Book review: Embracing the Wide Sky

Autistic savant Daniel Tammet wrote this gem, and yes that means he has ‘rainman' like mental skills.  In fact, he learnt Icelandic (his 11^th language) in the week prior to being interviewed for an Icelandic television program. 

Why the next interest rate move is down

Most economists predict another rate hike by the RBA. I am not like most economists and predict the next move will be down. My reasoning is founded on the unfortunate necessity to maintain housing values in order to avoid serious disruption to our financial system. The RBA will move strongly to reduce the interest burden on debt should they see evidence of a fall in house prices (aka values). The following snippets are therefore worrying for the RBA:

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.