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A Dismal Science

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Category: Markets
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Thomas Carlyle coined this epithet in 1839 while criticising  Malthus, who warned of what subsequently happened, exploding population.

According to Carlyle his economic theories: "are indeed sufficiently mournful. Dreary, stolid, dismal, without hope for this world or the next" and in 1894 he described economics as: 'quite abject and distressing... dismal science... led by the sacred cause of Black Emancipation.'  The label has stuck ever since.

This 'dismal' reputation has not been helped by repeated economic recessions and a Great Depression, together with continuously erroneous forecasts and contradictory solutions fuelled by opposing theories.  

This article reviews some of those competing paradigms and their effect on the economic progress of Australia.

 

In Australia economic thought took a couple of U-turns last century

For its first one hundred and seventy years the economy of New South Wales (and then Australia as a whole after 1901) was extraordinarily vulnerable to climate and agricultural trade cycles.

 fluctuations

 

Phil Ruthven IBIS: ‘The chart shows Australia’s economic progress over 140 years... ‘The volatility was enormous both before and during the Industrial Age (1865-1964) largely due to weather. Agriculture remained over 15% of our GDP for most of that period…  ‘a 25% fall or more in output would slice 4% off the economy by itself - with a domino effect through the food & fibre input-output chain - causing a recession. We had 27 such years or one every 3-4 years...

 

During the 20th century Australian governments experimented with the full spectrum of government interventions to develop manufacturing; both to reduce our dependency on agriculture and to increase Australia’s military resilience.  To grow and protect manufacturing Australia applied, then abandoned: selective tariffs; publicly owned businesses; and enforced government purchasing preferences.  

Until the start of the 20thcentury the political differences in pre-federation Australia were polarised around the issue of ‘free trade’ verses protection (NSW versus Victoria).

The electoral success of the Australian Labor Party (in 1910) (following the Marxist social analysis in the mid 19thcentury, and English Fabianism) led to a new polarisation around worker’s rights and the socialist alternative to capitalism; retaining a strong protectionist sentiment. With the split in the Labor party, at the start of the ‘Great Depression’, a new ‘United Australia Party’ (in government from 1932 to 1941) formed around ex Labor Treasurer Lyons and Labor splinter groups, together with the older establishment dominated parties (both free traders and protectionists).

Thus by the middle of the century, both major parties had elements combining the older protectionist movements, as well as elements supporting socialism and public ownership. Protection and government owned enterprise became an accepted reality on both sides of politics, reinforced by industrial mobilisation during two world wars.

By the mid 1960’s, under the protection of import tariffs and direct government involvement in economic production, manufacturing in Australia had grown to become the largest and most productive sector in the economy, long supplanting agriculture, services and mining.

But as the Menzies/ McEwen era drew to an end in the late 1960’s it was already apparent that much of this manufacturing and government enterprise was inefficient and unable to compete internationally.  Within the new Universities, post-war academic sentiment was swinging towards Neo-Keynesian (eg Samuelson) or Monetarist (eg Friedman) economics together with a strong belief that freer markets would deliver greater economic efficiency and administrative simplicity.  The intellectual climate had changed. 

Free trade and free market arguments prevailed, in both major political parties, and the progressive withdrawal of protection followed, along with the disposal of government owned businesses and local buying requirements.

 

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Travel

Bali

 

 

 

 

 

At the end of February 2016 Wendy and I took a package deal to visit Bali.  These days almost everyone knows that Bali is a smallish island off the east tip of Java in the Southern Indonesian archipelago, just south of the equator.  Longitudinally it's just to the west of Perth, not a huge distance from Darwin.  The whole Island chain is highly actively volcanic with regular eruptions that quite frequently disrupt air traffic. Bali is well watered, volcanic, fertile and very warm year round, with seasons defined by the amount of rain.

Read more: Bali

Fiction, Recollections & News

Cars, Radios, TV and other Pastimes

 

 

I grew up in semi-rural Thornleigh on the outskirts of Sydney.  I went to the local Primary School and later the Boys' High School at Normanhurst; followed by the University of New South Wales.  

As kids we, like many of my friends, were encouraged to make things and try things out.  My brother Peter liked to build forts and tree houses; dig giant holes; and play with old compressors and other dangerous motorised devices like model aircraft engines and lawnmowers; until his car came along.

 

Read more: Cars, Radios, TV and other Pastimes

Opinions and Philosophy

Electricity Woes

 

Recently, the National Electricity Market in Eastern Australia had to be temporarily suspended due to a shortfall in generation.

Now, the new Federal Government, that came to power on a promise to substantially cut power bills, has had to concede, that instead, there will be substantial price increases.

In part, they are blaming the war in the Ukraine; the consequent sanctions against Russia; and Russian retaliation.

During the election campaign the Shadow Minister for Climate Change and Energy repeatedly asserted that the solution lay in increased wind and solar generated electricity, that he also repeatedly asserted were cheaper than fossil-fuel generated electricity. 

Yet, now the solution is said to lie in 'temporary' price caps on the spot-price of steaming coal and gas (mainly methane).  

An observer from another planet might ask: why the global demand for steaming coal and gas is still rising (and with it their price) when wind and solar are, allegedly, so much cheaper? 

Meanwhile, last July (2022) Wendy and I had occasion to visit the town of Rønne on the small Danish island of Bornholm. There on the quayside were a dozen huge wind-turbine nacelles.

As I had some spare time on my hands, I looked on-line and discovered that they were Vestas V174-9.5 MW units for installation off the coast of Germany, for either the Baltic Eagle or Arcadis Ost 1 project. I compared the published project costs with those of other large scale energy projects around the world.

You can read my analysis here (Europe 2022 - Part 1 - An Energetic Diversion). 

Suffice it to say, that wind-generated electricity is not price-competitive with modern fossil generated electricity - it's just a lot cleaner.

Most importantly: nor is off-shore wind anywhere near price-competitive with the latest nuclear generated electricity (on a dollar per unit of installed capacity basis), as nuclear power has a similar cost per Watt of capacity but doesn't require additional batteries or pump-storage to satisfy fluctuating demand.

The present situation on the east coast of Australia may (or may not) have been aggravated by the war in the Ukraine.  Yet, the short-fall was entirely predictable, over a decade ago, and  it will not go away when the war ends.

In anticipation, back in 2012, I called for a 'root and branch' reappraisal of the combined impact of the Renewable Energy Target scheme, in the context of the operations of the National Electricity Market (NEM):

 

2012

"The present government interventions in electricity markets, intended to move the industry from coal to renewable energy sources, are responsible for most of the rapidly rising cost of electricity in Australia.  These interventions have introduced unanticipated distortions and inefficiencies in the way that electricity is delivered.

Industry experts point to looming problems in supply and even higher price increases.

A 'root and branch' review of these mechanisms is urgently required to prevent ever increasing prices and to prevent further potentially crippling distortions."

Read more: Electricity Pricing

 

I asserted that together these were making essential base load generators unprofitable and may lead to brownouts and blackouts in the future:

2012

"Now, in addition, rooftop photo-voltaic (PV) solar is beginning to add power to local distribution grids in mid-summer, when the market price is at its maximum and thermal stations have previously been assured of a profit.  Again the retailer pays for STC’s that subsidise the price of solar.

While again we might applaud the lowering of the peak market price and the reduction of peak grid currents at this time, we will not be so pleased if failure to invest in new generation capacity results in even higher prices; and future brownouts and blackouts.

While at first sight there appears to be a well established competitive generation market, the renewable energy targets and the associated certificates (paid for by our retailer and appearing in our bill) may be having an increasingly adverse effect on future investment decisions; with potentially disastrous outcomes ‘down the track’."

Read more: Electricity Pricing - The cost of energy sources

 

The article was written at a time when an ill-conceived Carbon Tax, that only targeted particular industries and in some cases individual businesses, was severely distorting the energy marketplace even further. 

A year earlier I had objected to the Gillard Government's short lived Carbon Tax on these grounds:

2011

"Well, the Gillard government has done it; they have announced the long awaited price on carbon...

Accusations of lying and broken promises aside, the problem of using a tax rather than the earlier proposed cap-and-trade mechanism is devising a means by which the revenue raised will be returned to stimulate investment in new non-carbon based energy.

Taxation always boils down to 'robbing Peter to pay Paul'. In this case the Government knows who Peter is but they apparently have no idea, or too many, about Paul.

It is the very definition of administrative inefficiency to rob Peter to pay Peter. Thus any tax that requires offsetting payments to those taxed is poorly designed; administratively cumbersome and likely to be extremely inefficient; a bad tax."

Read more: Australia's carbon tax

 

The Carbon Tax has gone but not the underlying problem remains: traditional coal fired power stations - upon which we will still need to rely for at least another decade - cannot remain viable as long as they are continually gazumped in the NEM by cross- subsidised renewable electricity generators.

This cross-subsidy, is in the form of Large-scale Generation Certificates (LGC's), paid for by electricity retailers (in other words: you). Each MWh of renewable energy supplied receives this cross-subsidy (effectively at the expense of other generators). It applies irrespective of the rapidly fluctuating (NEM) market price for that electricity (energy), that from time-to-time is very low or negative, due to ample wind or sunlight and low consumer demand.

By this means, renewable electricity, including rooftop solar, has been given a 'leg-up', in order to meet the Australian Government's Renewable Energy Targets.

When governments intervene in markets it always has consequences. Such an intervention maybe necessary in the long-term public interest, for example due to externalities, like the environment, or international responsibilities. Yet, then it is beholden on Government to put in place accompanying means of mitigating the inevitable negative consequences. 

In this case the negative consequences of Renewable Energy Targets on base-load electricity generation have been well known for well over a decade but nothing has been done in mitigation.

Possible mitigations might include:

  • an off-market base-load generation reservation and/or, perhaps;
  • ineligibility of all Renewable Energy Certificates (small and large scale) for energy supplied when supply exceeds demand.

Comprehensive modelling of these and other possible interventions, such as a targeted subsidy, is now essential to determine the best transition path to a secure electricity future.

A 'root and branch' review is long over-due.

 ___

 

If only...

'If onlys' are a bit pointless, yet I'll say it again: Had we embarked on building just three nuclear power-stations similar to the Cruas Nuclear Power Station in France, two or three decades ago (read more...), we could already be 'clean and green' and not in the predicament we now find ourselves in today. 

Instead, we find ourselves paying for Snowy 2.0 that will be: more expensive; more environmentally damaging; and totally inadequate to make a significant difference (see: Pumped-Storage Hydropower (PSH). Read more....

But that's all water over the dam now.

 

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