Congestion pricing & Infrastructure Australia

I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia's infrastructure needs over coming decades.  I was mainly interested in the transport sector and proposals that looked - on casual reading of the press this morning - like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs).  As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.

On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis.  They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.

Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result.  Their answer?  Build more roads everywhere and find ways of funding such investments.  Their answer?  Road use charges that fund the roads. 

That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency.  Indeed the issue is not primarily one of funding at all.  All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently.  Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.

Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades.  It is a shame that they cannot get the basic logic right.


http://www.infrastructureaustralia.gov.au/news-media/media-releases/2015/2015_05_22.aspx

How to eliminate government budget deficits with some simple efficiency-based tax reforms

I recently became awarec that each year the Commonwealth Government publishes a tax expenditures report that details the tax exemptions, deductions or offset concessional rates as well as deferrals of tax liability.  A colleague told me that state governments publish similar documents for tax expenditures associated with land tax, payroll tax and the non-taxation of non-profits. I have not yet checked these out.

A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:

• Exemptions of capital gains-tax on family home $25b
• Exemptions on residences previously lived in  $20.5b
• Concessional tax on superannuation $16.3b

These alone would boost the total tax take by 12% and obliterate the deficit.   These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off.  Over-investment in housing would give way to more productive investments in other areas.

Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.

Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has  40% less coverage. Some big items here:

• Exemptions of food from GST $6.4b.
• Exemption of education $3.9b
• Exemption of health services $3.6b etc etc.

There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future.  We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one.  There are no such policies so we will do nothing!

Emissions Reduction Fund insufficient to hit Kyoto targets

I wrote a paper with Rob Waschik and Iain Fraser arguing that the ERF would be unlikely to achieve Australia's Kyoto target by 2020 - in fact we computed that the $2.55b in the fund would only hit 50% of the target. (The link is to a preprint - the paper itself is now published but paywalled).

The figures today on the outcome of the first ERF auction do not lead me to reconsider my conclusion despite the assurances of The Australian that the ERF is "within reach" of the 5% reduction target by 2020.

The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted.  Not a big deal this error however and the "within reach" conclusion might even be approximately justified.

The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit".  As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne.  The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.

This is not to say that Australia won't hit its emissions targets.  It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas.  But the ERF itself won't be enough to achieve desired targets with its current budget. 

Insuring quack medical treatments and non-quack useless treatments

A few years ago I had an arthroscopy in my right knee. It followed acute knee pain that resulted from clumsy attempts to climb a locked gate at the Western Treatment Plant.   The pain was intense and "burning" - it lasted several weeks while my GP suggested I rub Voltaren on it which had no effect at all. Finally I went to a "sports doctor" who recommended arthroscopic knee surgery. I was on crutches for a couple of weeks after which the knee went back to normal,  the pain gone I think permanently.

I was intrigued therefore to read in this morning's AFR  ("Rolfing and Rebates", unfortunately pay-walled) that some insurers (NIB) regard arthroscopies as being ineffective so that, like Rolfing, homeopathy, naturopathy, massage and herbalist treatments (and other evidence-free medical practices)  insurance companies should not provide cover for them.

I am not expert on medical issues but I wondered if the claim with respect to arthroscopy is correct true. This article posted online claims they are.  It claims the recovery I experienced would probably be achieved by a placebo procedure.

Two issues occur to me:

(1) Should insurance companies provide cover for treatments that consumers demand - if- like homeopathy - there is no clinical evidence they work.  One insurer in the AFR answered "yes" to this question since insurance companies should reflect consumer preferences and, presumably, not science.  I have problems with this view since providing insurance cover to procedures signals to customers that the procedures are valid. By reducing the effective cost they also increase incentives to use them.

(2) How many more mainstream "respected" treatments (like arthroscopy) are being insured even though there is little clinical evidence they work?  I wonder, for example, about the widespread advocacy of Statin drugs for dealing with claimed cholesterol problems: See here - Statins of concern to me as I have taken these drugs for a decade.  Or the now discredited, but still practised, advocacy of a carbohydrate-based "food pyramid" that has driven millions into obesity, Type 2 diabetes and heart disease.  Ditto the rejection of carbohydrate intake as a treatment for diabetes and obesity.

Plain packaging of cigarettes

Ireland has followed Australia in introducing plain packaging of cigarettes.  David Prentice and I gave an interview on the Australian experience and its implications for such countries in The World Customs Organisation News, February 2015, Vol 76, pages 62-64.  This type of work David and I did on plain packaging won't get prestigious academic awards but in terms of practical policy and promoting the public good I rank it among my best. 

Childcare costs

An excellent editorial in the AFR today (unfortunately paywalled, buy yourself an AFR!) identifies the core problem with childcare subsidy policies in Australia.  The $6.7b from the Commonwealth and the $800m by the states that gets channelled into such subsidies should be skewed much more heavily towards low income earners.  Parents earning $160,000 plus annually will still have 60% of their childcare costs covered by taxpayers, those earning $200,000 will get 20% subsidies - these are after the reforms suggested by the Productivity Commission are implemented.  Indeed I would go much further than the AFR and look for very substantial cuts in the level of assistance provided across the board.

This childcare aspect of our entitlement society is absurd.   The prevailing belief is that even if you earn high incomes the fact that you are a parent gives you a net claim over the incomes of those who are not parents.

People don't have a right to have children that they cannot afford to make a substantial contribution to supporting. Those earning high incomes should obviously pay their own childcare costs.  Mothers (or fathers) who find that their incomes are too low to cover childcare costs should either stay at home and look after their children or delay having children until they can afford to by-in-large support their own children.  People need to understand that their parenting decisions have consequences that they must bear.

Subsidizing children and having an active immigration program creates high child-raising costs in Australia by driving, in particular, high housing prices.  We do not need to have an ever-increasing population - there are plenty of people - and, with less demand for housing, the cost of raising children would fall in accord with reduced market pressures.  We would also experience lower infrastructure costs and less unpriced congestion in our urban centres.
 

Price of beer

I bought a schooner of draft beer in a pub bar in Carlton at lunch today. It was $11 for 425 ml.  Yesterday I bought a dozen long-necked Coopers Sparkling Ale for $56 from Dan Murphy. That is $4-68 per bottle and each bottle contains 750 ml.  The cost of 425ml of the Coopers would be (425/750)*$4-68 or $2-65.

The costs are not directly comparable. The beer in the pub was a draft beer and was not a Coopers but was a good local brand.   But the Coopers bottle is a pretty good brand itself and hence a plausible substitute so the price comparison is not that misleading.

I wonder if it is the size of the price markup on beer - it was 415% - that might be the reason that almost no-one patronises pubs these days.  There were 4 clients in the pub I entered today and none were drinking alcohol - they were eating cheap counter lunches.

Australia has high alcohol taxes, particularly on full strength beer, but the tax is lower per unit quantity on the beer sold in the large containers that hotels buy.  Taxes create absolutely high priced beer but cannot account for these differentials.  Consumption of alcohol creates road death "externalities" but these are better addressed by heavily penalising those who drink-and-drive rather than innocent economics professors seeking a beer with their pork and stir-fried. Finally health costs are real consequences of drinking excessively but not of having a beer with your lunch.

Low patronage due to the enforcement of "drink driving" laws might encourage high prices of pub-provided beer to cover high fixed costs and maybe this is part of the story.  People drink most of their beer at home. I'd be interested to get more evidence on this.  For sure, institutions such as golf clubs are recording low revenues from bar sales and fear on the booze bus is pervasive.

Beer consumption in Australia is at an all time low.   A beer at lunch - part of the traditional Australian life style is also disappearing.  While the health Nazis will applaud this those of us who enjoy a beer do not. Australia does not want to be swamped in an alcoholic culture but nor do we want to become a nation of wowsers.