After our recent political spill and fill, there is always a need to show that you are a positive change and you can do something. So combined with:
CSIRO has released a series of report today (here) (summary by ABC here) by cherry picking 3 regions, they have identified 6 new dams locations in northern Australia. If they were all developed up to 4,400 GL of water would be available to irrigate 380,000 Ha and generate an additional $5.3 billion per year and require 15,000 new workers. (I'm deliberately ignoring the 710,000 Ha of new lined ponds in coastal areas for now.
As I'm a poor student of economic history, I once again turn around and drag out two of the classic Australian agricultural economic texts by Bruce Davidson:
Perhaps its time to remind people of the other white elephant in the north, the Ord Scheme. Bruce Davidson's Northern Myth is about the Ord. It tells the failure of the process and recent expansion (my review for The Conversation of stage two is here) was and is still not a shining economic success story. The 2017 Australia Institute report found that it had a return of $0.17 for every dollar invested. Or in other words for every dollar invested you loose 83 cents.
So lets say these new 6 dams generated the same return on the Ord. Well its probably going to cost about $31 billion a year to generate the reported $5.3 billion in benefits a year.
Lets not forget we need another 15,000 people to make this work and all plans to reduce the current rural labour shortage (here) have been so successful for backpackers (here) and migrant workers (here) and (here)
I think these white elephants are going to stay on the horizon once the costs are considered.
Background: The Murray-Darling Basin Plan is based on the concept of 'common property' were a set of environmental rights are established and managed in the national good (economic, society & the environment). The environments rights were purchased from farmers either: directly via market mechanisms (i.e. buy-back where rights were traded); or obtained as part of the water saved when on and off-farm irrigation infrastructure was upgraded with the assistance of public funds (i.e. water use efficiency). The costs of this purchase of environmental rights from farmers is estimated at between $10-13 billion in public expenditure.
The story today in the Guardian (here ) where politicians are calling for the farmers to be able to purchase environmental water goes against everything that the Basin Plan stands for and highlights one of my personal fears. In short the environmental water is not an overdraft facility that can be used when farmers failed to account for the risk and uncertainty associated with this land 'of droughts and flooding rains' (Mackellar, 1911). Nor should the environments water be used to provide base or conjunctive flows.
For too long, the environments share has been utilised for private gain at social & environmental cost. This is how we operated before the Basin Plan. The environments water is the environments water. The environment can experience irreversible losses when it fails to receive its share. If farmers want water, they can buy the water from other farmers.
I will provide a word of warning that people still fail to consider here. With all things considered (see the excellent charts by the ABC) this drought is in it infancy when compared to the Millennium Drought. If this drought turns into a long and persistent drought, there may be real welfare gains from buying more water for the environment from the allocation market.
If the environmental manager is willing to pay the most, why would we prevent willing sellers from maximising their income.
On Monday 30 July 2018, Dr Adam Loch and I gave evidence at the Murray-Darling Basin Royal Commission. The transcript from the proceedings can be found here. Both Adam & I were approached about our work in the area (we didn't put in a submission) and subsequently asked to give evidence.
Overall it provided the opportunity to talk about our work and depute points about the Murray-Darling Basin Plan with both the Senior Council (Mr R. Beasley) and The Royal Commissioner (Mr B. Walker). It ended up being an enjoyable experience as both The Royal Commissioner and the Senior Council have sharp minds and very dry wit.
C. Dionisio Pérez-Blanco (google scholar page) at the Universidad de Salamanca (map) has two predoc positions going. A pre-doc position gives young researchers a chance to build their skills before applying for a PhD,
Dioni is a friend of mine and I can highly recommend this opportunity. Salamanca is simply stunning and the town is a University town and a simply beautiful place to live. While working with Dioni will provide you an opportunity to develop the skills and thinking to help your endeavours in future study. Dioni is well connected and excellent at his work.
Details of the position:
We offer 2 positions based in Salamanca (Spain), with a competitive salary (same level as Ministry of Science's predoctoral fellowships FPI/FPU) and a duration of 32 months (20+12).
Successful applicants will work alongside other predoc and postdoc researchers on the development of a multi-model ensemble framework within the Program for the Attraction of Scientific Talent's SWAN Project (https://proyectosayuntamiento.usal.es/index-en.html).
We request a sound quantitative background (economics, engineering) and digital competences. Knowledge of mathematical programming/optimization (e.g. GAMS), macroeconomic (e.g. GEMPACK), hydrologic (e.g. SWAT) and/or statistical computing software (e.g. R) is an asset. Working language will be English.
Candidates can apply online here:
Go to "todas las publicaciones"; in the page that opens, click on the field "título", write "8357", and click on "buscar". Then scroll down and select the job offer that appears. A detailed job description in English is available in the doc "Anexo Conv". You can provide my contact for more information for potential candidates.
Cost to defend the health system from tobacco lobbying countries: Or some better media coverage please
In a prior blog post (here) I mentioned that it had been estimated that $50 million had been spent on protecting Australia's rights to have plain packaging on cigarette packets. Well this story here claims its only $39 million and then it has the usual story about opportunity costs of expenditure. Well a simple little reporting may have widened the rationale for this expenditure.
Tobacco causes millions of dollars in medical costs and lives a year. Lung cancer is estimated to cost over $107 million per year in Australia.
By all means complain that we aren't suing the tobacco companies for using third parties to go after our regulations. But hell even if the costs were $50 million, the future benefits from this expenditure can not be underestimated.
To build a comprehensive economic debate in policy we test hypothesis with real data to: determine trends, explore the reality of theory, and predict how individuals will respond to incentives (positive and regulations). Facts allow for the development of evidence-based policy that ideally should lead to welfare improvement. Data allows for the evaluation of policy decisions.
But evidence based policy is undesirable by those politicians who trust their feelings. The media game of pointing out falsehoods (Fact Check) appears to be running out of steam as it has little to no impact on individuals future statements. However, those same individuals who spruik feelings can influence public expenditure. They also know that without data, rational arguments are easier to defeat.
A critical provider of data to the policy debate is the Australian Bureau of Statistics (ABS). The ABS 's desire to increase the speed of reporting on the CPI reporting from a quarterly basis to a monthly basis sounds like they are doing alright.
However, if you type the words ‘ABS funding Cuts’ into your search engine, you end up with a raft of stories detailing funding cuts, staff layoffs, the delays in upgrading infrastructure, etc. The recent report by the ABS has the following chart
While the funding looks fairly constant, I believe the data is nominal and not real values. So using the RBA Inflation Calculator that $350 million in 2000-01 equates to $544.4 million in 2017 values. Or putting it in another way what the ABS received in 2016-17 is only 64% of their budget in 2000-01.
Budget slashing comes with a cost. Its not just the people, the skills, the infrastructure that helps create costs savings, but it’s the reduction in data. This reduction in data comes with real social costs, it allows feelings and not facts to dominate, reducing economic welfare.
The lack of data was noted in the 2007 Water Act where funding was allocated to collect data. A quick cut from my PhD
The Water Act legislated the roles of:
The MDBA was allowed to commission external parties to fill knowledge gaps. A principal knowledge gap was undertaken by the Commonwealth Scientific and Industrial Research Organisation (CSIRO), who were given the responsibility for determining the MDB’s sustainable water yields, and quantifying the risks climate change posed to the SDL (CSIRO 2008).
While the Basin Plan isn’t perfect, this data (while not perfect, and this is a long debate for a later post) has definitely helped enable the policy debate. When no data existed before, imperfect data provides a starting point for discussion.
However, the decommissioning of processes designed to collect data and the decommission of data sets comes at a cost. This cost is ultimately born by society.
In 2011, 4 Corners released 'A bloody Business' highlighting beef animal welfare in the live-trade industry. The story basically shut down the beef live-trade industry in northern Australia for about 6 months. In 2018, the beef industry was seeking over $600 million in compensation by the forced shut down.
The lack of market resilience (i.e. exports can be shut down by either party) exposed the lack of financial resilience in the northern beef industry. One key option strategy to diversify the beef industry was to encourage the development of abattoirs to increase market opportunities.
Well the Australian Agricultural Company (AACo) has just mothballed its $100 million, 3 year old abattoir, primarily due to supply chain logistics. This should be putting a fear into the northern beef industry.
Regulatory agencies can be described as benevolent social welfare maximisers (Laffont & Tirole 1991) who serve the public interest. However, the effectiveness of regulations is eroded by regulatory capture (regulations are designed in the interest of business and not society) and the failure to enforce regulations.
We can argue that this failure to enforce existing regulations and redesign of regulations away from the public interest has been evident in recent public policy development. The recent cry of 'smaller taxes' for business by our current government was fortunately a recent failure of an international race to the bottom.
There is perhaps nothing worse than watching the recent news story about the deaths of over 2,400 sheep over a shipment of 64,000 (I'm not putting links in), just after you have had a paper published reviewing the regulations concerning the live trade supply chain.
The comment today that the losses were due to extreme weather and crowding, is not a surprise. These are common excuses found here: http://www.agriculture.gov.au/export/controlled-goods/live-animals/livestock/regulatory-framework/compliance-investigations/investigations-mortalities
These rules and regulations have been developed in response to past failures and mounting public pressure on the live trade industry, These regulations allow for both regulation and criminal action based on losses of these levels.
Just like with the recent water thefts, its time to enforce regulations!
Jackson, E.L., Adamson, D., 2018. The live sheep export supply chain: when operational and societal complexities collide. International Journal of Business and Systems Research 12, 181-196.
Laffont, J.-J., Tirole, J., 1991. The Politics of Government Decision-Making: A Theory of Regulatory Capture. The Quarterly Journal of Economics 106, 1089-1127.
Australia in many ways has an enviable position in regards to water reform. Australia has embraced reform and highlighted what can be done and what needs to be done. The Murray-Darling Basin (MDB) has been essentially a natural experiment in water reform. This water reform has taken place in an environment where water supplies are highly volatile. To me the MDB looks like a kidney and it serves the same function. It drains water and salt from our land. As we use more water it gets saltier (yes we have spent a fortune on the salinity interception schemes that have allowed us to over extract water for private gain). As I frequently state, when dealing with the MDB we need to adapt one of the classic Game of Thrones lines to "Drought is coming".
The Murray-Darling Basin Plan (Basin Plan) is an attempt to create long term sustainability for all water users (irrigators, urban areas, other economic activities, and the environment) [Yes we left cultural water off the table]. The idea was to reduce what was then the Current Diversion Limits (CDL) to a new Sustainable Diversion Limit (SDL) with the difference going to an environmental manager to allocate water for the national benefit (its more complicated, but this will suffice). The Basin Plan included a review mechanism to adjust the SDL either up (more water to irrigators) or down (more water to the environment).
As expected by many people, the SDL adjustment in reality could only go one way. The proposed adjustment in the Northern Basin is that the environment needs 70GL less and the Southern Basin needs 605 GL less to meet their environmental goals. At this stage I will not enter the debate on the implementation of the Basin Plan and the impact that has on the environment, or the other 450 GL under debate, as that is well covered in my publications. Nor will I spend the time arguing the pros and cons of the SDL adjustments.
Yesterday the Senate blocked the proposed reductions in the Northern Basin's SDL and in response
both the NSW and VIC Governments have threaten to withdraw from the Basin Plan. This excuse has allowed the NSW government an opportunity to ignore the systematic failure in its compliance on water use (see here) and potential corruption that has been identified in the Mathews and New South Wales Ombudsman scathing reports about the process and governance failures. The official MDBA view on the decision is here.
The Basin Plan has cost well over $13 billion. Most of this money has been spent in NSW and VIC. This money was spent there as they are the ones using the most water (i.e. CDL). The political threat to the COAG process has come at a time when the Federal Government and Opposition are too busily trying to point score against each other and neither side are showing leadership on this issue.
The Basin Plan was an attempt to resolve the water over-allocation problem in the MDB. The implementation of the Basin Plan has not been what I hoped and may as I have argued in many papers potentially left irrigators, society and the environment more exposed to adverse climate events like drought. This is unfortunate, but there is still things to be salvaged from the Basin Plan that should not be lost. The threat of the states abandoning the Basin Plan needs to be dealt, and quickly.
The experimentation on the acceptance of a universal base income (UBI) in Switzerland was comprehensively defeated back in June 2016 with a referendum where 77% opposed the plan, with only 23% backing it.
The plan proposed that everyone would receive a monthly income of 2,500 Swiss francs (£1,755; $2,555) for adults and also SFr625 for each child. The UBI is designed to replace existing welfare payments with an income that covers more than the essential living costs, allowing people to choose not to work. There are a range of examples and arguments for an against the approach (here, here)
Part of the UBI discussion focuses around the premise that robots/automation will soon be taking our jobs (South Park pun intended). In the absence of job opportunities and the debates centred around inequality, the UBI is proposed as a way of restructuring society.
John Quiggin is currently working on a book chapter on this issue and notes that the minimum salary needed to encourage people to stay in the work force must be well above the UBI. There also need to be a job guarantee, I'll leave this out of this discussion.
I have spent a long time working on the unintended consequences of policy, so while I like the idea of the UBI, thought needs to focus on its design to prevent incentives creating unintended consequences. I'm not covering the things associated with paying criminals, etc that are out there already.
Ignoring the other arguments associated with the satisfaction and social interaction people gain from employment (so potentially the wage may not need to be that much greater than the UBI), most of the arguments pertaining to UBI are general focused around a single closed economy. I find this a bit limiting but we can start there.
First using the 2015-16 household expenditure from the ABS (here) 62% of expenditure is allocated to housing, food, transportation of capital. I'm concerned that the UBI may create a wealth transfer to the owners of capital (i.e. people who own rental properties). With a constrained housing market, those supplying rental accommodation are likely to increase the price of renting. Inflation then places upward pressure on the UBI.
Second, with wages needing to be above the UBI, the minimum wage rises rapidly. Yes fundamentally the impact of increased minimum wages on jobs is zero (I found this reference by reading Brad DeLong's site). However, this is a special case. Australian is a relatively open economy and the signing of Free Trade Agreements (another point of argument one day) has allowed firms to move manufacturing offshore, and a higher wage may speed up this process. In this situation, Australian imports increase, basic macro tells us that the exchange rate should fall, a lower exchange rate and reliance on imports subsequently reduces the purchasing power of the individual. In this case inflationary pressure is applied to the UBI but there is no guarantee that any capital will flow back to create jobs in Australia.
Third, the combination of existing and future FTA's and future FTA's could change labour mobility. How the policy deals with that will be interesting. It may help fill the future gaps that will emerge in the health services industry as the population ages.
Alternatively, increases in income may have positive impacts on consumption. In this case the desire to support the local industry may counter some of the above problems. While extra time may be dedicated to healthier lifestyle choices improving welfare.
However, perhaps worryingly is the recent US tax reform and the immediate response by governments around the world. Basically its a race to the bottom for corporate tax in a desire to relocate headquarters. The limits of this approach can be found in 'Last Week Tonight's' segment on economic development incentives Presently I can't see the UBI getting a lot of traction with any governments as they actively remove their revenue stream (No trickle down economics does not work). The notion of future job opportunities in the face of a changing work environment will continue to pose a issue, good thing the Governments continues to fund education to allow the future generation expand their opportunities (oh that's right).