At the moment I'm working on a little project... a model of the Australian economy.  

Now before you lose your praexeological heads, I'm not talking about a mathematical model that aggregates much of the economy into a few short equations based on false assumptions of equilibrium or even non-equilibrium.  Really, it's a flowchart to explore the relationships that exist between sectors of the economy on employment and the effect of the fractional-reserve banking system.  I believe that a flowchart model of the Australian economy will be vastly superior to the complex mathematical models developed by 20 000+ economists around the world, which has thus far served us so well (sic).  The reasons for this are:

1)  It takes a look at the economy as whole rather than aggregating economic growth and thus viewing the economy in a narrow field of view

2)  Seemingly unrelated sub-sections on the economy can be exposed for their influence on employment etc

3)  Exposes the savings vs credit foundation of the economy and the effects of fiat money creation by the central banks and fractional-reserve banking

4)  A flowchart is easier to understand than an equation, the path for economic 'cause and effect' is clear 

This is a fairly large undertaking and I believe the process will be more akin to lego rather than painting on a canvas.  I've made a start, really focusing on a few 'big ticket' items as it relates to Australia (especially with all the talk of China). Now my hope is to put together a neater flowchart that actually shows the flow of money and jobs within the economy to accurately represent the strength and influence of each sub-sector.  For now, the chart will serve the purpose of exposing the relationships within our economy.

Finally, please make suggestions/corrections/numbers/modules... this will be larger than one man!

God bless,

Washington

THE MODEL (click for larger version):

I feel I have to highlight one of the rare moments when the unseen consequences of governmental manipulation of markets becomes seen:

ENVIRONMENT Minister Peter Garrett will keep his job but thousands of workers will be sacked after the abrupt scrapping of the disastrous $2.5 billion household insulation scheme yesterday.

And Mr Garrett's own department admitted that as many as 80,000 homes across the country may have been left with insulation that does not comply with the official guidelines. Source

We know that when the government distorts the price system through, for example, incentives such as insulation subsidies or grants, the higher prices - which indicate to people where the most urgent shortages as dictated by true consumer preferences currently are - lure entrepreneurs and workers like moths to a flame into that industry. When the program ends, these people are suddenly not needed - they were employed in an area not aligned with consumer preferences. We will have thousands of unemployed insulation installers who might have become plumbers or gardeners or something else actually aligned with the true demands of consumers.

The failure of this program comes as no surprise to anyone who has read Bastiat's What Is Seen and What Is Unseen but 90 per cent of the time the majority of the voting population never look beyond what is seen. It's unfortunate that it took the loss of human life to expose it this time (another unfortunate consequence these programs have a habit of causing) - no doubt the government will be calling for more money, better people and better regulation to 'get it right' the next time.

Let me begin by saying that I still think the science that suggests anthropogenic carbon emissions are the major cause of climate change is anything but settled. Given the unpredictable nature of the climate and all the scandals involving the IPCC and other government-funded climate science bodies we would be foolish not to maintain some caution; I certainly don’t think we should be rushing into anything that could adversely affect the living standards of many, many people. However – and this is a dilemma I’ve had for a while – it seems both political parties are set on “action”, so the billion dollar question is: which path will cause less damage?

“Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it—or, to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational and must be kept separate from our regret that the new theories upset our cherished beliefs” – F.A. Hayek

First, apologies if I have the details of either policy a bit muddled; I honestly haven’t had the time to trawl through them so there might be some parts I have wrong, please correct me if that’s the case. With that said, first up on the chopping block is Labor’s Emissions Trading Scheme.

• Schemes of this nature have enormous administrative costs
• Government allocates emission permits sector by sector, industry by industry
• Government auctioning permits for businesses to continue to do business is a huge tax hidden in a bureaucratic black box
• The government has even more power to pick winners and losers, all of whom will no doubt commit huge amounts of capital to lobbyists to influence the government

Now as someone who is generally very sceptical about giving the government any new authority, I could certainly see how billions of dollars could go “missing” under this scheme. At face value, while it will cut carbon, it will expand bureaucracy and crony-capitalism to even further heights.

As for the Liberal’s “direct” approach, again correct me if I’m wrong, but it looks like, quite simply, “$10b worth of handouts for businesses and farmers to reduce emissions.” As with the above – although this may be more transparent and cost less – it’s almost a certainty that the creation of a new body to simply hand out cash for farmers to plant trees and so forth will reek of pork barrelling and waste. I’ll examine it a bit more in the coming days (honestly, I really don’t have the time – this entire post is being rushed, mainly so I can get the following point out. I will comment on this post at a later date after reading up on both schemes).

So, with both schemes looking rather rubbish, why hasn’t anyone considered a (fully rebated*) direct tax on carbon itself as an alternative (I’m only raising this as I feel – with action guaranteed – that it’s the most sound option)? It would avoid the shortfalls of the above options as:

• It would be a straightforward tax on fossil fuels based on each fuel's carbon content
• It avoids the uncertainties of the cap and trade – a carbon tax would provide a clear and candid incentive to adopt energy-saving and carbon-minimising technologies
• The market will be left to determine how to most efficiently order affairs under those new prices (i.e. windmills, solar, hydrogen, whatever – the market will pick the most effective)
• It has a known cost and taxpayers could demand a commensurate reduction of other taxes (e.g. income tax)

That final point is the biggest reason why I would support “action” in the direct taxation of carbon over a cap and trade or Abbott-style scheme. The amount collected from it could be directly transferred back to the taxpayer in the form of a tax reduction elsewhere. The last thing we need is another black box for the government and banks to play with (hello carbon trading bubble!).

Now, let me end with something I think needs to be addressed more urgently, and will do more good for the environment than any of the above schemes: the removal of state-granted monopolies in power generation.

The carbon tax scheme I mentioned above will not work unless there is a free market in power generation (currently as there's no incentive to cut emissions utilities can just absorb the loss – their performance isn’t measured on profitability – or pass on the extra costs in the form of higher prices without even a glance at alternatives. It is also very difficult/impossible for a competitor to enter the market.). 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.

If power was returned to the free market we would see more competition, better pricing, more cost-saving (more resources conserved) and more money flowing into green power.

It’s ironic that the government today spends money on adverts telling people NOT to use power during a period of high demand (e.g. a heatwave)...when if markets were in charge, a heatwave would not be looked at as a problem but as an opportunity. Entrepreneurs would be itching to meet demand instead of making excuses, just as they do in every other sector that is controlled by markets.

The real question is how can anyone be serious about helping the environment while these state granted monopolies are allowed to exist?

*Note: to be fully rebated, the government would have to cut spending in some other area(s) to make up the shortfall, as if the tax does what it is supposed to - reduce demand for polluting products by raising their price - then by necessity, less of those products will be sold and so the amount of tax collected cannot restore the economy to it's previous state even if all carbon tax revenue was returned in the form of, say, income tax cuts. The government would have to cut spending elsewhere for them to be able to cut income tax by more than the revenue the carbon tax brings in to restore the private economy to the level it was before the tax and make sure that, on aggregate, no one aside from the government is worse off. In other words, the government would have to shrink rather than the private sector (under a 'revenue neutral' model where all revenue from the tax is redistributed to the private sector, the private sector still bears the full cost of the tax through higher prices for goods and services - they can now buy less for their dollar than they could before the tax because producers are having to use more expensive methods of production and distribution).