Shorten and the cake

Three things emerged from qanda last night.

The first was that Malcolm Turnbull is out of control, and thinks he can undermine Tony Abbott at will. So there’s some fun in store.

The other two are closely related. One is that, whatever Bill Shorten learned in his MBA at the Melbourne Business School, it didn’t equip him with basic economic intuition. The other is that, despite the lessons of Rudd’s failed greenhouse legislation, the Government still hasn’t has figured out how to explain the concept of carbon pricing to the electorate.

An audience member had the inspired idea of posing the John Hewson question: What will the carbon tax do to the price of a birthday cake?

Shorten’s answer, to paraphrase only slightly, was: waffle, waffle waffle; waffle waffle, waffle. It might have been that he wanted to avoid a truthful answer, but one couldn’t rule out the possibility that, like Hewson, he simply couldn’t figure it out on the spot.

Turnbull couldn’t resist coming to his aid, pointing out that the price would go up. That’s what taxes on productive inputs do, after all. An easy point for Turnbull (if not for the Abbott cause).

However, what matters is the impact of the tax not on nominal prices, but on relative prices, real income, and behaviour.

Shorten managed to find a second opportunity to try and answer the question. This time he succeeded in mentioning compensation, which goes to the real income issue. But instead of explaining the principle in a systematic fashion, he got himself into a knot babbling about how the package was going to be ‘calibrated’. This created an opening for Piers Ackerman to interrupt and spray his tear gas around the room, and destroy any remaining hope that the basic logic would be laid out for us.

Ackerman demanded to know whether a cost-benefit analysis had been done, ‘inasmuch as the carbon tax isn’t going to reduce the temperature of the planet by any degrees whatsoever’. Had he chosen to, Turnbull could easily have pointed out: that, by Ackerman’s premise, there wouldn’t be any benefit at all; that mitigating climate change is indeed the intended benefit of the tax (provided other countries impose one as well); and that this benefit is enormous but impossible to quantify. However, Turnbull had done enough carbon-price advocacy by this stage, and was content to enjoy the free pass from Ackeman, reminding everyone that this is a government that doesn’t bother to do cost-benefit analysis for anything. More points for Turnbull.

Here’s an answer that Shorten might have given:

In money terms the cake will be dearer. But the revenue will be refunded to you via an income tax cut, so your disposable income in money terms will increase too. What matters is the purchasing power of your income. Will your take-home pay buy more cakes than before, or less? It depends on the cake. If you buy cakes produced by energy-efficient and clean-energy technologies, you will be better off than before, because you won’t be paying for much carbon. If you buy cakes produced by energy-intensive and fossil fuel technologies, you’ll be worse off because you’ll be buying more carbon. This is a scheme that rewards planet-friendly choices just as much as it penalises harmful choices.

It takes about 34 seconds to say that. If people don’t understand it the first time they’ll get it eventually.

There are qualifications. Yes, depending on whether our trading partners implement something similar, the tax could handicap exporters and import-competing firms if the scheme is designed badly. Yes, a tax on carbon emissions could reduce average real incomes by a little, with the magnitude depending on the degree of substitutabilty in consumption and in production technologies. But the cost in terms of forgone production and income ihas been repeatedly estimated to be only a small fraction of one percent of GDP; and at the same time, those substitutabilities will increase over time due to technological innovation spurred by the relative profitability of energy-efficient and clean-energy techniques. And no, we can’t promise that unilateral action by tiny Australia will make any difference to global warming. But progress is being made.

All of these qualifications can be explained as well — maybe even in a one-minute TV propoganda piece. And I suppose it will be, eventually, barring a dissolution of Parliament in the next few months. But if an Assistant Treasurer — supposedly a risng star and future leader — can’t seem to grasp the basic idea, let alone articulate it convincingly on a panel program where long-windedness is tolerated, well, that’s a worry. What is it with this government and explaining things?

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50 Responses to Shorten and the cake

  1. Patrick says:

    I am confused by one point, where you say:

    An easy point for Turnbull (if not for the Abbott cause).

    Do you mean that it is not a point for Abbot because it boosts Turnbull? I would have thought that the price of the cake rising is a very easy point for the Abbot cause?

  2. Ken Parish says:

    You could add the following without making it too long for any but the most attention-deficient:

    The price increase will be miniscule if the carbon tax only applies to electricity and similar inputs but slightly higher if it also applies to petrol. None of that has been decided so the question is impossible to answer precisely. Economists’ estimates of the average price effect of Rudd’s ETS was that it would add around 2-3% to prices at most, probably less for this example because I suspect that electricity is a fairly small proportion of the total cost inputs to a cake. Thus a $10 birthday cake will cost no more than an extra 20 or 30 cents at most. Compare that with John Howard’s GST supported by Tony Abbott at the time. That really WAS a great big new tax, but the sky didn’t fall and nor will it this time. This is a tiny little tax and most people will be compensated for the tax in any event, so the cake might cost a tiny bit more but they’ll have more in their pockets as well (although they’d be best advised spending that on measures that reduce the household’s “carbon footprint” on an ongoing basis).

  3. Jacques Chester says:

    In money terms the cake will be dearer. But the revenue will be refunded to you via an income tax cut, so your disposable income in money terms will increase too. What matters is the purchasing power of your income. Will your take-home pay buy more cakes than before, or less? It depends on the cake. If you buy cakes produced by energy-efficient and clean-energy technologies, you will be better off than before, because you won’t be paying for much carbon. If you buy cakes produced by energy-intensive and fossil fuel techiologies, you’ll be worse off because you’ll be buying more carbon. This is a scheme that rewards planet-friendly choices just as much as it penalises harmful choices.

    That’s pretty waffle-tastic in itself. How about:

    “Some things will be more expensive. Some might get cheaper. We’ll give you back money to offset the change.”

  4. Dave says:

    James,

    That is an awful response. And you had time to prepare. I can see why they haven’t asked you onto Q and A!

    How about something simple like:

    “nine-tenths of bugger all, I would expect. We are not talking about 10%. This is not a great big new tax on everything like the GST. This is not a tax on birthday cakes. This is a targeted tax on pollution, on carbon emissions.

    Now, of course, a baker uses some electricity and gas and the price of these will increase. But the cost of energy is really quite a small part of the cost of a birthday cake. The exact increase will depend upon the price of carbon, which has not yet been decided. But I would imagine the cost increase will be no more than 1 or 2% at most. And if your baker uses renewable energy, the increase will be even less.

    And the important point is that our proposal will include compensation, especially for low income earners. So really, if you just buy birthday cakes, you have nothing to worry about. In fact, you will probably be better off than before.”

  5. conrad says:

    “The price increase will be miniscule if the carbon tax only applies to electricity and similar inputs but slightly higher if it also applies to petrol.”

    Of course, the obvious retort to this is that “if the difference is miniscule, then how will it change any behavior?”. No one is going to want to say: “Because we can increase the tax later on so that it is not miniscule.”.

  6. James Farrell says:

    Patrick: Yes, because it boosts Turnbull. He is only doing what Rudd should have done a year ago — honestly explaining how the tax works.

    Jacques and Dave: You are being very very mean to me. I’m trying to educate as well as reassure.

    Conrad: On the other hand, the difference might be miniscule because the particular cake is a meringue, which didn’t have to bake very long, or because it was baked in an oven heated by solar-generated electricity. In that case, we’d miniscule would be what we want.

  7. Patrick says:

    I suspect that Turnbull is smart enough to have thought of the comeback to that!

    Yes, let’s compare that: why don’t we have an election on this too?

  8. Victor Trumper says:

    It is a moronic question deserving of a moronic answer.

    All that is agreed is that we wil have a sort of carbon tax in the lead up to a ETS.

    no target and thus no price has been agreed on yet.

  9. Patrick says:

    Sorry, comeback to KP’s Shorten response.

    Jacques, what is conceivably going to get cheaper as any result of a carbon tax?

  10. Catching up says:

    The aim is for coal to be as dear to use as non polluting fuels. This will allow coal to be frazed out. The theory in the long run, power will become cheaper as the non polluting options become cheaper.

  11. Paul Montgomery says:

    It’s not a moronic question. It’s a vital question, because it boils down all the rhetoric and faff down to what it means to the voter’s wallet, which is what decides most elections.

    The answer could have been even simpler:

    You can choose between two cakes: one at the same price as now, made using clean energy, and a dearer one made with polluting energy. Your other taxes will be lowered to compensate, though, so you will have more cash in your wallet to make your choice.

    This thread is starting to look like an episode of the Gruen Transfer. Suddenly we’re all advertising execs looking for the perfect pitch.

  12. conrad says:

    “On the other hand, the difference might be miniscule … In that case we’d miniscule would be what we want.”

    I guess this is why we need things well explained, although I must say that after seeing Abbott on TV, I can’t help but thinking of Keating vs. the GST and then John Howard and the GST — lots of noise for something that will have trivial effects on people’s lifestyles.

  13. Ken Parish says:

    Shorten comeback to Turnbull comeback as mentioned by Patrick at #7:

    Talking about having an election on a carbon price is a bit rich coming from Malcolm. After all it was Coalition policy too until he got rolled by Abbott. Even John Howard supported it belatedly after opposing Peter Costello’s plans to introduce one years ago. In fact even Tony Abbott supported a carbon price until he discovered there might be political points to be gained by misleading the Australian public and professing to oppose it.

    But leaving aside all the nasty inter-party squabbling, Australia just can’t afford to leave it another 3 years to even begin thinking about implementing a carbon pricing regime. Much of the rest of the world has already passed us by, and every month we waste will see us falling further behind and cost Australian businesses and the economy money and opportunities that we can ill afford to lose to take a world-leading position on clean energy technologies.

    Australian voters will be able to choose between the progressive, responsible approach of the Gillard government and the mindless, dishonest obstructionism of Tony Abbott at the next election in 3 years time. What Malcolm is REALLY worried about is that, just like after the GST was introduced, Australians will realise once a carbon tax is in place that all Tony Abbott’s propaganda about it is just misleading spin and lies. Of course Malcolm knows that already, but all his teeth-grinding and keeping his mouth (almost) shut will be wasted when his party ends up in opposition again after the Australian people realise the Coalition has been conning them about a carbon price.

  14. Fyodor says:

    But leaving aside all the nasty inter-party squabbling, Australia just can’t afford to leave it another 3 years to even begin thinking about implementing a carbon pricing regime. Much of the rest of the world has already passed us by, and every month we waste will see us falling further behind and cost Australian businesses and the economy money and opportunities that we can ill afford to lose to take a world-leading position on clean energy technologies.

    We like short shorts Shorter Shorten: we must close the pointless-tax-churning-gap!

  15. murph the surf. says:

    “Much of the rest of the world has already passed us by, and every month we waste will see us falling further behind and cost Australian businesses and the economy money and opportunities that we can ill afford to lose to take a world-leading position on clean energy technologies.”
    Do we have any realistic chance of taking a world leading position on clean energy technologies?
    Any references I can link to most welcome.Is this feel good boosterism or are we leading the world in some areas?
    Thanks.

  16. David Walker says:

    +1 for Dave’s suggestion (#4 above). I don’t know who Dave is, but Julia should hire him.

  17. Mack says:

    Isn’t the real answer “it depends on how much you earn” as a key principle of the carbon tax seems to be a redistribution of wealth from the top half to the bottom half once compensation, real income, etc. Is considered?

    What will be fascinating will be the disclosure of household income levels that will be eligible for compensation. Speculation in the press last week was for $120k to get nothing and the middle to get a sliding level as they get closer to the top figure.

    While I expect many to consider that fair, particularly on this blog, how it plays out in a electoral boundary perspective could be telling. For example, I would speculate that 25-35 year old DINK’s would have heavily voted labor (predominantly on social values) over the last 2 elections. They will have a good chance of falling in a band that will get limited or no compensation.

    Ultimately, there is still too much detail still not worked out for there to be much meaningful discussion yet

  18. conrad says:

    “Do we have any realistic chance of taking a world leading position on clean energy technologies?”

    We can at least produce people that will become leaders (or at least used to be able to) — Zhengrong Shi, who started Suntech, which I think is the biggest solar panel producer in the world now, did his PhD at UNSW in their solar centre, and then worked out how to make and produce them cheaply in China. Of course, the UNSW centre was one of the ones that got its funding cut to pay for the cash-for-clunkers scheme. That was lunacy in my books, so perhaps the answer is really “No” in 2011 given current attitudes (and it probably isn’t helped by the decline of engineering skills in Aus also).

  19. Dave says:

    Conrad @5,

    “if the difference is miniscule, then how will it change any behavior?”.

    The tax is not intended to stop people eating birthday cakes.

    Climate change is not being caused by people eating too many birthday cakes.

    James @6,

    “I’m trying to educate as well as reassure.”

    That is your mistake. Most people cannot concentrate on two things at once.

    David @16,

    Thanks.

  20. Victor Trumper says:

    Paul,

    It is a mornic question given there is NO price agreed on yet.

  21. Patrick says:

    Victor, you have a really really low threshold for moronic questions.

    By that standard we can probably only really ask questions about the past!

    Economics is certainly shot – I understand that they often consider the impact of changes in generic terms, rather than with actual prices, which sounds quite moronic now that you have explained it to me.

  22. Dave says:

    Patrick @21,

    Victor didn’t say “moronic”, he said “mornic”

    According to the Urban Dictionary:

    “A mornic is the biggest.

    ‘That skyscraper is easily the most mornic building around here'”.

    I’m not sure that taxation of birthday cakes quite deserves that description, but it is obviously important to Victor.

  23. Fyodor says:

    Climate change is not being caused by people eating too many birthday cakes.

    Are you sure about that, FELLA?

    Where is your EVIDENCE?

    /Bully-Boy Avocado of the Status Quo Ex-Post Antipasto

  24. Ken Parish says:

    Dave

    I hope you’re not putting shit on possibly the greatest Australian batsman besides Bradman. We should feel privileged that he’s returning from the dead to comment at troppo.

  25. Victor Trumper says:

    no-one can answer the question as yet because no-one knows what the actual tax wil be.

    It is a bit like the government agreeing to a GST but not yet agreeing on the rate.

    Thus only a moron would ask such a question

  26. Dave says:

    Ken @24,

    Well, since Trumper would now be 133 years old, I can see why he would be concerned about the tax on birthday cakes, particularly if (as suggested by Shorten) this will depend upon the number of candles.

  27. Dave says:

    Fyodor @ 23

    According to Wikipedia:

    “The birthday cake has been an integral part of the birthday celebrations in Western cultures since the middle of the 19th century.”

    From an empirical point of view, that does not seem to correlate with global warming, which (as I understand it) was only noticeable in the second half of the 20th century.

    Furthermore, I know of no scientific theory or hypothesis that would link birthday cakes to climate change, a priori.

  28. Victor Trumper says:

    I can’t hold a candle to that knowledge

  29. Fyodor says:

    According to Wikipedia:

    “The birthday cake has been an integral part of the birthday celebrations in Western cultures since the middle of the 19th century.”

    From an empirical point of view, that does not seem to correlate with global warming, which (as I understand it) was only noticeable in the second half of the 20th century.

    Yairs, Wikipedia – the source of all knowledge. Have at look at this chart, bud, and think again. Clear & present correlation. It was birthday cakes wot did it.

    Furthermore, I know of no scientific theory or hypothesis that would link birthday cakes to climate change, a priori.

    Of course YOU don’t. You’re part of the patisserie-industrial conspiracy. How long have you been working for Sara Lee? Stop shilling for your astrosmurf paymasters and consider the possibility of more than two competing hypotheses in parallel.

  30. Dave says:

    Fyodor,

    You are right. The evidence exists, but “Big Pastry” has been covering it up for years. You’ve busted this one wide open.

    I’m only a hired PR lacky. How I sleep at night, I just don’t know.

  31. Nabakov says:

    Yes It’s clear Bill’s answer could have used more shortening. Crumbs! I think this thread is flakey enough without me adding any more icing on top so I’ll leave you “Big Pastry” cheerleaders to have your cake and eat it too and see if that puts a damper on things.

  32. murph the surf. says:

    Sure , sure you all think this funny – just wait till they start in on the pies and sausage rolls.
    Is Australia a world leader in birthday cake technology?

  33. Ken Parish says:

    “Is Australia a world leader in birthday cake technology?”

    We will be once there’s a carbon tax. All those dynamic market forces unleashed to make lots of dough out of cakes with a low carbon footprint. I can hardly wait to get in for my (vanilla) slice of the action. I mean look at the lamington and the pavlova (it’s actually a kiwi creation, but they’re just Aussies who can’t pronounce their vowels). Not to mention cake-like bickies like Monte Carlos and Tim Tams. World leaders? My f***in’ oath we are!

  34. Nabakov says:

    So what you’re saying is that a carbon tax takes the biscuit?

  35. Dave says:

    Careful! Somebody is going to launch in with “half-baked” pretty soon.

  36. Fyodor says:

    We will be once there’s a carbon tax. All those dynamic market forces unleashed to make lots of dough out of cakes with a low carbon footprint. I can hardly wait to get in for my (vanilla) slice of the action. I mean look at the lamington and the pavlova (it’s actually a kiwi creation, but they’re just Aussies who can’t pronounce their vowels). Not to mention cake-like bickies like Monte Carlos and Tim Tams. World leaders? My f***in’ oath we are!

    Reality check time. I like a nicely chococonut-covered sponge as much as the next bloke…or perhaps a bit less if the next bloke is Graeme Bird…but you are baking up the wrong tree if you think Australia has a chance here.

    The pavlova and lamington are wonderful, truly they are, but they’re like the Ford Capri of baking – nobody else wants them. As for the Tim Tam, I’m sorry to have to break this to you, but the Tim Tam is a ripoff of the British Penguin.

    I defy you to match the excellence of the French croissant amandine or Portuguese pasteis de natas. And, no, chiko rolls for hangover-breakfast don’t count.

    The idea that burdening ourselves with extra tax is going to work industry wonders like some kind of Button Baking Plan is just a piped-icing-dream.

  37. Ken Parish says:

    Fyodor

    You surely realise that your last comment is deeply unAustralian. It really takes the cake. I hadn’t appreciated until now just how apt your pseudonym really is. After all your namesake was found guilty of treason and lined up against a wall to be shot, only to have his sentence commuted at the last moment and be sent to Siberia instead. I’m not at all sure you deserve the same indulgence.

  38. FDB says:

    waffle waffle waffle waffle waffle

    FFS, the man doesn’t even know how to make a cake.

  39. Labor Outsider says:

    In these debates, one also has to be careful about being misleading to support the case. For example, in pure economic terms in the short-run a carbon tax is a negative supply shock to the economy. Unless the additional revenue generated by the tax is used only for supply side boosting policies (and so boosts aggregate demand on through the effect on supply), in aggregate the imposition of the tax cannot lead to increase in national income unless there is aggregate over compensation. And if overcompensation occurs (in that it alters the balance of demand and supply in the economy so that there is excess demand relative to BAU) then there would almost certainly be a reaction by the RBA (who always moves last).

    The point I’m making is that the churning of the tax back to households is supposed to offset the income effect of the tax, but in this case the substitution effect through the change in relative prices (primarily because it makes some of the existing capital stock less productive and existing substitutes for carbon intensive goods and services are more expensive) will lower output and incomes relative to BAU. All modeling shows that.

    A government pushing a carbon tax through cannot and should not try and escape this basic logic.

    Instead, you have to admit it and justify it. The central case the government has to make is that climate change is real and costly and cannot be combatted without sacrificing something in the short to medium term. The government is introducing a price on carbon as the cheapest way for Australia to do its part in combatting a problem that if left unchecked will lead to bad future outcomes – not just for the environment, but for health and incomes. You then point out that although the imposition of the tax will lower real incomes for some people, the impact will be small.

    Liken combatting climate change to fighting a war (targeting the message at conservatives). It is a national security issue. In the same way as Australia contributes a small number of troops to foreign conflicts that threaten global security (I am not endorsing that view by the way) it must do the same with climate change, which is actually a far greater long-term menace than many wars we are involved in. Nobody pretends that a war can be fought at zero cost but that doesn’t mean that the sacrifice is not worth it.

    If the government cannot win the debate on these types of terms then it doesn’t deserve to carry the debate.

  40. conrad says:

    “but in this case the substitution effect through the change in relative prices (primarily because it makes some of the existing capital stock less productive and existing substitutes for carbon intensive goods and services are more expensive) will lower output and incomes relative to BAU. All modeling shows that. A government pushing a carbon tax through cannot and should not try and escape this basic logic.”

    I don’t want to encourage the silly puns more, but I think I’d rather clog my arteries from eating too much cream before trying to explain that to the public. You’ve also introduced the word “modeling” here, and as you probably know, many of the climate skeptics don’t believe anything that can’t be counted on their fingers, so the idea of modeling is surely out for them.

  41. Dave says:

    LO,

    There is no “free lunch” and I don’t think anybody expects there to be. But the lunch is a hell of a lot cheaper than the scare campaigns are making it out to be. I think that is the message to be getting out there.

  42. wizofaus says:

    How about just “Cakes baked in inefficient ovens using polluting power sources will be more expensive, and with the appropriate compensation, cakes baked in efficient ovens using clean power will be cheaper”. No floury language necessary.

  43. Labor Outsider says:

    Dave

    I agree. But I think Labor should admit that there is no free lunch but then explain how cheap the lunch is. Pretending that it is free or not wanting to discuss the price invites skepticism. Incurious and Unread on an LP thread suggested Labor publish a list of basic goods and services that dominate most household budgets with the price impact of a $20/t (or whatever they go with) carbon price. I reckon that is a great idea because it would demonstrate that outside of electricity itself, the percentage increase in the price of the almost items will rise by a tiny amount.

    Conrad, I wasn’t suggesting that be the actual language to the public (on substitution and income effects)!

  44. Dave says:

    LO,

    Yes, he has some good ideas that I&U.

    (Disclaimer: that is just me under a different Pseudonym)

    Because electricity is ever present, we over-estimate its economic significance. In fact, electricity generation (including fuel input) represents only around 1% of GDP.

    So a doubling of its cost (as a carbon price would do) does not have a huge impact on the economy as a whole.

  45. Labor Outsider says:

    Ahh…well that is confusing then :) I presume you are the same Dave that pops up regularly on Core Economics as well..

  46. Incurious and Unread (aka Dave) says:

    LO,

    Yes, that is me too sometimes, although there seem to be a few different Dave’s commenting there, and also here and at LP too, which is why I changed my handle over at LP.

    I should probably should try for a bit of consistency.

  47. murph the surf. says:

    A old figure (around 2001-2?) I read regarding energy costs as % of GDP in Hong Kong was approaching 15-16% .
    This figure included all energy costs and was part of a discussion about the unusual system HK has to reward power generators for capital expenditure in new stations.Basically it worked by rewarding them with more money for newer techniques and greater amounts of energy production.
    Transport use would seem to be a large component of the total energy consumption and it will also be affected by the proposed carbon price but will this be as easily explained and as palatable to the public as the relativley small increase in electricity prices?

  48. Fyodor says:

    I hadn’t appreciated until now just how apt your pseudonym really is.

    Oh, you have no idea.

    After all your namesake was found guilty of treason and lined up against a wall to be shot, only to have his sentence commuted at the last moment and be sent to Siberia instead. I’m not at all sure you deserve the same indulgence.

    Heh.

    “In 1849 a ranga smartarse was sent to prison by a Tsarist court for a crime he didn’t commit. This man promptly escaped from a maximum security stockade to the Ozblogistan underground. Today, still wanted by Graeme Bird, he survives as a stousher of fortune. If you have a stoush, a thread no one else can derail, and if you can find him, maybe you can hire the fecker F-bomb.”

  49. murph the surf. says:

    Just for the benefit of my previous question I would like to know the comparable figures for Australia.
    The question wasn’t very clearly communicated – I blame finding several 6 year old bottles of shiraz at the local bottle shop last night…..

  50. Victor Trumper says:

    well it depends on what Dave of the week it is obviously LO on who is exactly writing

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