Showing posts with label Local issues. Show all posts
Showing posts with label Local issues. Show all posts

Monday, August 29, 2011

Tobin tax for Australia?


But I see offhand no other way to prevent financial transactions disguised as trade

In 1972, after the collapse of the Bretton Woods system (where currencies where pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the conversion of currencies. As he says - 

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets. (here)

A 1978 article where Tobin reflects on global monetary reform is here, and well worth a read. The relevance to Australia in 2011 is quite clear when he says -

National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exhcanges, without real hardship and without significant sacrifice of the objective of national economic policy with respect to employment, output and inflation.

While Tobin originally suggested that all countries cooperate to implement a standard tax rate, with revenues raised pooled centrally, the idea is equally valid for a single currency-issuing nation to tax conversions of its own currency.

The logic behind the tax is quite sound. An influx of foreign funds only provides domestic benefits when it backs real investment in productive enterprise. And investing in a real business takes time. As Canadian economist Rodney Schmidt noted in 1994

In two-thirds of all the outright forward and [currency] swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year

A currency exchange tax reduces the gains from short term currency trades, and for a single country, allows them to reduce distortionary taxes elsewhere in the economy leading to productivity benefits. It also means there is a strong incentive for national savings to be invested locally, and a cost to banks seeking offshore funding to support their capital requirements. It also provides local governments some degree of control over their economy, rather than being at the mercy of global conditions. These are all good things.

Of course, like any tax, the risk is that governments simply spend this extra revenue unproductively and do not reduce distortionary taxes elsewhere in the economy, which greatly reduces its potential benefits.

In 2009 Brazil implemented a similar financial transaction tax regime that applies to foreign investment in stocks and fixed-income securities at a rate of 2%. And it seemed to work -

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

But only for a while. The chart below shows the Real regained its strength fairly quickly. 

(This is not to be confused with Brazil's former Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira, or CPMF, which was a transaction tax levied at 0.038% on all bank transactions from 1993 till the end of 2007) 

Of course the empirical macroeconomic problem arises once again here - would the Real have been even stronger if not for the tax? Who knows? My gut feeling is that because economic agents adapt very quickly to new taxes, their offsetting behaviour can greatly reduce the intended effect. 

Since that time, the global battle to devalue domestic currency has resulted in many calls to implement Tobin taxes, from the British Prime Minister to the French President, with all political leaders seeking input from the IMF. The IMF is now coming around to the idea (recently releasing this working paper), and with DSK's likely replacement Christine Lagarde being a fan (here), chances have improved that this tax will be supported globally.

There is even strong support from the economics profession, with1000 economists writing a letter in support of the idea earlier this year. A good summary of the breadth of support (and not) for such a tax is here. Even economists at the Australian Treasury are talking about it. 

The cynic in me says that such a tax is unlikely because those who benefit from fast and cheap currency exchange are those with the most money, while those who bear the burden of a high domestic currency are usually the workers in marginally competitive industries.

For Australia I see only upsides to this tax. A lower Australian dollar and reduced foreign investment will help to slowly rebalance our economy to become more diversified and stable again. While the Henry Tax Review overlooked this type of tax, at least we have a backdrop of tax reform to accompany a Tobin tax.

The outcome of this political battle with the global financial elite is anyone's guess.

Wednesday, August 24, 2011

Gay marriage - questions


The gay marriage debate is extremely interesting. I have a few issues that never seem to be resolved, and are often bypassed in discussion on the matter.

1. Marriage is a religious institution essentially designed to encourage conformity to a norm of one sexual partner, and for specialisation of labour in raising children. Why do so many gay people want to acknowledge this ancient religious anti-gay institution at all? In Australia there are almost no external benefits (in the form of tax treatment, visas, welfare etc) for marriage over de facto relationships. Why not just promise each other you'll be faithful till death do you part? In fact, why do straight people continue to be married (I am, and have my reasons, but I'll keep them for another time).

2. If people want 'marriage equality' why can't I marry my sister? Or my mother? Surely to be equal ALL marriage between consenting adults must be allowed? After all, the main social problems of genetic abnormalities from inbreeding can be solved by IVF - the same way gay couples are having children. In fact, two gay men who happen to be brothers should also be able to marry, no? It is love between two adults, so what's wrong with it? I can't believe anyone could argue for gay marriage and not for sibling marriage, especially between gay siblings, since the arguments are all the same.

3. Any study showing the 'superior' outcomes of children from gay couples (of which there are a few - here's a starting point for some academic research) must control for incomes and other social factors. I have a hard time believing that the 'gay couples with children' sample of society has a similar income distribution to 'heterosexual couples with children' and we know this is a huge factor in child development.

4. Is the desire to have children not in any way related to the desire to mate with the opposite sex? I would have thought that the two are somehow related, which makes me feel like there is more of a 'conforming to social identity' issue at play over the desire to be a progressive gay couple with children.

5. Are children raised by gay parents more or less likely to be gay themselves? It seems intuitive that they would be far more likely, both because one parent would be a biological parent, and the nurturing and exposure to 'gay' behaviour. Is this good or bad? Are children really getting a choice? Will marriage legitimise being gay as normal? Is that a problem?

6. Should gay couples be allowed to adopt children? Why not? Should IVF treatment for lesbian couples be subsidised by Medicare? Surely not.  It isn't a medical condition. If they want to pay the full cost for privately provided IVF from a voluntary donor, so be it.  If they want to meet a guy at a bar and do it the old-fashioned way, that is fine too.  But what about gay male couples? What about married gay brothers? Will recognition of marriage be a stepping stone to more subsidies for gay families?

7. What legal rights exist for the biological parent of the child who is not part of the 'parent couple'? If the relationship breaks down, will the courts decide in favour of the biological gay parent, or the surrogate biological parent?  Will marriage affect this decision?

8. If two children from gay family each have one of the parents as biological, and the other parent a different surrogate (so they are not 'blood relations'), can they be married?  What about if these two children are gay?

In any case, I always wonder why people don't just say why they feel gay marriage is unacceptable instead of beating around the bush about 'equality'. And those who so strongly support gay marriage should think about the flow-on implications to the role of government, the courts, the rights of parents and health care.

If you can't tell, I see no good reasons in favour of gay marriage, and plenty of unresolved issues surrounding rights of married gay couples, particularly regarding children.  Of course, I have no problem with two adults choosing to have a relationship with each other, regardless of their gender.

Sunday, August 14, 2011

Recycling Jevons Paradox



I have previously argued (here, here and here) that cost effective recycling actually leads to an increase in the demand for the resource being recycled. This is the opposite of what most environmentalists, and even most economists, believe.

What I probably didn't explain is that not only can recycling increase the demand for the resource being recycled, but it can also increase demand for all other natural resources used in the economy. Yes, a new technology that makes recycling car tyres cheaper than manufacturing new car tyres would increase our demand for tyres (because they are cheaper) and for other resources, like oil. The reason is simple. Automotive transport just became slightly cheaper due to the recycling technology, and the response to this price reduction, however slight, is to increase the demand for automotive transport and all the other resources required to provide it.

This result usually seems counter intuitive at first. But we all accept that improving labour productivity does not decrease the demand for labour. And we all accept that improving agricultural productivity leads to an increase in land under cultivation, due to marginal lands becoming economically viable. So why not recycling? After all, if recycling is cost effective, isn't it also an example of improving the productivity of the material?

At the risk of being painfully repetitive (this is my fourth post on the matter), I will use the 'recycling of labour' as an example.

Suppose there is a task that takes two labourers a month to complete. Given the nature of the task, suitable labour can be found at $1000 per month per man. Now, a new technology allows us to 'recycle' the first mans labour at a cost of $500 per month. Given this is half the cost of employing a second man, recycling is an obvious profitable choice to get the work of two men achieved in a month with only one man. This new technology might comprise new equipment (power tools etc.), or simply the investment in teaching the man new skills.

In any case, one man is achieving two men’s' work for less cost. If I changed the terms a little it is clear how this is actually an example of 'labour recycling'. "Two bottles of cola can be provided with one bottle for less cost" would be a simple summary of the net effect of plastic bottle recycling.

But we know from centuries of experience that recycling labour increases demand for it. And we know that it leads to productivity gains elsewhere in the economy, since you can't improve economic productivity in isolation of the rest of the economy. As Len Brookes once elegantly noted, the 'principle of the indivisibility of economic productivity' means that any technology that improves the productivity (aka efficiency) of one resource, improves the productivity of ALL resources in the economy.

This post was partly inspired by one of Don Boudreaux's blog posts (originally published here). In it he describes recycling more broadly -
After I awaken, I shower and dry myself with a towel that I’ve had for a few years. I don’t discard it after one use. When it gets dirty, I rejuvenate it by processing it through recycling machines that my wife and I own: a washing machine and clothes dryer.
Then I brew coffee and fix breakfast. Each day, I use the same coffee maker that I used the day before. I clean it after each use, recycling it for the next brew. My wife and I drink the coffee from mugs that have been used many times in the past. (One set of our coffee mugs was handed down to us after my wife’s parents used them for several years.)
We also eat our breakfasts using dishes and utensils that are recycled from countless past uses. After breakfast, we recycle our mugs, dishes, and utensils with the help of another recycling machine: an automatic dishwasher.
After breakfast, I dress in clothes that I’ve worn before and that I will wear again. My underwear, my pants, my shirt, my necktie, my belt, my coat, my shoes – all are recycled from previous uses. Indeed, I take my suits and coats to a store specializing in recycling such garments: my local dry-cleaner.
And from a later post -
When materials are worth recycling, markets for their reuse naturally arise. For materials with no natural markets for their reuse, the benefits of recycling are less than its costs – and, therefore, government efforts to promote such recycling waste resources
His use of the term waste in the final sentence is misleading. He means that no consumers will gain from government efforts to promote costly recycling, therefore the resources utilised in recycling are wasted, as they could have been employed elsewhere to better satisfy consumers. However, from a macro viewpoint, it is this very cost-ineffective recycling that reduces economy wide productivity (aka efficiency) and resource demand.

That is the key lesson here. If an activity in uneconomic, it decreases our total level of economic activity and our total demand for resources. If it is economically justifiable, it increases our demand for natural resources. Indeed, if we are concerned about the externalities associated with using our natural resources we need to restrict the supply of these resources at the source - restrict sand mining locations, reduce allowable mining rights to coal etc. Trying to achieve these environmental outcomes by the most indirect route possible, through the consumer and far upstream production processes, is completely misguided.

Wednesday, June 1, 2011

Queensland’s Strategic Cropping Land


I have been critical about the farming lobby’s reaction to the Murray-Darling Basin Plan, and I have also been very critical about the value of food security, especially when used as a justification for agricultural subsidies.

My general belief is that farmers should be treated like any other business and face risks from their investment decisions.  Because this belief I strongly support Queensland’s new Strategic Cropping Land Policy

The policy under development gives farmers a chance to opt out of mining and gas production on their land. Currently land owners must allow mineral and gas exploration and development on their land. The mining industry has legislative power behind it to explore for, and mine, the States mineral resources (have a look at your title deed and you will note that even freehold land owners don’t own the minerals under their land).

This means that miners do not need to buy any property rights from existing land owners to conduct activities on privately owned land. They do however need to provide some compensation for disruption to activities (as prescribed under the relevant acts).

In the greatest of ironies, agricultural policies in this country have protected farmers from their own business decisions (eg. subsidising water supplies, making drought and flood payments - I argue these events are part of the natural weather cycle and should be anticipated), yet have not protected farmers from external threats to from mining.

It took a while for the food security lobby to realise that the food production of the country rests in the land, soil and water, not in the individual businesses of farmers. If a farm business fails, the productive capacity remains for the next buyer of the property. But if land, soil and water is irreversibly damaged, then potential food production capacity is destroyed.

With these bizarre policies in place it is possible to have the situation where a farmer is receiving drought relief payments on the one hand to save his business, while the government is supporting the demise of his ability to farm on the other hand by allowing coal seam gas wells to be peppered across his fields.

In the Darling Downs the preservation of the water quality in underground aquifers is especially important. These aquifers are a significant source of water for agriculture and there is a reasonable probability that drilling through this aquifer many thousands of times to reach the deeper coal seam will contaminate the water. And unlike a river system which flushes water readily, underground aquifers may take hundreds of years to recover (or water users will need to treat the now contaminated water before applying to crops).

The irreversibility of mining and coal seam gas impacts is one of the key reasons that farmers should be given some ability to opt out of such activities on (or even near in some cases) their land.

The outcomes from this type of policy should satisfy a broad range of interests.

1. Land use conflicts are more easily resolved by given some powers back to existing land owners.

2. By protecting the land itself those who want food security and local food produce benefit.

3. Those who want ‘agricultural open space’ benefit (people actually like knowing there are farming communities and driving through the country).

4. Farmers who want to be free to run their own business, protected from irreversible land damage benefit.

5. Those who want mining can do so if the impacts on surrounding land owners are sufficiently low.

Of course there will be problems to overcome during implementation, but in principle the policy appears sound. An indeed, the minerals and gas remain in the ground should future circumstances require their extraction.

Tuesday, May 31, 2011

The telco confusopoly

The one frustration that started me blogging more than three years ago was the confusing pricing practices of phone and internet service providers. It was quite obvious to me that their 'plans' where meant to be confusing to ensure the consumer could not easily identify the cheapest provider. Today, the Australian Communications and Media Authority (ACMA) has released a report that recommends improving price information for telecommunications contracts to avoid a 'confusopoly' (here).  Amongst other things -

The authority also wants to prohibit what it says are misleading advertising practices, such as the use of the term "cap" on mobile and broadband plans.

"It's not a cap, it's not a maximum, it's a minimum," Mr Chapman said

"We want to prohibit that unless its a genuine hard cap, so that if you exceed your limit the service ends or you get the opportunity to upgrade." (here)

Most recently I have been comparing mobile phone plans. Some of the cheap plans don't allow you to call 13, 1300 and 1800 numbers under the cap, and they all have different call rates, flag fall and penalties for exceeding cap limits. To actually compare providers you need to know your calling needs in advance and have the mathematical skills to run this call profile, and other scenarios, through a model of each available phone plan. Insanity.

As I previously wrote -

By consciously manipulating these two criteria of a free market [low barriers to entry and perfect, or at least good, information], all firms in the market are able to avoid a state of true competition that would produce the most efficient allocation of services, and are able to artificially inflate the value of the commodity, hence producing more profit for each firm in the market.

This is not meant to sound like a conspiracy, because indeed each firm does not need to meet in back rooms with the other firms in the market and all agree to limit customer information and the comparability of their products. They each simply need to aspire to the great marketing ideal of product differentiation, a concept that is fundamentally designed to artificially eliminate direct competition by removing direct comparability.
...


The power of product differentiation, through its ability to remove comparability and create an information gap to distort what could be a perfectly competitive market, can be demonstrated by the case of the term life insurance market in the US in the late 1990s. There was a mysterious and dramatic drop in prices across all firms that did not correlate to price drops in other forms of insurance, which themselves where steadily rising.

According to economist Steven D. Levitt, this can be attributed to the realisation of a perfect market through the power of the internet. Although term life insurance policies had been quite homogeneous before this period of time, the process of shopping around for the cheapest price had been convoluted and time consuming, whereas websites such as Quotesmith.com suddenly made the process almost instantaneous.

In just a few years, the value of the term life insurance market in the US had dropped by USD$1bilion because of the new found ease of comparability. What insurance firm would want this to happen? Even if you were a small player in the market, say a 1% market share, your turnover had just dropped by $10million. It is perhaps one of the great recent examples of the power of perfect competition in allocating resources efficiently, yet possibly one of the greatest blunders by the insurance industry.

I believe that the power of private enterprise is its innovative response to the financial risks it incurs, but with very simple regulation the innovative confusopoly, which comes at a cost to cosumers, can easily be avoided.  Indeed, most of the pushback against the telco confusopoly is from webpages which keep up-to-date tabs on plans from each service provider and enable you to take some rough guesses about future use and compare the cost effectiveness of each offering (eg here)

Tuesday, April 26, 2011

Milk wars and Anti-Dumping

While there are many questionable assumptions in some economic theories, there are also many solid foundations to economic analysis. One of these was identified by Coles in its submission to the Senate inquiry into milk pricing (available in the Coles factsheet here).

The farm gate price dairy farmers receive is set by the world price because most Australian milk products are exported.


The first implication of this fact is that because prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.

By following this logic Coles, or any other domestic dairy retailer, cannot exhibit bargaining power as a buyer from milk processors (or distributors). Dairy processors would simply sell all their products abroad, whereas the only alternative for retailers is to buy imported dairy products with associated freight costs.  Processors can then bargain the price up to the price of the retailers next best alternative of imported products. Thus, even though we are net exporters of dairy products we still pay a retail price for domestic dairy products very close to the retail price for imported dairy products.

And to provide further evidence against dairy industry claims, even if Coles did have market power, one must question why Coles would not already be getting milk for the lowest price anyone would be willing to produce for?

The sceptic in me might even go so far as to suggest that upsetting the political milk cart might have been a publicity strategy for Coles itself. News outlets have told the public that Coles is aggressively dropping prices for months now – all free of charge. You really can't buy publicity like that.

Of even greater concern than the media beat-up, and public perception of danger from falling milk prices, is that the law entrenches protection of local industries from international competitors through anti-dumping laws. As the Productivity Commission describes

Tuesday, April 12, 2011

Risk homeostasis, Munich Taxi-cabs and the Nanny State


There is an odd coexistence between two conflicting safety policies that may well be pursued by the same accident prevention agency. The first seeks to improve safety by alleviating the consequences of risky behaviour. It may take the form of seat belt installation and wearing, airbags, crashworthy vehicle design, or forgiving roads (collapsible lamp posts and barriers). This policy offers forgiveness for a moment of inattention or carelessness. The second policy seeks to improve safety by making the consequences of imprudent behaviour more severe and includes things such as speed bumps, narrow street passages, and fines for violations. Here, people are threatened into adopting a safe behaviour; a moment of inattention or carelessness may have a dire outcome. 

While these two policies seem logically contradictory, neither is likely to reduce the injury rate, because people adapt their behaviour to changes in environmental conditions. Both theory and data indicate that safety and lifestyle dependent health is unlikely to improve unless the amount of risk people are willing to take is reduced. (here - my emphasis) 

The above passage points out a common logical absurdity, and contains an important lesson for Australian’s with and overeager obsession of controlling personal choices through ‘nanny state’ regulations. More on the nanny state a little later. 

First, it is important to examine the hypothesis of risk homeostasis to properly understand the implication of the opening quote, since it claims that neither of the two contradictory policies aimed towards improving safety are effective. 

The essential argument of risk homeostasis is that humans have an inbuilt level or risk that they gravitate towards in response to their external environment. If we reduce the risk of an activity, people will compensate by finding other risky activities as a replacement, or undertaking the activity in a more extreme manner. For example, if we ban smoking tobacco, which doesn’t seem like such a remote possibility, do we really expect smokers to replace their habit with fruit snacks and yoga? Or might they compensate by increasing their alcohol consumption or perhaps smoking dope instead. 

Risk homeostasis is not to be confused with risk compensation, which suggests that individuals will behave less cautiously in situations where they feel "safer" or more protected, but that we don’t necessary return to a predetermined risk equilibrium point. 

Improving transport safety is an area where there is strong evidence risk compensation, and indeed of risk homeostasis. 

Tuesday, November 30, 2010

GDP only positive because of rain drenched agriculture

Today’s National Accounts figures were not a huge surprise - except, of course, to many of the mainstream economic commentators, some of whom continue to demonstrate their undying faith by stating that the decline is nothing to worry about.

Neither are the downward revisions to the June quarter figures worth a second look.  The June quarter growth trend down was revised down from 0.9% to 0.7%, and seasonally adjusted down from 1.2% to 1.1%.

And possibly my favourite lines from the ABS release
In seasonally adjusted terms, Agriculture (up 21.5%) contributed 0.4 percentage points to GDP growth driven largely by strong forecasts for grain crops... GDP increased 0.2% in the September quarter, while non-farm GDP fell 0.2%

If it wasn’t for the surge in agriculture driven by last season’s strong rains, GDP growth for the quarter would have been negative, and for the year, just 2.3%.

Perhaps it is time to revisit some forecasts by our favourite economists back in September.

Peter Jolly, NAB - Our year ended GDP forecast has lifted to 3¼% from a little under 3%
Christopher Joye, Rismark - The economy is about to embark on a period of above-trend growth
Warren Hogan, ANZ - Hogan believes we are about to see a period of serious inflationary pressures thanks to the commodities boom's income wave
Michael Blythe, CBA - reckons the income surge will add 3 or 4 per cent to GDP over the next couple of years.

Yet the serious inflationary pressures and above trend growth seem to be a little hard to come by at the moment.

At least I can give myself a plug.  Heck, isn’t that what economists do?  My prediction from early September - Inflation and GDP will surprise on the low side in the September quarter.

Steve Kates explains much better how the data early in the year was deceptive due to the dramatic impact of fiscal stimulus, and that the private sector recovery is yet to appear. 

Monday, November 22, 2010

Prison, parenting, selection bias, and measuring success



In both parenting and the legal system one must carefully consider the role of punishment.  Recently, the discussion surrounding imprisonment has become focussed on rehabilitation, using recidivism rates inappropriately as a statistical measuring stick of success.  This seems to be the product of confusing success in parenting with success in crime prevention.

Wednesday, November 10, 2010

Sin tax myths – why smokers reduce health costs

Smokers have been the target of Australia's latest sin tax. Meanwhile, debate continues over using sin taxes to reduce consumption of 'unhealthy' foods such as soft drinks and confectionary.

(The word unhealthy is used quite loosely due to the fact that there is sufficient uncertainty about health – Are eggs good or bad these days? Margarine? – and because it is typically not the food itself, but the quantity consumed of a single food that is unhealthy.  Almost any food item consumed in excess will be unhealthy).

The primary arguments in favour of sin taxes are that
1.      the taxes reduce ‘harmful’ or ‘unhealthy’ consumption, and
2.      the taxes raised offset likely health costs such behaviours incur on others.

Unfortunately neither argument is compelling.

Tuesday, November 9, 2010

Public and Private schools – evidence from economics?


As an Australian parent in 2010, the public versus private school debate is hard to avoid.  In a society where private schooling is becoming the norm, yet literacy and numeracy skills are stagnating, how does one objectively analyse the costs and benefits of school choice?

First, let me say that school choie is just one factor determining vocational, personal and emotional skills during adolescence.  Genetics, parenting, the home environment, peer groups, sports and other club activities, amongst many factors, all contribute to shaping young minds. 

Additionally, the composition of students at the school plays a strong role in determining academic outcomes.  Many private schools for example, offer academic scholarships.  If those students had instead attended the local public school, any difference in average academic results may be greatly reduced.

How then does one separate the impact of school choice from these other factors?

Without the opportunity to conduct controlled studies, for example, by studying twins who attend different schools while holding all else constant, the best analysis of the measureable benefits of private schooling would be a statistical test of various measures of ‘success’, controlling for external factors such as parental intelligence and education, household income and location, and child’s intelligence prior to arrival at the school.

Unfortunately, in this debate one of the most overlooked considerations is what measure of 'success' would potentially make private schools ‘better’ than public schools. Is it simply a matter of final grades and tertiary entrance scores, or do parents (and children) value a broader measure of success? Does a public school with more diverse student cultural backgrounds give a better social experience, or does a private school offer more valuable professional connections?

The results of any statistical study will necessarily be narrowly defined to reflect the impact of school choice on a single measure (such as academic test scores), ignoring social benefits and opportunities for extracurricular achievement. 

So what do economists and social scientists have to say?

Monday, October 18, 2010

Counterintuitive findings?

Pool fences
Could Queensland’s new tougher pool fence laws offer an opportunity to study the Peltzman Effect? Will we now feel that pools are no longer a safety hazard for toddlers and drop our supervisory guard? One man, who refuses to comply with the laws, has argued this exact point and is strongly supported in his views (if you can trust the newspaper comments).

In one case, a pool owner living on a canal has had to fence their pool, yet is not obliged to fence off access to the canal.  One does wonder about how far governments can go to protect us from our own behaviour.

Pool fences are only there to protect kids from parents who don't. There are no fences around all the lakes in Brisbane, Southbank's lagoons are not fenced, the Brisbane River is not fenced. Why? Because we are responsible enough to ensure our children don't get into danger in these areas.

What further astounds me is that lack of evidence in the pool fence debate. In one of the more interesting studies I could find, 52% of pools where toddler drowning events had occurred in Western Australia where compliant with the pool fence legislation (compared to 40% for randomly selected pools).  There was no further discussion of this key point – that statistically it appears more likely to drown in a fenced pool that an unfenced one (I would be very interested if anyone can find a more thorough study of the effectiveness of pool fence laws).

While this is just a small sample from one State, and I would question whether general conclusions can be drawn, some more rigorous examination of the effectiveness of pool fence laws is seems appropriate before toughening the laws.  Is the government really going to do the same thing and expect different results?

Cycling by the road rules
The Council is inviting CityCycle subscribers to undertake a Cycling Confidence Course to improve their bicycle skills and brush up on their knowledge of road rules.

Maybe that's a bad idea. Recent research suggests that people obeying road rules are more likely to be killed by trucks than those who disobey the rules by, for example, running red lights. 

Women may be overrepresented in [collisions with goods vehicles] because they are less likely than men to disobey red lights.

By jumping red lights, men are less likely to be caught in a lorry driver’s blind spot. Cyclists may wait at the lights just in front of a lorry, not realising that they are difficult to see.

In more than half the fatal crashes, the lorry was turning left. Cyclists may be deceived by a lorry swinging out to the right to give itself room to make a left turn.

I can’t agree more with these findings.  Every day I see cyclists waiting in the blindspot of a car or truck at traffic lights, and occasionally see a cyclist sneak up the left side of a bus while it is turning left.  I hope Brisbane City Council’s cycling confidence course acknowledges that sometimes it is safer to break the rules.

Congestion (queuing) as an efficient allocation mechanism
I have raised the idea in the past that road congestion is in fact an efficient allocation mechanism provided that there is prior knowledge of expected travel times.  Now, from The Australian we have this:

Sure, if we invested enough in roads, all cars could travel at the speed limit. But the costs of thus expanding road capacity would greatly outweigh the value motorists place on the savings in time and discomfort.

Exactly the same applies to road charging. With charges set sufficiently high, remaining drivers could go at speeds rivalling the Melbourne grand prix. But even Mrs Moneybags, rocketing in her Ferrari, would not value the benefits enough to offset the welfare loss to the peons forced by the high charges to walk to work. Add to their loss the costs of implementing the road charging scheme and the efficiency loss is all the greater.

Wednesday, October 6, 2010

Effective marginal tax rates and Australia’s welfare trap

Australia’s complicated social security system often leaves me baffled. There are so many forms of assistance for families, with rates of benefit and qualifying incomes changing annually, your entitlement (if any) is sometimes a lucky draw.

What I have noticed is the rate at which these benefits decline as the family income increases. So much so that I instinctively feel that earning a few extra dollars is generally not worth the trouble - unless of course my income was already high enough to be out of the qualifying range for family welfare benefits.

So I took the time to examine situation for Australian families, and it is quite revealing.

This recent paper, for example, shows that the effective marginal tax rate (EMTR), which estimates the change in take home income after tax and after accounting for reduced welfare payments, actually declines at higher income levels for almost every family type (see table below). High income families receive a greater percentage of an extra dollar earned than low income families, with middle income families suffering very high EMTRs.


For example, an extra dollar earned by a parent in a family with two dependent children and an income in the middle tax bracket will leave them with an extra 28c in the pocket, while for a high income family, they keep 67c out of any extra dollar.

There are even situations in Australia where the EMTR is greater than 100%! Low income families with dependents on youth allowance have an EMTR of around 110% - for every extra dollar earned, they get 10c less in their pockets.

Unfortunately, I fall into the group with the highest EMTR – families with dependents – where 15% of the group have EMTRs above 70%.

...families with children are more likely to face an EMTR of 50 to 70 per cent than other types of households, due to the accumulation of withdrawal rates for family related payments on top of income support withdrawal and income tax. This is observed even without including the withdrawal of childcare subsidies. On average, the EMTR is highest for couples with dependent children. (here)

After a quick bit of research, it appears that if I earn another dollar we lose 20c from family tax benefits, about 18c in the dollar from child care benefits, and 30c in tax – a 68% EMTR. If my wife earns an extra dollar we lose 40c in Family tax benefits (Part A and B combined), 18c of child care subsidies, and 15c in tax – a 73% EMTR.

In light of this outrageous situation, cutting down to part-time work (4 days/week) provides an extra 48days of leisure per year at a minimal cost to the family.

Also, if we factor in the extra expenses incurred due to extra work hours and time pressure – takeaway meals, remaining child care costs, driving instead of cycling, and splurging on treats because you deserve a reward at the end of a busy day, you quickly see the rational for staying in the welfare trap.

All this makes me wonder just how many families are trapped in high EMTR bands – all earning different incomes, but taking home much the same income ‘in the hand’.

Monday, October 4, 2010

Statistics lessons for property people

I have previously posted about the Property Council of Australia’s cowboy approach to statistics to argue for pro-sprawl planning policies on environmental grounds. Now Brian Stewart, CEO of the Urban Development Institute of Australia (UDIA) Queensland, needs a lesson in statistics.

In a recent bulletin to members he criticised the Local Government Association of Queensland’s interpretation of a report they commissioned on factors affecting home prices in South East Queensland.

He questions the conclusion that the AEC report commissioned by LGAQ refutes ‘for all time the spurious arguments of a so-called under-supply of dwellings in the SEQ market’. If he had paid attention in statistics it would be clear to him that this is exactly what the report does.

Although the report is far from an exemplary analysis of key determinants of residential property prices, the authors did estimate six econometric models to seek the determinants of real median house, unit and land prices in SEQ - eighteen models in total. If we quickly browse the report we find just one model, for house prices, not unit or land prices, where any of their supply-side variables is significant in explain real prices.

To be sure, Stewart’s interpretation of the report was poor, and his bulletin misleading, but I still have reservations about the report itself.

Particularly I have concerns about the choice of, and construction of, variables, including location bias in calculating the median prices and using ratios to total stock rather than sales volumes (particularly in the treatment of the FHOG). It seems odd that with 69 data points and 32 variables at hand they had trouble finding significant relationships in the data – could it be their selection was stacked with the wrong variables to explain prices?

One example of the construction of variable is ‘SEQ housing stock per capita’, which is total stock for SEQ at the beginning of the period at the beginning of the analysis (1991) of 734,126, less an allowance for depreciation (about 0.3%), plus new stock completed IN QUEENSLAND in the period. This variable then accumulates over time to represent the stock of housing.

I first hope that the new stock only includes new stock in the SEQ region and that this is a typo. Second, I can’t see how depreciating a dwelling is good accounting. What should be considered is a factor for demolitions, and it would be easy enough to estimate the demolition to new dwelling ratio based on past census data.

These types of errors abound.

Most importantly I wonder how this controversial variable could be negatively correlated with prices. In the section on housing stock (p13) it shows that dwelling stock per 100 people grew from 38.1 to 41.1 from 1991 to 2006, while real prices grew from around $100,000 to $250,000 in this period (below). Either a) the three other significant variables, the All Ordinaries, unemployment and mortgage rates, explained the most of the change, or b) the variable used in the analysis is the CHANGE IN dwelling stock per person, which was positive but declining over the period.

What is further surprising is the conclusion that the SEQ property market somehow behaves differently to other parts of the country. Given that the analysis failed to explain the behaviour of the SEQ residential property market at all (their final land price model on page 29 had seven variables but just two were significant), one wonders how such conclusions are drawn. I am happy for someone to explain why it is different here (cringe) if they have the evidence to support the statement.

Anyone looking to elastify the supply side should note the report concludes by noting how responsive supply has in fact been to prices:

...the lot stock for SEQ rose from 25,000 during the early part of the decade to reach 50,000 by December 2005 and has stabilised around 54,000 since September 2007. This progression follows the growth in land prices very closely, indicating that supply of undeveloped residential lots has responded to price signals.

Thursday, September 30, 2010

Common sense and the CityCycle launch


I am pretty sure no one in Brisbane has ever said they do not ride for want of a bicycle. Nevertheless, Campbell Newman has spent $10million of ratepayers money on hire bikes to solve this none existent problem.  

I could be argumentative and say that if access to bikes was a problem, you could have bought 20,000 of them for Brisbane residents for that price (at $500 each – 33,000 at $300 each). 

After a dramatic week repairing bike stations that were installed backwards, today, Brisbane’s CityCyle scheme was launched, with 500 bikes at 50 stations across the inner city.  To my surprise there were actually some people waiting to use the scheme today.

There are few optimists left in discussion of bike hire schemes in Australia. Melbourne’s scheme, for example, is not quite off to a roaring start – 0.5% utilisation or 70 trips per day after three months.  I could repeat myself and highlight that the success of this scheme depends on its convenience to users.  Helmet laws and lack of road space are key impediments to convenience. Indeed, I proposed that a car hire scheme would be a better way to encourage cycling.

Brisbane is trying to overcome the helmet problem by giving away 2000 of them, but Council admits the helmet requirement shrinks the potential user base.  Tourists are apparently they are not a target market for the scheme. 

Tuesday, September 21, 2010

Gaming leads to unintended consequences when governments try to stimulate housing supply

Australia’s excessively priced housing gave rise to the housing shortage myth, which in turn led governments at all levels amending planning policies to allow for greater scale of development. Densification, transit-oriented development, growth corridors and other buzz words, were drip fed by property lobby groups to politicians in search of an elixir for the ailing mortgage belt voter. The media, and by extension the public, bought into this supply-side ‘solution’ to housing affordability. Very few realised the irony of the situation – a policy on housing affordability that was a gift to existing property owners and ‘land banking’ developers.

The aggressiveness of changes to planning instruments to allow for greater heights and densities, and allow fringe areas into the urban footprint, provided opportunities to profit simply from speculation on the next change to the planning scheme. For landowners it became more profitable to wait three years for the local government to update the planning scheme to allow greater density of development, than to actually develop the site.

One example, South Brisbane, epitomises this situation.
At this prime location, within a stone's throw of the CBD, the previous limits of 12 and eight storeys were already conservative. 
The planning scheme for this precinct has changed from allowing four storeys, to seven storeys, then proposing eight storeys, then twelve storeys in the latest draft plan, and now the UDIA is calling to increase the heights much further. With the approval of a 30-storey tower adjacent to Milton railway station, one could assume there is a long way to go in this saga.

Expectations were for this pattern to continue. A landholder in this area recently mentioned they have no reason to sell or develop when the council keeps increasing the value of their land by changing the planning scheme. Landholders are gaming the Council, waiting for a signal that the gifts will soon expire before selling up to developers.

Maybe that signal is here.

The State government has intervened in the latest round of planning scheme changes to request the proposed height limits be cut back – where 12 storeys was proposed, they will allow seven.

For anyone aware of the standoff taking place the flood of development sites onto the market in the month since the State government decision would come as no surprise. Who would have thought reducing height limits would promote so much development activity?

The moral of this story is that certainty (or lack thereof) can greatly change real outcomes. Economists often foolishly assume that all government decisions are taken at face value by the marketplace. Few realise the time element and that parties affected will already be anticipating the next decision, or gambling on a political backflip.

UPDATE: More evidence of rewarding land banking rather than productive land use, from the Local Government Association of Queensland -

The LGAQ today criticised a key provision of legislation introduced to state parliament on Tuesday which retained a 40 per cent rate subsidy for large companies holding big tracts of land approved for development but not yet formally subdivided.
The money at stake is not the issue here. The issue is the massive contradiction of rewarding developers for not sub-dividing land to increase supply when the state government says it is championing housing affordability issues

Wednesday, January 13, 2010

The land tax remedy

I have made  my point about the social benefits of land taxes clearly in the past.  I want to now direct the interested reader elsewhere for some informative discussion.

Here is an excellent article discussing land taxes and land price bubbles in an Australian context.  More from the same author here, and a plug for his personal blog here (take note of the CPI discussion - I want to discuss that in more detail in the future).

For those who want to digest some of the classic writings on the issue, see Progress and Poverty by Henry George (written in 1879).

Unfortunately there is a powerful political lobby working against such beneficial tax reform.  The Property Council of Australia has been pushing for reductions in land taxes, citing any increase in tax revenue from this source as a national embarrassment.  Of course, the large increase observed in Queensland (below) is partly due to the extremely low land tax base in 2007/08.  Not mention of the scale of the tax, just the increase.  Queensland's land tax revenue was just a third of the land tax revenue of NSW in 2007/08.



A little off topic now, but over drinks on the weekend I was talking to a Dutch friend of mine who also happens to be an economist.  He is thinking of moving to Australia but is very hesitant due to the exorbitant cost of living here compared to incomes.  He recently bought a new apartment in a the 'happening' part of town, and his total costs per month (including loan repayments, body corporate, rates, and his insurance for the home, car and motorbike which are a package) are 800Euro ($1300AUD). That's only $300AUD per week for all those expenses combined! That is below the median rental rate for a 2 bedroom apartment in Brisbane (including new and old stock).

There are a number of reasons for this.  In Holland, interest on loans for owner occupied dwellings is tax deductible.  The interest rate itself is just 4%.

So if the Dutch average household income is slightly higher than Australia's, and the Dutch have generally less land available, why is owning a home so affordable there?  And why is the rate of Dutch home ownership (54%) much lower than Australia's (70%)?

The sunscreen rebound effect



I’ve just returned from a few days at the beach with my family. One thing that stands out as a key function of a parent in the summer beach environment is making sure your child avoids getting sunburnt.

This got me thinking about a world without sunscreen. This cheap little cream enables us to withstand sun exposure like super-humans, avoid painful sunburn, and partake in activities that would be out of the question in a 'no sunscreen' world.

Since sunscreen allows us to tolerate so much more exposure to the sun, is it actually contributing in some way to increased incidence of skin cancer? Are the net health benefits of sunscreen actually much lower because of our change in behaviour?

 How big is the sunscreen rebound effect?

There seems to be some acceptance of the sunscreen rebound. This article states that “Sunburn may even protect against melanoma - by keeping people out of the sun.

Again here:
The Australian experience provides the first clue. The rise in melanoma has been exceptionally high in Queensland where the medical establishment has long and vigorously promoted the use of sunscreens. Queensland now has more incidences of melanoma per capita than any other place. Worldwide, the greatest rise in melanoma has been experienced in countries where chemical sunscreens have been heavily promoted.
And here:
...sunscreen use tends to prolong the amount of time people spend in the sun while they are on vacation—and that only sunburn modifies the behavior of sun-seekers
And here:
Sunscreens suppress natural warnings of overexposure to the sun and allow excessive exposure to wavelengths ofsunlight which they do not block. Because sunscreens create a false sense of security, more effective measures to reduce sunlight exposure, such as limiting time spent in the sun or use of hats and clothing, may be ignored.
My experience suggests that all of these statements are true to some degree.

If everything was held constant - time in the sun, covered clothing, etc (notice the decline in hat wearing in the past few decades?) - then sunscreen may be quite effective at preventing skin cancer. But humans have a tendency to adjust their behaviour to take maximum advantage of such innovations.

The question that remains is whether there is still a net health benefit from sunscreen. But due to the plethora of uncontrollable variable in any longitudinal study, I'm not sure that we will ever have definitive statistical evidence for this.

Sunday, January 3, 2010

Economics of work and leisure


Recently, I cut back work to 4 days a week with a surprising result. Rather than feeling like I am enduring marginally less of a bad thing, I am actually finding work more challenging and interesting – even though I am surrounded by the same public sector circus.

I feel like a 20% cut in work has resulted in an 80% improvement in my work satisfaction, rather than merely a 20% boost.

As an economist I really shouldn’t be surprised. Economic theory suggests an optimal work time – there are decreasing marginal benefits to work (in terms of pay), and increasing marginal costs (in terms of time, level of stress, level of frustration etc).

But this experience (and the popularity of this television show) has got me thinking about how the wellbeing of society at large can be improved by working less.

Tuesday, December 8, 2009

A graph I promised to make

There is a lot of talk about population and number of new dwellings in the housing market debate.  What is generally overlooked is that at any point in time everybody is living somewhere.  Occupancy rate is fluid, prices change, and in the long term, population growth in an area can't happen without prior construction of housing. 

The graph shows the new dwellings constructed per new person (per person of population growth).  We do notice a recent decline in the number of dwellings being constructed nationwide compared to the population growth, which is reflected in the later graph showing increased occupancy rates.  The direction of causation amongst these variables remains unclear, and in all likelihood, they are interdependent.

Regression with net new dwellings per person of population growth as an explanatory variable for change in the capital city price index gives a negative coefficient (-0.011) but really, has no explanatory power (r2 of 0.006).

That means that analysis of population growth and dwelling construction figures has no power in explaining housing price changes.