Greece is the worst affected, with a government debt to GDP ratio of about 160% and getting worse. It is clearly now on the other part of the Laffer curve and further tax increases will not lead to more tax revenue, but less tax revenue. Whilst for other countries, an ECB bailout is the most likely scenario, Greece is on a collision course with an official default that it can no longer turn away from. No one seriously believes the Greeks are going to pay their loans back. Greece is drifting irrevocably into the situation whereby it will officially default and simply not be able to pay the wages of its civil servants, the pensions of its elderly, and have Greek banks collapsing around them as well, unless the ECB bails them out completely, which now seems unlikely. Re-introducing a Greek currency would mainly add huge capital flight to the woes and solve nothing in the short run. It really is looking rather bleak for Greece at the moment, whether it manages to trick the rest of Europe into another stay of execution or not.

Here, I want to point to particularly interesting political processes that have locked Greece into a default death spiral: political paralysis, civil service paralysis, and population paralysis. And at the heart of them are the special interest groups that dominate Greece.

What do I mean by special interest groups and their hold on Greek society? Iannis Carras wrote a hilarious and informative piece on how it works in Greece. Iannis relates the story of how a particular set of rent-seekers conspired to divert water from Western Greece to Thessaly by means of large construction projects. Diverting this water via large dams and reservoirs was done against the wishes of local residents, against EU planning rules, and against the ruling of the Greek high court judging it to be illegal. How did the rent-seekers get round this? They nominally broke the project of water diversion from one region to another into several smaller ones and simply kept going. And what drove this project? European cotton subsidies! Cotton is very thirsty and so water was diverted to the area more suited for cotton. Who drove it? Construction companies, Thessaly major farmers, and Greek politicians, all happily flaunting Greek law. Worse, it turned many a Greek politician and former farmer into a pure rent-seeker. And once they got into that game, they kept going. A favourite means of extorting money out of their own government is now for Greek farmers to simply block the roads until someone gives them money!

Other examples abound. Greece is now full of museums, ports, and roads which no-one uses, paid by the European Union and spawning groups of entrepreneurs everywhere whose main income in life comes from lobbying either the EU or any other major institution. Indeed, in a quite cruel illustration of the increased power of vested interests in these times, Carras notes that the only real reforms being implemented in Greece are all in favour of the construction industry. The most recent such example is the removal of environmental obstacles to build houses, effectively allowing large-scale theft of government natural reserve land by private companies,  which in turn makes a mockery of the intended sale of that same government land. A sale which was hoped to reduce the government deficit!

Iannis Carras’s sobering conclusion is that ‘EU aid has strengthened the position of intermediaries and rent-seeking elements in the Greek economy.’

Then the issue of paralysis, whereby the main thing to say at the outset is that paralysis mattered because it prevented structural reforms from happening.

Importantly, structural reforms could have tilted the balance of whether default was inevitable, but it has turned out to be impossible to legislate and enact structural reforms. By structural reforms, I mean tackling tax evasion, opening the economy up by means of labour market reform, and dismantling the legal apparatus supporting strong special interest groups that paralyse the professional service sectors and the civil service. Such structural reform was needed to get economic growth going, has been advocated by virtually all intelligent observers inside and outside of Greece, and initially would have involved pretty simple off-the-shelf legislation. Yet, it has not been done and it now clearly wont be done, even though the consequence is a disaster for the country.

The first and probably most important lock-in process is the civil service: the need for quick spending cuts meant that the public sector had to reduce in size and freeze wages. What do you think happens inside the ministries when this occurs? That the lesser-paid remaining employees are going to do their utmost for their country by devising and enacting radical reform legislation, or that those who remain will be the weaker ones who couldn’t get decent jobs elsewhere and whose principle worry is not to rock the boat and retain their job? The right answer is the latter.

As a result of this paralysis of the civil service, the sheer capacity for structural reform has been strongly eroded, as was nicely illustrated in this excellent piece on the impossibility of reforms. Greece, and to some extent also Spain and Italy, is now less able to legislate and support structural reform than 2 years ago. All that remains is austerity packages, which are technically easy: bit less money here, slight increase in tax rate there. Nothing new has to be set up or thought through.

The second lock-in effect is a gradual paralysis of the political system. At the start, when it became clear to the elites of Greece that they were looking at a major loss of status for their country if they kept going as before, the political elite had a kind of ‘we must stop this’ mentality. This moment came about 2 years ago for Greece.

Yet, just as more recently in Italy, Greek politicians forgot the crucial lesson of Machiavelli about reforms that go against vested interests: you need to implement them with lightning speed whilst the political will is there.

What Machiavelli warned his audience about happened in Greece: by being too slow, they alerted all those who would lose from reform, which cemented opposition to them. As a result, Greek politicians have basically done nothing in the last year and Greece is in complete political paralysis with no-one daring to offend the rent-seekers.

It is instructive to think a step deeper and ask why Greek politicians see it in their best interest to do nothing. The major political reality in Greece is the anger of voters who see their standard of living go down with plummeting housing prices, increased unemployment and decreased welfare, and who blame whomever is in charge, whatever they did or are trying to do about the problem. Such voters might want the country to avoid the shame of a default, but that sentiment is dwarfed by blind anger towards anything associated with the loss they are having to endure.

Interestingly, this public sentiment has only strengthened the hand of the special interest groups: when faced with high uncertainty, workers became more militant within their unions; major corporations increased their attention to political lobbying to make sure they wouldn’t lose out; the professions mobilised such that the legislation favouring them was safeguarded; etc. Since the early pain fell on the politically weakest, i.e. those not organised in special interest groups, the relative power of the problem groups has only increased within politics, the civil service, and the world of work. It is now only via the popular vote that there is potential mileage for a politician in advocating real change, but the popular vote is uncertain and easily swayed by the relentless media lobbying of the special interest groups. Hence, as a calculating Greek politician, not implementing any real reform and blaming the foreigners is an optimal strategy.

The Greek politicians were not alone in being too slow to reform: the Italians are making the same mistake. Italy just in the last 2 months shows how this goes: Mario Monti was explicitly appointed as a technocrat to do what needed to be done. To his lasting shame, he wasted his first salvo in December 2012 on a simple austerity package without any structural reform. By now, the major unions and interest groups have organised against him.

Monti’s latest round of reform is a good illustration of what he now does. In grandiose media style, he promised 5000 more pharmacies, 500 more notaries, and what looks like no more than a few hundred extra taxi licenses. This is really nothing more than symbolism: Italy needs millions of jobs, not a few thousands! Worse, Monti made a big point out of extending bakery opening hours to Sundays, which is peanuts in the scheme of things. Hence the story there so far is no real reform whilst minor reform is puffed up to be the real thing, and meanwhile it’s getting late and Monti’s political backing in parliament is slipping.

To be fair, other European politicians also were not quick enough in realizing long-run realities. Some 18 months ago, when informed observers already knew that Greece could never pay back its debt, what did the Northern European leaders do? They pretended vociferously that Greece would not default, that ‘Europe would stand behind Greece’, and they exposed their own banks and countries much more to a Greek default by direct loans to the Greek government and to support the buying up of Greek bonds by the ECB. This policy, which is the height of folly in hindsight, only made sense at the time within the logic of a political elite that had no idea what was going on and that bought into its own rhetoric of Greek competency. And the parliaments all approved this!

A final fascinating aspect of the Greek death spiral is the return to full posturing once it became clear to the senior politicians that a default was inevitable because the road to structural reforms was political suicide.

Greece, quite incredibly, in January 2012 had a PM who was openly threatening Eurozone leaders that Greece would pull out of the Euro if he didnt get more bailout funds. This is much like a thief threatening to no longer enter your house if you don’t send him more of your valuables! The cheek of the man has to be admired, but the cold political calculator should drily note that such posturing is entirely for domestic consumption and a clear indication that the PM is preparing his country for a ‘blame the foreigners’ story, even though in reality these foreigners have propped up the Greek government by well over 200 billion Euro in loans in recent years!

In Italy too, the PM is adopting posturing mode. The minister of finance and the PM both announced that they want the markets to ‘recognise’ Italian efforts. You might as well demand of the weather to recognise your need for summer! Merkel, astonishingly, echoed their voices.

Indeed, the Italian government now and then resembles pantomime-mode when it comes to reforms. The PM, Mario Monti, has announced ‘rolling reforms’, sector by sector, one sector per month. He is just these weeks going to ‘talk to the unions’ about labour market reforms. This is so counter to Machiavelli’s prescript of swift and unexpected reforms that it is almost laughable. It is like Jason in the Friday 13^th movies saying to all his intended victims ‘I am coming to get you….. in 6 months time!’. The act keeps the handouts coming from the ECB and the rest of Europe, but we will see how long it works without real reform. So far, Northern Europeans seem to be buying it, just as they did with Greece….

A minor prediction I was making was that Libya would again succumb to the resource course, making democracy impossible there, an article taken over by the Congressional Quarterly in the US (December edition). So far I am looking good for that prediction, with individual cities maintaining their own prisons and militias, as well as open fights about the division of the oil spoils.

The main prediction I was making concerned Egypt where I predicted the regime would re-constitute itself, coopting deal makers in agricultural and slum areas. I predicted that the urban youth which was driving the protests would lose out.

This is indeed exactly what has now happened: the army has put the torture chambers on full throttle in order to intimidate the urban youth. The elections have clearly shown that the largely uneducated and agricultural population has no appetite for supporting intellectuals in cities, and has gone for what they know, which is the muslim brotherhood, more radical muslims, the army, or some regional politician. The muslim brotherhood, which over the years has become so infiltrated by the regime that it was amongst the first to condemn the original protests against Mubarak, has about 40% of the preliminary vote and the reform parties have merely 15%. The radical Islamists get 25% and more regional parties make up the rest. Given that the army has already decided to simply give itself some seats in parliament if it needs them, as well as several more months of systematic torture of any opposition before parliament is even convened, one is already seeing a grand bargain between the Muslim brotherhood and the regime: a further move towards religious austerity in exchange for no challenge to the economic parasitism of the army. Egypt will become a very dull place indeed.

This uneasy alliance is quite visible on a day to day basis, with the Muslim Brotherhood refusing to condemn extreme brutality, or really pushing for a faster handover of power to parliament: after years of being in the torture chambers themselves, the Muslim Brotherhood leadership is showing it can be intimidated and quickly backtracks on any strong statement it now and then makes in response to grass-root pressures. They are easy pickings for the repression system of the army, excusing their cowardice by the unrealistic tale that things will be different once a parliament convenes and they will have a real say. The interim silence allows the army to take full advantage of this cowardice to get rid of the remaining true reformers and thereby have the full repression system aimed at the Brotherhood leadership should they regain their courage too late. Before the parliament convenes, decides together with the army council on a constitution, then again has elections for a president, the real power struggle is long done.

Because Egypt is the Arab country of greatest significance, i.e. the one with by far the highest number of Arabs as well as being the intellectual heartland of the Arab world, the unequal alliance between the army and the Muslim Brotherhood really means the Arab Spring is over. Its last embers are dying in the increasingly brutal repression of the few urban youth who are hanging onto a vision that the vast majority of Egyptians neither understand nor trust, choosing instead for the devil they know. It is tragic from an Enlightenment point of view but it is the classic story of what happens in societies that are still 60% rural and where even the 40% urban is dominated by slums: some form of clientelism wins the democratic game.

I would also say that the outcome is worse than might have been reasonably hoped for 8 months ago, when it was clear that things were never going to be as good as they are in the West but one could at least hope for something that might be livable. 8 months ago one could still hope for a degree of economic reform in the sense that the old elite would have been content to hang onto what it had and otherwise have a hands-off approach, like the army in Turkey. New businesses would then be able to escape the clutches of the regime and the economy could flourish. Alas, Egypt is not following the example of Turkey but more that of Pakistan: a repressive regime is sitting centre-stage and is extending its economic tentacles, meaning that any business not belonging to the regime is fair game to predatory taxation, which in turn means economic growth will be slow for many years to come and parliament will quickly establish the pattern of doing what the commercially-minded children of the generals say in return for a slice of the crumbs. Dictatorship by democratic proxy.

Then the post-script analysis: who could have made a difference? If the West had thrown a lot of money and support behind the urban reformers, the outcome would have still been the same and perhaps even worse: the urban reformers never had a chance to sway the uneducated masses on their own. They needed an alliance with one of the big religious parties and those parties had other agendas. Association with the West would have simply sped up their alienation with the rest of the population. By illustration, just today, the army outlawed 200 pro-reform organisations on the mere allegation of foreign funding, showing how easily any real intervention by the West would have fuelled the dictatorship.

Saudi Arabia could have made a difference but chose to support the regime and the radical islamists. If it had thrown its financial and religious muscle behind a grand deal between, say, the more welfarist oriented Islamists (elements within the Brotherhood) and the urban reformers, then there was a chance. Alas, the Saudis too have their own dreams and they do not include upstart urban youth and real democracy. If the West carries blame, it is via our failure to really put the screws on the Saudis.

Hence, as feared 8 months ago, real change in Egypt and thereby the gravity point of the Arab world will have to wait at least a few more decades until urbanisation and development levels are high enough to make an urban-inspired middle-class democratic uprising sustainable. Until then, it is torture as usual for any outspoken reformers, with the months ahead sure to become very bitter memories. I expect an exodus of smart young urban Egyptians before the end of next year.

Though Israel will no doubt let go a sigh of relief that things are back to normal in Egypt (you can almost hear the relief spitting off the pages of some of their newspapers, already reverting to the well-worn line about being afraid of islamification of Egypt), the failure of the Arab spring to provide a platform for real reform is also bad news for the West because it means that for quite some time, the radical Islamists will continue to be seen in their own countries as the only trustworthy and non-corrupt opposition to the parasitical regimes there. This will mean the regimes will continue to have to blame the West for every problem on earth (in order not to be too outflanked by the radical islamists) and the more fanatical part of their population will want to make true on the fantasies of Islamic world dominance. Egypt’s tragedy may well be our tragedy.

How did he do?

Well, I would say he went one-third on the mapped route. As advised, he moved with lightning speed, bringing forward a set of reform packages by December 4^th, less than a month after taking power. Also, as advised, he went for some quick hits on existing vested interests. His increased tax on property and his taxing of funds owned up to after a tax-amnesty make up the majority of his tax increases and are visible forms of taxing the wealthy. He went for welfare reductions by removing the indexation of pensions for a few years (exempting the poorest) and a general tax increase via more GST.

In terms of long-term reforms, he went for pension age reform, which is a move that will not have major short-run fiscal benefits because in reality almost no-one works until the official pension age anyway and hence pension age reform should be seen as a long-term reform designed mainly for the civil service that retires early: it takes a long while for the various pension ages to adjust to the official one and for significant groups of people to go through the new system. Perhaps most important for the long term is that Monti is trying to reform the calculation of pensions such that they reflect total contributions rather than the wages of the last few years. Anyone who knows anything about pensions knows that that is a fairly revolutionary change and that it cant be done in the short run. It simply cannot be implemented retrospectively because of missing information about past wages. It is even hard to imagine that the whole stock of current employees close to retirement will be subject to this change, so I can only guess that the fine-print will say that it only applies to pensions from some far future date. It is a good example though of the kind of reform that economists have been calling for for decades (it is a key example in my own co-written econ textbook) but that you need the right moment for in order to push it through politically.

Yet, Mario didnt go for the truly debilitating special interest groups that would open up the economy in the short-run. No tackling of the laws on retrenchment, which is a real problem for hiring. No tackling of the professions (doctors, etc.), which debilitate much of the tertiary sector. He is even promising more unhelpful subsidies for business, like subsidies for eco-friendly building.

Hence, to be brutal, Mario went for the easier targets and didnt do much. Reduced welfare, an indexation freeze on pensions, indirect increases in income tax (i.e. via the states and not the central government), increases in GST, and a couple of obvious long-run reforms that will take decades to come into effect. No concerted effort to go after the tax avoiders and the fat-cats that dominate the political landscape in Italy. No major clashes with the unions either. Indeed, the size of the reform (20 billion Euro more taxation and 10 billion extra spending) is pretty paltry if you consider the problems that Italy faces (with about 2 trillion in debt). There is hence more of the appearance of decisive action, whilst the reality is that of a couple of helpful long-run changes whilst no major interest group has been offended in the short run. Indeed, all the reforms look pretty much off-the-shelf to me, which tells you there is little going on in the background in terms of policy development. Italy is not getting ready for real change.

What does this mean for Italy in the longer run? It most importantly means that there is now a much higher chance that Italy will default on its government debt: the reforms are simply not enough to either pay back the debt nor do they give confidence in medium-term future economic growth that would get rid of the debt.

Mario Monti undoubtedly knows this. So what game is he playing? Is he hoping for a miracle in the form of suddenly returning faith that Italy will always pay its debt and thus a return to 2% bond interest rates? I suspect he is not really hoping for a miracle but consciously has resigned himself to some form of default and meanwhile simply refuses to attempt the politically difficult, which is to take on the major interest groups that paralyse Italy and make it a place you prefer to visit rather than work in.

It is hard to know what Monti’s end game is, or even if he has one. Perhaps he thinks he can have another round of more serious reforms if this one gets through parliament. Perhaps he simply thinks this is the best he can do given the internal political realities of Italy. Perhaps he is trying to put Italy in the position where it could get by if it merely defaulted on the foreign part of the debt, not the domestic part, which in turn would strengthen its bargaining position in a bailout scenario. Whatever the end-game is, with these baby-reforms Monti has proven himself to be a conservative who will not upset the internal status quo. They chose well.

1. (high resistance) It is actually politically very hard for any country to leave the Euro. If, say, Greece announces it leaves the Euro then one should expect a bank-run overnight with Greece deposit holders cashing in their savings and putting it in foreign Eurozone banks. Moreover, it might easily take a year before Greece could physically re-introduce its own currency, during which time the uncertainties and capital flight accumulate: money-machines have to be changed, accounts have to be converted, export contracts have to be re-written, and a system of converting anything valued originally in Euros into the new currency has to be negotiated. Apart from being a major hassle requiring expertise many countries do not have, it would give all the other countries an immediate excuse to stop paying that country any transfers. Young ambitious Greeks should be expected to shun a defaulting Greece. It is hence quite costly in the short run to step out of the Euro, as well as virtually guaranteeing a severe deepening of the recession overnight. This is equally true for any other country in the Eurozone: leaving the Euro is a bold and courageous step, unlikely to be witnessed any time soon. The road of least resistance therefore does not include any single country leaving the Euro.
2. (low resistance) The political costs to defaulting within the Euro are, when one reflects on it, surprisingly low. Greece has in effect been defaulting for several years now and has been handsomely rewarded with transfers and debt-write-offs. It was certainly the road of least resistance within Greece to steer straight into default. So too will the governments of Italy and Portugal be calculating that any default on their debts is a viable scenario and preferable to major internal upheavals that could be blamed on the government of the day. For what are other countries actually going to do when governments default on their debts? Not much. There is no mechanism via which they can kick countries outside of the Eurozone or the EU, so barring a whole set of richer countries deciding to set up a new EU and abandoning the rest, the Euro countries are stuck with each other. Countries cant kick each other out, nor can they really force any sanctions within the system. If, say, Italy decides to only pay back the government bond loans to its own banks in order to prevent them from going bankrupt but defaults on any loans held by foreigners, then the other countries have no other course of action than to protest and take the hit. They might retaliate by not honouring any loans to Italian banks but, again, apart from a wholesale break-up of the EU, they actually have surprisingly little means to punish any country. This incidentally is true even under the newly proposed stability pacts: if a country simply refuses to pay any fines then there is not much the other countries can do. Hence, defaulting is a low-cost option for individual countries.
3. (high resistance) The political costs for the rich countries to start a new EU of their own, the so-called rump-Europe scenario, is surprisingly high. Think firstly of how the richer countries benefit from the current union: because they suffer less from civil-service-demanded wage growth, their countries are more competitive precisely because they are in a currency-union with countries that do suffer more from civil-service driven wage inflation. This guarantees them higher levels of employment and exports, a brain drain of the less well-organised countries towards them, and very low interest rates at which to borrow, all advantages that would disappear if they cut the ties. Also, cutting the union would not in fact mean that their own banks would no longer be linked to the government bonds of other countries so cutting political ties does not actually stop the financial ties. Hence the economic benefits are neither immediate in the short-run, nor obvious in the long-run. Then think of the politics by thinking of the mechanism involved in breaking away: the countries would have to formally abandon the EU, would have to negotiate their relation with the Eurozone with those remaining in the EU (!!), then set up a new treaty for a new zone and introduce a new currency or convert the Euro into a Euro-plus that would hold for their region. Each step has to go through all the parliaments involved, virtually guaranteeing years of wrangling about the shape of a new treaty. Now, this scenario is certainly imaginable, but would take years to go into effect and hence cannot be sold by any politician as the solution to anything. Hence, a break-away by the rich countries would only be assured to lead to short-term economic loss (the countries being set loose would have to default almost immediately, with all the consequences associated to that) without clear long-term gain. It is therefore not a viable scenario. What rich countries can do is to ensure their own banks and economies are less exposed to those of the high-debt countries, but that is a slow process that takes years.
4. (low resistance) The European Central Bank’s determination not to become a printing press is, probably, brittle. Mario Draghi, the president of the ECB just last week reiterated how countries must help themselves. At the moment hence, the ECB is sticking to the line that it is there for price stability in the Eurozone and is refusing to write blank checks to over-spending governments.  It is quite openly gambling on the current crisis to force governments into tighter spending regulation, with, it might be said, some apparent success. Yet, if the going gets really tough and neither commercial banks nor governments have the cash to pay back their loans to each other and to outsiders, is the ECB really going to refuse to bail out governments and the financial sector by means of printing money? It would seem highly unlikely that the ECB would indeed keep up its refusal for massive capital injections if its back was against the wall because it really is the only institution that can do it. More probably, it would indeed take on the role of the American Fed and simply print money on a massive scale to prevent widespread bankrupcies of governments and banks.

With this contour map in mind, the road of least resistance is starting to come into view. Given the current levels of low growth in Southern Europe and the unlikelihood of growth re-emerging soon because of all the spending cuts, it is clear that there are many countries with governments and banks that cannot pay their debts. This certainly includes Greece that is already in default, but now also quite clearly includes Portugal and probably Italy too: Italy can only pay back its debts if the interest rates are kept low by someone else.

Suppose these countries default, then the levels of loans that other governments have to extend to their commercial banks goes up, pushing countries like France and Eastern European countries closer to defaults too. This further undermines growth and pushes countries like Italy and Portugal into near-certain default. As the default-cascade gathers pace, the richer countries will find they do not actually have the means to stop these defaults and a communal appeal is made to the ECB to simply bail out the lot in exchange for a greater degree of fiscal integration and budgetary discipline in the future.

Hence, the ECB really only has the option of bailing them out heavily later on or at a creeping pace now. Which is what is happening:  the ECB buying up Southern European government bonds keeps the interest rates of these bonds manageable and thus hides the real risk of default. At the same time, the EU is gradually moving towards a system in which future deficits become less likely with stricter budget controls. The grand bargain – money-printing bailout in exchange of future austerity rules – has thus been agreed to and is underway. The ECB is printing enough money to prevent an open and massive default by Southern Europe, but only as long as those countries are playing ball, i.e. by agreeing to strong reforms and future austerity. It is a difficult game that is being played by the ECB but they are playing it well.

How does the bail-out fund, supported by the IMF (with the IMF in turn supported by the ECB, a one-two that helps to circumvent the sensitivities around the ECB mandate) fit into this scenario? One would have to say that the IMF\EFSF is going to be the means via which the ECB prints money rather than a means of organising loans to tie countries over: one can organise new loans as much as one likes, but if countries and banks cannot pay them back then one is in hand-out mode whether one admits this or not. The size of the hand-out needed is such that richer EU countries simply do not have the capacity to bank-roll them, whilst it would be naive in the extreme to expect other countries outside the Eurozone to foot the bill. Hence, one way or another, the bailout will never be paid back. Only central banks have the capacity to keep handing out money that is not paid back so it is there that the eventual funds will have to come from, however it is dressed up.

Summarising, the road of least resistance is for the EU and the Eurozone to remain as it is, for the ECB to slowly hand-out large sums of newly printed money to mainly Southern-European countries and the banks that have lend to them, and to have an emerging set of institutions wherein it becomes slightly harder in the future to have large government deficits. While a Tobin Tax would be a good addition to the European institution’s ability to raise taxes and Italy/Germany/France want it, it is hard to see how one can politically implement it whilst the UK is still in the EU. The city of London would be mad to allow the UK government to exit the EU because the remaining countries would immediately coordinate on somehow taxing the city of London, so the Brits too will stay right where they are: inside the EU simply blocking any move towards communal taxation.

How strong will the new fiscal institutions be that the ECB is enforcing? Well, the golden rule in Europe is that if it would require a round of referenda or new elections then it is not going to happen. So the institutions will by necessity have to be of the wishy-washy variety, not really binding anyone’s hands. Just like the Maastricht criteria were happily ignored by both Germany and France, so too should one expect any new rules to be fairly toothless. The best they might hope for is to have a system in place with large mutual investments (a kind of future fund for Europe) that itself becomes hostage to the behaviour of the governments, i.e. you forfeit your share of the future fund if you go bankrupt. However, such a future fund would need to be funded with surplus government money and that is not going to be floating around in Europe anytime soon. So the real stick-behind-the-door is going to be that a Southern European country goes bankrupt the moment they are out of favour with the ECB. That bankruptcy will not just mean they cannot pay foreign banks back their loans but, much worse, will have to default on the bills to their own citizens because their deficits are that high. As long as the Southern European countries are indebted to the degree that they would have to default on their own population (i.e. a running deficit), these countries can be forced into greater austerity and rules on future budgetary control. The moment these countries think they can default just on the foreign part of the loans is when the ability to force them into any new rules is going to disappear.

Maldives: so, when are you guys going to get serious about preventing my country from flooding?

Aus: you come from the Maldives, right? Haven’t you got any hills?

Maldives: no, our highest point is about 3 meters.

Aus: so low? Why aren’t you already flooded by the occasional hurricane or tsunami?

Maldives: we have a ring of coral around us sheltering us from the worst of the storms. So the real worry is the overall sea levels.

India: you have that prime minister who became all emotional at the last talkfest, dont you?

Maldives: yes, that is him. Our prime minister is very vocal at conferences.

Aus: so he should be. You guys are f*cked. We are just pretending to be interested in averting climate change. We dont actually care at all.

Maldives: do all Australians swear so much? You are joking though, right? Havent you guys just agreed to introduce the world’s highest carbon tax and promised a reduction in your emissions?

Aus: (snort) yeah, that fib was quite the media success. It even made the BBC. Dont be fooled though, we are not going to diddely squat. I challenged the climate scientists to an open bet on all the key promises saying that none of them were going to happen. No takers and plenty of endorsements. All the smart money in our country says we are not going to do anything of substance anytime soon. Neither is the rest of the world.

India: yeah, forget about asking us. You rich guys have had your turn. Now that it is our turn to zoom you shouldn’t ask us to worry about emissions.

Maldives: what do you mean you are going to do diddely squat? You have legally binding emission reductions, havent you?

(Aus and India both look with a mixture of incredulity and pity at Maldives)

Aus: look, this is how the con is played. Firstly, we havent actually promised to reduce our own emissions. We promised to reduce Australia’s contribution to world emissions.

Maldives: why does that matter? What is the difference?

Aus: that allows us to pay someone else to pretend to reduce their emissions. For instance, suppose you cut down your forests today and replant them tomorrow. We Australians pay you some money tomorrow because those re-growing trees are taking CO2 out of the air. We count that re-growth tomorrow as our achievement: a means of doing our bit for the planet. We conveniently dont count the cutting down today because we pretend we are not to blame for it. By the way, the Maldives really should get into that game. The Indians do stuff like this. It is a great scam. See it as development aid.

Maldives: I see. You pay for reductions tomorrow that only arise because of increased emissions, the cut-down trees, today, and then you say you have achieved something. Doesnt anybody know this is what you do?

India: of course someone knows, but the people interested in knowing this level of detail are already committed to this political party or another, so they dont count. The average voter has no clue and goes with the headline debate so that’s the one that matters for policy makers. What geeks and academics say doesn’t matter.

Maldives: huh. You guys are so cynical. What are the other tricks?

Aus: well, another trick is to pretend we are reducing domestic emissions via increasing the price of carbon emissions. Economic modelling by our own Treasury shows that’s not likely to achieve much. Yes, we force the electricity companies to pay for the emissions caused in the generation of electricity, but their best reaction is to simply take the hit and pass the price increase onto consumers. It is still way cheaper to burn coal than anything else as a means of electricity generation and the consumers’ reaction to the increased price is absolutely minimal. So the consumers pay the tax increase. The share of electricity in people’s overall bills is so small that they wont change their behaviour at all.

Maldives: and what about this business of sequestration?

Aus: (smile) the most beautifully sequestered forms of carbon are called coal, gas, and oil. That’s all you need to know about what a con the sequestration debate is.

Maldives: so do the Australians intend to reduce domestic emissions at all?

Aus: oh, we do a bit. We mandate some windmill farms, though the mileage in that is limited. Mainly, we bribe selected high-energy usage industries. We give them some extra cash so that they switch from, say, coal burning to gas burning. It is still carbon emission intensive, but slightly less so and we count the difference as due to the policy. In fact, as I understand it, we expect more reductions from that than from our so-called carbon pricing, though you dont hear about it much in our media. Of course, by the same token we are giving these industries money to invest in technology that will endure decades, so the whole thing is a con. Hand-outs with small and un-repeated reductions in emissions predicated on the ‘hint-hint nudge-nudge’ agreement that we are not really going to make life difficult for our industries in the long run. If you look at our long-run projections, the only way the Australian modellers think we will achieve significant further reductions is by paying others countries to reduce theirs. And all the other countries are projecting their own increases, looking for ways to hide it….

Maldives: jeez. How does everyone get away with all this lying?

Aus: well, it is not really lying. All this is freely available information. It has all been in the newspapers some time. There is simply this huge difference between what actually goes on and what the mainline public debate on the issue is. The general population is just not interested enough to absorb this stuff. Its too technical and buried in the appendixes of reports that are too hard for most people to understand. And at the end of the day, the population votes for growth before they vote green so they dont really want to know either.  The experts all know what is going on, but even if they bother to vent their views in public, the journos  have to fit their writings within the dominant story on this which is shaped by the big players. So while the underlying realities are visible for those who want to know, for the vast majority the actual issues are over-shadowed by the shouting between the big boys. And think of the incentives of the big players: the opposition is quite happy to go along with the pretence that its the carbon tax that does the job, rather than the bribes and the foreign pretence-reductions. The reason for this is that the opposition thinks the carbon tax can be spun as a vote-winner for them. The civil servants in the Climate change ministries loves the pretence because it makes it seem they are achieving something and are at the international forefront of things. Instead of being seen to have achieved nothing, they suddenly are in charge of internationally debated policies. Woohoo! Industry is happy their lobbying has paid off and they wont be asked to do anything real, so they are happy investing in the emission booms of tomorrow. The Greens have their token success and can pretend to their voters that this is the thin edge of the wedge. And the government is honouring an election pledge and its deal with their coalition partners. So all the big players go along with it for their own reasons and keep quiet about what’s lurking beneath. Similar things go on abroad. At the end of the day, our populations just don’t really care enough about something that might cause problems in the far future, so they want the politicians to pretend to be doing something as long as it doesnt interfere with business as usual.

Maldives: really? Surely not! What about China?

Aus: ha! They have got the pretence business down to a T. They are building additional coal fire power stations like no tomorrow and they are extending their road and rail network to get ready for all the new cars, aeroplanes and air-conditioning they are going to use. So no bets on the issue of where emissions are going to go there! Their main trick in the international debates is to talk about energy-GDP efficiency rather than total levels of emissions. The key thing to know about the efficiency angle is that they can increase their efficiency overnight by revaluing their currency: that increases their nominal GDP immediately without any change in their production set-up. Given the huge degree to which the Yuan is undervalued, they can keep any promise they want on efficiency by allowing a revaluation the eve before they have to deliver on the promise. Even without a devaluation, they are just a property boom away of any GDP efficiency gain they want without any real adjustment.

Aus: trust me, you guys in the Maldives are so f*cked. And we are not even pretending to push for emission reductions for your sake. You are so small, you are not worth lying to. This whole circus is for domestic consumption.

India: yeah, dont count on us either. People in India have much bigger things to worry about. But look on the bright side, you will have a century before the seas rise 3 meters.

Maldives: 2 centuries we have been told, worst case scenario.

India: so what are you worried about? Even a century is no problem: that’s your kids and your grand-kids. The generations after that have to worry about themselves. You will be fine.

Aus: true, but if you are desperate, the best-guess at the moment is that you might have a chance with artificial dimming. Attract energy-intensive industries and let them belch out large plumes high in the atmosphere with sunlight-reflecting particles. Part of the global warming of recent decades is due to countries cleaning up their coal stations. Think of the irony in that: global environmental problem due to cleaning up the local environment! You can go for artificial dimming though. You should attract the dirtier stations and encourage them to perfect the dirtiness of their emitted particles. You should aim for a plume roughly double the size of Australia, reflecting most of the sunlight.

India: wow, you are telling these islanders to live in a shitty dark place belching plumes and cutting down their forests? You must be an economist! They have a great place. Coral reefs and good weather. Better to tell them to get rich enough now from tourism so that their great-grandchildren will be welcomed as migrants somewhere else in the future.

Aus: ok, but either way, the Maldives are stuffed. No-one is really serious about saving their islands. You guys should team up with the other islands in the same predicament and perhaps the odd truly concerned low-lying country, and make it happen yourself. We are not going to do it for you.

Maldives: yes, we are starting to realise this back home.

The Italian political scene has given rise to a phenomenon seen often in developing countries: a care-taker government run by a respected economist with an implicit mandate to ‘get the country out of the mess’. That mess, a public debt of 120% of GDP that outside financial observers are increasingly sceptical can be paid back, has two possible happy endings: some outside agency manages to miraculously get Italy to grow or Italy manages internally to re-start economic growth.

In terms of what the best policy would be to get Italy growing again, you don’t need to be a genius economist. It can be summed up in one phrase: the special interest groups that paralyse Italy need to be tackled. Well, that and producing babies again, for there is no long-term growth without people!

What special interest groups, you might ask? The tax evaders, which are heavily represented in the top layers of society; the entrenched old civil servants who are close to an overly generous pension paid for by too few young workers; the many special subsidy receivers (including millions of welfare dependents); the criminal gangs who siphon off parts of the national wealth and evade taxes (the shadow economy is estimated by Schneider, using fairly controversial methods, to be 20%); the professional cartels who have a stranglehold on health and bureaucratic services (think of medical specialists and the closed professions); etc.

It’s not the solution that is hard, but implementing the solution: tackling special interest groups is incredibly hard. They are well-organised, know the law better than others, have their tentacles through all the main political parties, have captured part of the public debate such that few even recognise that they are the problem (rather, they are seen as the pillars of society), and they are highly alert to any threat to their position. This is also why they are so entrenched: before any political party can mount a campaign against them, they would already have opened a counter-attack against the political forces mustering against them. They are undoubtedly watching the situation closely, ready to fight any incursion to their rights.

So, what should Mario Monti do?

My advice is to move with lightning speed and to actively maintain a sense of desperate crisis until a reform package is agreed and is being implemented. Mario has to feed that atmosphere of desperation and encourage a widespread belief that Italy is staring into the abyss if he is to have any chance to dislodge some of the major interest groups. The first thing he should do is to arrange for new information to be brought out every week outlining how much worse everything is than previously imagined. The debts are higher, tax collection is lower, crime is higher, capital flight is worse, etc. This is the time to talk Italy down, whilst projecting confidence that he knows how to get Italy out of it under the right ‘tough measures’.

How quick should he move? I would say that he would need to get key legislation to parliament that tackles the most crippling interest groups (tax evaders and ageing civil servants) in no more than a couple of weeks. If he gives the interest groups 6 months to rally against him, he has no chance. Undoubtedly, the interest groups will still mount demonstrations and a vigorous media campaign if he manages to get legislation to parliament within weeks, but if he is fast enough then Mario will have the advantage that there is a feeling of desperation and that there is no alternative to his package.

In order to do this, Mario will need help. Given his relation to a raft of European think tanks (Friends of Europe, Bruegel, and several others) and a large network of connections, he should be able to find help. He will have to rely on young people with the energy and drive to spend many sleepless nights on new legislation designed to disentangle the embrace of the interest-groups from the Italian state. He should know that there is no chance to keep such an assault a secret, so he should assemble small teams of young experts as soon as he can and establish the right expectations amongst these groups (i.e. that their mission is to tackle the interest groups). They should be told to work harder than the interest groups can organise to oppose them and he should see his own job as tirelessly protecting these teams from the assaults on them that will come from within the bureaucracy and parliament. He should probably aim to get a couple of quick wins under his belt to cement his position. Going after some famous tax-evaders should do the trick, hopefully Berlusconi.

What should Mario not do? Mario should not play the ‘trust me, things will work out’ game, giving out positive and soothing noises about the Italian economy. He also should not spend a half year forging alliances between various parties, trying to hammer out compromise programs that a coalition of parties could agree to. If he does that, he will find himself with nothing: his coalition would sift like sand through his fingers when the going got tough; the markets would eventually see through the optimistic chit-chat; and no serious changes will occur. He might still get austerity packages through (they are much easier to implement than tackling interest groups), but getting the economy going forward again would be out of sight.

Is Mario the kind of dynamic, fast-moving economist Italy at this time needs? I have never met him, but at the EU, he was a respected commissioner, known for being calm and collected, deliberating each decision carefully, in charge of the tough cases requiring diplomacy. He is the kind of person known as a safe pair of hands, able to see the woods through the trees, making the noises everyone wants to hear. He is the consummate insider who advises Coca Cola and mediates between governments.

Unfortunately, Italy does not need an ageing safe pair of hands. Mario’s party trick, that of being the smart guy in the room who calmly works at the behest of established political powers, will simply not be enough in this case. He is in a vipers nest asked to do the impossible. The question is not whether he can placate the vipers, but whether he can do what needs to be done before he is bitten. Italy needs someone with the political instincts of a cheetah, prepared to make unexpectedly fast moves against well-entrenched interest groups.

It is a tough ask to go from the trusted wing-man to the treacherous cheetah pouncing on Italy’s internal enemies before they can mobilise. He seems too used to spinning things positively to play the part of the harbinger of doom in order to create the desperation he needs to create political support for a reform program. We will see.

Update 18/11: so far, so good. Mario has more or less appointed whom he could and has named all the elements in the blog above as things he wants to reform: tax evasion, welfare, the labour market, education. He also talks of urgency.

Let’s see if he stays on track with quick reforms + desperation campaign.

Some public commentators believe that reducing carbon emissions is possible and that we are on the right way with the current policies. Others, like me, see carbon emission policies as a political dead end and advocate geo-engineering and adaption. Hope versus realism one might say. Endless debates full of emotions and hot air ensue, yet how can an outsider tell who is right?

In the best of Aussie traditions, I propose a set of gentlemen’s wagers. For each one, the stake is 1000 AUS to a favoured charity (mine is Amnesty International). The propositions[1] which I offer to any Australian scientist active in the climate change debate are:

1. Australia will not meet its 2020 Kopenhagen emission commitments in that domestic emissions in 2020 will not be at least 5% lower than they were in 2000.
2. World emissions of CO2 (measured by the EIA) in 2020 will be higher than they were in either 2000 or 2010. And there will be no global Emission Trading Scheme in 2020 of which the participating countries cover at least 80% of world GDP (measured in PPPs).
3. Both Australian and world coal production will be higher in 2020 than in 2010.

 Conditions: first come, first served; names are made public; scientists active in the debate only; I win if and only if, measured in 2021, the proposition holds; disputes to be settled by ESA peers; offers close end of October 2011.

Proposition one should appeal to Labor politicians who write flowery speeches about how the government’s emissions policies are good policies that are going to work. I am calling those policies symbolic wastes of time that are not going to achieve anything substantial, like delivering our promises. The bet is on domestic emissions because there is some chance we will pay other countries to pretend they are reducing their emissions, which should not count.

Proposition two is a judgment on world developments and is a challenge to anyone who believes serious international cooperation to reduce emissions is going to happen. Note that there are various non-political events that could deliver the outcome: a major world recession or a technological breakthrough could also tilt emissions down, so one gets several bites at the cherry.

Proposition 3 is a direct challenge to those who believe Australia is serious or will become serious about carbon emission reductions: the whole point of emission trading schemes is to get to a situation where we stop digging up our fossil fuels and leave them unburnt in the ground. The wager is that neither Australia nor the world is going to actually do this.

Why am I offering these wagers? Because I have found that scientists often dodge the question of whether their policies are politically feasible. They debate on the basis of the policies they want to see succeed rather than on the basis of what could succeed. The arguments are thus emotional, involving the intricacies of climate science, or how we owe it to the next generation to do something. Yet, precisely when you truly believe the doomsday scenarios and our inter-generational obligations, you need a calm look at what is politically feasible in this world: whoever thinks carbon emissions policies are not going to work given the political realities of this world, owes it to the next generation to say so and move on to advocating things that might work. If those emotionally defending current policies believe their own words, they should be brave enough to take up the offered wagers.

I would advocate more bets on this debate and others debates in which the number of participants is too small to sustain a commercial betting market. Bets are an open signal to the public as to where the balance of probabilities lies on complex questions. They are a quick way to force scientists to stop posturing and have a calm look at the political realities of the world, which in turn should help to focus the policy debate on what is workable.

Besides, Australia is the betting capital of the world and we should make that national trait work to our benefit.

The major indicators of how we as humans are doing are smelling exceptionally rosy. We are living in a golden age of progress and opportunity for humanity. Let’s list some of the big changes in recent times:

1. Life expectancy is going up by a lot. Whereas the average Australian would not have expected to see 50 in 1885, the average Australian now can expect to live beyond 80. The same trend goes for both developed and developing countries. For the world as a whole, the World Bank reports that life expectation has thus crept up from about 52 in 1960 to 69 in 2009. And the increase is greatest in poorer countries, so there is even increased equity in terms of life expectancy by country.
2. There are more of us every year, but the numbers are stabilising. According to this source, we used to be with no more than 50 million some 3000 years ago, reached 1,5 billion in 1900, now count close to 7 billion, and can expect to be with close to 10 billion in 2050 after which a reduction is expected. Whilst the increased numbers, who can all expect to live longer than our ancestors ever could, is itself a sign of success, the expected peaking, due to reduced fertility levels virtually everywhere in the world, is also very good news because it means the old nightmare-scenario of a Malthusian melt-down is now highly unlikely.
3. We are less and less violent. Trends in murders and homicide are at incredibly low levels from an historical point of view: whereas our hunter-gatherer ancestors were believed to kill off about 1 in a 100 every year, modern Western society sees one homicide per 10,000 as very violent, corresponding to exceptionally violent countries like the US. More normal levels are in the order of 2 per 100,000. Globally, the trends have even been going down in the last 10 years. Trends in armed conflict also speak of exceptionally peaceful times. The Upsalla Conflict Data Program thus collects statistics on how many combatants die in total in organised conflicts around the world. The basic facts are that the period just after WWII was easily 5 times as violent as the 1980s per capita, whilst the 2000s are easily twice less violent again than the 1980s. The trend for the last 10 years too has also been clearly downward in per capita terms.
4. Less of us are poor and more have access to basic facilities (clean water, sanitation, literacy, etc.). Global output growth in 2011 is in the 2-3% range, the vast bulk of which in poorer countries. Great news for inequality reduction hence.
5. We are getting happier as the poor amongst us are getting richer. As one can see from the World Value Survey, the relation between income and happiness is very robust by country and we furthermore know that countries who escape dire poverty also increase their happiness. So the world as a whole is almost certainly getting happier. Even within countries that are in an economic downturn like the US, the average life satisfaction is about as high as it was before the downturn.

The main surprise for me was to see how clearly some of  the other economists speaking there, like Warwick McKibbon, David Pierce, and Henry Ergas, were skeptical about the prospects of serious coordinated international efforts to reduce carbon emissions.

The message of my presentation was that it is time to get more serious about adaptation. The synopsis of my presentation is over the fold.

The world is getting warmer and wetter, almost undoubtedly due to the fact that we are burning up fossil fuels at an incredible rate. Whilst this change in our climate will lead to some positive opportunities, such as wine growing in Tasmania, our natural and social habitat is not accustomed to changes that are this rapid and we should hence expect a significant loss of biodiversity and human infrastructure if we cannot halt climate change.

There are those that believe that we can avert climate change by repenting of our sinful energy-guzzling ways. They advocate an increased cost of activities that lead to carbon emissions in the expectation that this will gradually become normal throughout the world, eventually leading us to new technologies that will make humans more carbon neutral. They expect small-step policies, like the one the Australian government is planning to implement in 2012, to be instrumental in getting towards long-term changes in our use of energy.

Then there those like myself who see no hope whatsoever in reducing emissions. Most of the rest of the world simply doesn’t worry enough about the climate in coming decades and centuries to make the radical adjustments asked for. The scenario I see unfold is for the world to more or less go through the cheapest means of energy first, only using the cleaner energy as the more polluting but cheaper forms have run out. For sure, I also hope for technological breakthroughs, but having seen no major new technology in the last 50 years that comes close to out-competing coal and oil, I am not holding my breath that the magic technological fix is around the corner.

So if you fully expect the climate to change and think of policies surrounding carbon emissions as feeble symbolic gestures, does this mean you want to do nothing? The answer is no. If you are desperate enough, you try geo-engineering fixes that do not require massive and sustained coordination. Otherwise, what you do if there is a problem you can’t fix is that you learn to live with it and adapt to it such that you minimize the loss and maximize the gain.

Let us remind ourselves what we are adapting to. As a rule of thumb, in the course of 10 years we are talking about a warming of 0.1 degree Celsius, an increase in sea levels by 5 centimetres, and about a 0.5% increase in rainfall per 10 years. Ocean acidification and the melting of the ice caps make up even slower changes in our climate. On reflection, these anticipated changes in climate are very fast from a geological point of view, but from a human point of view they are painstakingly slow. You would be forgiven for not noticing any changes in your lifetime, which is of course precisely why I deem it folly to expect the world to really get anxious about this.

For any investment that is usually written off in a matter of decades, which includes most existing housing and nearly all business investments, the slow change in climate means that taking account of climate change is irrelevant since there will be plenty of time in the future to redirect such investments when the climate is actually noticeably different. One can think of making building codes take account of a greater likelihood of floods and storms, but that is about it.

The things to really worry about are public investments with payoffs measured in centuries rather than decades. Where governments have a particular role is in fishing stocks, biodiversity, nature parks, coastal lands, and other public goods that get given down via the generations.

How can governments react to the collapse in the stocks of those fish that would disappear due to acidification of the oceans? That acidification is a serious problem, to the extent that if it goes on unchecked, we’d be in the situation in a century or so time that the shell of many marine animals would dissolve, which means the end of them and things that feed on them.

One question is whether acidification can be reversed by pumping more alkaline substances into the ocean or churning alkaline rock beds in the ocean itself. Given the amount of fossil fuels we dig up, one would need an awful lot more chalk into the oceans to balance the acidity. My understanding is that this is an active area of research where we don’t yet know if acidification can be countered by things like mixing up shelves of chalk under the seabed.  A ‘coalition of the willing’ could try to churn enough calcium in the oceans to prevent further acidification and Australia could lead research and international efforts that way.

If it turns out that acidification is unavoidable, we should think of ways of preserving the biodiversity. Governments can extend the conservation areas in the oceans, can set up ‘artificial reefs’ on land that preserve some of the current marine diversity, can set up gene banks for the many current marine life species, and in various other ways can preserve as much of the marine life diversity as possible in the cheapest way possible. Some of these things, like in-land reefs, could be tourist attractions.

Apart from conservation, governments can also be more pro-active: if you take the warming and acidification of the oceans as inevitable, you can turn to the question how to re-stock the ocean with fish and other organisms that do well in warmer and more acid waters. Of course, nature itself will experiment with this, but governments can give nature a helping hand. We can try to genetically engineer new fish species or mass-raise those species which we know are more suited for the new climate. Such initiatives would of course greatly benefit from having a database of ocean life conserved somewhere. And it of course will be a case of hit-and-miss as the long history of introducing new species in Australia has shown. Learning how to engineer the fish and other marine life we want is not something we can do overnight and there is a government role in coordinating a knowledge base in that area.

Analogue to how governments have a role to play in maintaining and increasing the stock of fish, there is a role for government in maintaining biodiversity and nature parks on land. Gene banks, artificial species, artificial habitats, etc. are obvious things governments can get involved in. To some extent, we already are involved in such thing. The Australian National Botanic Gardens for instance already stores seeds of over 5000 different  plants and such programs would seem worth expanding.

The main areas in which active government intervention specific to Australia would seem desirable are hence in terms of our unique natural habitats and waters. One would want to invest in our ability to re-stock habitats and to engineer species and plants capable of thriving in the new conditions. The two tasks, habitat conservation and habitat experimentation, are both long-term enterprises where the 10 billion dollars currently spent on symbolic measures would go a long way to helping us prepare for the climate changes ahead.

Just a week ago, the betting markets still gave Gaddafi a 40% chance of remaining in charge till the end of the year but now the markets have given him up for a lost cause. The Arab Spring can hence boast another regime change, and this time one that is quite complete: there is almost no existing government bureaucracy that remains in place after the change because there was no Libyan government bureaucracy in the first place.

It is also a victory for French and English pride: as I predicted 4 months ago, the European countries caved in to their own need to keep face once they started interfering and they thus armed and trained the rebels, whilst NATO acted as the rebels’ air force. They said they wouldn’t arm the rebels at the time but it was obviously more important to win than to stick to that promise. And it must be said, the victory has been well-managed so far with few reprisals. It is a good day for international justice.

What next for Libya? If you read the constitution that the Transitional Council has put up, you get to read a carbon copy of the constitutions of Western nation states. If nation building was hence only about laws, the Libyans are going to be just like us. With a GDP per capita of around 20% of that of the US (which is high but still down from 100% in 1980!), an urbanisation rate close to 80% and a relatively large tertiary student base, no government debt worth talking about, and more revenues than running expenses, you would think that if any Arab country could pull off a modern democracy it would be Libya.

Libya will be a good test of the political-economic theory of the ‘natural resource curse’ which holds that a country with weak institutions burdened with a lot of money flowing in for no effort is going to end up very corrupt and un-democratic. There are many variations to this theory (for an example paper of my own on this issue, see here), but the essential story is that the rents created by the resource lead to a political system oriented solely around fighting over those rents, leading to exclusion of losing groups and of the non-resource sector. Under the curse, it is too hard to develop a vibrant manufacturing or export-oriented service sector when the natural resource rents make the exchange rate high and gives the politicians too little incentives to provide public goods oriented towards the non-resource sector. Having to fend on its own and surrounded by rent-seeking politicians looking to tax anything visible, the modern sector dies in childbirth and the country remains poorly educated and un-versed in the ways of the modern economy, merely living off the resource rents while they last.

There are two scenarios for Libya, one in which it overcomes this curse and one where it once again succumbs to it.

The first scenario is that Libya can skip the century or so it normally takes for good democratic habits to become ingrained and immediately mimic a country like Norway. The way to do that would be to actively reduce the degree to which the resource rent affects the exchange rate too much. A national fund that buys up overseas assets and that re-invests any dividends in increases in the fund is one way to do this. The government can otherwise invest in the kind of things needed to get modern sectors up and running, including a more developed education infrastructure, independent competition regulation, modern tax codes, etc.

The second scenario is that the many different groups that make up the transitional government, before and after elections, fight over the spoils and all demand their group gets a share. If no group trusts the other groups and there is insufficient national identity to trust anyone calling themselves ‘non-partisan’, then things like a national future fund cannot be set up and maintained as each group in power would simply raid the fund immediately for its own benefits. There might be then some prestige projects (like ‘broadband for all’) that a national government engages in, but every check and balance in the system gets manned by individuals foremost identifying with their group. The oil contracts are of course the main things over which the groups would fight, and deal-makers on the side of the oil companies will look for long-standing political connections to safeguard their own interests.

The essential question is whether Libya has the centre-group it would need for the first scenario. It would have to be a centre-group not associated primarily with a particular city, not encumbered by the demands of their family and communal structure for jobs and influence, and not identified with any particular grouping.

Such a group does not exist in Libya: land-holdings are still primarily based on kin-ship, i.e. family and community ties. Cities have strong independent histories and are made up of patchworks of overlapping tribe-like communities. Even if you have the odd individual who himself really wants Libya to become like Norway, the reality of the situation is that such a person would only have political support from his community and would be expected to reciprocate. If he doesn’t, he is out.

So, my prediction on the eve of its introduction is that Libyan democracy will fail. There will probably be an election in which some coalition of interests will win, after which there will be a gradual sifting-out of alliance members who are not needed to hang on to power. More and more of the best jobs and transfers will go to a smaller in-group defined by family, ethnicity, and, most-importantly, region. That group will subvert the democratic process such that Libya becomes a kind of small Egypt with oil, a mini-Russia at best. The internal divisions in Libya are not strong enough to expect blood-shed of the type you see in Nigeria, but true democracy is going to have to wait in Libya. In 20 years time much of the current tribal and ethnic structure should be destroyed by economic forces that make land irrelevant and that will replace most of the other tribal economic aspects with purely monetary aspects (greatly aided by the internet). With any luck, Libyan oil has run out by then.

Is there a way in which truly far-sighted decision makers could avert the resource curse? What the Libyans should realise today rather than tomorrow is that their oil fields are their curse. They should immediately outsource the running of their oil fields to some international organisation that pre-commits to hoarding most of the oil wealth generated from these fields for Libyans in the future. It won’t happen though: it goes against human nature for the victorious Libyans to recognise what they themselves will become if they don’t remove the temptation, and there is no international organisation that has the ability to credibly pre-commit to doing the right thing by the Libyans such a long time into the future.

Where we economists are most useful in climate change discussions is the question of how to change the behaviour of humans and how to organise the production of public goods. Because the climate is a world public good, individual behaviour that affects it involves an externality and our training as economists leads us to particular answers as to what can be done about this externality. One of the main things that economists brought to the climate change debate early on is that in an ideal world, you would want to price the externality via taxes or trading schemes, rather than mandate behaviour directly.

There are three more things that economists know about public good provision that are absent from current climate change debates. The first is that when there are many players who have strong incentives to free-ride, then you will need punishment to induce cooperative behaviour. Voluntary sustained cooperation in the case that there is a clear gain of defecting is simply not going to happen. The second thing we economists know is that monitoring and taxation activities within countries and between them will be gamed, particularly by big business. What cannot be well-measured and taxed will be very hard to affect. The final thing we economists know is that public goods are more likely to be produced by agents with something to gain from it, which in the case of climate change means big countries negatively affected by climate change. Let us take each of these three in turn and show how the basic economics of public goods makes you look very differently at the issue of climate change from the way the debate rages in the mainstream.

Economists know almost everything there is to know about free-riding. We have tonnes of experimental data on it from games played amongst students and practitioners, and we have the whole history of taxation, public goods provision, and international cooperation at our fingertips, as well as the theoretical apparatus of cost-benefit analysis to explain that history. A brief look at history and at how things are organised within countries now tells you what you need to know regarding how to set up public goods, and it also tells you how likely it is that a world coalition will emerge to seriously curtail greenhouse emissions in every country.

Do we rely at the country level on kindness and generosity to fund our education, health, and defence spending, which are all public goods? No we don’t. We rely on tax obligations, with associated punishment for those who do not comply.

Do we then rely at the village level on the joint pride of the villagers to ensure that they bring their garbage to the dumps, that they abide by the traffick rules, and in other ways maintain levels of public goods? No, we don’t. We organise garbage collection so that it is free of charge to the individual villagers to have their garbage collection, and we have village cops who now and then monitor the traffick rules and punish the deviants. Social norms are definitely important, but punishment helps maintain social norms.

Do we rely at the international level on the sympathy of dictators in order to motivate them to stop abusing their populations, whilst giving the right example in our own countries? No, we don’t. We have international courts, UN security councils, coalitions of the willing, etc., with the explicit intend to punish wrongdoers.

Hence why on earth would we think that in the case of climate change, we are going to get a world coalition whereby all the major players are going to constrain themselves in order to seriously reduce emissions? Which historical examples can we point to where you get big behavioural changes amongst 200 players with huge free-riding incentives just on the basis of appealing to their morality? I can think of no example. The only examples of coordination I can think of were either when there was little incentive to free-ride (such as in the case of the ozon treaty), or only a few countries affected (such as with landmines). To believe appeals to morality will work when the desire for more wealth creates huge incentives to free-ride within every country is essentially the mistake of the socialist experiment all over again in that socialism too started out with the belief that you can organise cooperation by appealing solely to morality. It is the sort of folly we pretend to believe on Sunday mornings in the church, not in the bright light of day.

This first piece of knowledge of economists about public goods thus points to the crucial role of some sort of real punishment of major countries that do not cooperate, or else some solution that can be implemented by a smaller group of countries who individually stand to lose from climate change. What is on the table – small promises by a few countries – is not going to work (which is why I keep calling the current policies symbolic).

The second thing we economists know is the importance of measurement. When it is impossible to measure an activity to any reasonable degree, then people will avoid taxation on it. This is why we don’t tax home production, even though it theoretically should be taxed. This is why we do not apply small taxes to the littering of public parks, but rather use inordinately large fines to compensate for the fact we don’t measure it with high probability, and we pay people to clean up the parks every day. Similarly, we do not tax noise pollution or people who piss in the ocean because it is too hard to measure, and instead we creates spaces where it is easier to monitor noise and effluence. Similarly, we often try not to tax for road use because there is a large cost in toll booths and electronic systems to monitor the use of roads. Instead, we pay roads from general taxation and live with the fact that some people get more benefit out of them than others. As a rule of thumb, if we cant monitor it well, we look to the government to produce some public good rather than attempt to control individual behaviour.

What forms of emissions are too hard to measure? Almost anything connected to agriculture, low-scale forestry, and small-business emissions is too hard to measure. So we don’t have taxation or emission markets for small-scale forestry, urban gardens, single-person firms, etc. Small users are all out of the taxation and emission loop, and we only get at them indirectly, for instance by changing the electricity price. But their emissions matter and if the incentives are high enough, they could start to by-pass the indirect taxation. Big firms can become small firms, or they can outsource their major emissions activities to small firms if the costs of being large start to include the fact that they then become large enough to be noticed and taxed for measured emissions. Farms and firms can switch to oil or coal generators that bypass the taxes on big electricity producers if the taxes are high enough.

This second piece of knowledge warns us about the limits of what can possibly be controlled in any emission-oriented scheme. Households can hide the emissions from their gardens, farms can hide them, small companies can hide them, large companies can hide them by becoming small or by moving to a country where they are not monitored, etc. This reality means that targeting emissions for taxation is going to be a very haphazard affair, very easily gamed. The best you might hope for is to target the places where there are a lot of concentrated emissions, like power stations, oil companies, or large forestry. Since it is perfectly possible to have smaller-scale usage of energy (including burning your own wood!), one should just from a measurement point of view be sceptical as to what governments who want to tax the externalities can achieve.

This second piece hence already points to the likely futility of trying to tax emissions, even if there would be a world coalition. It leaves you wondering whether there are other ways of influencing the climate that does not involve the measurement of emissions.

The final piece of knowledge concerns the question of what happens when there are many different players with differing incentives to produce public goods. From basic maximisation behaviour, we know it is the big players with a lot to gain individually who will make the largest effort to individually produce the public goods and to organise the rest. This is why the big shareholders monitor the boards of public companies. This is why the biggest mining companies spearhead the lobby against government action on climate change. This is why the countries with the most to gain from whaling spearhead campaign to broaden the hunt for whales. Etc.

This final piece of knowledge tells us where to look for possible action against climate change: amongst those countries who have the most to lose from climate change with the greatest resources to throw at it. In terms of agriculture, the losers are certainly not the US or Northern Europe (bar the low-lands), where agricultural yields are expected to increase. It is not places like Russia and China that you should look to either, because they too are projected to see increases in agricultural potential. Rather, it is places in low latitudes like Indonesia, Southern Asia, Southern Europe, and low-lying islands. They stand to lose the most in terms of agriculture.

Whether Australia is going to be a major loser is up for debate. Ocean warming and acidification is not likely to be good for us as it might destroy the Reef. In terms of agriculture, it is less clear. Despite what some academic papers have said about agriculture (Hennessey 2007), there will be areas where agriculture may prosper: things are like to get worse in the South-East but better in the North-West. Since we are talking about climate phenomena that take centuries to materialise, we should look at the effect over the whole country, in which case it is less clear cut than CSIRO reports would have us believe.

If you thus look at the likely winners and losers, as well as their resources, you will thus notice that the wrong countries are leading the current climate efforts. Indonesia, Polynesia, Micronesia, and India should be leading the way on this, not Australia and Europe. No wonder that the efforts to do something are so paltry: the effort at the moment is mainly for ‘feel-good’ reasons amongst players who might well secretly think they won’t individually lose all that much.

From basic economic history and theory you thus learn that the current mainstream debate misses the real issues. If you truly want a world coalition you have to talk about punishment of big countries who do not fall into line, which means you are talking about national sovereignty. If you don’t think that the punishment of countries like the US will ever be a realistic scenario, then you cannot talk about a world coalition. If you want to set incentives for emissions, you have to argue you can get to desired targets whilst having a leaking bucket in terms of many areas and players that cant be monitored. If you think the bucket is too leaky, you have to give up on emissions and look to something else that influences the climate. If you are looking to see who will lead the debate in the future, you have to concentrate on the big countries of low latitude or the low-lying islands in the world.

Whilst it is fairly clear that the current climate change policies of Australia and other countries will do next to nothing to avert climate change (see here for a latest update on the debate), there is a key element particular to Australia that has so far managed to stay off the political battleground: our coal exports.

Australia is the biggest coal exporter in the world, responsible for about a quarter of the world’s total coal exports. Australia’s coal production accounts for 6% of the world’s total coal production. We export roughly half of our production. Since coal is responsible for about 40% of the world’s total greenhouse gas emissions, Australia’s contribution to total greenhouse gasses is 2.5% just via coal alone, twice as much as the proportion of Australia’s total GDP to world GDP. Put simply, our coal exports alone account for about the same proportion of the World’s greenhouse gasses as the whole of the domestic economy accounts for world GDP. Yet coal exports account for no more than 3% of Australian GDP. By giving up 3% of our GDP we could thus `re-coup’ our whole domestic economy’s worth in terms of global production and global emissions. That puts the paltry 5% we have promised to reduce our own domestic emissions by into the shades (a target we are furthermore almost certain to fail).

The key question is why both Australia’s political parties have exempted coal from their discussions about climate change? Australia could at a stroke achieve far more world greenhouse gas reductions by halting its coal exports overnight than it could do with trying to become more energy efficient in the domestic economy.

There are several lines of defense that coal interests can and do use to keep it out of the debates. One is the economic theoretical argument that in an ideal world, one would want to punish the users of something that is bad, not the producers. Another is the argument that it would do much damage to our own economy, and there is finally the argument that if we wouldn’t dig up the coal and export it, then someone else would just dig theirs up faster. Let us take each of those arguments in turn.

In an ideal world where one can perfectly monitor and control everyone, it is almost immediate that one would not want to prevent production and export of coal, but rather tax or punish the person burning it since it is the person who burns it that receives the final benefit of the use of coal, not the producer.

Yet, we do not live in an ideal world. We cannot force the importers of coal to abide by the taxes we have in mind for them, nor can we even somewhat accurately monitor what they do with their coal if they would put their minds to the task of hiding it from us.

The situation one is then in, is rather like that of the production and use of cocaine. One can similarly argue that it is the user of cocaine who should be punished, but in reality this is too hard so the legal system punishes those it can somewhat more easily lay its hand on: the producers and traders in cocaine. Just as the drugs dealer can hide behind the excuse that it is ultimately his clients’ problem, so too can the coal producer hide behind the same argument. And in both cases, the reality is that we should put the enforcement effort on the person who produces the stuff for the simple reason that we can more easily punish the producer than the consumer. Australia in this regard is a bit like a rich drugs dealer who hides behind idealised economic theory to say it is not his problem if his clients are addicted to coal and he shouldn’t have to change his ways.

Then there is the question as to whether halting coal exports would seriously hurt the Australian economy. Here, the essential distinction is between short-run and long-run. There is no doubt that to halt 3% of our GDP constitutes a medium sized recession there and then. A political poisoned pill. The pain can be spread out over a few years, but a 3% reduction in GDP is painful in the short-run, no doubt about that.

In the long-run, probably the opposite is true: halting coal exports is most likely a long-term blessing. The main reason is that high mineral exports are hurting all the other sectors of our economy (including the export of education!) via an inflated exchange rate. The mining boom in the last few years has nearly doubled the value of the Australian dollar relative to the American dollar, and this is seriously hurting our manufacturing and service export industries. Australia’s future as a high-technology and high-skilled economy would be much safer if we weened ourselves off our mining incomes than if we remained dependent on it.

Moreover, choosing not to dig up the coal now doesn’t mean it cannot be dug up in some far future. We are thus essentially swapping income now for income in the far future, and probably at a much better price too since the price of fossil fuels can only be expected to rise rapidly in the coming decades. Hence, leaving the coal into the ground should be seen as a kind of Future Fund for next generations: we leave wealth in the ground that accumulates in value.

Then the question of whether others will take over from us in the export market for coal if we halt our own exports. Whilst there of course is the real possibility that other coal producers will get a short-term benefit if we leave market share to them (probably with an associate price increase too), the main point to make here is that we shouldn’t care about this. For one, it underscores the short-run versus long-run argument. More importantly, to be afraid that others step in should surely not be a reason in itself not to halt coal exports. To argue that we should pollute the planet because others would do it if we don’t, is like saying one should keep slave trading because others would if we don’t. If we feel it is truly morally just to do something, independent of what others do, then it should be irrelevant what others do. And of course, the world only has so much coal so if we don’t dig ours up there is less for the world as a whole to burn off.

Hence making a concerted effort to reduce our coal exports as a means of making an actual difference to the level of Greenhouse gas emissions in this world is sound from a second-best economic point of view, a long-term wealth point of view, and is impervious to trade equilibrium arguments. But it would mean short-run political pain so it won’t happen and we will be stuck with the symbolic policies we have at present. Nor do I personally think that any policies oriented around reducing our own energy use, or indirect energy use, are going to really do much to change the world’s climate. The only realistic options are to either adapt to the forecast climate changes or else embrace far more radical geo-engineering options.

A reminder on the rules of the survey: you need to be invited. Economic society members are automatically invited and merely have to click on a link in an email that is sent to them to reach the survey. Nearly all academic economists have been sent an email that invites them indirectly: they have to send an email to the main person organising the survey, Richard Hayes (r.hayes@mbs.edu) , who then sends a personalised link. Yet, basically any economist in Australia who is keen to have their say should feel themselves invited to mail Richard and ask to be included. This for instance goes for economists in ministries, banks, and regulatory institutions.

Observations:

1.       At the top end, it has been publish or perish long before the government got into the game of assessment exercises. Good young budding academics knew that in order to be seen as a top academic they had to do well in the international publication game. Like it or loathe it, that game is dominated by Europeans and Americans. This doesn’t mean that it is impossible to do work on Australian issues and get into the top journals, but it does mean that one ultimately has to work on the things that interest European and American editors and referees. Hence a cute Australian experiment with a policy that might also be introduced elsewhere (say, the baby bonus or HECS) has a shot. An analysis of the labour market dynamics in Australia has no chance. As a result, many of the top academics have told their best students in the last 30 years or so not to work with Australian data and to preferably go and study somewhere else. It is a form of cultural cringe in that one has an insufficient degree of pride in ones’ own country, but many felt this was the honest advice they owed their students. Australia is not alone in this. We interviewed job market candidates from Britain this year whose supervisor had told all his students to work with American data in order to have more chance of top publications.

2.       The research assessment exercises have made the reality above visible to everyone. In particular, it has made it visible who has not played the international game at all and who has. Even though it was only in place shortly, it has lead to major changes in the power structure inside academic schools, and now that that genie is out of the bottle it wont go back in. Those who publish a lot in leading journals were promoted much faster than they would have been otherwise, whilst those who didn’t do any visible research had to become administrators if they still wanted to have a chance of being called professor. This was both good and bad. It was good for the highly talented who felt frustrated that there was no clear way in which they could outperform others, whilst it also, at a stroke, stigmatised individuals who made different, but still worthy, investments, such as in teaching quality or local research groups oriented towards Australian policy. At a stroke they were visibly designated as second rate, whereas before they could at least with some probability get away with saying they were world-class (which, in a local sense, they were). The recent demise of the ERA changes nothing about this reality, so don’t expect any tweaked version of the ERA to make much difference. The real losers from the recent change in the ERA are those who only look good on an A/A* publication schedule, but whose work is not cited, who have few grants, who teach small classes, who do little service, and who basically play no other game than the international publication game. And they do not really lose any of their reputation, but their desirability for institutions looking to do well in ERA rankings is slightly reduced, which might cost them some of their loadings.

3.       Even though teaching is the core business of the tertiary sector, the assessment exercises have contributed to the gradual marginalisation of teaching that has happened the last 20 years. Teaching in academia is now considered a second-rate activity, one that is actively avoided by the up-and-coming. In fact, the reduction in the status  of teaching in academia has gone so far that teachers are now at the very bottom of the university hierarchy, behind administrators who can boss them around and pester them with forms; behind junior researchers who know nothing about real life but who play the journal game better; and even behind contract workers. It is no wonder that the academic teaching profession is not attracting good youngsters and has to rely heavily on migrants who will by design know less about Australian policy issues and will have less interest in it.

4.       The advent of the internet has increased the possibilities of academics to move into the market for Australian economic issues. Blogs, tweets, homepages, and virtual centers have reduced the costs of speaking to the general public and to the policy makers. This has made the returns to Australian policy work more direct and higher, though paradoxically it tends to reward fairly shallow commentary rather than real understanding (I say this as a blogger). This trend is still continuing.

5.       The government bureaucracy has had an increasing appetite for academic involvement. Hence there has been an explosion of groups loosely affiliated with universities that essentially do work for the ministries. They write reports on poverty, Aboriginal issues, health, urbanisation, transport, tourism, etc. They evaluate proposals by industry and other ministries. They set up courses for the bureaucracy and in almost every other way provide intellectual services to ministries that seem to treat academia as a substitute for in-house expert knowledge.

In short, it has been a mixed bag for the incentives to do work on Australian policy. At the top research end, all the incentives are not to bother and the best students who could be interested in it are actively dissuaded from pursuing Australian issues. At the bottom teaching end, the reduced status of teaching has lead to a large reduction in the amount of local content that will be taught to the next generation, just by virtue of who teaches it. But elsewhere, work on Australian issues has blossomed like never before. There are thus more than enough report-writers, too few teachers, and  perhaps too few top academics involved in Australian economic and social policy issues.

The problem at the teaching side is basically unsolvable. You would have to double academic teaching salaries to make a dent on their low status and such a move, whilst not actually that expensive, will be bitterly resisted by everyone else (i.e. the researchers and the administrators) because it would lower their relative standing. They would most certainly veto any change or pervert it so that it first increases their salaries. Even if one is capable of bypassing all the forces rallied against increases in teacher pay, it would take decades for the higher incentives to be an academic teacher to work through into more home-oriented teachers to enter the system. The best you can probably do in the short-run is to have additional courses on local content for the civil service, which is a market that already exists and seems to be working quite smoothly.

Presuming that one sees it as a problem that our best minds are turned away from internal issues (though of course you have the odd exception of someone so interested in local issues that they are prepared to accept a hit to their academic standing), the question is what can be done. The following possible actions come to mind:

1.       Set up a world-beating PhD education system. Australia has enough smart academics to teach at world-standards in almost any field of social science, but individual universities do not have the clout to offer their PhD students something comparable to overseas PhD places, like the European Institutes, or the Ivy league programs in the US. This means that many of our best young minds are sent overseas and don’t come back, whilst it is the home-grown young minds that are far more likely to be interested in Australian policy than the imported academics. Thus, effectively, the lack of world-class PhD programs prevents our best minds from working on Australian issues. We can set up such institutes, again at a cost that is not too great. What has worked for the Europeans is to have a dedicated PhD institute with an academic governance structure that limits the time any individual academic spends at such a place. Hence what one needs is a European Institute type scenario where one has dedicated PhD programs, located in one of Australia’s major cities.

2.       Open up the data files. It has been said many times before but it clearly needs to be said many times again: Australia actually collects great databases. Good enough so that their use could interest international researchers. However, the ABS is too afraid of the privacy laws to make it easy for academics to use them. I for instance know of a recent case where someone had to wait 18 months to get information on whether respondents to a particular survey lived in NSW or Victoria. By the time the permission came, the researcher involved had already left! The reality of international research is that one looks for low-effort, high-gain data, and the barriers put in place to use the Australian datasets are simply too high to bother. This is in a sense a ridiculous state of affairs because it means that Australian tax payers fund large datasets which are not used whilst they also fund researchers who work on American and European datasets! There is an easy solution, and it is to be much less prissy about privacy concerns. Abuses of data virtually never happen and you can punish people afterward anyway. Yet, the ABS still does not bring out data that links individual information to their medical records, their military records, their employment and tax records, etc. It has the technical know-how to do it, but thinks it is shackled by privacy concerns. A most inefficient state of affairs that is a big turn-off for academic researchers who play the international game.

3.       Do not introduce specific measurement devices for policy impact because a poor measurement instrument is worse than no measurement at all: for academics, the main reason to be interested in local policies is because one wants to make a difference. Media attention, policy impact, ego, etc. As soon as you start directly rewarding any observable impact though (which is only very loosely related to real impact), you will create a wall of noise because the market for policy advice will be flooded by academics who want to crank up their ‘policy ratings’. Institutes will specialise in targeting particular bureaucrats with their publications in the hope of being cited. Middle-range junior academics will start to nit-pick with policy reports in order to get a mention in the next one. Blogs, tweets, and websites will flood the market such that no-one will have much clue what is useful and what is not. As a result, the marginal rewards to policy work will actually reduce for the good academics who will then simply no longer bother. Australia has already had experience with this kind of perverse effect, which is really just a standard effect that occurs when you replace a market mechanism by imperfect bureaucratic measurement: the ‘DEST’ system for measuring productivity. Under the DEST system, every publication and every conference started to count as ‘output’. As a result, Australia witnessed an explosion in fake conferences, conference volumes, local academic journals, etc. The ‘publications’ in those conferences and journals all counted towards DEST and hence they were a way to prop up the CV’s. As a result though, many academics stopped coming to the local conferences and no longer sent anything to local journals, simply because it was no longer worth their while and started to be a bad signal. And one can even argue that the ‘productivity explosion’ engendered by the DEST formula was worse than worthless in that it diverted effort away from more worthwhile things to do (including leisure time with the family). Hence, let the bureaucracy and the politicians work out themselves which academics they want to contact about policy work (academics don’t get paid so much that they will really say no if offered the right price), and don’t mess that market up by inept measurement because that is worse than no measurement.

The idea of the survey is to give a voice to the thousands of economists in Australia who do not regularly talk to the media, by asking their views on economic issues. The survey asks opinions about fiscal deficits, education policy, taxation policy, carbon taxes, trade policy, and basically anything that has been controversial in economic policy debates in the last 10 years or so. Essentially this is an opportunity for Australian economists to have their say.

In order to do the survey, you need to be invited. Economic society members are automatically invited and merely have to click on a link in an email that is sent to them to reach the survey. Nearly all academic economists have been sent an email that invites them indirectly: they have to send an email to the main person organising the survey, Richard Hayes (r.hayes@mbs.edu) , who then sends a personalised link. Yet, basically any economist in Australia who is keen to have their say should feel themselves invited to mail Richard and ask to be included. This for instance goes for economists in ministries, banks, and regulatory institutions.

The survey has a number of academic and institutional sponsors, including of course most prominently the Economic Society headed by Bruce Chapman and with Jonathan Pincus who heads the sub-committee that oversees the running of the survey. On the academic side, Richard Hayes from the Melbourne Business School is the main person organising and running the survey with me and Joshua Gans as ‘silent academic partners’  in the endeavour.

Similar surveys have been run in the US and the UK, and a previous one in Australia was done by Fred Argy who has been  consulted about this version too. Experience shows that the average responses to topical questions show up a lot in newspapers and policy debates and also serve as an internal reality check for economists (what do their peers think?). The voice of economists matter. Obviously, the survey is anonymous, with almost no personal information actually gathered.

Ken Parish was quick to condemn slutwalks, but on reflection, I basically think he is wrong and the sluts are right. No offense intended to either Ken or sluts.

There are two questions involved here. One is whether the immediate reason for the slutwalks is reasonable and the second is whether there is an important underlying issue worth demonstrating against. The immediate question is whether the police officer was out of line and the deeper question is whether society employs a double standard when it comes to the sexuality of men and women.

Ken and others raise the point that the police officer is factually telling the truth to his audience when he say that the dress-signals of women can incite the desires and abuses of men. That is undeniably true, but is not sufficient to exonerate the police officer in question. To see the unreasonableness of the remarks of the police officer, consider the analogy with theft. Would a police officer tell someone who doesn’t want his fancy car to be stolen not to drive in it so that it can’t be seen by potential thieves? The suggestion would be seen as absurd because it would be taken for granted that the whole purpose of having a car was to drive in it and, in the case of a fancy car, to be seen driving it. Think of another analogy closer to the topic of violence. Can you imagine a police officer saying to parents concerned about the threat of a pedophile priest that they if they were worried about such things that they should not have had kids in the first place or, if they did, that they shouldn’t send their kids to mass so as not to tempt the priest? Again, the suggestion would be considered hurtful and malicious because it would, rightfully, be seen as inferring that the parents should go without kids or should change their attitudes towards potential parenthood and religion because of the possibility of a pedophile priest.

It is this analogy that is the correct one, because dressing up constitutes an important signal sent from women to their potential partners (both male and female) about their attractiveness, habits, and willingness to at least consider offers of intimacy. Dressing desirably is not an open invitation for violence, even though it would be silly to deny that it is commonly understood as a signal of interest in offers. Just like a baker who advertises his bread on open shelves, and invites customers to make bids for his bread, does not want to be told by a police office that he should hide his bread lest he invites theft, neither should a desirable woman be told by a police officer to dress inconspicuously so as not to invite rape.

In this light, what the police officer said makes no sense.  Instead, what it reflects is a wider and implicitly understood message that the police officer (and perhaps his community of police officers) morally objects to the signalling function of ‘dressing like a slut’. It is an objection to being aroused by desirable women, and/or an objection to the possibility of such women having sex, that is needed to make sense of the police officer’s statement. One might counter by saying that a police officer might reasonably suggest to the baker that he should take due care in not abandoning his shop while his bread is on display, and that parents should not leave their kids unattended with males they do not trust. In the contest of dresses that would be a statement of the type ‘when you look desirable but are not seeking sexual advances, take care not to be alone in dark alleys or alone and drunk around men you do not trust’. That is the type of sensible advice any mother and father (I have 2 daughters nearing that age) would give their offspring. They would not tell the baker to stop advertising bread and for kids to stop going to school and to church.

Hence the sluts and the slutwalkers have a valid argument that the police officer’s comments were out of order and indeed indicative of a disapproving attitude regarding the signals given by dressing “like a slut”.

Then there is the question of whether there is a deeper issue here. Does society have a double standard regarding public signals about the sexuality of men and women? I cannot speak for all countries, but there can be no doubt that the answer for Australia is an unequivocal ‘yes’. I have lost count of the number of times I have been told as a father to lock up my two daughters and buy them chastity belts, whereas all signs of sexual awareness and activity on the part of my son are seen as healthy and worthy of praise and encouragement. I have had learned and heated arguments with eminent scholars on the subject (usually when drunk, but still). I have seen both fathers and mothers putting their daughters down warning them not to fraternise with boys whilst telling their sons the opposite. It invariably involves an element of putting ‘that girl in her place’, and is usually accompanied with gleeful faces on the part of the boys. There is not a tiff of doubt in my mind that in this country, women are derided for being sexually promiscuous whilst men are praised for the same activity.

I ask myself as a father and an intellectual whether that is a good attitude, and where it comes from. I ask myself ‘so what do all these fathers, mothers, uncles, aunts, leaders and followers want for their women? Do they really want them to be virgin nuns until they marry a perfect suitor at the ripe age of about 30?’. That would be such a selfish wish. The males certainly don’t want this for women when they are in the pub hoping to get laid, but it is nevertheless the logic that follows from openly looking down on sluts in their own family and set of friends. It is a pure double standard, and a very mean one at that because it essentially denies women the idea that having an active and even promiscuous sex life is healthy and normal. It burdens them with the idea that they must somehow feel themselves to be unworthy if they pursue their desires, whilst not burdening men with the same stigma. And it smacks of a power game when it comes to the attitudes of the men: why do all these brother and fathers want their daughters and sisters to live up to a notion of sexual purity or repression, whilst they themselves do not? These sisters and daughters eventually will have sex anyway, with someone else than their brothers and fathers, when they are finally married off to someone else. One cannot help but wonder: what is the personal gain to the brother and fathers of the idea that their sisters and daughters have to go without until then? At the very least it is somewhat mean, and it also smacks of gender power-politics (if not something even darker).

Hence, hurrah to both sluts and their walks. From a utilitarian standpoint there is nothing wrong with being a slut since having sex is a healthy and pleasurable experience for which, in the age of contraception, there is no good reason to have one rule for men and another for women.  From an economic perspective, sending signals increases the flow of valuable information and hence lubricates exchange on the market for intimacy.  I think that the slutwalkers are entirely correct about both the inappropriateness of blaming victims of sexual crimes for the way they dress, and about the general societal attitude about sluttiness.

UWA in Perth has studied the Melbourne Model and is gearing up to introduce a system with some similarities, but with important bells and whistles designed to avoid the mistakes of Melbourne. Let’s dissect the main features of the Melbourne experiment and how UWA has learned from the experience:

1. By creating broad degrees, the Melbourne model lead to a mixing of students with different types of talents into the same courses. I predicted at the time that this mixing, together with the pervasive incentives not to fail anyone, would lead to a dumbing down of the disciplinary courses (a race to a bottom). This indeed happened, though not quite the way I envisaged it. What I envisaged was that the university bureaucracy would put pressure on the existing schools to dumb down their course offerings. Many schools anticipated this and tried to erect entry barriers into their courses. In turn, this lead the Melbourne university bureaucracy to create new ‘inter-disciplinary courses’ which I would say were at much lower levels than the more disciplinary courses they replaced in the student curriculum. Hence the dumbing-down was not so much due to pressure on existing courses but by a complete by-passing of existing courses, in many cases replacing them. This indirect dumbing down of the degrees did of course filter through to the higher years of the disciplines: if your 3rd year students have done a year of fluffy stuff in stead of any real learning then you will have to drop the entry-bar to honours, masters, and PhD courses, which is exactly what I understand has happened. UWA by contrast has opted not to create new courses but to reduce the number of disciplines into 4 broad disciplines (arts, science, commerce, and design) and to simply force students to follow a certain number of courses in the ‘other disciplines’. One part of the compulsory mixing is in the form of 4 compulsory ‘broadening units’, whilst another part comes from pick-and choose second majors in other discipline groups. This introduces the same forces I talked about 4 years ago: the mixing of students of different abilities, coupled with the strong incentives not to fail anyone, will lead to a significant dumbing-down of the courses in these 4 main disciplines, making them all ‘un-specialised’. Anything included in the ‘broadening units’ must be dumbed down, as well as anything that depends on it. This is not true if you let ‘broadening’ happen voluntarily (optional courses or people trying double degrees) because you then can have entry-barriers into courses and turn away students with insufficient aptitudes for particular courses. Hence the UWA model will lead to a more radical and probably more permanent change in the quality of the degree structure than the Melbourne model. Whereas Melbourne is now reversing its model and, because it has left the schools largely intact, can still draw on the expertise in those schools to unwind the clock, UWA will have no such easy turning-back option. UWA is burning its bridges and in that sense is embarking on a more ambitious program than Melbourne did.

2. The University of Melbourne saw potential problems coming with top students who wanted to focus on a discipline. One way to prevent the fall-out was to bribe more good students to keep coming to Melbourne by giving out more grants conditional on High-school grades (top students are such valued commodities that they are given money to go somewhere!). Yet, many of the best students still switched from Melbourne to Monash, much to the delight of my fellow economists there. These students were attracted by the disciplinary logo of many degrees, via which they can really get their teeth into something substantial (even though they often change their minds later on). UWA has clearly looked carefully at this and has added an important element to the mix: it is going to set up a 4-year honours degree (a Bachelor of Philosophy) that starts in the first year and that is tailored to the top 2% of high-school leavers in WA. This is a quite important and a potentially radical divergence from the Melbourne model. If UWA would run these honours degrees like some of the top state universities in the US run them, i.e. as a stand-alone institution with its own building and administrative structure wherein highly disciplinary courses are taught, then I think this is a quite exiting development for Australia. It would basically mean the resurrection of the elite-education streams that preceded the move to mass-education in the university sector. It would recognise that mass-education cannot be as high-quality as the previous elite education of the 50s to 80s because it is too expensive to offer this to the masses and too demanding on the students. It takes the logical course of action of having a double-stream inside the university system: plain vanilla for the masses and good education for the few. It is somewhat elitist but it beats plain vanilla for all.

It may thus seem as if UWA has made its changes more resistant to top-end competition than Melbourne did by offering the 4-years honours programs. At the moment though, it has designed these honours programs as a minimum-cost enterprise by double-dipping: the bachelor of honours is basically going to consist of two majors out of the existing ’4 disciplines’ plus some fairly vague extra ‘research’ bits, meaning that the level of the courses and, indeed, the level of the co-students will be the same for these ‘top students’ as that of the masses at UWA. That entirely defeats the purpose of the bachelor of Philosophy. The American experience with these honours programs is that you need a physically and administratively separate entity to run and protect the honours program from the cost-cutting short-term managerial incentives to double-dip. From their website I understand this is not what is going to happen at UWA. By not separating the honours stream, UWA is going to have the worst of all worlds: the individual schools wont care about the higher needs of the honours students so will also give them plain vanilla, the plain vanilla will be less good for all students because of the compulsory mixing of talents leading to a race to the bottom, and the actual content these supposed top students will get will be less disciplinary since it is made up of fairly generic ‘majors’.

The local competitors, Edith Cowan and Curtin, should be able to make in-roads into the market for top-students in Perth if they can jump into the ‘pure discipline’ gap that UWA will leave. I can just see the marketing slogans: “study something real, come to us”. There should be plenty of disgruntled staff at UWA who can be poached at a premium to set up and teach the competing education streams. Some speculate that UWA is counting on Curtin and Cowan to be too far behind UWA to provide effective competition. We will see.

Probably the most significant geopolitical event of the last 12 months has been the regime change in the Arab world, where the 360 million Arabs[1] make up 5% of the world population. Though a small and relatively poor group in this world, they occupy the main oil fields and have been heavily involved in the so-called ‘War on Terrorism’, making up vast numbers of casualties on both sides of that conflict.

What started as a fairly minor scuffle in Tunisia has since lead to a remarkable turnaround in Egypt, a stifled revolt amongst the Shiites in Bahrain, an ongoing war in Libya between tribes that look almost indistinguishable, and continued unrest in Syria and other countries. Whilst much has been written already, here goes for a socio-economic perspective on key aspects of these developments:

1.       Egypt is the big one. It has a population of about 85 million, more than the combined total of Libya, Saudi Arabia, Syria, Yemen, Jordan, Lebanon, Israel, Bahrain, Kuwait, and Tunisia. It is the intellectual heartland of the Arab world, so whatever becomes the stable outcome there is going to be the model for other Arab countries, particularly if it is seen as a success.

2.       Despite early appearances, the changes in Egypt appear more far-reaching and stable than anyone held possible beforehand. Key figures in the old regime have lost out (see here, for example) and there is some real organisational shake-up as well, most notably with the dismantling of the security services. The new constitution that was overwhelmingly supported makes it harder for a new military regime to come to power by making state of emergency laws less forceful and time-constrained. Elections are imminent. There is certainly hope.

3.       The people that lead the demonstrations in Egypt have lost out: their calls for a boycott of the referendum (which didn’t promise enough changes) have been roundly ignored. El Baradei and other symbols of the middle-class urban youth movement that forced the changes have essentially been sidelined by the demographic realities of Egypt: more than 55% of the population still lives in the rural countryside, is quite conservative and religious, and is still living in semi-feudal circumstances. Of the 45% living in the city, more than half is dirt-poor and almost uneducated. That type of economic reality almost invariably translates into a clientelist political system, whether democratic or not. Hence you will have rural and slum-town power brokers: local ‘big men’ who can promise politicians a certain number of votes in return for particular policies, which is exactly what happened in the run-up to the constitutional elections and will happen again for the parliamentary elections. That kind of wheeling-dealing means that democracy Western-style has no chance. At least not until the country becomes more urbanised and richer, which is projected to take a few decades. Hence, whilst Egypt has become more democratic, it is not the type of democracy ‘we’ are used to. Rather, it is the type of democracy that, at worst, Pakistan is used to and, at best, Turkey (where political assassinations are very common). It will thus continue to have a large independent role for the military (which is successfully reinventing itself as a custodian of the nation, modelled on Turkey) and a small super-wealthy elite that makes deals with voting blocks to protect its interest.

4.       In effect, most of the old elite has been bailed out in Egypt: much like democracy in the West often took the form of creating symbolic roles for the previous elite (most notably the kings), there is an amnesty for most of the old elite, including protection for the wealth they have amassed. It is not ideal, but there is no realistic alternative. Only the closest associates and family members of the previous strong man (Mubarak) will be held accountable. The old elite seems to be gearing up for elections and they are expected to do well, which is probably why they allowed the changes to happen in the first place.

5.       Things are looking good for the medium term for the Arab world: fertility levels have dropped to close to replacement rates, economic growth is fairly steady (projected to be 4% in Egypt this year, down from an average 6% in the previous 4 years), and the idea of Western-style democracy is finally showing some promise in that region, albeit tentatively.

6.       There is a large Arab and Arab-sympathising diaspora in Europe and America (over 10 million, of which maybe half a million in Australia: in 2006 243,700 spoke Arabic at home[2] and 367,374 people in Australia in 2001 had ancestries in North Africa and the Middle East) who are not seen to integrate very successfully in those regions. A normalisation of the Arab world can only be expected to reduce the tensions between Arabs and non-Arabs elsewhere, making it good news for ‘us’.

7.       From a geo-political perspective what is happening in Libya is fairly inconsequential. Only 6.5 million people live there, its resources are smallish, it has no organised state to do any real damage to anyone but its own population, and its former colonial overlord was Italy. It seems all about pride at this moment, with on the one hand the pride of Kaddafi and the group that has supporting him and on the other hand the pride of the European countries that have promised they would get rid of Kaddafi and now find themselves in the situation that they will probably have to arm the opposition if they want to see it happen (which is a bit of a let-down so it will take a while before they will succumb).

8.       The strong repression seen in Syria and Bahrein suggest that the status quo with regards to the ethnic\religious division of the spoils from running a country is strongly defended, probably because a change of the guard in terms of ethnic supremacy means an automatic disenfranchisement of the current elite and hence a change of the guard cannot be accompanied by a buyout of the current elite making them fight much harder to stay in total control. The contrast with the US invasion of Iraq is instructive here since that invasion became a de facto liberation and elevation of the downtrodden Shi’ite majority from their oppression by the Sunni minority in that country. That elevation was, ironically, the opposite of what the Americans had in mind as it greatly strengthened the position of Shi’ite Iran in the region. As if the countries in that region have learned from that ‘mistake’, repeats are being prevented in Bahrein and Syria.

In short, we can only rejoice at the normalisation of institutions that is currently happening in the Arab world. The emerging institutions are not clones of Western democracies yet, but much closer to that mould than 12 months ago, and this probably bodes well in terms of reduced tensions connected to Arab minorities elsewhere.

You can be assured that many people will claim these changes are really due to them and their policies. Undoubtedly those who defended the Iraq invasion will point to these changes as the payoff that came from forcing change in one country and even of drawing the sting out of the idealists who came to Iraq to fight ‘the invaders’. No doubt the Turks will claim it since it is their example that their former enemies, the Arabs, are following most closely. It will be interesting to see who else will claim it and who knows where the truth is on that one?

Which region is next to succumb to the democracy-bug, one wonders?

The Australian clearly thought the study was courageous in that a large revenue streams for universities was deemed to have a negative effect on the standards of courses, which in turn will negatively affect domestic students. It brings into focus a trade-off between the revenue stream of fee-paying foreign students and the educational quality enjoyed by Australian students.

Educational quality is notoriously hard to improve by administrative means because, in the absence of market forces, administrations manned by people with short-run incentives have little cause to increase quality and every cause to decrease it. Two ways to go are then to either seek some kind of outside quality signals (a kind of University inspectorate) or else to allow more competition between universities so that it starts to make sense for universities to offer higher quality.

Australia has an official policy, pursued by the Ministry of Finance and Deregulation, on the relationship between government and the web that attempts to outline how the government will take advantage of the ‘opportunities’ opened up by the web. Similar undertakings are in progressin many countries where governments are struggling to come to terms with the role of government in the online age. ‘Our’ policy, which is still under construction, has been kicked off by accepting 12 of the 13 recommendations of the ‘Gov 2.0 taskforce’  led by Nicholas Gruen.

In this blog I will attempt to sketch the political economy of the enterprise so that it might become clearer, to those schooled in the language of markets and incentives, what is going on. The three main tenets of gov 2.0 as I see it are to put lots of documentation online, to tap into the free lunch of online volunteerism, and to make money from the government’s unique ability to identify you and tax you. Apart from talking you through these three main tenets, I will also try to dispel some particularly confusing myths doing the rounds about gov 2.0, in particular the idea that gov 2.0 will lead to more ‘participatory democracy’.

Online documentation

The main economically relevant idea of the Gov 2.0 taskforce is to put a lot of information that the government has online, under the philosophy that the information produced by the government is owned by the public at large. An added reason given for this by the taskforce is to encourage all kinds of good things (participatory democracy, open government, etc.). The economic use of this information would be to allow consumers to more quickly find out what the regulations are and where to find government services. Of course, the most relevant information (tax rules, penal codes, health advice) is already online.

The political economy of putting more information out is clear: you will need armies of additional bureaucrats to put everything online and to maintain a web presence. The wholehearted support of all departments to this part of Gov 2.0 is thus only natural.
Will all information be put online, including the privacy-sensitive information and the potentially politically embarrassing stuff? We will have to wait and see, but probably not. On the whole, the online documentation part of Gov 2.0 is a straightforward expanse of the bureaucracy without much clear benefit to the community. Will I as a researcher for instance get access to the unit census data? No way, because people are promised confidentiality when filling in their census form. Will the government publish the data that allows us to look at which hospitals have higher mortality rates? Don’t hold your breath. Will the internal deliberations be made public concerning sensitive areas, like defence contracts or Aboriginal affairs? Again, don’t count on it. The one thing you can be sure of is that we will get an avalanche of online information that will cost a lot.

The free lunch
The free lunch that the internet, quite to the amazement of classically schooled economists, has unearthed is in the willingness of tens of thousands of volunteers to provide pure public goods to the world community at zero cost. Retired house mums write brilliant entries into Wikipedia. Unemployed layabouts generate free code for the Linux operating system that anyone can download anywhere for free. Bored civil servants sift through millions of lines of old documents in online state libraries and correct the spelling mistakes.
The free lunch provides everybody, including government, with the opportunity of getting something for nothing. Government is particularly well placed though to get something for nothing because it has already taken up the mantle of working ‘for the good of all’. Hence the thinking is that it should be easier for the government to get volunteers to do work for them than other organisations.
Online volunteerism has particular characteristics that one has to look out for when tapping into it. For one, it is very sensitive to the illusion of autonomy: give your volunteers too many rules and guidelines and they will walk away. Also, the volunteers seem to be attracted to the idea of working on something universal that will last for a long time. Lastly, the volunteers seem to need extraordinarily little recognition.
Gov 2.0 is thus partially about getting that free lunch, but it will have to adapt to the rules of the online game in order to get it. In particular, they have to be somewhat relaxed about control and trust more in peer-review self-correction mechanisms as opposed to bureaucratic criteria. Old habits die hard of course, so a lot of gov 2.0 is about trying to school parts of the bureaucracy in being relaxed.
Where can the government use that free lunch? The usual examples bandied around are in terms of having its documents checked and improved. And the government has many documents that need improving, ranging from information as to how laws should be interpreted (where the advantage of tapping into outside expertise would seem great) to local council websites (which outsiders are probably far better at improving than insiders) to self-help for questions about regulation.

The free lunch however can also be used to generate information that does not yet exist, information that both governments and the electorate would want to know. An easy example is to have a website where constituents can alert their local council to potholes in their street, faulty streetlamps, drug-pushing neighbours, and loud parties. More complicated systems could include feed-back systems on the quality of hospitals and GPs, which is something of great interest to departments and patients alike, but where the information gathered via official channels is deliberately manipulated and hence quite inaccurate. Peer-ratings of medical services can potentially do what scores of government statisticians cannot, if only because volunteers are not hindered by the demands of a bureaucracy to take official documents seriously. What goes for hospitals also goes for schools, army units, police stations, etc. Since volunteerism has given us damned good online encyclopaedias and rating systems for movies and books, it might also be useful in rating government services.

The political economy of this part of gov 2.0 should now also come into greater focus: relying on volunteerism might be a free lunch, but of course also means a reduction in the power of current insiders. The power of judgment will then shift to the designers of the online systems, to the amorphous mass of outside volunteers, and to the inevitable gangs of manipulators that would form as soon as real money starts to hinge on these systems. This disenfranchises the incumbents and creates opportunities for others and will thus be bitterly resisted by the incumbents whilst only lukewarmly supported by those who think they might gain. This part of gov 2.0 will be a long slog. It is hence not that surprising that the one recommendation of the 13 in the Gov 2.0 report that was not taken up by the government was the recommendation on ‘e-philanthropy’ .

The market for online government services

Government is the natural monopoly of violence. It is the only institution in our society that has the power to find and punish you, a power it uses for taxation and the enforcement of laws. Any other organisation that would try to mimic this power is guilty of treason and subject to the highest form of punishment our societies are willing to administer.
The monopoly of violence comes with several unique bits of information: who you are, what your tax record has been in the past, what your medical record has been, what your criminal record has been, what property you own, and what liabilities you have acquired (divorce, kids, etc.). No other organisation has that information and is allowed to use it openly.
This information is worth something in the online world where many people deliberately misinform others of their identity and their track record in order to sell something (often themselves). Being able to credibly signal your past and your identity is then worth something in all situations where reputation is important, such as when significant amounts of money or pleasure are at stake. The internet thus creates a new market for the comparative advantage of the government.

The simplest product a government can sell to the internet is an identification technology: the means for you to prove you are who you say you are. Governments have the power to invent that technology and to use its coercive powers to prevent others from abusing it.
This basic product can also be used in conjunction with other activities, such as the volunteerism market. Governments can use their identity technology to make sure that only Australian citizens whose children go to a local school are able to peer-rate that local school. Governments can ensure only ex-patients and their families can rate a hospital. In short, governments can enhance reputation mechanisms on the net and will often be able to charge for it (bona fide sellers and buyers on ebay would probably be willing to pay a percentage to be able to signal their identities).

The political economy of this aspect of gov 2.0 is much less fraught with difficulties than tapping into volunteerism: we are here talking about an expansion of government into new markets for its services, something that does not require insiders to give up power but rather something that allows insiders to expand their power. It does require a bit more of an entrepreneurial spirit than is usual in government, but governments have in the past been involved in setting up new businesses and know how to do it when they have to (eg. set up state companies and partnerships).

Red herrings

A couple of red herrings keep occurring in the discussions around gov 2.0. It is useful to list a couple of the most frequently encountered ones:

1. The internet has changed the rules of the game of public goods provision. Look at google and twitter, which are global public goods provided by private companies. Government too must become more like google. The fallacy here is to fail to see the actual business model of the googles and twitters of this world. They run on the same business model that radio, television, and newspapers have run on for more than a century: they run on advertising, including ‘sponsored links’. Advertising is rivalrous and excludable, which is why google and twitter can charge for it. The reason that the public goods of the search engine and the social chat-rooms are provided in google and twitter is because they create such enormous traffic that the small bits of the surplus that can be siphoned off are worth enough to produce them. There is nothing new about this phenomenon. It has been the same story with radio, newspapers, and television ever since their inception: for those three services too, the business model was always that they never charged directly for what they produced but rather that they charged private companies for access to the traffic they created. The basic business model of the internet is thus centuries old. Just as the advent of newspapers did not change the business model of the government (which is to identify a population and tax them under the philosophy of doing the taxed a favour), neither will the internet. Public goods that create enough surplus to be socially desirable but that do not create enough traffic to warrant their private provision by those who can only siphon off a small part of the surplus will still have to be provided by government.

2. The internet has created a new market for reputations that should be used by government, i.e. people who make their reputation in blog-land should be hired as top civil servants. I am afraid this is wishful thinking. Again, the analogy with radio and television should make it clear that the reputations that can now be earned by activities on the web will not translate themselves into reputations inside bureaucracies. The internet is simply a new way to become famous. Whilst fame is convertible into political capital and thus useful in elections, it has not proven to be convertible in bureaucratic capital. Have brilliant writers and actors made it as politicians? Yes they have, and good examples are Churchill and Reagan. Have they been put on government selected committees? Sure they have. But have they been able to break into the career development paths of bureaucrats? No way. The one avenue I see becoming possible is that internet reputation might be convertible into academic reputation in the form of honorary doctorates and the like. This has happened to famous writers in the past and I wouldn’t be surprised if some universities specialise in the accreditation of internet fame at some point. Academic capital has some traction inside bureaucracies.

3. The internet has changed the way science is done in that any clearly defined puzzle can now be opened up to the world community. Examples of this then include companies that run prediction competitions and invite solutions from around the world. The basic thing to note here is that the internet has greatly reduced the search costs of finding people to do work for you. You can hence suddenly find people in Kenya to solve your chess problems or unemployed Russian mathematicians to set up a peer-review system for movies. In essence this is not a departure from normal market economics but a move towards it: over time this will simply lead to a convergence in prices asked for such solution activities. Whilst firms who are first onto this market will find bargains and will be able to get a lot for almost nothing, this is not a viable long-term business model for science and even for most problems. It only works for very well-defined problems with limited cultural idiosyncrasies, and is only cheaper than other channels in the short-run whilst market prices adjust to the lower costs of finding alternative suppliers.

4. The internet has opened up a new medium that will revolutionise our democracy. Armies of volunteers will scrutinise government decisions online, hold local councillors to account for their decisions, alert departments to the crime and traffic problems they have yet to solve, and will be the new forum where politicians engage with the citizenry. Again, most of this has to be put into the realm of fantasy land. Is the internet now a place where politicians have to find constituents and explain themselves? Undoubtedly yes. Has democracy changed in the sense of populations wanting to feel closer contact with their politicians? Probably yes again and this now means politicians are always campaigning. But are governments now under greater scrutiny and has this been for the better? There is no evidence whatsoever for that kind of statement. The tea-rooms and debating societies of old that discussed the actions of government have simply gone online. ‘He said, she said’ journalism dominates the policy discussions, whilst the real policy discussions are firmly kept behind closed doors. Television and radio did not lead public servants to become television personalities, but instead lead to rules preventing them from using that medium to talk to the public. Did the advent of email lead to ‘sharing information and engaging with citizens to determine better ways of doing things’ ()? Of course not. To expect anything else with the internet is naive in the extreme.

In short, government 2.0 has little to do with google, twitter, kaggle, blogs, facebook, and ‘participatory democracy’. It has to do with hiring more bureaucrats to put the less interesting documents online; tapping into the free lunch of volunteerism; and opening up new markets for the basic products that governments generate. And I expect the first and the last of these to be pursued with much more enthusiasm by the departments than the volunteerism bit.
Does this mean that one shouldn’t expect any increase in participatory democracy due to the web? That is a different matter: interested citizens use the technologies available to try and influence politics and the web opens up new possibilities for them. The web makes it easier to organise people for a common cause and the web also makes it easier to keep tabs on politicians and public services. Perhaps most importantly, the web makes it easier to get expert opinions on almost anything (health, the economy, etc.) which in turn erodes the information advantage of the bureaucracy. There is hence quite a lot of scope for citizens to expand their sphere of influence.
The point about participatory democracy is that it is naive to expect the government and the bureaucracy to be instrumental in more participatory democracy. Greater influence by concerned and knowledgeable citizens has to be earned before it can be acknowledged and taken into account by government. Just like the International Red Cross and Amnesty International had to secure their own power base in the absence of (too much) help from governments, so too will new initiatives have to prove themselves outside of government.
A good example of the impossibility of government to set up its own competitor in the citizen sphere is wikileaks. Undoubtedly, wikileaks is an expansion of the power of the citizenry and an attempt to hold governments more to account. At the moment, it is a force towards greater participatory democracy. But could it ever have been set up by governments? Of course not: it has to wrestle power from governments which are kicking and screaming in protest. If successful , and the jury is still out whether that kind of initiative will take off, then of course governments will start to embrace it and learn to live with it as governments have embraced the Red Cross and Amnesty International.
Hence the web most certainly can influence government, but to expect governments and bureaucracies to be able to organise that process via policies is not realistic.

To see comments on the government’s response to the taskforce’s recommendation see here.

In a previous blog I discussed what the long-term impact was of having private citizens trying to hold whole administrations accountable for their dealings with other countries and for the way they ran their administration. The ensuing thread uncovered differences of opinion on whether whistle-blowing sites had something of value to offer over and above the usual checks and balances in the form of ombudsmen, constitutional protection, and the existing media.

In this blog I want to highlight the behavioural and political economy aspects of the wikileaks saga, including the question of whether Australia should put in formal protests at the American embassy due to senior American politicians like Sarah Palin calling for the assassination of an Australian citizen who has so far not been convicted or charged with anything. It is ironic, but it is probably Rudd’s current duty to defend his countryman against unconstitutional death threats made by foreigners.

Some salient observations to be made on the current saga:

1.       The wikileaks affair has made it clearer than ever before that the Internet is the new Wild West, i.e. a self-regulating social entity that lacks a police force. Within hours of the arrest of Queensland-boy Julian Assange, a group of hackers calling themselves ‘Anonymous’ launched cyber attacks on organisations deemed to have abandoned wikileaks, including the Swiss post, and PayPall. It now also appears as if some of these organisations or their sympathisers retaliated by launching cyber attacks on the group of hackers. We thus find ourselves in an age where vigilantes and particular vested interests fight for dominance on the web. One would expect from history that after a few such skirmishes, some kind of Internet Police will arise. If governments wont set it up, then private organisations will band together to create a kind of Internet Watchdog that uses whatever methods available to silence troublemaking sites via blacklists and the like.

2.       The wikileaks affair has lead to surprisingly hostile US reactions in camps you would normally think would favour it. The Tea Party in particular, which purports to defend the US constitution and that is purportedly sceptical of big government, has swung right behind the administration and vilified wikileaks, blatantly ignoring the 1^st amendment of the US constitution and calling for illegal acts of violence in support of the discretionary power of the government. Those who drew up the constitution would turn in their graves! Make no mistake though: should Julian Assange be extradited to the US and face charges there, the civil rights movement will have no choice but to swing behind him and an army of American pro-bono lawyers will probably defend him all the way to the Supreme court.

3.       The latent US-European divide on press freedom has opened up. The web-sites that mirror wikileaks after its original URL (wikileaks.org) was disrupted are nearly all in Europe, first in Switzerland (wikileaks.ch), but then all over the continent, run by all kinds of organisations. In the Netherlands, for instance, it is a public media organisation (the VPRO) which now openly supports and hosts wikileaks.nl.

4.       When push comes to shove, national media feast on the wikileaks saga and focus on what the cables reveal about their country. This has happened in Australia, where the Sydney Morning Herald has announced it is going to run several stories, and it seems to be happening in many countries. It is probably a one-off media-fest, but a fascinating one.

5.       The saga is a classic case of ‘shoot the messenger’. The criticism of slack American protocols surrounding their diplomatic cables has been muted even though it should be clear that so many people had access to these cables (the Guardian alleges it was millions) that all the real enemies will have known all the bits important to them already. Instead, American politicians are falling over themselves to accuse wikileaks of being irresponsible, showing remarkable disdain for freedom of information. The witch-hunt is intense enough for private companies to fall in line out of fear of further retribution, as witnessed by Amazon pulling back from wikileaks, and Visa and PayPal pulling the plug too. The vice-president of Pay Pal reports to have been sent a letter by the US state department on November 27th, i.e. before the latest round of leaks, telling him that wikileaks’ activities were illegal. If true, such a letter would seem to be a clear-cut case of political interference with free speech. The psychology of this is truly fascinating: instead of thanking wikileaks for pointing out the major security breaches in its system and the generally positive image that the cables give of American diplomacy and America’s role in the world, there is a blind lashing out at the messenger of sensitive news. Would the same American politicians have preferred it if slack security would have gone on, so that all the major enemies would have continued looking over their shoulder? The logic of shooting the messenger in this case is very primal. Animal spirits are on display. Some do recognise this even within the US, witnessed by the following quote in a BBC interview:

Daniel Ellsberg, the former military analyst who in 1971 released the Pentagon Papers which detailed government lies and cover-ups in the Vietnam War, is sceptical of whether the government really believes that lives are at stake.

He told the BBC’s World Today programme that US officials made that same argument every time there was a potentially embarrassing leak.

“The best justification they can find for secrecy is that lives are at stake. Actually, lives are at stake as a result of the silences and lies which a lot of these leaks reveal,” he said.

“The same charges were made against the Pentagon Papers and turned out to be quite invalid.”

6.       The reaction of close American allies has been mixed. In the UK, there is embarrassment at the revelations of being seen to beg the US to acknowledge a mythical ‘special relationship’, but there are also positive messages in the media about whether the leaks are desirable. The Guardian, a UK newspaper, is one of the most ardent consumers of the wikileaks cables and runs many stories supportive of it. On the other hand, the current and former foreign affairs ministers condemned the leaks, particularly the leaked lists of strategic sites. A propos: the list of security critical sites, even if one doesnt think much of real interest was on the list, is an odd thing to publish because there is not much public interest in knowing this list. Wikileaks’ defense was that the list showed that it contravened the official position of the US government that its embassies are not involved in scanning sensitive sites. Whilst that may be true, it is so obvious to anyone that embassies spy that it must fall into the same category as exposing Santa.

7.       (Australian response) The first reaction in Julian’s home country was to straighten the backs and fall in line with what our big ally seemed to be doing. The prosecutor general made threatening noises towards Julian Assange and several politicians condemned wikileaks in strong wordings, calling the publication of the leaks illegal even though Ben Saul argued quite quickly that the leaks were most likely not illegal. Yet, it is clear that, down the line, the Australian government and its departments will have to become involved in the defense of one of its citizens. Julian Assange has been demonized by foreign leaders and there have been calls for his assassination, even though he has not been charged with anything yet and even though it is very doubtful that he can be convicted of anything at this moment. What else is our government to do once the dust settles down, but to heed the demands that will undoubtedly come from his friends and family in Australia to insist on due process and freedom of movement for one of its citizens? We are hence at the moment in a little time bubble where our politicians and some commentators join in with the demonization of an Australian citizen by foreigners (though Gillard’s latest reaction was much more careful than her first one), whilst after the bubble bursts these same people will have no choice but to stand up for the rights and good treatment of this Australian citizen (calls for this have apparently already been made). I even dare say that there will come a time when Australia will be proud of an Aussie who is, like a lone outback crusader, trying to hold large governments to account by revealing their internal deliberations.

What we have seen so far is still fairly benign. The leaks on the Irak and Afghan campaigns show what the term ‘fog of war’ really means, i.e. that mistakes are made, that nasty people can do nasty things if given discretion, and that civil war is not pretty. This is no surprise to those who study war, but it does go counter to the clean image that sides present of themselves in the media (including the image of the islamists: the number of tortured beheaded corpses found in Iraq was quite something. The released documents form an historical record of what Muslims did to each other). The same goes for the diplomatic leaks: few surprises to the insiders, but there is a distinct loss of face. Those who think the public can handle the truth and want open government in general should rejoice (though for reasons entirely unclear to me, some advocates of free information don’t ). The realists amongst us simply note that the ability of governments to maintain an image has just been reduced a notch. Not by much, but it is a reduction in the power of government relative to the discerning portion of their populations, which is of course why governments are displeased.

What will happen to the Wikileaks team? Are we in the age where governments will really be held accountable by their populations? Is the uncovering of sensitive information good or bad for our democracies and international security? These are the issues mused about below.

What will happen to Wikileaks is a guessing same. Here’s mine: a fly cannot irk big beasts for too long without being swatted by them. Soon Julian Assange will get caught, if not by Interpol which seems to be close to putting out a warrant on him, then by the Australian prosecutors who will want to ‘scrutinise whether he has broken the law’, or else some other Western government. Once he is caught, I predict he will spend the rest of his life in the courts. His prior actions make it believable that he would skip bail, so as long as new charges can be brought against him (and diligent American prosecutors can be very creative about these things), he can be kept busy for the rest of his life. The army of pro-bono lawyers that will undoubtedly adopt his case will still not prevent him from being caught in red tape.

There are those that believe Mr. Assange will meet an accident, but I personally think no Western politician can afford to give that order and that he will thus simply be kept busy once caught. Indeed, I would expect him to be relatively well-treated as a person for fear of making a martyr out of him, or the fear of what he has up his sleeve to reveal. Julian Assange in that sense has a fairly clear historical predecessor in the 19^th century. A Scot named David Urquhart published confidential state papers of the Russian government and then later of the Victorian government. He even founded several outlets in his attempt to do away with state secrets. This killed his career but he was still allowed to live out his days on ‘the continent’.

How are they going to legally go after the whistle-blowers in future? The most practical suggestion I have seen sofar is to make an awful lot more information copy-righted. If nearly all sensitive material is copy-righted then copyright laws can be used to go after any individual or organisation disseminating it without having to resort to shady ‘national security’ laws. Perhaps other means will be found.

Yet, the genie is out of the bottle. The ability of the internet to disseminate sensitive information around the world in milliseconds will guarantee that other whistle-blowing sites will come and go and that there will be thus remain some forum for widespread leaks. Leaking has undoubtedly become easier. And sexier! The fact that Julian Assange has managed to get random women to sleep with him in Sweden (and who now primarily seem to want to charge him for rape because he didn’t use a condom) is of course an added incentive for any other would-be organiser of these kinds of leaks. Pop-star status and its trappings attract copy-cats.

How much does the ability to put sensitive information on the web and out of reach of governments reduce their power? Hard to say, but I would think not much, at least not in the short run. Governments controlled 40% of GDP yesterday and will do so tomorrow. Most of their activities and their budgets are already quite visible. The real power of governments is in the belief of their populations that they are working in the interest of those populations and that itself requires no secrecy as long as that is what they do. In well-functioning states, few secrets are really important. Secrecy is more aimed at protecting individuals within the bureaucracy from criticism and accountability, but is not really important for the operation of the state as a whole. Far more open-minded states than the Anglo-Saxon model survive perfectly well, notably Sweden or even the Netherlands (not much is secret there). Nevertheless, states have immense resources available to guide information streams, so they have many options open to keep things secret. They can devise more secure internal systems, make it harder to copy information and keep the sensitive information in different data formats. No doubt, they will do this.

A fear propounded by those who see the wikileaks of this world as attacking the nation state, is that telling the world about the internal deliberations of government exposes useful secrets to enemies. This effect seems likely to be minimal, even if far more sensitive material is released than has been released so far. It is already impossible to keep the deliberations of a large group of people secret. Foreign governments and big corporations already can find out pretty accurately what is being thought about them in a big bureaucracy via spying, bribery, poaching of ex-employees, unofficial communication, etc. Apparently, 3 million Americans have security clearance to see sensitive documents. Leaks about internal deliberations are thus not going to be helping our enemies by telling them something they didn’t know.

What about the ability to keep an image? That has of course been reduced, but there the reality is that few in the West are truly interested in the internal deliberations of government or other big organisations for that matter and hence the masses can easily be lead to ignore such leaks. The fact that it is now a little easier for the already well-informed to spot the hypocrisy of any image is immaterial. For the majority of the population, the revelations of greatest interest are probably the salacious bits of gossip about famous politicians.

Does leaking increase accountability? I would say unequivocally yes. The less any organisation can keep a secret, the more an organisation has to keep within the social norms of the society it operates in, which is the essence of accountability. The question is whether we have seen much of real interest so far uncovered by the online journalism of wikileaks. For my taste, the exposure of the war documents will probably make army commanders in the next war be a little more careful than they would otherwise be, and the exposure of the hypocrisy of the Saudi elite should be an eye-opener to the general population, but there has not yet been anything to really bother the rich and powerful. To have true accountability one would want far more insidious information: one would want to know the names of corrupt officials and details of the shady deals done by private organisations. Of course, that is far harder to get since one is then chasing the same information that the police is chasing so one cannot really expect too much there.

There is finally the question whether accountability is really that desirable when it comes to civil servants. One would definitely want accountability in the long-run, but in the short-run there is something to be said for a bit of trust and non-interference.

Hence, on the whole, I’d say Julian Assange is destined for a lifetime of prison food unless he finds a country willing to protect him. Wikileaks should be applauded for its adherence to the ideal of openness and government accountability, but it has not yet opened up the powerful to truly invasive scrutiny of the bad things some of them get up to. Perhaps that is yet to come. I certainly hope so.

Fortunately, Professors Bobbi Wolfe and Bob Haveman provided this very readable piece in a European policy journal on the recent health reforms. It is only 8 pages, but it comes highly recommended as these authors have been in the health economics business for decades and can draw upon many sources close to the fountain for their opinions.

If I had to summarise their summary, the main points of the health plan that are doable are:

1. To extend health insurance in 2014 to about half of the 20% of the Americans under 65 without current health insurance.

2. To tax the big current winners in the health industry via imposing payroll taxes on employer-provided health benefits, to fleece the big pharmaceuticals and medical equipment companies, to make increases in insurance fees subject to government approval, and to cap the amount of health cover that is reimbursed via Medicare (which is the system for the over-65).

3. To impose community ratings, i.e. to force insurers to ensure the kids of those currently insured and to insure people with pre-existing conditions. Also, there is a big move to make it impossible to kick people out of insurance who develop a long-term illness (currently you can lose your insurance if you become too ill!). Most of these changes have already been imposed, presumably to make it hard to undo the legislation.

4. To have more health services be provided by the cheaper health professionals (nurses) and less by the expensive ones (specialists), for instance by extending community care facilities and tweaking the incentives of insurers and patients.

One of the less doable aspects of the plan is the attempt to force private insurers into offering four basic insurance packages and to compete across regions in the hope that this simplification plus competition will lead to lower prices. Without offering state insurance as a means of truly providing a base case however, you are then always susceptible to collusion amongst the insurers and the limited degree to which individuals and firms have an incentive to shop around. Also, the promise to improve hospital and medical efficiency via incentives such that about 160 billion US ‘cost savings’ are made sounds a little over-the-top to me. You have to fire a lot of people to make 160 billion in savings and that kind of job cutting is not easily achieved.

Yet, in its entirety, the plan is one of immense size, virtually certain to change the allocation of something like a quarter of total expenses on health in the US. I am making this number up from the 20 million extra individuals who are going to be insured as well as another 20 million extra projected to be serviced by the expanded community centers, which in total get you some 15% of the current insured population who will be serviced completely differently. Guessing that this group is less healthy and will thus use a disproportionate amount of services and guessing that the other changes will amount to maybe half the size of the sheer expansion, gets you at least a quarter change in total health cost allocation. If you look at the money that the extra taxes are supposed to generate in order to pay for these expansions, you are also looking at around 460 billion US per year, which is a quarter of all health expenses and 4% of GDP. That money is essentially taken from the rich and mainly allocated towards the poor and the really sick.

A transfer of 4% of the nation’s wealth from the rich to the poor is a big Robin Hood reform in my book. No wonder the incumbents in the health industry in the US are squealing.

How did they do? Politically speaking the scheme has been a success in that Portuguese politicians, including the current prime minister Socrates, have been bragging about their role in the introduction of this policy. What about the effects on usage and crime? I can do no better than to copy the conclusions of a recent paper on the issue by Hughes and Stevens, two UNSW based Australian researchers:

In the Portuguese case, the statistical indicators and key informant interviews that we have reviewed suggest that since decriminalization in July 2001, the following changes have occurred:

* small increases in reported illicit drug use amongst adults;
* reduced illicit drug use among problematic drug users and adolescents, at least since 2003;
* reduced burden of drug offenders on the criminal justice system;
* increased uptake of drug treatment;
* reduction in opiate-related deaths and infectious diseases;
* increases in the amounts of drugs seized by the authorities;
* reductions in the retail prices of drugs.

Perhaps worth copying here in Australia?