Last week, the Minerals Council Australia (MCA) came up with a KPMG report (download here) that suggested that the newly introduced Resource Super-Profit Tax (RSPT) would lead to many future mining projects being non-viable. This is of course a cornerstone in their scare-campaign about this tax and I had a look at the report to see what they did.

A preamble to this is that the timing and source of this report raises an eye-brow. I first presumed that KPMG must have some very fast modelers in order to be able to come up with a whole report on the effects of a new tax on new mines within weeks of the budget announcement of this new tax. It would be a testimony to how fast markets can generate research if there is a quick dollar on offer for it. However, this appears not to be a case of fast modeling. The research was commissioned way in advance of the budget. This is somewhat extra surprising if you reflect on the fact that KPMG also modeled the long-term consequences of the RSPT for the Treasury, as part of the Henry Review! At the same time, in the last months of 2009, they were apparently already modeling extensions of their RSPT models on behest of the Minerals Council Australia. Large sections of the report are hence devoted to explaining the differences which read a little forced to me. You can smell the guilt.

I doubt any formal codes of conduct were broken in terms of conflicts of interest, but I find it a little dubious that the same modelers are able to sell the advise to the Treasury that the RSPT will have no adverse long-term consequences whilst simultaneously selling advise to the MCA that there might be some negative short-run consequences. It is hard to see how you can conscientiously serve two masters at once.

I have the following quick comments to make about the content before turning to the main issue:

– The report nowhere gives you the actual models and codes used for the calculations. I could not find the code books either on the KPMG website, linked to within the report, or on the website of the MCA. It is hence very much a ‘trust me, I know what I am doing’ piece. Since these were the same guys as that did the calculations for the Treasury, they probably did know what they were doing, but it would be nice to have independent access to the data and models, and I gather from the introduction that the MCA could give this information out if it wanted to.

– The report is highly selective in terms of what it chooses to calculate and highlight. It doesn’t tell us what the RSPT would do to the Net Present Values (NPVs) of all possible future projects, but only talks about the NPV of the second quartile of profitable projects. This is of course because the first quartile will go ahead anyway and the third quartile will probably see increases in NPVs due to the cost-sharing in the RSPT. It loads the dice towards the negative to focus on only 25% of all considered future projects.

– The report leaves out the effects of all existing projects, at least in its headline treatment. As Chris Richardson pointed out in his presentation on June 3^rd to the Minerals Council, existing projects will probably start to see more intensive mining activity because of the reduction in output-taxes associated with the RSPT increases the incentives to produce more at existing mines. This is also implicit in the KPMG report, but the finding that in the next 2 years mining activity should increase is not highlighted at all.

– Trying to make the argument that the RSPT leads to high overall taxes by international standards, the report compares effective tax rates under the new regime with existing tax rates elsewhere. The crucial questions are of course which commodities the comparisons are made to. In choosing comparison commodities, the report leaves out oil which is more heavily taxed than the mining industry would be under these changes (but where production and investment in oil exploration haven’t suffered in the slightest despite these high taxes!), but leaves it to a side-note on page 30 to mention this. Since mineral production is becoming more profitable, it is not at all strange to compare the future of mining with the present treatment of oil, since both involve exploration, investment, and production phases.

– The report itself mentions that long-term effects of the RSPT should be positive for mining activity (a similar point is made by Richardson).

– Computed internal rates of return look very healthy for all types of mining under the RSPT, something given little attention to.

– All these highly selective choices already make it clear that the report, and in particular the summary, is indeed not an objective appraisal but a piece of propaganda that was bought for a reason. The newspaper headlines ‘KPMG report shows miners are going to be ok the next 2 years and in the long-run’ clearly is not what the MCA wanted others to get from this report, even though such headlines would be warranted by it.

Then, to the true matters of substance.

Continue reading “Is the KPMG-report on the resource super-profit tax reasonable?”

Anzac day is when Australians and New Zealanders remember their casualties of the first World War and other conflicts. It has become a defining event for the sense of nationhood of the Australians and solemn commemorations are held all over the country. Sharing the same background (some ancestors on the English side of my family fought alongside the Anzacs on the Western front), I find it a great tradition to remember the horrors of that war. It is also an event that is fascinating as a social scientist. Some observations:

1. A lot of the commemorations are state-sponsored via the Department of Veteran affairs. This department is running out of veterans to take care of, but has over the years increased its budget for commemorative services. It is actually quite hard to figure out just how many of the various ‘budget posts’ should be counted as commemorative, but at best guess we’re talking about half a billion dollars and rising. One of the reasons why Anzac day appears to become a bigger and bigger event as time goes by might quite simply be that it is a way for an existing ministry to spend surplus resources on its budget.
2. The ‘message of Anzac day’ has changed within Australia over the decades to suit the morals of the day. I was at the Anzac celebration of the school of my kids, with military commanders giving the assembled quiet and disciplined kids the supposed reasons for why so many young men died in WWI. The story these kids were told was that the Anzacs died ‘for tolerance’, ‘mateship’, ‘standing up to bullies’, and more of those values we hold dear today. The kids were basically told to follow the social norms of current day Australia as a means of honouring the memory of the fallen of previous wars. I don’t have an inherent problem with this, but do note as a social scientist that such statements take liberties with the truth. At the time of WWI, appeals were made on the basis of ‘God, King, and Country’. In the intervening century, God and King have been axed from the moral appeal, but ‘the Country’ is still there. Also, tolerance and anti-bullying were not really a big thing in the 1910s when Australia was still a very ethnically ‘pure’ country and bullying was an institutionalised accepted reality in schools. Anzac day is hence a bit like going to church on a Sunday: the book of yesterday is reinterpreted to prop up the moral code of today.
3. The ability of kids to imagine themselves part of a group that extends over the centuries but that they are not objectively part of is quite remarkable. At a guess, maybe 25% of the kids at the school commemoration will have had actual Australian ancestors involved in WWI, but they all somehow identified with ‘the Australians that went to war’, even if both parents were Chinese or African. It is simply an amazing thing how easily kids adopt stories of cultural continuity as their own even if that story has no real bearing on their actual personal histories. This imaginative capacity is not in any economic model I know, but clearly underlies our sense of identity and hence underlies important economic variables too, such as our willingness to pay taxes for ‘this country’.
4. The ‘message of Anzac day’ is different in different countries. Where I grew up, i.e. Western Europe, a big message of similar commemorations was the pacifist spirit of ‘J’accuse!’, which was the historic quote from Emile Zola that was also the title of a French film in 1919. It means ‘I accuse’ and one of the characters in that film explains it to mean ‘accusing the war… accusing men… accusing universal stupidity’. We were told as kids that WWI was one of history’s most stupid mistakes started by leaders who get themselves into a mess because their pride wouldn’t allow them to back down, and fought by gullible enthousiastic populations who thought of war as something exciting. The message we were told was that people should not blindly follow their leaders, but should think for themselves and question the logic of going into conflicts just because the conflict exists. Interestingly, there is almost none of this pacifist message left in Australia, though perhaps it was there and has simply been lost over the decades. Indeed, the kids at the school I went to for Anzac day were told to be silent, obedient, and to take it on faith that Australian men lost their lives in droves for a good cause. There is hardly any mention in Australian commemorations that it lost the flower of its nation to a pointless mistake on the other side of the world, lead by foreign commanders (such as Winston Churchill) and not even by one of their own. I must say that I find it curious that Australians are not far more critical about the leaders they blindly followed into WWI (as well as later on) but make excuses to exonerate the mistakes of those leaders and allies, even when the populations of those allies themselves are far less forgiving.

I hence like the idea of Anzac day, but miss the pacifist message that WWI was one of the biggest f-ups of the last century and that we should think for ourselves and question the wisdom of following leaders blindly into battle.

Kopenhagen is currently witnessing two comic relief shows. One is regularly seen in the amusement area known as Tivoli, and the other is the climate change conference. The core element of pure humour in the second circus is that the actions of many governments are diametrically opposed to their words, mainly for the benefit of a watching population that wants tough words but no real action. It is like watching one clown after the other pretending to be sad whilst laughing if the rest of the clowns’ backs are turned.

Let us over the fold once more review the core elements of the actions and the words in this debate, and let us start at home.

Continue reading “The Kopenhagen circus.”

Suppose you believed the world was getting warmer due to humanity’s greenhouse gas emissions and you worried about it but you can’t get yourself to believe that the 200-odd countries in the world are ever going to agree to drastically reduce their emissions via some joint scheme, partially because it is too hard to measure many emissions, partially because it might take a world dictatorship to actually enforce such a deal, and partially because some countries are most likely going to be much better off if the world warms up and hence are going to sabotage any joint plan. You would find yourself backed up in this opinion by a lot of auxiliary data on the difficulties of letting go of the growth fetish, ranging from the known miniscule effect that the ETS schemes currently on the table would have even if they were agreed upon, to the factoid that China is building two coal powered stations a week, to the factoid that in nearly every election politicians promise their electorate more economic growth (read: bigger cars, more holidays to far-away places, more gadgets running on energy, etc.), to the factoid that even the European countries who have been calling for reductions in emissions for over 2 decades have themselves been happily ‘burning the midnight oil’.
For people like this, which includes me, geo-engineering seems the only realistic way forward, i.e. some kind of technological fix that can be implemented by a single worried country or a sub-set of countries desperate enough to try unproven technology to cool the planet down. No world dictatorship or elusive coalition needed, hence much less of a free-rider problem. How serious are good scientists thinking about such technological fixes, what are the front runners, and are the front runners indeed things a sub-set of countries could implement?
It turns out that the possibility of geo-engineering is taken much more seriously in the academic community than you’d ever think from reading the newspapers. English scientists in particular seem to have adopted the idea that they should look for technical fixes, just in case the world coalition on CO2 emission reduction doesn’t quite live up to the dreams of its adherents. The Royal Society for instance advocated research in geo-engineering quite openly (see here) making it clear sensible people are thinking about this option seriously. Find over the fold a basic breakdown in basic options and their characteristics.

Continue reading “How far are we in the science of geo-engineering?”

(This is my first post at Core economics, cross-posted with ClubTroppo)

There has been much talk in the last 12 months about the relationship between macro-economic theory and explanations of the current recession. Krugman essentially dismissed most current macro theory as being delusional about the workings of major recessions. His major argument (which goes back at least to Stiglitz in the mid 1990s) is that, within Real Business Cycle theories, major recessions are at their core viewed as mass holidays.

The ‘holiday’ view of recessions essentially arises from the fact that most macro-models take a perfect-market view of the aggregate economy and boil down the complicated machinery of GDP creation into a smooth production function which usually only includes Labour, Human capital, Physical capital, and Technology. As soon as you realise that the factories have not been bombed, that no-one has shot the workers or de-educated them and that people haven’t forgotten how to use the internet, then you are by necessity forced to say that any large reduction in production must have been because workers decided to go on holiday. Of course, you can redefine any of these ‘basic’ production factors to mean ‘the rest’ in which case you can tautologically say changes in it explain everything, but that kind of window dressing is ultimately useless.

In this blog I simply want to pose the question of which additional production factor we would have to think of to augment our models with, such that we get a more palatable story of what happens in major recessions, whilst still remaining within the confines of a production function view of the economy. Let’s look at what must roughly be true of this mystery production factor X:

– It must be easy to destroy X and hard to build up. If it wasn’t true that X was easy to destroy, then one couldn’t have a major reduction in GDP because the other production factors don’t really take a hit during recessions. If it was easy to build up again, then recessions should be over very quickly and one should be able to return the aggregate economy back to the path it was on previously. We know this is not true and that it has, for instance, been argued that the Great Recession of the 1930s really only ended in the Second World War (see here for support and here for a paper with a contrary view).

– X must have something to do with the utilisation of labour. This is because we know that the utilisation of labour quite closely follows the downturn and subsequent upturn, just as in this recession the GDP downturn was very quickly translated into losses of jobs and losses in labour participation. In the latest recession for instance, the US Department of Labor estimated the gross job losses totalled 7.4 million in the first quarter of 2008, whilst the US Department of Labor figures showed a loss of 533 000 jobs in the month following October 2008, the biggest drop since December 1974. For more, see here.

– X must have an element of a negative externality about it. If this weren’t true, then one would be forced to arrive at the absurd conclusion that people knowingly destroyed their own X and accepted the huge loss of income stream associated with it. There is no believable story that would make individuals inflict the kind of income loss that we see in recessions on themselves. Hence, to some degree, the reduction in X must be due to the actions of others and the destruction of the X of others might well be due to our actions. X must therefore be two-sided in that it is not something that would arise in a Robinson Crusoe economy.

– If we take the stylised story of this financial crisis at face value and accept that things like banks can be ‘too big and integrated to be allowed to fail’, then X has to have something to do with the other production factors being ‘integrated’. It must also be relatively easy to make up stories that tie the making or destructing of X to what happens in the financial sector.

– X must make internal sense as a production factor. This means it must cost resources to build up, that investments into it are in some sense visible (even if they are not yet measured by statistical agencies), and it must actually be associated with production. Hence things like ‘trust’ or ‘confidence’ do not qualify because they don’t actually directly involve the production and sale of goods. A lack of trust makes it hard to organise production and sales, but is not itself a production factor. Trust might be involved in the cost of building X, but it doesn’t make sense to call it a direct production factor in itself. In a pure command-and-control economy for instance one, in principle, needs no trust between people at all to have a reasonably high GDP. This of course does not preclude the possibility that the start of a recession is a dramatic change in things like trust which might affect the costs of making or breaking X.

Is it worth saving the production function approach at all, you might ask? Shouldnt we simply give it up as a bad job? I think it is worth saving, because the production function approach is the most obvious way to interpret GDP and growth regressions, and forms a logical basis for expanding the set of economic macro-variables the statistical agencies look for. It is also the easiest way to teach students about the macro-economy because it is nice and compact. What is hence wanted are reasonable candidates for ‘X’ and a model that convinces the profession it forms a palatable answer. We need an X to ‘save’ the production function approach to macro. Any ideas?