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.

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.

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. 

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.

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 20^th 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.

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?

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.

Food packaging less wasteful than none at all!

I wrote once before that the concept of waste has been distracting environmentalist for decades. Today I came across this exceptionally interesting article on food packaging. The main point is that packaging serves an important purpose - to preserve food. The longer food is preserved, the more likely it is to be eaten rather than wasted. Thus, packaging cuts down immensely on food waste.

I do however believe that some packaging, such as the excessive size of cereal boxes to ensure good shelf space, does not always result in benefits for consumers.

Fail: CPI, housing and the cost of living

This short article about inflation, and the ABS review of the Consumer Price Index (CPI), prompted me to write again on the subject.  In fact, some friends and family who recently returned from a few years abroad have also been bugging me about why Australian prices have shot up so much, yet we hear almost nothing about rapid inflation.  Housing prices in Brisbane have typically increased 200% in the past decade - around 7% per year.  If housing was just 10% of the CPI basket, it alone would contribute 0.7%pa growth to the index.

First, let's be clear about the purpose of the CPI.  In principle I believe that measuring the price level is impossible as the type and quality of goods and services in the economy changes constantly. However, some indicator about the changing cost of living is still important for determining changes to welfare payments and calculating real growth in incomes. 

Unfortunately, not many people know that the CPI does not measure the change in the cost of living (see p6 of the ABS CPI overview report here).  The ABS method, including quality adjustments and the weighting of household consumption goods, means that the CPI fails to be a useful measure for determining real incomes and purchasing power. 

Randomness and probability: can people intuit probability?

One of my concerns with the evidence on the misinterpretation of randomness and probability in The Drunkards Walk arises during the discussion of the first law of probability: The probability that two events will both occur can never be greater than the probability that each will occur individually. While the law makes intuitive sense, the evidence that people fail to apply it to their reasoning is a little flimsy.

Mlodino asks us to consider an experiment from Khaneman, Slovic and Tversky’s famous book on judgement under uncertainty. Given the brief description about the Linda below, eighty eight subject were asked to rank the statements that follow on a scale of 1 to 8 according to their probability, with 1 representing the most probable, and 8 the least. The results are in the order ranked by the participants from most probable to least probable.

See the results under the fold and why their finding, that people have poor intuition of probability, may be incorrect.

What I've found interesting lately...

There has been a lot of comment on bonuses in the banking industry since the onset of the GFC.  Read Dan Ariely's take on the effectiveness of bonuses here.

For those who believe that economics generally gets things half right, behavioural economics might be your thing.  A mix of psychology and economics, this field has been enlightening economists for the past two decades.  Some of the latest findings in behavioural economics are found here (highly recommended).

Ugly city syndrome

This article suggests that ugly cities are the result of poor political leadership. That seems like a long bow to draw. I believe the cause of ‘ugly city syndrome’ is more subtle, and maybe we just have ourselves to blame. The simple answer might be that in the modern day of cheap international travel we are comparing ourselves to a wider selection of cities.

But where are the incentives to create a beautiful city? 

The Australian property market debt gamble

Investing and gambling are often mistaken for each another.  In one, you take risks based on known probabilities, in the other, unknown probabilities.  In one, you will probably win in the long run, in the other, you are bound to lose out.  In both pursuits we are psychologically predisposed to scams.

I find it interesting that prudent advice for gamblers is to risk only your own money, while for investors it's a different story - the more leverage the better.  But there must be an optimal level of leverage, otherwise we would all simply continue to borrow and destroy the value of the currency through money creation.

Given the realities of our world, one would expect that leverage below this optimal level would not persist for an extended period, as people would begin to notice the advantages of more leverage, nor would leverage or debt beyond this optimal level be able to persist.   It is therefore interesting to ask how would we know if we are above this optimal level?

UPDATE - How not to climb the property ladder

I really appreciated the discussion on my last post, and wanted to clarify some of the issues raised.

My two key points were:
1. The capital gain made from buying a cheap home and upgrading later does not always improve your ability to buy a larger place in the future, and
2. That forgoing life's little luxuries to start a savings plan directed at owning your own home is not always effective.  The 'work hard and save' mantra does not work if prices increase faster than your ability to save.

The issues flagged by readers were that
1. I ignored increased wages
2. I ignored the paying down of principle, and
3. I ignored the fact that rents increase in line with CPI while loan repayments do not.

My response is under the fold.

How not to climb the property ladder

Baby boomers and older generations often cite high expectations, and the inability to save, as the main hindrance to the younger generations’ ability to buy their own home. They go into great detail about how much it has always been a struggle to buy a home, and that if young people decreased their expectations and bought something small they could work their way up the property ladder.

I am one of those generation Ys looking to buy my own home, and from this perspective, it is not quite that simple.


The mythical property ladder
The argument that if younger generations decreased their expectations, and maybe bought a small apartment now, so that they could somehow work their way up the ‘property ladder’, is entirely misleading.

For example, a young couple buys an apartment for $200,000 in lieu of a $400,000 house they really want based on the contemptuous advice of older generations. They imagine that in 10 years they might be able to sell for $350,000, netting a profit of around $100,000 to spend on a larger home (after transfer costs). The problem is that larger homes have also increased in price by 75%, so that the $400,000 house is now $700,000. Buying that dream home has gone from a $400,000 prospect to a $600,000 prospect even with the apparent advantage of being on the property ladder.

The way to benefit from increasing property prices is to buy multiple investment properties, so that you leverage the benefits beyond your single dwelling needs.

No more avocados
Next, we can look into the arguments about spending a little less on luxuries to get a person into a home-buying financial position. Dining out, gadgets, and holidays all seem to get mentioned. But if we look into it, these relatively small expenses are not the main factor – the main factor is income.

A hypothetical future home buyer might spend $200 per week on dining out, ‘gadgets’ (mobile phones etc), and travel. That’s $10,400 per year – maybe $3,000 on a trip to SE Asia, $2,000 on gadgets, $2,000 on dining out, and the balance for other luxury items. Let’s see what that money could have done if it were funnelled into a property-buying strategy.

Assuming a starting point with no savings, this hypothetical person (or couple, or family) can save about $58,000 in 5 years assuming they receive 6% on their savings. If they thought they might one day want to live in a home that currently costs $300,000, by the time they save their $58,000 the home is worth $400,000 (at a 6% price growth rate). They now need $80,000 for their deposit. They continue saving instead of splurging and in another 5 years they have $137,000 saved. The home is now worth $535,000. They have enough for a deposit, but the repayments on their home and associated ownership costs are now around $900/week.

So after ten years of saving, living life without those luxuries that make it so much more enjoyable, they are in no better a position than before.

I’ll leave you with a question. If you bought a home for $100,000 in 1990, and the market his risen so that it is now worth $600,000, how much better off are you?

How randomness rules our lives and why statistics need discipline

I have been reading Leonard Mlodino’s terrific book The Drunkard’s Walk, which is essentially an historical narrative on the development of thought around randomness and probability intertwined with modern statistical anecdotes. I would highly recommend this book to you all (especially if the inner nerd in you enjoys a little mathematical philosophy like mine does).

I feel the need to share some of the most interesting insights, and highlight some of my remaining concerns about the nature of randomness and probability. My main reason for caution is because the normally practical and insightful discussion occasionally crosses the boundary between mathematical and statistical insight and plain old common sense. These instances reiterate my stance that statistics need discipline. For now I will put these to one side – topics for future posts.  Today I want to share one of the more interesting insights into differentiating luck from skill with some basic probability theory.

Helmet law rebound effects and the success of terrorism

I write regularly about rebound effects - those unintended consequences that occur due to behavioural adjustments.   I wrote my Master’s thesis on the rebound effects from energy efficient technologies and household energy conservation behaviour (a good summary is here, my thesis is here, a draft paper on household conservation is here, and a draft paper on the effect of government environmental subsidies is here)

I have written about rebound effects from using photovoltaic panels.  The rebound effect from recycling, which enables us to use even more of the raw material we are trying to conserve. Recently, I wrote about the potential rebound effect from sunscreens – because we don’t have the immediate signal of sunburn to tell us that we have had enough sun exposure, we tend to spend more time in the sun.

One area I am particularly adamant that unexplored rebound effects exist is in preventative health care costs – by preventing one disease, we enable people to succumb to other diseases, which have potentially greater treatment costs.

But these sly rebound effects do not end there.

Population growth and the residential property market

I have been asked to develop further my ideas on population growth and residential property.  I hope to make it clear that arguments using population growth as a cause of future house price growth are probably misleading.

The first chart (above) shows the rate of population growth (RHS) and the the growth in the ABS capital city price index (LHS).  There are two important things to take away from this chart.
1. The rate of population growth can change very rapidly, and extrapolating past trends will always miss changes to this rate.
2. There is no significant relationship between these two figures over the period.

The land tax remedy

I have made  my point about the social benefits of land taxes clearly in the past.  I want to now direct the interested reader elsewhere for some informative discussion.

Here is an excellent article discussing land taxes and land price bubbles in an Australian context.  More from the same author here, and a plug for his personal blog here (take note of the CPI discussion - I want to discuss that in more detail in the future).

For those who want to digest some of the classic writings on the issue, see Progress and Poverty by Henry George (written in 1879).

Unfortunately there is a powerful political lobby working against such beneficial tax reform.  The Property Council of Australia has been pushing for reductions in land taxes, citing any increase in tax revenue from this source as a national embarrassment.  Of course, the large increase observed in Queensland (below) is partly due to the extremely low land tax base in 2007/08.  Not mention of the scale of the tax, just the increase.  Queensland's land tax revenue was just a third of the land tax revenue of NSW in 2007/08.

A little off topic now, but over drinks on the weekend I was talking to a Dutch friend of mine who also happens to be an economist.  He is thinking of moving to Australia but is very hesitant due to the exorbitant cost of living here compared to incomes.  He recently bought a new apartment in a the 'happening' part of town, and his total costs per month (including loan repayments, body corporate, rates, and his insurance for the home, car and motorbike which are a package) are 800Euro ($1300AUD). That's only $300AUD per week for all those expenses combined! That is below the median rental rate for a 2 bedroom apartment in Brisbane (including new and old stock).

There are a number of reasons for this.  In Holland, interest on loans for owner occupied dwellings is tax deductible.  The interest rate itself is just 4%.

So if the Dutch average household income is slightly higher than Australia's, and the Dutch have generally less land available, why is owning a home so affordable there?  And why is the rate of Dutch home ownership (54%) much lower than Australia's (70%)?

The sunscreen rebound effect

I’ve just returned from a few days at the beach with my family. One thing that stands out as a key function of a parent in the summer beach environment is making sure your child avoids getting sunburnt.

This got me thinking about a world without sunscreen. This cheap little cream enables us to withstand sun exposure like super-humans, avoid painful sunburn, and partake in activities that would be out of the question in a 'no sunscreen' world.

Since sunscreen allows us to tolerate so much more exposure to the sun, is it actually contributing in some way to increased incidence of skin cancer? Are the net health benefits of sunscreen actually much lower because of our change in behaviour?

 How big is the sunscreen rebound effect?

There seems to be some acceptance of the sunscreen rebound. This article states that “Sunburn may even protect against melanoma - by keeping people out of the sun.”

Again here:

The Australian experience provides the first clue. The rise in melanoma has been exceptionally high in Queensland where the medical establishment has long and vigorously promoted the use of sunscreens. Queensland now has more incidences of melanoma per capita than any other place. Worldwide, the greatest rise in melanoma has been experienced in countries where chemical sunscreens have been heavily promoted.

And here:

...sunscreen use tends to prolong the amount of time people spend in the sun while they are on vacation—and that only sunburn modifies the behavior of sun-seekers

And here:

Sunscreens suppress natural warnings of overexposure to the sun and allow excessive exposure to wavelengths ofsunlight which they do not block. Because sunscreens create a false sense of security, more effective measures to reduce sunlight exposure, such as limiting time spent in the sun or use of hats and clothing, may be ignored.

My experience suggests that all of these statements are true to some degree.

If everything was held constant - time in the sun, covered clothing, etc (notice the decline in hat wearing in the past few decades?) - then sunscreen may be quite effective at preventing skin cancer. But humans have a tendency to adjust their behaviour to take maximum advantage of such innovations.

The question that remains is whether there is still a net health benefit from sunscreen. But due to the plethora of uncontrollable variable in any longitudinal study, I'm not sure that we will ever have definitive statistical evidence for this.

Are economists cheapskates: A case study

Lately, economists have been copping it from all angles.  They have been widely acknowledged as cheapskates, following this Wall Street Journal article.


My personal view is that economists are either; (a) more aware of the satisfaction they derive from various goods, services and activities (they know their utility), or (b) studying economics makes us more aware of which choices provide more satisfaction.


I tend to agree with this point about economists, and myself in particular (from here):
They are cheap in the sense that they need to be convinced of an item's value—and be convinced of the fact that there is no cheaper way of getting that item—before paying up. They hate being wasteful, and they take a cold, scientific approach to maximizing efficiency.

GI Joe and the Market for Lemons

GI Joe is possibly the worst movie ever (see the number of goofs and plot holes here). But I still spent 2 hours watching it, even though there were plenty of better things to do with my time. Am I simply a fool?

The answer is, well, maybe. The reason I sat all the way through is that I thought the movie might redeem itself by having a nice twist at the end, or even a few cheesy lines that I could laugh at. But no.

Considering the number of terrible films made this type of situation is relatively rare. It is easy to get a number of honest reviews to narrow down the quality before watching a film.

In any case, it got me thinking that movie markets are similar to lemon markets because the quality of the good cannot be known in advance. In a true lemon market the quality cannot generally even be known after the good is consumed.

Economics of work and leisure

Recently, I cut back work to 4 days a week with a surprising result. Rather than feeling like I am enduring marginally less of a bad thing, I am actually finding work more challenging and interesting – even though I am surrounded by the same public sector circus.

I feel like a 20% cut in work has resulted in an 80% improvement in my work satisfaction, rather than merely a 20% boost.

As an economist I really shouldn’t be surprised. Economic theory suggests an optimal work time – there are decreasing marginal benefits to work (in terms of pay), and increasing marginal costs (in terms of time, level of stress, level of frustration etc).

But this experience (and the popularity of this television show) has got me thinking about how the wellbeing of society at large can be improved by working less.

Investing the easy way

If I combine the ideas of my land tax post, and my post on Tony Abbott, I end up with a generalised principle of scarce resources.  That is, that productivity gains across the economy accumulate as capital value of scarce resources that have few substitutes, with land being the ultimate example of this principle.

As we find dwindling environmental assets such as wild fish stocks, scarce rights to harvest fish begin to accumulate value due to economy wide productivity gains.  Australia is separating land and water rights as part of National Water Reform, and these finite water rights will also exhibit this general principle.

Most interestingly, and permits from the proposed Carbon Pollution Reduction Scheme will have this characteristic.

We will make a transition from a society where wealth accumulates in land, to one where wealth also accumulates in various rights to other finite resources.  I'm not saying this is bad. In fact the creation of finite rights is the best way I can think to place a value on scarce environmental assets.

I guess my point is that investing in these new finite rights to the environment is one way to invest in the protection of the environment.  Simply buying and holding these rights will accumulate wealth in much the same way that land traditionally has.  Of course, buying land and not developing (or even improving the environmental condition of the land) is a fantastic way to invest in the environment.

*Please note this idea is not yet fully developed.  Any ideas/comments are appreciated.

The Christmas gift arms race

I do like Christmas. Maybe it’s the memories of childhood where a simple water pistol was enough to keep the anticipation high for weeks, and then become an object of desire (and destruction) for months.

But these days I feel like Christmas has become more of a burden then a blessing. My experience suggests that the last decade has seen the demise of delayed gratification. Maybe it’s just because as a child you are subject to parental decisions, and so you learn about delayed gratification. Then in adulthood, you realise there is little need for that anymore and are happy to splurge whenever it suits you. But maybe it is a more widespread cultural phenomenon.

The cause of this burden I feel is what I call the Christmas arms race.

Summer Reading

The past few weeks I’ve somehow found time to read.  Here are a few interesting titles that I would recommend.

Tony Abbott...

…believes that a high price of oil will encourage new discoveries, such that the concept of peak oil is not valid.  This is a classic example of what could be called ‘Price religion’.

Could I suggest that Tony Abbott (and I guess many ideological economic zealots) try and apply their logic elsewhere.

For example, if the price of fish goes up, does that mean that we will discover more fish on the Great Barrier Reef?

If the price of land goes up, will we discover more land?

Of course Tony Abbott and other followers of the Price religion don’t believe we will find more fish on the reef if the price goes up. But somehow, they will leave their logic at the door when it comes to oil or other fossil and mineral resources.

Then again, he could just be reiterating his party line – it is probably not a good time to let the media catch a glimpse of anything other than unity in the Liberal party these days.

Best of luck with that Tony.

*Note: I have grown to dislike all the current political parties, although I used to give support to the Greens. Maybe there is an opportunity for a fresh young political party in Australia these days?

Are the States simply an historical legacy?

Kevin Rudd seems to be taking Federal control wherever he can.  His latest move is take more control over town and regional planning.  (Does that mean more regulation or less?)

But why not scrap the States altogether?  Aren't States just historical happenstance?

It's an old question. As a State employee I have witnessed the inefficiencies of this bureaucracy first hand.  More importantly, I have witnessed the animosity between State and Federal governments where open cooperation should be the order of the day.  The States always complain about the lack of understanding of Federal officers. "They don't understand what it's like in Queensland" - true, they don't understand the getting things down the slowest and most expensive way is the how we do it.

But my questions are, what is holding back Federalism (for want of a better word)?  Is there not enough public frustration with the States, no political will?

If there was the political will, how would one actually start the process of removing State governments?

Maybe in my lifetime I will get a chance to witness these things.

PS.  I'll be in Canberra next week liaising with the Federal government, so the blog may be quite for a while.  Maybe when I'm there I can get some thoughts from Federal government officers on this issue.

A graph I promised to make

There is a lot of talk about population and number of new dwellings in the housing market debate.  What is generally overlooked is that at any point in time everybody is living somewhere.  Occupancy rate is fluid, prices change, and in the long term, population growth in an area can't happen without prior construction of housing. 

The graph shows the new dwellings constructed per new person (per person of population growth).  We do notice a recent decline in the number of dwellings being constructed nationwide compared to the population growth, which is reflected in the later graph showing increased occupancy rates.  The direction of causation amongst these variables remains unclear, and in all likelihood, they are interdependent.

Regression with net new dwellings per person of population growth as an explanatory variable for change in the capital city price index gives a negative coefficient (-0.011) but really, has no explanatory power (r2 of 0.006).

That means that analysis of population growth and dwelling construction figures has no power in explaining housing price changes.

Australia's most expensive house

The previous record for Australia's most expensive single dwelling (don't think it falls into the house category, nor even the mansion category) was a measly $45million.  Just this week that record has been smashed by a respectable figure of $57.5million for a Perth waterfront mega/super/ulltra-mansion.


(What was he askin'? $70million - tell him he's dreaming!)


It shouldn't be a surprise that the sale was from one mining baron to another.  In Brisbane mining companies have a reputation for sending lots of cash in a hurry.


What shocked me was the claim from the real estate agent the he had sold Australia's most expensive house back in 1980 - for just $2,150,000.


Times have indeed changed.