The CPRS, Treasury modelling, and the predictable reaction

Now that the long-awaited Treasury modelling for the Carbon Pollution Reduction Scheme has arrived, it is a salutary exercise to check how well the predicted reactions of the players match their actual response.

Predictably the Government has used the modelling to reinforce its determination to start the scheme by 2010.  2010 is a whole year, so there is twelve months’ flexibility in the start date.  But since 2010 is an election year, the timing of the introduction to some extent will be governed by the poll date.  To support its case for an early start, the Government has used the modelling data that shows that delay in implementation will be costly.  Kevin Rudd and his Minister for Climate Change and Water Penny Wong have injected a note of urgency, citing the increasing evidence of steadily accelerating global warming.  They have pointed to the relatively modest cost of a dollar a day increase in electricity and gas prices based on emission prices between $23 and $32 per tonne, leading to a oneoff rise in the consumer price index of between 1 and 1.5 per cent.  They also assert that early global mitigation will reduce longterm costs and that “delaying mitigation action in the global economy will increase climate change risks, lock in more emissionintensive industry and infrastructure, defer cost reductions in lowemission technologies and heighten distortions associated with tradeexposed industries. This will increase the cost of achieving any given environmental goal.”  On the positive side, the report shows that demand for lowemission goods and services will increase with a CPRS and that an emission trading market would create new sources of revenue.  The consolidated fact sheets are here

Predictably, Ross Garnaut agrees that the Government's proposed emissions trading scheme should go ahead as planned despite the global financial crisis and that 2010 is the best possible time to push ahead with the scheme.

For its part the Opposition has been as predictable in its response.  Having called for months for the modelling to be released urgently to inform those preparing a response to the Government’s Green Paper, and insisting that it was ridiculous to expect submissions in its absence, it has bucketed the modelling.  First, it has ridiculed the modelling on the grounds that it has not taken into account the current financial crisis.  The argument sounds plausible enough.  But the report itself says “The modelling focuses on the medium to longterm transformation of the Australian economy.  Market fluctuations, such as the current global financial crisis, will not materially affect the analysis.”  Since the timeframes modelled are 2020 and 2050, it’s hard to see how the 2008 financial crisis is relevant.  It might be to the start date which is likely about two years ahead, but even then the effects of the crisis are likely to be much less than now.  And in any case these effects will govern the trajectory of the introduction.  So the complaint about the current crisis not being factored in is spurious.

The strategy of mounting seemingly plausible arguments, but which on cursory analysis are clearly invalid, is one we have seen from the Opposition before.  Something similar occurred over the Government guarantee when Malcolm Turnbull ridiculed Rudd for not consulting with the Reserve Bank governor prior to the October 12 decision, superficially a preposterous thing to do.  But Turnbull knew full well that a Reserve Bank member, head of Treasury Ken Henry, was present and was the direct conduit from the governor to the PM.  The barb was soon blunted, but no doubt Turnbull hoped that it had had its desired effect.  Is this strategy deliberate and therefore disingenuous, or does the Opposition really believe its own rhetoric, which is even more disturbing. More...

The bank guarantee – what does the Opposition and the media really believe?

Ever since the Rudd Government announced its guarantee for deposits in banks, credit unions and building societies there has been a running commentary from the Opposition and the media about that move.  After a brief flirtation with bipartisanship, following Tony Abbott’s dictum that oppositions should oppose, propose nothing, and turf the government out, the Opposition has embarked on a corrosive process of criticism in the hope that some of the gloss would be rubbed off the Rudd Government.  Even if that were a legitimate course of action for oppositions, it would improve their standing if they at least added their considered opinion on the best course of action, so the public could judge which seemed better, their's or the Government’s.  So far, the only recommendation that Malcolm Turnbull has made was to limit the guarantee to $100,000.  All the rest has been carping criticism.

One would have hoped though that the media might at least have been even-handed, dispassionate and critically analytic, and that their analyses would be based on factual evidence, precedents, experience elsewhere, or well-founded, economically sound arguments.  Sadly that has not been so.

We have seen a wide range of appraisals. Janet Albrechtsen’s 12 October piece Courageous Rudd overcomes history and populism, written the day of the guarantee announcement, says “...the Rudd Government deserves praise for acting responsibly and courageously.” and “Whilst safeguards, limits and restrictions need to be added to today’s measures to avoid them becoming blank cheques for foolishness, the government has clearly demonstrated leadership at a critical time. It is a sign that the Rudd Government is economically responsible in direct contrast to the Liberal Party populists who have ignored the international reality that banks are falling over, or being bailed out by governments, on a weekly basis.”  No mention of bungling.  Paul Kelly too had praise initially, although he subsequently hedged his bets by saying that although the unlimited guarantee was a ‘mistake’ it would do the Government no harm, and that Rudd had played his cards brilliantly.  Predictably, Dennis Shanahan labeled the move as Rudd’s ‘first big mistake’.

As time went by, with the benefit of hindsight, the media began to express even greater doubts.   Some, such as Alan Kohler in Business Spectator on 28 October said in Savings in a stranglehold  “Unless they (Rudd/Swan) are to go down in history as the bumbling fools who wrecked the Australian economy, they must instantly, this morning, put a universal price on the deposit guarantee that was announced on October 12.”  Strong words, but at least he offers advice, namely that every institution be enabled to offer AAA accounts that pay zero interest, and explains how this would work.  Who knows if there’s any merit in his advice, (no one else has publically endorsed his views) but at least he’s explained himself.  Not so the rest of the media. More...

The national interest versus political expediency

When Kevin Rudd likened the effect of the global financial crisis on Australians to a rolling national security crisis, he was ridiculed by Malcolm Turnbull and the media, and cartoons of Rudd in fire-fighting gear soon appeared.  But Rudd was right.  The calamity facing us already has had more effect on most of us than 9/11 and any subsequent security scare.  Turnbull accused Rudd of creating a scenario that would make him look like a knight in shining armour ready to save us from a fate worse than death.  Even if that were so, it doesn’t negate Rudd’s metaphor.

So almost from the beginning Turnbull looked for and found what he believed were base political motives behind Rudd’s moves.

With that level of suspicion it is perhaps surprising that bipartisanship emerged at all, as indeed it did when the Government guarantee on deposits in banks, credit unions and building societies was proposed.  The legislation passed through parliament without a murmur of dissent.  But now all that bonhomie has evaporated.  Why?  Was it that some elements of the Opposition saw such statesmanlike collaboration from their leader as lacking the ‘mongrel’ needed to savage the Government?   In a contribution to a new book Liberals and Power: The Road Ahead, Tony Abbott says: "At one level, the Opposition's most urgent job, between now and the next election, is to publicise the government's mistakes. Randolph Churchill once declared that oppositions should oppose everything, propose nothing and turf the government out. He was right in this fundamental respect: the opposition's job is to get elected. Intelligent oppositions have no unnecessary enemies. They make the government rather than themselves the issue by ensuring that everyone harmed by government decisions well and truly knows about it."  Is it Abbott’s view of the role of oppositions that has changed Opposition tactics?  Maybe, but what a pity it did not follow his other dictum:  ‘have no unnecessary enemies’, instead of creating them as it has done this past week.

So after just a few days political expediency overtook the national interest

Turnbull began by sowing doubts in people’s minds about the merits of the proposal.  Ideas of a ‘cap’ on the guarantee emerged, first Rudd’s $20,000, raised by Turnbull to $100,000, then Rudd’s unlimited guarantee, now modified with a levy applied to deposits over $1 million.  Then, aided and abetted by an article in The Australian Turnbull attacked Rudd for not taking RBA advice which the paper insinuated had not been passed onto Rudd.  As Ken Henry, Secretary of the Treasury and RBA board member was the conduit for such advice to the Government, Turnbull queried whether he had failed to pass on this vital information, and if this were so, would Rudd sack him?  It was at that moment Turnbull lost the initiative he had been building.  His propensity for barrister-speak overrode his need to stick to political-speak.  Not only was that a damaging mistake, but it ‘gave permission’ to others to similarly attack a highly respected public servant. More...

Where has reason flown?

That so many investors seem to be making unreasoned decisions and dumping stock as share prices fall is understandable if they are, as has been described, in a state of blind panic, occasioned by unremitting fear.  But that state of unreason should not infect journalists, who ought to be able to view events with cool dispassion.  Yet we see them apparently also afflicted with unreason. 

Take the Government’s response to the global financial crisis, now just the ‘GFC’.  To have done nothing would have seen the flow of funds from Australian banks, building societies and credit unions to overseas banks that had been guaranteed.  By being the first to offer a government guarantee on bank deposits, Ireland started the inexorable process of ‘follow-the-leader’ with European banks offering the same to stop outflow to Ireland, and banks elsewhere being forced to follow.  Not one commentator has challenged the validity of our Government’s initial move, and it was supported by the Coalition in its passage through the parliament.  But that has not stopped Coalition members and their media cheerleaders from labelling the Government’s actions as having been bungled.  If the initial move was not bungled, what was?  Michael Stutchbury in The Australian says “Not enough work was done on the 100 per cent guarantee when Rudd announced it on October 12.”  Stutchbury does not say what more work was needed.  Because he doesn’t know.  Like so many journalists his learned opinions emerge only after he has gazed down the retrospectoscope. 

On the subject of market-based managed funds, who have frozen redemptions to cut the flow of funds to the guaranteed institutions, Glen Milne in the 25 October issue of the Daily Telegraph in his piece How Wayne Swan made a right royal gaffe canvasses the idea that if the Government had followed Malcolm Turnbull’s suggestion of a $100,000 cap on the deposit guarantee, the flow of funds from the non-guaranteed managed funds would not have occurred to the same extent.  That might be so, but according to Government figures, at $100,000, 40% of bank deposits would not have been covered by the guarantee.  What a protest that would have evoked.  Columnists like Milne seem to be unable to look at the whole picture, preferring instead to cherry-pick aspects that suit their pre-ordained attitude. More...