Not so random links, comments and quotes

 

Law of demand holds
Bust fares go up, patronage goes down. A lesson for policy makers about defining their outcomes better – do they want cost recovery for transport (higher fares, lower usage), or are they willing to subsidise public transport to save costs of maintaining the road system?

Algorithms rule our lives
The algorithms of Wall Street may be the cyber-equivalent of the 80s yuppie...
The question for the economist is not whether there are downsides to this infiltration, but whether the costs outweigh the benefits. I am pretty sure that is not the case yet – after all, algorithms are written by humans, redesigned by humans, and often ignored by humans.

Culture -
The Misconception:  You celebrate diversity and respect others’ points of view.
The Truth: You are driven to create and form groups and then believe others are wrong just because they are others.

If patents over software are a bad idea, why not all patents?
This article argues that companies find it more attractive to make money suing each other for infringement than actually making things.

The question for society is whether innovations would occur at close to the same level without patents? My personal view is that they would, and that a possible first mover advantage would be reward enough. A short, but very useful, free online textbook on the economics of patents and copyright is here.

Apple iPad patent fiasco

Free trade in apples, finally?
As I said before with food import restrictions, if prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.

Essentially, by protecting our producers from import competition we are paying HIGHER prices for Australian food than foreigners are paying for Australian food.

Of course apple growers will whinge, but they will adjust over time, and in reality, their incomes have been protected for a long time anyway.

Warren Buffet supporters in France - the rich want to be taxed more

Quotes -  
Graveyard market - buyers don't want in, sellers can't get out (ht: doomsday_trader)

After all, statistics are like bikinis. What they reveal is interesting, but what they conceal is more important (ht: John Booth)

If an Axe is being ground, cluelessness will follow naturally. I used to be an ideologue and as I think back on my unreflective self, I remember that I just chose to devote all my mental energy to what I wanted to believe and none to what I didn't want to believe and the result was I appeared clueless, sometimes intentionally clueless (ht: anon)

The lesson of Alaska is never give away land, even when it is seemingly worthless (ht: M)

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.

Econompic - negative real interest rates encourage savings

The basic premise behind stimulatory monetary policy is that lower interest rates reduce the cost of debt, and decrease the returns to savings, encouraging present spending and maintaining asset values. But recent experience (particularly in the US) has shown that in a low (or negative) real interest rate environment, savings rates are climbing.

Jake over at Econompic has put forward a reason this might be the case. He argues that if an individual needs to save a certain amount for future consumption, for example someone who wishes to fund their retirement, a low interest rate means they need to SAVE MORE NOW to reach that point.

What surprises me is that Jake’s hypothesis is fairly consistent with Milton Friedman’s permanent income hypothesis, which asserts that people will try and smooth out their earnings over their lifetime (through savings decisions) to maintain a relatively constant level of expenditure. In Friedman’s model, a transitory income, like prize money, would not be spent all at once, but mostly saved and spent over the rest of one’s lifetime. While the reduced debt burden from low interest rates may been seen as temporary by some people and not greatly affect their spending, the reduced return on savings DEFINITELY means that smoothing out income for retirement requires greater levels of saving.

For example, if interest rates are 5%, someone might want to save $1million in order to earn $50,000 per year in returns on which to live during retirement. But if interest rates are 1%, that person needs to save $5million in order to earn $50,000 in returns to fund their retirement.

One might suggest that low interest rates mean that people who need to save will save more, and people who don’t, will save less. This might translate to quite a variation in saving patterns by age, with the soon to retire boomers increasing savings, with the young workers saving less.

The low interest rates and high savings rate correlation probably also has a lot to do with household repairing their balance sheets following massive losses on equities and housing (particularly in the US and the UK).

Over to Jake for the details (original post here).

Electric v petrol scooter

I've been reading some great posts recently at Chris Eastwood's blog in my view... . Below is a full post comparing the merits of electric and petrol scooters in a detail rarely seen.

But first a few quotes from Chris that might get you interested in some of the ideas floating around on his blog.

By having an increasingly itinerant population is it any wonder that no one gives a rats arse that your home is being degraded? (here)

I recall a conversation with 2 educators on Fraser Island ... that the last thing you want to do is encourage more people to come to national parks, even if it does somehow liberate more funding from the government it won't pay for the extra damage caused by the extra bogans. (here)

The full electric scooter post is below, and the original link here. Chris finds that the electric scooter produces more greenhouse gas emissions than the petrol version. Please keep in mind the rebound effect, since the electric scooter is so much more expensive (the owner can’t spend that money on other goods).

Over to Chris.

Economies of scale do not equal productivity

Only three things matter in the Australian economy - productivity (how much each person produces); employment (how many people are producing); and equality (how that output is shared). All the other random shrapnel of economic news that flies around is kind of irrelevant.

(c/o Andrew Charlton + must read article entitled The Economic Myths of Peter Costello here)

Productivity is the key to greater wealth, as an individual, a nation, and a world. Productivity is doing more with less. It is that simple. Unfortunately people often equate productivity with economies of scale and population growth, which leads to a poor understanding how economic growth really occurs.

If a farmer selectively breeds his crop so that the next generation of plants yield 5% more grain, with no further inputs required (no more water, fertiliser, harvesting time etc), then he has made a 5% productivity improvement. The output in terms of grain is 5% higher for the same inputs.

Productivity gains flow through the economy, allowing us to produce more goods over time. When other farmers follow this lead, we find that marginal land can now be used productively. We find that fewer people need to work in agriculture, because each farmer is producing more food. This frees up labour to be employed elsewhere in the economy, producing other goods to satisfy our desires.

Productivity gains normally come from two sources. The first is in the form of new inventions and innovations in the methods of production - a new engine design, a new breed of plant, a new manufacturing technique or a new material. Innovation in the methods of production is THE key driver of our prosperity.

A second way that productivity improves is through economies of scale. Even in the absence of new technology or innovation, we can produce more output with less input by specialisation of labour, and larger and more efficient capital equipment, to achieve economies of scale.

However, people often get the drivers of productivity confused. They believe economies of scale are the main driver, and innovation is some secondary consideration. But in fact, economies of scale are only sometimes productivity enhancing. Often there are diseconomies of scale, where there is a trade-off between the size of the economy, and the efficiency of the economy. This occurs when the marginal cost of production is higher than the average cost (which is bizarrely where economists believe production usually exists on the cost curve except in the case of a natural monopoly).

For example, urban water supply can initially be produced very cheaply with a network of local dams. However, once local water needs exceed this amount, another source must be found. In Brisbane and Melbourne, this source is desalinised sea water, which is far more costly than any other water. What this means is that the cost of the last batch of water from the desalination plant (the marginal cost) is far higher than the existing average cost of water to the city, which increases the average cost and makes all water more expensive. Businesses that use water will pay more, and that leaves them less able to increase production and invest in their own innovative capital. Households pay more for water, leaving them less income to spend on other goods. We are all worse off, and far less productive, due to this diseconomy of scale in water supply.

There are many other examples from roads, to electricity, to housing.

Another popular view is that there is a connection between the population of a city or country, economies of scale, and productivity - if we don’t have more people, we can’t get the economies of scale necessary to become more productive.

Yet the great problem with this view is that economies of scale do not rely on the population of the geographical area where goods are produced, but on the size of the market being satisfied by that production. This is why German car manufactures in a single Länder (state), with a population of perhaps 10 million, can achieve greater economies of scale than many other manufactures because they supply a global market with a high volume of vehicles. More people in these Länders will do nothing to make these auto firms more productive, and may likely achieve the opposite effect if the required expansion of the housing stock, roads and other infrastructure, competes for labour demand and finance with the car manufactures.

Even if population growth means that expansion of some of our capital stock occurs where economies of scale exist, there is always the need to expand the housing stock – a capital good where economies of scale do not readily exist. Duplicating any capital in this nature comes at a cost to society that can never be recovered. Read more on that here.

The below Venn diagram shows the relationship between these factors and productivity. As you can see, innovation in new production technology is the primary driver, with economies of scale sometime being beneficial for productivity, and population growth usually coming at a cost to productivity.

The implication then is for government especially to be aware of when expansion of publicly funded capital is approaching diseconomies of scale and recognise this cost to society. Why stimulate population growth when it comes at a cost to the existing population in the form of more expensive water, transport, and the diversion of resources from genuine productive investment?

Friday thoughts

Democracy

In a democracy, we put political power into the hands of some and try to limit the damage they will do as much as we can by putting all the obstacles we can think of in their way while giving them the authority to do what needs to be done. (from here) 

Warren Buffet says tax me more. 

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. 

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. 

...Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

...Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

...I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

...I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

But he can make a voluntary contribution of taxes the US government at any time. So why doesn’t he?  As a friend recently suggested, he is trying to leverage his good will by forcing others to come for the ride.  But he also states that his fellow mega-rich friends are "very decent people" and "give most of their wealth to philanthropy" and "wouldn't mind being told to pay more in taxes".  My questions are

Why isn't a greater tax contribution part of their philanthropy? 

What is stopping them? 

Do they feel that giving privately to charity offers more social gains on a per dollar basis? 

If they were taxed more, would they give less to these charities?

'Going green'

This came by email from an unknown original source, but is appearing all over the internet now. Please keep in mind my previous comments about how we increase demand for resources when we learn to use them more efficiently – we expand our use electricity, fuel and another resources in ways we never dreamed would happen.  Also, here is some background reading on the ineffectiveness of 'green' shopping bags.

In the line at the store, the cashier told an older woman that she should bring her own grocery bags because plastic bags weren't good for the environment.

The woman apologized to him and explained, "We didn't have the green thing back in my day."

The clerk responded, "That's our problem today. Your generation did not care enough to save our environment."

He was right -- our generation didn't have the green thing in its day.

Back then, we returned milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled.

But we didn't have the green thing back in our day.

We walked up stairs, because we didn't have an escalator in every store and office building. We walked to the grocery store and didn't climb into a 300-horsepower machine every time we had to go two blocks.

But she was right. We didn't have the green thing in our day.

Back then, we washed the baby's diapers because we didn't have the throw-away kind. We dried clothes on a line, not in an energy gobbling machine burning up 220 volts -- wind and solar power really did dry the clothes. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing. But that old lady is right; we didn't have the green thing back in our day.

Back then, we had one TV, or radio, in the house -- not a TV in every room. And the TV had a small screen the size of a handkerchief (remember them?), not a screen the size of the state of Montana.

In the kitchen, we blended and stirred by hand because we didn't have electric machines to do everything for us.

When we packaged a fragile item to send in the mail, we used a wadded up old newspaper to cushion it, not Styrofoam or plastic bubble wrap.

Back then, we didn't fire up an engine and burn gasoline just to cut the lawn. We used a push mower that ran on human power. We exercised by working so we didn't need to go to a health club to run on treadmills that operate on electricity.

But she's right; we didn't have the green thing back then.

We drank from a fountain when we were thirsty instead of using a cup or a plastic bottle every time we had a drink of water.

We refilled writing pens with ink instead of buying a new pen, and we replaced the razor blades in a razor instead of throwing away the whole razor just because the blade got dull.

But we didn't have the green thing back then.

Back then, people took the streetcar or a bus and kids rode their bikes to school or walked instead of turning their moms into a 24-hour taxi service.

We had one electrical outlet in a room, not an entire bank of sockets to power a dozen appliances. And we didn't need a computerized gadget to receive a signal beamed from satellites 2,000 miles out in space in order to find the nearest pizza joint.

But isn't it sad the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Households better of than 1994... just

Housing market data provider Chris Joye has written a great deal of analysis on Australian housing recently. However his latest graph (above), showing households have more money left over after buying the average home today than any time since 1994, is very confusing.

He explains the data and method as follows.

We decided to simply look at the "average household"--calculated by dividing the ABS's quarterly disposable national income estimate by the number of households each quarter--buying the "average dwelling" in Australia, which is defined as the average sales price in a quarter.

And he explains the findings

Like the RBA, we find that--contrary to popular myth--today's households actually have more disposable income than at any other point since we began our analysis in 1993.

One would hope that with 28 years of economic growth in the mean time household would have FAR MORE disposable income today (after housing costs). What is surprising is how little disposable income has grown because of increased housing costs.

Even Joye’s own graph shows that home buying households were worse off between 2000 and 2009, because any income growth was more than offset by the cost of homes. It also shows that home buying households in 2004 were no better off than in 1994. In fact, if this analysis was undertaken any time prior to 2009 the popular myth would be shown to be true.

I also have some other concerns:

1. The income measure in the national accounts is 57% higher than measured by the survey of Survey of Income and Housing Costs (SIHC) and does not reflect actual household income (see here)

2. The outcome does not pass the common sense test. $43,000 of disposable income left over after mortgage payments, in 1993 dollars, is actually $73,350 in 2011 dollars. This seems like a lot of disposable income for the average household to have left over considering the national median dwelling at $418,000 dollars and the associated mortgage cost of $35,000 per annum. These figures therefore assume that $113,000 after tax is the average household income. This makes no sense to me. You need to have one income of approx $170,000 or two incomes of around $75,000 to meet this income level – that is FAR above average.

3. The outcome appears inconsistent with previous data. For example, mortgage rates in 1998/99 were a little over 6% (compared with a little over 7% today), and prices were about 60% lower than today, according to Joye’s own recent published graphs.

4. The graph shows that mortgage repayments have gone from 25% to 32% of the average household income over the period (which is consistent with Steve Keen’s observations – second graph). To get back to 25% of average income, prices need to fall 20%, or mortgage interest rates drop below 5%.

5. The graph, probably unintentionally, shows that incomes grew 40% in real terms over the period, but after housing costs, they only grew 26% (with most of that growth the past 4 years).

6. Indeed, the 2008 and 2011 blips show that when prices fall home buying households are BETTER OFF. The same applies to interest rates.

I sincerely hope this type of analysis is not interpreted as a reason for house prices to rise and I hope nobody leverages into the housing market because of it without properly understanding the risk they are taking.

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.

Chart of the day: Shares v houses in the US

A fellow blogger has pointed out a comparable chart to yesterday's share price v house price chart for Australia since 2003 from the Federal Reserve Bank of St Louis.

Just because housing investors (in some Australian cities) have made relatively good returns over the past four years, that shouldn't be interpreted as an indication of future outcomes.  There are precedents for large sustained falls in home values which will be extremely financially painful for the leveraged investor.