I recently watched a National Press Club debate between British climate sceptic Christopher Monckton and Australian economist Richard Denniss. The point I would like to address is the claim that Denniss made repeatedly during the debate, that [sic]:

"...the main point is that this conspiracy runs far deeper than the communist takeover of Greenpeace because Malcolm Turnbull and John Howard are in on it and Marius Kloppers and Ralph Hillman the head of the coal association, are in on it...we just really need an explanation here of what is it that is driving the head of BHP to accept this and why is Woodside using climate science to predict how much stronger its gas rigs will need to be to resist the climate change that their gas is going to cause."

I can provide the answer the Denniss is [not] looking for: large, established businesses are not necessarily friends of - and are in fact almost certainly against - the market and are instead in favour of anything the government can do to prevent competition by raising the barriers to entry for their industry. It is entirely within the scope of rational self-interest for someone like Marius Kloppers get on board and support a carbon tax regardless of the science that may or may not be behind it. As Matt Ridley pointed out in his recent book The Rational Optimist:

"I hold no brief for large corporations, whose inefficiencies, complacencies, and anti-competitive tendencies often drive me as crazy as the next man.  Like Milton Friedman, I notice that ‘business corporations in general are not defenders of free enterprise.  On the contrary, they are one of the chief sources of danger.’  They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age."

We live in a crony-capitalist world and thus should expect the likes of BHP to jump at the opportunity to get in bed with government (no doubt BHP's team of lawyers have cut private deals with the government for their support resulting in them coming out on top of any carbon tax, whether through exemptions, compensation or simply through the increased barriers to entry insulating them from competition). As Mises said:

"In the interventionist state it is no longer of crucial importance for the success of an enterprise that operations be run in such a way that the needs of the consumer are satisfied in the best and least expensive way; it is much more important that one has "good relations" with the controlling political factions, that the interventions redound to the advantage and not the disadvantage of the enterprise...An enterprise may be well run, but it will go under if it does not know how to protect its interests in the arrangement of tariff rates, in the wage negotiations before arbitration boards, and in governing bodies of cartels. It is much more important to have "connections" than to produce well and cheaply. Consequently the men who reach the top of such enterprises are not those who know how to organize operations and give production a direction which the market situation de mands, but rather men who are in good standing both "above" and "below," men who know how to get along with the press and with all political parties, especially with the radicals, such that their dealings cause no offense."

I hope that answers Denniss's question. As for the carbon tax itself, no self-respecting economist should support it regardless of what the science shows. Indeed, Australia is lining up as a perfect case study for why it is impossible for any government to implement a theoretically, economically "efficient" carbon tax. It is yet another example of the problems repeatedly highlighted by the public choice school; that even if we assume the best intentions, the incentives and institutions that self-interested political and bureaucratic actors operate within will always result in an outcome that will be worse than if nothing was done at all.

The interest rate debate has once again entered the mainstream in Australia with Westpac becoming the first major bank to forecast that the next move the Reserve Bank of Australia (RBA) makes will be a 25 basis point cut in December of this year, followed by another three 25 basis point cuts next year (bringing the cash rate down from the present 4.75 per cent to 3.75 per cent). This is in line with what the bond market has been showing for a while and was followed by comments from bloggers and financial / economic pundits all providing their two cents on the issue, with opinions varying on whether rates should increase (actually, I have yet to find anyone supporting an increase – while the ‘experts’ are forecasting a rise, most think it is unwarranted) or decrease.

While there is nothing wrong with trying to predict the RBA’s moves – in fact, in today’s world of fiat currencies and a centrally-planned cash rate, it can be incredibly profitable for the savvy investor to correctly predict the moves of their favourite central bankers – it is wrong for people to make claims that the RBA “must” either increase or decrease rates when these claims are based on fallacious reasoning. Most of this reasoning proceeds like this:

1)      Analyst ‘sees’ X industry or industries suffering

2)      Concludes rates are too high for non-miners

3)      Insists that RBA must cut rates

But to suggest policy recommendations on this reasoning is extremely dangerous. For one, who says that the current state (or some past state) of X industry is the proper state? Perhaps it is rife with malinvestment and the marginal businesses within X industry are finally starting to liquidate, allowing for the necessary restructuring and capital reallocation process to begin? Lowering rates would simply delay this process and squander even more capital with the piper still to be paid down the road.

Imports, not exports…

Another classic fallacy that is tossed around as if it is fact is that a cut in the cash rate and the subsequently weaker dollar it will create as capital inflows reverse is that it “…will be a boost to manufacturers and exporters.” But this is the oldest trick in the mercantilist book and can only be believed if you ignore the wider effects this policy has on the economy rather than the visible gains of a few select industries and the balance of trade; it is the zero-sum idea that all that matters for economic wellbeing is that the balance of trade remains positive. However, the “boost” received by exporters and manufacturers is largely illusory; while some industries will undoubtedly gain, domestic prices will rise faster than any gains those industries receive from increased sales. Given that everyone is also a consumer, they and everyone else in the economy now have to pay more for everything they consume. With a weaker dollar, the entire country has to export more and work harder to pay for the same amount of imports received before the devaluation of the currency. When you have to trade (export) more ‘stuff’ for the same amount of ‘stuff’ as you could buy before (import) then it is a net loss, not a gain.

Back to interest rates…

There are only two ways to avoid a boom-bust cycle induced by exogenous factors (e.g., monetary expansion in the US/China): maintain a cash rate that is perfectly aligned with the natural rate of interest – that is the rate that Knut Wicksell initially defined as the equilibrium interest rate that balances saving and investment in an economy over time – or with sound money such as a true gold standard (this is of course assuming government control over money; if money was privatised, true free banking – under the institutional setting of private property, contract and consent – would be the ideal method).

We know for a fact that all central planners, even the ‘elite’ planners who sit at the top of currency boards known as central banks, suffer from the same knowledge and rational calculation limits as all central planners do and can never equal or better a private competitive market in the allocation of scarce resources. They suffer from what Hayek, in his Nobel Laureate acceptance speech, called the “Pretence of Knowledge”; a belief that they can “manage” something that is impossible to manage. Thus, the only option available under fiat currency – that of keeping the cash rate perfectly aligned with the natural rate – is impossible beyond the occasional fluke. This means that unless the central bank raised rates to a level that stifled all economic growth, it is almost a certainty – especially when the insights of the public choice school are factored in – that the cash rate will be held below the natural rate more often than not. When this happens, there is only one outcome: relative price distortions, an unsustainable boom and the subsequent malinvestment that goes with it.

The reality is that any policy that cuts the cash rate below the natural rate of interest will cause inflation and even though it will be touted as an attempt to “fix” the economy it will not in fact “fix” the economy but will instead be nothing more than a transfer of wealth to debt holders (banks, government, corporations, mortgagees) at the expense of everyone with savings (anyone holding bonds, bank deposits, insurance policies or super, i.e. most people). Likewise, if the cash rate is held above the natural rate of interest a reverse transfer will occur. As Bob Murphy noted,

“In truth, there's no obvious right or wrong answer to this question [what interest rates should be]. It would be akin to asking, "How many cars should the Soviet planners have produced in 1983?" One is tempted to say, "Ideally, the number of cars that would have been produced if there had been a capitalist economy," but not only is that impossible to know; it's not correct. The very existence of a centrally planned apparatus changes the real economic data, and so changes what the "correct" number of cars should have been, even if we could agree on the criteria for correctness.”

Structural issues

One of the reasons people believe they can achieve economic prosperity through price manipulation (interest rates) is that they have no concept of capital; it is simply this homogenous blob of putty which can be moulded in any shape or form. In reality, capital can do no such thing; once it is ‘formed’ it differs in how easy it is to reallocate to other uses, from virtually impossible (say a bridge to nowhere) to relatively easy (human capital).

“The more elastic is the currency system the longer can a more or less constant difference persist between the two interest rates [actual and natural] and the greater, therefore, will be the influence of this discrepancy on prices,” Cf. K. Wicksell in Geldzins und Giiterpretse.

Australia has had over 20 years of relative prosperity, in part financed through unprecedented levels of personal and now government debt. There are now massive structural imbalances in the economy (housing for one!) that have accumulated over these years as a result of interest rate targeting and a floating fiat currency. Another rather unfortunate aspect of interest rate manipulation is that it covers up the distortions the government itself has – the burden it inflicts is allowed to grow without the effects being felt for a significant amount of time. To paraphrase Milton Friedman, the “Iron Triangle” of politicians, special interests (e.g. banks) and bureaucrats (e.g. the RBA) is able to grow significantly larger than it would under a free market and the most effective way it does this – by stealth – is through its control of the interest rate.

Conclusion

In summary, by maintaining relatively stable interest rates, a flexible exchange rate and growth in the (aggregate) price level consistent with its stated goals over the course of the past decade – in other words, by doing its job – the RBA allowed relative prices in Australia to be slowly but surely distorted and malinvestment to ensue. Cutting the interest rate in an attempt to distort the correct functioning of the price system and prevent the appropriate feedback mechanisms from reaching actors in the economy will at best delay the inevitable (and cause further resource misallocations) and at worst fail completely, resulting in a prolonged downturn as restructuring is made virtually impossible.

While cutting the interest rate may spare many marginal firms and individuals in the short-run, in the long-run there will be significantly less wealth (not false wealth i.e., as recorded by GDP, but a smaller pie - a smaller quantity of goods per capita) for all Australians. Marginal and unsound firms – the ones most affected by the false signals sent by the RBA’s price manipulation – have to be allowed to restructure or liquidate, correcting Australia’s structure of production, allowing sound businesses to grow and letting economic recovery occur as quickly as possible. This can only happen if the natural rate of interest is allowed to reveal itself through the market system.

Well over a year since it was first proposed, details of the Gillard government's carbon tax have been released and at first glance it looks like it will be a colossal failure.

I first wrote about the proposed tax back in February 2010 and quickly came to the conclusion that both the Liberal's 'direct' approach and Labor's 'tax' approach would both fail at achieving - as Thomas Sowell would say - their 'hoped-for' results. Indeed, any policy designed with 'hoped-for' results in mind rather than looking at the process itself is doomed to fail and the new carbon tax is no exception. Let us take a quick look at what is actually included in this tax:

• Any facility that produces at least 25,000 tonnes of carbon dioxide equivalent per year will be included in the carbon pricing scheme, unless it falls into an exempt industry. The Government estimates around 500 companies will be directly affected.
• A reduction in fuel tax credits for business equivalent to carbon price (excluding agriculture, fisheries and forestry, but including road transport above 4.5 tonnes from 2014-15).
• An increase in the domestic aviation fuel excise equivalent to the carbon price, but no effect on international aviation.

There is also a massive amount of wealth redistribution (something like $15bn in wealth transfers) which will come hand-in-hand with an undisclosed amount of wealth-destroying administrative costs (I mean, bureaucratic jobs). But even if we ignore that negative aspect of this tax, will it even achieve its hoped-for results, or will unintended consequences derail the whole thing? What happens if:

• Polluting firms, instead of being incentivised by higher polluting costs to spend money in R&D in areas they are not familiar with (high search and knowledge costs) or that are quite simply not cost effective unless you ban polluting altogether (solar, wind?), decide to instead build more 'facilities' of a smaller size to fall below the 25,000 tonne threshold, sacrificing the economies of scale available to larger 'facilities' but still cheaper than paying the tax. This would create more inefficiencies through duplication and thus pollution than the existing situation. Strike one.
• Transport firms, also deciding that investing in 'green' or rail technology for freight is simply not economically possible, decide start converting their fleets to smaller vehicle sizes - conveniently below the 4.5 tonne threshold, once again reducing economies of scale, raising congestion levels on the nation's roads and causing more pollution and inefficiencies. Strike two.

Finally, as I wrote last year, almost all of the nation's energy-generation industry is either completely state owned or insulated from competition through regulation. You simply cannot have a 'market-based' tax (note with all the redistribution, compensation and exceptions in this tax it is hardly 'market-based' - it is closer to a 'we will pick the winners and losers' mechanism than a 'market-based' mechanism) unless there is a free market in power generation. Utilities have no incentive to cut emissions as they can just absorb the loss and cry for more subsidies; or if it is politically acceptable they will just raise energy prices without looking for alternative methods or efficiency gains (like a profit-seeking enterprise that faces a true threat of competition would or it would soon find itself in bankruptcy court). Strike three, you're out.

As I said before, "It's clear that state-sponsored public utility monopolies and the bureaucratic regulation of their pricing structures and investment options greatly limits the freedom of power markets...consumers lose the ability to choose their provider and the utilities lose their freedom to determine what to charge and what infrastructure to invest in."

A carbon tax is pointless without a free market in power generation. However, what is good politics is not good economics; there's plenty of wealth redistribution (for Labor) and wealth destruction (for the Greens) in this bill and at the end of the day that's what they want. The environment is just the latest 'fear' that they are exploiting to gain power and push their ideology on the Australian people.

A couple of days ago Joseph Stiglitz published an essay over at Project Syndicate which has received plenty of attention from all sides of the political and economic spectrum. My summary of it is this: it is an essay completely devoid of anything resembling economic analysis which Stiglitz uses to bash his (false) interpretation of laissez faire with nothing but ideological sophisms while trying to claim the moral high ground with calls for things such as "greater equality".

This is not surprising to me; I went to an incredibly unprofessional lecture Stiglitz presented late last year, packed full of grammatical errors and other mistakes (clearly he had just put it together on the flight over from the US) and devoid of economic analysis, much like his recent essay. In the lecture he recommended things like global income redistribution to reduce savings and boost consumption; more regulation; a tax on countries that save too much (Germany); and during the comments when asked about what his solution would be - or rather how it would be possible to enact his recommendations as he was clearly frustrated that governments around the world were not being 'proactive' enough or were constrained by silly things like legal checks and balances or constitutions - he implied that the ideal would be for a global government with a global fiat currency, but only so long as the "right people" (Stiglitz) were in charge.

In the above essay, Stiglitz never defines what "greater equality" is, but presumably he means income equality. He mentions that the rich are getting richer and the poor poorer, ignoring that people move between income brackets and are almost never the same people. Also, his selective use of data (not provided) is countered by a quick Google search: from 1970 to 2007, US real income per capita almost doubled (and that ignores shorter work years and increased leisure which reduce this figure along with other improvements in the standard of living - like how more 'poor' people these days have iPhones, plasma TVs, personal computers, etc.). Are people really worse off, especially given that the 'poor' are usually young, unskilled people just starting their careers who don't stay poor forever? I doubt it. What is more likely is that Stiglitz's call for "greater equality" is nothing more than an attempt to reinforce his position on the moral high ground thereby allowing him to make moral arguments while maintaining his apparent 'objectivity' as an expert. It's an attempt to deceive, a bunch of rhetoric designed to mislead the reader into supporting his position without actually presenting a valid argument.

Stiglitz's views and argumentative methods are no different to those of any people who have tried to forcibly impose their own value sets on entire populations who do not want them. He postulates himself as an objective expert with the moral high ground and whose conclusions are backed by logical analysis and scientific evidence, all in the interest of the "public good". In reality, he is simply pushing his own self-interested totalitarian ideology while using dishonest tactics to dismiss or discredit his opponents without engaging in any kind of cognitive dialogue with them.

James Burnham once said: "When we discover that certain ideas about man, history and society seem, to those who believe in them, to be either self-evident or so manifestly correct that opposing them is a mark of stupidity or malice, then we may be fairly sure we are dealing with an ideology and ideological thinking."

That is Stiglitz down to a tee. He is no longer interested in any kind of logical, rational debate; he is so blinded by his own ideology and utopian dreams that he wants to forcibly impose on unwilling victims that facts and reality no longer matter to him. Anyone who disagrees is merely a "...right-wing [economist], driven, as always, by ideology and special interests," and who "...seek[s] to repeal the basic laws of math and economics."