Random externalities

A complete reiteration of my arguments against exceptional circumstances provisions for farmers can be found on today on Business Spectator courtesy of David Leyonhjelm.  Simply, we fear a non-existent negative externality of diminished food production should farm businesses fail.   

As a parent I also found this article on the externalities of public advertising quite intriguing.  It seems that movies (private consumption decisions) need to be classified to prepare the viewer for their level of violence and sexuality, yet advertising in public spaces seems to be M rated even when Parental Guidance is not possible.  To avoid this negative externality on children and parents could we not adopt the G rating standard from the film and television industry as the standard for public advertising?

Those who are a fan of the movie Pay it Forward will ba happy to see that acts of kindness can spread through society very easily.  Just another bit of evidence for how culture can change behaviour and how our preferences, expressed through our behaviour, are not fixed at all (as economists would have us believe).  Given this is an example of a positive externality, economic theory would suggest we will face a constant battle to ensure a socially optimal level of kind acts.  Luckily the research suggests that once we adopt a strategy of kindness we don't go back to selfishness very easily.

Newsflash: Property Council of Australia makes a reasonable point

The Property Council of Australia is a powerful lobby group known for ignoring truth and reason in its appeals for support from all levels of government.  The PCA’s latest battle surrounds the proposed amendment to the Valuation of Land Act 1944 (the Act), which will clarify a number of definitions for determining the ‘unimproved’ value of commercial buildings – a value upon which land tax liabilities and local government rates are calculated.

(As a strong proponent of land taxes I should be paying particular attention to the necessary practicality of  valuing unimproved land.)

The property lobby sees this Bill as a tax grab due to the likelihood of higher land valuations, and they have mustered plenty of support from other industry associations to stop it getting passed.

What follows is a brief analysis that suggests the Bill is quite unworkable, that the PCA has actually raised real issues with the practicality of the Bill, and also suggests extreme incompetence by the Queensland government.

Proposed changes to Section 3 of the Valuation of Land Act 1944

Words removed are struck through, and inserted words are in red. 

(1) For the purposes of this Act—

unimproved value of land means—

(a) in relation to unimproved land—the capital sum which the fee simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require negotiated as a bona fide sale; and

b) in relation to improved land—the capital sum which the fee simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require, assuming that, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist. negotiated as a bona fide sale, assuming the improvements did not exist.

Thinking like an economist

This article is the first I have come across that compares housing prices and costs to hours worked, which is the ultimate measure for comparing housing affordability across countries or over time (although hours worked for average rent would also be a good measure).

According to the CommSec analysis it now takes 19,374 working hours to pay for an average house at the average hourly rate of pay, compared to just 7,500 hours in 1960.  That's ten years of full time work in 2010 versus 3.9 years in 1960.  I admit the data may be a little skewed if it is truly generated using averages (means), rather than medians, however there seems to be a strong message coming through.

It also supports my claim about the leisure dilemma, and the ability of others to bid up prices if they choose to work more hours.

An alternative way to gamble on the markets

I have previously mentioned on this blog how investing and gambling share many traits in the short term.  Now, you can literally combine the two with Centrebet now taking bets on the value of the ASX200 at the end of the month.  I would suggest that the odds generated by Centrebet on this gamble will become a salient leading indicator for economic commentators worth their salt. Currently the outlook is positive for March.

The week's best economic commentary

The best Australian economic commentary I have read all week is here.

Drought is not exceptional

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'.

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.

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.

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.