Tag Archives: economics

Looking beyond the financial crisis

The IMF has been busy of late, what with their attempts to stave off European sovereign defaults and shenanigans of its erstwhile managing director, Dominic Strauss-Kahn. I have been busy too (for rather different reasons I hasten to add) and so it has taken me a while to get to looking at the IMF’s most recent World Economic Outlook (WEO) report, which was released back in April.

The WEO is prepared twice a year and, whatever one’s views of the merits of the economic ideas of the IMF and their role on the world stage, the report provides a rich source of data and includes both historical data and five-year forecasts.

I was interested to compare the effect of the global financial crisis on the most challenged euro nations, the so-called “PIIGS”, Portugal, Ireland, Italy, Greece and Spain, to a few other countries. To account for differences in population and currencies, I chose Gross Domestic Product per capita expressed in US dollars as the measure for this comparison*. Even so, care needs to be taken in interpreting the results. Exchange rates do introduce a fair degree of volatility as is evident in the chart below: the trajectory of US GDP per capita is quite steady, although the downward dip over recent years is clearly evident, while the paths for every other country wiggle up and down with the vagaries of currency markets. Nevertheless, it is striking to see the IMF projecting that Australia will dramatically outpace the other countries in this group, thanks to the combination of a resources boom and escaping relatively unscathed from the financial crisis of the last few years. I should point out that, while taking the gold medal in this group, Australia is not the overall winner in the IMF 2016 forecast stakes. That honor goes to the small nation of Luxembourg, and Qatar is not far behind.

GDP per capita (II)

History and IMF forecasts of GDP per capita (in US$)

An alternative approach that seeks to eliminate exchange rate effects is to work in local currencies and make these comparable by scaling to a common base at some point in the past. Somewhat arbitrarily, I have chosen to base this comparison on 1996, which gives a 20 year span including the forecasts out to 2016. This time I have used inflation adjusted figures**. Interestingly, this approach sees Ireland coming out on top, which reflects the strength of their economic boom over the period immediately up to the start of the crisis.

Real GDP per capita Indices

History and IMF forecasts of GDP per capita (local currency index)

This chart shows even more clearly how unaffected Australia was by the financial crisis compared to other countries. Once again, these results should be treated with caution. Any comparison like this will be very dependent on the year chosen to base the indices. If only I had chosen the year 2000, Australia would be in the lead again!

* This is the IMF series NGDPDPC.
** This is the IMF series NGDPRPC, rebased to 100 in 1996.

Action and reaction on climate change

Regular guest contributer James Glover (@zebra) takes a closer look at the Coalitions climate change policy.

Malcolm Turnbull, an Australian MP, did a rare and risky thing last week. He actually broke away from the political spin-cycle and explained some figures underlying the cost of the Coalition’s “Real Action on Climate Change” policy. Naturally he was attacked by both the Labor government, who are having trouble selling their own Carbon Tax policy, and his own party colleagues who were horrified that he didn’t stay “on message”. The Coalition quickly bunkered down under orders from the top to avoid discussing Turnbull’s “outburst”. So what was he saying anyway and why was it so controversial?

To see why we need to explain the difference between the Labor Party and conservative Coalition’s policies. There are really only two broad differences. Both policies recognise that anthropogenic climate change is scientific fact, not speculative political fiction. Both recognise the need for action (ie. spending money) on combating climate change. But where they differ is in how global warming should be reversed and how to raise the money to do so. It is not commonly understood but the real difference between the policies is the former.

The Carbon Tax (or its close relative the CPRS) aims to reduce carbon emissions by making carbon pollution relatively more expensive than cleaner, alternate sources of power (and really it’s all about power generation). In order to do this they need to raise the price of carbon powered energy sufficiently to tip the balance in favour of wind, wave, geothermal, biofuels or solar energy (as explained in a recent post here on the Mule). Of the money raised by the Carbon Tax, about half goes back to subsidising the increased power bills of the less well-off. Of the remainder, most goes to developing cleaner sources of energy at lower cost. As explained in the earlier post, when there is no more carbon pollution then there is no more carbon tax to distribute. So ultimately, unless the cost of alternate energy comes down to the levels currently enjoyed by coal, gas or oil based power, in the long run the less well off will be much less well off.

While the Coalition’s “Real Action on Climate Change” has more than a whiff of policy-on-the-run, it can be presented as a respectable alternative. It says that we should ignore the fruitless and expensive attempt to cheapen alternative power and accept carbon pollution as a fact of life. In order to mitigate the effects of carbon pollution, though, we need to remove it from the atmosphere after the pollution has occurred, not at the source. This will cost money. A lot of money. Australia alone currently produces about 0.2 billion tonnes of carbon (not C02) each year. That’s a cubic block of carbon approximately 500m x 500m x 500m*. Each year. Anybody who thinks sequestration is the answer has to find somewhere to put all that carbon for a start. Or plant several million trees a year. The only hope for this reactive approach to reducing carbon is that some method is found which removes large amounts of carbon from the atmosphere at a relatively small cost: and much smaller than the likely Carbon Tax price of $20-40 per tonne. While such methods are conjectured, for example spreading iron filings in the ocean to increase carbon uptake by marine organisms, to say they are untested is an understatement. Equally we could allow carbon to increase in the atmosphere but mitigate the effects of global warming by using giant sunlight reflecting shields. Or paint the Sahara Desert white. Hey, stranger things have happened. But at the moment all these methods remain firmly in the province of science fiction.

So what did Malcolm Turnbull actually say that was so exciting to friend and foe alike? Well, using Treasury forecasts of population and economic growth, that 500m carbon cube will have grown to 850m wide by 2050 (650m tonnes) if we do nothing. Assuming we can mitigate the effects of carbon pollution, or pay someone else to do it for us, the cost could be as low as $15 per tonne or $18bn per year. Assuming the population has doubled by 2050 that’s about $500 per person, or an extra $50 per week on the average household tax bill. Given the extreme rubberiness (definitely not vulcanised rubber) of these figures, that’s pretty much what the Carbon Tax will cost as well. If the initial price of the Carbon Tax is set at $30 per tonne, then over time this should come down as alternate energy becomes actually cheaper due to technology improvements and economies of scale, not just relatively cheaper. Indeed if the Real Action plan involves buying permits from other countries who have set up some sort of CPRS and use alternate energy sources, then the equilibrium cost of both plans is probably pretty much the same, i.e. $15 per tonne. The real action policy really only comes out ahead if one of the fanciful ideas for removing carbon en masse, post production, pays off.

Of course the Coalition’s policy has to be funded somehow, and herein lies the second difference between the two. The Coalition’s policy will involve raising taxes, and probably income taxes as opposed to the Carbon Tax favoured by Labor. So any claim on the Coalition’s part (a point made by Mr Turnbull) that the major benefit of their policy is that it won’t raise electricity prices is totally spurious. Both policies will lessen household discretional spending. By the same amount. That’s all voters ultimately care about. Turnbull also claimed that their policy had the advantage that if “climate change is crap” as Tony Abbot famously is purported to have said, then it can all be dismantled without much cost. For that statement alone, sending a dog-whistle to his party’s climate skeptic supporters, Mr Turnbull deserved the public flaying he got, if not for the right reason.

*Note: in the above I have assumed that 1m cubed of carbon weighs 2 tonnes which is the density of graphite. It obviously depends on the form of carbon used. It is intended as an indicative figure only. Though I wish someone would actually build a structure of that size and point out to everyone this is how much carbon a year we are producing

Carbon tax

Our regular guest writer James Glover (@zebra) returns to the Stubborn Mule today to look at the real cost of carbon tax…and who pays the cost.

It is no surprise that the latest Newspoll shows the Labor Government sinking under a concerted attack by the Opposition, and its supporters in the media, over the Carbon Tax. The incessant cry of “a great big new tax” was bound to have an effect on the marginal voters who derive their political views in atavistic ways. In fact most of the political arguments lately recently seem to revolve around the distinction between levies and taxes. The trick seems to be if your opponents propose it then it is a tax and if you propose it is a levy—the latter being used by both sides to describe variously the flood levy (Labor) and the parental leave levy (Coalition). Taxes, as opposed to levies, apparently lead to profligate spending and are downright un-Australian. It makes you wonder what they use to fund hospitals, schools and roads.

So how does the Carbon Tax work? And what does it mean to say it is “revenue neutral”? Is it really a tax or “not really a tax” as the Treasurer, Wayne Swan, claims? Suppose the government wants to set up a Carbon Tax for the purposes of reducing carbon emmissions. It does this by imposing a tax (or levy or fee) on the price of goods and services that are deemed to ultimately cause high but avoidable (hence no agriculture) emissions of carbon. This of course raises the price of these goods e.g. electricity. If we impose a Carbon Tax on coal-generated electricity (the sine qua non of carbon emitters) then expect the power companies to pass on all or most of the increase to consumers. Now here’s the thing, the money the tax raises will have gone to subsidise the increased power bills of these very same power consumers. By exactly the same amount as the price should rise. So in effect nothing happens. In other words, at a base level the Carbon Tax does nothing. It has no benefits and no costs. Isn’t it really “a great big snooze tax” and not “a great big new tax”?

The Carbon Tax has one (fully intended) important consequence. If power emitters want to increase their profits they can do so by switching to lower carbon emitting alternatives. These might already be available or they can pay to research and develop them. And because of the tax what was previously uneconomic will now be made viable. Since these alternatives are really more expensive than coal-based power, without the tax, you might ask what is really happening at the cost end. It seems like a tax which costs nobody nothing, magically makes alternatives to carbon emitting industries economic. Voila!

Well that’s what the government would have you believe. On closer examination though it is precisely when the Carbon Tax has its intended effect that the cost gets passed onto consumers. But not when the Carbon tax is first introduced. To see why let’s have a look at an example.

Suppose the cost per unit of producing electricity from coal is $100. The power company charges $110 to consumers and so makes a $10 profit. The Govt introduces a 20% Carbon Tax on the cost of producing electricity using coal. This raises the price to $130 in order for the company to maintain its $10 profit margin. That’s $100 for the coal, $20 for the tax and a profit of $10. The extra $20 gets passed onto the consumer whose bill is now $130 per unit. However after the $20 subsidy (paid for by the $20 proceeds of the tax) they still only pay $110.

In other words: the producers, the consumers, and the government are no better or worse off immediately after a Carbon Tax is introduced. But what happens if the Carbon Tax is successful in reducing emissions? That is when consumers end up paying more. The cost to the company, including the tax, of producing one unit of electricity is $120. Suppose an alternative non carbon-emitting energy source is found which costs $115 per unit. This is more than the coal-based cost before the tax, but less than the cost with the Carbon Tax as this carbon-free energy source, let’s call it “sunshine”, attracts no Carbon Tax. So the company, in order to maintain their profit of $10, charges $125 per unit, less than coal based power with a Carbon Tax. But now the consumer receives no subsidy either so even though their total bill has dropped from $130 (with carbon tax and a subsidy) to $125 without a subsidy. It now actually costs them $125, an increase of $15 over the cost before the carbon tax was introduced and even immediately afterwards. This of course is the extra $15 per unit that it costs to produced electricity from sunshine rather than coal.

That is how the Carbon Tax really works and ends up costing the consumer. You start out with a Carbon Tax which costs nobody anything and end up without a Carbon Tax that everybody ends up paying more for. When it has its intended effect, and there is no coal based power, but also no more money for subsidies. And, in principle, no more carbon pollution.That of course though is really the point. There is a (currently) hidden cost of producing carbon as carbon dioxide and methane in global warming and that is, if the system works, the $15 extra you pay to solve the problem by removing carbon from the economy.

Virtual currency

Thanks to my new job, the rate of Stubborn Mule posts has declined somewhat over the last few weeks (to say nothing of Mule Bites podcasts!). Still, my commute has allowed me to catch up on my podcast listening and a particularly interesting one was the recent Security Now episode about the “virtual currency” Bitcoin. Here is how Bitcoin is described on their website:

Bitcoin is a peer-to-peer digital currency. Peer-to-peer (P2P) means that there is no central authority to issue new money or keep track of transactions. Instead, these tasks are managed collectively by the nodes of the network.

Given that e-commerce is already widespread on the internet, what exactly is new about this idea of a virtual currency? The key to this question is understanding the difference between money in the form of “currency” (notes and coins) and money in the form of balances in your bank account. Currency is essentially anonymous. If I hand you a $10 note, we don’t need anyone to facilitate the transaction and you can take that $10 and spend it with no further reference to me or anyone other else. To move $10 from my bank account to yours is quite different. Before we could even start, we both had to provide extensive identification to our respective banks to open bank accounts. Then, you would have to provide me with enough account information for me to instruct my bank to transfer money from my account to yours. Both banks would retain records of the transfer for a long period of time and, if the transaction was rather bigger than $10, the chances are that there may even be requirements for our banks to notify a government agency in case we were engaged in money laundering. Even if I paid you using a credit card, the information exchange would be much the same.

The Bitcoin virtual currency aims to mimic some of the essential characteristics of currency while allowing transactions to be conducted online. To do so, it makes very creative use of a powerful encryption technology known as “public key cryptography”.

Public key encryption involves encrypting data in a rather unusual way: one key is used to encode the data and a different key is used to decode the data. This is in contrast to “symmetric key encryption” in which the same key is used for both encoding and decoding data. To appreciate the difference, consider a less electronic scenario. I want to exchange messages with you using a locked box and ensure no-one else can open it. If we already have identical keys to the one padlock there is no problem. I simply pop my message in the box, pop on the padlock and post it to you. When you receive the box, you can use your key to open the box, read the message, reply and pop the same padlock on the box before sending it back. But what do we do if we don’t both have keys to the one padlock? There is a tricky solution. I put the message in the box, secure it with my padlock and send it to you. Once you get it, although you cannot open my lock, you add your own padlock to the box and return it to me. Once I get it back, I unlock my own lock and send the box back. You can then open your lock and read my message. While in transit, no-one can open the box. It’s certainly an elaborate protocol and, of course, I’m ignoring crowbars and the like, but it gives a rough analogy* for how public key encryption works.

When it comes to data encryption, both users will create a “key pair”. One key they keep to themselves (this is known as the “private key”) and one key they can share with the world (the “public key”). I can then let you (and indeed the whole world) know what my public key is. When I want to send you a message, I encrypt it using your public key and send it to you. The only way to decode it is using your private key, which only you have. Even though everyone can find out what your public key is, only you can decode the message. When you want to send a message back to me, you encode it using my public key. So, anyone who knows my public key can send me a message for my eyes only. As a side benefit, public key encryption can also provide authentication. If you send me a message encrypted using my public key, I would ideally like to confirm that it really came from you not someone else (after all, everyone knows my public key). To deal with this, you can also send a copy of the same message encoded using your private key. Once I have decoded your message with my private key, I can also decode the second message using your public key. If the two messages are the same, I know that whoever sent me the encoded message also had access to your private key, so I can be reasonably sure it was you. In practice, authentication works a little bit differently to this, using a “hash” of the original message (otherwise anyone could decode the secret message using your public key). This authentication process is known as “digital signing”.

All of that may seem like a bit of a diversion, but public key cryptography is at the heart of the Bitcoin idea. Essentially, a Bitcoin is a blob of data and if I want to give you one of my Bitcoins, I add your public key to the blob and then sign it using my private key. This means that anyone who has access to my public key (i.e. the whole world) can confirm that I intended to pass the coin onto you. As a result, Bitcoins have their entire transaction history embedded in them! To decide who “owns” a Bitcoin, we just need to look at the last public key in the transaction chain. Whoever owns that key, owns the Bitcoin.

“How is that anonymous?” I hear you ask. Since “keys” are just strings of data themselves, there is no reason you have to advertise the fact that, say “6ab54765f65” is your public key. While the whole world can see that the owner of “6ab54765f65” owns a number of Bitcoins, that does not mean that anyone has to know your secret identity.

The other important feature of Bitcoins is that there is no centralised coordinator of the Bitcoin records. There is no bank keeping the records. The Bitcoin algorithm is public and information about Bitcoin transaction histories is shared across a peer-to-peer network which allows anyone to independently verify Bitcoin transactions.

It’s a fascinating idea and I don’t know if it will take off. It is only in beta, but there are a number of websites that have begun accepting Bitcoins for payment, as well as sites which will trade Bitcoins for “real” money. I will be watching with interest.

* It really is quite rough, only showing that a secure exchange without key exchanges is possible. Other features, such as authentication and the key asymmetry (either key can lock and then the other key unlocks) are not captured.

Where does the money go?

A regular Mule reader drew my attention to an article in the Sydney Morning Herald (also published in The Age) which attempts to defend Australian banks from some of the criticisms levelled at them in recent months. It is something of a laundry list of points, some accurate, some dubious and has little in the way of hard data behind it.

What my correspondent was more interested in, however, was that one powerful argument was missing. If banks had not bolstered their margins by raising mortgage rates by more than the Reserve Bank cash rate rises, the Reserve Bank would in all likelihood have increased the cash rate by even more. This contention is supported by the Reserve Bank’s own board meeting minutes from the 2 November meeting. Discussing the considerations which led to the November rate hike, the following observations appear:

Members noted that lending rates might increase by more than the cash rate, but this tendency would not be lessened by delaying a change in the cash rate. Lending rates had been rising relative to the cash rate since the global financial crisis, and the Board had taken this into account in setting the cash rate. It would continue to take account of any changes in margins in its decisions in the period ahead.

From this it seems clear that if the banks had kept to moving their mortgage rates in line with the cash rate, the cash rate would now be higher and the end results for borrowers would be much the same.

Of course, if this had happened, bank margins would have been squeezed, which leads to this question from my correspondent:

Where banks don’t increase margins but RBA increases base rate more so overall level the same, where does the “banks’ profit” go? RBA [Reserve Bank of Australia]?

This question gets to the heart of how banks work.

While we tend to think of banks as lenders, it can be more useful to think of them as intermediaries between borrowers and lenders. The real lenders are the banks’ depositors and bondholders. Banks pay interest on deposits and bonds and charge a somewhat higher rate interest on their loans. The difference between the interest they pay and the interest they receive is their net interest margin which, along with fees and charges, is their source of profit. In the wake of the financial crisis, the market for deposits has become very competitive and bond investors now demand higher returns on bank debt compared to lower risk alternatives (such as government bonds…at least if the government in question is not European!). Both of these effects have resulted in the interest banks pay increasing by more than the amount the Reserve Bank’s cash rate has increased. Banks have attempted to recoup the resulting increases in the interest they pay by passing through bigger increases to their borrowers (you can read more of the details in an earlier post on bank funding costs).

So, if banks had kept their mortgage rates strictly in line with the Reserve Bank’s cash rate, their margins would certainly have been smaller than they are today. If that had happened, where would the money have done? It does not go to the Reserve Bank: while they set the target rate, the Reserve Bank itself does very little lending at that rate. Rather they ensure that any lending overnight from one bank to another is done at or very close to the target rate by promising to lend or borrow large amounts at rates only slightly above or below the target respectively. No, the real beneficiaries of the higher rates are the ultimate lenders: depositors and bondholders.

Anyone with a balance in a superannuation fund is likely to have a certain amount invested in bond funds which would invest in, among other things, bonds issued by banks. Self-funded retirees and others seeking to keep their investment risk to a minimum may have money in bank term deposits rather than shares or property. All of these people lend money to banks and benefit through higher earnings when interest rates go up*. The banks do get some of the benefit themselves. Some deposit balances are paid little or no interest and so when the cash rate rises, these deposits represent an increasingly cheap source of funds for banks, although these low interest balances represent a much smaller proportion of banks’ funding than they used to.

The effect of changing interest rates is thus an exercise in wealth redistribution between the ultimate borrowers (including those borrowing to buy a home), the ultimate lenders (depositors and investors) and the banks themselves. What we have seen over recent months can be seen as a bit of a tussle between banks on the one hand and depositors and investors on the other as to who should get how much of the higher rates borrowers are paying.

* There is a timing issue for bond investors: fixed rate bonds actually fall in value when interest rates go up, but from that point onwards the ongoing earnings of the investment are higher.

The Chinese growth engine

As Australia’s economic fortunes continue to surpass the likes of the US, UK and Europe, it is hard to escape a lingering nervousness about what could happen if the mining boom were to collapse. What if the Chinese juggernaut were to falter? Would we be doomed?

Having a conversation exactly like this earlier in the week, I was reminded of a post I wrote more than a year ago which showed surprisingly (to me at least) that exports to China were contributing only 3% to Australia’s gross domestic product (GDP). In yesterday’s Sydney Morning Herald, economist Ross Gittins tried to bring some perspective to the nervous by pointing out that 80% of Australia’s economic activity is domestic and concluded that:

Take away mining and we wouldn’t be quite as rich as we are, but most of the economy would look much the same as it does. Most of us would still have good, secure, well-paid jobs.

Of course, not everyone is taking such an encouraging line. Over on the Mule Stable, one econo-pessimist drew my attention to this interview with hedge fund manager John Chanos, who has been predicting a bursting of the Chinese economic bubble for some time now. As well as showing a very detailed knowledge of China’s construction industry, Chanos notes that were China’s economy to stall, the US would be much better positioned to cope with it than countries like, say, Australia. That was supposed to be good news for American viewers…not so cheering for those of us on this side of the globe!

All of this suggested that an update of the trade statistics was overdue. The results are as one might expect: the contribution that exports to China make to Australia’s GDP has risen from the 3% I noted in August 2009 to almost 4% as at September 2010.

Exports to ChinaGDP from Exports to China (Dec-1988 to Sep-2010)

So, while 4% may still be small compared to the 80% of activity that is generated internally in Australia, the real story here is growth, as the steepness of the chart dramatically illustrates. That increase in exports has contributed almost 1% to Australia’s GDP growth for the year! Here is the rolling annual change in the contribution that exports to China make to Australia’s GDP.

Exports to China - changesAnnual Change in GDP from Exports to China (Dec-1988 to Sep-2010)

Not wishing to forget Gittins’ point that we should consider total contributions to the economy, not just exports, it is hard to resist wondering how many of our exports now go to China. The answer is: a lot and growing.

China export shareChina’s Share of Exports (Dec-1988 to Sep-2010)

So, where does that leave us? Gittins is not wrong, and a collapse in the Chinese economy would not suddenly put everyone in Australia out of work. Nevertheless, it would certainly take a lot of the wind out of our economic sails. Furthermore, given the amount of attention China and the mining industry have in our national consciousness at the moment, it is worth recalling the words of that sage John Maynard Keynes:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

There is little doubt that if Chanos is right about China, our animal spirits would not take it too well.

Data source: based on Australian Bureau of Statistics (copyright Creative Commons Attribution). Note that all export figures here represent exports of merchandise, so exclude services.

Job guarantee on “Mule Bites”

It’s official! The Mule Bites podcast has been launched.

Regular readers will know that I travelled to Newcastle at the beginning of the month for the 12th annual CofFEE conference. Conference organiser and director of CofFEE, Professor Bill Mitchell, was kind enough to allow me to interview him after the conference. Fortunately, a couple of failed attempts to get the recorder to work did not exhaust Bill’s patience and I ended up with about half an hour of audio covering both Bill’s idea of a “job guarantee” to achieve full employment and a discussion of the nature of money. The workings of fiat money is a subject I have discussed a number of times here on the blog, so I thought that the job guarantee would make a good first podcast topic.

For those not satisfied with the 16 minutes in this podcast, I am planning another episode with the money discussion and will also make the full, unedited interview available.

Audio credits: Mule Bites theme by ToastCorp, train sounds CC by Robinhood76.

UPDATE: there were some balance problems in the audio mix, which have now been improved. Thanks for the feedback, keep it coming! I am well on my way to learning basic audio engineering.

Polls apart on climate change

Regular Stubborn Mule guest James Glover (@zebra) turns his statistical expertise on some apparently contradictory polls gauging opinions on climate change.

Two polls came out today on the question of whether people believed climate change is real and if so whether it is caused by human activity. The first was a Newspoll published in The Australian and the second was by Essential Media and was commented upon by Essential’s Peter Lewis on ABC’s The Drum. Intriguingly, the Newspoll suggests 73% of Australians believe in climate change with a significant human contribution (so called Anthropogenic Global Warming or AGW). Now The Australian has copped a bit of flak lately for its alleged anti-climate change agenda, but leaving that aside this poll suggests that AGW should be practically a closed book politically as an overwhelming majority believe in it. Essential Media describes themselves as a research tool for progressive political campaigns. Essential’s poll indicates that only 45% of people believe in climate change caused by human activity. In the accepted narrative of such things the results would have been around the other way and the tweetsphere would be apoplectic accusing The Australian and News Corp of once again distorting Newspoll results for their own right-wing political agenda. So what is happening here?

First a note on sampling error. Essential polled 1896 people while Newspoll contacted 1,123 people. For polls where the expected split is approximately 50% a good rule of thumb for margin of error (MoE) is 1/√sample size. In the two polls here this gives MoEs of 2.2% and 3.0% respectively. MoE represents two standard deviations from the sample average so differences of 25% are extremely unlikely (like 10-10 probability unlikely) to be explained by a unfortunate random choice of sample from the general population.

The most likely explanation is that one or both of these polls suffer from an underlying sampling bias. This would be easy enough to generate artificially—just poll people in Newtown if you want to get more people who believe in AGW or in Bob Katter’s seat for the opposite result (is this a little glib? Maybe, but you know I am right). But legitimate pollsters like Essential and Newspoll rely on the rigour of their sampling technique. Especially as every time you publish a controversial result, a large section of the population who disagree with it will accuse you of bias. There are a number of techniques to reduce bias—one is to ask coquestions whose population statistics are well accepted. For example if in your poll you found that 46% of the respondents were female and 54% were male you can readjust the result to reflect the actual population average of 51:49. I assume both polling organisations follow standard methodologies to minimise bias. Often though their actual methodologies are proprietary so question marks remain. A famous political polling agency was well know to always come up with polling results that reflected the political opinions of its founder after “adjustment for bias”.

Some indication that there isn’t an overwhelming bias are some additional questions about voting intention. Here are the results:

Essential Newspoll
Coalition 45% 41%
Labor 38% 34%
Green 11% 14%
Other 6% 11%

I would have to say that the differences in the numbers are on the borderline of being consistent with the MoEs I estimated. In any event the Newspoll which has a higher number believing in AGW has less Coalition voters (though about the same Labor+Green votes). It seems unlikely that the votes for Independents and other alone could account for the 28% difference in the polls on the question of AGW.

So that leaves us with the polls themselves. I have assumed so far that they asked the same questions, but there are major differences. Here are the actual questions and results:


Climate change is happening and is caused by human activity 45%
We are just witnessing a normal fluctuation in the Earth’s climate 36%
Don’t know 19%


No climate change 18%
Climate change solely caused by human activity 18%
Climate change partly caused by human activity 55%
Climate change not caused by human activity 3%
Believe in climate change but don’t know cause 2%
Don’t know if climate change is real 5%

Now what appears at first to be a headline difference between the polls is more subtle. It is quite hard (I tried) to map the answers between them exactly to compare the results. For example Essential doesn’t ask if the respondents directly if they don’t believe in climate change at all (18% in Newspoll) so presumably the climate skeptics get lumped under “Don’t know” (19%) which will also include those who believe in climate change but don’t know if it is caused by human activity or don’t know if climate change is real. That Newspoll total of “don’t knows” and skeptics is 23%, a bit higher than Essentials “Don’t know” of 19% but within the MoEs as reflected by the voting intention results.

However we can try to compare the two main results which boil down to “Believe climate change is real and human activity is significantly affecting it” of 73% (Newspoll’s headline result combining “solely” and “partly” caused by human activity) vs Essential’s “Climate change is happening and is caused by human activity” of 45%. The difference appears huge. The only thing I can think to explain this is that when not offered the choice of “solely” vs “partly” caused by human activity the Essential respondents threw their lot in with “caused by a normal fluctuation in the Earth’s climate”. In other words the results are consistent if most people who believe that “climate change is real” but don’t believe it is “solely caused by human activity” believe it is “partly caused by human activity” but mostly due to “natural fluctuations in the Earth’s climate”.

What is clear here is that the wording of polls is important and that both polls failed to tease out the subtle distinctions in people’s views on climate change (though Newspoll did a better job of this than Essential). There are also question marks about the sampling bias as shown in the voting intention results. But the headlines of both polls will superficially look like totally different results. And that is a problem when the results are used to support political rather than scientific views on anthropogenic global warming as fact or fiction.

Coffee day 1

As promised, I spent the day today “live-tweeting” the first day of the CofFEE conference. However, I was more than outdone by Bill Mitchell. As well as hosting the conference and giving the final presentation of the day, he has already posted a wrap-up of the day.

The first few sessions focused on specific employment policy topics, such as employment considerations for the mentally ill. In the afternoon, the focus shifted to broader macroeconomic themes, with a heterdox, “modern monetary theory” flavour which would be familiar to readers of Mule posts on money and debt and even more so to readers of Bill’s blog. In most cases the talks linked a better understanding of why government deficits should not be feared back to the case that governments should be doing more to address unemployment. Bill’s presentation, which gave some background on the CofFEE research centre and the history of the conference is a good example of this perspective.

Marshall Auerbach spoke about the challenges facing the euro zone and took a very interesting historical perspective, tracing the region’s “German problem” (i.e. It’s disproportionate economic scale relative to neighboring countries) all the way back to Bismarck.

I will digest all of what I heard today and will hear tomorrow and plan to distill something for a later, more detailed post, but now it’s time for dinner and a possible chance to ask some of the questions suggested in the comments on the last post.

Coffee meeting

No, I’m not writing this post over a macchiato. The title of the post has nothing to do with caffeinated beverages. Rather, it refers to the annual conference of “CofFEE”, the Centre of Full Employment and Equity, a research centre at the University of Newcastle.

The director of the center is Bill Mitchell, who may be known to Stubborn Mule readers as the author of Billy Blog. Two of Bill’s primary interests are the macroeconomics implication of the nature of money, a topic that comes up frequently here on the Mule, and the development of economic policies aimed at restoring full employment, chief among which is the idea of a “job guarantee”. For Bill these two areas are intimately linked. He argues forcefully that too much economic policy around the world today is mired in thinking that has not progressed past the days of gold standard currencies. A better understanding of the real nature of money in modern economies like Australia, the United States and the United Kingdom (but unlike those unfortunate countries struggling in the euro-zone) would release governments from baseless fear of government spending and the confusion generated by concepts like NAIRU (the idea that full employment would necessarily generate excess inflation) and empower more effective fiscal policy.

I will be attending the CofFEE conference later this week and the program reflects these twin themes of employment policy and the theory of money. Among the speakers are Marshall Auerback and Randall Wray who are both out from the United States and, along with Bill Mitchell, are well-known proponents of the “Modern Monetary Theory” approach to macroeconomics. Auerback and Wray will be sure to have some interesting perspectives on the financial crises and the failures of US policy responses to the ongoing recession over there.

I will be reporting back on highlights from the conference and, in the meantime, keep an eye out for tweets from @stubbornmule. If you have any questions you would like me to try to ask, let me know.