Turning points

I declared in July that the turning point in thinking about climate change has arrived. Now it seems one of the world's most renouned climate modelers is questioning the validity of the climate change hypothesis (here).

You see the thing is, complex systems results in perculiar outcomes, and can violently change without apparent reason. I have written in the past that I think N.N. Taleb covers the topic well when he talks of Black Swans. Extrapolating the past does not predict the future.

Let us look at some relevant examples. Recently, the population growth predictions from the Treasury were revised upward. But I wonder what the logic behind this revision might be. What new information could change significantly a previous prediction of a century of population growth?

My suggestion is that they make the mistake of extrapolating the past to predict the future. Let's imagine we are Treasury in 1988, and that we have just witnesses population growth like in the graph below.

Wouldn't it be obvious that we should be expecting higher growth in the future? Be if you knew the causes of this growth you could predict that the trend would not continue. It would certainly decline again. And it did.

So I imagine that the current boom in population is the result of two main factors - increased skilled migration, and the baby bonus. The increase in skilled migration could decline drastically at any moment upon political will. Of course, if the douple-dip downturn eventuates, this is more than likely to occur.

Additionally, the increase in natural growth due to increasing births in recent year - the baby bonus children - are likely to be the result of couples bringing forward their decision to have a family. Thus, this little boom is likely to fade quickly as all the number of remaining fertile young couples who desire children drastically reduces. I would hope these underlying points did not escape the Treasury.

Put simply, in complex systems, the longer period of time we consider, the more likley we are to gain insights into the behaviour of the system.  My bet is that the rate of population growth will fall significantly from this peak over the next few years. 

Doesn’t current monetary policy indirectly target asset prices anyway?

There has been plenty of talk about the RBA targeting asset prices by leaning against bubbles. All reports are that this is unlikely to happen in the foreseeable future. And for good reason.

They would face two problems;
a) identifying bubbles, and
b) using an economy wide instrument, interest rates, to target asset prices in an individual sector. All other sectors will suffer as a result.

But after thinking about this after footy last night, doesn’t inflation targeting automatically lean against asset price bubbles if they appear in a broad range of sectors?

Think about it. Asset price increases flow on to the price of consumer goods. Property price rises are the simplest example. Commercial property price increases have increased the costs of business, for everyone, which eventually flows though to retail/consumer prices. I don’t have much data at hand, but it would appear that asset prices are a good leading indicator of inflation. When interest rates are increased to curb inflation, they also curb asset price growth.

Thoughts?

Live anywhere and join the new rich

Timothy Ferriss’ book, The 4-hour Work Week, is definitely motivational, is full of practical ideas and tips. But after taking me on an exciting journey, it somehow it left me back where I began.

The premise of this book is there is no need to be trapped in the 9 to 5 drudgery, and that the life we want is waiting for us to come and grab it. We can stop wasting our precious time on menial tasks by becoming extremely efficient, and outsourcing much of our time consuming routine. By making your work ultra efficient, and mobile, you develop the freedom to see the world and fulfill your dreams. Simple.

I am economist, so the idea of maximising utility is no stranger to me. Timothy Ferriss, in my mind, is the ultimate homo economicus. He designs his life to fulfil his own goals, and ignores the need for social convention and traditional work routine – he should really be on the cover on of economic text book! But before I get into my thoughts on particular parts of the book, let me present some of my favourite quotes.

Retirement is worst-case scenario insurance
Less is not laziness
The timing is never right
Ask for forgiveness, not permission
Emphasise strengths; don’t fix weaknesses

And that’s all by the second chapter. One point I would like to develop is the distinction Tim makes between effectiveness and efficiency. Effectiveness is doing things that get you closer to your goals. Efficiency is performing a given task in the most economical manner. This idea resonated with me (I had never heard this distinction made before), as I believe I naturally think in terms of effectiveness.

Two other little gems from this book the 80/20 rule, and Parkinson’s Law. The 80/20 rule is a restatement of the non-linearity of our inputs and outcomes. For example, 80% of our output might come from 20% of our time, while 20% of sources might cause 80% of my problems. It allows one to optimise by isolating and eliminating (another key point of Tim’s) wasteful use of your time.

Parkinson’s Law dictates that a task will swell in (perceived) importance and complexity in relation to the time allocated for its completion. Just like those university assignments, a long deadline give too much time to think about the unimportant parts and delay hitting the key tasks in the head. Combining these two principles is the secret to heightened productivity. As Tim states:

Limit tasks to the important to shorten work time (80/20)
Shorten work time to limit tasks to the important (Parkinson’s Law)

Couldn’t agree more - but I've never been able to express it like that. As well of these little gems of advice, the book is packed with actual practical advice, such as email templates, examples of courteous phone messages explaining how you won’t be answering y our phone much anymore, and phrases to use when negotiating remote working arrangements with your boss. Oh, and there’s plenty of links to website dealing where particular issues covered in more detail.

In the end, I feel like I am already living the 'lifestyle design' mentality of the new rich espoused by Ferriss. While his advice is extremely helpful, and quite motivating, it leaves me back to the existential conundrum I had at the beginning. If we can have anything we want out of life, and I believe we can, what is it that I want?

A man’s home is his castle - and the major component of his investment portfolio

I said it like this (in support of Kris Sayce):

…house prices during a bubble (if you want to call it that, however mild) begin to carry a growth premium. People begin paying a premium on the price for the expected future capital growth. The elimination of this growth premium may explain the decline in prices observed over 2008.

These guys, Karl E Case, John M Quigley and Robert J Shiller, say it like this:

For the vast majority of buyers, investment was ‘a major consideration’ or they at least ‘in part’ thought of it as an investment. …it was a major consideration for a majority of buyers. Similarly, only a small percentage of buyers thought that housing involved a great deal of risk in all cities...

While I’m here, a question that has been bothering me for some time is why property ‘experts’ obsess about auction clearance rates? I’m not sure what theory supports this measure as sign of strength in the market. High clearance rates could either be a sign of buyer enthusiasm, or seller desperation. In the share market, an ongoing auction, a high volume of trade is generally necessary for a significant price change – up or down. I would love to see the correlation between auction clearance rates and price movement.

Must-see data on ye olde chronic housing shortage

I guess the housing shortage advocates have not looked at the data straight in the eye before.

A simple comparison of percentage change in population, and percentage change in dwellings shows that only a few places in Australia suffer from anything that could be labelled a shortage, while most capital cities show a glut of housing.

Not only that, but the prices continued to rise in 2006-08, the period immediately following the data in the linked table. Looks a lot like a bubble to me. Don't know about you, but I'm waiting for another slump in residential real estate prices next year.

Move over stock exchange – welcome the Real Estate exchange!

There are reasons buying and selling a home gives the average person a high risk of bursting into fits of rage. Ninety percent of real estate agents are dodgy ninety percent of the time. Information on the home buying process is provided by the self-interested agent to the otherwise (but often not) uninformed buyers and sellers. And while the provision of information, in the form of sales data, legal and financial advice is growing, the incentive structure at all levels is engineered to complete a sale, rather than achieve the best price for the seller. I am going to suggest that the provision of a nationwide residential real estate exchange will benefit both buyers and sellers in the real estate market, at the expense of commission based leeches (that’s real estate agents).

First, consider the role of an agent. They are contracted to act on behalf of the seller to find a buyer at the highest possible price. For this service, they receive a commission on the sale price, which is designed as an incentive for them act in the sellers best interests. Which we all know that in practice this often faces some obstacles. An agent, who would receive in their own hand 1.25% of the sale price, or $2,500 on a $200,000 sale, has little incentive to work harder to achieve an extra $10,000 for the seller. The agent’s premium for the extra $10,000 is a meagre $125.

But maybe the current commission system is better than the alternative fixed cost system. Imagine you pay an agent a fixed cost of, say, $2,500. Where is the incentive for them? Well, they get the same money at whatever price the house sells for. And if it was structured as a fee for service, where the price needs to be paid regardless of whether the house is sold, the incentive is to never get it sold - to get the repeat business!

My main concern however, is actually not about the commission structure itself, but that the commission charged by every agent is the same. The State regulates that the maximum commission charged is 2.5% of the sale price plus $900. You cannot find one single agent who will endeavour to sell your house for less, even though the standard REIQ contract suggests negotiating this amount. Wouldn’t competition amongst agents cause this price to decline, especially as house prices have increased substantially since the regulation was introduced?

The question then is would anyone be worse off if the maximum commission rate was reduced? Some agent would of course, and it may send some out of the game, but that wouldn’t be such a bad thing at a society wide level. The prices acheived in the market will be the same (people's willingness to pay for housing will not be affected by this small detail).

The other little nasty in the real estate game is auctions. As a buyer I always find it amazing how often auctions occur, because it puts me off completely. First, to be a serious bidder you have to commit money for appropriate inspections and financial arrangements without being certain of the price you will have to pay, and whether you will actually buy. The media has recently reported some buyer complaints against agents for misleading them on house prices. The potential buyers had committed around $1,500 to inspections and other arrangements, only to find that the eventual price was way out of the ballpark. So buyers at auctions face higher risks, and hence are likely to pay a lower price than they would be willing to if they could buy with a conditional contract.

But that risk is the key. Agents face the risk of a house not selling because the seller has unrealistic expectations, or they change their mind, or whatever the case may be. Eliminating this extra ‘agency risk’ will reduce transaction costs significantly.

Imagine a real estate exchange (REE) where home owners could list their properties. Maybe each property has a list of compulsory documentation to be included – Survey plan, title, aerial photo, front photo, number of rooms, bath, bed, total covered area, building materials, age, car spaces, maybe pest inspector and engineers reports. The house would be put up on the exchange, which could be searched by any of the characteristics. The seller would nominate a price and contract conditions they are willing to accept, and buyers would nominate a price in a kind of open auction process. There would be no time limit, and people could keep their house in the exchange at a ridiculously high price, and if someone agreed, they would be forced to enter the contract, even if it was a bit of a joke - “just testing the market” or something like that.

In this case, there is no requirement for agents. Remember their fundamental role is to bring buyers and sellers together, and that role would now be replaced with the REE. Risks of uncommitted sellers would be eliminated.

There may then open up a market niche for business to provide the service of granting entry to homes for sale. Real estate agents may metamorphise into home display service providers, who collect a fee for answering enquiries and granting entry to potential buyers. Similarly, they may inspect houses on behalf of buyers. But without commissions, and without the associated risk, they can focus on the streamline management of inquiries and inspections, and compete on price for a rather homogenous service.

But maybe we don’t need government here. Google offers listings on their mapping tool for free to any individual or agent. This is a real step in the right direction. Maybe soon they will use their Google Checkout to enable bids to be made, further facilitating transactions. Maybe we will find market solutions to market failures?

*I had this blog written for some time, then searched the web before publishing and found the REE idea here.

Economists strike – what next?

One wonders about such things (and here). The most highly educated group in our society (university academics if you are still wondering) are threatening strike action for better pay.

The question in my mind is; will the economics departments be participating in such actions, and what is there reasoning?

The economic academics I know think that the university lifestyle, autonomy, and interesting research projects, mean that moderate pay is sufficient to attract good talent. After all, that’s what keeps them in the game – it’s not the money honey. Why then the need for more pay?

Surely if there was a problem attracting staff, universities could voluntarily offer higher salaries for some positions?

In the end, academics always have self interest to fall back on as a justification for participating in strikes. Although, they could just as easily benefit from the strike action and not bother participating – another self-interest motive at work.

Oh, the mystery.

Conspiracy!

I don’t take anything at face value. I give credit to conspiracy theories, as they often seem as plausible as the mainstream interpretation of events. Many times though, I simply don’t care, and even if I did, I couldn’t do much about correcting any misrepresentations of history.

I want to throw another one out there.

I have written before how implying causality between correlations of changing global surface temperature and increasing concentrations of carbon dioxide is statistical mumbo jumbo. But considering we know so little about whether the global climate will in fact ‘change’ (we still don’t know if that is for better or for worse) as a result of humanities combustion of fossil fuels, we seem to be taking quite radical actions. Households appear to want to do their part to prevent some hypothesised distant future even of low probability, while immediate and dire problems exists all around us (maybe more so in other parts of the world than the Lucky Country). So the question remains, how did such a fringe issue become so mainstream?

Today’s conspiracy theory is that a group of very powerful world business leaders (the big oil men) saw the imminent peak of fossil fuel production, and the resulting problems of a declining productive capacity of the economy. They wanted to get governments to act on this problem without having to admit that the problem existed. So, they utilised the fringe climate change movement, giving them a voice in mainstream circles. Any government actions implemented to curb climate change would conceal the peak of oil production for a little longer. Government research and subsidies may even assist in finding alternatives for big oil to invest in. All they while they can maintain that oil reserves are plentiful, keep confidence in their business and the share price high, while having governments unknowingly assist them to wean themselves off oil.

They use lines like “the stone age didn’t end because of a stone shortage” to show that change can happen voluntarily.

Anyway, that’s a nice one for today. I’ll leave you with this interesting comment from here.

I'm a bit of a conspiracy theory buff and one of my favorites is the meta-theory: all conspiracy theories that become popular are actually produced by the government to keep the paranoids occupied looking for aliens, bigfoot, and psychics instead of focusing on the more nefarious intrusions into civil and social rights. Meta-theory has a lot of benefits, such as that it explains why government explanations for things like Roswell are so terrible: a good explanation would leave only a few true believers, a bad explanation actually creates more believers in the conspiracy. As a final benefit, generating conspiracy theories as red herrings is cost-effective. A conspiracy theory works by arguing from the void/gaps. All the government need do is create a few vague clues and let the mind of the legions of paranoids do the rest of the work filling in the huge, ambiguous spaces. Why would anyone investigate mundane government corruption when there are aliens and psychics to research?

Information deficiencies in the job market

I am in the market for a new job. Here are some things I have noticed:

1. All jobs are exciting, and require people with enthusiasm.
2. All jobs are for an integral role in a team.
3. All jobs require you to work independently and as part of a team.

Here's a snapshot of the jargon.

...with a strong mission to provide outstanding services to our sunshine state. Undergoing an exciting diversification of its portfolio...

It all makes me pretty cynical. I mean, not all jobs can be that exiting! To make matters worse, many job advertisements emphasise the importance of experience. Even for a dish-pig or waiter, they seem to want a minimum of 2 years experience. Is there anything about washing dishes or carrying plates that can't be learnt in a week?

One job I saw suggested that the suitable candidate would have 5 years experience in a similar role. In my letter I wrote:

While I may not have 5 years experience in a similar role, I would suggest you are unlikely to find a proactive candidate given those requirements. Anyone who has spent 5 years in the same role, then applies for another similar one, in my mind, appears to be destined for mediocrity. If instead you seek a candidate with enthusiasm, analytical skills, and drive for constant improvement, then I may be quite suitable.

We’ll see how that application goes. I always wonder how you are meant to explain how great you will be for a job after reading a total of two paragraphs of non-sense. Maybe I'll offer a 'try before you buy' period in my next application. Surely that's in the best interests of all involved.

Where did we leave our common sense? Is it behind the new plasma screen?

This article raises the point that we have a tendency to eat more after exercise, negating the potential weight loss benefits. I don’t think this is breaking news. Nor does it actually mean that exercise won’t make you thin, as the title so controversially states. In fact, the following excerpt shows the ridiculous need to frame a discussion about how to address the compensating hunger from the exercise in emotive and controversial terms:

Exercise, in other words, isn’t necessarily helping us lose weight. It may even be making it harder.

Common sense tells us that diet and exercise are the ingredients to weight loss (and gain mind you – athletes are right into this diet and exercise equation). Eat less, exercise more, and you should lose weight. Eat more, exercise less, you should gain weight. And for those who want to gain muscle, heavy exercise and a high protein diet with plenty of calories. I heard a third hand story once that a famous Iron-man was asked in an interview whether he would consider writing a book about his particular views on health and fitness, and he replied along the following lines: “It would be a pretty short book”. It is after all, a simple equation.

Also, imagine that reality TV show where contestants lose weight. Are we to think now that they would have done a better job without all the exercise? Or that they could have really shed all that weight by sitting on their arse, but eating slightly less - really?

Anyway, I wonder where common sense has gone sometimes.