Published in the Geelong Advertiser, 28 September 2011, p. 22 as ‘Reconciling price, real vlaue is just trouble.’ Roy Hay

This column does not offer financial advice. Nor is it very good at predicting the future. Trained as an economic historian with twenty-twenty hindsight, I can tell you how we got into this mess, but I cannot pretend to know how we will get out of it. All I can do is outline some of the issues in play, in the hope that you find that useful.

We are still feeling the effects of the global financial crisis (GFC) of 2007–2009 and the excesses which led to it, and we have not learned all the lessons therefrom or applied the remedies we thought were appropriate. That crisis came about essentially because significant players in financial markets had cut the links between any conceivable value of assets they held and the price at which they were trading them. They were simply doing what always tends to happen in a boom, gambling that they could make money on the trade before the collapse in prices occurred.

Thought the cant phrase is ‘nothing is inevitable except death and taxes’ the reality is that speculative bubbles always end in tears and consequences which take much longer than you might expect to unravel. Governments tried with varying degrees of success to mitigate the effects of the GFC by strengthening prudential measures affecting the lending policies of banks and other institutions and by a variety of stimulus packages to prevent economies falling into recession. Australia came through this phase better than most, in part because the Howard government had used the previous boom period to pay down national debt to historically low levels, though private borrowing had grown significantly. The skyrocketing demand for Australian raw materials thanks to the growth of China and the fact that Australian banks were not committed to a large extent to some of the more outlandish complex financial transactions going on in the United States home loan market also helped. Many other countries were not so lucky and it was not just the banks but national treasuries which were now under pressure.

Sovereign debt was believed to be safe because governments could always use taxation to raise internal funds to meet their obligations. This was the case when national debts tended to be a small proportion of the gross domestic product of most countries. The ones that exceeded these ratios were usually small, peripheral nations whose dodgy practices hardly threatened the international system and when they defaulted the impact was limited. There were exceptions such as the first Baring crisis in the 1890s when the bank was brought to its knees by overextending itself in loans in Argentina.

However, in the 21^st century some major countries have built up very substantial debts during the era of easy money that preceded the GFC. In the case of Greece, joining the European community and the Eurozone, the single currency now used by all members except the United Kingdom, was supposed to introduce some fiscal discipline but it did not curb Greece’s binge on debt to the point where no conceivable measure of austerity can enable it to meet its short-term obligations. So it looks as if a partial default on its debt is being considered with the banks that are holding the Greek debt being supported out of a general European fund, probably backed by the International Monetary Fund. Will this so called ‘orderly default’ calm the market jitters or simply transfer the focus of concern elsewhere, perhaps to Spain or Italy? That is a real risk.

But debt is not just a Greek problem or even a European one. The United States has an economy that is just on the brink of recession and it has less room for fiscal stimulus thanks to the level of debt it has incurred. Much of this is held by China and that has consequences for the rate of growth of the economy that has been underpinning Australian resource exports.

Though there is much gloom in the current economic outlook and a high level of risk that the world economy will grow more slowly in the next few years, there are some amazing opportunities in the development of new technologies to meet the challenge of global sustainability. Collectively these have the potential to institute a new era of economic and social development if people could lift their focus for a moment. So I remain a glass-half-full economic historian.

Species extinction and the human record

By Roy Hay

This article was originally published in the Geelong Advertiser, on Tuesday 28 June 2011, p. 16, as ‘For species’ sake, let’s embrace technology.’

My recent column in the Geelong Advertiser (See ‘Limits to Growth,’ 17 June 2011 in Recent articles) on the impact of growing numbers of humans on our environment provoked a constructive response from a reader who pointed to the extinction of many species and the possibility that this will increase in future. Our track record has not been great, though there is another side to that argument which is at least worth canvassing. But we need to go back to the beginning.

There is a strong belief that our Aboriginal ancestors lived in harmony with their environment and set a model that we have not been able to emulate in modern times. However, when the first groups arrived (incidentally as boat people from mainland Asia) when sea levels were much lower than they are now, they were not necessarily at the top of the food chain. Yet eventually the megafauna, the jumbo-sized marsupials and other large carnivorous beasties, disappeared, and human agency and the semi-domesticated dingo are often held responsible. Thereafter, as an often, though not invariably, nomadic set of societies, our original inhabitants realised the value of husbanding their resources, culling by firestick farming, gathering some of the nuts, berries and vegetables, and using technology to create fishtraps and weirs.

Kookaburras at Teesdale

The common view is that the Europeans overturned this relationship with the land and natural resources with a rapacious ignorance, from which we have never recovered. As our reader pointed out, many species, which flourished around the time of European settlement and indeed for much later, have subsequently disappeared. On the other hand, people like Thomas Austin are now excoriated for bringing in exotic species, including rabbits and foxes, some of which had a devastating impact on indigenous flora and fauna. To project further decline in species diversity into the future is not the whole story. New species are continually being discovered, sometimes with the use of the most advanced technology, deep in the oceans, for example.

Conservation movements here and abroad have done a great deal to identify and protect species threatened with extinction, using the best available technology to trace, count and observe the features of their existence and habitat which are necessary for their survival. Some examples have been so successful that they had to be scaled back because they upset the local environment. The repopulation of Tower Hill, near Warrnambool, with koalas is one such case. So trial and error is involved and we still have vast gulfs of ignorance to cross, but it should not all be gloom and doom.

Further down the track the work that has been done on analyzing DNA and the building blocks of life, like the human genome project, raise the possibility of bringing back extinct species. It is easy to say that is just science fiction and that cloning and the other methods currently available raise serious ethical problems. I agree, but it would be wrong to rule out the possibility of finding ways of recreating life forms which are acceptable in future.

A recent article on crowdsourcing, the idea of offering rewards via the internet for the best ideas that can be worked up into viable projects, has also produced some important advances in the arena of conservation. Instead of relying on a small group of experts within an organisation, the problem is thrown open to the best minds around the world. Their responses are then workshopped with people who have relevant production and commercial experience to produce new solutions. In the relevant case, Sony and the World Wildlife Fund asked ‘How can technology help us make the most of the planet’s resources?’ Nearly 400 ideas were generated and the winner was an interactive online magazine which linked people with local projects. OpenIDEO.com is at the hub of many more such ideas and it was co-founded by a Melbourne designer, Haiyan Zhang.

House sparrows. Photo: James Cassels

So it is more than possible that technology may come to our aid in dealing with the risks of species extinction. Meanwhile, there is an existing matter which can be solved or at least ameliorated, thanks to Thomas Austin. If sparrows are disappearing in the United Kingdom today, we could re-export the squadrons in our shrubberies in Teesdale to repopulate their original homeland.

Do you ever wonder about the contradictory notions which surround the current debates and practices on global warming, drought and the death of our rivers? We need a one-handed environmentalist, just like we need a one-handed economist. You know the problem, you ask one for an answer and you get, ‘On the one hand, but on the other hand’.

I talked to a firie at the week end. I said I thought the one good thing about the drought was that there hadn’t been much growth this year so there would be less to go up in smoke. No, he said, the leaves have been falling off the trees in October and November instead of in high summer as they usually do, so there will be more litter build up and more to burn. So you see whatever happens it is going to be very dodgy summer.

This drought, the one in a thousand, according to Malcolm Turnbull, or is it just the worst since Federation, or since the one during the First World War, or the one in the 1920s which drove the returned soldiers off their farmlets in the Mallee? I have friends who grow rice very efficiently in the Riverina. Were it not for tariffs and other barriers to trade they could sell the quality product to the Japanese and the Chinese in substantial quantities. That would help our balance of payments, which has gone crazy in recent years. But this year, and maybe from now on, the rice growers will not get the water they need. My wife says it is crazy to grow rice in a dry continent like Australia, but we started doing so effectively during the Second World War and we learned then how to make use of limited water supplies. Maybe we should tell the Japanese we will not let their horses run in the Melbourne Cup if they will not accept our rice?

Domestic consumers are bidden to save water, but the big users in this country are industry and the farmers. Those icebergs which have been spotted just off the south coast of New Zealand should be put to use. Why don’t we tow one in to Adelaide as was mooted some time ago? It should not be nearly such a long tow this time. Are icebergs salty? Now there is a question for Dr Karl Kruzelnitsky.

So do we really need to change our lives completely? We got some mixed messages from our power supply company this week. They invited us to sign up for GreenEarth, environmentally friendly electricity and gas. But then they told us if we paid our bills we could win a home shopping extravaganza, a car or a holiday in Los Angeles. I am not sure that that would be carbon neutral or environmentally friendly.

Family sizes are getting smaller but we are building bigger houses and houses which are designed to need heating and cooling rather than ones which use less energy.

I know that in per capita terms we are among the world’s worst polluters, because we derive so much of our electricity from nasty, messy brown coal. But when you compare what this continent does in absolute terms, Australia could stop using any energy at all tomorrow and it would hardly make a blip on the global warming index. Indonesia is knocking down its rain forests so fast that it is now in the top four greenhouse gas emitters in the world. India, China and the United States churn out far more despite their best efforts to go for controls, carbon trading or better and more efficient production.

Now my boss, Rupert Murdoch, has become a reluctant convert (his own assessment) to the notion that we ought to do something about global warming. He is not sure how much human agency is the cause, but reckons we ought to pay the insurance premium, just in case. Meanwhile our Prime Minister has belatedly woken up to the fact that there votes in being seen to do something about the problem. Having kept his head firmly in the sand for the last decade, that is something I suppose. But isn’t leadership supposed to be about setting the agenda and doing something? ‘I am their leader, I must follow them,’ seems to be his motto.

One big advantage will be that we will not have to go to Alice Springs for the Henley-on-Todd dry boat regatta. We can do that along the bed of the Barwon and the Moorabool.

So look on the bright side. Global warming may lead to a rise in sea levels. Australia may not have the highest mountains, but it is the continent with the highest average height. When the sea level rises we can all move inland a bit. It will be less cold at those altitudes too. That would solve the problem of urban sprawl and ribbon development along our coastline. All of that will be under water. We will not need to dredge the entry to Port Phillip Bay, it will just become deeper naturally. Pity about the Pacific Islands though.

The debate on climate change policy is becomingly increasingly strident and certainly baffling to many Australians who seem to be well disposed to the idea that we ought to do something about it. They remain puzzled about the science and confused as to policy. The scientists themselves are still arguing about fundamental issues, so uncertainties remain at that level too.

Perhaps a look back to an earlier era when some similar issues occurred might be instructive. In the early to mid-nineteenth century in England, at the height of the industrial revolution, people were dying in thousands from cholera, and pollution was choking the atmosphere and the waterways of the industrial shock cities like Manchester. Technological change was occurring very rapidly, disrupting traditional forms of employment and replacing them with new ones, often in different parts of the country. Urban squalor was probably at its absolute and relative worst. Congestion, overcrowding and poverty was the lot of the mass of the people in cities and the death rate there was far higher than in the countryside from where many of the people had come in search of a better standard of living.

A series of shocking reports on urban conditions by political radicals like Frederick Engels, the sponsor of Karl Marx, and social investigators like Sir James Kay-Shuttleworth, brought the evils to light. But what to do about them?

The science and medicine of the causes of disease was in its infancy. Connections between water-borne and interpersonal transmission of the vectors of epidemics was not understood. The notion that a miasma of ill vapours rather than bacilli caused or transmitted plagues was argued strongly by some medical people.

Those who could afford to move, left the urban centres and migrated into suburbs where the air was clearer and the streets were cleaner. But they remained vulnerable as long as drinking water was polluted by sewage and food was contaminated by uncleanliness. So cleaning up the environment was critical.

This was the era in which the United Kingdom was as close to the laissez-faire model of government so beloved of the Des Moore and the current members of the Institute of Public Affairs, who believe that everything should be left to the market. But as Oliver MacDonagh and Tony Dingle, two fine economic historians who made a close study of the pattern of government growth and the reform of the urban environment in the United Kingdom in the nineteenth century showed, the actions of a dedicated group of public servants and political activists instituted a series of policies which tackled urban pollution, the ‘monster nuisance of all’, effectively for that generation. In doing so these pioneers helped create the statistical and quantitative basis for research which underpinned the development of knowledge in the next era.

No one would claim that all the reforms mentioned were driven by this relatively small cadre of individuals. Some of the improvements were environmental rather than medical. For example, the replacement of earth floors in houses by wood or stone helped reduce dirt-borne diseases. Some demographers argue that this had a greater impact on mortality rates than medical improvements per se.

Now I am aware that this is an argument by analogy and one from history, but what it shows is that policy changes to deal with acknowledged issues need not wait until the science is incontrovertible. If we hang around until the climate change science is settled once and for all we may be reminded of the saying of another economic historian, John Maynard Keynes—‘in the long run we are all dead’.

The 500-page Garnaut report on what Australia should do about climate change is not your average bedtime reading, but we will all have to come to terms with its arguments, sooner rather than later. While there seems to be general support in the community for the idea that we ought to do something about what human beings are doing to their only home, there is less agreement on what we should do and the consequences of not doing anything, or doing the wrong thing.

One of Garnaut’s main notions is that we should set up a carbon-trading scheme to help encourage a move away from the generation of carbon dioxide and other greenhouse gases. The idea is that a price should be set for the emission of a certain quantity of the polluting gases and industry, including power generation, should bid for what are effectively licenses or tradeable certificates to produce that amount of pollutants. If the industry becomes more efficient and cleaner (or has a smaller carbon footprint, as they say), then it can sell the unused amount of its licenses or certificates in the open market. An entity which needs more capacity to pollute can buy that on the market at the going price. The costs of these permissions to pollute will be passed on to customers, but the incentive to reduce the quantity of emissions will now be clear to all. Some entities will be carbon neutral; that is, their emissions will be matched exactly by the amount of carbon they absorb in the production process. Others will be able to absorb more than they emit and hence earn carbon credits, which can be traded.

Garnaut has not included agriculture in his scheme so far. This is a big gap since methane is more polluting than carbon dioxide and animals generate more methane than industry does carbon dioxide. It is true that methane, the exhaust gas of ruminant animals, hangs about in the atmosphere—like a bad smell—for only about 12 years whereas carbon dioxide is around for twice or three times as long. But as Garnaut makes clear, if we allow exceptions, then some other parts of our economy and society have to pay more or reduce their emissions further. The absence of agriculture means other sectors have to carry more of the cost of adjustment to our new world.

There is some unease that recently the Premier of Victoria approved a new brown coal-fired power station for the Latrobe Valley. While this may produce more greenhouse gases than say a gas, solar, nuclear or wind powered plant, the new power station will be significantly more efficient than existing base load generators at Yallourn and Loy Yang. For some time to come the bulk of base load power in Victoria will continue to be produced from brown coal, and this is what makes us among the worst per capita emitters in the world. But we need to think very seriously about how to replace that by more efficient forms of coal-fired production and the so-called alternative green forms.

There is a high degree of uncertainty at the moment about the likely pattern of technical change in the area of energy efficiency. If we could be certain which technology was going to produce the best outcome it would be an easier, though probably not a costless decision. But there is a risk involved that high investment may yield very little return.

Australia is not, as some suggest, leading the world in carbon trading or energy efficient technology. New Zealand and several European States are ahead of us and are making much bigger cuts in their energy consumption and pollution. We can learn from their experience, but in return there are some promising signs that we are beginning to develop expertise which can be turned into export sales. The deep drilling into the core of the earth to release geo-thermal energy in the north of South Australia is looking very promising. Our solar industry has already spawned some successes, though one of the best of these (a firm making large-scale solar energy capture arrays) has already relocated to the United States. The sequestration of carbon in underground sinks has also begun, though it will be some time before the environmental effects are fully assessed and understood. Our wind and water-power capacity and experience is growing and the first experiments in harnessing the waves for something other than surfing are being planned.

It would be good if Australians could see climate change as a challenge rather than a threat, as it tends to be portrayed in some of the more alarmist quarters. It would be even better if the two main political parties could take a slightly longer view of what is required and accept, as Garnaut insists, that a bipartisan approach to the issues involved would be preferable. By all means let’s keep an open mind over the new technologies and the time it will take to implement all the measures necessary, but can we pull together on the broad outlines of this approach to climate change for our children’s sake?