quiggin, universal, system, higher, education

As in other countries, the Australian higher education system is a set of institutions originally created to serve a small elite of the population, faced with a modern economy in which everyone needs some form of post-school education. As in other countries, this problem has been dealt with in haphazard fashion. The first big expansion in higher education, following World War II, was met with the creation of a number of new universities, institutes of technology and colleges of advanced education (mostly former teachers colleges). Then, in the 1980s, the latter two groups were converted into universities, with a corresponding expansion of their range of offerings. Meanwhile, existing universities opened a range of new campuses.

The process, already slowing in the early 1990s, came to a near-complete halt under the Howard government. The last new university in Australia was the University of the Sunshine Coast, opened in 1994. And, under Howard, new enrolments of domestic students stagnated, while the public contribution per student was cut.

The system was saved from financial disaster in part by increasing the fees charged to domestic students, but even more by an expansion in the number of full-fee paying overseas students, mainly from Asia. More than in any other country, Australian universities saw overseas students as representing a market that could profitably be served. Meanwhile, for rapidly developing Asian countries, the availability of Australian universities provided an alternative, or supplement, to massive expansion of their own higher education systems.

With the 2007 change of government in Australia, followed by the impacts on job prospects of the financial crisis, the growth of domestic enrolments has resumed, while demand from overseas students has remained strong. But the funding to support these developments, promised as part of the Rudd government’s ‘education revolution’ has so far fallen far short of what was promised. A big increase in higher education expenditure is needed, but it remains to be seen whether it can be delivered under the current system.

			john quiggin, nuclear pwoer

There's been some discussion about nuclear power lately, but it tends very much to the abstract. I thought I would look into the question of when, if ever, nuclear power might be a reasonable option for Australia to consider, and how we should go about it.

An obvious starting point is the Switkowski report commissioned by the Howard government, which I've uploaded here. There are two main points which allow me to provide an answer to the question, at least for the next decade or so.

(i) In the absence of a substantial carbon price nuclear power is not competitive with coal
(ii) First-of-a-kind (FOAK) nuclear plants are likely to be very expensive (above $80/MWh), not competitive with wind or gas (even with CCS).

The estimate is that 'settled down' long run costs could be $40-$65/ MWh, which is competitive with wind and cheaper (for the moment) than other renewables.

Let's take "settled down" to refer to a design with at least five examples completed and operating in developed countries, at least some of them built on greenfield sites (that is, not next to existing nuclear power plants which already have a lot of the necessary infrastructure).  It seems clear that these minimal conditions can't be met before 2025 at the earliest. The US, which has been attempting for a decade to restart its nuclear industries is still at the pilot stage, exploring a number of technologies, and offering to subsidise the construction of three (different) designs for each major option. Most of the proposals are on existing sites, only six have reached the point of a plant actually being ordered,  and none is anywhere near starting construction.  Given a sharp acceleration in progress, the emergence of a highly successful design and a lot of new orders towards the end of this decade, the 2025 date might just be reached.

That suggests that Australia should forget about nuclear power entirely for at least the next five years. If things are going well for nuclear, and not so well for renewables, that would be the time to start setting up regulatory structures, looking for sites and so on.

			quiggin, book, zombies, PPP and EMH

My column from Thursday's Fin, with a not-so-subtle plug for my book.

Ideas are almost impossible to kill, especially when they serve powerful interests. There can be no better example than the efficient (financial) markets hypothesis, that is, the claim that the prices at which financial assets trade represent the best possible estimate of their value, taking account of all available information.

The efficient markets hypothesis ought to have been discredited once and for all by the absurdities of the dotcom boom a decade ago. But as soon as the immediate crisis had passed, with the help of the Greenspan Fed, financial market participants were singing the same old song. The one marginal piece of reform adopted in response to the dotcom disaster, the Sarbanes-Oxley bill was soon being derided as an overreaction.

If the dotcom boom was not enough, surely the near-collapse of the entire global financial system, brought to its knees by absurd speculation, ought to have killed the hypothesis. And indeed, some notable advocates such as Ian Harper in Australia and Richard Posner in the US, looked at the evidence and admitted it was decisive. But most supporters kept quiet when the crisis was at is worst. As soon as a partial recovery became evident they returned to preaching their gospel as if nothing had happened.

But even if no-one wants to admit it, the failure of the efficient markets hypothesis is making itself felt. An example of particular relevance to Australia is the collapse of the market for Public Private Partnerships. The case for PPPs rested directly on the belief, derived from the efficient markets hypothesis, that private financial markets would always outperform governments in assessing and managing risk. So, it was claimed, public infrastructure could be financed by transferring demand risk to private owners.

In the 1990s, governments were desperate to get debt off the books at any price, and signed deals that were massively profitable to the private ‘partners’ and even more costly to the public.

By the 2000s, governments had mostly wised up, and demanded that PPP projects should yield value for money when tested against a ‘public sector comparator’.

It was now the turn of the private sector to engage in over-optimistic dealmaking. With credit standards almost non-existent in the later years of the bubble economy, projects went ahead on the basis of absurd traffic projections, with disastrous results for investors.

In the wake of the financial crisis, illusions are less affordable. There is a big gap between the cost to governments of traditional bond financing for projects, and the return demanded by investors for taking on demand risk.

A traditional PPP deal makes sense only if the parties can find cost savings sufficient to offset the lower capital cost of government bond financing. For projects within the traditional scope of the public sector these conditions are rarely met - that’s why these activities were in the public sector in the first place.

Despite all this, everyone who matters is keen for PPPs to continue. The finance sector needs dealflow, and government bond financing does not yield the kind of fee income they need. Governments still want to get debt off the books, and remain absurdly terrified of the ratings agencies. And while the infrastructure industry is becoming disillusioned with the PPP model, it seems to be the only game in town for many projects.

The solution, for the moment, has been found in ‘availability payments’. The idea is that, instead of receiving a cash payment when the project is completed, the private partner gets a stream of payments, conditional on the project remaining operational. In economic terms, this is just the same as traditional public procurement with a bundled maintenance contract. Why then, go to the added expense and complexity of a PPP arrangement?

The answer may be found buried in a report on the website of Infrastructure Payments Australia which indicates that availability payments ‘may not be viewed as debt owed by the public entity’. That is, although it looks like a debt, and quacks like a debt, governments can pretend that the obligation to make availability payments is not really a debt. It remains to be seen whether Auditors-General will fall for this piece of creative accounting.

As the PPP example shows, the efficient markets hypothesis is a zombie idea. It is not so much dead as undead, buried by a mountain of contrary evidence, but still capable of emerging from the grave and doing immense damage.


John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. His book, Zombie Economics will be published by Princeton University Press later this year.

			Quiggin, Windschuttle

Talking of books, it's been nearly a month since it was announced that Volume 3 of Keith Windschuttle's fabrications would be released "next week".  Such vaporous promises are typical of KW, but I would have thought that if a book was promised for next week it would have already been printed. Could it be that, with his lead story about Rabbit Proof Fence totally demolished, Keith has decided to pulp the book and try again?

<strong>Update</strong> Commenter Charlie, who obviously has a stronger stomach than I do, visited the <a href="http://www.quadrant.org.au/magazine/issue/2010/1-2/why-there-were-no-stolen-generations-part-two">Quadrant website</a>, and found an extract and cover art for the book, with publication details as follows: The Fabrication of Aboriginal History, Volume Three, The Stolen Generations 1881–2008, Macleay Press, $59.95, 656 pages, published in December 2009. But <a href="http://www.macleaypress.com/">MacLeay Press</a> itself has nothing.

			Quiggin, Zombie Economcis

I just sent a draft manuscript of my <em>Zombie Economics</em> book off to the publisher at Princeton UP. It's pretty much in beta stage now.The aim is to have it come out in the  Fall List.

Thanks heaps for all the praise and criticism. The praise has kept me motivated, and the criticism has been at least as valuable.

 I've got some more sections of the privatisation chapter and the afterword to post here for comments, and I'm now going to circulate the draft in the older version of the same process. I'm also updating the draft at <a href="http://zombiecon.wikidot.com">wikidot</a> (lagging a little on this).

			Quiggin, Austrian economics

Over at what was the Austrian economists blog, Peter Boettke announces a change of name, saying 

As an experiment, over the past six months we have been tracking the use of the term Austrian economics in the news and in the blogosphere.  Less systematically, we have also been listening carefully to the use of the term among fellow professional economists and what they think the label means.  The results do not fit our intention.  Google alert, for example, inevitably points to financial advice or libertarian politics, rarely to the research paradigm of F. A. Hayek, never to the scholarship of Israel Kirzner.  Mises is often mentioned, but Mises the ideological symbol, not Mises the analytical economist.  The "Austrian" theory of the business cycle is mentioned, but only in relationship to anti-fed politics and hard money advocacy, and never as an ongoing research program among professional economists.

These trends are not recent, but have been constant throughout our respective careers.  We have always been among those who attempted to offer resistance to this use of the term.  It has become evident to us that our efforts have been futile.  Rather than resist the pure ideological identification, we are choosing to devote our efforts elsewhere.  The name Austrian economics has been lost as a focal point for a tradition of economic scholarship, and is now a focal point for something else.  We have to let it go.

This is pretty much the view I expressed here

although the Austrian School was at the forefront of business cycle theory in the 1920s, it hasn’t developed in any positive way since then. The central idea of the credit cycle is an important one, particularly as it applies to the business cycle in the presence of a largely unregulated financial system. But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.

The result (like orthodox Marxism) is a research program that was active and progressive a century or so ago but has now become an ossified dogma. Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections.

Meanwhile, Rafe Champion points to this post suggesting that market liberals (the author prefers "classical liberals") should abandon the use of the term "capitalism".

It seems pretty clear that these developments are related to the global financial crisis and related events.  The adoption as a badge of pride by Forbes magazine and others of the previously pejorative term "capitalism" was one of the most extreme manifestations of market liberal triumphalism in the 1990s. But, in the wake of the crisis, "capitalism" is a much more problematic term. It works well enough as a generic term covering all advanced economies in which private capital plays a leading role, but one that is, as we have seen, ultimately dependent on government action for sustainability. We can then say that the relatively unregulated, finance-dominated form of capitalism that has held sway for the last 30 years is being supplanted by a different form in which the role of government as ultimate risk manager is more direct and obvious. But this has little rhetorical value for market liberals.

The story with Austrian economics is more complex. On the one hand, the crisis has increased the appeal of Austrian views of the business cycle, relative to other rightwing views like New Classical macro and Real Business Cycle theory. On the other hand, the label has been increasingly associated with gold bugs, critics of fractional reserve banking, neo-Confederates and general fringeness.