I was asked to write an opinion piece about Kevin Rudd’s essay in The Monthly on the GFC which, by the way, should stand for Great Fracking Complacency. It is in today’s Age and my opinion and disappointment speaks for itself. (Others seem more willing to carry ideological baggage than I am).

Forget ideology common sense should prevail

The global financial crisis is an opportunity for reform, writes Joshua Gans.

AS AN academic, I am a big fan of frameworks, philosophy and a sense of history. This is our bread and butter. They discipline us in being consistent and testing our assumptions against facts. And when I think of what I want in a leader, it is someone who can demonstrate that they can rise to that level. Our most recent example is Barack Obama, who is one of the greatest expositors and, potentially, implementers of collectivist theory and practical compromise that I have seen.

It was with that hope in mind that I read our Prime Minister’s essay in The Monthly, which was billed as a higher-level piece reflecting on those intellectual values in the context of an unprecedented economic event. And as a person who is generally a supporter of this Government, I knew that reflection was missing and I had hoped it would fill the void between the various actions this Government is taking and an underlying set of values. I am sorry to report that it fell far short of that hope. And it did so for several reasons. The most important of these is the dressing-up of what we are seeing as a flashpoint in the battle of ideologies. Rudd uses the term “neo-liberal” to describe the old and “social democrat” to describe the new. In neither case do we know what it all means. It seems to mean unbridled faith in markets versus a concern for public goods and the role of government. But is this a conflict we are seeing in Australia?

Economically, two things have come home. First, unchecked and unregulated financial markets can suck up energy and spew out distress. Second, that distress can spread from a single economy to economies that have had what appeared to be appropriate checks and balances.

While these challenge blind-faith adherence to markets, they do so not from a new ideology but to convince those denying the theory of market failure that such failure is a fact. They do not tell us that we need to be any more concerned about social equity or the role of government in, say, building infrastructure. There is a debate there but a financial meltdown does not give rise to ideological victory.

Rudd does better in the parts of the essay that eschew ideology and concentrate on past governmental failures. The fact that Howard and Costello rested on the laurels of economic fortune and did nothing to pay premiums on insurance against financial shocks and global recession is where Rudd has stronger claims. But that is a story of blindness to evidence and a lack of rigorous economic thinking, rather than ideological failing. After all, Howard presided over the largest growth in the size of the government and a set of irresponsible handouts at the end of office that burned any buffer for this crisis. If neo-liberalism means something, it surely is not that.

However, it is there that Rudd is somewhat exposed. I can vividly recall this time last year when fellow columnist Christopher Joye and I raised the problems in the mortgage-backed securities market [base ']Äî a warning of what might befall Australia [base ']Äî and the Government dismissing the notion, to quote Rudd, that “systemic stability and integrity represent public goods in their own right” and arguing that the market would bounce back. Fortunately, and admirably, when faced with evidence to the contrary, the Government intervened last year. But it is a policy borne of crisis.

The global financial crisis is an opportunity for reform because it reminds us that catastrophic financial risk is always present and we need to structure our institutions to insure against its worse consequences. A year ago I argued for institutions to do just that. They would be permanent government presences in our credit system and a renewed approach of direct regulation. It is evidence and common sense that drive these things, and not ideology. We need to gather that evidence and move away from faith that breeds complacency. We should write of them no more.

Joshua Gans is an economics professor at Melbourne Business School. Some of his writings on these matters are at economics.com.au.

11:50:40 PM    

Not according to the Australia Institute who today came out with a press release on the insulation package, arguing that with the Carbon Pollution Reduction Scheme, it won't reduce emissions.The Government says the scheme will help households save energy and cut carbon emissions by up to 49 million tonnes by 2020.

But the Australia Institute's executive director Richard Denniss says the Government’s carbon pollution reduction scheme will just reallocate those emissions.

“The way the Emissions Trading Scheme is designed, every kilogram of emissions saved by a household frees up an extra permit for a big polluter,” he said.

This is something John Quiggin noted the other day. And strictly speaking, it is true for a public policy of this kind. So for the 2 tonnes in CO2 saved for each household per year or around 4 million in total, that is an equivalent amount of permits that can be used for something else.

So while that looks like reallocation of permits, it is actually focusing on the wrong thing. What it means is that the demand curve for permits will shift to the left by 4 million units. Depending upon its elasticity, that will translate into some reduction in permit prices. Is that a bad thing? Think about it. The environment is no worse off but the cost to the economy is reduced. And as that is the biggest constraint on stricter emissions targets that solves a policy impediment too.

Does this mean we should value the social return above the energy costs to insulation at the expected carbon price times 4 million per annum? Probably not. But it could be a much larger amount or a smaller amount. Regardless there is some benefit there.

Actually, if the Australia Institute were really wanting to go at this, it is better to think about the fact that the costs of producing the insulation will be borne this side of the ETS. That means that any pollution that production process gives rise to, especially given the extreme concentration of capacity (and hopefully not a big investment in it) at a relatively short period of time, will not be priced and so there will be no incentive to economise on emissions. But then again, this argument gets preciously close to being happy about the recession because it is good for the environment. Hmm, a slippery slope but I guess, to be honest, I can’t rule it out as a theoretical possibility.

11:47:24 PM