(cross-posted from Core)

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.

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The political fight over climate change policies continues to rage in our parliament, with the shadow minister for Climate Action apparently threatening a double dissolution of parliament if that is what it would take to repeal the current policies. The deeper question for analysts in the background is whether emission policies are a political feasibility, not just at the world level but even within Australia.

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.

It is easy to become absorbed in particular problems and in the disaster stories that dominate the daily media. Climate change, natural disasters, wars in Africa and Asia, Financial Crises, riots and food price rises: you would be forgiven for thinking the world is going to the dogs. Is it really, however, or is that just the gloom you get from staring at the problems and not smelling the roses?

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.

On Monday, the Crawford school at the ANU ran a symposium on whether or not the government policy on carbon emissions was good policy. The video of the event should shortly appear here.

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.

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(note to self)

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.

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(see here for part one and two and here for even earlier posts)

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.

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(cross-posted at Core-econ)

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.

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The survey on economic opinions run by the Economic Society Australia is running to a close. It is your chance to register your opinions on the ERA journal rankings, the status of economists, carbon taxation, etc. The response rate so far has been surprisingly high – with about 30% of all ESA members registering their opinions, which is damn good for an internet-based survey.

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.