Monday, March 7, 2011

Abbott re-writes the laws of economics.

Last week on Twitter, economist Josh Gans linked to John Nash’s (he of A Beautiful Mind) PhD Thesis. The thesis on non-co-operative games has two items in the bibliography, and one of them is a paper by Nash himself. Now that is ground breaking. Abeautifulmindposter

But I’m sorry to say, when it comes to economic theory, Nash is left in the shade by Tony Abbott and his steady right hand man, Andrew Robb. Bugger trying to work out the equilibrium of cooperative gaming, Abbott and Robb have done nothing less than re-invent free-market theory! (And they haven’t needed to cite any lame economists to support it).

It all started on Sunday morning, where Andrew Robb was struggling through an interview with Barrie Cassidy on Insiders, when the topic got on to the Lib’s proposed “direct action” plan to reduce greenhouse emissions:

BARRIE CASSIDY: Wayne Swan quoted your position this morning on television. You said that the most efficient and effective way of managing emissions reduction is through a market mechanism. Is that still your position?

ANDREW ROBB: Well our direct action plan is a market mechanism.

BARRIE CASSIDY: In what way is it?

ANDREW ROBB: In the sense that we will say to different sectors: if you bid - we'll ask farmers to bid, we'll ask those within the large construction industry to bid for assistance if they can reduce the price, if they can reduce certain tonnages of carbon in their sector.

So in other words the lowest, if someone comes in and says, I can reduce 1,000 tonnes of carbon at $7 a tonne, the next one $8 a tonne, we put up a tender if you like and the one that can reduce the carbon at least cost, market based systems, tender system, they will get the assistance.

Now that is a system that has worked very effectively in New South Wales and around the world in different parts of the world on different commodities. It is market based. So there's not just one market based system.

Now I was going to give Robb all the credit for single-handily redefining what is meant by a “market mechanism”, but today Tony Abbott was over in Adelaide and on ABC local radio. He came out with this pearler:

TONY ABBOTT:  Well, what we’re going to ask the market to do is provide us with proposals and we’ll look at them and pick those that we think are most cost effective.

IAN HENSCHKE: How will you pick them? Will you go to Tim Flannery, for example, because he’s got his climate change commission and say, or would you get rid of that if you were in office?

TONY ABBOTT: Well, it’s a bit like Government buys anything. You buy motor cars, you buy pharmaceutical drugs etcetera, you go to the various people who have an interest in providing them and you say give us your best price and your best product and you pick the one that you think is the most cost effective. I mean, that’s what the Government does with the PBS all the time. When I was the health minister we were always going to the market and saying, ‘what’s the best price for particular drugs,’ and it all works reasonably well and I don’t think anyone should think that this is something novel or shocking or anti-market. It’s the kind of thing that Government does all the time and it makes very effective use of the market.

That a a guy who wants to be Finance Minister, and another who wants to be Prime Minister of Australia, (and who holds an Economics Degree) could think that a Government going to tender is the market at work almost defies belief.

If Abbott seriously believes this then he must also think the Government should tender for DVD players and then sell those players to the public all at the same price because that is an effective market solution.

I must re-read my copy of Milton Friedman’s Free to Choose, because I seem to have skipped the chapter where he writes the free market is the Government picking the winner.

A market solution is letting the market work – demand and supply, the invisible hand. It is not the Government engaging in a tender process (and if it is, then all those years in Eastern Europe post-WWII were idyllic periods of capitalism at its finest) 

Here’s the thing; for all the bullshit being sprouted about only 1 person in the House of Reps (Adam Bandt) being in favour of a carbon tax, what 149 are in favour of (not sure about Bob Katter) is that by 2020 emissions will be 5 per cent below 1990 levels. That’s because that is the stated aim of BOTH the ALP and the Liberal Party to achieve this cut.

So we get down to how to do it. You can either side with the government putting a price on carbon and then essentially letting the producers use market forces and the profit motive to achieve the reduction; or you can believe it can be best done by paying the polluters to pollute less.

Here’s Abbott explaining how his Direct Action will work:

TONY ABBOTT: Well, you go to the market and you say look, we are looking to buy cost effective emissions reductions. What market can you offer us? And I think what they’ll offer us is tree planting, which is a good thing. They’ll offer us soil carbon which will actually produce better soils as well as reduce our emissions and they’ll offer us smart technology like for instance, the technology which is started to be employed at some power stations where they use carbon dioxide emissions from the power stations to grow algae and the algae of course is very useful for bio diesel, for fertiliser and so on. So more trees, better soil and smarter technology I think, is the best way to go here.

Yeah Tony, and paying tobacco companies to make less cigarettes would have been the best way to reduce smoking.

Look, I don’t care if you think we shouldn't even bother cutting emissions because it’ll do nothing to global emissions, that’s fine; I don’t mind if you say we shouldn’t cut emissions until every other nation cuts emissions, that’s great. But if you agree – as do BOTH the ALP and the Liberal Party – that we should cut emissions, then all we are left with is the most effective way to do that. And if you agree with Tony Abbott and Andrew Robb’s way then just know you are flying in the face of economic theory and political history.


So Tony Abbott was in Adelaide today. He attended a meeting that got great coverage on the ABC website:


Wow a sympathetic audience. He must really be cutting through with his message.

Who was he speaking to?

The forum showed what a hot-button issue asylum seekers are - at least among the demographic that turned up to the Highway Hotel - mostly retirees who appeared to be strong Coalition supporters.

And Mr Abbott gave them what they wanted to hear.

A forum? Wow, a community forum – and it was full of Coalition supporters – wow the Libs must be just dominating things over in SA.

Err no. What wasn’t stated in the ABC story but was in the one on the Adelaide Now website, was that:

the attendees had been invited by the office of Liberal Senator Simon Birmingham.

Wow. What a stunning achievement for Abbott to find a sympathetic audience among a group of people invited by a Liberal Senator.  Great work ABC….


There is a Newspoll out tomorrow. It’ll be bad for the ALP – my guess is at best 47 per cent on 2PP. That is pretty obvious given today’s Essential Media Poll which has them at that rate.

If there are ALP MPs and advisors who are not expecting to take a hit, then they should take a hike. This is very early days in the Carbon Price match. We’ve just seen the opening gambits, there’s a long way to go. The ALP should take comfort in for once they are taking a hit for some decent policy, and not because of either a gaffe, or not doing something.

The good thing about taking a hit after announcing something that is viewed as a tax is that as time passes and people see the world has not collapsed, and also once the discussion gets into the nitty gritty of the policy then the heat to an extent goes out of it all – and the usual matters like the economy, program delivery etc again take precedence in people’s minds. The problem for the ALP when they dumped the CPRS was there was nothing to get used to except the fact that the ALP had dumped it, and getting used to that fact was never going to help the ALP.

At least no media commentator can now say this ALP Government hasn’t taken a courageous decision. The key is if they can now see it through to the end.



So the Newspoll comes out at 46-54. Disastrous? Well yeah, if the election was in three weeks, but the only election in three weeks is the NSW one (and remember the anti-ALP state feeling in NSW will still be washing over a bit into this)

The ALP’s Primary vote has collapsed to 30% – which is shockingly low, but not that shocking given all the polls since the announcement of the carbon price deal. They lost 6 points – 4 went to the LNP, and 2 went to the Greens. Anyone changing their vote to the Greens after the ALP announce they’re putting a price on carbon is not going to preference the Libs so in effect it’s a 4 point loss. Big yes, and not where you’d want to be, but hey, you take tough decisions you get hit – so make sure you make the decisions for the right policy reasons. I believe they have. They now need to persuade the public as well.

Julia Gillard’s personal rating has taken a huge hit – her satisfaction is down from 50% to 39% and her dissatisfaction rating went up from 39% to 51%; but here’s the thing: after all that slapping, Abbott’s personal rating didn’t go up either. His satisfaction rating went up 1% to 39% , but his dissatisfaction rating went up to 2% to 51%, which means, yep, after the biggest hidings of her time as PM Abbott is now only equal with Gillard – which says something about where he rates… (a few Libs may be thinking, if only there was someone else… – remember leadership changes in opposition occur when the party is in the lead, but the leader is not…)

They also did a who do you prefer Rudd or Gillard question and Rudd won 44 to 37. That is nice for the papers, but in reality is pointless. The parliamentary party will never go back to Rudd, and as has been mentioned before, dumping Gillard means an immediate election, because the independents did a deal with Gillard, not with the ALP. Won’t happen.

Oh and by the way, the election is about 2 1/2 years away….


Mick said...

WOW! Anyone who has ever worked in government knows that a product produced for a government tender is ALWAYS more expensive than the same product purchased retail in the marketplace.

Also ask anyone in defence or other such industry.... Remember your safety gear is provided by the lowest possible tender NOT the most fit for purpose item.

Anonymous said...

How then is placing a price on carbon any different other than it being sneaky interference by the Government - which incidentally we know very little about but can bet the house & farm it will end up hurting the average person more than industry. Both plans are just as daft as the other. Federal government should simply be providing legal framework for businesses & citizens to reduce carbon emissions, not taxing people or throwing it out to tender. Once law is in place, the "free" market will then set its own price.

Gordicans said...

Brilliant post as it describes the coalitions lie; they'll reduce carbon emmisions to 5% of 1990 levels by planting trees and getting farmers to plough more. That's it. We are at the mercy of the Parrot and the Murdoch press unfortunately.

Very good post today on the mechanics of climate change policy in the drum today:
PS apologies grog on my odious comment; i was intemperate

L said...

One can only wonder what Abbott and Robb would be saying about "direct action" if the ALP had come up with it first.

Anonymous said...

To be fair and in no way wanting to support the shenanigans of Abbot and Robb what they (and in particular Robb) are referring to are “market based instruments”. They have been very useful tools in limited circumstances such as finding (due to asymmetric information) and protecting at least cost valuable pockets of native biodiversity on privately owned land (typically farms).

To extend the use of MBIs to deal with global pollution such greenhouse gases is an enormous and mischievous leap (but what’s new?). And Robb would know better – he has a background in agricultural economics

Chris Grealy said...

Abbott mentioned tree planting in passing, but he seems to have forgotten that as soon as that bright idea was announced, the Nats said - NO. No planting trees, trees are bad!
That's the Coalition for you.

Sir Ian Crisp said...

There is nothing courageous about Ms Gillard’s carbon epiphany; the smile on Ms Milne’s face indicates who owns the carbon policy.

As I’ve said before the polls rise and fall on the issues. Today Ms Gillard is as popular as a pig skin wallet in a synagogue. In 6 months from now her approval rating may soar, that is if she doesn’t get a visit from the ALP’s accident department.

Craig said...

Here’s the thing; for all the bullshit being sprouted about only 1 person in the House of Reps (Adam Bandt) being in favour of a carbon tax, what 149 are in favour of (not sure about Bob Katter) is that by 2020 emissions will be 5 per cent below 1990 levels.

And every competent climate scientist on the planet will tell you that a cut of that level is so inadequate as to be laughable. If the Greens can't drag the outcome towards something a bit closer to reality, we're all screwed.

Mark Heydon said...

The media commentators seem to have Robb pegged as competent when it comes to economic matters. I have yet to see any evidence for this and plenty of evidence against it. He seems to have a poor grasp of the subject matter and he combines this with a very poor public speaking ability.
As for Abbott having an economics degree, my first thought was that this must be a joke.

kazann said...

Just wondering if anyone knows if Mr Abbott said during an interview with Channel 7, sometime possibly just after going to the backbenches and between becoming leader, "Why can't we just have a simple carbon tax"? I didn't see the interview but I do remember reading something about that quote.
In regards to the opposition's Direct Action policy, it didn't get a ringing endorsement in the blue book and the media is, as usual, doing it's substandard job in questioning the opposition about how they will find the money from the taxpayer coffers to pay for these "tenders". Will they need to cut services to find this money in the budget. How the tendering system will work. How those companies who do not receive funds after applying for tenders remain competative and the impact that will have on jobs. How will the tenders be divided between the states to make sure no particular state has an unfair advantage. Will all tenders be transparent, to help combat jobs for the boys or ensure the best value for taxpayers. There are so many unasked and unanswered questions and sadly our mainstream press just don't have the cohones to do anything other than sensationalise and spin their employers agendas.

Anonymous said...

For Kazann, I think this is the quote you were looking for
''If you want to put a price on carbon why not just do it with a simple tax? Why not ask motorists to pay more? Why not ask electricity consumers to pay more?'' Tony Abbott

Hillbilly Skeleton said...

Then, to top all the obsequious toadying of Tony off, by the ABC and SBS, the 2 most serial offenders, there came the vision and commentary about the 'Standing Ovation which Mr Abbott received from the crowd'. It couldn't be more blatant in its support of the Coalition if it tried.

silkworm said...

There can be no free market in carbon pollution without a price on carbon, but the market cannot set the price. Only the government can set a price on carbon. This price sets a cap on carbon emissions, and power producers and their surrogates can trade with each other on emissions above or below the cap. The trade of emissions does not in itself lower emissions. It is the price set by the government which lowers emissions.

The problem with a cap and trade system, which is what Julia Gillard is suggesting, is that it is subject to corruption, with governments giving away free permits to the coal producers. Europe's ETS failed because of too many giveaways by the EU. Japan's ETS also failed to reduce emissions.

For any system to reduce emissions, the carbon price must be set high enough to allow solar thermal-storage to compete with coal.

We know that any system that Abbott proposes is going to fail, but what about Gillard? She has been short on details, but hopefully the Greens will hold her to account, and ensure that the government provides an adequate price on carbon, as recommended by experts such as Ross Garnaut.

On the other hand there are signs of resistance to adequate action by Labor. Greg Combet has recently indicated that coal industry jobs must be protected. Now, he is Climate Change Minister. For statements such as this, he should be sacked.

Greg Jericho said...

Craig - that is a good point - the key will be devising a system that is able to be ramped up as the rest of the world get on board. The problem (well one of them) with the CPRS is it locked in behavior for about 30-40 years.

Anonymous said...

Grog, I usually agree with you but think your opening argument here does not stack up. Over the past decade and a bit, I've worked on market-based solutions for a bunch of environmental problems. While I don't disagree that wide and deep markets with few carve-outs offer the best chance of least-cost abatement, it is incorrect to suggest that environmental economics and environmental policy do not consider auctions and tender type schemes to be market-based mechanisms. There are not that many tender or auction based environmental schemes in Australia (like Bush Tender), but they do exist and are often recognised as market schemes. Small markets, perhaps, but still markets.

Arthur Harris said...

Who cares what Abbott or Robb say now next week or in April . By your logic that the real poll is 2.5 years away it doesn't matter anyway . My guess is that with a Labor primary vote of 30 points and further alienation of blue collar Labor in favor of public sector Labor the zeitgeist has changed under Gillard . She will soon be longing for those far away days of a PV in the low 30's. She won't be leader 2013 shell be an ambassador or whatever by then after all Labor could win her seat fielding a tethered goat for the candidate unlike Kevs seat which is obviously seriously marginal right now.

Bobalot said...

This is a spectacular own goal. Labor was starting to do well in the polls. They should have left this to 2013.

At least, we can tell the greens to shut up. Labor will lose government in 2013, and the greens will lose most of their power.

They could have had a scheme with Kevin Rudd, but they stuck to ideological purity rather than pragmatically passing something and incrementally improving it.

Anonymous said...

On the 7.30 Report (sorry 7.30) last night Chris Uhlmann stated that Canada and quite a few states in the US have backed out of their carbon pricing agreements, what's going on?

Anonymous said...

I'd suspect, in the case of canada and some US States, it's because the Government changed.

Craig said...

Greg - and that problem with the CPRS is why the Greens voted against it (along with the ridiculous levels of "compensation" to the big polluters).

If the ALP had been willing to work with the Greens on a genuine solution that was able to be scaled up in the timeframe required (however flawed it may have been to begin with), then they could have gained Green support. Fielding and the Coalition probably would have combined to kill any workable solution in the Senate, but at least there could have been something ready to go as soon as the Green Senators came in.

"5% off 1990 by 2020" doesn't even meet the IPCC's recommendations, and the structure of the IPCC ensures that their findings are systematically biased towards excessive optimism. The IPCC proposals are the absolute bare minimum that might let us get out of this with our arses intact.

On the present trajectory, we've got bugger-all chance of making even the pathetically inadequate 5% cut. I'll be surprised if Australia's carbon output isn't still rising every year at 2020.

Anonymous said...

Is there anyway we can convince all the appalling pollsters to go on permanent leave and stop boring us with their perpetual tripe with loaded and worthless questions.

Anonymous said...

The extraordinary inversion of economics principles reminded me of Major Major's Dad in "Catch-22".

He had a nice little earner going whereby the government paid him for not growing alfalfa. Later he bought more land so he could not grow more alfalfa, and be paid for it.

It was so successful that he bought more land so he could not grow even more alfalfa.

It sounds very much like the Abbott scheme for coping with CO2 pollution.