Post-mortem on the RSPT I: the other hired guns

Economist Paul Frijters critically deconstructs the anti-RSPT report written by MIT Professor Jerry Hausman and funded by BHP Billiton.

With Gillard as our new PM, a compromise has been done on the RSPT, rewarding the big mining companies for their negative campaigning. In this first post-mortem, I have some mopping up to do regarding two as yet undiscussed ‘reports’ brought out on the old RSPT, one by Ernst and Young and one directly brought out by BHP.

Ernst and Young, paid by the Chambers of Minerals and Energy of Western Australia, put out a report in June by two relatively unknown American economists that is completely devoid of any new calculations on the RSPT but nevertheless talks loudly about potential job losses in mining. Its main point is that the RSPT reduces the pay-off on mining projects and that this might mean mining companies put greater priority on other investment projects overseas. Even if this were true, it would merely mean that the projects would be postponed, not cancelled, but it is in any case an empirical question relating to how profitable future projects actually are.

The KPMG reports from May, using data on actual projects obtained from the Mining Council, basically finds that with a properly implemented RSPT, nearly all currently planned Australian mining projects remain too profitable to walk away from.

BHP wielded out a short paper by Professor Jerry Hausman, an econometrician from MIT. Professor Hausman also doesn’t calculate anything new, but nevertheless calls for adjustments to the implementation of the RSPT. Professor Hausman does not take a stand on whether he thinks the RSPT is going to lead to more or less mining activity, but wants to make the RSPT far more complicated by taking account of ‘option values’. Professor Hausman essentially recycles an old 1997 paper of his on the optimal taxation of profits that has been roundly ignored in policy circles.

What is Professor Hausman on about and are there any merits to what he says?
Continue reading “Post-mortem on the RSPT I: the other hired guns”