claims without releasing their modelling. I was reminded to look back into this by the The Age today, claiming:
ENERGY Minister Michael O’Brien ignored his own department’s economic modelling on the impact of the federal carbon tax, instead relying on his own calculations to claim Victoria would be hit ”first and hardest”.
It’s a little confusing who said what based on what, so here is my clarification of events….
In July last year, amongst the excitement of the carbon pricing legislation, Minister O’Brien put out this release, claiming that the Feds were about to take “$450 from the pocket of each Victorian” and other exciting claims. We still don’t know what this was based on, as the Department of Primary Industry won’t release the advice it gave to the minister, but claim that it’s figures were “different from those ultimately published” in the minister’s release. The Age has interpreted this to mean that the minister relied on his own calculations and he doesn’t seem to be saying anything different.
In August, the government made other claims based on commissioned modelling from Deloitte Access Economics (DAE). Initially they made their claims without releasing their modelling, prompting my blogpost. The federal response to the state claims was that the modelling, which they hadn’t seen, didn’t include the compensation package. See the now updated version of the Herald Sun story here. I wondered how reasonably smart economists like DAE would have missed the entire compensation package. Soon the crushing pressure of the Economists at Large blog forced the Vic government to release their modelling and all was revealed.
DAE hadn’t missed the compensation, that was just a guess from the feds. The DAE modelling is actually pretty similar to Treasury’s, though it assumes much less international carbon trading, making life more difficult for Australian emitters and increasing the impact of carbon pricing. What happened was that the state government, the Herald Sun and DAE all took a page out of the Institute of Public Affair’s playbook, presenting the difference between two positive growth rates as a negative impact.
The Sun claimed “the tax will result in 23,000 fewer jobs being created in the state in 2015″, though actually if you read the DAE report, the number is 35,000 (piii). Regardless, what they mean to say is that employment in Victoria is forecast to grow strongly from the current levels of around 2,000,000 people employed to either 2,976,000 with carbon pricing or 3,011,000 without carbon pricing, a difference of 1.16%.
It’s the same old spin. What it comes down to is this: If you’ve used similar modelling to Treasury, you’ve got similar conclusions to Treasury. That is that most Australians are better off under a carbon tax and that we still grow strongly under a carbon tax, albeit at a slightly slower rate. I’ve blogged about this here and here.
As for where Minister O’Brian got his figures, I imagine we’ll have to keep reading the papers.
Moanin’ and whalin’ – Why markets aren’t the answer to whale conservation
Jan 19th
An article came out in Nature last week, titled “A market approach to saving the whales”. We’re always interested in whale-economics, having written reports such as Whale Watching Worldwide and What’s a Whale Worth, both commissioned by IFAW.
The Nature article proposes that a quota for whale hunting should be set by the International Whaling Commission (IWC). Shares to this quota would be tradable, creating a market for whales either for hunting or for conservation. Both whaling groups and conservation groups could participate. This market would be:
Economically, ecologically and socially viable for whalers and whales alike. Because conservationists could bid for quotas, whalers could profit from whales even without harvesting the animals. A market would therefore open the door to reducing mortality without needing to battle over whether whaling is honourable or shameful.
Such an elegant, market-based solution should make an environmental economist happy, but I’m not happy for a number of reasons.
Firstly, I think the authors have misunderstood the value of whaling. Whaling (or at least Japanese whaling) isn’t about making a profit. As they point out, it has been subsidised for years, a WWF/WDCS report details how Japanese whaling is “unambiguously loss making”. Other reports have shown that whaling is alheavily subsidised in Norway. If it was up to markets, whaling wouldn’t have existed for some time.
The real value of whaling is a question of political economy. There are politicians, organisations, companies, etc, that gain political value from whaling, or fighting for the right to it, or being seen to fight for it. I can’t see these organisations abiding by an IWC-administered whale quota auction, certainly not if they were bid out of it by conservation organisations. Australia has seen this week how hard it is to enforce rules on whaling groups.
More importantly, I think taking a simplistic approach to a complex problem does a disservice to market-based approaches to natural resource management. Well designed, market-based mechanisms can make a great contribution to conservation. Victoria’s BushBroker is a good example relating to native habitat offset markets and hopefully Australia’s attempts to put a price on carbon will also be successful. But a simplistic “international whale market” type approach, that is bound to fail, leads to public scepticism about market-based approaches.
In particular, it leads to “economists-think-they-can-value-anything-aren’t-they-stupid” lines of thought. This was best shown by British writer George Monbiot, who last year showed his lack of understanding of environmental economics in an article which somehow linked environmental service values with economists trying to value love and kisses. I sent him this email but never got a reply. Maybe I should have left out the bit about “sanctimonious wanking”.
I confess I don’t have a better, faster solution to the whale-wars, though I do feel economics has a role to play. Reports that point out the uneconomic nature of whaling, like this report from WWF-WDCS, and others that point out the value of whale watching tourism, will help inform the public. More likely, demand for whale meat will continue to decrease and whaling will become politically irrelevant as demographics change and younger voters no longer support fat subsidies to hunt whales.
Happy Dutch New Year!
Jan 6th
First day back in the Economists at Large office, so a good time to think about the year gone by and the year ahead. In 2011 the word “fracking”, was added to the Australian vernacular. My prediction is that 2012’s mineral-related new term will be “Dutch Disease”.
Dutch Disease refers to the adverse effects on other industries (especially manufacturing) of having a booming industry (especially minerals). It is named after the “disease” that Dutch manufacturing caught after the discovery and export of large natural gas deposits there in 1959. Due to the sudden increase in gas exports three things occurred:
- The exchange rate appreciated, making other exporting industries like manufacturing less competitive.
- The demand for skilled labour went up, making it more expensive to employ people in manufacturing.
- The influx of money from the gas developments fuelled demand for non-tradable goods and services, further taking labour away from exporting sectors.
I’m basing my bold, linguistic prediction on the work we did looking at coal expansion in Queensland and NSW late last year and a couple of articles in today’s Age, which suggest that some of our non-mining export industries, tourism, education and manufacturing are taking a “battering” and are “in reverse”. The modelling of one Queensland coal mine, the China First project, quantified that mine’s effect on manufacturing and agriculture – declines in output of up to $1.2 billion and $38 million respectively.
The Australian recently published an article based on a Minerals Council submission to a senate inquiry, saying:
MINING companies have attacked the national discourse on the “patchwork” economy, declaring it flawed and confused in presenting the success of the mining industry as coming at the expense of other sectors.
I agree – its high time we replaced this confusing term “patchwork economy” with the more proper term, Dutch Disease.
Before I end this first-day-back procrastination, a less bold prediction and a new year resolution:
- I predict there will be more work for Economists at Large helping community groups assess mining proposals in 2012.
- I resolve to read up on the work of Australian economist, Max Corden, who contributed greatly to the economic literature on Dutch Disease.
China First Coal Project Economic Assessment Reviewed
Dec 20th
Finishing off a big year of looking at large, controversial coal projects, we reviewed the economic assessment of the Galilee/China First project on behalf of the landholders of the Bimblebox Nature Refuge in central Queensland. The assessment is couched in positive terms, but none of its key findings are unambiguous – impacts on labour demand and exchange rates will lead to losses in competing industries, especially manufacturing and agriculture. A claim in the executive summary of the EIS that the project will create 70,000 jobs is an error based on complete misinterpretation of the economic assessment.
The economic assessment contains no cost benefit analysis, leaving decision makers with no idea if it will have a net benefit for Queensland or Australia. Read our review here: Ecolarge Dec 2011 China First submission FINAL.0