UPDATE - Turning points

Recently I posted about the spike in population growth experienced in Australia over 2008, and how we cannot simply extrapolate the trend, or we will miss important turning points. I predicted that the rate of population growth will fall from this level over the next few years as a result of

1) reduced migration, and
2) a decline in birth rates due to the ‘bringing forward’ of births encouraged by the baby bonus.

I didn’t have to wait long for some supporting evidence. The ABS today released overseas arrivals and departures data showing a significant increase in departures, and decline in arrivals, since April 2009.  It looks like migration is on its way back down.  When the June 2009 release of the population statistics is published on 3rd December we might just see the turning point in population growth I forecast back in September. 

iTunes v Foxtel

I know; there is no battle between iTunes and Foxtel (yet) but it seems like a good attention grabbing headline. The relevant point here is that Foxtel is releasing a new service where subscribers can download movies and TV programs. Although the service has its drawbacks, it sounds like the next big thing to me.

Whenever I see innovation like this, I can’t help but see it as another example of economics in action. It also makes me wonder what industries will be next to leap into the downloadable marketplace. Given that music and books have taken the leap, probably in response to pirated downloads, movies were an obvious candidate to jump soon. But what next?

Rebound effect in action

The image below is from an email sent by the Queensland Government Climate Smart program.  What an odd prize for a program designed to reduce energy consumption!

Move over horoscopes, forget cold reading, here is… economics!

Derren Brown, famous British magician, mind reader, and all round deceptive yet entertaining fellow, has often discussed the tricks used by psychics and fortune tellers. One particular method, cold reading, involves suggesting non-specific messages, and letting the subject of the reading provide the meaning to the message.

For example, a psychic using cold reading techniques might suggest that there is an old male, or a dog, or another such subject of emotional connection, and let the subject say something like, “yes, my dog Spot died recently”, to which the psychic replies with something like, “I can feel you have a strong bond with those, human or otherwise, that you share your life with”. Essentially, the psychic says nothing except that you are close to the people you are close to. But the delivery of the message makes it appear that the psychic knows something about you that they couldn’t have – unless they have psychic ability.

I will get to economists under the fold.

The value of food security?

Food security, energy security, job security - all political terms that conjure up emotion, deliver electoral support, all the while remaining devoid of meaning.

I have been asked impossible questions in my job. But one comment recently sticks in my mind. It goes:

..there must be some data that they could have used to address the “value” of having future food security.

What value might that be? Do you want a dollar figure that represents the present value of all future value streams from having food security? And do you imply that food security means that Australia remains a net exporter of food?

Wikipedia provides a fairly detailed, but useless, entry on food security. It does not mention national self-sufficiency at all, but merely one’s access to nutrition, and the link with poverty. No surprises there.

I’m all for national pride, but arbitrarily deciding that a country must be self-sufficient in one particular good is a poor philosophical position. If we replaced food security with toilet paper security, or car security, or hat security, we would immediately reveal the absurdity of the argument.

That bloody housing shortage

It seems that the RBA's Anthony Richards may have been reading my blog. His comment today from a national housing market forum includes the following

I said in a talk earlier this year that most calculations available then put underlying demand at something like 180,000 to 200,000 dwellings per year. However, I noted that such figuring was based on simply extrapolating earlier trends in household size and ignored the likely impact of prices on the demand for housing. At some point, the overall demand for housing will be affected by the higher cost of housing. For example, with housing – both owner-occupied and renter – more expensive than in
the past, we might expect to see some young adults choosing to live with their parents for longer. We might expect some households to look for an extra flatmate rather than leaving a bedroom vacant. Some owners of holiday homes or second homes might have become more inclined to sell them, with those houses then occupied full-time.

Hence the ‘undersupply’ of housing might not be as large as sometimes thought. But this is not necessarily something that should reassure us – it may be because the higher cost of housing – partly reflecting supply side problems – has choked off some of the demand that might otherwise have existed.

However, by the end of his statement, fingers are squarely pointed at the pet issue for housing analysts, supply side constraints.  That bloody housing shortage gets a good run in his statement as well. 

I also wonder how we are meant to know the counterfactual demand that might otherwise have existed.  Isn't he just saying that demand for housing follows the law of demand?
 
His remarks are reported as evidence that the housing market is ready to 'take off'. But only time will tell whether the inverse correlation between change in housing shortage and change in price proves reliable in the longer term, or whether the RBA really can forecast market behaviour.

----------UPDATE----------

It looks like I'm not the only one who has interepreted the housing market exactly the opposite way to the RBA and other property bulls.

Roads for nobody

Friday's local rag suggests that the State government here in Queensland is keeping their employees busy by investigating a possible new tunnel from Toowong to Everton Park.  This is to alleviate traffic congestion (of course).

Let me make some predictions.
1. This tunnel will not start construction within a decade.
2.  If 1 comes true, expect the tunnel never to be built.

The reasons are equally as obvious as the predictions.
1. The State government has no money for ridiculous projects like this.
2. The Federal government will tighten its belt before they are asked to fund this project.
3. The private sector will not fund it - they wouldn't fund a little $250million bridge because of good alternative routes, why would they fund this. 

If you want to head north on the Bruce highway from Toowong, wouldn't you take the other tunnel they plan to build to the Inner City Bypass, then get on the other new tunnel to the airport, then get on the Gateway motorway heading north?  I would.

It appears that the transport planning community has looked to cities around the world that have similar traffic problems to Brisbane (Los Angeles, Sydney etc), and adopted similar approaches to alleviating traffic congestion.  One wonders why transport planners don't instead look to cities that actually don't have severe traffic problems, and instead adopt some of the approaches used in these cities.  It is a lot like asking a chronic alcoholic which intervention worked best for him when he still drinks like a fish. 

I await a more diversified transport plan for South East Queensland.

Property bulls take note

The main problem with the housing shortage proponents is that they neglect the existing 8.5million or so existing residential dwellings as a supply of housing. Currently, the average dwelling occupancy rate across the country is 2.53 persons/dwelling. This rate has varied between 2.48 and 2.60 over the last 27 years. In fact, it peaked at 2.6 in 1982 (soon after the second oil crisis). The graph below shows that we are currently heading back to level of occupancy last seen in the 1980s.

But surely, with such a small variation, this issue is minor compared to the 17,000 homes we are currently short of! On the contrary, it is the crux of the whole debate. You see, a change in the occupancy rate occurs for all dwellings, including the 8.5million existing homes. The 43,000 people apparently in need of the 17,000 dwellings can be accommodated in existing dwellings, and the result would be a shift in the occupancy rate of 0.005. If you look at the y-axis scale you can see how small an increment this is (one quarter of one notch), and how quickly we are heading that way.

In fact it only requires 1 in 200 households to welcome another person. Seems realistic to me, considering how popular this trend is amongst my peer group. Also, considering that the average dwelling is much larger now than when the occupancy rate was 2.6 back in 1982, such a shift would barely be noticable. 

I have mentioned before how this adjustment in occupancy rate occurs, for example:

• youths stay home with parents longer
• group households rent spare rooms
• elderly parents move in with children’s families
• other lone relatives move in
• when families relocate they choose smaller houses… and so on

This is happening and there is plenty of scope for it to continue. In 2003-4, 35% of households reported one spare bedroom, while 42% reported more than one spare bedroom. That’s at least 9.4million spare rooms in existing dwellings.

So I caution the property bulls to be realistic with their investments. Don’t expect a boom of 6 years to be followed by a six month bust. If you want to get into the market now, buy on the high rental yield and find good tenants. And of course, don’t forget about location.

Upon request

Peter Fraser recently commented that I should look a little more closely at the ABS data on housing construction, demolitions, and population growth, as the data I linked to that suggested the was no housing shortage was a bit light on (and outdated).  Fair point, so I thought I'd play with the same data as other analysts and see what I make of it.

Below is the graph that apparently makes quite obvious the current housing shortage (the scale is such that the ratio between the two variables is set at the last decades average occupancy rate).  I measure shortage first by establishing the underlying demand for new dwellings as change in population divided by occupancy rate (which changes through time as well), then subtracting new dwellings completed.  (I wanted to then add demolitions of residential dwellings, but it appears that the ABS does not collect such data, and after a brief chat with them, they don't know of anyone who does collect it.  In fact, determining a reliable collection method is one of their current projects.  If anyone knows who is collecting it, and how reliable it might be, I would love to know; as would the ABS).

At first glance, yes, the housing shortage appears to be getting out of control.  But I think what matters is how this comparison of population growth and new housing completions can be useful in forecasting the future behaviour of the market.  Below, the ABS capital city price index is also plotted, and shows a surprising relationship with the shortage. 

The plot below shows the relationship between change in shortage and change in price.  A quick regression shows a significant negative correlation between change in shortage and change in price, even when the shortage is lagged a little.

This is what makes me wonder if we all have this forecasting thing backwards.  If the housing shortage declines (by way of adjustments in occupancy rates, conversion of non-residential to residential, dramatic reduction in population growth), would that signal an increase in prices is imminent?

What theory could explain this relationship?  My suggestion relies on the fact that the demand and supply of housing are interrelated - that is, they each react to the other, and the price change is a signal for actions by both sides of the equation.  Ceteris paribus (including constant incomes), we have a number of reactions to a price change on both the supply and demand side.

1. When the rate of price growth increases, occupancy rates increase, to reduce the effect on a per person housing cost, which in turn decreases demand.

2. When the rate of price growth increases, supply increases as developers can now build more profitably.

3. When rate of price growth declines, occupancy rates decrease as people can afford more space per person.

4. When rate of price growth declines, the supply of new dwellings slows dramatically.

How can that make sense?  If we follow this through, an increase in the rate of price growth is a signal that demand is declining but supply is rising! And vice versa.  A decline in rate of price change signals a increase in demand and a decrease in supply! 

I am pretty sure that the market is not so simple that it can be deciphered by comparison of population growth and dwelling construction. 

Those crazy French

The French have a reputation for pursuing the art of living. An appreciation of the finer things in life is a typically French quality. Their government reflects that pursuit back to the people through policies that reduce the hours of work of full time jobs, and that enable plentiful holidays. Their President, Nicolas Sarkosy, percieved as womaniser and playboy by some, embodies the French passion for life.

Sarkosy is now considering redirecting his government to use measures of happiness as a benchmark for progress; much like the quirky Kingdom of Bhutan, whose King Jigme Singye Wangchuck introduced Gross National Happiness as a measure of Bhutans progress in the 1970s.

It makes me wonder how subjective these measures might be, and how they will deal with the problem encountered by economists studying happiness - that after a shock to peoples happiness (death in the family, loss of job etc.), they return back to their equilibrium state rather quickly.  As a society, does this mean that this measure may lose validity, as the population has an equilibrium level of happiness that is not determined by external factors?  Poor government decisions would quickly drop from the radar as people returned to their previous happiness level. 

I can answer that one myself - no.  Because the measures being discussed are simply subjective weighted averages of external measures, such as air quality, income inequality etc.  The happiness measure therefore faces the problem of reconciling these subject external measurements with peoples actual self reported happiness.

Another interesting problem facing happiness researchers is that they can find very counterintuitive results.  For example, a new job actually decreases happiness, rather than increases it as would be expected.  An of course there is the Easterlin Paradox, which suggests that wealth is not an important factor in happiness.

But, in the end, what gets measured get managed.  If we as a society strive for progress of a kind that reflect our values of fairness, equality and our environmental concern, then maybe Gross Domestic Happiness is the tool for the job.  Maybe, it's simple another example of politicians playing politics.

Turning points

I declared in July that the turning point in thinking about climate change has arrived. Now it seems one of the world's most renouned climate modelers is questioning the validity of the climate change hypothesis (here).

You see the thing is, complex systems results in perculiar outcomes, and can violently change without apparent reason. I have written in the past that I think N.N. Taleb covers the topic well when he talks of Black Swans. Extrapolating the past does not predict the future.

Let us look at some relevant examples. Recently, the population growth predictions from the Treasury were revised upward. But I wonder what the logic behind this revision might be. What new information could change significantly a previous prediction of a century of population growth?

My suggestion is that they make the mistake of extrapolating the past to predict the future. Let's imagine we are Treasury in 1988, and that we have just witnesses population growth like in the graph below.

Wouldn't it be obvious that we should be expecting higher growth in the future? Be if you knew the causes of this growth you could predict that the trend would not continue. It would certainly decline again. And it did.

So I imagine that the current boom in population is the result of two main factors - increased skilled migration, and the baby bonus. The increase in skilled migration could decline drastically at any moment upon political will. Of course, if the douple-dip downturn eventuates, this is more than likely to occur.

Additionally, the increase in natural growth due to increasing births in recent year - the baby bonus children - are likely to be the result of couples bringing forward their decision to have a family. Thus, this little boom is likely to fade quickly as all the number of remaining fertile young couples who desire children drastically reduces. I would hope these underlying points did not escape the Treasury.

Put simply, in complex systems, the longer period of time we consider, the more likley we are to gain insights into the behaviour of the system.  My bet is that the rate of population growth will fall significantly from this peak over the next few years. 

Doesn’t current monetary policy indirectly target asset prices anyway?

There has been plenty of talk about the RBA targeting asset prices by leaning against bubbles. All reports are that this is unlikely to happen in the foreseeable future. And for good reason.

They would face two problems;
a) identifying bubbles, and
b) using an economy wide instrument, interest rates, to target asset prices in an individual sector. All other sectors will suffer as a result.

But after thinking about this after footy last night, doesn’t inflation targeting automatically lean against asset price bubbles if they appear in a broad range of sectors?

Think about it. Asset price increases flow on to the price of consumer goods. Property price rises are the simplest example. Commercial property price increases have increased the costs of business, for everyone, which eventually flows though to retail/consumer prices. I don’t have much data at hand, but it would appear that asset prices are a good leading indicator of inflation. When interest rates are increased to curb inflation, they also curb asset price growth.

Thoughts?

Live anywhere and join the new rich

Timothy Ferriss’ book, The 4-hour Work Week, is definitely motivational, is full of practical ideas and tips. But after taking me on an exciting journey, it somehow it left me back where I began.

The premise of this book is there is no need to be trapped in the 9 to 5 drudgery, and that the life we want is waiting for us to come and grab it. We can stop wasting our precious time on menial tasks by becoming extremely efficient, and outsourcing much of our time consuming routine. By making your work ultra efficient, and mobile, you develop the freedom to see the world and fulfill your dreams. Simple.

I am economist, so the idea of maximising utility is no stranger to me. Timothy Ferriss, in my mind, is the ultimate homo economicus. He designs his life to fulfil his own goals, and ignores the need for social convention and traditional work routine – he should really be on the cover on of economic text book! But before I get into my thoughts on particular parts of the book, let me present some of my favourite quotes.

Retirement is worst-case scenario insurance
Less is not laziness
The timing is never right
Ask for forgiveness, not permission
Emphasise strengths; don’t fix weaknesses

And that’s all by the second chapter. One point I would like to develop is the distinction Tim makes between effectiveness and efficiency. Effectiveness is doing things that get you closer to your goals. Efficiency is performing a given task in the most economical manner. This idea resonated with me (I had never heard this distinction made before), as I believe I naturally think in terms of effectiveness.

Two other little gems from this book the 80/20 rule, and Parkinson’s Law. The 80/20 rule is a restatement of the non-linearity of our inputs and outcomes. For example, 80% of our output might come from 20% of our time, while 20% of sources might cause 80% of my problems. It allows one to optimise by isolating and eliminating (another key point of Tim’s) wasteful use of your time.

Parkinson’s Law dictates that a task will swell in (perceived) importance and complexity in relation to the time allocated for its completion. Just like those university assignments, a long deadline give too much time to think about the unimportant parts and delay hitting the key tasks in the head. Combining these two principles is the secret to heightened productivity. As Tim states:

Limit tasks to the important to shorten work time (80/20)
Shorten work time to limit tasks to the important (Parkinson’s Law)

Couldn’t agree more - but I've never been able to express it like that. As well of these little gems of advice, the book is packed with actual practical advice, such as email templates, examples of courteous phone messages explaining how you won’t be answering y our phone much anymore, and phrases to use when negotiating remote working arrangements with your boss. Oh, and there’s plenty of links to website dealing where particular issues covered in more detail.

In the end, I feel like I am already living the 'lifestyle design' mentality of the new rich espoused by Ferriss. While his advice is extremely helpful, and quite motivating, it leaves me back to the existential conundrum I had at the beginning. If we can have anything we want out of life, and I believe we can, what is it that I want?

A man’s home is his castle - and the major component of his investment portfolio

I said it like this (in support of Kris Sayce):

…house prices during a bubble (if you want to call it that, however mild) begin to carry a growth premium. People begin paying a premium on the price for the expected future capital growth. The elimination of this growth premium may explain the decline in prices observed over 2008.

These guys, Karl E Case, John M Quigley and Robert J Shiller, say it like this:

For the vast majority of buyers, investment was ‘a major consideration’ or they at least ‘in part’ thought of it as an investment. …it was a major consideration for a majority of buyers. Similarly, only a small percentage of buyers thought that housing involved a great deal of risk in all cities...

While I’m here, a question that has been bothering me for some time is why property ‘experts’ obsess about auction clearance rates? I’m not sure what theory supports this measure as sign of strength in the market. High clearance rates could either be a sign of buyer enthusiasm, or seller desperation. In the share market, an ongoing auction, a high volume of trade is generally necessary for a significant price change – up or down. I would love to see the correlation between auction clearance rates and price movement.

Must-see data on ye olde chronic housing shortage

I guess the housing shortage advocates have not looked at the data straight in the eye before.

A simple comparison of percentage change in population, and percentage change in dwellings shows that only a few places in Australia suffer from anything that could be labelled a shortage, while most capital cities show a glut of housing.

Not only that, but the prices continued to rise in 2006-08, the period immediately following the data in the linked table. Looks a lot like a bubble to me. Don't know about you, but I'm waiting for another slump in residential real estate prices next year.

Move over stock exchange – welcome the Real Estate exchange!

There are reasons buying and selling a home gives the average person a high risk of bursting into fits of rage. Ninety percent of real estate agents are dodgy ninety percent of the time. Information on the home buying process is provided by the self-interested agent to the otherwise (but often not) uninformed buyers and sellers. And while the provision of information, in the form of sales data, legal and financial advice is growing, the incentive structure at all levels is engineered to complete a sale, rather than achieve the best price for the seller. I am going to suggest that the provision of a nationwide residential real estate exchange will benefit both buyers and sellers in the real estate market, at the expense of commission based leeches (that’s real estate agents).

First, consider the role of an agent. They are contracted to act on behalf of the seller to find a buyer at the highest possible price. For this service, they receive a commission on the sale price, which is designed as an incentive for them act in the sellers best interests. Which we all know that in practice this often faces some obstacles. An agent, who would receive in their own hand 1.25% of the sale price, or $2,500 on a $200,000 sale, has little incentive to work harder to achieve an extra $10,000 for the seller. The agent’s premium for the extra $10,000 is a meagre $125.

But maybe the current commission system is better than the alternative fixed cost system. Imagine you pay an agent a fixed cost of, say, $2,500. Where is the incentive for them? Well, they get the same money at whatever price the house sells for. And if it was structured as a fee for service, where the price needs to be paid regardless of whether the house is sold, the incentive is to never get it sold - to get the repeat business!

My main concern however, is actually not about the commission structure itself, but that the commission charged by every agent is the same. The State regulates that the maximum commission charged is 2.5% of the sale price plus $900. You cannot find one single agent who will endeavour to sell your house for less, even though the standard REIQ contract suggests negotiating this amount. Wouldn’t competition amongst agents cause this price to decline, especially as house prices have increased substantially since the regulation was introduced?

The question then is would anyone be worse off if the maximum commission rate was reduced? Some agent would of course, and it may send some out of the game, but that wouldn’t be such a bad thing at a society wide level. The prices acheived in the market will be the same (people's willingness to pay for housing will not be affected by this small detail).

The other little nasty in the real estate game is auctions. As a buyer I always find it amazing how often auctions occur, because it puts me off completely. First, to be a serious bidder you have to commit money for appropriate inspections and financial arrangements without being certain of the price you will have to pay, and whether you will actually buy. The media has recently reported some buyer complaints against agents for misleading them on house prices. The potential buyers had committed around $1,500 to inspections and other arrangements, only to find that the eventual price was way out of the ballpark. So buyers at auctions face higher risks, and hence are likely to pay a lower price than they would be willing to if they could buy with a conditional contract.

But that risk is the key. Agents face the risk of a house not selling because the seller has unrealistic expectations, or they change their mind, or whatever the case may be. Eliminating this extra ‘agency risk’ will reduce transaction costs significantly.

Imagine a real estate exchange (REE) where home owners could list their properties. Maybe each property has a list of compulsory documentation to be included – Survey plan, title, aerial photo, front photo, number of rooms, bath, bed, total covered area, building materials, age, car spaces, maybe pest inspector and engineers reports. The house would be put up on the exchange, which could be searched by any of the characteristics. The seller would nominate a price and contract conditions they are willing to accept, and buyers would nominate a price in a kind of open auction process. There would be no time limit, and people could keep their house in the exchange at a ridiculously high price, and if someone agreed, they would be forced to enter the contract, even if it was a bit of a joke - “just testing the market” or something like that.

In this case, there is no requirement for agents. Remember their fundamental role is to bring buyers and sellers together, and that role would now be replaced with the REE. Risks of uncommitted sellers would be eliminated.

There may then open up a market niche for business to provide the service of granting entry to homes for sale. Real estate agents may metamorphise into home display service providers, who collect a fee for answering enquiries and granting entry to potential buyers. Similarly, they may inspect houses on behalf of buyers. But without commissions, and without the associated risk, they can focus on the streamline management of inquiries and inspections, and compete on price for a rather homogenous service.

But maybe we don’t need government here. Google offers listings on their mapping tool for free to any individual or agent. This is a real step in the right direction. Maybe soon they will use their Google Checkout to enable bids to be made, further facilitating transactions. Maybe we will find market solutions to market failures?

*I had this blog written for some time, then searched the web before publishing and found the REE idea here.

Economists strike – what next?

One wonders about such things (and here). The most highly educated group in our society (university academics if you are still wondering) are threatening strike action for better pay.

The question in my mind is; will the economics departments be participating in such actions, and what is there reasoning?

The economic academics I know think that the university lifestyle, autonomy, and interesting research projects, mean that moderate pay is sufficient to attract good talent. After all, that’s what keeps them in the game – it’s not the money honey. Why then the need for more pay?

Surely if there was a problem attracting staff, universities could voluntarily offer higher salaries for some positions?

In the end, academics always have self interest to fall back on as a justification for participating in strikes. Although, they could just as easily benefit from the strike action and not bother participating – another self-interest motive at work.

Oh, the mystery.

Conspiracy!

I don’t take anything at face value. I give credit to conspiracy theories, as they often seem as plausible as the mainstream interpretation of events. Many times though, I simply don’t care, and even if I did, I couldn’t do much about correcting any misrepresentations of history.

I want to throw another one out there.

I have written before how implying causality between correlations of changing global surface temperature and increasing concentrations of carbon dioxide is statistical mumbo jumbo. But considering we know so little about whether the global climate will in fact ‘change’ (we still don’t know if that is for better or for worse) as a result of humanities combustion of fossil fuels, we seem to be taking quite radical actions. Households appear to want to do their part to prevent some hypothesised distant future even of low probability, while immediate and dire problems exists all around us (maybe more so in other parts of the world than the Lucky Country). So the question remains, how did such a fringe issue become so mainstream?

Today’s conspiracy theory is that a group of very powerful world business leaders (the big oil men) saw the imminent peak of fossil fuel production, and the resulting problems of a declining productive capacity of the economy. They wanted to get governments to act on this problem without having to admit that the problem existed. So, they utilised the fringe climate change movement, giving them a voice in mainstream circles. Any government actions implemented to curb climate change would conceal the peak of oil production for a little longer. Government research and subsidies may even assist in finding alternatives for big oil to invest in. All they while they can maintain that oil reserves are plentiful, keep confidence in their business and the share price high, while having governments unknowingly assist them to wean themselves off oil.

They use lines like “the stone age didn’t end because of a stone shortage” to show that change can happen voluntarily.

Anyway, that’s a nice one for today. I’ll leave you with this interesting comment from here.

I'm a bit of a conspiracy theory buff and one of my favorites is the meta-theory: all conspiracy theories that become popular are actually produced by the government to keep the paranoids occupied looking for aliens, bigfoot, and psychics instead of focusing on the more nefarious intrusions into civil and social rights. Meta-theory has a lot of benefits, such as that it explains why government explanations for things like Roswell are so terrible: a good explanation would leave only a few true believers, a bad explanation actually creates more believers in the conspiracy. As a final benefit, generating conspiracy theories as red herrings is cost-effective. A conspiracy theory works by arguing from the void/gaps. All the government need do is create a few vague clues and let the mind of the legions of paranoids do the rest of the work filling in the huge, ambiguous spaces. Why would anyone investigate mundane government corruption when there are aliens and psychics to research?

Information deficiencies in the job market

I am in the market for a new job. Here are some things I have noticed:

1. All jobs are exciting, and require people with enthusiasm.
2. All jobs are for an integral role in a team.
3. All jobs require you to work independently and as part of a team.

Here's a snapshot of the jargon.

...with a strong mission to provide outstanding services to our sunshine state. Undergoing an exciting diversification of its portfolio...

It all makes me pretty cynical. I mean, not all jobs can be that exiting! To make matters worse, many job advertisements emphasise the importance of experience. Even for a dish-pig or waiter, they seem to want a minimum of 2 years experience. Is there anything about washing dishes or carrying plates that can't be learnt in a week?

One job I saw suggested that the suitable candidate would have 5 years experience in a similar role. In my letter I wrote:

While I may not have 5 years experience in a similar role, I would suggest you are unlikely to find a proactive candidate given those requirements. Anyone who has spent 5 years in the same role, then applies for another similar one, in my mind, appears to be destined for mediocrity. If instead you seek a candidate with enthusiasm, analytical skills, and drive for constant improvement, then I may be quite suitable.

We’ll see how that application goes. I always wonder how you are meant to explain how great you will be for a job after reading a total of two paragraphs of non-sense. Maybe I'll offer a 'try before you buy' period in my next application. Surely that's in the best interests of all involved.

Where did we leave our common sense? Is it behind the new plasma screen?

This article raises the point that we have a tendency to eat more after exercise, negating the potential weight loss benefits. I don’t think this is breaking news. Nor does it actually mean that exercise won’t make you thin, as the title so controversially states. In fact, the following excerpt shows the ridiculous need to frame a discussion about how to address the compensating hunger from the exercise in emotive and controversial terms:

Exercise, in other words, isn’t necessarily helping us lose weight. It may even be making it harder.

Common sense tells us that diet and exercise are the ingredients to weight loss (and gain mind you – athletes are right into this diet and exercise equation). Eat less, exercise more, and you should lose weight. Eat more, exercise less, you should gain weight. And for those who want to gain muscle, heavy exercise and a high protein diet with plenty of calories. I heard a third hand story once that a famous Iron-man was asked in an interview whether he would consider writing a book about his particular views on health and fitness, and he replied along the following lines: “It would be a pretty short book”. It is after all, a simple equation.

Also, imagine that reality TV show where contestants lose weight. Are we to think now that they would have done a better job without all the exercise? Or that they could have really shed all that weight by sitting on their arse, but eating slightly less - really?

Anyway, I wonder where common sense has gone sometimes.

Child care subsidies and maternity Leave: New incentives and unintended consequences

The maternity leave debate was raised yesterday with an angle I had not thought about before, but being an economist, really should have. It suggests that maternity leave has the unintended consequence of encouraging women with young children to work rather than stay home with their children. Rather than bringing families together, it actually tears them apart. Let us examine this claim.

The article claims that more than 80% of children under 5 years of age attend formal day care in Sweden, where 12 months maternity leave is the norm. This figure must surely be closer to 100% of children aged 1-5, given that mothers (or fathers) are paid to stay home for the first year of their child’s life. In Australia, the number of children under 5 in formal day care is currently less than 40%, and much of that I would imagine is part time.

Both the pro and anti maternity leave debaters need to get straight the purpose of their policy. That way we can examine whether there are possible unintended consequences which can undermine the suggested outcomes.

For example, the pro-maternity side appear to want to reduce the cost of child rearing to working mothers. Fair enough. But the unintended outcome of a maternity leave is to decrease the costs of child rearing for working mothers, but not stay-at-home mums. The new incentive structure encourages mothers to choose work over staying home with youngsters.

Complementing maternity leave is the current child care benefit scheme. I have mentioned before how cheap child care can be after all the subsidies are considered – about $15/day/child. This policy increases the net benefits of working for mums, as the cost of working, in the form child care, is reduced. These subsidies provide incentives for mothers to return to work quickly after the birth of their children.

Sweden is the classic case study of the pro-maternity leave lobbyists, but I wonder if they have really examined the outcomes of Swedish policies in detail.

Consider this comment (all quotes from here): 

Policies such as childcare and parental leave have meant that the majority of Swedish women are employed in the labour market and remain there throughout their lives, with only minor interruptions after the birth of a child.

And: 

from 1990-1998 the percentage of women engaged in part-time work fluctuated between 43 and 47 percent, while since then it has decreased to between 33 and 36 percent.

It appears more kids in full time, rather than part time, child care is what you get.

The following graph is of the period following the introduction of 180 days parental leave, at 90% of previous salary, in 1974 in Sweden. This was extended to 9 months in 1978.

During the 1970s and 1980s, the state and the municipalities both covered approximately 45 per cent of the fees, leaving the remaining 10 per cent to be covered by parental fees.

Again, subsidising child care works, in that it increases the uptake of child care. Not subsidising it works too. Cost of childcare exploded in the 1990s, and

…by 1998, 17 per cent of the costs of childcare were being covered by parental fees

The graph above clearly shows this impact. But what of the 2000s boom? We have another policy change to explain that one.

In July 2001 the Swedish government expanded childcare to include children of parents who are unemployed and in January 2002 to include children of parents who are on parental leave looking after a sibling (Swedish National Agency for Education, 2003). In addition, in January 2003 all children aged 4-5 became entitled to 525 hours of free attendance in childcare per year.

It is time for the pro-maternity leave lobby to ask whether having almost all of our children aged 1-5 in full time child care is a desirable social outcome.

My gut instinct is no, but I have no reason for this position. My son is in family day care two days a week, and he started this at 18months of age. He enjoys it, and he learns to socialise with other kids. Since putting kids in child care is a voluntary action of parents, my inner economist says that it must be the best outcome in the circumstances. Of course, the circumstances are the direct result of government policy tweaking the incentive structure.

In the end, it appears maternity leave policies do not bring families closer together, but create a generation where parents and children become strangers.

What's with the news?

I thought some of you might be interested in the content you can find through the Courier Mail website’s front page:
• Sexy designs on Columbian catwalk – photo special
• Beauty and the beast – how Miss Universe narrowly escaped a captive crocodile
• The flying car is here!
• Get naked – best nude events, beaches and resorts
• Miranda Kerr caught topless again – photos inside
• Amazing animal escapes
• Beauty and the beast – picture special (bikini clad models holding exotic pets)
I just want to remind you that they also claim a readership of 620,000 each weekday. An economist will ask, is this degradation of news demand driven, or supply driven? Considering the vast flesh content of the internet, maybe it is demand driven. Anyway, I think I have now confirmed where not to go for news.

Insightful

I thought it might be time for a short break from the residential property market. Time, maybe, for a more philosophical glimpse at our world.

When election time comes around I often wonder what difference my vote will make. All the candidates seem to converge on the same policies 99% of the time, and often take advantage of irrelevant fringe issues to attract voters to their side. It appears then that much of the benefits from a democracy actually happen before votes are cast, as candidates seek to determine policies to satisfy the majority of people. Thus, we get the candidates and policies we deserve.

I will leave you with a quote from a very interesting piece.

... we also have to overcome our perception that elections are about the future course of our country. Actually, they are about picking managers who will oversee public policy as we move into the future...

UPDATE 2 - A chronic housing shortage: Myth or reality?

This is my final post on the housing shortage debate. After a little probing, I have isolated the single point that leads astray the data rich, but theory poor, residential property analysts. It is this. Housing shortage proponents believe that housing supply is not very responsive to price changes, or the jargon, supply in inelastic. As such, we can expect another house price spike as we wait for supply to catch up with expanding future housing demands.

I would like to think that today’s ABS release of building approvals data confirms my point, and makes a mockery of housing shortage predictions, such as those of Paul Braddick of ANZ. Braddick seems to acknowledge the housing shortage as some kind of inside joke when he writes:

If housing supply remains on its current trajectory, Australia will face a critical, and potentially intractable shortage of housing throughout the decade ahead that would force rents and house prices significantly higher and drive both rental and house purchase affordability/availability to extremely difficult levels. (my emphasis)

To look at the graph below, and make dire predictions based in extrapolating a one year trend in supply, in light of historical evidence, is probably one reason for the poor reputation of economists.

By the way, Braddick has claimed a shortage for some years, and in 2007 stated that buying a home was going to get much harder, and that we face supply constraints. Yet in the year following these claims prices dropped and affordability increased. I thought houses were like bananas. A supply constraint causes prices to rise, not fall. But if you make the same prediction for long enough it is bound to be right eventually.

Where is the theory in all these extrapolative forecasts? In Joye’s own words, his solution is to ‘elastify supply’, but how elastic is supply currently? And is there a problem with too much elasticity, which may accentuate the boom and bust cycle? Let’s not also forget the fact that supply is normally more elastic in the long run than in the short run anyway.

Why do we not see these types of conclusions from our top economists instead?

…the projections of demand, of supply and of the gap between them are simplistic and unlikely to be realised in the longer term. The housing market is dynamic, as is the economy as a whole, and the emergence of a major gap between effective demand and supply would stimulate market reactions affecting price (affordability) and aggregate supply.

There are my last thoughts before putting this debate to rest.

• Housing demand comprises rental and owner-occupier demand. Investor demand is simply a function of rental demand (income) and growth expectations, which may be partly driven by owner-occupier demand.
• The elasticity of supply of housing appears quite reasonable, but I have yet to find a good recent estimate for Australian housing. Even Joye and Co’s epic volume on home ownership, with a chapter on the elasticity of housing supply, fails to estimate the elasticity figure itself, and whether there has been some recent decline attributable to regulatory changes. In the UK it, the elasticity of supply of housing appears to be between 1 and 3. My own back of the envelope estimates using ABS weighted homes average price for capital cities (price), and dwelling units completed (quantity) result in a similar range of estimates (depending on whether monthly, yearly, or lagged).
• Although a Robertson/Keen type wager does not interest me so much, I am still prepared to offer a forecast. The growth in dwelling prices from July 2009 to July 2011 will be less than the growth in prices from July 2005 to July 2007. I know, it’s not particularly shocking, but it makes my point that the methods used to justify a housing shortage are flawed, and do feed into house prices.

UPDATE - A chronic housing shortage: Myth or reality?

I tried to contact Christopher Joye and Business Spectator to promote my previous post, which tried to unravel the mysterious reason for making dramatic claims of a chronic housing shortage.

I would like to think that today’s comment by Joye at Business Spectator is in some way connected with my own analysis, but doubt it. He does not address the concerns I raised of defining the term shortage, nor does he address why house prices declined during 2008, or why the rate of price growth is slowing. He does address a point that I have not made, about the large number of unoccupied dwellings in the census data, but I agree with his point about that data. Instead, I will have to take it as an expansion of his general argument.

To be clear, the argument is centred on the fact that building approvals are at all time lows, while population growth is at historical highs. Blind Freddy can see this.


In the long run population growth is the driver of underlying demand, but part of the cause of the recent burst in the population growth rate is the ‘baby bonus children’. They will not be a significant driver of demand for space for a couple of years yet. I also challenge the validity of simply extrapolation net migration trends, which would have missed the 1987 decline, and will miss any future declines. Maybe the shortage claim is that we currently do not have enough dwellings for future demand, and that there is some reason why we may not be able to supply these future dwellings. I’m sure we both agree that long run demand is a function of population, even after minor fluctuations in occupancy rates are considered. Population has grown in fits and starts before, and it will again - that surely is not the prime justification for claims of a shortage.

But we can first examine the obvious reason why building approvals, starts and completions are at a historical low. Joye’s own research shows that house prices declined through 2008, so there was little incentive for developers to bring stock to a falling market. Developers don’t count houses, they count profits. Could housing shortage proponents please explain to developers why they should have continued to build homes unprofitably when house prices were declining?

I understand Joye’s frustration in communicating his claim to the general populous, and I have no problems with being labelled neither an academic, economist or serious researcher; simply an independent pundit. My independence I feel is my strength. But neither does my independence imply a lack of academic rigour, seriousness of research or experience in property markets, for I like to think that is my forte.

But let me focus on the arguments at hand. The proponents of a housing shortage believe there is some kind of impediment to the future supply of housing, and in Joye’s own words they include: strict density restrictions; long building approval processes; a range of taxes and charges that stifle new development; insufficient infrastructure to liberate distant supply; and scarce new land in proximate urban areas.

Solution: elastify supply. Translation: build roads, rezone land for housing, decrease government fees to developers, and streamline the development and building approvals process – make it easier to build new homes.

But Joye’s own numbers show just how responsive the supply of residential property can be. Ignoring the GST induced slump in 2000, the graph below shows three previous periods where residential building activity slowed dramatically, only to bounce back within a couple of years. And these recoveries faced similar, if not worse, taxes, charges, and approvals processes.


The Queensland government has taken Joye’s ideas for elastifying supply on board with their SEQ Regional Plan. The plan complements the SEQ Infrastructure Plan, and together they achieve all of the solutions proposed by Joye. However, a Regional Plan delivering these same outcomes has been active in the State since 2005, and yet apparently, we still have a housing shortage.

There is a very good reason why this should be the case, and why Joye and Co.’s proposed solutions will not bring forward the construction of new dwellings. Let us examine each proposed solution in turn.

1. Density restrictions. If I understand this correctly, the claim is that if developers were allowed to build higher buildings, they would build more dwellings.

But through what mechanism is this claim achieved. Let us use an example to show how rezoning to increasing building height restrictions benefits only current land holders, and does not improve the supply of dwellings.

A great case study is near my own home, where former industrial land near the city is a target for gentrification by the local government. The land has been rezoned for residential, and the building height restriction has been increased periodically from 5 to 7 to 10 storeys in the past 5 years. Yet there remains just a trickle of new apartment buildings.

The reason is simple. As the height limit is raised, the land itself gains value. Any developer looking to enter into the area would have to now pay the current owner an even greater price for the land, leaving their rate of return on the development similar in every case (the 5, 7 and 10 storey cases). Rezoning, while in some instances is required to change uses, and to allow for natural growth to proceed, still remains a gift to the land owner.

2. Long building approvals process. The argument is that supply responses to price changes are delayed due to arduous approvals processes.

In general, I agree that the approvals process for residential dwellings is in some cases arduous and time consuming. However, the fact that planning and building approvals remain current for a period of time allows developers to speculate with early approvals, without committing to construction until prices appear stable enough.

Even if the cost and time taken for approvals is reduced though innovative management by local governments, the argument of benefits going to current owners of developable land, as in increase in value reflective of the reduction in development risk, applies.

3. Taxes and charges stifle new development.

This is the same argument for rezoning and the building approvals process. Reduced development costs are returned to land values.

4. Insufficient infrastructure to liberate distant supply; and scarce new land in proximate urban areas. These arguments assume that developable land is unavailable due to current planning restrictions.

This argument is one of the more popular ones in the property industry. If I just stated here that there is plenty of land currently zoned for residential development, both within existing suburban areas, and in new outer suburb developments, I would be hit with a request to show some evidence. So here it is for South East Queensland.

Springfield, to the west of Brisbane is only 13% developed. It has an area of 2,860Ha, and a target population of 86,000 people, with house and land packages available now. Coomera, north of the Gold Coast, has been rezoned for a new satellite city, and has very good highway access to both Brisbane and the Coast. Land is zoned for housing for an estimated 60,000 people. Sippy Downs, west of the Sunshine Coast has a new plan promoting development around the University of the Sunshine Coast. Not to mention infill projects such as Portside in Hamilton, and the ongoing transformation of Teneriffe, South Bank, and South Brisbane into dense residential areas.

Of course, I have repeatedly mentioned, the benefits from rezoning go to current land holders. For a development industry with large parcels of land bought for long term speculation, this is a simple gift.

At the end of all this reasoning we end up at the same point as before. We all agree that there has been a recent jump in population growth rates, which will lead to medium term stability in house prices, and a recovery in residential construction. However, some things remain uncertain, like why Australia’s leading expert on residential property markets can claim something as radical as a chronic housing shortage based on extrapolating trends in data without resorting to theoretical foundations; and why all levels of government are buying into ineffective solutions to a non-existent problem.

A chronic housing shortage: Myth or reality?

What I really want for me and my young family is a nice big house, well located, with a shed, in a quiet street, with shops close by, and parks all around. Damn the housing shortage!

But let us be serious for a minute. If you are going to claim a housing shortage, a chronic one at that, you will need some pretty solid economic justification.

This article is targeted squarely at the claims of protagonists Christopher Joye and Jason Anderson. I do this not to provoke, but to share ideas and present some theoretical arguments. I read Joye’s columns in Business Spectator, and am a fan of his general rigour and respect for evidence. But for some reason, he repeatedly claims that Australia suffers a chronic housing shortage. Maybe it is just his enthusiasm coming through, but surely to make such a claim he would need to define both chronic and shortage. Setting the definition of shortage aside for a moment, I think we can first ignore the use of the term chronic, as it implies long-lasting and ongoing. Maybe this term is used to make the point that Joye foresees the scale of future housing shortages to be quite severe.

Anderson makes these same claims, and challenges those who deny a housing shortage to explain to me why it is that in the 2008 calendar year we had the strongest rental growth in nominal terms for more than 20 years and in real terms for more than 30 years. He further claims his analysis revealed a housing shortage in 2006, and proposed that this would result in large increases in rent. While the rent rises did in fact happen, Joye’s own RP Data-Rismark Hedonic Index shows that house prices in capital cities have only just recovered their losses to return to the levels of early 2008. Are we to believe that a chronic housing shortage resulted in a decline in prices of 4%? If we adjust this index into real terms, that is a significant reduction (although I’m not certain whether this is already factored into the index). In any case the house price index in the figure below has grown at an average rate of 5.6% pa since Jan 2007. Over the period, the weighted average inflation in capital cities was 3.4% for 2007/08 and 3.1% for 2008/09.



Joye also makes the following claims as he tries to make the case for a chronic housing shortage, and I quote:
1. House prices have only just recovered their 2008 losses.
2. The rate of house price growth is not accelerating – in fact, it is decelerating. 3. Australia has had very low rates of appreciation –currently and since 2003.
4. Indeed, Australian house price growth since the end of 2003 has been well below household disposable income growth and nominal GDP.

I still can’t see the chronic housing shortage.

This article is also aimed at the antagonist Kris Sayce, who wrote an interesting piece that attempted to challenge the claims of Joye, Anderson and others. One of his key foci is the research that quantifies the shortfall of dwellings, which to me misses the point entirely. Dwelling counting, like job counting, is meaningless to an economist without regard to the profile of demand and supply and subsequently the price. These figures, as far as I am concerned, are a communication tool for planners and politicians; for those who get lost in more abstract economic concepts.

But Sayce does finally focus on the issue at hand – supply, demand, and price. He makes the poignant point that house prices during a bubble (if you want to call it that, however mild) begin to carry a growth premium. People begin paying a premium on the price for the expected future capital growth. The elimination of this growth premium may explain the decline in prices observed over 2008.

But this article is not about discrediting the two main protagonists, nor is it about supporting Sayce and the pool of antagonists, of which Steve Keen is probably the most extreme. In the end, I think we all agree (apart from Steve) that an upswing in residential property prices is certain, but I think we disagree on the timing and the severity of the boom.

Let us turn then to the details, which I believe get lost or forgotten in discussions of this nature. First, we need to define shortage in some meaningful way. Second, we need to examine the reason for the disconnection between rents and prices to answer Anderson’s question. And third, we need to consider the role of expectations and behaviour in response to broader economic circumstances.

First, shortage, or scarcity, of resources is THE economic problem. Most economists believe that prices are the best way for resources to be rationed amongst competing demands. In the residential property market, prices really do reflect a point where the supply and demand curves meet at a given point in time. Either the term shortage is used as a proxy for high prices relative to some subjective normal price level, or there must be some barrier that is stopping the market from functioning; some barrier that makes buyers unable to participate even though they have the financial means.

I await a meaningful definition of housing shortage from Messrs Joye and Anderson.

Second, the response to Jason Anderson’s challenge of explaining the dramatic rental increases in 2008 is deceptively simply. Any individual, family or other residing group, face two options for housing: renting or buying. The trend observed over the past 7 years or so has been an early rise in house prices, with a less substantial increases in rent, and a late fall, or plateau, in house prices, and an increase in rents. Buying and renting each have their benefits. If on aggregate, people tended to see buying as preferable in the early part of the decade, having seen significant price increases, and factoring in this growth premium to their decision, we would get the pattern observed. If in recent years, that growth premium has been lost, and job uncertainty has increased, people may feel like renting is relatively more attractive. Hence, we have seen significant rental gains since the end of 2007, but flat or decreasing house prices. At some point, rents will increase to the point where buying seems an attractive option again.

To clarify, the demand for housing is the sum of the demand for rental accommodation and owner-occupied accommodation.

Third, there is plenty going on in the economy more broadly that will impact the housing situation; lingering uncertainty (about a W-shaped recovery), expected interest rate rises, and a new generation entering housing with different attitudes.

Uncertainty is, in my opinion, going to hold back price growth for residential dwellings for some time yet. While there is much media attention to those who claim the end of the recession, but there are still warnings about a W-shaped recovery. Too much exuberance too early in global stock markets could be a big mistake, and another big fall would postpone a sound recovery. While this may make residential property appear a more stable investment, I suspect the net effect will still be a reduction in demand from both investors and owner-occupiers.

More closely related to the residential property market, the likelihood of interest rate rises next year will be holding back many moves from the rental to the buying market. Coupling this with a potential W-shaped recovery, and the potential for greater job disruptions should that occur, I would hesitate to call a house price boom until after 2010.

Taking the focus back to the home seeking individual or family, how do these uncertainties change their accommodation decision? For starters, it delays the decision to go from renter to owner. It also delays the decision to even become a renter. Young adults will choose to stay much longer with their folks. Importantly, and this is often overlooked, it may increase the occupancy rates in an effort to consolidate space and increase savings. For example, Grandma may move in with her children’s family and rent her own house. Or families may take boarders in their spare rooms, and group households may decide that rents can be shared better by having someone occupy the spare room. All of these points describe my network of young professional friends – the next generation of home buyers.

This brings me to my final point. The next generation of home buyers have different values to the Baby Boomers, or even Generation X. Generation Y travels, they see a mortgage as a burden, and the opportunity costs of homeownership to be very high. In my own case, the difference in costs for me to own the house I currently occupy, or to rent, are about $20,000 per year. The Generation Y attitude is to see the choices as
a. Buy a house and commit to continuous work for a lengthy period of time with little opportunity for saving or an extravagant lifestyle, or
b. Rent, stay mobile, and use the $20,000 difference on a year long trip to South East Asia, or a spend 6 months motorcycling through South America, Che Guevera style. And do this year in, year out.

My own prediction is that the housing market, in terms of prices, will remain fairly stable for the next year, while rents may continue rising at a slower pace. Should a second economic slump occur next year, governments of all levels have incentive to prop up prices temporarily, prolonging the plateau. It is likely to be another year until increasing rents and prices combine to provide the incentive, and the certainty, for developers to bring housing stock to the market. The recent population growth also points to the fact that housing will remain a reliable investment in the medium term, as the current ‘baby bonus children’ grow out of their bassinets.

I often wonder where the incentives lie for making such dramatic claims about the housing market. The obvious reason is that making claims that hit the middle ground are not particularly newsworthy. A second obvious reason is that maintaining confidence in the market is very important, and claims such as this do dilute the uncertainties discussed above. But really, developers are savvy operators, and many have large financial and land reserves, leaving them ready to build and profit when the market is ready. There is no need for alarm.

In good company on a W-shaped recovery

These blog entries are my ideas. I have them, then I write them down. And when I find my ideas are being taken up by others (most likely independently), or my predictions prove accurate, I like to take some credit by posting a little reminder.

It seems my prediction of a second share market crash is now shared by a number of prominent economists. I'm not certain whether their predictions are based on oil supply considerations, but that is the fundamental basis for my own.

If we could get economic forecasting like this, where a two week range was proposed for a Chinese stock market crash, and was off the mark by only a week, economics would gain some serious social status.

Should

It’s weird word, and one that I hear much too often from the environmentalists in my social circle. We should care for the environment, we should turn off the lights, we should drive less, we should eat organic food, we should should should should. Where does it end?

And isn’t it amazing how many people are happy to should you without a solid principle upon which to base their assertion.

I had a guy once pull up next to me on his push-bike at traffic lights after he saw me roll through the previous red light. He told me I should obey the lights, and clothed his statement in the authority of his role as a bike shop attendant who hears drivers complain about cyclists flaunting road rules. “No worries” seemed like the most polite palm off I could manage, considering I felt like telling him to mind his own business and wishing he’d get knocked off his bike.

That afternoon, returning home along the same stretch of road, I followed another cyclist who happened to run a red light. I stopped, as there was traffic coming. But I caught up to him a couple of intersections later. I didn’t think there was anything to say, he was acting as I would expect a cyclist to act but it was the same guy who gave me an earful in the morning! Want a hypocritical bastard.

I wasn’t in the mood for confrontation (I rarely am) so I just said g’day, and rode on my way. I hope he felt like a tool, because it must have been fairly obvious I’d seen him run the light.

I thought originally his should proposition was that we should all obey road rules. But by evening, it looked like his should proposition is that we should look after our personal safety before road rules, but make sure everyone else is doing the 'right thing'.

But it brings me to my point about should. Where does the authority to should someone come from? Most of the greenies get their best information from the hippie papers, and unwashed websites, and very few would understand an academic journal should they ever learn how to find one. A loose translation of should is “let me tell you how to behave” – but that wouldn’t go down so well.

But the real problem is that the ‘should-ers’ generally have the best intentions. They genuinely believe what they say, and that they are on some kind of mission to rescue the world from the ‘unshould’; those who independently determine their behaviour.

I should resolve never to should anyone again. My wife would appreciate that.

Close the Gap

I’ve wanted to write about the Federal Government’s Close the Gap campaign for quite a while. But I am going to use this opportunity to raise a much bigger issue that underpins the campaign, and other calls for equality, such as women’s salaries, gay rights, and racial equality to name a few. That issue is fairness.

When I hear of calls for equality, I always ask, why would you expect equality? I never hear calls for more white guys in basketball or more black guys in swimming. I never hear cries of outrage when women in sport never seem to make the speeds, heights, of distances of the men; or even fury over gay fellows being far more fashionable than the rest of us straight guys. It is just plain UNFAIR!

So why do we suddenly decide that equal outcomes are important when it comes to other things?

For a start, we can only observe outcomes, not opportunities. What most of use really want are equal opportunities. But how can we know? When we look at nationwide data we can’t know how many women chose to work less, chose not to continue their education, or chose to do more housework?

Let’s take a closer look at the Close the Gap campaign. For starters, why would we expect life expectancy of a single race, to be the same as the average life expectancy of all other race in our society combined? And what about mixed race people? Are they an average of the racial heritage in their bloodline?

I’m pretty sure the data is out there for a real comparison which would isolate race from a number of other factors that are likely to have a large impact on life expectancy, such as alcohol and tobacco consumption, hours of exercise per week, occupation, family history of illness, location and so on. Somehow my instinct tells me that it’s highly unlikely that after all these factors are considered, that race has any impact on life expectancy.

“Why, but of course not!”

That’s the response I would expect from Close the Gap advocates.

“Of course it’s not race exactly that is the cause of shorter life expectancies (because if it is, there’s not much anyone can do about it), it’s all those other factors that are more prevalent amongst Aboriginal people.”

So? They also prevail to varying degrees in people from all races. This campaign is ONLY about improving conditions for Aboriginal people. Closing the gap gets a lot more difficult if you are helping the other races as well. How is that fair? If we were really to be fair we would ignore race altogether. Not one single policy should require the identification of race. Our new campaign would be called Let's Live Longer, but I don't think it would appeal to our emotions so much.

But when it comes to government social programs, fairness appears all the rage. Those people who oppose markets in human organs probably epitomise misdirected notions of fairness. They imagine for example, that a world in which kidneys must be donated, and where 1,000 people (these are arbitrary figures) die each year awaiting a donor organ, is better that a world where kidneys are bought from willing donors and where only 100 people die waiting for a kidney - based on the notion of fairness. They cry that rich people will have an advantage over poor people for access to kidneys. True. But that's no different from the markets for food, clothing or housing. The point is that donors will be able to accept rewards, thus encouraging donations. And every extra kidney will go to someone, rich or poor. The fair scenario in this case treats people differently, while the unfair case treats them all the same. It's the kind of backward logic that bugs me all too often.

But before I move on from the racist livespan campaign and unfair view of life saving surgery, I will reiterate that we can still only observe outcomes, not opportunities. If more Aboriginal people choose to live in shanty towns in the desert, choose not to seek medical attention, choose to abuse alcohol and smoke like a chimney, than who are we to intervene?

My gut instinct tells me that the remote location of many Aboriginal people is a key factor, which itself captures level education, access to health services, diet, exercise, and probably drug abuse. But does that mean that we should supply all the modern services available in the big smoke at every little tin-pot shanty town in the desert? No way.

Anyway, that’s enough about very popular but completely racist campaign; on to the ever-popular issue of equal pay for women. Again, we have an opportunity vs outcome problem here. Did you know that tall people earn more on average as well? I want equal pay for short people!

I won’t continue. I feel frustrated by the absurdity.

Health costs revisited

In July 2008 I wrote how preventative health care, such as screening and early treatments, actually increase the total cost to society for medical treatments.

Now, there is some more evidence in my corner. The US Congressional Budget Office is now on my side, with plenty of research to support the claim that preventative medicine adds cost to the health care system, rather than reducing costs.

Who would have thought that my original ideas (I had not read any of the studies that this letter refers to) would reflect reality!

I stated it like this:

What has happened is that improvements in medical treatments have enabled us to live longer lives, and because of much of the preventative treatments, we die less suddenly then ever, increasing these 'death postponing' medical costs. Because we can diagnose more problems, we can visit doctors more readily, and we treat more medical conditions then ever. Thus, it is because of the very efficiency and effectiveness of medical technology that our demand for it has grown, both during our lives, and in our ‘prolonged death’.

And the CBO summarise one study like this:

The researchers found that those steps would substantially reduce the projected number of heart attacks and strokes that occurred but would also increase total spending on medical care because the ultimate savings would offset only about 10 percent of the costs of the preventive services, on average.

Remember, we all die. If you prevent someone from having a heart attack, although you may prolong their life, they will die from something else, and most likely, they will need further medical treatment for that ailment.

And now the economics blogosphere has picked it up here.

Predictions

We all know that predicting is very difficult, especially about the future. Google tells my I should attribute that saying to the Danish physicist Neils Bohr, who won the Nobel Prize for physics in 1922, but I’m sure even he borrowed if from someone, because we are all in essence simply human prediction machines.

For the speculators out there, here are mine:

1.Oil will rise again. Maybe we’ll get to $200/barrel this time. Other raw materials will follow the boom.

2.We will have another crash in prices – shares, commodities, and possibly housing will come along for the ride this time.

3.People will point the finger in all directions except to the finite oil supply. Only the lone fighter on this blog will point out that we are in an adjustment period where we are going to have the change the way we do many things. But we will adapt, and we will look back at all the scaremongering and wonder why anyone thought it would be a difficult transition.

4.They say it’s all in the timing, but I am least confident about this point. The next crash will happen after Sept 2010, but before Dec 2012.

5.The crash is unlikely to be as sudden next time, although I wouldn’t rule out a surprisingly fast price free fall. I would expect some more restrained reactions by market actors after the 08/09 experience.

6.There is money to make in the next 12 months, but it might be wise to take profits when you can, phasing down exposure to financial stocks and commodities late next year.

7.For Capricorns, next year is a good time to focus on love, but also to gain control of your finances.

All but number 7 I reckon have merit. I just want to post this now so that if I am proven correct, I take credit for having amazing insight. If my predictions prove wrong, I’ll find reasons why and try and pass the blame. Although number 7 is a certainty!