Concorde’s lesson for gov’t industry promotion efforts

Interventionist industry policies by governments, such as the Queensland Government’s current hydrogen industry strategy, are usually viewed sceptically by economists, because they often deliver poor value for money for taxpayers and don’t have logical rationales. One notorious example from history is the Concorde, which was an incredible technical achievement and a beautiful airplane, but cost the British and French governments 11 billion pounds (as calculated by the Economist in 2003, so it would be more now due to inflation), and the end result was an aircraft that ultimately proved uneconomic to operate. I tell the story of Concorde in my latest Economics Explored podcast episode.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. 

Show notes and a transcript of the episode are available at:

Concorde’s economic lessons: a closer look – EP131

British Airways Concorde Aircraft, sometime in the 1976-2003 period when they were in service.

In my view, one of the main lessons from the Concorde experience is governments should avoid interventionist industry policies. Instead, they should focus on delivering essential services and setting competitive tax and regulatory policy settings.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Industry policy | Tagged , , , , , , , | 2 Comments

Qld Gov’t $3k EV subsidy looks like poor value for money for taxpayers

As far as I can tell, the Queensland Government hasn’t released any economic analysis of its $3,000 electric vehicle (EV) subsidy, probably because, if it did, the analysis would reveal the subsidy was a poor use of public funds. Some back-of-the-envelope calculations can illustrate this.

First, let’s work out the reduction in greenhouse gas (GHG) emissions associated with an EV. According to PwC, in its 2018 Recharging the Economy report on p. 18: 

An average new ICE [internal combustion engine] vehicle emits roughly 185 gCO2/km compared to average new EVs which emit 98 gCO2/km if charged via the electricity grid. When charged via renewable energy sources, EVs emit zero emissions. As renewable energy represents an increased proportion of the electricity mix and battery capacity improves, EV emissions are estimated to fall to 58 gCO2/km.

Now, according to the ABS’s Survey of Motor Vehicle Use, the average distance travelled per year by passenger vehicles is 11,100km. Using this estimate, and the average CO2 emission estimates reported by PwC for ICE vehicles and EVs, it can be calculated that each new EV should result in a reduction of GHG/C02 emissions of 1.0-1.4 tonnes per annum. 

Let’s be generous and say each EV has a life expectancy of 20 years, which would mean 20-28 tonnes of GHG emissions avoided over its lifetime. If every household receiving the $3,000 EV subsidy would not otherwise have purchased an EV, that would mean the Government would effectively pay $107-150/tonne for GHG abatement. But I expect a lot of people who end up getting the subsidy would probably purchase an EV anyway. If we assume half of the EVs subsidised would have been purchased anyway, then the Government would effectively be paying $214-300/tonne for GHG abatement. This would be very poor value for money. Consider the following: 

  • The Centre for International Economics (CiE) has estimated Australia’s cost of GHG abatement at around $40-50/tonne (see p. 49 of the CiE report What existing economic studies say about Australia’s cost of abatement);
  • Australian Carbon Credit Units (for a tonne of GHG abatement) are trading at $31, according to the Renewable Energy Hub, and hence it would be cheaper for the state government to buy carbon offsets instead of subsidising EVs for a given level of emissions reduction; and
  • the social cost of GHG emissions is unlikely to be much higher than $100/tonne (e.g. see this Brookings note The social cost of carbon which refers to a 51 USD/tonne estimate), and hence governments should be unwilling to spend any more than $100/tonne to reduce GHG emissions. 

All these figures suggest that the Queensland Government will pay far too much to abate GHG emissions with its EV subsidy. There would very likely be much more cost-effective emission-reduction measures it could support, and much better uses for the $45 million this subsidy will cost the budget.

I’m not criticising EVs, which are certainly the way of the future. I’m criticising the state government’s $3,000 subsidy. It look likes a high-cost way to achieve additional GHG emission reductions – i.e. reductions beyond those which would occur anyway as people naturally switch to EVs over time.

I’d really like to see the Queensland Government’s analysis of the cost-effectiveness of its EV subsidy, although I suspect it didn’t prepare one, because it probably guessed the analysis wouldn’t look good, or it doesn’t care about the cost-effectiveness of its policy measures, only their political attractiveness.  

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Budget, Environment | Tagged , , , , , , , | 4 Comments

Qld the fastest growing state with Southerners flocking here: 41k net migration gain in 12 months to Sep-21

At nearly 41,000 people in the twelve months to 30 September 2021, net interstate migration to Queensland is the highest it’s been since the early 2000s, according to the ABS’s latest population estimates (see chart below). Queensland is the fastest growing state in Australia, at 1.1% yearly compared with 0.3% nationwide. Obviously, this has been a big contributor to Brisbane property prices growing the fastest in the nation over the last twelve months, an incredible 29.7%, according to CoreLogic (see Growth in Australian housing values continues to lose steam as Sydney records first decline in 17 months). During the pandemic, many Australians obviously reassessed their lives and decided to move to Queensland, either for the first time or back here. While, in my view, some of our COVID-related restrictions were excessive, they were nowhere near as harsh as the measures in Victoria, and our lockdowns didn’t last as long as those in NSW and Victoria, so comparatively we looked very good.

Yesterday, we also learned from the ABS that the unemployment rate remains at a very low level, no doubt partly due to lower labour supply growth associated with a lack of international migration. In February, Queensland’s unemployment rate was 4.3% compared with a national average of 4.0% (see the chart below).

Finally, the war in Ukraine goes on, and it is still disrupting the global economy, as well as being an humanitarian crisis. Coal prices remain at crazily high levels (e.g. see the coking coal 1-month ahead “1st position” and 12-month ahead “12th position” futures prices in the chart below).

The hundreds of millions of dollars of extra royalty revenue to Queensland as a result of the super high coal prices mean the Queensland Government has lots of additional money to throw at its favourite causes such as electric vehicles (EVs), which are getting an extraordinary $3,000 subsidy from the state government. What a wasteful and highly inequitable policy measure, one where the benefit will largely go to affluent households, many of whom would already be planning to purchase an EV. Wouldn’t that money be better spent on flood repairs or on needy schools or hospitals? Sure, we need to massively reduce greenhouse gas emissions over the next few decades, but this is an inefficient and inequitable policy regardless, in my opinion.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Macroeconomy | Tagged , , , , | 3 Comments

Thriving, a new book by Wayne Visser, Cambridge pracademic and sustainability expert – my latest podcast episode

Wayne Visser, of the Cambridge Institute for Sustainability Leadership and Antwerp Management School, has written a thoughtful and informative new book Thriving: The Breakthrough Movement to Regenerate Nature, Society, and the Economy. Wayne is reassuringly optimistic about the future of the planet due to a variety of technological and business practice changes that mean we are approaching “tipping points”, after which we will rapidly reduce the stress we are placing on the environment – all going well, of course, as nothing is guaranteed. 

I was grateful to interview Wayne for the latest episode of my Economics Explored podcast. Wayne spoke about a convergence of positive developments, such as rapidly improving electric vehicles, cultured/lab-grown meat, blockchain and synthetic DNA to aid traceability of supply chains, green hydrogen, and Unilever committing to deforestation-free palm oil (by 2023, and whether it achieves that is still to be determined, I should note). You can listen to my conversation with Wayne using the embedded player below or via Google Podcasts or Apple Podcasts, among other podcast apps. 

Here’s a short video clip of our conversation in which Wayne introduces the concept of Thriving:

These developments are of great interest to Queenslanders and other Australians, of course, given they could mean substantial structural change for our economy, which has a greater reliance than others on coal mining and livestock farming. I suspect my conversation with Wayne would be of great interest to many of my Indonesian friends, too, given the challenging transition Indonesia also faces in coming decades. Palm oil has been an important commodity for Indonesia – indeed, there’s an oil palm monument in the Bogor Botanic Gardens (see my photo below) – but its farming has had adverse environmental consequences.

Oil palm monument, Bogor Botanical Gardens, south of Jakarta, Indonesia.

Finally, I’ve obviously been watching the war in Ukraine and thinking about what it means for the Queensland economy. One of the most direct impacts has been via the crazily high coal prices we’ve seen recently, something which means additional dollars for the state budget and coal miners, which John McCarthy at In Queensland covered and quoted me on last week: Auditor General’s report warns public sector blowouts could force cuts to services. On the downside, apart from being a humanitarian catastrophe, the war in Ukraine could mean a surge in business input costs, consumer prices, and hence inflation globally. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Housing lending remains at super high levels

First, my thoughts go out to all those affected by the recent flooding in Queensland and northern NSW. The intensity of the rainfall was extraordinary – in Brisbane, 80% of a full year’s rain in a few days reportedly. While, for Brisbane, overall flooding was not as severe as in 2011, it appears to have been worse in some pockets of the city, and some of our regional centres such as Gympie and Maryborough have been very badly affected. It’s too soon to tell what the ultimate cost and economic impact of the flooding is, but, whatever figures are produced, of course they won’t be able to convey just how devastating the flooding has been for many families, particularly for those who have lost loved ones.

The Queensland and national economies look like they will remain resilient this year despite the pandemic and natural disasters. A big unknown, of course, is what happens in Ukraine, and how much turmoil that causes internationally, but I can only speculate about that. Regarding what we can be reasonably confident about, as I’ve covered on QEW previously, the leading indicators for the economy such as job vacancies are very encouraging, and it appears that the economy has handled the omicron shock really well.

For instance, ABS retail trade data for January reveal that retail turnover in January in Queensland actually increased (by 0.4%), despite Queensland experiencing a lot of the omicron wave in January, as it came to us later than it did in NSW and Victoria. Those states experienced strong bounce backs in retail spending after large falls in December when they experienced the start of the omicron wave. 

Other indicators that are consistent with the resilient economy story are lending data published by the ABS today, which show super high levels of lending (and hence borrowing by households) continuing. Lending to owner occupiers in Queensland is running at around $4 billion per month, compared with $2-2.5 billion in the months leading up to the pandemic (see chart below).

Monthly lending to property investors in Queensland is now running at over $2 billion per month compared with well under $1 billion per month in the months leading up to the pandemic (see chart below).

All this new lending has been fuelling rapidly rising property prices and an expansion of the money supply, which appears to be having broader inflationary consequences (see Inflation & interest rates chat with 4BC’s Scott Emerson). As I’ve discussed previously, the RBA will probably have to act much sooner than it has previously planned if it is to control accelerating inflation. 

I should note that property prices may have risen as far as the market can bear in Sydney and Melbourne for now, according to CoreLogic data for February published today (see Growth in Australian housing values continues to lose steam as Sydney records first decline in 17 months). Sydney prices were down 0.1%, Melbourne prices were unchanged, while Brisbane prices increased 1.8% in February. Of course, as with any monthly indicators, in my view, we shouldn’t read too much into any monthly figures. Property prices are still up 22.4% in Sydney, 12.5% in Melbourne, and 29.7% in Brisbane over the last twelve months. These incredible results have been driven by the huge growth in housing credit shown in the previous charts.    

Finally, tomorrow, Wednesday 2 March, the December quarter 2021 National Accounts will be published by the ABS. The figures should show a strong bounce back in GDP in the December quarter after the lockdown-afflicted September quarter. Some market economists are expecting a GDP growth rate of above 3%, as reported by Reuters (see Australia’s Q4 GDP looking even stronger as trade surprises | Reuters).  

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Get it right the first time: the Paradise Dam example

The Queensland Government’s rural water business Sunwater has released a great video about the restoration of Bundaberg region’s Paradise Dam to its full capacity, which the state government finally agreed to last Christmas Eve.* This came after more than two years of uncertainty about the dam’s future. In 2019, the state government revealed it had to lower the spillway by 5 metres to guarantee the dam wall wouldn’t collapse if it rained like it did in January 2013 again. The Christmas Eve announcement that the dam would be restored to its full capacity came as a great relief to many local growers, who have planted thirsty tree crops such as macadamias and avocados in expectation of a highly reliable water supply in the Bundaberg region.   

According to Sunwater, the Paradise Dam repair will require 370,000 cubic metres of concrete, more than 90% of the volume of concrete that was used in the dam’s construction in the mid-2000s. It will cost $1.2 billion (i.e. $1,200 million) to repair (see Federal government agrees to fund remaining $600 million cost of fixing Paradise Dam). 

The state government’s original budget for Paradise Dam in the mid-2000s was $240 million. If we convert that to current dollars using the price index for the construction of roads and bridges tracked by the ABS, the cost of construction would now be around $400-500 million, but the repair is going to cost $1.2 billion! Obviously, the cost of constructing dams has increased at a much faster rate than the cost of constructing basic infrastructure. 

Ultimately, the Paradise Dam debacle shows the importance of getting it right the first time. As carpenters say, measure twice, cut once. Something appears to have gone badly wrong in the design or construction of the Paradise Dam in the 2000s. Paradise Dam was the first dam in Australia to use roller-compacted concrete, and as ABC News reported in May 2020:

Concrete used in the construction of Paradise Dam near Bundaberg may have been “intrinsically incapable” of meeting design standards, an independent inquiry has determined.

It’s unclear exactly who stuffed up, but it was a very costly mistake, one which Queensland and Australian taxpayers now have to pay $1.2 billion to correct. 

Paradise Dam, on the Burnett River, near Bundaberg, Queensland. 

*Disclosure: My consulting business Adept Economics was engaged by Bundaberg Regional Council and local grower groups to analyse the economic costs of inaction on Paradise Dam in early 2020 and I’ve participated in various working group meetings hosted by Sunwater since then. Full credit to Sunwater for the professionalism and responsiveness of its staff.  

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Economic update and interest rate discussion at Brisbane Club next Wednesday

Australian Treasury Secretary Steven Kennedy nicely summarised the economic outlook in his Opening statement to the Parliament’s Economics Legislation Committee yesterday:

Nonetheless, while the disruption caused by Omicron has been significant, its overall economic impact is likely to be less than was foreshadowed in the downside scenario.

This is because we have also learnt that the underlying economy is stronger than we had recognised.

As I told the ABC’s Julius Dennis last weekend (As we begin to emerge from the Omicron wave, Queenslanders are spending more and returning to work), the economy is still being supported by the massive monetary expansion resulting from the RBA’s unconventional monetary policy (a.k.a. Quantitative Easing) and all the new credit associated with the latest housing boom. Consumer prices are yet to catch up, and households feel wealthier with their additional money balances, and are spending more. Queensland Treasurer Cameron Dick was quoted by the ABC as saying “Spending is up 27 per cent in early February, compared to pre-COVID.” That Australians haven’t been able to holiday overseas and have been spending more at home is another relevant factor I should note.

Partly as a result of all the additional money held by households and businesses, CPI inflation is accelerating, as I discussed with 4BC’s Scott Emerson last month (see When home owners can expect an interest rate rise), and that will push up interest rates. The outlook for interest rates is the topic of the Brisbane Club’s Economics in Conversation event at the Brisbane Club, on Post Office Square in the CBD, next Wednesday 23 February at 5pm. I’ll be speaking on the economic outlook and likely interest rate movements alongside my colleagues Brendan Markey-Towler and Nick Johnson. 

None of this is to deny the disruption and hardship caused by omicron in the very short-term. CCIQ’s most recent Pulse Survey, conducted over the heavily disrupted month of January, was reported by the Courier-Mail as finding confidence is As bad as lockdown: Business confidence at drastically low levels. I’m expecting that plunge in business confidence was only for a very short period. The CCIQ result may have been reasonable, but it was only applicable for a very short period of time and doesn’t tell us much about the outlook for the rest of the year. That said, as I mentioned to the ABC, it’s hard to know what will happen in Winter if we have simultaneous COVID and flu waves.   

Other indicators are much more encouraging about the economic outlook than CCIQ’s Pulse indicator. For instance, NAB’s Monthly Business Survey reported that while omicron did reduce business activity in January, business confidence actually rebounded in January after it fell in December following the initial omicron outbreak (see chart below). NAB reported:

The confidence rebound signals that, despite the disruption, firms were optimistic that the outbreak would be short-lived, and consistent with this, forward orders remained steady.

NAB data show business confidence as above the neutral reading of 0 in January in Queensland and Australia (on a national-average basis). Also, I should note the Financial Review today reported CEOs ‘very optimistic’ about 2022.    

It’s difficult to know how to reconcile the NAB and CCIQ survey results. Possibly the discrepancy has to do with different compositions of businesses undertaking the surveys, with SMEs more affected by the omicron outbreak making up a larger share of the CCIQ survey sample. 

Finally, there’s been a big recovery in Queenslanders’ mobility (see the chart below). While many of us, including me, stopped going out as much for retail and recreation in early to mid January, we’ve now got back out there. Queensland is now above the baseline for retail-and-recreation-related movements, although Southern States are still significantly below it. Queensland appears to be leading Australia out of the latest COVID-induced disruption.      

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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UBI podcast chat w/ Ben Phillips, ANU Associate Professor and microsimulation modeller

My latest podcast episode features a conversation about the pros and cons of a Universal Basic Income (UBI) with my old UQ economics classmate Ben Phillips, now an Associate Professor at the ANU. Ben is one of Australia’s leading modellers of the impacts of tax and welfare policies on households, so he’s the perfect person to chat with about UBI. Here’s a video clip from the episode to give you a sense of the issues Ben and I discuss.

You can listen to the full audio episode using the podcast player in this post or via podcasting apps, including Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among others.

Finally, if you’d like to learn more about what a UBI could look like and its implications for Australian households, check out this great paper Ben co-authored with David Ingles and Miranda Stewart: A basic income for Australia? Exploring rationale, design, distribution and cost.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Gigi Foster event on the Great COVID Panic + latest podcast episode on price controls & infrastructure

Thankfully, we’re getting much closer to a return to normality with the international border reopening. While we should focus on the brighter future, at the same time we should rigorously review what happened over the last two years, and ask whether, in our authoritarian ends-justify-the-means response, we succumbed to The Great COVID Panic, as Gigi Foster and her co-authors call it in their latest book. Gigi is currently in Brisbane to present her views to the Australian Institute for Progress on Friday evening, 11 February. You can pick up tickets via the Eventbrite page The Great COVID Panic: What Happened, Why, and What To Do.

I spoke briefly about Australia’s COVID experience with Larry Reed, the President Emeritus of the Foundation for Economic Education, toward the end of my latest podcast episode Price controls to fight inflation a bad idea + infrastructure lessons from POTUS 21. The bulk of our discussion was on price controls (i.e. regulating that businesses can only increase prices by x% over a period), which some commentators have suggested as a way to control accelerating inflation in advanced economies. As Larry explains in the episode, price controls would be a really bad idea, resulting in shortages, and wouldn’t solve the underlying problem. Inflation after all is a monetary phenomenon and, in my view, requires a monetary policy response. The big test this year for our Reserve Bank is how rapidly it responds to growing inflationary pressures. There is a risk it doesn’t act quickly enough and inflation accelerates even further.

In addition to COVID and price controls, Larry and I chatted about the recent controversial statements from US personal finance guru Dave Ramsey, who said he wouldn’t feel like a bad Christian if he increased the rent on an investment property to the market rate and doing so forced a poor tenant to move out. Check out a clip of Larry’s response in which he cites the parable of the vineyard workers:

Here’s another clip in which Larry explains why it would be good if he could put President Biden and the 21st President Chester A. Arthur in a room together to discuss infrastructure.

Finally, here’s another clip, this one focussing on what we can learn about economic prosperity from San Marino and Genoa.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Health, Infrastructure | Tagged , , | 1 Comment

Qld Titles Registry trickery should be investigated in integrity inquiry

There is growing pressure for a wide-ranging inquiry into the Queensland Government’s integrity, and, in my view, any such inquiry should explore the fake privatisation of the Titles Registry in mid-2021. This gave the Government political cover to take on billions in additional debt, while breaching fundamental principles of government budget reporting. The Titles Registry trickery raises big questions about the Government’s public financial management and whether Queensland Treasury has been politicised. Is the state Treasury offering the frank and fearless advice it should? 

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