Australia not an island away from world’s troubles – recession, bank runs, and printing cash

The continued media hype around Australia’s economic stability and security can be partly attributed to the fact that, by official figures, we avoided a ‘technical recession’ during 2008/09, and also that ‘the health and strength' of Australia's banking system played a major factor in domestic economic outcomes following the financial crisis (here for example).

Griffith University’s Professor Tony Makin, however, has a little more to say about whether Australia actually avoided recession. The answer depends on your definition, and we are unique in that respect.

In the aftermath of the GFC in September 2008, Australia's nominal GDP, real GDP measured on an income basis and on a production basis, as well as real GDP per person, all fell over two successive quarters, as did various other national income measures that account for the slump in export commodity prices (or terms of trade) at the time.

Of the many national accounts series the Australian Bureau of Statistics publish, the only one indicating there wasn't a recession was the real, or price level adjusted, national expenditure series.

In the US, a recession dating committee of the National Bureau of Economic Research uses a battery of macro-economic measures, not just the somewhat arbitrary two successive quarters of negative real GDP.

If the behaviour of Australia's business cycle in the aftermath of the GFC had been assessed by an independent committee of economists with reference to a broader range of macroeconomic indicators in this way, a recession, albeit mild, would most likely have been declared for 2008-09. But this would not have been of great concern because, due to greater labour market flexibility, unemployment did not rise anywhere near as much as in the recessions of the early 80s and early 90s.(here)

No doubt business people would have wondered how official figures could have been so out of touch with on the ground realities during early 2009, but a mere statistical discrepancy kept the headlines optimistic.

And as far as the ‘health and strength’ of our banking system, well, let’s just say a better phrase would be ‘government rescue’ of the banking system, with the deposit guarantee and massive fiscal and monetary stimulus.

This extract from the book Shitstorm: Inside Labor’s darkest Days, has far more detail on just how perilously close our own banks were to disaster.

All around the country, banks were facing unusual demands for cash. Small businesses in Queensland and Western Australia were switching their deposits from regional banks to accounts with the big four banks.

An elderly woman turned up in the branch of one bank in Queensland with a suitcase and asked to withdraw her term deposits of $100,000 or more. Once filled, she took the suitcase down to the other end of the counter and asked that it be kept in the bank's safe.

A story did the rounds of the regulators about a customer who wanted to withdraw his six-figure savings. The branch manager said he did not have that quantity of cash on hand, but offered a bank cheque, which the customer accepted, apparently unaware that the cheque was no safer than the bank writing it.

It was a silent run, unnoticed by the media. Across the country, at least tens and possibly hundreds of thousands of depositors were withdrawing their funds. Left unchecked, there would soon be queues in the street with police managing crowd control, as occurred in London at the Golders Green branch of Northern Rock a year earlier.

...

Households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke - the onset of the global financial crisis - and the beginning of December. That is roughly 80 tonnes of cash salted away in people's homes. Mattress Bank is doing well, was the view at the Reserve. A year later, only $1.5bn had been put back.

The worst problems were in the second-tier banks, particularly Queensland's Suncorp and, in Western Australia, Bankwest. Deposits at the big four banks were surging as customers sold their shares, pulled money out of cash management trusts and put the proceeds in the bank. But at Suncorp deposits slumped by $1bn. They dropped $2bn at Bankwest.

The regulators and the government were gravely concerned for these two banks. Suncorp had total assets of $75bn and Bankwest $60bn. Bankwest was in double trouble because its British parent, HBOS, was teetering on the edge of bankruptcy.

...

Despite their preparation, the Lehman crash caught local banks by total surprise. NAB chairman Michael Chaney had set off on a 13-day rafting trip down the Grand Canyon on the day Lehman failed. He had taken a satellite phone but by the time he got it to work his share price had collapsed by almost 30 per cent. "I couldn't get a helicopter in there, so it was a five-hour climb out," he says.

Balance of payments figures show that in the immediate aftermath of the crash, Australian banks were called on to repay $50bn in short-term debt to international investors who refused to roll over their exposures.

Governments across the world were also being tested. Two weeks after the Lehman crash, Ireland's banking sector was facing an alarming run on larger deposits. The government stepped in and guaranteed all deposits and wholesale fundraising.

There was an immediate call for the British government to follow suit. Within a week, Germany, Denmark and Greece had offered unlimited deposit guarantees, while the British and a number of other European governments had increased the size of their insurance schemes. The Reserve Bank, APRA and Treasury were worried as were the chief executives Wayne Swan was talking to.

The long-standing concerns of the main banks about depositor protection were cast aside. The fate of small institutions could influence the stability of the system.

"One of the lessons of this whole period is you can have an abstract almost clinical discussion in the absence of a crisis about which institutions are systemically important and which are not. But when the crisis hits, is there any financial institution that is not systemically important?" Henry says. "It was my view back in September after the collapse of Lehman, I came to the view there was no financial institution in Australia that could not be regarded as systemically significant."

The issue was so delicate that most cabinet ministers knew nothing of what was going on.

"Some of this stuff is so sensitive, the bank guarantee could only be agreed between the Prime Minister and myself," says Swan. The government's unlimited guarantee of retail deposits went further than any other country, partly because Treasury was now concerned about capital flight.

Nothing is so firmly believed as that which least is known - or why changing your mind is evidence of learning

For a second, consider of all our major public thinkers today. They do the opposite, constantly telling how sure they are of their beliefs and criticizing their “opponents” for changing their minds. Changing your mind is a good thing, Montaigne would say. It means you’ve resisted the impulse to think you’re infallible. He wrote that as part of his profession of getting to know himself he found such “boundless depths and variety that [his] apprenticeship bears no other fruit than to make me know much there remains to learn.” If only we could internalize that attitude—instead of feeling cocky when we learn something, acknowledge that it really just taught us how much more we need to learn. (here)

While I often use this blog to vent frustration, propose new ways of looking at problems and possible unintended consequence of our actions, this does not mean that my ideas and opinions are as fixed once published. Indeed, if I look back at some of the opinions I held some years back I can imagine a heated debate between current me and previous me.

For example, for a period of time, I had a fixation about peak oil and what it meant for society. I thought in a linear manner, ascribing a reduction in total economic production possible to a reduction in technically possible rates of oil extraction, without thinking of behavioural responses and adaptations likely to take place including a renewed demand for alternative resources. My last post clearly shows that I have edged away from that view to a more reasoned and 'systems' view of economic behaviour.

I used to be passionate about ‘sustainable’ living (whatever that means). If we could only all do our little bit our environment, in the holistic sense rather than just the trees and animals sense, would be a better place to live. However, with more research into the matter it appears that while my own choices are the only ones within my control, there are offsetting effects from the actions of others that may render my personal actions ineffective.

While my ideas evolve slowly as I seek evidence one way or another, I can’t help but marvel at how quickly strongly held beliefs can change in a time of crisis, even when evidence for the new idea is as sparse as the one previously held.

CPI surprise

Today’s Australian CPI data, according to the headlines, was ‘lower than expected”.  This was the first part of a forecast I published here back in early September, when I said “Inflation and GDP will surprise on the low side in the September quarter”.  GDP figures come out with the National Accounts on the 1^st December so we had a little while to wait before assessing my prediction (1^st November is the ABS capital city price index which may also show some surprises).

But the CPI print really shouldn’t have been a surprise.  Maybe most economists have loyal wives and girlfriends (or husbands and boyfriends, although it is a male dominated profession) to do their shopping, so they wouldn’t have noticed the price declines in food, health, communications and transportation in the previous quarter.

It is evidently odd that the US can experience no price growth with a collapsing dollar, while Australia’s currency has gained strength yet our favourite media hungry economists forecast high inflation and multiple interest rate rises. The high dollar was always going to dampen any inflationary pressures.

On a far more interesting note, Google has been experimenting with a real-time price index compiled, I assume, by experimental software that searches for listed prices of items on the web.  Their index has showed a “very clear deflationary trend” for the US, and has the additional benefit of compiling the same (or at least comparable) indexes across countries.  By the same measure the UK has shown a slight inflationary trend, attributable to the weak sterling.

The automatic nature of the index also provides the possibility of releasing multiple indexes with different scope and purpose, to provide a much richer picture of prices changes across the economy.  For example, hedonic price adjustments can be in one index and not in another, and the basket of goods can be quickly changed to suit different social groups.

There has been a strong push for the ABS to publish multiple prices indexes to address these very issues, particular with regard to quality adjustments.  I have demonstrated the Lower Bound Problem of Hedonic Price Indexes before, although Rob Bray makes the argument more concisely:

Revise the approach to quality adjustment to take account of the actual utility consumers achieve from changes in product ‘quality’; and also consider an approach which reflects the extent to which products actually exist in the market place for consumers to purchase

Twice the quality is not the same as half the price.

The benefits of real-time data available to Google are yet to be fully understood by economists, but there is no doubt the Hal Varian, Google’s chief economist, will change that soon enough.

Mr Varian also discussed some of his other work on using Google’s search data for economic forecasting. He said that he is working on “predicting the present” by using real-time search data to forecast official data that are only released with time lags.

For example, searches for “unemployment insurance” may be a good tool to predict actual claims for unemployment insurance, or the unemployment rate.

This is something I have tested before with the US housing bubble, clearly demonstrating that search volumes can be amazing predictive tools.  It won’t be long before these real-time measures become commonplace in mainstream economic publications.

Zombie Economics

This Friday, 29^th October the Young Economists will host the launch of John Quiggin’s much anticipated, and creatively titled, book, Zombie Economics: How Dead Ideas still Walk among Us.

This is an opportunity to meet an interesting bunch of economists and young professionals in a social atmosphere and discuss some of the challenging ideas in Professor Quiggin’s book. All are welcome to this free event, and there are free drinks for Young Economist and ESA members.

There are prizes on offer for best dressed living dead economist, and best economic limerick (try here for some inspiration)

A PDF flyer is here.

No limits to economic growth

For an environmental economist these words are blasphemous, but I said them, and I have good reason to. 

The modern Limits to Growth movement gained prominence with the publication of the Club of Rome’s book of the same name in 1972. This book, by Donella Meadows and colleagues, reports on the results of a computer simulation of the economy under the assumptions of finite resources. The World3 computer model produced scenarios showing that under various assumptions, a decline in non-renewable resources will lead to a decline in global food and industrial production, which will in turn lead to a decline in population and greatly reduced living standards for all. 

The following image is one example of the results of their simulations where a catastrophic decline in industrial output, food production and population will result form reaching our finite resource limits. 

While I don’t doubt the finitude of many natural resources, and that the human population cannot grow indefinitely, I doubt that finite limits of resource inputs to the economy necessarily means that economic growth cannot continue indefinitely.

To be sure, I am certain that substantial unforeseen changes to the rate of extraction of some resources will lead to short-term disruption of established production chains, such as shocks to oil supply, but in the long run I see no reason that an economy with finite resource inputs cannot increase production through improved technology and efficiency.

I need to be clear that when I talk of economic growth I mean our ability to produce more goods and services that we value for a given input. Increasing the size of the economy by simply having more people, each producing the same quantity of goods, will be measured as growth in GDP, but provides no improvement in the material well being of society.

A better measure of growth is real GDP per capita. This adjusts for the disconnection between the supply of money and the production of goods, and adjusts for the increase in scale provided by the extra labour inputs. Even then, this may overestimate the rate of real growth occurring, as there has been a trend of formalising much of the informal economy, for example child care, which is now a measured part of GDP rather than existing as individual family arrangements.

On these adjusted measures economic growth is a very slow process. In a world where non-renewable resource inputs are fixed or declining, it is the rate of the decline and the speed of adjustment that will determine the overall outcome for our well being. If the rate of decline of non-renewable resource inputs is below the rate of real growth (our ability to produce more with less) and the rate at which we can substitute to renewable alternatives, we can avoid economic calamity in the face of natural limits.

Unfortunately there are other factors at play.

The rate of population growth will greatly determine the per capita wellbeing in a time of limited growth. While extra labour input will no doubt contribute to production inputs, my suggestion is that this input will be outweighed by a decline in complementary resource inputs. Remember, we care about real economic ‘wealth’ per capita, and with more people there is a smaller share of remaining resources each person can utilise in production, thus reducing wellbeing.

Further, we can begin to take productivity gains as leisure time instead of more work time, thus there is a possibility of maintaining a given level of production in the economy with fewer labour inputs over time.

There is also the reliance of our financial system on high levels of growth. Many economic growth critics cite the need for exponential growth of financial measures of the economy as being in conflict with any finite system. Yet the ‘system’ itself is a human construction and I seen no reason why a stable money supply cannot operate under various levels of growth (even prolonged negative growth) if used cautiously and with little leverage.

Often forgotten is that many resources are currently fixed and yet go unnoticed. There are always 24 hours in a day, but that doesn’t stop us producing more each day. If a shortage of hours was encountered, would a sudden change to 23hrs (a 4% decline) have a dramatic impact? Or would society easily adjust to this new environment of tighter time scarcity?

While a smooth transition to prosperity under much greater limits on resource inputs to the economy is theoretically possible, I don’t expect this to be our future reality. Self interested governments, businesses and the general public will react to short term shocks in unexpected ways, potentially promoting conflict, and taking the bumpy road. I have no doubt that there will extended periods of prosperity in the future, but also expect a rough ride to get to them.

Counterintuitive findings?

Pool fences

Could Queensland’s new tougher pool fence laws offer an opportunity to study the Peltzman Effect? Will we now feel that pools are no longer a safety hazard for toddlers and drop our supervisory guard? One man, who refuses to comply with the laws, has argued this exact point and is strongly supported in his views (if you can trust the newspaper comments).

In one case, a pool owner living on a canal has had to fence their pool, yet is not obliged to fence off access to the canal.  One does wonder about how far governments can go to protect us from our own behaviour.

Pool fences are only there to protect kids from parents who don't. There are no fences around all the lakes in Brisbane, Southbank's lagoons are not fenced, the Brisbane River is not fenced. Why? Because we are responsible enough to ensure our children don't get into danger in these areas.

What further astounds me is that lack of evidence in the pool fence debate. In one of the more interesting studies I could find, 52% of pools where toddler drowning events had occurred in Western Australia where compliant with the pool fence legislation (compared to 40% for randomly selected pools).  There was no further discussion of this key point – that statistically it appears more likely to drown in a fenced pool that an unfenced one (I would be very interested if anyone can find a more thorough study of the effectiveness of pool fence laws).

While this is just a small sample from one State, and I would question whether general conclusions can be drawn, some more rigorous examination of the effectiveness of pool fence laws is seems appropriate before toughening the laws.  Is the government really going to do the same thing and expect different results?

Cycling by the road rules

The Council is inviting CityCycle subscribers to undertake a Cycling Confidence Course to improve their bicycle skills and brush up on their knowledge of road rules.

Maybe that's a bad idea. Recent research suggests that people obeying road rules are more likely to be killed by trucks than those who disobey the rules by, for example, running red lights. 

Women may be overrepresented in [collisions with goods vehicles] because they are less likely than men to disobey red lights.

By jumping red lights, men are less likely to be caught in a lorry driver’s blind spot. Cyclists may wait at the lights just in front of a lorry, not realising that they are difficult to see.

In more than half the fatal crashes, the lorry was turning left. Cyclists may be deceived by a lorry swinging out to the right to give itself room to make a left turn.

I can’t agree more with these findings.  Every day I see cyclists waiting in the blindspot of a car or truck at traffic lights, and occasionally see a cyclist sneak up the left side of a bus while it is turning left.  I hope Brisbane City Council’s cycling confidence course acknowledges that sometimes it is safer to break the rules.

Congestion (queuing) as an efficient allocation mechanism

I have raised the idea in the past that road congestion is in fact an efficient allocation mechanism provided that there is prior knowledge of expected travel times.  Now, from The Australian we have this:

Sure, if we invested enough in roads, all cars could travel at the speed limit. But the costs of thus expanding road capacity would greatly outweigh the value motorists place on the savings in time and discomfort.

Exactly the same applies to road charging. With charges set sufficiently high, remaining drivers could go at speeds rivalling the Melbourne grand prix. But even Mrs Moneybags, rocketing in her Ferrari, would not value the benefits enough to offset the welfare loss to the peons forced by the high charges to walk to work. Add to their loss the costs of implementing the road charging scheme and the efficiency loss is all the greater.

Murray-Darling Basin Plan: Despite extreme lobbying, you can’t take water that does not exist

The release of a guide to the Murray-Darling Basin Plan is receiving very poor media coverage. This headline – “Basin Authority holds its first public meeting” - is entirely misleading. The Authority had numerous meeting with stakeholders including water users, irrigation groups, farmers groups, local councils, and anyone else who could claim and interest for the past two years. There should be no surprises.

Another here – “As many as 130,000 jobs could be lost because of reduced water allocations in Victoria's fruit bowl region under the Murray-Darling Basin plan, a farmer says” That’s right. A farmer says so, therefore it must be true. 

This is a week the farming lobby has spent years preparing for, and they are basking the attention. 

The further problem which is completely overlooked by the media, is that while the reductions in rights to take water are ‘up to 37%’ that means that most reduction in most rivers are ‘between zero and 37%’. 

Let’s not also forget the fact that these are reductions of paper rights, not volume taken. There would be very few water users whose volume taken matches the volume of their rights due to variability and recent dry conditions.  The graph below shows that recent rainfall conditions are below historical averages, although this is not uncommon in the long term.

What is missing from this mainstream media nonsense is any actual thought about the reason the plan was developed in the first place. Simply put, there are more rights to take water ‘on paper’ than there is water in the system. This leads to both downstream water users suffering at the expense of upstream users, and environmental areas suffering due to upstream water users. When downstream environmental assets, such as wetlands, receive water, the water also flows through to downstream users. 

There is even the possibility that the next five years more water will be used by irrigators than the past five years, even with the Basin Plan, simply because of rainfall variability. The percentage figures are based on long run averages, which are a distant memory for many people in the Basin. 

Imagine I give you a piece of paper that allows you to take 100ML/annum of water from a particular reach of a river. The river flow is highly variable and because of this you get 60ML one year, zero the next three, 100ML the next, then 25ML. You average 31ML. Then, you get told the stream is overallocated and you are getting cut 37%, so that your allocation is now 63ML. If we had the previous six years again the impact would have only occurred in one year - the cut would take your five year average from 31ML to 25ML – a 20% decline in average use, and a once in five year impact. 

If over the next 5 years you can take 63ML, zero, 25ML, 50ML, 5ML and 60ML, you might end up with even more water on average – 34ML/a instead of 31ML/a – despite the theoretical cut to you water right.

In South Australia for example, irrigators have only been able to access 10% or less of their water rights over the past 5 years or so. If the Basin as a whole shares the water more equitably, these irrigators may be able to use 63% of their previous water allocation – a 37% cut on paper, but a 600% increase in real water use compared to the past 5 years. 

Even the MDBA itself showed just how low actual water use is compared to these theoretical baseline figures from which reductions are calculated. The graph below is from page 130 of the Guide and shows that the average water use since 2002-03 is equal to their most ambitious reduction scenario.

My point is, people are taking the cuts as real water then multiplying impacts to flow on industries then getting bigger and bigger impacts that border on ridiculous. These complementary agricultural industries are clearly already adjusted to any proposed cutbacks.

The only person to present any figures on the media circus is economist Quentin Grafton. He makes his case that farmers are exaggerating losses as follows: 

"In 2000-2001, the gross value of irrigated agricultural production was just over $5 billion, and they used surface water of about 10,500 gigalitres in that particular year," he says. 

"Fast forward to 2007-08, 70 per cent reduction in surface water use, guess what happened to the gross value of irrigated agricultural production? It changed by less than 1 per cent." 

Not only are impacts greatly overstated but water users will generally be compensated for their theoretical water loss at market prices for water – whether the water exists or not. 

Historically most water rights are a gift from the State to landholders. They have generally earned a good living from these gifts, and now that the government has realised that too many were granted, they are going to pay to buy them back. 

While I’m on the water bandwagon, some people are taking the chance to have a dig at cotton and rice growers for their water consumption. What they need to understand is that while Australia is a dry continent, we are characterised by variability of rainfall. Some years it floods and to make use of the water you need a thirsty annual crop. That’s why the virtual desert regions south of St George are cotton areas, even though this intuitively seems bizarre. 

WEIRD people: Western, Educated, Industrialised, Rich, Democratic... and unlike anyone else on the planet

The Ultimatum Game works like this: You are given $100 and asked to share it with someone else. You can offer that person any amount and if he accepts the offer, you each get to keep your share. If he rejects your offer, you both walk away empty-handed.

How much would you offer? If it's close to half the loot, you're a typical North American. Studies show educated Americans will make an average offer of $48, whether in the interest of fairness or in the knowledge that too low an offer to their counterpart could be rejected as unfair. If you're on the other side of the table, you're likely to reject offers right up to $40.

It seems most of humanity would play the game differently. Joseph Henrich of the University of British Columbia took the Ultimatum Game into the Peruvian Amazon as part of his work on understanding human co-operation in the mid-1990s and found that the Machiguenga considered the idea of offering half your money downright weird — and rejecting an insultingly low offer even weirder.

"I was inclined to believe that rejection in the Ultimatum Game would be widespread. With the Machiguenga, they felt rejecting was absurd, which is really what economists think about rejection," Dr. Henrich says. "It's completely irrational to turn down free money. Why would you do that?" (here)

A recent paper by Dr Henrich and colleagues from the University of British Columbia investigates the psychological differences between WEIRD societies and other societies. In a deep examination of the literature, Henrich shows that while many basic similarities remain common to Homo sapiens, cultural factors play a large role in determining many psychological dispositions. Such differences occur when examining fairness, individualism and cooperation.

For me one standout finding was that the income maximising offer for the ultimatum game (discussed in the introductory quote) was a mere 10% of the total sum for most cultures in the review, while in typical WEIRD cultures a 50% offer was income maximising (see graph below).

So what environmental factors contribute to the difference?

Effective marginal tax rates and Australia’s welfare trap

Australia’s complicated social security system often leaves me baffled. There are so many forms of assistance for families, with rates of benefit and qualifying incomes changing annually, your entitlement (if any) is sometimes a lucky draw.

What I have noticed is the rate at which these benefits decline as the family income increases. So much so that I instinctively feel that earning a few extra dollars is generally not worth the trouble - unless of course my income was already high enough to be out of the qualifying range for family welfare benefits.

So I took the time to examine situation for Australian families, and it is quite revealing.

This recent paper, for example, shows that the effective marginal tax rate (EMTR), which estimates the change in take home income after tax and after accounting for reduced welfare payments, actually declines at higher income levels for almost every family type (see table below). High income families receive a greater percentage of an extra dollar earned than low income families, with middle income families suffering very high EMTRs.

For example, an extra dollar earned by a parent in a family with two dependent children and an income in the middle tax bracket will leave them with an extra 28c in the pocket, while for a high income family, they keep 67c out of any extra dollar.

There are even situations in Australia where the EMTR is greater than 100%! Low income families with dependents on youth allowance have an EMTR of around 110% - for every extra dollar earned, they get 10c less in their pockets.

Unfortunately, I fall into the group with the highest EMTR – families with dependents – where 15% of the group have EMTRs above 70%.

...families with children are more likely to face an EMTR of 50 to 70 per cent than other types of households, due to the accumulation of withdrawal rates for family related payments on top of income support withdrawal and income tax. This is observed even without including the withdrawal of childcare subsidies. On average, the EMTR is highest for couples with dependent children. (here)

After a quick bit of research, it appears that if I earn another dollar we lose 20c from family tax benefits, about 18c in the dollar from child care benefits, and 30c in tax – a 68% EMTR. If my wife earns an extra dollar we lose 40c in Family tax benefits (Part A and B combined), 18c of child care subsidies, and 15c in tax – a 73% EMTR.

In light of this outrageous situation, cutting down to part-time work (4 days/week) provides an extra 48days of leisure per year at a minimal cost to the family.

Also, if we factor in the extra expenses incurred due to extra work hours and time pressure – takeaway meals, remaining child care costs, driving instead of cycling, and splurging on treats because you deserve a reward at the end of a busy day, you quickly see the rational for staying in the welfare trap.

All this makes me wonder just how many families are trapped in high EMTR bands – all earning different incomes, but taking home much the same income ‘in the hand’.

Statistics lessons for property people

I have previously posted about the Property Council of Australia’s cowboy approach to statistics to argue for pro-sprawl planning policies on environmental grounds. Now Brian Stewart, CEO of the Urban Development Institute of Australia (UDIA) Queensland, needs a lesson in statistics.

In a recent bulletin to members he criticised the Local Government Association of Queensland’s interpretation of a report they commissioned on factors affecting home prices in South East Queensland.

He questions the conclusion that the AEC report commissioned by LGAQ refutes ‘for all time the spurious arguments of a so-called under-supply of dwellings in the SEQ market’. If he had paid attention in statistics it would be clear to him that this is exactly what the report does.

Although the report is far from an exemplary analysis of key determinants of residential property prices, the authors did estimate six econometric models to seek the determinants of real median house, unit and land prices in SEQ - eighteen models in total. If we quickly browse the report we find just one model, for house prices, not unit or land prices, where any of their supply-side variables is significant in explain real prices.

To be sure, Stewart’s interpretation of the report was poor, and his bulletin misleading, but I still have reservations about the report itself.

Particularly I have concerns about the choice of, and construction of, variables, including location bias in calculating the median prices and using ratios to total stock rather than sales volumes (particularly in the treatment of the FHOG). It seems odd that with 69 data points and 32 variables at hand they had trouble finding significant relationships in the data – could it be their selection was stacked with the wrong variables to explain prices?

One example of the construction of variable is ‘SEQ housing stock per capita’, which is total stock for SEQ at the beginning of the period at the beginning of the analysis (1991) of 734,126, less an allowance for depreciation (about 0.3%), plus new stock completed IN QUEENSLAND in the period. This variable then accumulates over time to represent the stock of housing.

I first hope that the new stock only includes new stock in the SEQ region and that this is a typo. Second, I can’t see how depreciating a dwelling is good accounting. What should be considered is a factor for demolitions, and it would be easy enough to estimate the demolition to new dwelling ratio based on past census data.

These types of errors abound.

Most importantly I wonder how this controversial variable could be negatively correlated with prices. In the section on housing stock (p13) it shows that dwelling stock per 100 people grew from 38.1 to 41.1 from 1991 to 2006, while real prices grew from around $100,000 to $250,000 in this period (below). Either a) the three other significant variables, the All Ordinaries, unemployment and mortgage rates, explained the most of the change, or b) the variable used in the analysis is the CHANGE IN dwelling stock per person, which was positive but declining over the period.

What is further surprising is the conclusion that the SEQ property market somehow behaves differently to other parts of the country. Given that the analysis failed to explain the behaviour of the SEQ residential property market at all (their final land price model on page 29 had seven variables but just two were significant), one wonders how such conclusions are drawn. I am happy for someone to explain why it is different here (cringe) if they have the evidence to support the statement.

Anyone looking to elastify the supply side should note the report concludes by noting how responsive supply has in fact been to prices:

...the lot stock for SEQ rose from 25,000 during the early part of the decade to reach 50,000 by December 2005 and has stabilised around 54,000 since September 2007. This progression follows the growth in land prices very closely, indicating that supply of undeveloped residential lots has responded to price signals.

Common sense and the CityCycle launch

I am pretty sure no one in Brisbane has ever said they do not ride for want of a bicycle. Nevertheless, Campbell Newman has spent $10million of ratepayers money on hire bikes to solve this none existent problem.  

I could be argumentative and say that if access to bikes was a problem, you could have bought 20,000 of them for Brisbane residents for that price (at $500 each – 33,000 at $300 each). 

After a dramatic week repairing bike stations that were installed backwards, today, Brisbane’s CityCyle scheme was launched, with 500 bikes at 50 stations across the inner city.  To my surprise there were actually some people waiting to use the scheme today.

There are few optimists left in discussion of bike hire schemes in Australia. Melbourne’s scheme, for example, is not quite off to a roaring start – 0.5% utilisation or 70 trips per day after three months.  I could repeat myself and highlight that the success of this scheme depends on its convenience to users.  Helmet laws and lack of road space are key impediments to convenience. Indeed, I proposed that a car hire scheme would be a better way to encourage cycling.

Brisbane is trying to overcome the helmet problem by giving away 2000 of them, but Council admits the helmet requirement shrinks the potential user base.  Tourists are apparently they are not a target market for the scheme. 

Too good to be true environmental solutions

... roughly 42 percent of U.S. lighting energy (in Canada the fraction might even be a little higher) goes to incandescent bulbs. ...compact fluorescent lamps in all sorts of sizes and shapes that have roughly quadrupled efficiency -- 11 watts replacing 40, 18 watts replacing 75, and so on. They last about thirteen times as long as a regular light bulb; therefore each one of them saves you not only three quarters of the electricity, but also a dozen replacement bulbs and trips up the ladder. That more than pays for them, even though these things are rather expensive.

Think of such a compact bulb, with 14 watts replacing 75, as a 61 negawatt power plant. By substituting 14 watts for 75 watts, you are sending 61 unused watts -- or negawatts -- back to Hydro, who can sell the electricity saved to someone else without having to make it all over again. It is much cheaper to save the electricity than to make it -- and not only in thermal stations. It is cheaper for society to use these bulbs than to operate a Hydro plant, even if building the dam were to cost nothing. Each bulb has a net cost of minus several cents per kilowatt- hour, and no dam can compete with that! - The Negawatt Revolution 

The crackpot with a mo, Amory Lovins, wants people to be paid to not consume electricity as a way to promote energy efficiency and decrease the demand for energy. He has been pushing the negawatt bandwagon for twenty years, yet for all our dramatic increases in energy efficiency, we consume more energy than ever (or more correctly, we use more natural resources to generate more electricity, heat and motion than ever). 

The term negawatt describes the fact that in a capacity constrained electricity generation system, reduced energy consumption by one customer allows an increase in consumption by another customer. Without the reduced consumption by one customer, the increased consumption by the new customer would only have been possible by investing in new generation capacity. Thus, the energy saved is as good as energy generated - so much so that the energy generator could pay users to reduce their energy consumption.

From an engineering perspective there is little wrong with this concept. Unfortunately, an economic perspective reveals many flaws.

Lessons for the RBA on their blunt instrument

RBA Governator Glenn "I''l be back - with higher interest rates" Stevens has been softening up the public for his next interest rate move. He warns that his toolkit contains only a blunt instrument, and we will all be affected. I guess if the only tool you have is a hammer, every problem looks like a nail.

... we only have one set of interest rates for the whole Australian economy; we do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions. A given region or industry may not fully feel the strength or weakness in the overall economy to which the Bank is responding with monetary policy. In fact no region or industry may be having exactly the ‘average’ experience. It is this phenomenon that people presumably have in mind when they refer to monetary policy being a ‘blunt instrument.

I think poor old Glenn is taking his hammer to a screw.

While he wisely notes we have one set of interest rates, not one interest rate, he seems to ignore the fact that differentiation of interest rates on debt should reflect the risk for each particular loan. The problem for the RBA is that those who actually lend in the marketplace are failing to properly price the risk premium associated with their particular loans. Housing is surely a risky investment at the moment, yet interest rates do not reflect the risk premium.

The obvious alternative to shifting the whole set of interest rates is to better manage the risk premium rate for a particular industry of concern, or forcefully adjust risks taken with other measures to suit the rates adopted in that industry.

For example, if banks insist on lending for housing at relatively low interest rates, they can reduce risk by keeping lower LVRs and more conservative income estimates. If they won’t do it voluntarily, because they suffer from extreme moral hazard associated with guaranteed government bail-outs, maybe the RBA can seek to have banks better regulated with regards to housing loan risks, particularly qualifying income and LVRs.

At the moment increasing interest rates will simple increase the interest burden on current debts, high risk or not, decrease take up of borrowing for productive purposes, and fail to curb the mispricing of risk and crude lending criteria of housing loans with the major banks.

What I have found interesting lately

Bizarre findings in advertising:

“...in a relaxed situation like TV watching, attention tends to be used mainly as a defence mechanism. If an ad bombards us with new information, our natural response is to pay attention so we can counter-argue what it is telling us. On the other hand, if we feel we like and enjoy an ad, we tend to be more trustful of it and therefore we don't feel we need to pay too much attention to it.

"The sting in the tail is that by paying less attention, we are less able to counter-argue what the ad is communicating. In effect we let our guard down and leave ourselves more open to the advertiser's message.

"The findings suggest that if you don't want an ad to affect you in this way, you should watch it more closely."

Responsible lending?

Genworth’s acting chief executive Paul Caputo said yesterday the group had relaxed its view on earnings from overtime and second jobs in loan serviceability calculations...

Caputo said: “We support loans up to 95 per cent LVR. One of the lessons of the global financial crisis is that where a borrower has skin in the game the behaviour is very different.

“I don’t think we will get back to underwriting 100 per cent LVR loans.

“Another factor is the National Credit Act. It would be hard to see how a 100 per cent LVR loan would fit into the responsible lending criteria.”

Why of course, lending 95% of inflated values to people who need second jobs and overtime pay to meet repayments on teaser mortgage rates epitomises responsible lending.  

Why are German home prices so stable? It is something they aspire to. Unlike Australia, where high prices are frowned upon everywhere except in housing.

Amazing graphic on the daily activities of Americans

Helmet laws back in the headlines - a good introduction to the debate

Leading indicators for the housing market - a website tracking advertising history to give up to the minute data on vendor discounting and days on market.

In the spirit of environmental month, a short must see video on global commercial air travel. What would be an economist environmentalist view?

Gaming leads to unintended consequences when governments try to stimulate housing supply

Australia’s excessively priced housing gave rise to the housing shortage myth, which in turn led governments at all levels amending planning policies to allow for greater scale of development. Densification, transit-oriented development, growth corridors and other buzz words, were drip fed by property lobby groups to politicians in search of an elixir for the ailing mortgage belt voter. The media, and by extension the public, bought into this supply-side ‘solution’ to housing affordability. Very few realised the irony of the situation – a policy on housing affordability that was a gift to existing property owners and ‘land banking’ developers.

The aggressiveness of changes to planning instruments to allow for greater heights and densities, and allow fringe areas into the urban footprint, provided opportunities to profit simply from speculation on the next change to the planning scheme. For landowners it became more profitable to wait three years for the local government to update the planning scheme to allow greater density of development, than to actually develop the site.

One example, South Brisbane, epitomises this situation.

At this prime location, within a stone's throw of the CBD, the previous limits of 12 and eight storeys were already conservative. 

The planning scheme for this precinct has changed from allowing four storeys, to seven storeys, then proposing eight storeys, then twelve storeys in the latest draft plan, and now the UDIA is calling to increase the heights much further. With the approval of a 30-storey tower adjacent to Milton railway station, one could assume there is a long way to go in this saga.

Expectations were for this pattern to continue. A landholder in this area recently mentioned they have no reason to sell or develop when the council keeps increasing the value of their land by changing the planning scheme. Landholders are gaming the Council, waiting for a signal that the gifts will soon expire before selling up to developers.

Maybe that signal is here.

The State government has intervened in the latest round of planning scheme changes to request the proposed height limits be cut back – where 12 storeys was proposed, they will allow seven.

For anyone aware of the standoff taking place the flood of development sites onto the market in the month since the State government decision would come as no surprise. Who would have thought reducing height limits would promote so much development activity?

The moral of this story is that certainty (or lack thereof) can greatly change real outcomes. Economists often foolishly assume that all government decisions are taken at face value by the marketplace. Few realise the time element and that parties affected will already be anticipating the next decision, or gambling on a political backflip.

UPDATE: More evidence of rewarding land banking rather than productive land use, from the Local Government Association of Queensland -

The LGAQ today criticised a key provision of legislation introduced to state parliament on Tuesday which retained a 40 per cent rate subsidy for large companies holding big tracts of land approved for development but not yet formally subdivided.
The money at stake is not the issue here. The issue is the massive contradiction of rewarding developers for not sub-dividing land to increase supply when the state government says it is championing housing affordability issues

Flow-on effects of recycling - are there net benefits?

It is widely claimed that recycling “saves resources.” Often, recycling proponents claim that it will save specific resources, such as timber, petroleum, or mineral ores. Sometimes particularly successful examples are singled out, such as the recycling of aluminum cans. Both of these lines of argument rest on the notion that reusing some resources means using fewer total resources.

Daniel K. Benjamin

Like efficiency, the word recycling reflects positivity from all angles. How could anyone say a bad thing about recycling?

I propose not to say a bad thing for the sake of cementing my identity as a super-sceptic, but to examine in detail the potential flow-on effects of recycling and determine whether the espoused benefits can theoretically be delivered.

Generally two benefits of recycling are proclaimed. First, waste will be diverted from landfill, thus we can reduce the space required for this purposed and reduce the threat of leaching from landfill sites into groundwater systems and other environments. Second, recycled material will substitute for raw materials and thus reduce consumption of natural resources which may have associated negative environmental externalities.

These are two distinct benefits, and achieving one does not necessarily imply achieving both.

There are also two different economic scenarios for achieving recycling with different outcomes – the profitable recycling scenario, and the unprofitable recycling scenario that requires government support.

The profitable scenario represents an improvement in overall economic efficiency, thus, like the case of profitable energy efficiency, it facilitates future economic growth and improves our productive capacity.

In this scenario, recycled material cannot be said to be diverted from land fill, because it would never have been put there in the first place due to the material’s value to remanufacturing. If the material was simply dumped on the street there would be an opportunity for a business to emerge to collect the material and sell for a profit. Without a counterfactual we cannot estimate the effect on either of our two recycling claims.

If we assume instead that the counterfactual scenario is one where the technology had not yet emerged to make recycling profitable, then we can now consider the flow-on effects from the technology. It is best to have a single material in mind, say glass, when thinking of these effects.

First, the price of the final goods (windows, bottles etc) using the newly recyclable material will decline due to the reduced cost of recycled instead of raw materials. Thus we will see an increase in demand (not a shift in the demand curve, but a new point on the demand curve at a lower price) for these final goods and therefore an increase in demand for recycled and/or raw materials (recycled glass or silica from natural sand deposits). Depending on the availability of recycled material compared to the total quantity of raw materials, this can lead to greater demand for natural resource itself (sand mining).

We can now say we have probably diverted waste from landfill leading to a greater quantity of material circulating in the hands of society (as either capital equipment – glass in buildings perhaps- or soon to be recycled consumables – maybe bottles), but we cannot say with certainty that the new recycling technology has reduced demand for the particular natural resource in question. Nor can we say that demand for, and consumption of, other natural resources remains unaffected. In fact the new recycling technology, since it improved overall economic efficiency, is likely to increase demand for all natural resource inputs to the economy.

The alternate unprofitable scenario represents a decrease in overall economic efficiency, and will reduce overall economic activity compared to scenario where government did not use its coercive power to enforce this unprofitable venture.

In this scenario we are likely to see a decline in waste to landfill compared to the economically efficient situation where recycling is not subsidised. We face the same situation of compensatory demand due to price declines of final goods manufactured using the cheaper subsidised recycled materials. This scale of this offsetting behaviour cannot be readily estimated and is likely to strongly depend on the relative prices and quantities of the recycled materials and raw material inputs are a particular point in time. A decline in overall demand for raw materials in the economy as a whole is certain in the unprofitable scenario due to the overall reduction in economic efficiency.

For unprofitable recycling the net result will be a reduction in waste to landfill of both the recycled good and other goods (since we can now produce fewer goods in total across the economy), and a reduction in resource consumption of the recycled material and all other resource inputs to the economy.

In what is becoming a familiar environmental theme at this blog, it should be clear that indirect measures to curb negative environmental impacts from our activities, such as promoting conservation behaviours, profitable energy efficiency, and recycling, have questionable net impacts on the environmental issue at hand.

Returning to our two main environmental goals of recycling – reduce negative impacts form landfill sites and reduce resource extraction that involves an environmental burden – we can clearly offer more direct measures which are both easy to establish and have certain environmental benefits.

The first environmental goal can be achieved by setting minimum environmental standards for landfill sites to address leaching (or any other associated problem depending on local conditions) including, perhaps, restrictions on location. In response to these criteria, landfill operators (public or private) would need to adopt appropriate measure to limit external impacts – possibly lining their pits with impermeable material, sorting, washing or removing particular types of waste, or some other creative response. These extra costs of waste disposal – the internalised environmental cost – will flow through to the cost of disposal, and may render some recycling programs profitable.

For the second environmental concern, resource extraction, similar direct controls can be used. Sticking with the glass example, the scope of sand mining can be limited through planning controls where natural environments which are valued by the community. Once this limit is established, sand mining in that area can proceed, at any particular rate, with certainty that there is a finite limit to the environmental cost.

These limits would never be, strictly speaking, perfect. They would at best reflect the perceived value of the environment to the community. There is no reason that the limits should not be stricter in some areas than others.

As an indirect environmental measure with questionable benefits, recycling, like efficiency, is claimed to be a panacea for a variety of poorly defined environmental ills. We often forget to critically examine the link between this indirect environmental ‘remedy’, and the target environmental illness.

A closer look at Australian incomes and predictions from Google Trends

Income distribution fascinates economists.  The release of the new ABS personal income estimates for small areas gives a complete picture of the geographical spread of incomes in this country for the first time.  Given the amount of media attention to Australia’s recent economic success, these figures surprised me.  They are extremely low. Australia’s average gross personal income for 2007/08 was $44,402 or about $853 per week. 

Let’s take a closer look.

The calculation of this income figure is an average of individuals with any of the following sources of income in the 2007/08 financial year -wage and salary income, investment income, unincorporated business income, superannuation and annuity income. It does not include individuals whose sole income comprised government benefits.  It therefore includes all casual, part-time and full-time workers, self-funded retirees and business owners. What it doesn’t include are the government benefits many of these groups may also receive.

If government benefits received by this group were included the average would be higher.  After tax incomes would, however, be much lower.

It is important to be clear that these are gross incomes after deducting losses, remembering that there are 1.7million residential property investors with net losses in 2007/08 of $8.6billion. Averaging across the population does not clearly show the diversity of investment income and the severity of many negative investment incomes.

We must also note that these are all average numbers, and as is typical for these types of (assumed) distributions, the median income would be much lower. 

Why is this important?

Much of the mainstream economic establishment has latched on to the idea that incomes have been rapidly rising in Australia, yet the data does not to support this optimistic view.

If we examine, for example, total earnings of full time employees, we can see that in the period 1995-2010, annual growth in before tax total earnings was a mere 3.9%.  In real terms, a 1.3% annual increase in full time wages since 1995.  Total earnings of fulltime employees in 2007/08 were $67,860 (wage plus other income), and from recent data, it looks like private sector earnings are pretty flat since then. That’s about $52,000 after tax.

The ABS capital city house price index on the other hand, rose by an annual rate of 9.4% since 2002. RPData-Rismark currently has Australia’s median dwelling price (detached and attached) at $405,000 and the ‘trimmed mean’ home price at $435,000.

Anyone who claims home prices are rising in line with incomes either has not seen the data, or is being intentionally deceptive.  The RBA can be counted amongst this group.

Australia’s current housing situation is truly unsustainable.  It would take two above average fulltime workers to buy one median priced dwelling.  If they want to live in or near a capital city, the situation is more severe.

With an income picture less rosy than many make out, it is quite clear that current elevated house prices are not due to owner occupier demand - there is simply not enough income for that to be true.  They have risen strongly through speculative investment decisions backed by government support (including negative gearing). Anyone who claims that home prices are stable due to incomes fails to realise that prices are determined by investors who can abandon the market in droves as soon as returns start looking bleak.

Moving on.

Google has an uncanny ability to predict the future.  Google Trends allows users to plot search popularity over time for any search term you like.  I have borrowed this idea from various other sites, but what prompted me to post it was a line I read that went something like - ‘once the mainstream media is talking about a housing bubble it is ready to crash.’  As you can see below, this was definitely true in the US.  The recent attention to Australia’s precarious housing situation is a worrying sign for those recently leveraged into the market.

Energy efficiency - further reading

A robust discussion on the impact of energy efficiency on energy use took place in the journal Energy Policy over the decade since Len Brookes' article The greenhouse effect: the fallacies in the energy efficiency solution in 1994.  It concluded (for now) with another article by Brookes in 2003 entitled Energy efficiency fallacies- a postscript.  Brookes' conclusions are almost identical to my own, and those of Blake Alcott - capping or rationing resources where their use entails some kind of externality.

Brookes also adds taxing resources to reflect the cost of negative externalities, which one assumes, would be spent on reparation activities to return to a new optimal resource allocation which internalises the cost of pollution and eliminates the possibility of rebound effects (if reparations are possible).

It is worth reading his conclusions in full (below the fold):

Dutch Cargo Bike Review

Note: A follow-up (3yr) review is here. I am now a local ambassador for Dutch Cargo Bikes. If you would like to test rise this bike in Brisbane (or a three wheeler) email me at cameron@dutchcargobike.com.au  

I almost convinced myself not long ago that a bicycle for carrying children was a completely unjustified expense.  Luckily I didn't. Because my sparkling new bakfiets.nl cargo bike, supplied through Dutch Cargo Bike, arrived several weeks ago. And I'm excited. I've also convinced myself that in reality it isn't expensive, and in fact represents great value for money.

In the past three weeks I've used the bike daily for the commute to work, to the shops, to day care, to pick up my wife from yoga – you name it. It is now time for an early review. But first, I need to explain how this value conscious economist ended up with a $3000+ bike.

For the non-cyclist the prices of these bikes can be a shock. Bikes are meant to cost hundred, and second hand cars are meant to costs thousands. We have trouble seeing where all the money goes on a bicycle! But as avid cyclists would know, high quality equipment still costs money in the world of bikes, and this bike is extremely high quality.

You need to understand that the ongoing costs for cycling are extremely low, and lower with higher quality components.  I can imagine in 5 years when our youngest child is happily riding themselves we might have less use for the bike, but it would be reasonable, given the high quality of all the parts on this bike, to expect the bike to be very good condition.  If the bike sold for $2000 in five years time, you are looking at a total 5 year total cost of around $1300 (including servicing, tyres etc) or less than $300 per year, or $5.70 per week –a little more than one bus fare – which is a bargain for a young family given the great health and social benefits from family cycling [1].

I believe this bike represents good value for our family, so what are my first impressions?

The Dutch Cargo Bike team arranged delivery and assembly at my local bike shop.  What first struck me about the bike was the attention to detail – rubber antislip coating on the floor of the box, with a ledge for kids to use to help them climb in, a magnetic latch for the very stable four-prong kick stand (apparently a patented design by Maarten van Andel), and built in elastic straps for securing loads to the heavy duty rear rack. Not to mention the very bright generator light as standard equipment (which I now just leave on at all times).

The bike rides incredibly smoothly.  In fact I can cross manoeuvrability from my cons list and shift it to the pros list. After a bit of practice you can steer this puppy easily through tight gaps, even loaded with four children. And slow, well, it’s actually not as sluggish as I expected either.  After a week of riding this fairly weighty beast my legs seem to have built up the strength to ride at breakneck pace and tackle those hills that seemed so intimidating at first.

The box is extremely strong.  It looks like flimsy plywood in photos, but is almost one centimetre think, does not scratch easily, and does not flex under heavy loads. I've taken all my mates for a spin, and even loaded with my wife, child and dog (80kg) on board it feels solid and safe.

The most unexpected benefit of the bike is that after a laid back ride and lots of smiles and waves from passersby, you always arrive happy.

fn.[1] The alert reader will note there is an opportunity cost to the forgone $3000 that could have been alternatively invested, say at 5%, which adds another $150 per year.

Energy efficiency: A flawed paradigm

The word efficiency carries a meaning immersed in all things positive – you never hear that being more efficient could possibly be detrimental.  In fact, if you can bear the evangelical fervour, you may have read about achieving ‘Factor Four’ or ‘Factor Five’ gains in energy efficiency, as part of a ‘Natural Capital’ revolution comprising a ‘decoupling’ economic growth from a growth in the consumption of exhaustible resources – aka ‘sustainability’.  You may even have heard that I=PAT, where environment impact (I) is a function of population (P), affluence (A) and technology (T), and that becoming more efficient will enable a desired level of affluence will far less environmental cost.

Believe me, this is all nonsense, and indeed counterproductive to the stated aims of curbing resource use and decreasing negative environmental externalities.

When it comes to natural resource use, and the externalities associated with resource extraction and production, efficiency alone is the enabler of greater consumption.  William Stanley Jevons first noted that technological improvement, in terms of greater efficiency and therefore productivity, was the enabler of greater coal consumption in Britain back in 1865 in his book, The Coal Question: an Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of our Coal-mines. His observation was coined Jevon’s Paradox, even though the argument that technological improvements in resource efficiency (modes of economy) leads to greater resource use was already widely accepted in the labour market:

“As a rule, new modes of economy will lead to an increase in consumption according to a principle recognised in many parallel instances. The economy of labor effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.”

Economist forecasts for the record

Just for fun here are some recent forecasts from some of Australia’s leading economists.

Bill Evans – Westpac Chief Economist - 3 September 2010

At present we are expecting rates to rise by 75 basis points during 2011. Markets will need to adjust a long way to accommodate that view

Peter Jolly – NAB  Head of Global Research - 4 September 2010

Our year ended GDP forecast has lifted to 3¼% from a little under 3% As a consequence, we debated whether the 100bps of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) Q3 inflation in late October be shockingly high or b) the economy grows above trend in the 2nd half and the unemployment rate (now 5.3%) plunges through 5% - quite possible

Christopher Joye – Rismark - 23 Aug 2010

The economy is about to embark on a period of above-trend growth (mean of the ABS trend measure since June 2000 is 0.7%/qtr or 0.4%/qtr/capita)

Warren Hogan – ANZ Chief Economist - 1 September 2010

The consensus seemed to be that the Reserve Bank will be happy to sit pat for six months and then raise rates by 100 basis points through next year. The ANZ's Warren Hogan was the hawkish outlier of the group, predicting 150 or 170 points over the next 18 months.

Hogan believes we are about to see a period of serious inflationary pressures thanks to the commodities boom's income wave – the CBA's Michael Blythe reckons the income surge will add 3 or 4 per cent to GDP over the next couple of years

Dr Frank Gelber – BIS Shrapnel Chief Economist - 7 September 2010

Interest rates are set to rise and commercial property values will skyrocket.

"I've never seen a lower risk, higher prospective return, in the commercial property market, ever," he said. "We're looking at rents and property values doubling in Sydney and Melbourne over the next five years." [commercial property]

Cameron Murray –Economist, blogger (you read it here first)

Inflation and GDP will surprise on the low side in the September quarter.  Remember, the June quarter had a booming terms of trade (which is now languishing), fiscal stimulus (which is now finished) and two interest rate moves by the RBA which could drain consumer confidence and spending, especially when combined with house price nerves and debt concerns.  Therefore I expect the RBA to keep rates on hold for the next 6 months (with some independent upward moves of mortgage rates by banks), with a possible stimulatory move by the RBA next year.

On a different note, for those who want a little more insight into Australia’s own residential mortgage backed securities market, this piece from Adam Dellaverde might pique your curiosity.

Waste Revisited – the ‘Green’ bag revolution

The last time I wrote about waste I started like this:

The oft-repeated mantra of the ‘ecological modernist’ is that we are wasteful. They see the rise of disposable cups, packaging and plastic bags as a sign that of that wastefulness. Further, in terms of energy and climate change, they see traffic jams full of cars with only the driver inside, and lights on in buildings with no occupants in the city all night – a society squandering our resources. If only we could stop all this wastefulness and build a utopia.

I argued that waste is a relative and value driven term, and that the popularity of waste as a concept in environmental circles is in fact slowing progress on environment issues, as it distracts from the core problems.

Waste is not a useful concept, but litter, ‘stuff in the wrong place which may cause harm’, certainly is.  Governments have waged war against plastic bags in the name of reducing litter (even though they prefer the term waste).

Outlawing giveaway plastic bags appears to have gained traction with policy makers as one path to environmental bliss.  South Australia has a law.  Victoria has one. Ireland has one (although the list of exemptions is pretty long). California is considering one.  And the list goes on. 

The Environment Revisited

I want to revisit some of the key environmental themes of this blog that have had very little airtime lately. In particular I want to revisit, over the next month, the unintended consequences of some of our favourite environmental policies and personal choices.

For those new to the blog, the divergence of post topics from my blog title is explained here:

...understanding property is the key to a reasoned approach to preserving our quality of life by preserving environmental amenity. Maybe I am more of a ‘quality of life’ economist who believes there are many non-market goods, including the quality of, and accessibility of natural environments, that are major contributors to our well-being.

However the increasing fanaticism I have observed in some areas of the climate change movement, the lack of ability for some environmentalists to see the forest for the trees (pun intended), has lead me to distance myself from some of the core environmentalist views.

As a rule of thumb I believe we should first focus our efforts on local, tractable environmental problems with clear externalities, and implementable solutions – protecting diversity and fish stocks in the Great Barrier Reef, tackling air pollution and improving urban amenity, and preserving the quality of waterways and wilderness areas. Climate change, that global intractable problem, has dropped down my list of concerns, even though my previous research focussed on ways to reduce greenhouse gas emissions.

The development of my ideas on the environment is the reverse of renowned ‘skeptical environmentalist’ Bjorn Lomborg’s u-turn. He once held a strong position that climate change was far down humanities list of concerns, particularly noting the obvious an immediate threats from treatable diseases in the developing world. Now climate change to the top of his list, no doubt to pitch his new book to cashed-up fanatics.

My second rule of thumb is that personal ‘green’ consumption choices make no difference, and small actions do not add up. These behaviours are typically offset by other economic adjustments in upstream production and by choices of others as prices respond. These effects are know an rebound effects.

A recent article in The Economist highlights new research showing these rebound effects in action. The study estimates that new energy efficient lighting technology will increase energy consumption in the long run. My own research showed that conservation behaviour, such as using lights and electrical appliances and driving less, will also result in minimal change as money saved get spent elsewhere in the economy.

I intend to revisit ideas about waste, efficiency, environmental taxes, recycling and solar power over the next month to see how my ideas have developed, and to seek input to develop them further.