The front page of yesterday's Australian newspaper reports Agricultural Minister Tony Burke's recent speech outlining his intention to reform Australian drought policy. The specific part of the Exceptional Circumstances subsidies targeted by the Minister's speech was the interest rate subsidy. Under this scheme farmers in drought declared areas can have 80% of the interest on their farm debts paid for by Australian taxpayers. Farmers were provided $61 million per month in drought assistance at the end December 2009 - or about $730 million per year.
As a side note, it makes me wonder how substantial agricultural subsidies must be in Europe. Australian direct agricultural subsidies amount to approximately 8% of farm income, while in most European nations subsidies account for greater than 60% of farm income.
What I find particularly interesting about drought policy is the logical dilemma encountered when determining what are in fact 'exceptional circumstances'.
Wednesday, March 3, 2010
Tuesday, March 2, 2010
Money can buy happiness after all
I came across some fascinating research showing that money can buy happiness if we use it well. My favourite paragraph below.
Dunn and others are beginning to offer an intriguing explanation for the poor wealth-to-happiness exchange rate: The problem isn’t money, it’s us. For deep-seated psychological reasons, when it comes to spending money, we tend to value goods over experiences, ourselves over others, things over people. When it comes to happiness, none of these decisions are right: The spending that make us happy, it turns out, is often spending where the money vanishes and leaves something ineffable in its place.
Dunn and others are beginning to offer an intriguing explanation for the poor wealth-to-happiness exchange rate: The problem isn’t money, it’s us. For deep-seated psychological reasons, when it comes to spending money, we tend to value goods over experiences, ourselves over others, things over people. When it comes to happiness, none of these decisions are right: The spending that make us happy, it turns out, is often spending where the money vanishes and leaves something ineffable in its place.
Monday, March 1, 2010
The leisure dilemma: Rebound effects from productivity improvements
A recent report from UK think-tank New Economics Foundation generated plenty of publicity recently by suggesting that a 21hour standard workweek would significantly improve well being by giving people more time for family, friends, neighbours, and leisure activities. My own experience is that reducing work time has surprisingly large positive impacts on well-being.
Interestingly, economist John Maynard Keynes envisaged in a 1930 essay on the Economic Possibilities for our Grandchildren the following situation
Thus for the first time since his creation, man will be faced with his real, his permanent problem-- how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.
The productivity gains imagined by Keynes did eventuate. Everywhere we look we can see far greater output per hour of labour, from agricultural production all the way through the production processes in our complex 21st-century economy.
However recent research suggests that leisure time has been relatively constant since 1900, and time spent on home production activities (cooking, cleaning etc) has actually slightly increased. Additionally, while time spent at work over a lifetime has decreased since 1900, most of this is the result of more time spent studying.
How is it that we continue to fill our time not with leisure, but with work, study, and household chores?
There is a rebound effect at play.
To properly explain how this rebound effect occurs at a national (and sometimes international level), we need an analogy closer to home. Instead of businesses and industries improving productivity across the economy, imagine yourself improving your productivity during your working life. You start on low pay as a youngster and edge your way up the ladder to better paying jobs over time.
Immediately we can see the analogy is sound. Most people don’t take their gains in productivity (as reflected by increases in their salary) as leisure time. Rather, they continue to work the same hours (or more) and receive a higher income.
Why?
The problem is one of cooperation and it has striking similarities to the classic prisoner's dilemma. You see, if you take your productivity gains as leisure time, and the next person doesn’t, they can bid up prices for things you might like to buy (such as land). However, if you both cooperate and each take more leisure time, you will both face accessible prices.
In our analogy, if everyone took their gains as leisure time, incomes would be relativity even, but each person’s work/leisure ratio would be different. The most productive people would work the fewest hours and vice-versa. Because each person’s income is the same, there would be little opportunity for people to outbid each other on prices, or out consume each other in status displays.
Furthermore, as our productivity increases (or our hourly rate of pay in this analogy) the gains at the margin from working just one more hour are far greater. Compared to when you were the local barista making $15 an hour if you worked longer, you might now make $60 per hour and find that you can make in a couple of hours in the evening what you used to make in a day.
How do we overcome this cooperation problem?
There is a simple answer at an individual level, and that is to decrease your consumption expectations and take your productivity gains as leisure (as I have done). There is also a more difficult answer at a society-wide level. Yes, we can regulate maximum working hours and penalty rates for overtime. However, penalty rates increase marginal benefits from overtime hours. Maybe instead we could have anti-penalty rates. After a certain number of hours by law your pay decreases per hour, until after say 30 hours, there are zero benefits from working any longer.
But, as I have discussed before, regulating working hours is a tricky game. Such a law would encourage a cash economy for labour in order to avoid the laws (and avoid taxes), allowing individual workers to get ahead.
In fact, in the spirit of free choice, I would discourage further regulation of hours. Instead, I would opt for solutions such as more public holidays (which also allow a coincidence of leisure for more workers), and labour laws that encourage flexibility and part-time work.
Maybe my grandchildren will be so lucky as to face Keynes’ leisure dilemma.
Thursday, February 25, 2010
Housing investment is not productive
Property spruikers are currently having a field day proclaiming the productivity of housing investment. These claims are fallacious. Housing investment does NOT improve productivity.
To clearly explain why this is the case we first need to define productivity. Productivity is a measure of output from a production process, per unit of input. A productive capital investment therefore enables more future goods and services to be produced per unit of input (such as labour, materials etc).
An example of a productive investment may be a machine that enables a new design of metal fasteners to be produced from less metal, and with less labour time, but is equally as strong. In this case we have a productivity gain in terms of materials and human labour time for the same output. This investment allows use to produce more fasteners in future periods even with no more inputs.
Housing does nothing of the sort. It simply houses more people and does nothing to improve the per capita productivity.
Let's use a little thought experiment to prove the point.
To clearly explain why this is the case we first need to define productivity. Productivity is a measure of output from a production process, per unit of input. A productive capital investment therefore enables more future goods and services to be produced per unit of input (such as labour, materials etc).
An example of a productive investment may be a machine that enables a new design of metal fasteners to be produced from less metal, and with less labour time, but is equally as strong. In this case we have a productivity gain in terms of materials and human labour time for the same output. This investment allows use to produce more fasteners in future periods even with no more inputs.
Housing does nothing of the sort. It simply houses more people and does nothing to improve the per capita productivity.
Let's use a little thought experiment to prove the point.
Tuesday, February 23, 2010
Irrational saving or rational spending?
One question economics prefer to avoid is why irrational solutions to common problems faced each day by individuals seem to work. For example, our lounge room clock is 20mins fast (yes, I know that’s a lot). But when chatting with my wife the other day about whether we should put it back to the real time we decided to keep it fast. For some reason if the clock says 8 o’clock, even though we know it’s 7.40, it seems later than it really is. I don’t know why, but it does.
Another classic example is saving. Economists assume that the savings rate is fixed by our preference for current consumption over future consumption (not only this, they assume that individual preferences are fixed over time – that’s right, from birth to death). To any person living in reality, this fixed assumption is obviously not true.
For example, there are literally millions of websites preaching new an innovative ways to implement a saving strategy. Freezing your credit card in a block of ice to overcome spending urges is one solution. Having your salary paid directly into a fixed term investment account that can’t be touched is another.
The intriguing question is why we can be rational enough to use these ideas, but not so rational as to not need them. I want to examine this point today.
Another classic example is saving. Economists assume that the savings rate is fixed by our preference for current consumption over future consumption (not only this, they assume that individual preferences are fixed over time – that’s right, from birth to death). To any person living in reality, this fixed assumption is obviously not true.
For example, there are literally millions of websites preaching new an innovative ways to implement a saving strategy. Freezing your credit card in a block of ice to overcome spending urges is one solution. Having your salary paid directly into a fixed term investment account that can’t be touched is another.
The intriguing question is why we can be rational enough to use these ideas, but not so rational as to not need them. I want to examine this point today.
Thursday, February 18, 2010
Firday quick links
No need to correct my spelling. It's my new revenue generating strategy (thanks Ben). At least it will be if current research on misspelled domain names is anything to go by.
It appears that someone has spent time investigating the potential ad revenue from websites that are misspelled variations of popular websites. Surprisingly, a viable business model is to register misspelled website domains, and simply post ads relevant to the real website (or to the real website), to ultimately generate a decent profit.
But is there anything wrong with that? The authors of the study think so, and they have launched a lawsuit seeking damages from Google for facilitating this practice with their Adsense for Domains tool.
To me, this is a classic example of market fulfilling a niche function. There is nothing stopping businesses buying the domains which are misspellings of their own if they are willing to pay more than the value of revenue generated by advertising to the current domain name owner. Further, I would suggest that typing a web address to navigate to a site is fast becoming obsolete as you can generally navigate to the site with less typing by using a search engine.
In other news, the Brisbane Young Economists Network is hosting an event in Brisbane on the 4th March. Pecha Kucha presentations will be given by some local economics PhDs, drinks are supplied, and there will be plenty of time for socialising.
It appears that someone has spent time investigating the potential ad revenue from websites that are misspelled variations of popular websites. Surprisingly, a viable business model is to register misspelled website domains, and simply post ads relevant to the real website (or to the real website), to ultimately generate a decent profit.
But is there anything wrong with that? The authors of the study think so, and they have launched a lawsuit seeking damages from Google for facilitating this practice with their Adsense for Domains tool.
To me, this is a classic example of market fulfilling a niche function. There is nothing stopping businesses buying the domains which are misspellings of their own if they are willing to pay more than the value of revenue generated by advertising to the current domain name owner. Further, I would suggest that typing a web address to navigate to a site is fast becoming obsolete as you can generally navigate to the site with less typing by using a search engine.
In other news, the Brisbane Young Economists Network is hosting an event in Brisbane on the 4th March. Pecha Kucha presentations will be given by some local economics PhDs, drinks are supplied, and there will be plenty of time for socialising.
Tuesday, February 16, 2010
23 things I have discovered about Singapore
A guest post today from my very good friends Yo and Matt who are currently living in Singapore.
Yo's list -
1. People buy whitening products for their skin – it is considered more beautiful – funny that a tan is beautiful in the west! No one sunbakes.
2. The people walk very slowly, they are never in a hurry.
3. No one EVER sticks to the left.
4. People always sit on the aisle seat in the bus so that no one sits next to them
5. “la” is said at the end of most sentences (I still don’t t know why this is)
6. People hold a business card with two hands when passing it to someone whom they have just met.
7. The umbrella is actually useful on a sunny day *shame* and is a must for the handbag
8. Pashmina’s are also a necessary handbag item – the air-conditioning is set to arctic wherever you go.
9. Chewing gum is not illegal
10. You get the cane for any sort of graffiti (10 lashes I believe)
11. Kids don’t play in parks, or generally for that matter...they are very academic from a young age
12. There are alot of really, really expensive cars: Ferraris, Lamborghinis, Bentleys, Aston Martins...etc etc
13. Public transport is exceptionally cheap to encourage high patronage – it really puts Australia to shame. It is also very efficient (except to Matt’s work of course).
14. Affordable housing is done well, there are very little, if any homeless people.
15. Maids (mostly from the Philippines) invade Orchard road on Sundays – it’s their day off
16. Being Caucasian, and blonde (and female), you get stared at alot...you learn to win stare-offs very well. (Phebs, prepare yourself)
17. You pay for incoming calls on your mobile
18. You don’t see many policemen.
19. Shopping is a sport. More importantly, bargain shopping.
20. It’s all about the food here. Everyone is always asking about your next meal. (Chappo will fit in just fine)
21. Taxi’s are cheap, which is odd considering a Toyota Yaris is about $50k (just imagine what the Ferrari’s cost).
22. Starting Salary for a graduate engineer is about A$20,000.
23. You can have a maid for A$400/month. They will work 6days/week.
To round out Yo’s top 23 things to a top 30, Matt adds-
24: Almost all residents who live in Singapore are not from Singapore. Most are from Malaysia, Indonesia and other surrounding countries.
25: “Can” means yes, as in yes I can do that
26: Cash for payment is received in two hands (similar to Yo’s no. 6)
27: When someone invites you out to Friday afternoon drinks, that means you leave work late, not early
28: You can pay $2 for two coffees. You can also pay $20.
29: In addition to Yo’s no. 20, people never bring lunch with them to work. We don’t even have a microwave in the kitchen. Lunch with Singaporeans is always a sit down hot meal in a restaurant or cafe.
30: A 100m walk to a Singaporean is equivalent to a 1k walk to an Australian. No one walks very far here.
Yo's list -
1. People buy whitening products for their skin – it is considered more beautiful – funny that a tan is beautiful in the west! No one sunbakes.
2. The people walk very slowly, they are never in a hurry.
3. No one EVER sticks to the left.
4. People always sit on the aisle seat in the bus so that no one sits next to them
5. “la” is said at the end of most sentences (I still don’t t know why this is)
6. People hold a business card with two hands when passing it to someone whom they have just met.
7. The umbrella is actually useful on a sunny day *shame* and is a must for the handbag
8. Pashmina’s are also a necessary handbag item – the air-conditioning is set to arctic wherever you go.
9. Chewing gum is not illegal
10. You get the cane for any sort of graffiti (10 lashes I believe)
11. Kids don’t play in parks, or generally for that matter...they are very academic from a young age
12. There are alot of really, really expensive cars: Ferraris, Lamborghinis, Bentleys, Aston Martins...etc etc
13. Public transport is exceptionally cheap to encourage high patronage – it really puts Australia to shame. It is also very efficient (except to Matt’s work of course).
14. Affordable housing is done well, there are very little, if any homeless people.
15. Maids (mostly from the Philippines) invade Orchard road on Sundays – it’s their day off
16. Being Caucasian, and blonde (and female), you get stared at alot...you learn to win stare-offs very well. (Phebs, prepare yourself)
17. You pay for incoming calls on your mobile
18. You don’t see many policemen.
19. Shopping is a sport. More importantly, bargain shopping.
20. It’s all about the food here. Everyone is always asking about your next meal. (Chappo will fit in just fine)
21. Taxi’s are cheap, which is odd considering a Toyota Yaris is about $50k (just imagine what the Ferrari’s cost).
22. Starting Salary for a graduate engineer is about A$20,000.
23. You can have a maid for A$400/month. They will work 6days/week.
To round out Yo’s top 23 things to a top 30, Matt adds-
24: Almost all residents who live in Singapore are not from Singapore. Most are from Malaysia, Indonesia and other surrounding countries.
25: “Can” means yes, as in yes I can do that
26: Cash for payment is received in two hands (similar to Yo’s no. 6)
27: When someone invites you out to Friday afternoon drinks, that means you leave work late, not early
28: You can pay $2 for two coffees. You can also pay $20.
29: In addition to Yo’s no. 20, people never bring lunch with them to work. We don’t even have a microwave in the kitchen. Lunch with Singaporeans is always a sit down hot meal in a restaurant or cafe.
30: A 100m walk to a Singaporean is equivalent to a 1k walk to an Australian. No one walks very far here.
Monday, February 15, 2010
Global Barefoot Marathon
I have never run a marathon. I never considered myself a runner. But lately I have grown to enjoy the rhythm of running, the pureness, and the simplicity of putting one leg in front of the other.
It is with this in mind that I propose to run my first marathon on the 20th June 2010. Want to join me?
Here’s the deal. I know there are a lot of passionate runners out there all around the world, and I want to share this run with them. While we cannot share the run with a physical presence, we can share the spirit of the run by all running together – a global marathon, synchronised, with people participating in the experience from around the world.
Sunday, February 14, 2010
Randomness and probability: quantify with caution
One of the main lessons (or reminders for those trained in statistics) found in the Drunkards Walk deals with the reliability of data. Mlodino makes the important point that people latch on to numerical values. He uses wine tasting rankings as an example of how the numerical ranking has a huge impact on price, yet under blind tests, the people ranking are next to useless at actually determining which wine they are drinking.
Let’s look at a recent example of people latching on to the quantity without thinking of the error. Lately, ABS data has shown that unemployment has fallen by 0.1% - what is the probability that in reality unemployment has actually risen?
Let’s look at a recent example of people latching on to the quantity without thinking of the error. Lately, ABS data has shown that unemployment has fallen by 0.1% - what is the probability that in reality unemployment has actually risen?
Wednesday, February 10, 2010
CPI update
I was attempting to create a 'Make your own CPI' spreadsheet that uses the ABS price indexes for each commodity group and allows you to assign your own weighting. I was also using the weighting from the German CPI as a comparison (which weights housing as 30% of the basket, while Australia's CPI has housing at 19% of the basket).
But there was a problem.
The price indexes for each commodity group were so completely manipulated by quality adjustment (and any other unknown statistical manipulation that occurs) that you could not dramatically change the final CPI figure. Using German weightings I was within one percent (of the total change) over a 10 year period.
Have a look at the house purchase index used for the CPI against the ABS' own capital city house price index in the graph below. The extreme magnitude of the disparity is quite shocking. The index used for the CPI increased by 36% over the 7 year period, while the capital city median price index increased 92%.
What lesson should we take away from all this? I for one will never trust an official statistic without first understanding the methodology behind it.
But there was a problem.
The price indexes for each commodity group were so completely manipulated by quality adjustment (and any other unknown statistical manipulation that occurs) that you could not dramatically change the final CPI figure. Using German weightings I was within one percent (of the total change) over a 10 year period.
Have a look at the house purchase index used for the CPI against the ABS' own capital city house price index in the graph below. The extreme magnitude of the disparity is quite shocking. The index used for the CPI increased by 36% over the 7 year period, while the capital city median price index increased 92%.
Subscribe to:
Posts (Atom)