Blog
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.
Enough about renewable vs non-renewable. Let’s talk opportunity cost.
Feb 10th
I wrote this post after reading a short tweet by Ben Cubby, Environment Editor at the Sydney Morning Herald, who tweeted earlier today:
Should burning woodchips be classed as
#renewable energy? Oakeshott and Windsor think maybe it should. bit.ly/zwipL4#climate
I read this while walking to the office and pondered the question of whether or not wood chips should be classified as renewable. My first reaction was that this is surely a question scientists can answer for us, perhaps using life cycle analysis or some other comprehensive study. Then I began to think about the nature of what it means to be renewable. Given a long enough time frame, everything in the Universe will be re-used in some way eventually. Everything is technically renewable. Of course, bringing things back to a more human scale makes things more complicated. The word renewable ends up meaning good, while non-renewable means bad. I think this way of looking at things is too narrow to be useful. Here’s where economics comes in.
Any first year economics student will be familiar with the concept of ‘opportunity cost’. It is essentially what you forgo to undertake a particular activity. A common example used by lecturers is the “you could be working and earning $17.50 per hour, or you could be in my lecture”. I personally thought that the majority of my lectures and lecturers where worth a lot more than $17.50. As for others, perhaps I should have been stacking shelves at Woolworths instead. Anyway, back to my point.
To assess whether or not something has merit environmentally, I think it’s better to think in terms of opportunity cost than renewable/non-renewable. In the case of woodchips, this means thinking about what we forego by chipping and burning the chips in question. If the woodchips are from native forest logging, the it’s my opinion that the loss of habitat and associated biodiversity impacts probably outweigh the benefits of burning. If the woodchips come from waste products such as green or construction waste then the opportunity cost of burning these for energy is much lower and so it makes sense. Debates about the renewability of otherwise of a resource can miss the point entirely.
Based on this, the lowest opportunity cost form of power is probably solar, preferably floating in orbit around the earth. Anyway, that’s a topic for a scientist, not an economist.
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.
Chew on this, Lynas – Daiwa sends correspondant to assess risks to LAMP project
Jan 19th
Back in September ’11 we posted about a mining-related project in Malaysia being proposed by the Australian rare-earths miner, Lynas Corporation Ltd. The point we tried to make in that post were that there is very little economic analysis of the impacts of the Lynas project and that the reasons for granting Lynas generous tax concessions didn’t seem to make a lot of economic sense. We’ve been following events since then and there continues to be a very well organised community (and political) effort to oppose the Lynas Advanced Materials Plant (LAMP).
So it was with great interest that we read a report today by Daiwa Capital Markets titled: “Will Lynas’ LAMP ever shine?”. The short report is the joint effort of Amy Chew and and David Brennan at Daiwa. Amy visited Malaysia to investigate the community concerns and political risk surrounding the project. David did some analysis of what the risks might mean to Lynas’ share price here in Australia. Their conclusions:
- Local opposition to Lynas’ rare earth processing plant is vociferous and mounting
- Regardless of a 30 January decision by the AELB on whether to commission the plant, protests look set to continue
- If the plant doesn’t go ahead, Daiwa value Lynas at A$0.68 per share, if it does go ahead, they value it at $1.63 per share.
We applaud Daiwa for sending somebody to Malaysia to investigate the issue and the very fact that they have attests to the seriousness of the risks due to opposition to this project. This issue is now highly politicised in Malaysia and whatever the outcome, this will surely make for an excellent case study in corporate social responsibility and emerging market risk. In addition, we would hope that it will also prompt the Malaysian government to reassess its process for project approval and tax exemption status to include more transparent economic cost-benefit analysis and social impact assessments.
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.
Jiggery Pokery – The economics of gambling in Australia and proposed pokies reforms
Jan 16th
The ongoing debate over mandatory pre-commitment on pokies is big on hype, but at the heart of it all is the Productivity Commission’s (PC) inquiry into gambling. The report is an in-depth look at the economics of the gambling industry in Australia, and provides an insight into the sizeable benefits and costs of the industry. Despite these insights, the findings of the inquiry may often fall by the wayside when the debate switches to a war of politics, and arguments turn towards sentiment and emotion more than research and data. As such, I believe it would be useful to review some of the key findings of the inquiry to understand what has motivated this latest push towards pokies reform.
The key policy issue regarding gambling is a question of balance between preserving the enjoyment that many people receive from gambling against the considerable harms that gambling poses. While this is no simple task, the PC has also chosen to focus on policy options that provide Pareto improvements, that is:
- Policy measures that can reduce the cost of gambling without reducing the benefit, or
- Policy measures that can increase the benefits of gambling without increasing the cost
The benefits and costs of gambling
The PC estimated the tax and consumer benefits of gambling to be in the range between $12.1 and $15.8 billion AUD. This includes the tax revenue that state governments receive, social contributions and the consumer surplus that non-problem gamblers receive from gambling. One finding of note is the dispelling of the myth that reduction in gambling revenue would hurt the ability of clubs to provide sporting and community support, with the PC finding that clubs with more reliance on income from pokies actually provided less community and social support. Similarly, the PC points out that while the gambling industry may employ a large number of individuals, the net employment that the industry creates is relatively small, given the skills of many of these workers would be heavily demanded in other industries.
Estimates of the cost gambling were between $4.7 billion and $8.4 billion AUD. This was primarily composed of social and financial costs of problem gamblers and their families and friends, and is actually considered a conservative estimate as the PC has not considered possible costs arising for non-problem gamblers.
The result is an estimated net benefit from the gambling industry between $3.7 to $11.1 billion AUD. This re-iterates the idea that banning gambling outright would not be an optimal decision (and would actually result in society being worse off), something that the PC duly notes. However, one other caveat to this result is that the PC states this net benefit could be much larger if effective harm minimisation measures were put in place; they estimate that a sustained 10% reduction in the costs associated with problem gambling would generate benefits to society in the range of $450 million AUD (in 08-09 prices), as well as producing long term benefits in the billions.
Introducing mandatory pre-commitments
The PC makes a number of recommendations, but the two recommendations which received the most fanfare were the introduction of full mandatory pre-commitment to all pokies machines and limiting the maximum bet on all machines to $1, both by 2016. It cites pre-commitment as a “strong, practicable and ultimately cost-efficient option for harm minimisation” and would allow for other government regulations to be relaxed or removed. Moreover, the introduction of mandatory pre-commitment would have little impact on recreational gamblers, and so would not reduce the sizeable consumer surplus that these consumers enjoy.
Despite this, there are still many opponents to the introduction of mandatory pre-commitment. Clubs Australia has been quick to (repeatedly) claim (bringing in high-profile personalities such as former AFL Star David Schwarz and Youth Off The Streets Founder, Father Chris Riley) that mandatory pre-commitment will not deter problem gamblers from seeking loopholes or workarounds to beat the limits, which is likely to be true. However, if anything this means that effective and thorough design must go into creating a better system rather than rejecting this idea until “something better” comes up or relying on the status quo of education and counselling which conveniently do not seem to harm club gaming revenues.
The full report discusses gambling in much greater depth, as well as offering a number of additional recommendations. Nonetheless, it is clear that much of the solid economic research in the report is getting drowned out by the noise of rent-seeking clubs. Given that we are talking about the possibility of reducing harm to tens of thousands of individuals, it would be a real shame if the lobbyists won this particular battle.
For those interested in reading the full report, it is available at the link below.
References
Productivity Commission (2009), Gambling: Productivity Commission Inquiry Report No. 50, February 26 2010, Last accessed on 22 December 2011 at http://www.pc.gov.au/projects/inquiry/gambling-2009/report
Coorey, Phillip (2011), “Pokies clubs play an ace in battle to prevent changes”, The Sydney Morning Herald, December 7 2011, Last accessed on 22 December 2011 at http://www.watoday.com.au/national/pokie-clubs-play-an-ace-in-battle-to-prevent-changes-20111206-1oha5.html
Craven, Jessica (2011), “David Schawrz says mandatory pre-commitment won’t help gamblers”,Herald Sun, December 5 2011, Last accessed on 22 December 2011 at http://www.heraldsun.com.au/news/more-news/david-schwarz-says-mandatory-pre-commitment-wont-help-gamblers/story-fn7x8me2-1226213824606
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.
Live cattle exports and Indonesian beef
Nov 8th
A few months ago I wrote a blog post about some of the misconceptions surrounding the ban on live cattle exports. My main point was that neither the supportors of the ban nor its opposition seemed to have any understanding of the welfare implications of live exports to Indonesia. My general point was that live cattle exports resulted in cheaper beef prices, particularly in urban centres. The benefits of this would flow to urban, middle class consumers, while domestic beef producers would be worse off. Livestock producers in developing countries like Indonesia tend to be smallholder farmers and typically very poor.
I made some references to international literature, but have now come across some Indonesia-specific work. In 2002 the Australian Centre for International Agricultural Research (ACIAR) published Improving Indonesia’s Beef Industry, which reinforces my points. It found that the Indonesian beef industry should develop in a way that:
- Improves the incomes of smallholder producers.
- Encourages a sustainable and efficient domestic production capacity.
- Satisfies the growing demands of Indonesia’s consumers for beef in ways that improve the overall performance of the economy
Clearly these points suggest a move away from live exports and towards strengthening local, smallholder production which “accounts for over 80% of beef production…[but is] seriously constrained by low [productivity].” Smallholder incomes are constrained by “very high trader margin in facilitating the flow of [domestic] cattle from farm through to processing and final consumption”. As I suspected, most live export cattle is consumed by urban, middle class supermarket shoppers:
The structure of beef sales differs between outlets. Wet markets still dominate sales of beef, but supermarkets sell most imported beef and beef from imported cattle.
The ACIAR report is no anti-live exports publication. It considers that:
Imported feeder cattle are essential for the Indonesian beef industry to provide it with enough flexibility to rapidly expand production.
The report doesn’t discuss the welfare trade offs of live exports and smallholder production, an area I’d like to research more. It does, however, provide some sophistication – admittedly 10 years old – in the discussion about the Aus-Indo beef trade. Such sophistication has been sorely lacking in media analysis this year.