Recently in Economics Category

The return of the Labor government after 11 long years of miserable conservative rule saw "The Pigs" take holiday. The 'fire in the belly' (read 'indigestion') caused by more than a decade of the Howard government had subsided. With it went any inclination to add to this blog.

The antics of the Federal Opposition and some questionable policy decisions by the government have rankled to the extent that the urge to write has returned. If those urges persist is another matter.

The first stirrings were caused by the bleats of the well off to sensible means testing of government handouts.

The issue that finally forced me back to the keyboard was the pathetic responses from both sides of the parliament regarding the rapid increases in energy prices.

Brendan Nelson's policy to reduce the price of petrol by five cents per litre was a cheap grab for popularity, a stance begging to be ridiculed by the government. Rudd should have emphasised that the oil price is set by supply and demand in the global energy market, and thumped the Opposition's lunatic policy that would increasing the demand of a limited resource.

That the government seems spooked by Nelson's announcement, to the extent that they've mooted the possibility that petrol prices may be reduced by re-jigging the calculation of GST, is gutless, narrow minded policy of the worst kind.

If the government is worried by the issue, and they should be for other than political reasons, then they should be proposing that fuel taxes be used for sensible medium term measures that will lower fuel demand. Here's a few suggestions:

1. Revamp tax on new cars to make economical vehicles cheaper.
2. Remove the tax concession on new off road vehicles.
3. Revamp the novated car lease tax scheme by removing the incentive to drive further to reduce tax.
4. Provide tax breaks if you use public transport to get to work.

Sensibly, the government should increase fuel excise to reinforce the issue, because, apart from climate change (which is related), exceeding the limits of oil production (Peak Oil) is likely to be the defining issue of the 21st century.

With attention focussed on the amount of carbon dioxide (CO2) released into the atmosphere by coal fired power stations, coal mining companies are desperate to find ways of maintaining the viability of the industry in the era of CO2 induced climate change and carbon trading.

One method being considered is to use CO2 Geo-Sequestration, sometimes known as "Carbon Capture." It is one of a number of "Clean Coal" technologies that reduce CO2 emissions.

The concept's simple enough. Just capture the C02 after the coal's burnt, cool and compress it, then push it down the nearest convenient hole in the ground, where it will forever remain out of sight and out of mind. Sounds easy, but there are a number of difficult technical hurdles.

For a start, there's a lot of CO2 produced. The power stations in New South Wales burn millions of tons of coal a year. The weight of CO2 produced is 3.7 times the weight of the carbon in the coal. That's a hell of a lot of material to be safely disposed of.

Next, it's not that easy to separate the CO2 from the flue gas of a conventional power station. A lot of it is nitrogen plus other gasses which are largely inert in the combustion process, and you don't want to be adding those to the already large amount of CO2 you're trying to get rid of. For that reason, carbon capture may not be the 'bolt on solution' for conventional power stations that everyone hoped. It may mean building completely new plants that burn coal in pure oxygen, negating the need to separate the flue gasses, but markedly increasing the capital cost of the process.

And lastly, sites that can safely store the material are not readily available. Certain geological structures are required, and they're not always were the coal is burnt. If not close, the energy required to compress and transport the the CO2 to suitable sites will further increase the costs.

Despite the problems, Carbon Capture (along with nuclear energy) has been the darling of conservative governments. Until now.

THE [Australian] Government is facing a tough decision over whether to continue funding the world's leading clean coal experiment after the Bush Administration ended its commitment to the $US1.8 billion ($2 billion) project, citing massive budget blow-outs.

The US move is a grave setback for the Australian coal industry's hopes that a commercially-viable clean coal plant would be built in the foreseeable future. The US-led FutureGen project was embraced by the Howard government which pledged $15 million to it shortly before last year's election.

This is a surprising development considering that the current US administration is sympathetic to the fossil fuel industry. Not to be outdone, the former Australian government supported Carbon Capture at the expense of other environmentally friendly energy solutions.

Hopefully, this development marks the end to governments trying to pick green energy technology winners. If makes more sense for all technologies to be in the mix and receive equal opportunity to receive government research funding.

Who knows? Carbon capture may be a viable green technology, but it needs to be evaluated on an equal footing with all other technologies, whether they be nuclear or windmills.

My few regular readers know I'm concerned with the effects of climate change. I have little doubt in the science that points to the detrimental effects of loading the atmosphere with carbon.

Despite the current wet spell, Sydney's dams are only 60% full and half the state is still drought effected. We'll have to wait and see if the current La Nina phenomenon lasts long enough to further improve the situation, but trends show that the dryer El Nino periods are getting longer and consequently, the countryside dryer.

Why then, you may well ask, haven't I subscribed to "green" electricity and installation of water tanks? Both are within my means. The answer is that I'm reluctant to make it easier for the authorities to shirk their responsibilities for the provision of basic infrastructure and the imposition of charges to tackle climate change.

Consumers who take the laudable action of paying extra for green power or pay hundreds (or thousands) of dollars to install water tanks deserve praise, but their effects are puny in the larger scheme of things and make it easier for the government to abrogate their responsibilities.

The effects of climate change are felt by everyone and the mitigation costs should also be borne by the community at large. More so than the provision of small subsidies as happens now.

Electricity authorities should have fixed and mandated levels of green energy generation, with the extra costs met by all consumers. Why should the concerned few pay extra and still wear the effects of coal fired power?

Water tanks installed on private property should be no different from the public dams, water mains, pumping stations and (dare I say it) desalination plants. They should be paid for and maintained by the water authorities from the revenues collected from water consumers. Water taken from the tanks should be metered or calculated by some other mechanism, and added to the householders water bill.

I'm sure that many more households would be willing to install tanks if an equitable scheme was devised, perhaps saving the authorities the huge sums needed to expand existing facilities. Not very altruistic sentiments, I know, but I'm willing to donate land for water storage and pay increased costs for power if the conditions are acceptable.

Kevin Rudd's comments that we should increase savings may be the first indication that the government is rethinking the tax give-aways planned for this year's budget.

With inflation on the rise and the Reserve Bank poised to increase interest rates, now is not the right time to provide a tax break.

Given that the planned tax cuts are a result of the previous government trying to buy its way back into office, and the mood of the electorate was for the revenues to be used to restore services that were neglected by Howard and Co, I think the government would be forgiven if they reneged on at least a portion of the cuts.

Alternatively, they could cut the tax rates while simultaneously increasing the percentage of compulsory superannuation contributions.

Rudd is keeping faith with the voters by staying true to his election promises, no matter how outlandish. That faith will be tested if the promised cuts are provided only to be removed by the Reserve Bank.

One of the assumptions made by both parties in the current election campaign is that the economy will keep growing at the present rate for the foreseeable future. Howard's and Rudd's recently announced $30 odd billion tax giveaways are only deliverable if that assumption holds true.

There are a couple of economic 'elephants in the room' that both side of politics don't want to mention. One is the sub-prime lending crisis in the US, the other is Peak Oil. The former may knock a few years growth off the economy. The later issue, Peak Oil and its effect on the oil price and world economy, is much more serious.

If the more dire predictions regarding Peak Oil eventuate, the predictions of tax giveaways will be laughable in the face of declining government receipts.

Peak oil and climate change are related, but the effects of peaking oil supplies will be felt much earlier and have a sharper negative effect on the economy. Predictions of just when the peak will occur vary. Some say it's here now, others say it won't happen for a couple of decades. Even if the optimists are correct, it's not that far away.

Over the last week the oil price hit $90 barrel*. Admittedly, that spike was a reaction to the threat of Turkey taking military action in Iraq. However, the steady rise of the oil price from around $30 three years ago to $85 this month is simply due to demand outstripping supply. $100 / barrel is not out of the question in the near future.

Since the 1960s, two barrels of oil have been consumed for every barrel found. China and India are competing for oil on the world market for supplies, and they have some way to go before they approach anything like the per capita energy we consume.

(Click to enlarge)

Australia has been insulated from the current rising energy prices due to the rising value of the Oz dollar. Not every country is so lucky, and eventually increasing energy prices will start to negatively effect the world economy.

Perhaps the imminent $100 per barrel oil price will put the issue on the public agenda. Until then, Rudd, Howard and Co will happily perpetrate the myth that resources and rising living standards last forever.

*$92 as of today.

And that reason's called "Value Adding."

Australia has an appalling record at adding value to it's primary exports. From wool exported decades ago, to present day minerals and, in this case, trees. Just load it on a ship, wave it goodbye and receive a fraction of its processed value.

I know there are issues with the mill regarding its siting, pollution and the source of its raw material. If all those meet acceptable standards, then the thing should go ahead.

If the trees are going to be cut down regardless, then we should ensure we get the maximum value for them.

I stayed up late on Thursday night to watch Paul Keating interviewed on Lateline. I wasn't disappointed.

Keating's discourse was somewhat rambling and egotistical, but he hasn't lost the art of producing the 'quotable quote.' Here's some lifted from the transcripts.

On the effect of Work Choices on productivity ...

If you go to 200 or 300 people in a factory or 200 or 300 people in a workplace and come to a three or four year bargain to the improve productivity and share it between wages and profits you've got a good chance of getting productivity from the whole enterprise. But if you just take one person at a time, bring them into the boss' office and cut their wages there's no chance of getting any productivity. That's why trend productivity is now rapidly on the way down. It was 3 per cent under me. It's now under 1 per cent.

And this in the same vein ...

The great lie of the Howard Government in respect of workplace changes, they are simply a set of arrangements to keep unions out of workplaces. They've got nothing to do with productivity and the quicker we move away from that kind of discriminatory structure to a truly trust based co operative sharing of work and workloads, then we get back to reasonable levels of productivity and again, reasonable rates of growth in real wages. It's no accident as you saw in today's front page of The Sydney Morning Herald and other places that the wage share in the economy has gone down, and the profit share in the last four years has gone up because wages are now in real terms, are declining.

On using the Corporations Powers to regulate IR ...

Let me make this clear, the Liberals decided that they wouldn't use the conciliation and arbitration power.

Under that power of the constitution you always needed a commission who tested capacity to pay and comparative wage justice. They've now used the corporations power and the High Court for the first time as validated its use. That means a Federal Government can now legislate the wage and the conditions.

On the real reason why the economy has boomed without the traditional wage blowout ...

Everything in those national accounts yesterday, everything, that is the growth in the economy and the low unemployment, the reason the system is not blowing, the tinder box has not taken off is because of the float, because of the tariff changes and because of [the previous Labor government's] IR changes, structural changes. That's why they're there. Not because of any superior management by Mr Costello. You know this pat line tonight about you wouldn't put an L plater. God, he's the greatest L plater of all time.

And finally, best til last. This on poll based policy. Could be true for any political organisation these days ...

The Labor Party is not going to profit from having these proven unsuccessful people around who are frightened of their own shadow and won't get out of bed in the morning unless they've had a focus group report to tell them which side of bed to get out.

Keating makes the current pollies we're lumbered with these days look very bland. I look forward to his next media forray.

The mining industry has hinted at a compromise regarding their objections to Labor's recently introduced IR policy ...

There are signs the mining industry and the Labor Party could find some common ground in the stand-off over industrial relations.

Opposition workplace relations spokeswoman Julia Gillard insists Australian Workplace Agreements (AWAs) will be scrapped if Labor wins office but the Mines and Metals Association (MMA) says it is important to keep AWAs because of the flexibility they offer.

MMA chief executive Steve Knott says the association would be prepared to accept a return to the 'no disadvantage test' if Labor agreed to keep AWAs.

The miners elaborated their position on the ABC's PM program tonight ...

STEVE KNOTT: We've said all along that if [Labor] had something that gave us similar benefits to what we've got now, we'd look at it. Even if they returned to the old no-disadvantage test that was in place 12 months ago, which was a global test based on a comparison with the award, we'd be comfortable with that.

But of course the people in the mining industry are way, way, way over and above the award rates. So the old no-disadvantage test that was in place pre-WorkChoices wouldn't bother the resources sector one iota.

Being a pragmatist, I don't think this an unreasonable ask. Defusing this issue would make Labor's journey to government a lot easier. With the mining lobby on side, they could concentrate on the much easier task of pointing out the real inequities of Work Choices.

Hearing Peter Beattie resurrect the idea, first proposed 70 years ago, of diverting rivers in Queensland's north to augment flows in the Murray Darling river system took me back to my yoof in the late 60s. Then, the idea of using large engineering projects to 'tame nature' were common.

The nearly completed Snowy Mountains hydro project was the inspiration for other, sometimes wacky, schemes being proposed. One of the more silly ones was a proposal to use an atomic explosion to create an artificial harbour in the country's north-west. Madness!

The environment was seen as a limitless resource that could be altered at will for human advantage.

We now know that these grandiose schemes often result in unintended environmental consequences. It could be land degradation due to salination, the destruction of animal habitat, or accelerating climate change due to the creation of greenhouse gasses during construction and operation. It's fair to say that all these projects have an environmental downside.

As a engineer, I'm not against sensible engineering projects, as long as a favourable cost / benefit ratio can be demonstrated. I suspect that Beattie's proposals would have been built by now if the benefit was there.

In an example of ideology over common sense, the government has decided to sell $8 billion worth of Telstra stock.

The shares are trading at a historic low. Dumping the shares on the market at this time is hardly likely to improve the company's value.

I'm keen to see how they're going to promote this to the public, some of whom have seen the value of their shares fall from $7 to around $3.50 each this week. A sweetener for those who hold T2 stock is a strong possibility.

Mr Howard says the Government's shares would have been sold earlier at a higher price if opposition parties had not blocked the legislation.

Yes, and ripped off a greater number of the gullible public. Let's be thankful that the Senators held off the sale for as long as they did.