Climate, meet economics. Economics, meet climate.

Who could fault government grants to foster research into clean energy technology?

http://www.phillyburbs.com/news/news_details/article/92/2009/december/04/feds-give-clean-coal-projects-979m.html

Me actually.

Subsidies and grants of this nature do indeed create an environment of corporate innovation and discovery. Unfortunately, companies tend to use the money to discover increasingly innovative ways to harvest yet more money from taxpayers' pockets.

I met a climate scientist the other day...

...the conversation went sometihng like this...

Scientist: Look at my marvellous study. Do you see that squiggly line? It shows that temperatures 1000 years ago were not very high compared with today because tree rings show smaller amounts of growth then. The earth is much hotter now than it has ever been.

Me: Fascinating. What do those same tree rings show about recent history, say the last 50 years?

Scientist: Well, they show very little growth over the last 50 years.

Me: You mean just like the periods in the past where you claim they indicate low temperatures.

Scientist: Well, yes

Me: So, doesn't that imply that the tree rings indicate that temperatues over the last 50 years aren't higer than 1000 years ago?

Scientist: No, because I take them off the chart and you don't see them, so we can just ignore that.

Me: But isn't that, sort of, cheating?

Scientist: Of course not. It is a "trick" - that is a technical scientific phrase meaning a special adjustment.

Me: But doesn't this hide a decline in the tree rings that would indicate temperatures in the last 50 years aren't particularly high compared with 1000 years ago?

Scientist: It is very technical, but there is something in the data that has caused the decline which isn't related to temperature, so it makes sense to leave it out - hide it if you will. We call call this problem the "divergence problem"

Me: What is this "something" that is effecting the data over the last 50 years? What is the cause of this "divergence problem"?

Scientist: We don't know.

Me: Might this same "something", that you don't know about have affected tree rings in the past?

Scientist: We don't know.

Me: Doesn't this make your analysis all a bit, what is the technical term, ropey?

Scientist: Not at all, we can employ this trick. You see if we hide it then you can't see the decline.

Me: Didn't we cover this...?

Yet another vignette showing climate scientists at play.

What a lovely bunch they are. After reading his work and his communications with others, one can but admire a man like Roger Pielke Snr. He is someone who has been contributing to the science of climate in the way that Darwin intended. On merit rather than on the extent and influence of his academic coterie. Even as a layman observer of the climate science community, his looks like a lonely position.

In a recent blog piece Roger retraces a distasteful (but increasingly familiar) looking episode of climate science in action. In that post by Roger is one email that made my jaw hit the ground. I reproduce it in part below with the bits that caused my mandibular dislocation:

Subject: Chapter 6: an alternative? [email not for the faint hearted?]
Resent-From: CCSPTempTrendAuthors.NCDC@noaa.gov
Date: Wed, 10 Aug 2005 13:22:32 +0100
From: Thorne, Peter

To: CCSPTempTrendAuthors.NCDC@noaa.gov

Dear all,

Health warning: This mail does not hold its punches as the youngest member of this panel I suppose that I have the most to lose through Chapter 6 in its current form in terms of future research career. I also suspect that I am the most likely to run around making a pain in the proverbial of myself. My apologies for that! I’ve tried over the past few weeks to help others in the Chapter 6 redrafting, but I really think that the structure we had just will not work. Therefore I took the liberty of spending 3 hours this morning developing an alternative, which I attach. I will caveat that David has looked at this, but the rationale and most of the text is my responsibility, not his (in other words the buck stops here).

[SNIP]

What does this say to you? I know that it is not in context, blah blah blah. But let's just cut to the chase. A young and (by all indications) ambitious researcher felt that a scientific report might not be good for his career advancement and so personally redrafted it as a replacement for the combined work of the team.

Just as background, this was a CCSP report. CCSP stand for Climate Change Science Program. They provide the scientific basis for the US, a bit like the IPCC role at an international level. So this was a biggish deal and should have had an objective and inclusive approach to the broad base of scientific views, including those represented by (NB not held by) Roger Pielke. Could it really be true that some young buck thought such an approach might stimey his scaling of the greasy pole of success and so, with or without the support of others, arranged to hijack proceedings? Hard to believe and yet hard to rationalise otherwise the self stated conflict of interest and resulting actions detailed in that email.

And it is the Climate Change preachers who constantly parrot on about how sceptics are compromised.

"proving" Dangerous Anthropogenic Cimate Change

I entangled myself in "discussion" with Richard Tol over on irisheconomy.ie. I say discussion, but Richard seems quick to jump to use of epithets.

The issue I (quite politely) took Richard up on was a statement he made about the efficacy of the hypothesis of Anthropogenic Climate Change. Note I have remove the "Dangerous", because I don't believe that the issue had been extended to that (additionally hoary) question.

Richard's contention was that because, using the DACC hypothesis, we could mathematically model past temperature changes we had all the "proof" we need.

Here is where I introduce some terminology and two important concepts:

NECESSARY condition:
This is something that must be true (i.e. is necessary) in order to support a particular hypothesis. As in test of the statement "Serena Williams won the Ladies Singles title at Wimbledon in 1999". If I wanted to test the truth of that statement, I could start with a necessary test - is Serena Williams a woman? Answer: yes (cut the giggling up the back there Thompson!). What does that information prove? It proves that Serena William could have won the Ladies Singles title. Another NECESSARY condition would be was she entered that year? But again, this only proves that she could have won, not did.

So what do we need to move from a helpful could to more useful did. For that we need a SUFFICIENT condition. If this condition holds then that is all we need to prove the claim. So, did Serena Williams collect the All England Club Ladies Singles trophy in 1999? If she did, then we can say she did win.

So what use are NECESSARY and SUFFICIENT conditions? In mathematics, statistics or everyday logic a NECESSARY condition is something you can use to falsify an hypothesis. You can rule things out. A very useful tool and vital in science. A SUFFICIENT condition is used to move an hypothesis in the territory of a theory - not only can we not rule it out as an explanation, but we must rule it in. Exclusively.

Back to Richard and the hypothesis of DACC. Richard presented a claim that modelling past climate is SUFFICIENT to test the hypothesis. The problem is that this is only a NECESSARY condition. I have posted on this blog before about modelling hypotheses and the long and short is that only by making correct predictions (correctly modelling future and otherwise unknowable events) with our model can we meet NECESSARY conditions.

Don't believe me? Here is someone who isn't an "anonymous lizard" who agrees with me.

So there you have it and it deserves repeating, and repeating and repeating. DACC will not be "proven" until they start accurately modelling future climatic outcomes. And the track record on that isn't good to date.

I'm just wild about Harrrryyy....

One of the hacked/leaked/lost files from the Climate Research Unit is one called HARRY_READ_ME.txt

It opens with this line:

READ ME for Harry's work on the CRU TS2.1/3.0 datasets, 2006-2009!

Note the exclamation mark (!).

Even for non programmers like me it provides some mild chuckle moments as you scan down the code and comments as the programmer codes their building exasperation into posterity via comment lines, like this:

As a glutton for punishment I then looked at the tmin/tmax db format. Looks like two extra fields (i6,i7) with mvcs of 999999 and 8888888 respectively. However *sigh* inspection reveals the following two possibilities:

It makes you wonder who Harry is, as I came to pity him so. Maybe this is him?

http://www.cru.uea.ac.uk/cru/people/#Research%20Staff

More on the IPCC

What a treasure trove of intrigue can be found in the leaked CRU emails. Here is another one that is an eye opener for anyone of a trusting nature. First the background. We all know the Intergovernmental Panel for Climate Change is an august body that is the authority on "the science". Here is how the IPCC describes itself:

The IPCC is a scientific body. It reviews and assesses the most recent scientific, technical and socio-economic information produced worldwide relevant to the understanding of climate change. It does not conduct any research nor does it monitor climate related data or parameters. Thousands of scientists from all over the world contribute to the work of the IPCC on a voluntary basis. Review is an essential part of the IPCC process, to ensure an objective and complete assessment of current information. Differing viewpoints existing within the scientific community are reflected in the IPCC reports.

My bold; I just wanted to draw your attention to the complete and objective nature of the work of the IPCC as well as its welcoming attitude to different views.

OK, that's enough of the bedtime stories (they all lived happily ever after). The R rated (X rated for any North American readers) can be gleaned from this email from Phil Jones of the CRU:

Quote:

From: Phil Jones p.jones@xxxxxxxxx.xxx To: "Michael E. Mann" mann@xxxxxxxxx.xxx Subject: HIGHLY CONFIDENTIAL Date: Thu Jul 8 16:30:16 2004 Mike, Only have it in the pdf form. FYI ONLY - don't pass on. Relevant paras are the last2 in section 4 on p13. As I said it is worded carefully due to Adrian knowing Eugeniafor years. He knows the're wrong, but he succumbed to her almost pleading with himto tone it down as it might affect her proposals in the future ! I didn't say any of this, so be careful how you use it - if at all. Keep quiet alsothat you have the pdf. The attachment is a very good paper - I've been pushing Adrian over the last weeksto get it submitted to JGR or J. Climate. The main results are great for CRU and alsofor ERA-40. The basic message is clear - you have to put enough surface and sondeobs into a model to produce Reanalyses. The jumps when the data input change standout so clearly. NCEP does many odd things also around sea ice and over snow and ice. The other paper by MM is just garbage - as you knew. De Freitas again. Pielke is alsolosing all credibility as well by replying to the mad Finn as well - frequently as I seeit. I can't see either of these papers being in the next IPCC report. Kevin and I will keep them out somehow - even if we have to redefine what the peer-review literature is ! Cheers Phil Mike, For your interest, there is an ECMWF ERA-40 Report coming out soon, whichshows that Kalnay and Cai are wrong. It isn't that strongly worded as the first authoris a personal friend of Eugenia. The result is rather hidden in the middle of the report.It isn't peer review, but a slimmed down version will go to a journal. KC are wrongbecausethe difference between NCEP and real surface temps (CRU) over eastern N. America doesn'thappen with ERA-40. ERA-40 assimilates surface temps (which NCEP didn't) and doingthis makes the agreement with CRU better. Also ERA-40's trends in the lower atmosphereare all physically consistent where NCEP's are not - over eastern US.I can send if you want, but it won't be out as a report for a couple of months. Cheers Phil Prof. Phil Jones Climatic Research Unit Telephone +44 (0) 1603 592090 School of Environmental Sciences Fax +44 (0) 1603 507784 University of East Anglia Norwich Email p.jones@xxxxxxxxx.xxx NR4 7TJ UK

HIGHLY CONFIDENTIAL indeed!

Phil Jones and Kevin Trenberth?

That's right, the "Coordinating Lead Authors". The guys who "coordinate" the "complete and objective assessment of the different views from the scientific community"


Pardon my French, but what a load of bollocks.

Did someone say "conspiracy"?

Here is a nice little vignette of some of the dubious nonsense revealed in these email. All previous comments about the authenticity of this material still holds.

Background:

In the IPCC AR4 (Assessment Report 4) there was a desire to keep the famous "Hockey Stick" in place. If not the discreditted Mann stick, then a substitute that could be used to say something like "it's hotter than when Jesus played fullback for Jerusalem"

Now in order to do this, IPCC rules stated that any research to be included in AR4 would HAVE to be published no later than July 2006. As it turned out a paper by Wahl and Amman appeared to scape in by it teeth, phew.

But after a little time over which people could read all the publications, it appeared that there was something strange about this savious W&M paper. Hidden in the citation was an absolutely crucial one to a paper (also by W&M) with a publication date AFTER July 2006. In fact, the citation was even worse, it was to a paper "under review" after July 2006 (and was in fact subsequently rejected for publication!!).

• How did they do that. Were W&M time travellers?
• Had someone at the IPCC bent the rule for them because they wanted the specific "flavour" of findings (jolly Hockey Sticks) their paper had?
• Had someone at the Journals in question bent rules to allow citations to unpublished papers?

It was all very murky. Even after a year, as shown in this post:

http://www.climateaudit.org/?p=3110

Well, up to now, it was not possible to do anything but look at the circumstantial evidence that there had been some manipulation of peer review processes and IPCC rules (supposed to be so stringent and credible).

Until now. Look at this email:

Alleged CRU Emails - Searchable

Quote:

-----Original Message----- From: Phil Jones [mailto.jones@xxxxxxxxx.xxx] Sent: Wednesday, September 12, 2007 11:30 AM To: Wahl, Eugene R; Caspar Ammann Subject: Wahl/Ammann Gene/Caspar, Good to see these two out. Wahl/Ammann doesn't appear to be in CC's online first, but comes up if you search. You likely know that McIntyre will check this one to make sure it hasn't changed since the IPCC close-off date July 2006! Hard copies of the WG1 report from CUP have arrived here today. Ammann/Wahl - try and change the Received date! Don't give those skeptics something to amuse themselves with. Cheers Phil

Do I have to spell out the conspiracy here?

The highlighted bit showed they knew they need to change the dates after the fact (don't forget, this email is dated 2007 talking about the final changes to a paper supposed to have been published in by July 12006.

Phil Jones was a Coordinating Lead Author for the relevant part of the IPCC report. He was helping this scam as this email clearly shows.

http://www.ipcc.ch/pdf/press-ar4/wg1/wg1authors.pdf

And everyone holds up the IPCC Report as some form of high science.

A note on scepticism

In the Blogosphere of climate debate a major earthquake has hit. Supposed data and email communication has been allegedly obtained by fair means or foul from the Climate Research Unit (attached to to University of East Anglia). The material was brought to the interwebbie via this blog:

http://noconsensus.wordpress.com/

Now, of course, given the nature of the contents, which variously paint a picture of a distinct cabal of "insiders" looking to promote their own research and conclusions of that research by any means at their disposal, this has been dynamite.

I am not going to comment on the contents, but rather about the blog response to date and what this rapidly evolving story says about scepticism in general and scepticism as it specifically relates to the hypothesis of Dangerous Anthropogenic Climate Change.

One of the pitfalls of human behaviour is "confirmation bias". It happens everywhere, especially in financial markets. It is the natural human tendency to put more weight on new information that supports your own views or prior conclusions.

This is one of my personal criticisms of the many proponents of the DCC hypothesis. Even some nominally well credentialled academics in the field appear to do it, hence creating an environment where these proponents and the resulting media and lobby organisations exaggerate their case.

This new information (the validity of which we can not yet establish and may never will), offers the potential for confirmation bias to reveal itself in those who have to date been sceptical of the main claims of the DCC lobby (including the IPCC). The email communications in particular appear to confirm what most sceptics have suspected and appeared to be indirectly implied by the belligerent behaviour of many notable academics in the field and the incestuous relationships between key academics, and government and policy organisations (including the UN's IPCC).

As someone who (possibly mistakenly) prides himself on being a genuine sceptic in the best sense, I have to try and recognise in myself that same instinctive reaction that "this proves exactly what I thought" and restrain it. Instead, the issues are; what more do I need to know before I can properly assimilate this new "information" into my thinking?

The first and primary requirement is the provenance and accuracy of any of this information I would use. If there is an email communication that clearly shows some form of academic bias, collusion or worse fraud, I need to be convinced first and foremost that it is genuine before I consider what it might mean.

I believe everyone else should do the same or further damage the case of true scepticism even more than I believe proponents of the DCC hypothesis have already done to date.

A mind map of Ireland's economic travels

I have been playing with mind maps as a way to convey the connections and interactions between ideas and event etc. Here is one that I have been working on to describe the last 15 years of Irish macroeconomic history.

Please be forgiving; this is an experimental work in progress.

Where now central banks

Funny how we often see commonalities across disciplines. A famously clever man once said about the field of physics:

"There is nothing new to be discovered in physics now, All that remains is more and more precise measurement."

Lord Kelvin

Similar sentiment was probably held with regards to monetary economics until very recently. We just seemed to know it all, more or less, and the fruits of that understanding appeared to be ripening on the vine with low and stable inflation and interest rates.

Prior to the recent difficulties economists were probably guilty of complacency. Central banks seemed to have found their ideal role as independent guardians of price stability, with sole discretion over the use of monetary policy. That is entirely understandable. It was and still is believed that (1) "money is neutral", that is it has no long term influence on real incomes and that (2) inflation creates net costs and (3) inflation is purely a monetary phenomenon. Those three beliefs led to the 1990s craze for independent central banks tasked with meeting specific inflation targets.

An associated development was the division of roles, traditionally both held by a single central bank, where responsibility for regulation of the financial system went to a new and separate organisation.

And things appeared to be moving swimmingly. Monetary policy from Britain to Australia, via the US and Euroland was tweaked up and down by the various independent price guardians as demands appeared to dictate. Inflation was subdued and relatively stable everywhere that this was practiced. Sure, there was debate about rapidly rising asset prices (asset price inflation) and the need for monetary policy to consider this in an inflation targeting remit. But that argument didn't gain traction and was really at the periphery while goods and services inflation remained low and apparently under control.

The rest of course is history as the financial world neared complete implosion and we entered into a deleveraging process that might lead to anemic growth in a number of countries for a few years yet. So what will come out of this in the form of debate and possible reform of regulation and monetary structures and policy approaches? Here is a a few things that I think will come to the fore:

• Rethink on the separation of financial regulation and monetary policy roles. Many now better understand the potential for the two to be closely intertwined. A purist might say that things worked as they should; the world levered itself up on debt and tried to inflate itself via excess demand for goods and services (as well as assets), but central banks held tight on the money lever and inflation never took hold and eventually led to the end of the party before inflation could take hold. However, a more circumspect view might be that given the deflation that has now occurred in many countries policy wasn't optimal - was there a way to understand that non-monetary developments were a threat to price stability (i.e. a potential for a collapse and deflation) and that the regulatory environment might have had some role to play in mitigation? That is the debate to be had. Should financial regulation and monetary policy be closely considered in such a way that only a single organisation should be tasked with overseeing both in a coordinated fashion?
• Appropriateness of monetary targets. Up until today, despite some differing views, it is accepted in the mainstream that monetary policy should be used as an instrument to meet an inflation target defined as goods and services price inflation. Some have questioned in the past whether asset price inflation should have some weight in monetary policy decisions directly (as opposed to indirectly), but that argument has not held sway. Maybe that question needs to be opened afresh and rethought.
• International interdependence. With a floating exchange rate and an independent monetary authority (central bank) it is thought that an economy is insulated from monetary shocks from abroad. It doesn't matter if Ben Bernanke goes off on a bender and inflates the US economy because other countries can follow their own inflation targets and allow nominal exchange rates to adjust for changing relative prices. This adjustment occurs through money and foreign exchange markets. But have we seen, via highly integrated and increasingly large asset markets and importantly increasingly large balance sheets on financial intermediaries that straddle national regulatory boundaries, a potential short circuit to that independence? It is something that is worth understanding better.

It will be worth watching, but monetary economics should be one area of research that returns to focus over the immediate future, after suffering recently from being "pretty much solved".

A bottled water frenzy

The Grauniad appears to have saved the day again by quickly alerting us hoi polloi to the imminent danger/disaster/apocalypse into which we were plummetting. This final warning on the complete depletion of Adelaide's water supply seems to have done the trick:

http://geckkosworld.blogspot.com/2009/09/rip-quality-journalism.html

You will recall that last month Adelaide had but one week's supply of water left before emergency bottled supplies would need to be shipped in. It seems that the local population has been extra busy, by pouring the emergency bottled supplies directly into the drinking water reservoirs, which have increased from 90% of capacity to 93% capacity.

Apocalypse averted. Keep up the good work guys.

NAMA. "It's about getting liquidity flowing"

I was in Cork yesterday attending the Chamber of Commerce conference there. One phrase that was oft repeated was that we needed to "get the liquidity flowing from banks again". That doesn't really make a lot of sense from an economics point of view. Liquidity in the strict sense of the banking system related to the workings of the money market; being that market for short-term lending (under 30 days by general convention). This is dominated by banks that use it balance their immediate needs for funds - say to fund withdrawals of deposits.

But I think what everyone meant was that they didn't think that banks were lending large enough sum to enough companies - my general impression was that this included any company that wanted/needed it.

A couple of observations on that line of thinking that seems to be too prevalent and, in my opinion, likely to meet a sudden stop against the cold hard facade of reality.

Firstly and briefly, should banks be lending? No. Banks should be managing risk. If a loan, line of credit or overdraft does not make commercial sense from a risk and expected return basis, it should not lend.

Secondly, what is likely to happen when the Irish banks wend their way to the ECB and exchange their NAMA bonds for some freshly minted Euros? As some commentators have already indicated, the likely outcome is that they will pay down some of their liabilities. They will shrink their balance sheets.

Why would they do this? Simple. Because their balance sheets are too large. Don't tell me you have forgotten already how we came to be in this mess? Let me remind you. We (the collective people of Ireland) borrowed until we had put into hock virtually all our future income earning potential. And then we borrowed some more. That, dear readers was the expansion of the balance sheets of Irish banks.

And flowing directly from that, we have our present economic obstacle. Too much debt - synonymously bank balance sheet are too large.

And flowing from that is the unavoidable economic correction that needs to take place. A contraction in the balance sheets of Irish banks.

The following things will cause this to happen:

• Writing off bad debt/defaulting on some liabilities starting from the top and moving down the capital structure (e.g. shareholders' equity, unsecured bond holders etc.).
• Use any excess liquid assets (thank you NAMA/ECB) to retire short-term laibilities

The following things would not allow this to happen:

• Increased growth in lending

And are you curious about how big the balance sheets of Irish financial institutions became of recent years? Here is a handy comparison. The UK is considered one of the more leveraged countries in the world. Total assets held against residents (i.e. outstanding lending to UK residents) reached 1.9 times annual GNP at the end of 2008. The equivalent for Ireland was around 2.5 times annual GNP. For the US the ratio is about 0.6.

People really need to be told. There is too much debt, which means banks will be taking every opportunity to shrink their balance sheets. That means no free money.

Need credit? State owned enterprises to the rescue

An interesting announcement yesterday. Bord Gais, the state owned gas monopoly, have announced that they are moving into the market to provide a wide range of consumer energy related services. Not only will they supply you with gas, but they will sell you all manner of insulation, heating and associated services.

All very good, thinking at the margin and employing their core comparative advantage (direct access to households) to their strategic corporate gain. Let's leave aside concern about market power that one might have (they might easily throw other suppliers out of the market due to their size, brought by their state enshrined monopoly in gas supply, or their very favourable access to capital markets as a state owned monopoly utility). No, what I am thinking about is the way they are going to allow customers to pay for such big-ticket capital expenditures.

It is the intention of the Bord Gais that customers will be able to "pay via their gas bill". That is just another way of saying that Bord Gais will extend credit to allow customers to undertake expenditure. No need to borrow from a bank (that has quite rightly tightened up its lending criteria). Bord Gais will, in the words of their CEO John Mullins at the Cork Chamber of Commerce yesterday, let customers have it "on the never-never".

There seems to be a general clamour for banks to open up the taps to all comers. The Irish government is happy to play along. I find this a curious development in such a context. With credit comes euphoria, if only for a short time until the never-never arrives for payment.

How are the recapitilisation plans going boys?

One thing that gets pushed off the front pages during the NAMA debate is the fundamental question of how and by how much Irish banks will recapitalise themselves.

So far we know:

• The banks were insolvent, regardless of fiction that appeared in company accounts
• The Banks are unloading 77bn of assets on their balance sheet in exchange for 54bn in sovereign paper (and then on to cash via the ECB Refi window).

So how big is the capital hole, how is it going to be filled and by whom? Plans really should be afoot now, but I have not seen so much as a rumour appearing in the press.

Associated loans - what the hell are they?

Yes, NAMA again.

This question has been keeping me awake at night. The Draft Business Plan for NAMA identifies 36% of loans to be bought as being "associated loans", without any clear explanation of what that might mean. The Department of Finance is only marginally more enlightening with this:

Associated loans will be those loans which are not in the land and development category but which are held by individuals/companies that also have land and development exposures or the borrower may be a systemic risk to the financial system. Associated loans will take account of cross collateralisation and other associated loan exposures of borrowers.

which is pretty much what one would have guessed, but gets us little closer to the purpose for which these funds were advanced and to whom.

I have been searching for more detail, but have found nothing. And in the absence of facts the imagination runs riot. Are they unsecured? Do they represent advances to insolvent creditors (like rolled up interest for example)? I don't know, but would sure like to know.

I think we, as taxpayers, have over 27 billion good reasons why we should be told a bit more about this.

NAMA - how much write-down?

One for the greatest unknowns about the NAMA escapade is the proportion of loans that will be recovered by this newly conceived Naughty Bank (increasingly naughty by the day). Under the Plan, the loans to be acquired will have a nominal value of €77bn and will be purchased by John Q Taxpayer for €54bn. The Draft Business Plan for NAMA assumes that €62bn of the €77bn will be reapid - an 80% recovery rate. 62 is greater than 54, brilliant, we're laughin'. Let's just ignore for the moment the matter of interest on this €77bn pile of debt, which is a tidy sum itself, which may or may not be paid.

Now, you may have read in the press that NAMA is going to make us taxpayers a tidy €5.5bn in profits. That of course depends on the ability to recover from the various borrowers 80% of what they borrowed. If we get only 70% paid back, that is €7.7bn lost and there goes the profits and up go the taxes. Not much wriggle room in those assumptions, I think you will agree. I wonder what type of robust analysis has been done to arrive at the 80% recovery assumption. How certain can we be that it will be achieved. Well, here it is:

"Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made."

Looks impressive, doesn't it? We have found out via Karl Whelan at irisheconomy.ie that this "one UK Bank" was in fact Barclays. So let's have a little gander at Barclay's accounts.

In the five years between 1990 and 1994 inclusive Barclays recorded realised losses on write-offs of £7.0 bn. At the start of 1990 Barclays had a total loan book of £77.7bn. Now what I am about to do is a massive fudge, as it assumes that all the write downs occurred on loans on the balance sheet at the start of 1990. But I am writing this on the hoof and in the spirit of NAMA I don't think it appropriate to get to pernickety about precision.

Barclays realised default rate was 7/77.7 = 10% near enough for any Naughty Bank.

Excellent. This seem quite robust then. But, just for fun, let's dig a fraction deeper. Let's look at the type of loans NAMA is taking on. This is taken from the Draft Business Plan again and is a broad breakdown by borrower:



















Doesn't look great to me. Lent to people to develop property assets, to buy land to develop property assets and to buy things associated with buying land and developing property assets.

I think we can safely say that there is a comprehensive diversification of exposure right across the property development/construction sector of the Irish economy. It is the contention of the government that this Naughty Bank will recover all but 20% of lending from this portfolio of loans.


Now let's look what Barclays did in 1990:


















Yes. Do you see that pale blue slice around 6 o'clock. That is the amount that Barclay's accounts for 1990 identify as being to customers in "property and construction". The rest is spread all over the place (what were these guys thinking?????).

Do you want to see where the UK economy generated its income around 1990? Here is a breakdown of Gross Value Added by sector. Not directly comparable, but the best I could do on my budget (45 minute lunch break):
















Note that I have taken out the public sector as best I could. Also note, that I have built in a novel "Individual" sector; this doesn't exist of course, but I need some device to compare with Barclays lending. I could have allocated that lending across the Barclays book - and maybe should have, but the affect on what this data is telling us should be the same.

Now look at those two compared. The proportion of Barclays loan book exposed to any sector minus the size of that sector in the economy by income).

It looks like this:

















You can see the affect of my fudge. It assumes that Barclays exposure to individuals was neutral on a sectoral basis (i.e. it wasn't all to people in finance for example). You can also see the overweight and underweight position of Barclays' loan book. A maximum exposure of around 10% to broad sector. Underweight manufacturing and finance and overweight services and property and construction.

That isn't too bad I would suggest, when you compare with NAMA, which is 100% overweight property and construction.

Now, this data isn't particularly robust. But it is certainly more detailed than that revealed in the NAMA draft Business Plan, which is a type of finger in the air exercise. But I think it tends to suggest that if Barclays managed to confine their losses to 10% of their loan book with a good amount of diversification, then NAMA will have one hell of a time trying to confine its losses to 20%. Even 30% seems a bit racy to me.

You can make up you own mind. Then cross your fingers. That is what the architects of this seem to be doing.

Water charges - some political slight of hand

I blogged about water charges a little while back. I don't think they make sense in the form of water metering in Ireland.

Now those Red-Green (does that make purple?) political advocates for around 2% of the electorate are proposing a flat rate household water charge. All my points about water as a scarce resource in Ireland still apply. Little reason to set the marginal price of water above zero.

What I want to highlight here is this bit:

"Charging for water in every house was agreed by the government parties, at the Greens' behest, as a way to reduce waste and fund local government."

Do these people really think the electorate are that stupid that they think they are presently getting water for "free"?

This is ludicrous beyond belief. The overwhelming majority of houses in Ireland have mains water. This makes a flat rate household charge a type of "poll tax" - although levied per household rather than per head.

It is also coming on top of the tax paid that presently funds water catchment, storage, distribution, treatment and maintenance. This is more tax on top of the tax that currently goes towards paying for our mains water.

Is a little bit of honesty too much to ask. Even if you are purple?

Negative equity - what to do?

Negative equity is back in the headlines in Ireland again over the last couple of days. Here is a paper from the ESRI on this issue released this week.

Negative equity is when people pay too much to capitalise their future housing costs. This can be because:

• They over estimate the likely rate of increase in real rents, or
• Under-estimate the discount rate over the long term.

In Ireland, it is likely to be a function of both. People were expecting low interest rates over a long time that would, by the miracle of compound interest, make future rental payments very high in today's money. This is the fallacy of the "affordability" approach to property. Low short-term interest rates certainly make it easy to finance a variable mortgage, but to work out the price of a house you need to consider what interest rates will be in 5, 10, 15, 20, 25 and sometimes 30 to 40 years time.

When you get a decision like this wrong, by that I mean the decision to buy a very long series of cash flows (when you buy a house you a buying a lifetime of market rents), the ramifications are significant. Small changes in the actual increase in real rentals, or changes in expected interest rates will cause a large change in the capital value - i.e. the price of the house. A bond trader knows this. House buyers should also.

So Ireland now finds itself in a position where too large a proportion of the population got caught "on the wrong side of the trade". And they have a capital loss. What are the potential implications for the economy?

• The loss in wealth. Those people with no debt against their homes have suffered little. They were perfectly hedged - they had enough capital to finance their future rental costs and they still do. Those with mortgages have suffered because they were geared. They never had sufficient capital to pay for their future rental costs, they borrowed to do that and paid to much.
• The loss in mobility. This occurs geographically and demographically. Growing families need more room. Unemployed people need to go to where the work is. And people get together and separate.
• Lack of well functioning property market. People in negative equity can not sell their house for less than the mortgage. It is a legal impossibility unless the lender agrees to it. And no lender is willing to agree to it on this scale (size of potential shortfalls and number of borrowers affected). That means there is a significant proportion of the housing stock that has a an artificial price floor. The market wants to adjust to lower prices (there is excess supply), but sellers are not free to drop prices as far as they need to clear the market.

Those are the big ones. So what can be done? About the first, nothing in aggregate. You could transfer wealth from those not affected (the sensible/prudent) to those who have suffered loss. The loss hasn't vanished, it has just been redistributed. Would that be sensible? I would be most concerned about the clear message that sends to people making decisions in the future - don't worry about the risk. That is the "moral hazard" problem. So I think it a bad idea. People made a decision, a bad financial one and lost. It happens all the time. They can work hard and rebuild. It will be better for everyone in the long run if they do that.

What about the second. This is tricky. The benefits of mobility are not explicit. It is no doubt important that people are able to change their circumstances, but how important is not really quantifiable. Qualitatively, I would say it is pretty important.

The final point is perhaps the most transparently important one. Ireland is in for a long period of real house price deflation if nominal prices have a floor under them due to the extent and size of the negative equity problem. Like he removal of a band aid, getting you pain in one short burst is usually the best. So it is with prices. Just ask the Japanese.

Thinking about those points on balance, my default position is typically that public policy has a limited role. People need to save their way back to solvency.

However, I am ready to be convinced that there is a social and economic benefit to finding a way to facilitate a much faster resolution to the negative equity problem, due to the mobility and price adjustment issues, but would object to a policy based on wealth transfer.

On that basis I would strictly oppose some of the following, which are all a variation on a theme of wealth transfer:

• Debt forgiveness
• Government subsidies
• Any public funded sale and lease-back type agreements

So what would I propose? I would suggest a government financed unsecured loan, to the value of the negative equity. This would have the following characteristics:

• It would be a charge against the owner logged against their tax number by the Revenue.
• Recovery would come in the form of a levy on all income (say 5%, but could be more) through the tax system, until the debt is repaid.
• Interest would be charged at long term fixed rate at a modest premium to the current 30 year government bond yield.
• Repayment in full could be made at any time without penalty.
• An optional charge on the estate at death could also be include to strengthen the recovery.

That type of arrangement would keep the proper incentives in place:

• You would still want to get the best price possible for your house.
• You would not be getting a bail out, helping to mitigate against moral hazard problems.
• It would allow more efficient adjustment in the property market, by allowing losses to be crystallised by sellers at price buyers are willing to pay.
• Tax payers would not be bailing anyone out, although more public debt is required in the short to medium-term.
• With the correct interest rate, this could self financing - noting that some people will never repay all of their debt in their lifetime.

Green tax proposals

The Green party are using their NAMA brought political leverage to play in Ireland by extracting some concessions out of the senior coalition partners. Natural, being Green, these are of a particularly Red hue.

One change was lifting the ceiling on PRSI, which was in fact raised not long ago. Since I ran some analysis of Irish marginal and average effective tax rate recently, I thought I would update the charts. I have had to assume that lifting the PRSI ceiling will not come with a revision of the "health levy" that applies to high incomes. Otherwise it wouldn't make much sense to do it in the first place. By removing the ceiling on PRSI, you would increase the marginal rate of tax by 4% on all income over €75,000 approximately. The implications are illustrated in the chart below.

Ireland already has very high marginal rates of tax applying very low down the income scale. This will reinforce that general approach. A 54% marginal rate of tax would apply before you hit twice the median earnings. and 56% would be incurred further up the income scale. This is an implicit statement from the Greens (and to be fair most of the Irish political industry) about who they believe have the primary rights over the market value of your time and expertise.

It isn't you. It's them.



















The average rates that would take effect are illustrated below. Ireland's tax structure is already punitively progressive in my opinion. This is another notch on the ratchet of a couple of percent. Given that the massive open pit mine that is Ireland's public finances, I anticipate that we will be seeing more of this type of shift; a couple of percent here, a couple of percent there.

What I hate about climate "debate"

In a word. Strawmen. Making up a statement or claim by an opponent so you can knock it down. One which is a popular target for "debunking" is a strawman that a climate scientist (specialising in oceanography) and contributor to the IPCC, Mojib Latif, was now forecasting a decade or two of falling average global temperatures. The usual suspects and others are no all abuzz pointing out how Mojib Latif has not made any such predictions.

Let's get one thing straight first. There appears to be different reporting of Latif's comments in the media and across the interwebby. Some indeed suggesting that he made a "prediction" of cooling. I am happy enough that he did not make a prediction, but made a hypothetical along the lines; "if there was a cooling, and I don't think that is impossible".

A journalist called George Will is a particular target of this manufactured argument. He is thoroughly disliked by a large proportion of the Dangerous Climate Change lobby because he takes an opposing view. How distasteful. But regardless of whether Mojib was making prediction of or not, this was never the issue. Look at what George will wrote. Verbatim:

The Times says "a short-term trend gives ammunition to skeptics of climate change." Actually, what makes skeptics skeptical is the accumulating evidence that theories predicting catastrophe from man-made climate change are impervious to evidence. The theories are unfalsifiable, at least in the "short run." And the "short run" is defined as however many decades must pass until the evidence begins to fit the hypotheses.

George Will

Cooling Down the Cassandras

This isn't written in ancient sanskrit. It is pretty plain English. The point is not what anyone is or is not forecasing - including Mojib Latif - but the apparent impossibility that any data might falisfy the DCC hypothesis. It clearly says what skeptics have difficulty with is the way nothing (even a hypothetical two decades of cooling) would still not falsify a theory of global warming.

That is what skeptics are getting increasingly frustrated with. The proponents of the DCC hypothesis would advance their standing in the eyes of skeptics immeasurably if they began drawing some clear lines in the sand, which if they are truly scientists they should do. Does Latif imply that no amount of cooling would falisify the DCC hypothesis? His quote doesn't say that wouldn't be they case, he just leaves it at "cooling would not falsify".

My question for any such climate scientists would be; what outcomes or data are you looking for that would falsify parts of the DCC hypothesis?

An answer of "none", leaves me in no doubt that we aren't talking science. And that is the answer skeptics are getting at the moment.

The "demise of the Dollar" - what it's really about

I posted yesterday about this buzz doing the rounds. I didn't know at the time, but it was Chinese whispers (pun intended) started by Robert Fisk. Enough said.

But that doesn't mean that some of the facts reported could be correct and most probably are. Various oil exporting countries like Iran, Venezuela and developing economies such as Russia and China have almost certainly been thinking about the Dollar for some time. However, not for the reason and economic ramifications that the widespread reports all declare.

I dealt with the issue of the ramification of changing commodity pricing to a different numeraire. Here I will discuss what is the more likely reason behind the supposed deliberations about the role of the Dollar in international markets.

The background to this is exchange rate regimes. Every geographical region - not necessarily defined by sovereign national boundaries but usually so - has over time developed a currency to aid in the exchange of goods and services, the accounting of prices and values and as a way to store value. Those are the three primary function of money:

• a unit of account
• a medium of exchange
• a store of value

These work fine within the regions in which they operate, but hit a road block when one currency region wants to exchange goods or services with another. Hence we need some exchange rate that will price one currency relative to another. This can be set by decree against some durable globally traded item (fixed to gold for example), or against the currency of another region or a basket of such currencies (fixed against the US Dollar for example), or left for the market to price it freely (a "floating" exchange rate). Note that there are all sorts of varieties of fixed rates with names likes "pegs", "crawling pegs", "currency boards" and others, but they are variations of a theme only.

Some floaters include the Australian Dollar, Sterling, Euro, the US Dollar. Some fixed rates include China, Iran, Venezuela, Russia, Saudi Arabia. Are you starting to see the pattern here? Well spotted. Those countries named as the ones colluding to bring the demise of the Dollar are those that fix their exchange rates to the Dollar. And this is what this story is really about.

This story is about the fact that these countries have tied their local currencies to the US Dollar, which means that they have effectively set the price of everything they produce (their income and output) to the price price of everything produced in the US, set in US Dollar prices. So if the US goes through an inflationary bubble and the price of things in US Dollars goes up, pressure will build in the country for prices to do the same thing, bringing in the first instance pressure on output (excess demand) and then inflation. That might seem confusing, but the simple point is that with a fixed exchange rate you will import inflation (or deflation) from the currency to which you are tied.

So it is with some of these countries. China in particular has been struggling with prices in Reminbi that have become out of kilter with the US. That means lots of demand for Chinese goods to be exported to the US. Current account surplus for China, deficit for the US. This brings pressure on Chinese productive potential, the economy is at full capacity and creates shortages and pressure for an increase in the price of these Chinese goods.

What is going on in the background is that this flow of demand for Chinese goods and services is creating a big demand for Chinese Reminbi in exchange for US Dollars at the fixed exchange rate. The Chinese government has agreed to give a fixed amount of Reminbi for each US Dollar and people are flocking to them in droves.

The Chinese authorities have two options.

1. They keep selling the Reminbi to all comers at the fixed exchange rate. As they do this they accumulate more and more US Dollars, which they need to keep in the form of currency, deposits, bonds etc. This will mean there are more and more Remminbi out in the world looking for a home. That leads to Chinese prices rising - inflation. They try to sell some of the Reminbi for other currencies, but the Dollars are coming in thick and fast and it is a difficult task. Witness the recent Chinese spending spree around the world buying up all manner of foreign assets and interest. This is them trying to unload all these US Dollars. And more are coming in every day.
2. The alternative is they "revalue" the exchange rate. Each Reminbi will now cost more Dollars in exchange. This chokes off the flow as it has increased the price of Chinese output relative to US output. It also relieves the Chinese economy of the inflationary pressures it was under. They might alternatively just let the currency float and allow the market to push the exchange rate where it will, most likely up in the first instance.

And this is what this story is all about. China in particular, but increasingly many oil producing nations since oil oil prices increased from the lows experienced over the entire 1990s, are following track #1. It is unsustainable as a policy, so they are being forced to consider #2. But there is a political problem with this. Having the exchange rate where it is, undervalued, is not healthy; the Chinese economy for instance is eroding under the inflationary pressures being put upon it the excessive growth that is occurring forcing much investment and expenditure that it might likely regret in years to come (the over-hyped expansion of a small number of urban areas for example). However, the Chinese government (and people to be honest) get a nationalistic pride out of a booming economy that is buying up foreign assets. That is not a criticism of the Chinese people, it is a common human trait. Anyone living in Ireland over the last 10 years will recognise instantly the swelling chests that come with an inflationary boom at home and the ability to stride foreign property markets like kings.

It is a familiar choice. Sensible economic policy, or populist sentiment and beliefs. The latter usually wins in the short term until the proverbial inevitably hits the fan. These countries have been dialling up the speed setting on their fans for a few years now and the projectiles are being stockpiled.

So Robert Fisk might have simply stumbled on the latest discussions about this problem, or this might be a straw in the wind indicating that the time of inevitable revaluation (or even currency float) for these countries is on the way.

That is a big story and an investment opportunity if you can find some cheap way to access it. Go long these mainly developing and OPEC currencies that are under pressure to revalue and short the US Dollar (the second part not necessary if you are US based already).

Trading oil in Dollars - who cares...

This story, sometimes appearing in different guises, always gets tongues wagging. The end of the Dollar, the decline of the US. This is BIG news.

No it isn't.

When we want buy something from someone else we need some way to put a price on it. We could say, for example "this car will cost you 50 goats". No reason why we couldn't. The most astute readers will spot some potential problems with such an arrangement; for those buyers who don't own a herd of goats it will be difficult to properly assess exactly how much of your wealth such a purchase will require. How much other stuff, like housing, food, holidays etc. today and in the future will you have to forgo in order to buy this new car?

Follow this up with a couple of questions. Does the simple act of stating the price of the car in goats mean that:

1. The seller will takes goats and nothing else in payment?
2. If you don't currently have any goats you won't be able to buy the car, or it might cost you more than if you did have 50 of the critters munching on your front lawn?
3. The seller is strictly demanding goats in payment (#1) so that they can be added to the ever growing flock in the paddock around the back of the car dealership?

Are we going to get any arguments if I suggest the answers to those questions are:

1. No,
2. No and
3. No?

No.

So what's the fuss about oil (or any commodity for that matter) and Dollars, or Yen, or Euros? We price stuff using some historical convention because it is convenient and communicates a lot of information to the largest number of people. Trading a global commodity sold and bought by everyone around the world is far easier when we talk the same financial language and the US Dollar has been the lingua franca of the industrial age. I can immediately compare the price of oil being sold out of Venezuela with the price of oil being sold out of Kuwait, make any adjustments I need to for differences in composition or quality and transport and know where the best deal is. That is why we use a single currency as a numeraire - which is nothing more than an accepted unit of measure. Sure, goats might make a better numeraire for a Tibetan goatherd, but the world has just naturally come to use Dollars.

But of course I am missing the point aren't I. There will be no need for Dollars any more. People won't want them. Really? Did you think about the questions I posed earlier? Saudis, Venezuelans, Iranians don't sit around thinking "damn, what can I do with all these Dollars I am getting?". They either buy US Dollar assets with them (anything from US government bonds, to real estate or equities or simply cash stuffed under the Persian rug), or they sell them to someone else so they can buy Euro government bonds, Chinese real estate or whatever.

Take the buy side. People aren't sitting on piles of US Dollars simply to buy oil. They trade what ever currency they hold to buy US Dollars (assuming that settlement is in fact in Dollars and not some other currency).

But what about currency risk you ask? If that is of concern, you hedge the currency. Changing the numeraire won't alter the economic implications of exchange rate movements. A 20% appreciation of the US Dollar (with oil price in Dollars) will bring the same affects as a 20% depreciation in the Euro (with oil priced in Euros). In both cases oil will become more expensive for some, in this example Eurozone buyers, relative to others, US buyers.

So, any change to a new numeraire for oil will not bring any earth shattering implications for the global economy. Nor will it happen at the whim of a group of people who think it matters and will try and enforce such a shift - those efforts will fail if buyers and sellers don't find it convenient. It won't be some catalyst to a dumping of US Dollar assets - this would have been done already if people didn't like US Dollar assets.

What it might do is:

• Reduce the trade in US Dollar foreign exchange markets a little. But hardly to the extent that it would have any implications for spreads or liquidity
• Reduce the seinorage that the US enjoys. This is the interest free loan that the US gets when someone holds some of their currency. This isn't a lot in the scheme of things at the moment and for reasons discussed above, changing the numeraire for oil trading is unlikely to dramatically reduce foreign holdings of US currency.

No. This story is just another round of penis comparison geopolitics. I fully expect that one day the Reminbi is very likely to become the global financial and trade numeraire. Nobody will need to legislate it, it will just happen over time. It will make nobody worse off and nobody better off, but simply change the language in which we talk numbers.

UPDATE: Just goes to show how poorly this blog is read. I have amended the incorrect reference to "Yen".

Talking taxes

Income taxes that is.

Deep recessions following boomy booms almost invariable entail nice big fat public deficits. What usually happens has now happened again; our elected public representatives fool themselves into thinking that the tax revenue windfall associated with a monetary bubble are genuine, when in fact they are transient. When economies correct, the fact that politic ans have been spending far beyond the country's (i.e. tax payers') means is revealed and large deficits appear.

The economic concept is that governments may have been running significant cyclically adjusted deficits. Simply, the public balance (tax less spending) adjusted for economic output above (or below) its long run potential may be quite different to headline numbers.

And when we get deficits like this, tax rates are in the firing line. The UK Chancellor has announced a nice juicy new 50% top marginal tax rate (up from 40%). Ireland is incurring a raft of new taxes levied on income. The US is threatened with similar. The affect in Ireland is quite phenomenal, talking from personal experience. What, I would argues, is an extremely unbalanced income tax regime, raising the massive majority of incomes tax from a narrow band of earners, is becoming almost unbearable.

Consequently, I thought I might look at how Ireland's income tax system sits relative to others.

What follows is a brief look at some of the marginal and effective average tax rates that apply to Ireland and compared with the US and UK. This is only one abbreviated way to look at the data, given the fact that their is an almost infinite number of ways to cut things, given that most regimes treat different people in different ways for tax purposes (married versus single for example). But what follows looks at rates that apply to single earners and ignore any manner of tax concession that might apply. I would suggest that the extent to which different classes of tax payers receive significantly different treatment represents a failing on the part of a tax system.

Here is exhibit #1. Marginal rates that apply, including national insurance contributions in Ireland and the UK. Note for the US, these are Federal rates only, so they are good for Texas for example.

The X axis is local currency units, £, $ and €. Ireland starts with low marginal rates kicking in at relatively high minimum earnings levels. The US has low rates throughout, but more grades. The UK has higher rates kicking in lower down the earning scale. Both the UK and Ireland have much higher top marginal rates that take affect much earlier than in the US.

Also note some of the quirks. Irish (and UK) tax rates jump to very high levels very quickly. 50% of marginal income going in tax is a lot. Beyond that the government is effectively saying there is some income over which you don't have the right to keep even half. Note the spike in the UK marginal rate, which is an artifact of National Insurance rates hitting a ceiling.

While these lines appear on the same chart, they are not of much use for cross country comparison. We need some way to compare different income levels across countries. The way I propose to do that is to adjust the scale to a common currency (Euros), using a Purchasing Power Parity rate of exchange. I have used consumer expenditure PPPs and I lift these from the OECD and the most recent data is for 2007. If we do that we can compare $ and £ to Euros on the basis that we have tried to adjust the numeraire to a basis of common purchasing power.

If we do that the chart looks like this:



















I have added some vertical lines to denote where Irish median (and 150% and 200%) earnings fall.

What you first notice is the shift in the lines. The top rate of tax in Ireland clearly begins to bite at a much lower level of income than in the UK. In fact it kicks in at the median earnings - so by definition half the income earners in the country should pay some tax at this rate of 50%. Let's now compute what this would imply for average rates of tax paid across the earnings scale:

Now this is the money shot, so to speak. This is the average rate of tax that would be paid under the marginal rates shown above. Here are some of the striking characterstics of the Irish structure, especially compared with the US and UK:

• There is no tax paid until someone earns at least 50% of median earnings. Not even a token 5%, that might encourage some sense of social contribution.
• By the time someone earns the median wage (nearly €38,000 per annum), they will pay less than 15% in tax. Note that this is before any types of legal tax avoidance measures that are available.
• Beyond the median, income tax burdens rise at a dramatic rate. at 150% of the median you will pay around 25% of you earnings in tax.
• The pace of increase slows only marginally beyond that and at a mere 200% of median earning it has increased to 33% of earnings in tax. That means someone earning twice the median earnings (€75,000) pays nearly 5 times as much tax as someone on median earnings.

Now personally, I would favour something more in the style of the US. It is progressive, in that the higher your earnings, the higher the proportion you pay in tax. But it is not massively progressive as evident in Ireland.

Secondly, A larger proportion of earners pay something and something material relative to everyone else. Low to median earners might pay 5-10% of their income in tax, compared with 20-25% for those on 2 or 3 times median.

One thing is clear from this. Ireland is no "low tax" country.

Tax Commission report – congestion charges

Economists just love congestion charging. Academic economists I mean. It pushes all the hot buttons for them. A widely accepted source of “market failure” (negative externalities), loads of primary data collection and analysis, scope to play with prices and estimate demand curves in a real life situation. It is one of the very few areas where economists can play at being real scientists, with experiments and stuff, like.

I tend not to like them so much. Not in theory, that is pretty sound in an abstract way. But in the practice. It turns out if you really dig into this, congestion charging in most standard real world conditions is wasteful, produces an inefficient allocation of resources, opens up potential inequities (in particular regressive ones that punish lower income groups) and creates a dead loss to society in terms of welfare (I mean like making everyone pay up some money only to put it in a pile and burn it).

Let’s start with the theory. We tend to get more efficient allocation of scarce resources when there are clear and transparent prices that incorporate all costs of production. That way, people only do something if the price is less than or equal to the utility (pleasure, sustenance etc.) they derive from it. It means resources don’t get wasted where they aren’t really needed or wanted.

The concept of “externalities” in economics was identified some time ago. These externalities can be positive or negative if they impose a benefit or a cost on someone else. A lighthouse has positive externalities, while a cigarette being smoked in a confined place has negative externalities (cough, cough). The issue at hand here is negative externalities. The concept is that in the act of doing something, or consuming something I impose a cost on others. The theoretical economic framework for this is that the marginal social cost exceeds the marginal price I pay. Consider this. I drive to work at 8am and base my decision on how much petrol and wear and tear etc. on my car will cost me for the journey. I do not consider in my decision the inconvenience that my presence on the road might cause others (the congestion effect). So I base my decision on a price, but the price I am paying is less than the marginal cost. That means I am doing too much of it. Well, not me specifically, but those people for whom the price is only just worth paying. If you made them pay more, they would not drive and hence reduce the congestion affect that have on others.

The problem with the use of this type of analysis in support of a congestion charge is that it ignores a fundamental characteristic of congestion costs; they are perfectly reciprocal. What do I mean by that? I mean any costs you impose on others bounce back in equal measure to you from them. Just think about it. If my decision to drive to work at 8am has the affect of increasing the journey time of every other person on the road at that time (say 10,000 of them) by 0.1 seconds. So the total cost I impose on others is 10,000 times 0.1 seconds = 17 minutes of total lost time. But everyone else is equally guilty and each of my commuting buddies impose the same cost of 0.1 seconds of increased journey time on me. So I suffer a 10,000x0.1 = 17 minutes extra commuting time.

So, although I am indeed imposing an external cost on others, they are imposing an identical cost on me. Perfect symmetry and most importantly perfect information for me to make my decision.

When deciding whether to drive to work at 8am in the morning I am not expecting a clear road. I know I am going to suffer congestion costs. And I have an excellent idea of precisely how much they will be. And I don’t think that makes me particularly clever, everyone else will have the same information. So if I drive I am doing so on the basis that it will cost me an extra 17 minutes in travel time, which is exactly the same as the external costs I will impose.

All this means that there is no place for policy intervention. I am making an efficient decision that reflects all costs, including the external ones. To place a congestion charge on my journey would create an inefficiency, not address one.
A nice analogy is a “smokers’ room”. Smoking in an office would create external costs that fall on others. But if you have a smokers’ room where people can go to smoke you will instantly internalise the externality in the same way that road congestion does. Everybody in the room is there of their own volition, knowing that they will have to put up with the inconvenience of other people’s smoke. The only real issue is who pays for the smokers’ room. As long as the smokers pay for it, maybe on an entry fee basis, everything is efficient and equitable. Road users are similar in this way. The more you drive and the more congestion you sit in, the more tax you pay on the petrol you burn – hence paying for the road system on which you sit.

Instead, with a congestion charge, we layer even more cost to monitor and account and administer the scheme, we prevent people from driving as much as they would like (even after correctly pricing the cost of congestion they impose) and underutilise the roads that we spend a lot of money to build. This creates a dead loss to society.

So congestion charging is typically inefficient and an abominably poor application of economic theory.

But what about equity issues? These are usually brushed under the table a little when it comes to congestion charges. But consider for a moment the range of people you might see sitting in that rush hour traffic jam. They will range from shop assistants and nurses, to bankers and company CEOs. Now think about how they price their time. People in lower paid jobs would typical value money over time (it is an awful expression, but their time is cheap, so to speak). For high flyers, the opposite is true. So if you introduce a congestion charge you are actually setting a price for time, because that is where congestion has its economic affect. And who suffers most? Those who would rather spend an extra 30 minutes getting to work than have to pay €10 in a congestion charge; the lower paid. This makes a congestion charge regressive as it favours those who place a higher value on their time, which is invariably those on higher incomes. Think of the case of Michael O’Leary who went to the expense of buying a taxi licence so he could drive in bus lanes and beat congestion. A hypothetical congestion charge of €50 per day would delight Michael O'Leary and increase his welfare, but would be detrimental to someone struggling by on a below average wage.

So all in all, congestion charges are a bad idea, creating economic inefficiency, regressive welfare affects and a financial and social dead loss.

RIP quality journalism

The Gruaniad is a newspaper that seems to pride itself on notoriously poor standards of fact finding and editorship, but I have just been bowled over by a superlative piece of garbage that went up on their web site this week. No surprise that it appears in their "environment" section and no further surprise that it is yet another lame piece of climate change alarmism.

Have a look at the article and then do as much fact checking that you can in, say, nine tenths of a second.

Adelaide latest victim of global water shortages

Australia's fifth-largest city could be reliant on bottled water as early as next week as overuse and drought stretch the Murray river to its limit

http://www.guardian.co.uk/environment/2009/sep/28/adelaide-water-drought

Pretty self explanatory really, but also seriously alarming. Adelaide (the fifth largest city in Australia) must surely be in a state of emergency given such an imminent event. Can you imagine the logistics involved in the supply of a city with bottled water, the restrictions one would need to place on any water use at all in order to prevent all manner of disasters and even death?

Google must be running hot with links to local press warning the populace of the danger they face and the things they need to do....





Oh.

9 potential news articles. Only one referring to this disaster, from the Gruaniad itself.

No bother, this means nothing. The Gruaniad journalists are quick off the mark. They get the scoops weeks before other inferior news hounds. A quick look at primary sources will reveal the astonishing speed with which these paragons of the news media have pounced on cold hard verifiable FACTS:



























Oh.

Adelaide reservoirs 90% full. Maybe they are filling the bottles at the reservoirs for distribution to this thirsty city.

Never mind, the South Australian Water authority are consummate professionals. They will be on the case and will be ensuring that water is being used for the most essential purposes only. Sure enough, they have put everyone on LEVEL 3 ENHANCED WATER RESTRICTIONS!!! This is definitely serious.

Dripper systems and hand-held hoses fitted with a trigger nozzle can be used for a maximum of 3 hours a week

What? Don't these dolts realise that there will be NO WATER NEXT WEEK? And they are still letting people waste it on their gardens!?! They are rushing headlong into this disaster.

I await the upcoming Gruaniad reports of this unfolding crisis in the coming days with great anticipation.

UPDATE 14 OCTOBER:
I received this disturbing e-mail today [I do hope this poor soul survives]:

Still waiting on the bottled water to arrive. Can't hold out much
longer. So... thirsty...