The annual ACCC Regulatory Conference was held last week at the Gold Coast. At a time when various governments are intervening to separate Telstra’s business, sell public railways, subsidise a fibre broadband network, and introduce competition in water markets, any evidence on the effectiveness of competition reforms in such network industries would be helpful. Yet my take home message was that nobody is sure if competition reform has provided, or even can provide, the social benefits it was designed to achieve.
Ironically, in the second session of the conference the following findings were put forward:
...in most circumstances, profit maximising vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ point of view. The vast majority of studies support this claim,.. even in industries which are highly concentrated…
However, the thrust of competition reform is directed at unbundling vertically integrated monopolies to reduce potential abuse of market power. Railways, electricity, and telecommunications are classic examples, yet a quarter century of evidence shows that vertical integration is in fact the efficient outcome for both producers and consumers. I would note however, that even where market structures appear to be competitive, price competition and innovation may still fail to eventuate. On the other hand, monopolies may innovate simply due to a the threat of competition. Arguing that competitive outcomes will be achieved based on market structure alone is flawed.
That got me thinking. Is competition reform more about ideology than social gains through efficiency? Are we just swapping government incompetence at regulating and incentivising its monopoly with incompetence at developing sufficient regulation for a competitive market operate while still relying on government owned monopolist components of the value chain?
This post is the first in an August series on competition which will follow my emerging understanding of this controversial topic. I hope to investigate key theoretical assumptions, investigate the history of competition reform, compare theoretical outcomes with real evidence, and identify regulatory shortcomings. In doing so my personal opinions will become known, yet I hope that some debate will challenge these opinions. Any comments and criticisms are welcome.
Wednesday, August 4, 2010
Sunday, August 1, 2010
Quick housing update and forecasts
The residential property bears breathed a sigh of relief with the release of the monthly RPData hedonic price index for June - down 0.7% (with Brisbane prices down 1.3%). The bulls however are happy enough with the 20% capital growth performance since June 2009.
In light of this, Steve Keen has laid out his forecast of things to come in residential property:
Firstly, with an increased stock of unsold houses on the market, buyers are likely to take yet more time to make a decision—which will add further to the backlog. If prices are falling, why hurry? The urgency will leave the buy side.
Secondly, so-called investors—whom I prefer to call speculators, since 90% of them have bought existing properties rather than built new ones—will start to consider whether they should swap from the buy side to the sell side. After all, no-one in their right mind buys an investment property in Australia for the rental returns: it’s capital gains or nothing DownUnder. Do you capitalize on gains to date, or hang on hoping that the upward trend will re-assert itself once more?
I expect these two processes to lead to an accelerating rate of decline in house prices now, as they did in the USA when “Flip That House” ceased being a winning trade.
Chris Joye has made a typically broad prediction:
Rismark had been forecasting a substantial deceleration in housing conditions back to single-digit annualised growth rates since October 2009. Over the long-run, house prices track purchasing power quite closely. Disposable household incomes were only projected to rise by about 5 per cent in 2010. We’ve had 4.7 per cent growth in dwelling values in the year-to-date. We do not, therefore, expect to see the market rise much further over the remaining year subject to labour market conditions and the course of monetary policy.
Interestingly, Joye notes the decline in housing credit outstanding, but does not seem to believe this will strongly influence prices in the near term.
Finally, over at Delusional Economics we have this gem:
There is no "soft landing" for a debt driven economy that suddenly decides to shun debt
Tuesday, July 27, 2010
Economic myths - another dose
Population growth
I have written at length on why population growth does not improve welfare. Mark Crosby over at Core Economics reiterates these fundamental arguments.
The pro-population growth arguments are theoretically flawed, and empirically dismissed. Below is a chart of the relationship between population growth and GDP per capita for around 200 countries and localities, showing a distinctly inverse relationship. If I was in the business of improving welfare, low population growth would be a key avenue.
Another emerging myth is that population growth will decrease interest rates. Renowned property spruiker Chris Joye has created plenty of media fanfare recently with his spurious connection between population growth and interest rates. This table shows the interest rates in 23 countries, and if I’m not mistaken, shows that countries with the lowest population growth (and highest GDP per capita) also have the lowest interest rates.
Food
Food myths are widespread. The environmental movement wants us to believe that vegetarianism is better for the environment and that ‘organic’ (what does that mean?) food is more nutritious and can solve hunger around the world. The agricultural lobby would have us believe that food self-sufficiency is of utmost importance, although their argument is shallow at best.
The latest myth to be busted is that chickens are pumped with artificial hormones and steroids to make them grow faster and larger. However, it appears that hormones are not part of the poultry picture at all.
While I firmly believe that raising animals for food should be conducted in a humane manner, those who push for change would garner more support if they were fully informed of current practices - their message could then be taken seriously by industry and government. Furthermore, the organic food movement could concentrate on promoting farming practices that reduce externalities, as a result of chemical use for instance, and improving land quality. The incentives for such change often align with the long term goals of the agricultural industry and may attract wider public support.
Safety
Under the rebound effect banner I have discussed how some innovations to improve safety can backfire if peoples’ behavioural response is to take on more risk. For example, the vigorous uptake in sunscreen use has led to a culture of sun exposure, offsetting the intended consequence of reduced skin cancer rates. The name for this behavioural response in the context of risk taking is the Peltzman Effect.
You can find this type of response in broad range of situations. Most recently, in trials of automatic lane correction technologies in cars, one participant noted:
...that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home
Minimum wage
The business lobby loves the textbook response to minimum wage laws, but even world renowned economists are sceptical. No doubt this debate will continue.
I have written at length on why population growth does not improve welfare. Mark Crosby over at Core Economics reiterates these fundamental arguments.
The pro-population growth arguments are theoretically flawed, and empirically dismissed. Below is a chart of the relationship between population growth and GDP per capita for around 200 countries and localities, showing a distinctly inverse relationship. If I was in the business of improving welfare, low population growth would be a key avenue.
Food
Food myths are widespread. The environmental movement wants us to believe that vegetarianism is better for the environment and that ‘organic’ (what does that mean?) food is more nutritious and can solve hunger around the world. The agricultural lobby would have us believe that food self-sufficiency is of utmost importance, although their argument is shallow at best.
The latest myth to be busted is that chickens are pumped with artificial hormones and steroids to make them grow faster and larger. However, it appears that hormones are not part of the poultry picture at all.
While I firmly believe that raising animals for food should be conducted in a humane manner, those who push for change would garner more support if they were fully informed of current practices - their message could then be taken seriously by industry and government. Furthermore, the organic food movement could concentrate on promoting farming practices that reduce externalities, as a result of chemical use for instance, and improving land quality. The incentives for such change often align with the long term goals of the agricultural industry and may attract wider public support.
Safety
Under the rebound effect banner I have discussed how some innovations to improve safety can backfire if peoples’ behavioural response is to take on more risk. For example, the vigorous uptake in sunscreen use has led to a culture of sun exposure, offsetting the intended consequence of reduced skin cancer rates. The name for this behavioural response in the context of risk taking is the Peltzman Effect.
You can find this type of response in broad range of situations. Most recently, in trials of automatic lane correction technologies in cars, one participant noted:
...that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home
Minimum wage
The business lobby loves the textbook response to minimum wage laws, but even world renowned economists are sceptical. No doubt this debate will continue.
Thursday, July 22, 2010
Stay informed for Election 2010 - Labor Factions: Basic Questions Answered
By Andrew McMicking
Why does the ALP have factions? What are the benefits?
Factions have been set up to serve a useful purpose in the ALP. In brief they:
• Allow support to be readily marshalled behind candidates and ideas.
• Provide for a sharing of power between different philosophical or ideological interests in the party.
• Serve as a mechanism to settle disputes.
Any organisation or group of people – be it the workplace, a golf club, church group or school classroom – will always see groups of like minded people associate more readily together. The ALP has recognised this and, through factions, has formalised such groupings. Members and unions in the ALP can now formally apply and join a faction. Each faction usually has a membership list, executive, AGM, bank account, fundraising activity and negotiation committee for dealing with other factions. This formalised nature allows the principle of solidarity to be applied i.e. a decision is made within a faction and all members are bound to abide by that decision.
What is Right and what is Left?
You often here the terms ‘left wing’ and ‘right wing’ applied to factions by both the media and in public discussion. In political/philosophical terms, ‘right wing’ means you tend to take a more conservative and pragmatic view of policy issues, whereas ‘left wing’ means you tend to take a more reformist or progressive view. Support for a budget surplus, tax cuts as opposed to more government spending, a close defence relationship with the US, free market economics, less red tape for business and uranium mining is regarded as ‘right wing’. Support for greater government spending on health, education, disability services and infrastructure, an Australian Republic, recognition of the rights of indigenous people and other minority groups, and opposition to the war in Iraq is regarded as ‘left wing’.
What do we currently have in Qld? Federally?
The ALP, in each State, have factions which can be classified as either Left or Right.
In Qld we have The Left as a left wing faction. However we have two right wing factions: Labor Unity known as the ‘Old Guard’ (refer page 3) and Labor Forum known as the ‘AWU’ faction (as the AWU, Qld’s biggest union, dominates this group). These two factions are now in close alliance together and many view them as one right faction. They technically remain separate entities, though, and many in Labor Unity would not see themselves as a right wing faction, but more in the centre between The Left and Labor Forum.
Why does the ALP have factions? What are the benefits?
Factions have been set up to serve a useful purpose in the ALP. In brief they:
• Allow support to be readily marshalled behind candidates and ideas.
• Provide for a sharing of power between different philosophical or ideological interests in the party.
• Serve as a mechanism to settle disputes.
Any organisation or group of people – be it the workplace, a golf club, church group or school classroom – will always see groups of like minded people associate more readily together. The ALP has recognised this and, through factions, has formalised such groupings. Members and unions in the ALP can now formally apply and join a faction. Each faction usually has a membership list, executive, AGM, bank account, fundraising activity and negotiation committee for dealing with other factions. This formalised nature allows the principle of solidarity to be applied i.e. a decision is made within a faction and all members are bound to abide by that decision.
What is Right and what is Left?
You often here the terms ‘left wing’ and ‘right wing’ applied to factions by both the media and in public discussion. In political/philosophical terms, ‘right wing’ means you tend to take a more conservative and pragmatic view of policy issues, whereas ‘left wing’ means you tend to take a more reformist or progressive view. Support for a budget surplus, tax cuts as opposed to more government spending, a close defence relationship with the US, free market economics, less red tape for business and uranium mining is regarded as ‘right wing’. Support for greater government spending on health, education, disability services and infrastructure, an Australian Republic, recognition of the rights of indigenous people and other minority groups, and opposition to the war in Iraq is regarded as ‘left wing’.
What do we currently have in Qld? Federally?
The ALP, in each State, have factions which can be classified as either Left or Right.
In Qld we have The Left as a left wing faction. However we have two right wing factions: Labor Unity known as the ‘Old Guard’ (refer page 3) and Labor Forum known as the ‘AWU’ faction (as the AWU, Qld’s biggest union, dominates this group). These two factions are now in close alliance together and many view them as one right faction. They technically remain separate entities, though, and many in Labor Unity would not see themselves as a right wing faction, but more in the centre between The Left and Labor Forum.
Monday, July 19, 2010
Is residential property Super?
The retirement plans of working families may soon succumb to Australia's residential property mania. If Chris Joye had his way, Australian super funds would invest in the emerging residential equity market to diversify their portfolios against highly correlated domestic and global equities markets. The argument for this move is summarised below.
Investors, such as super funds, get extremely low-cost, highly enhanced and very long-dated exposures to what has, during the past three decades (including the recent calamity) been the largest and best performing of all investment classes: residential real estate. Historically, investors have only been able to access highly concentrated, risky development-style holdings comprising small parcels of properties that incur heinous transaction costs of about 12.5 per cent. By investing in a portfolio of thousands of shared equity interests, super funds could avoid all of these costs and secure the low risk diversification that they have never had before. Independent actuarial analysis suggests that about 15 to 30 per cent of all super fund capital should, in theory, be allocated to housing, in part because its returns are so unrelated to the performance of other investments. Compare the 50 per cent plus losses in shares and listed property trusts in the past year with the fact that the RP Data-Rismark Australian House Price Index has tapered by only -0.8 per cent. (emphasise added)
Is this idea worth embracing? Or to put it another way, how many people would actively choose to invest superannuation in the residential property market?
Super funds investing in residential property equity face a couple major of problems in my view:
1. decreasing the diversity of investor portfolios, and
2. moral hazard associated with residential equity finance.
Investors, such as super funds, get extremely low-cost, highly enhanced and very long-dated exposures to what has, during the past three decades (including the recent calamity) been the largest and best performing of all investment classes: residential real estate. Historically, investors have only been able to access highly concentrated, risky development-style holdings comprising small parcels of properties that incur heinous transaction costs of about 12.5 per cent. By investing in a portfolio of thousands of shared equity interests, super funds could avoid all of these costs and secure the low risk diversification that they have never had before. Independent actuarial analysis suggests that about 15 to 30 per cent of all super fund capital should, in theory, be allocated to housing, in part because its returns are so unrelated to the performance of other investments. Compare the 50 per cent plus losses in shares and listed property trusts in the past year with the fact that the RP Data-Rismark Australian House Price Index has tapered by only -0.8 per cent. (emphasise added)
Is this idea worth embracing? Or to put it another way, how many people would actively choose to invest superannuation in the residential property market?
Super funds investing in residential property equity face a couple major of problems in my view:
1. decreasing the diversity of investor portfolios, and
2. moral hazard associated with residential equity finance.
Tuesday, July 13, 2010
Skilled labour immigration removes incentives for Australians to invest in education
The shrill from commentators warning of Australia’s apparent skills shortage is deafening. But there are a number of reasons why this claim, and the inevitable recommendation for government to increase quotas of skilled migrants, is flawed, and why the solution is not in the best interests of Australia in the long run.
For the acute observer the transparent falsehood of the claim jumps right out at you.
… skilled labour in an area like project construction is an international problem, so poaching what we need from overseas is not going to be easy.
ACIL Tasman points out that LNG project specialist workers are globally mobile, moving from site to site (and often between projects at varying stages of development) – wherever their services command the highest price. As the consultants warn, opting for less-experienced personnel carries with it the dangers of higher error rates in construction and resulting delivery delays and still more expense.
Translation: if you want the skills you need to pay.
A government with backbone, and an eye on long term prosperity, would tell industries crying poor to sort it out themselves. Large mining and gas projects have very long lead times - long enough in fact to train some of the existing workforce in skills that may be required for future projects. If you need the slam-dunk of skills and experience, you are inevitably poaching people from another project - experience only comes from a finite number of places.
For the acute observer the transparent falsehood of the claim jumps right out at you.
… skilled labour in an area like project construction is an international problem, so poaching what we need from overseas is not going to be easy.
ACIL Tasman points out that LNG project specialist workers are globally mobile, moving from site to site (and often between projects at varying stages of development) – wherever their services command the highest price. As the consultants warn, opting for less-experienced personnel carries with it the dangers of higher error rates in construction and resulting delivery delays and still more expense.
Translation: if you want the skills you need to pay.
A government with backbone, and an eye on long term prosperity, would tell industries crying poor to sort it out themselves. Large mining and gas projects have very long lead times - long enough in fact to train some of the existing workforce in skills that may be required for future projects. If you need the slam-dunk of skills and experience, you are inevitably poaching people from another project - experience only comes from a finite number of places.
Sunday, July 11, 2010
Generations of housing affordability
The degradation of housing affordability is widely acknowledged, but unfortunately mainstream explanations miss the fundamental stories of easy credit and tax rules encouraging property speculation.
One of the best collections of Australian residential property analysis on the web has emerged at The Unconventional Economist. Leith's latest article explores changes to housing affordability since the 1970s and the key drivers behind the change.
He summarises the article as follows:
One of the best collections of Australian residential property analysis on the web has emerged at The Unconventional Economist. Leith's latest article explores changes to housing affordability since the 1970s and the key drivers behind the change.
He summarises the article as follows:
- It is the demand for, and supply of, credit that is the key determinant of house prices. Whilst demand-side factors such as tax concessions, benign economic conditions, and population growth might increase people's willingness to borrow for property, ultimately, if you cannot obtain the finance, you cannot pay a high price. Similarly, tight housing supply would have little impact on house prices when credit is not readily available.
- Lower interest rates and easy credit do not make houses more affordable. Rather, they quickly get capitalised into house prices, increasing the amount that home buyers must borrow.
- When examining interest rates and their effect on housing affordability, it is real interest rates (i.e. the mortgage interest rate less inflation) that matters. Whilst mortgage interest rates averaged a seemingly high 9% in the 1970s, due to high inflation (averaging 11%), real interest rates were negative, resulting in borrowers' mortgage debt being 'inflated away'.
- Importantly, be very weary of offers of more credit and the promise that it will "improve housing affordability". Any scheme that increases home buyer's borrowing capacity, such as shared equity loans and the Never Ending Mortgage, will instead fuel further house price growth, thus eroding affordability.
- Beware the property spruiker. Always be sceptical when reading property-related articles in the press, or when listening to politicians talk about housing affordability. Whilst they might, on the surface, sound reasonable, they are often talking their own book. Instead, think critically about their motives and who their constituents really are.
Thursday, July 8, 2010
Tuesday, July 6, 2010
Effects of dwelling composition in the property market
Much popular property market analysis based on flawed principles. A secret to identifying rubbish analysis is to note the following meaningless buzzwords and phrases; underlying demand, housing shortage, urbanisation or population growth.
Spruikers use this measure to justify the likelihood of price gains, yet the price changes observed seem to in fact be inversely correlated to underlying demand. We had a price boom from 2002-2004 at the same time as a housing surplus!
Furthermore, the size of existing homes changes over time with renovations and extensions. It has been widely acknowledged that many home owners have chosen to renovate instead of relocate in their search for more spacious accommodation. It is easy enough to imagine a street of heritage homes, for example, being renovated and extended to allow a large increase in the population of the street. No new homes, plenty of new people, and no housing shortage.
These buzzwords are based on a fallacy. The problems they have in common is that they are quantity based (thus ignore prices), and they ignore changes in the composition of dwellings.
Commentators calculate underlying demand by dividing the quantity of population growth in a given period by the average occupancy rate. This is supposed to give a measure of quantity of dwellings that ‘should’ be constructed of the period. Unfortunately, the occupancy rate itself changes over time. It has been declining dramatically for three decades. If the trend continues we may soon be able to calculate a housing shortage even if we build a new home for every new person!
Calculating a ‘housing shortage’ is then a simple matter of subtracting the number of dwellings constructed over a time period from the underlying demand. The graph below shows the result of this calculation for Australian from 1994 – 2009 using quarterly data (and the occupancy rate at each quarter – not the current occupancy rate).
These measures also fail to acknowledge the heterogeneity of housing. Counting a studio apartment and a 5-bedroom house as equal in the calculation of a housing supply is a mere fallacy. Clearly these two different dwellings will house different numbers of people.
Furthermore, the size of existing homes changes over time with renovations and extensions. It has been widely acknowledged that many home owners have chosen to renovate instead of relocate in their search for more spacious accommodation. It is easy enough to imagine a street of heritage homes, for example, being renovated and extended to allow a large increase in the population of the street. No new homes, plenty of new people, and no housing shortage.
What we have seen in the latest property boom is a continuation of the trend to build larger homes with more bedrooms, while the occupancy rate continued to decline. At some point you would expect the occupancy rate to bounce back before we all ended up living alone with three spare bedrooms. And it did.
The average number of persons per household has declined from 3.1 in 1976 to 2.6 in 2007-08. In the same period, the proportion of dwellings with four or more bedrooms has risen from 17% to 29% and the average number of bedrooms per dwelling has increased from 2.8 to 3.1.
In 2007-08, most households enjoyed relatively spacious accommodation. For example, 86% of lone-person households were living in dwellings with two or more bedrooms; 75% of two-person households had three or more bedrooms; and 35% of three-person households had four or more bedrooms. Over a fifth (21%) of three-bedroom dwellings, and 8% of four-bedroom dwellings, had only one person living in them
Important demographic reasons explain why we should expect the declining occupancy trend to come to an end. The aging population including baby-boomers downgrading is a key way in which this will occur (others include a rise in share housing by the forever young Gen-Y who are delaying family formation).
For example, the parents of a family whose adult children have moved out with friends or partners might find that the upkeep of a large house conflicts with their ‘grey nomad’ retirement plans. They can sell their 5-bedroom house and move into a new 2-bedroom unit, pocketing the price difference for their retirement.
In this scenario, the construction of a 2-bedroom apartment resulted in a 5-bedroom home being available to meet the housing needs of population growth.
The final fallacious buzzwords that provide property bulls justification for their position are urbanisation and population growth. If we were discussing any other good or service the pattern of habitation would be of little consequence to the expected prices. Increased urbanisation doesn’t drive up the price of food, petrol or any other goods – nor does population growth.
Increased urbanisation can lead to increased land prices, but that doesn't necessarily lead to increases in median housing price measures due to compositional change. Because new dwellings in outer areas are typically inferior locations to existing homes, the prices one would expect for identical dwellings in new estates would be lower. Since there is more land at the fringes of cities, we would expect that proportionally more cheaper dwellings to be added to the mix of housing. Prices for existing homes can rise, but due to the greater proportion of housing in outer areas in the mix, a price index can remain flat at the same time.
The table below shows a hypothetical city made up of identical dwellings, where new supply is mostly added at the fringes. Even though the price of each individual dwelling increases 10% over the period, a city-wide mean price index would remain flat due to the greater proportion of cheaper dwellings. The same effect can happen with new apartments in traditional detached housing areas.
Also constantly overlooked is the fact that urbanisation can only occur AFTER new urban dwellings are constructed unless driven by an increase in occupancy rates. Until the end of 2005 prices was rising fast, urbanisation and population growth were occurring, but the occupancy rate continued to decline.
Increased urbanisation can lead to increased land prices, but that doesn't necessarily lead to increases in median housing price measures due to compositional change. Because new dwellings in outer areas are typically inferior locations to existing homes, the prices one would expect for identical dwellings in new estates would be lower. Since there is more land at the fringes of cities, we would expect that proportionally more cheaper dwellings to be added to the mix of housing. Prices for existing homes can rise, but due to the greater proportion of housing in outer areas in the mix, a price index can remain flat at the same time.
The table below shows a hypothetical city made up of identical dwellings, where new supply is mostly added at the fringes. Even though the price of each individual dwelling increases 10% over the period, a city-wide mean price index would remain flat due to the greater proportion of cheaper dwellings. The same effect can happen with new apartments in traditional detached housing areas.
Analysis of the property market should focus on returns in comparison with other investments, with renting (user cost approach), and historical returns. Counting dwellings, and implying demand from population growth or urbanisation is problematic due to compositional factors.
Sunday, July 4, 2010
Automation and the housework rebound effect
As I have previously argued, innovations that aim to save time, increase safety, decrease energy consumption can be subject to flow-on rebound effects that lead to the opposite result. These counter-intuitive results have lead to ineffective government intervention and bizarre social norms.
A typical challenge to the idea of rebound effects goes like this.
“If a business has to pay each worker more due to government intervention on wages, they are clearly going to employ fewer employers. Are you challenging the Law of Demand? If the price of labour is higher, demand will be lower.”
No, I don’t argue that if we hold everything in the world outside of an individual business constant that the business will employ more people. I argue that to believe the world is held constant robs you of the vision to see flow-on effects to society and the ability to estimate the real net effect of a policy or action.
Today's rebound effect concerns time saving and housework.
A typical challenge to the idea of rebound effects goes like this.
“If a business has to pay each worker more due to government intervention on wages, they are clearly going to employ fewer employers. Are you challenging the Law of Demand? If the price of labour is higher, demand will be lower.”
No, I don’t argue that if we hold everything in the world outside of an individual business constant that the business will employ more people. I argue that to believe the world is held constant robs you of the vision to see flow-on effects to society and the ability to estimate the real net effect of a policy or action.
Today's rebound effect concerns time saving and housework.
Wednesday, June 30, 2010
End of Financial Year Wrap Up
HOUSING MARKET
All things considered, the Australian housing market looks ready to dive. My conversations with real estate agents are the only ones they've been having - no buyers are willing to even make a call at the moment. Home lending is down, prices are taking a u-turn, sales are down, and first home buyers are lost somewhere in the mist of winter mornings.
There has been some interesting analysis from Steve Keen lately, along with the more spruikung from renouned pro-housing, anti-commerical property, anti-shares, anti-all other investments, man on the spot Chris Joye.
My outlook – a surprise drop in home prices leading a significant decline in economic activity in Australia. The Reserve Bank will act promptly to reduce interest rates while pointing fingers to troubles abroad. Bulls will then promptly join the finger pointing, noting how exceptional strong Australia’s housing market has been and the supply shortages still threaten to create future unaffordable housing.
Aspirational home buyers should take a look at a true financial comparison of home ownership and renting before making any major decisions.
AUSSIE DOLLAR
The Australian dollar will not be safe. Think September 2008 all over again.
BLOGOSPHERE
Two new blogs worthy of mention are Delusional Economics, where you will be enlightened by some straight talking no-nonsense commentary, and a special mention for the Unconventional Economist for some very high quality articles on the Australian property market.
REBOUND EFFECTS
My attitude on helmet law rebound effects has been seen as quite controversial. But for those interested this site articulates my position quite accurately.
Experience shows helmets give only limited head protection. Studies in Australia show some prevention of superficial injuries (such as scalp lacerations) but only marginal prevention of “mild” head injuries and no effect on severe head injuries or death. When helmets were made compulsory in Australia, admissions from head injury fell by 15-20%, but the level of cycling fell by 35%.
To summarise, helmet laws led to a major decline in cycling. Fewer cyclist on the road decreased awareness of them by drivers, leading to cycling in general becoming less safe. Further, helmets themselves offer limited head protection in a limited number of crash circumstances - a helmet doesn't help much if you go over the handle bars and land on your face for example. And if you get hit by a truck (the classic pro-helmet argument) you are stuffed whatever you are wearing on your head.
THE LAST WORD
If the financial and economic circus of 2009/10 has been all too mauch, it might be time for a holoiday. For those who take this advice but want to optimise their holiday time, have a read of this quality article.
All things considered, the Australian housing market looks ready to dive. My conversations with real estate agents are the only ones they've been having - no buyers are willing to even make a call at the moment. Home lending is down, prices are taking a u-turn, sales are down, and first home buyers are lost somewhere in the mist of winter mornings.
There has been some interesting analysis from Steve Keen lately, along with the more spruikung from renouned pro-housing, anti-commerical property, anti-shares, anti-all other investments, man on the spot Chris Joye.
My outlook – a surprise drop in home prices leading a significant decline in economic activity in Australia. The Reserve Bank will act promptly to reduce interest rates while pointing fingers to troubles abroad. Bulls will then promptly join the finger pointing, noting how exceptional strong Australia’s housing market has been and the supply shortages still threaten to create future unaffordable housing.
Aspirational home buyers should take a look at a true financial comparison of home ownership and renting before making any major decisions.
AUSSIE DOLLAR
The Australian dollar will not be safe. Think September 2008 all over again.
BLOGOSPHERE
Two new blogs worthy of mention are Delusional Economics, where you will be enlightened by some straight talking no-nonsense commentary, and a special mention for the Unconventional Economist for some very high quality articles on the Australian property market.
REBOUND EFFECTS
My attitude on helmet law rebound effects has been seen as quite controversial. But for those interested this site articulates my position quite accurately.
Experience shows helmets give only limited head protection. Studies in Australia show some prevention of superficial injuries (such as scalp lacerations) but only marginal prevention of “mild” head injuries and no effect on severe head injuries or death. When helmets were made compulsory in Australia, admissions from head injury fell by 15-20%, but the level of cycling fell by 35%.
To summarise, helmet laws led to a major decline in cycling. Fewer cyclist on the road decreased awareness of them by drivers, leading to cycling in general becoming less safe. Further, helmets themselves offer limited head protection in a limited number of crash circumstances - a helmet doesn't help much if you go over the handle bars and land on your face for example. And if you get hit by a truck (the classic pro-helmet argument) you are stuffed whatever you are wearing on your head.
THE LAST WORD
If the financial and economic circus of 2009/10 has been all too mauch, it might be time for a holoiday. For those who take this advice but want to optimise their holiday time, have a read of this quality article.
Sunday, June 27, 2010
Creating road space without building roads
This unreliable article suggests that each passenger trip on the QR passenger network is subsidised in the order of $9 – probably double the average fare price. How this figure was determined is anyone’s guess, but the issues surrounding such apparently high subsidies are interesting.
While at first the $9/trip figure may seem high, it is important to acknowledge that the benefits of subsidising public transport do not go solely to the users. Each time a person uses the rail network they are not using the road network (either car or bus trips) - thus simultaneously improving traffic conditions for road users. What looks like a rail subsidy could easily be classified as a road subsidy. The reduction in road usage has a similar effect to increasing road capacity.
Most public transport systems around the world are subsidised from the public purse. If you subscribe to the belief that a degree of government support is warranted due to external benefits for road users, the two key questions to consider are:
1. How much of a subsidy is acceptable?
2. How can incentives be provided to improve the efficiency of the whole transport network?
Some guidance on the first question could be gained by looking at a cross-country comparison; however the second question is far more interesting.
We can see examples of the failure to consider multiple types of transport as a single efficient solution to urban (and regional) mobility. The profitability of the Airtrain has been completely undermined by subsidised expansion of competing road networks. Had the government instead heavily subsidised the Airtrain link itself (to make ticket prices an attractive alternative to taxis and car pickups), the demand for road space would have reduced as train use increased.
Further, the success of the rail network rests on the failure of its competition. We can never reach a situation where there is high public transport patronage while at the same time having cheap uncongested private automotive alternatives. These two networks are in competition and the direction of government assistance can tip the advantage either way it chooses.
The ignorance of this reality and the external benefits from new transport connections may be one reason that the traffic forecasting for Brisbane’s major road projects grossly overstated traffic demand.
Using this case study we can make a couple of pertinent observations:
1. New transport connections provide internal benefits to users, as well as benefits to users of competing transport connections
2. Subsidies to incentivise rail use can provide the net effect of increasing road capacity through road spending.
While at first the $9/trip figure may seem high, it is important to acknowledge that the benefits of subsidising public transport do not go solely to the users. Each time a person uses the rail network they are not using the road network (either car or bus trips) - thus simultaneously improving traffic conditions for road users. What looks like a rail subsidy could easily be classified as a road subsidy. The reduction in road usage has a similar effect to increasing road capacity.
Most public transport systems around the world are subsidised from the public purse. If you subscribe to the belief that a degree of government support is warranted due to external benefits for road users, the two key questions to consider are:
1. How much of a subsidy is acceptable?
2. How can incentives be provided to improve the efficiency of the whole transport network?
Some guidance on the first question could be gained by looking at a cross-country comparison; however the second question is far more interesting.
We can see examples of the failure to consider multiple types of transport as a single efficient solution to urban (and regional) mobility. The profitability of the Airtrain has been completely undermined by subsidised expansion of competing road networks. Had the government instead heavily subsidised the Airtrain link itself (to make ticket prices an attractive alternative to taxis and car pickups), the demand for road space would have reduced as train use increased.
Further, the success of the rail network rests on the failure of its competition. We can never reach a situation where there is high public transport patronage while at the same time having cheap uncongested private automotive alternatives. These two networks are in competition and the direction of government assistance can tip the advantage either way it chooses.
The ignorance of this reality and the external benefits from new transport connections may be one reason that the traffic forecasting for Brisbane’s major road projects grossly overstated traffic demand.
Using this case study we can make a couple of pertinent observations:
1. New transport connections provide internal benefits to users, as well as benefits to users of competing transport connections
2. Subsidies to incentivise rail use can provide the net effect of increasing road capacity through road spending.
Thursday, June 24, 2010
Is Australia the best place to raise children?
This HSBC report ranks Australia as the best place to raise children for expats. IN fact, the media release suggest that the Expatriate Survey reveals the expats ‘say Australia is the best place in the world to raise children’. What it doesn’t do is justify that claim.
The report is based on a sample of 30 respondents from each country and they are asked to compare the various factors about raising children, such as child care costs, amount of junk food eaten, and time spent playing outdoors, with what occurred in their home country.
This may be interesting, but it is no way to rank a country’s performance. Without knowing the country of origin of the expats it is impossible to make a controlled comparison. For example, if the majority of expats in the sample living in Australia are from the UK, and the majority of expats living in the US are from Australia, we get a nonsense conclusion that Australia is the best country (because the difference between the UK and Australia is highest), even if the US is ranked in preference to Australia.
The rankings are the result of the difference between the country of origin and the new country without knowing the country of origin. The way to be highest ranked is to have the most expats from much poorer countries so that the positive change experienced is greatest.
Don’t misunderstand me. Australia probably is one of the better countries to raise children and could easily be the ‘best’ out of the comparison countries (UK, US, Singapore, UAE, Hong Kong). But this report is a classic example of how conclusions do not match the facts presented.
You don’t have to look far to find other cross-country comparisons of family well-being with utterly unsurprising results.
The report is based on a sample of 30 respondents from each country and they are asked to compare the various factors about raising children, such as child care costs, amount of junk food eaten, and time spent playing outdoors, with what occurred in their home country.
This may be interesting, but it is no way to rank a country’s performance. Without knowing the country of origin of the expats it is impossible to make a controlled comparison. For example, if the majority of expats in the sample living in Australia are from the UK, and the majority of expats living in the US are from Australia, we get a nonsense conclusion that Australia is the best country (because the difference between the UK and Australia is highest), even if the US is ranked in preference to Australia.
The rankings are the result of the difference between the country of origin and the new country without knowing the country of origin. The way to be highest ranked is to have the most expats from much poorer countries so that the positive change experienced is greatest.
Don’t misunderstand me. Australia probably is one of the better countries to raise children and could easily be the ‘best’ out of the comparison countries (UK, US, Singapore, UAE, Hong Kong). But this report is a classic example of how conclusions do not match the facts presented.
You don’t have to look far to find other cross-country comparisons of family well-being with utterly unsurprising results.
Tuesday, June 22, 2010
Negative Gearing Exposed
By far the best analysis of the impact of negative gearing on the residential property market is found here. The myths that negative gearing increases the supply of rental accommodation and keeps rents down are exposed, and some quality suggestions for improving housing affordability are made. Highly recommended.
Sunday, June 20, 2010
The Proximity and Lateness Rebound Effect
I have a habit of labelling any unintended consequence that works in the opposite way to the intended consequence as a rebound effect. With this in mind, I hereby declare the discovery of the Proximity and Lateness Rebound Effect.
The discovery is not mine of course, but the name is. I learnt of this bizarre social phenomenon here.
The Proximity and Lateness Rebound Effect (I would appreciate any better name suggestions) describes the offsetting behaviour of people to commuting distances. One would initially think that moving closer to their workplace, their relatives, friends or other regular destinations would reduce lateness, but in fact the opposite effect can potentially occur – as your commute decreases your lateness increases (in frequency - you are late more often).
Here’s my proposed theory as to why this may occur.
First, 100% punctuality is surely suboptimal. Because each trip has a degree of uncertainty, if we budgeted for perfect punctuality we would have to allow for a commuting time under the worst circumstances every time. We would be far too early most of the time just to ensure that we weren't once a minute late.
Now suppose that being a little late is not a big problem, but being quite late is a serious problem. We might say that we want to be less than 10 minutes late 70% of the time, and less than 20 minutes late 95% of the time.
If your commute is typically 50mins, but traffic congestion and delays mean that the trip takes less than 70mins 95% of the time, less than 60mins 70% of the time, and less than 50mins 50% of the time, you can budget for a 50 minute commute and meet your lateness expectations. You will be on time 50% of the time, more than 10mins late 30% of the time and more than 20mins late a mere 5%.
If instead your commute is a mere 10mins on average, with only a very small variation in time (say less than 2 minutes), and you budget 10mins for your commute you will far exceed your lateness requirement. Therefore you may start allowing less and less commuting time to get to your destination, and soon become accustomed to regularly being a little late, but never very late.
Because of the difference in trip variation, the person with the long commute needs to be more cautious to avoid being exceptionally late. Doing so increases the frequency that they arrive early. On the other hand, those with short commuting distances have very little chance of being extremely late, and therefore need to pay little attention to factoring in their commuting time and may regularly be a little late.
My personal experience of moving closer to work is just this. I almost treat the 10 minute commute as negligible, and am typically a little late to everything. Previously, when the commute was about 30 minutes I would ensure that I had budgeted enough travel time, with a little room for delays.
The discovery is not mine of course, but the name is. I learnt of this bizarre social phenomenon here.
The Proximity and Lateness Rebound Effect (I would appreciate any better name suggestions) describes the offsetting behaviour of people to commuting distances. One would initially think that moving closer to their workplace, their relatives, friends or other regular destinations would reduce lateness, but in fact the opposite effect can potentially occur – as your commute decreases your lateness increases (in frequency - you are late more often).
Here’s my proposed theory as to why this may occur.
First, 100% punctuality is surely suboptimal. Because each trip has a degree of uncertainty, if we budgeted for perfect punctuality we would have to allow for a commuting time under the worst circumstances every time. We would be far too early most of the time just to ensure that we weren't once a minute late.
Now suppose that being a little late is not a big problem, but being quite late is a serious problem. We might say that we want to be less than 10 minutes late 70% of the time, and less than 20 minutes late 95% of the time.
If your commute is typically 50mins, but traffic congestion and delays mean that the trip takes less than 70mins 95% of the time, less than 60mins 70% of the time, and less than 50mins 50% of the time, you can budget for a 50 minute commute and meet your lateness expectations. You will be on time 50% of the time, more than 10mins late 30% of the time and more than 20mins late a mere 5%.
If instead your commute is a mere 10mins on average, with only a very small variation in time (say less than 2 minutes), and you budget 10mins for your commute you will far exceed your lateness requirement. Therefore you may start allowing less and less commuting time to get to your destination, and soon become accustomed to regularly being a little late, but never very late.
Because of the difference in trip variation, the person with the long commute needs to be more cautious to avoid being exceptionally late. Doing so increases the frequency that they arrive early. On the other hand, those with short commuting distances have very little chance of being extremely late, and therefore need to pay little attention to factoring in their commuting time and may regularly be a little late.
My personal experience of moving closer to work is just this. I almost treat the 10 minute commute as negligible, and am typically a little late to everything. Previously, when the commute was about 30 minutes I would ensure that I had budgeted enough travel time, with a little room for delays.
Thursday, June 17, 2010
What is German economic culture?
This interesting post by American economist Tyler Cowen, who I believe now lives in Berlin, delves into some differences in the economic principles embedded in the minds of Germans and German policy makers in contrast to their American counterparts (and Australian I would suggest). He believes there are a number of consistent views held by German policy makers which put Germany in the running for the ‘best country award’:
1. It is the long run which matters and we should be obsessed with the long run consequences of our choices.
2. Economic growth comes from high productivity, most of all in quality manufacturing.
3. Borrowing to finance consumption is a nicht-nicht. Savings is all-important.
4. If we need to make a big change, we'll all grit our teeth and do it. For instance Germany has done a good deal, on the real side, to restore its export competitiveness in the last ten years, not to mention unification and postwar recovery.
5. These strictures should be enforced by rigorous rules, to limit temptation, because indeed you will find cases where it appears to make sense to break the rules.
6. Values matter, as do norms of cooperation.
7. Don't obsess over the creation of too many low-wage jobs, because in the longer run it will be bad for your cultural capital. If need be, pay people to be unemployed, but hold high human capital. In the longer run, try to educate them up to higher productivity and thus employment.
8. Be obsessed with self-improvement, most of all at the personal level.
Regular readers may note that I hold many of these views. Last week I noted that minimum wage laws may not be great in the short run for job creation, but in the long run the may be - showing my belief in points 1 and 7. Also, I have raised the long term focus of German capital gains tax rules on property, which are charged at the highest tax rate unless the property is held for more than ten years.
Point 2, that economic growth comes from high productivity, is another point I have tried to make during discussions of population growth, the productivity of housing investment, and the overstated benefits of the mining boom.
I also agree that values and social norms matter (point 6), as I have suggested when discussing work and leisure, and cycling culture.
In my experience however, German rules and laws can appear overly intrusive for the uninitiated (point 5). But for one to aspire to these principles, rules do need to be made to ensure that individuals’ short term gratification of does not override the long term prospects of the country as a whole. If you believe people are perfectly rational and fully informed, your inner libertarian may have a problem with this – who is to say that I cannot rationally make decisions about the future for myself and why would the government be any better at it than me?
Clearly I believe the points observed by Cowen are key factors to the long run prosperity of any country. But I would appreciate any insights into whether this is truly representative of the German policy machine, and what the application of the principles means for people on a day to day basis
1. It is the long run which matters and we should be obsessed with the long run consequences of our choices.
2. Economic growth comes from high productivity, most of all in quality manufacturing.
3. Borrowing to finance consumption is a nicht-nicht. Savings is all-important.
4. If we need to make a big change, we'll all grit our teeth and do it. For instance Germany has done a good deal, on the real side, to restore its export competitiveness in the last ten years, not to mention unification and postwar recovery.
5. These strictures should be enforced by rigorous rules, to limit temptation, because indeed you will find cases where it appears to make sense to break the rules.
6. Values matter, as do norms of cooperation.
7. Don't obsess over the creation of too many low-wage jobs, because in the longer run it will be bad for your cultural capital. If need be, pay people to be unemployed, but hold high human capital. In the longer run, try to educate them up to higher productivity and thus employment.
8. Be obsessed with self-improvement, most of all at the personal level.
Regular readers may note that I hold many of these views. Last week I noted that minimum wage laws may not be great in the short run for job creation, but in the long run the may be - showing my belief in points 1 and 7. Also, I have raised the long term focus of German capital gains tax rules on property, which are charged at the highest tax rate unless the property is held for more than ten years.
Point 2, that economic growth comes from high productivity, is another point I have tried to make during discussions of population growth, the productivity of housing investment, and the overstated benefits of the mining boom.
I also agree that values and social norms matter (point 6), as I have suggested when discussing work and leisure, and cycling culture.
In my experience however, German rules and laws can appear overly intrusive for the uninitiated (point 5). But for one to aspire to these principles, rules do need to be made to ensure that individuals’ short term gratification of does not override the long term prospects of the country as a whole. If you believe people are perfectly rational and fully informed, your inner libertarian may have a problem with this – who is to say that I cannot rationally make decisions about the future for myself and why would the government be any better at it than me?
Clearly I believe the points observed by Cowen are key factors to the long run prosperity of any country. But I would appreciate any insights into whether this is truly representative of the German policy machine, and what the application of the principles means for people on a day to day basis
Monday, June 14, 2010
The Big Short: Inside the Doomsday Machine
Lewis's book provides a fascinating insight into the minds and mischief of the characters shorting the sub-prime mortgage market during the US real estate bust and general GFC calamity.
I found the unintentional insights into herd behaviour eye opening. The players shorting the market almost couldn’t believe that the price to insure sub-prime mortgage backed securities was so low when by their analysis, they carried so much risk. They spent an achingly long time trying to figure out if there was some critical piece of information missing from their analysis. If there was, it might explain the apparently irrational behaviour of the counterparty to the bets. But the more they searched, the more they realised that it was a simple matter of ignorance that kept the sub-prime security holders in the game.
It took a strong will to bet such grand sums against the markets, and for those behavioural economists looking for insights into our predictable irrationality this book offers a thorough exploration of the personality differences amongst the characters in this ill-fated market.
I found the unintentional insights into herd behaviour eye opening. The players shorting the market almost couldn’t believe that the price to insure sub-prime mortgage backed securities was so low when by their analysis, they carried so much risk. They spent an achingly long time trying to figure out if there was some critical piece of information missing from their analysis. If there was, it might explain the apparently irrational behaviour of the counterparty to the bets. But the more they searched, the more they realised that it was a simple matter of ignorance that kept the sub-prime security holders in the game.
It took a strong will to bet such grand sums against the markets, and for those behavioural economists looking for insights into our predictable irrationality this book offers a thorough exploration of the personality differences amongst the characters in this ill-fated market.
Thursday, June 10, 2010
Minimum wage decision and the textbook response
Economists like to promote the idea that increasing the minimum wage results in fewer jobs. The law of demand states that when the price of a good goes up, demand goes down. But a welfare State has a role not just to encourage people to work, but to improve overall welfare.
The job loss textbook response is only fair if we cling to the unreasonable ceteris paribus assumption – that minimum wage increases and all else stays constant. But that is not reality.
For example, offsetting effects of an increase in the minimum wage include
- people choosing to study instead of work
- businesses investing in capital equipment to improve labour productivity
Both of these indirect effects of the minimum wage are good for society’s welfare in the long run via increased productivity.
Apart from being a good long run policy, I see the minimum wage as a tool to control possible market power of employers. Uninformed and low skilled workers are easily vulnerable to manipulation, and are unlikely to access legal guidance or negotiate their wage with vigour. Not all people are fully informed, perfect knowledge homo economicus. Asymmetric information and the resulting market power of employers of low skilled workers are justifiable reasons for government intervention.
One needs to exercise extreme caution when applying economic principles to reality. Most mainstream economic theories are based on completely unreasonable assumptions (an upward sloping supply curve and an ignorance of time for example).
The job loss textbook response is only fair if we cling to the unreasonable ceteris paribus assumption – that minimum wage increases and all else stays constant. But that is not reality.
For example, offsetting effects of an increase in the minimum wage include
- people choosing to study instead of work
- businesses investing in capital equipment to improve labour productivity
Both of these indirect effects of the minimum wage are good for society’s welfare in the long run via increased productivity.
Apart from being a good long run policy, I see the minimum wage as a tool to control possible market power of employers. Uninformed and low skilled workers are easily vulnerable to manipulation, and are unlikely to access legal guidance or negotiate their wage with vigour. Not all people are fully informed, perfect knowledge homo economicus. Asymmetric information and the resulting market power of employers of low skilled workers are justifiable reasons for government intervention.
One needs to exercise extreme caution when applying economic principles to reality. Most mainstream economic theories are based on completely unreasonable assumptions (an upward sloping supply curve and an ignorance of time for example).
Wednesday, June 9, 2010
The Noble Lie?
In his book The Noble Lie: When Scientists Give the Right Answers for the Wrong Reasons, Gary Greenberg challenges conventional wisdom to suggest that many social vices have become labelled as diseases, without evidence, but for the betterment of society. His book delves into the grey areas of science, politics and philosophy, conveying a line of reasoning that presents a picture of positive self-delusion on a grand scale.
This review summarises some of the challenging points in the book.
For instance, Greenberg explains how alcoholism's transition from vice to disease was a welcome one, especially following Prohibition. It was long viewed as an allergy, though the specific allergen persistently failed to appear. Even today, neither its disease-nature nor any possible cures have manifested themselves. Regardless, people are happy to accept the idea that addiction is a medical illness, perhaps, Greenberg suggests, because of our ambivalence towards the role of pleasure and our uncertainties about free will and self-determination. “With the disease model we have an answer,” he writes, “one that has the imprimatur of science; addiction isn't wrong, it's sick.”
In the absence of scientific proof that addiction is a disease, is it wrong for medical professionals to perpetuate the idea? Not necessarily, Greenberg says – there are times when what is scientifically wrong, or at least uncertain, is morally right. “There can be no doubt that the disease model has helped millions of people. If a made-up disease can be of such immense value, then we must consider the possibility that the truth is not what it's cracked up to be. Perhaps, in the republic of medicine, the fiction that addiction is a disease is a noble lie.”
Sometimes the noble lie works the other way round. In a chapter on homosexuality, Greenberg shows how humane concerns first led people to prefer a medical to a criminal definition, but conflict followed concerning the disrespect a medical definition implied toward what should perhaps be viewed as a free life choice. In 1973, following the Stonewall riots and the start of the gay rights movement, the American Psychiatric Association deleted homosexuality from the Diagnostic and Statistical Manual of Mental Disorders (DSM), a move decided not by scientific facts but by political and moral attitudes. “It may be the first time in history that a disease was eliminated by the stroke of a pen,” Greenberg writes.
Sunday, June 6, 2010
Mining on a pedestal?
The proposed Resource Super Profits Tax (RSPT) has received both scathing criticism, and reserved admiration. Critics proclaim that the mining industry is almost a fundamental necessity, without which Australia would grind to a halt. Otherwise respected firms are making contradictory claims of social benefits, including increased wages, while also arguing that there is little impact on wage rates in other parts of the economy, and denying that other investments are being 'crowded out', as most capital is raised abroad. They indirectly state that foreigners are reaping the most benefit from Australia’s resources providing an intangibly small flow-on effect to other sectors of the Australian economy.
Such is the confusion about the true social and economic benefits from mining and the likely impact of the RSPT on Australia's welfare.
This type of confusion in the debate over the RSPT and its likely impact is widespread, possibly even within the government itself, which is still to make decisions on exactly how to implement the proposed tax. While I agree with the principle of the tax, which has the same theoretical basis as the Petroleum Resource Rent Tax, certainty of the details is required – particularly the rate at which the RSPT will begin to apply (currently 6%).
But one thing we can examine is the claim from miners that their industry brings great benefits to your average Australian. A recent report by David Richardson from the Australia Institute does just that and makes surprising conclusions:
Overall, it is hard to identify the benefits to ordinary Australians of the mining boom. The estimated 9 percent increase in real incomes from the terms-of-trade changes do not appear in the figures for wage earners or recipients of government income-support payments. It seems that the benefits of the boom barely went beyond the mining industry itself.
Further, in Ken Henry’s Senate testimony he claims that the mining industry is not a source of economic stability, but a highly speculative and cyclical business that did not contribute to Australia’s economic stability in recent years, having dropped 15% of their workforce in response to the financial crisis.
Just because mining is a large industry when compared in terms of dollars of investment, does not mean that it is more productive than other forms of investment. Only improvements in productivity lead to broad social gains.
We can plod along happily talking about number of people employed in mining, the dollars invested into mine projects, or any such figure, but unfortunately any number is rather meaningless without an alternative with which to compare.
One could be tempted to brag, for example, about the contribution their farm makes to the regional economy by stating how many people they employ, how much they invest in capital works, and how much food they produce. But if their next door neighbour employs more people, invests in more capital works, and produces more food per hectare, the first farmer is performing poorly and is a burden to the nations’ productivity.
The contribution of mining to Australia’s welfare is determined by its productivity gains, and simple investment numbers say nothing of the opportunity costs of labour, land and capital.
All comments/criticism welcome.
Such is the confusion about the true social and economic benefits from mining and the likely impact of the RSPT on Australia's welfare.
This type of confusion in the debate over the RSPT and its likely impact is widespread, possibly even within the government itself, which is still to make decisions on exactly how to implement the proposed tax. While I agree with the principle of the tax, which has the same theoretical basis as the Petroleum Resource Rent Tax, certainty of the details is required – particularly the rate at which the RSPT will begin to apply (currently 6%).
But one thing we can examine is the claim from miners that their industry brings great benefits to your average Australian. A recent report by David Richardson from the Australia Institute does just that and makes surprising conclusions:
The mining boom would have had a major stimulatory impact on the Australian economy but for two factors. First, the Gregory effect saw the exchange rate appreciate, which caused a contraction in the rest of the economy. Secondly, the Reserve Bank of Australia increased interest rates in an attempt to offset the stimulatory effects of the boom.Anyone owning resource stocks would have benefited from the enormous paper gains, which peaked in May 2008 but had largely disappeared by the end of 2008. However, to the extent that the gains persisted, the benefits would have gone to the top 20 per cent of wealthy households where share ownership is concentrated.
Overall, it is hard to identify the benefits to ordinary Australians of the mining boom. The estimated 9 percent increase in real incomes from the terms-of-trade changes do not appear in the figures for wage earners or recipients of government income-support payments. It seems that the benefits of the boom barely went beyond the mining industry itself.
Further, in Ken Henry’s Senate testimony he claims that the mining industry is not a source of economic stability, but a highly speculative and cyclical business that did not contribute to Australia’s economic stability in recent years, having dropped 15% of their workforce in response to the financial crisis.
Just because mining is a large industry when compared in terms of dollars of investment, does not mean that it is more productive than other forms of investment. Only improvements in productivity lead to broad social gains.
We can plod along happily talking about number of people employed in mining, the dollars invested into mine projects, or any such figure, but unfortunately any number is rather meaningless without an alternative with which to compare.
One could be tempted to brag, for example, about the contribution their farm makes to the regional economy by stating how many people they employ, how much they invest in capital works, and how much food they produce. But if their next door neighbour employs more people, invests in more capital works, and produces more food per hectare, the first farmer is performing poorly and is a burden to the nations’ productivity.
The contribution of mining to Australia’s welfare is determined by its productivity gains, and simple investment numbers say nothing of the opportunity costs of labour, land and capital.
All comments/criticism welcome.
Thursday, June 3, 2010
Interesting news
Developers using cows to reduce land tax burden. One of the defining traits of rule makers is that they rarely foresee the extent of gaming likely to occur. It seems Australian agricultural policies are not immune to the type of manipulation seen in Japan.
History repeats (must see video). BP's deep water oil spill in the Gulf of Mexico is almost identical to a spill in 1979, where the same inneffective and oddly named 'solutions' were tried. That spill lasted months and was only brought under control by drilling relief wells to take the pressure from the oil bed.
Melbourne Cycle Scheme up and crawling.
Users will have to bring their own helmets as they won’t be available for hire with the bikes. However, those joining the scheme will be issued with a free helmet, while hotels and other city outlets will have cheap helmets available for hire or purchase. (here)
A cycle by-pass is also proposed in Melbourne - a step in the right direction for urban transport planning.
A lesson on being sceptical about statistics in economics (warning: technical content)
Organic farming – a closer look.
History repeats (must see video). BP's deep water oil spill in the Gulf of Mexico is almost identical to a spill in 1979, where the same inneffective and oddly named 'solutions' were tried. That spill lasted months and was only brought under control by drilling relief wells to take the pressure from the oil bed.
Melbourne Cycle Scheme up and crawling.
Users will have to bring their own helmets as they won’t be available for hire with the bikes. However, those joining the scheme will be issued with a free helmet, while hotels and other city outlets will have cheap helmets available for hire or purchase. (here)
A cycle by-pass is also proposed in Melbourne - a step in the right direction for urban transport planning.
A lesson on being sceptical about statistics in economics (warning: technical content)
Organic farming – a closer look.
Tuesday, June 1, 2010
Bakfiets – is Australia ready for the cargo bike revolution?
Note: I bought a Bakfiets long cargo bike in September 2010 from Dutch Cargo Bikes and couldn't be happier. A follow-up (3yr) review is here. I am now a local ambassador for Dutch Cargo Bikes. If you would like to test ride this bike in Brisbane (or a three wheeler) email me at cameron@dutchcargobike.com.auRecent discussions on cycling culture and the imminent arrival of our second child have resulted in an obsession with cargo bikes or Bakfiets (Dutch for boxbikes). These bikes are taking the world buy storm, and have now made their way to Australia, with the market well served by DutchCargoBike.com.au, who offer a variety of models.
I want one, exactly like in the photo above, but I don’t know why.
Economists generally believe people know how to make decisions that maximise their welfare. But in many cases we can’t know how much we will enjoy our consumption decisions in advance, since we have never experienced them before – such goods are known as experience goods.
Having already test-ridden one and been impressed, I am now attempting to evaluate the bike's worth by first itemising the pros and cons. Any assistance or insight or suggestions are appreciated.
Pros
Can handle a load of groceries plus children for short trips
Can pick up hitchhikers
No parking or fuel costs and only minimal maintenance
Fun
Cons
$3150 for the bike
Over $4000 if you want electric motor assistance
Plenty of hills in Brisbane
Size and manoeuvrability
Extreme summer heat (can buy a shade for the kids though)
More importantly, to determine the value to our family of the bike I have been thinking in terms of marginal utility. Instead of thinking how good or practical the bike could be in isolation, I think in terms of how much better having the bike would be compared to our current situation.
Sunday, May 30, 2010
Japanese farming: A tale of incentives and externalities
Why is this? What is so peculiar about Japan that people would forgo higher value urban land development to grow rice?
Thursday, May 27, 2010
Induced traffic, super profits, and 3D TV
On that topic, I drove across the William Jolly Bridge on Monday at 4.30pm, and Thursday at 9am. I was alone on the bridge. I fear that the Hale St Bridge, at $1.50 then $2.70 each way, will be completely empty except for maybe a couple of hours each weekday – surely not a good way to spend $370million.
Ken Henry defends the Super Profits Tax on mining against a wave of political and media misunderstanding and misrepresentation. Whether the government adopts Henry’s ideal version of the tax, or some other politically modified version (or none at all), remains to be seen.
An interesting history of the private provision of public goods
3D Cinema and TV – how does it work and why can’t a normal TV project images that trick the eye into seeing 3D?
Monday, May 24, 2010
Update: Tax me, please
Last year I wrote about the important social benefits of land taxes compared to other forms of taxation. My headline was Tax me, please (also cross-posted at Online Opinion).
Maybe it is just a coincidence, but Mark Carnegie’s outstanding piece on the best recommendations from the Henry Tax Review, including the land tax as a substitute for transactions taxes such as stamp duties, is entitled Tax me!
Carnegie’s article sums up my thoughts on the Henry review and is worth reading in its entirety, but here is a taste.
“… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”
“When a government builds a new railway line and the value of the surrounding property soars, surely it is right that this wealth be taxed.” The same is true of people who get dairy farms on the edge of cities rezoned as residential land in quarter acre blocks. As Churchill said, “To not one of these improvements does the land monopolist, as a land monopolist contribute, and yet by every one of them the value of his land is enhanced...”
We all hate paying more tax than we have to but Ken Henry has written a document that is a compelling argument for how to build a better country given that someone has to pay to run the country.
If I had my way, I would abolish the states and cut billions from the cost of running the country. But I know that will never happen because Australians would never vote for a referendum to do that and so we are pretty much stuck with the bill as it is. Can’t we at least come together for the good of the country and put aside our personal interests for long enough to capture this powerful vision of a better, fairer, more productive tax system?
Maybe it is just a coincidence, but Mark Carnegie’s outstanding piece on the best recommendations from the Henry Tax Review, including the land tax as a substitute for transactions taxes such as stamp duties, is entitled Tax me!
Carnegie’s article sums up my thoughts on the Henry review and is worth reading in its entirety, but here is a taste.
“… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”
“When a government builds a new railway line and the value of the surrounding property soars, surely it is right that this wealth be taxed.” The same is true of people who get dairy farms on the edge of cities rezoned as residential land in quarter acre blocks. As Churchill said, “To not one of these improvements does the land monopolist, as a land monopolist contribute, and yet by every one of them the value of his land is enhanced...”
We all hate paying more tax than we have to but Ken Henry has written a document that is a compelling argument for how to build a better country given that someone has to pay to run the country.
If I had my way, I would abolish the states and cut billions from the cost of running the country. But I know that will never happen because Australians would never vote for a referendum to do that and so we are pretty much stuck with the bill as it is. Can’t we at least come together for the good of the country and put aside our personal interests for long enough to capture this powerful vision of a better, fairer, more productive tax system?
Sunday, May 23, 2010
One percent realty – a revolution in the making
Real estate agents have a poor reputation. The cynical side of me would say that they get paid a lot for doing very little. Unspoken collusion results in an unwillingness to negotiate commission from the maximum allowable, which, under the Property Agents and Motor Dealers Regulation 2001, is $900 plus 2.5% if the price is over $18,000. Almost ten years on residential property prices have increased is many areas by 300%, yet agents still typically charge this maximum amount in a 'take it or leave it' fashion.
But things are changing fast.
Thursday, May 20, 2010
Housing and population updates
Australian housing finance is falling rapidly with prices likely to follow.
This graph of historical prices and housing finance approvals deserves a look. Also, the graph below was part of the RBA's Luci Ellis' speech on housing last week and was referred to as follows:
Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle. But we should expect that to be true. Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.
...
Recent data suggest that we do not have a credit-fuelled speculative boom on our hands.
I wonder what data would be required for Ellis to conclude otherwise? If it was so easy to see a speculative bubble in the data, none would ever form.
Finally, a word of caution about the graph. It is the ratio of debt to value. Therefore a rise can be caused either by an increase in debt or a decrease in home values. Clearly the dramatic lift in the US ratio in 2008-09 was caused by declining asset prices, not increased debt.
Strangely Ellis concludes that a 40% aggregate debt ratio was a massive bubble in the US, but 30% in Australia is not apparently, even though we should expect this relationship due to differential tax treatment of mortgage interest.
The RBA is sounding very confused these days.
On another note, the 'population growth increases house prices therefore the Australian market is safe' point of view is looking very shaky. Latest BIS Shrapnel report forecasts significant declines in population growth in the coming years.
BIS Shrapnel says annual net overseas migration - which includes permanent migration and longer-term but temporary stays - will fall from its pace of 298,900 in the year to June 2009 to 240,000 in the year to June 2010. It will fall more dramatically to 175,000 in 2010-11 and 145,000 in 2011-12.
This graph of historical prices and housing finance approvals deserves a look. Also, the graph below was part of the RBA's Luci Ellis' speech on housing last week and was referred to as follows:
Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle. But we should expect that to be true. Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.
...
Recent data suggest that we do not have a credit-fuelled speculative boom on our hands.
Finally, a word of caution about the graph. It is the ratio of debt to value. Therefore a rise can be caused either by an increase in debt or a decrease in home values. Clearly the dramatic lift in the US ratio in 2008-09 was caused by declining asset prices, not increased debt.
Strangely Ellis concludes that a 40% aggregate debt ratio was a massive bubble in the US, but 30% in Australia is not apparently, even though we should expect this relationship due to differential tax treatment of mortgage interest.
The RBA is sounding very confused these days.
On another note, the 'population growth increases house prices therefore the Australian market is safe' point of view is looking very shaky. Latest BIS Shrapnel report forecasts significant declines in population growth in the coming years.
BIS Shrapnel says annual net overseas migration - which includes permanent migration and longer-term but temporary stays - will fall from its pace of 298,900 in the year to June 2009 to 240,000 in the year to June 2010. It will fall more dramatically to 175,000 in 2010-11 and 145,000 in 2011-12.
Friday quick links
Latest research suggests that government owned banks are better for growth than private banks.
Another potential rebound effect - encouraging snus instead of cigarettes might lead to another avenue for nicotine addiction and potentially more cigarette use.
A belief in supernatural communication with the dead must surely be evidence for irrationality
One reason (not) to get an iPad - freedom from porn
Another potential rebound effect - encouraging snus instead of cigarettes might lead to another avenue for nicotine addiction and potentially more cigarette use.
A belief in supernatural communication with the dead must surely be evidence for irrationality
One reason (not) to get an iPad - freedom from porn
Tuesday, May 18, 2010
Lower bound problems of hedonic indices
Prices are a fundamental feature of modern economies, yet measuring a true price change is exceedingly difficult due to the constantly changing quality of goods and services. I have previously discussed the use of hedonic price indices, where adjustments are made for quality changes using regression techniques, and the potential pitfalls when interpreting the results of this method. I apologise for raising this issue again, but I hope to clarify my message with an example.
While a hedonic index is a useful tool, and when part of a package of price indices can clarify our understanding of price and quality movements, many unresolved issues persist. One issue that attracts little attention is how to interpret and apply results from hedonic price index calculations.
Today I want to further elaborate upon, and demonstrate using the table below, what I call the lower bound problem of hedonic price indices. Quality improvement does not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available. Buyers of cheaper products will not see the price declines measured by a hedonic index, and may even see price increases.
The above table has been constructed to show how different methods for determining price changes can produce significantly different results. This hypothetical market could be computers, cars, or any other market where quality changes noticeably over time.
The animal names are the models. For car markets, it could be Corolla, Landcruiser and so on, or for computers, Dell Latitude, Apple MacBook or any other model. The reason to include models is that one method for determining price changes is called the model-matching technique. Because models typically have fewer quality changes than the market as a whole, and that they typically represent a segment of the market (budget or premium), compiling prices over time for the same model can give a reasonable measure of price changes for similar quality products. In the table above two models are highlighted, Kangaroo and Echidna, to show how their prices have changed over the period. If we take the average price change of models we can match over the period (the model matching technique), we get a price change in this market of -42% over the eight-year period.
The number beside each model is a measure of quality. I have used a single number in this situation, but typically there would be a number of associated quality measures. You will note that the quality of each model improves over time, thus if we use a hedonic (quality controlled) method for measuring price change, it will show a more substantial price decline. If we were to buy a ‘quality level 9’ product in 2001 it would be $3,000, while in 2009 it would be $1,000 – a 67% decline in price.
Using a median price index, where quality is not considered, the data in this table shows a median price increase of 14% over the period (assuming an equal volume of sales in each price category). In this scenario, this measure more accurately shows the price movement of the market as a whole. If you wanted to stay at the same level in the market, this is the price change you would experience.
Finally, and this is the main pitfall when utilising quality-adjusted prices measures to make policy decisions, the price change for the lower bound market entrant has increased 33%. The cheapest computer/car/shoe/phone/appliance, or whatever good this happens to be, has gone up in price significantly while the quality-adjusted measures show large declines.
Measures such as the CPI (a price index) and the Analytical Cost of Living Indexes do consider quality change, yet we apply these measures as a way to adjust welfare payments, even though most welfare recipients will be lower bound market entrants for much of their consumption bundle.
In an ideal world, a selection of price indexes using different methods would be produced for each major consumption category to show paint a clear picture of the situation being faced by different members of society. Not only would we measure ‘pure price change’, but also changes to the cost of living which can more easily guide policymaking.
While a hedonic index is a useful tool, and when part of a package of price indices can clarify our understanding of price and quality movements, many unresolved issues persist. One issue that attracts little attention is how to interpret and apply results from hedonic price index calculations.
Today I want to further elaborate upon, and demonstrate using the table below, what I call the lower bound problem of hedonic price indices. Quality improvement does not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available. Buyers of cheaper products will not see the price declines measured by a hedonic index, and may even see price increases.
The above table has been constructed to show how different methods for determining price changes can produce significantly different results. This hypothetical market could be computers, cars, or any other market where quality changes noticeably over time.The animal names are the models. For car markets, it could be Corolla, Landcruiser and so on, or for computers, Dell Latitude, Apple MacBook or any other model. The reason to include models is that one method for determining price changes is called the model-matching technique. Because models typically have fewer quality changes than the market as a whole, and that they typically represent a segment of the market (budget or premium), compiling prices over time for the same model can give a reasonable measure of price changes for similar quality products. In the table above two models are highlighted, Kangaroo and Echidna, to show how their prices have changed over the period. If we take the average price change of models we can match over the period (the model matching technique), we get a price change in this market of -42% over the eight-year period.
The number beside each model is a measure of quality. I have used a single number in this situation, but typically there would be a number of associated quality measures. You will note that the quality of each model improves over time, thus if we use a hedonic (quality controlled) method for measuring price change, it will show a more substantial price decline. If we were to buy a ‘quality level 9’ product in 2001 it would be $3,000, while in 2009 it would be $1,000 – a 67% decline in price.
Using a median price index, where quality is not considered, the data in this table shows a median price increase of 14% over the period (assuming an equal volume of sales in each price category). In this scenario, this measure more accurately shows the price movement of the market as a whole. If you wanted to stay at the same level in the market, this is the price change you would experience.
Finally, and this is the main pitfall when utilising quality-adjusted prices measures to make policy decisions, the price change for the lower bound market entrant has increased 33%. The cheapest computer/car/shoe/phone/appliance, or whatever good this happens to be, has gone up in price significantly while the quality-adjusted measures show large declines.
Measures such as the CPI (a price index) and the Analytical Cost of Living Indexes do consider quality change, yet we apply these measures as a way to adjust welfare payments, even though most welfare recipients will be lower bound market entrants for much of their consumption bundle.
In an ideal world, a selection of price indexes using different methods would be produced for each major consumption category to show paint a clear picture of the situation being faced by different members of society. Not only would we measure ‘pure price change’, but also changes to the cost of living which can more easily guide policymaking.
Sunday, May 16, 2010
A Rum Thing
Guest post by Stephen Hogg
This Business Spectator article gave me pause for thought. It is discusses how ASIC recently made a ham-fisted attempt at reigning in rogues in the market making a buck off spreading a rumour and then profiting from inevitable price movements. It’s called rumourtrage, and is the practice of spreading false or misleading information in respect of securities in order to take advantage of artificial changes in market prices.
Now don’t get me wrong, it’s a cunning idea. I know a lot of people who wish they had thought of it some years ago. But I became stuck on one point made by ASIC. At the end of the article it is made plain that when ASIC was figuring out how to put a stop to all this, that:
"The principles were developed noting concerns that confidence in the integrity of Australia’s markets could be undermined if investors believe rumours are actively spread in the market to distort proper price discovery"
I think is a flawed statement.
This Business Spectator article gave me pause for thought. It is discusses how ASIC recently made a ham-fisted attempt at reigning in rogues in the market making a buck off spreading a rumour and then profiting from inevitable price movements. It’s called rumourtrage, and is the practice of spreading false or misleading information in respect of securities in order to take advantage of artificial changes in market prices.
Now don’t get me wrong, it’s a cunning idea. I know a lot of people who wish they had thought of it some years ago. But I became stuck on one point made by ASIC. At the end of the article it is made plain that when ASIC was figuring out how to put a stop to all this, that:
"The principles were developed noting concerns that confidence in the integrity of Australia’s markets could be undermined if investors believe rumours are actively spread in the market to distort proper price discovery"
I think is a flawed statement.
Wednesday, May 12, 2010
Barefoot running: The transition and Vibram Five Fingers
Economic instinct initially held back my enthusiasm for Vibram Five Finger (VFF) shoes. At first glance getting less shoe for your money is bizarre. At next glance it feels like a step backwards - expensive well-cushioned running shoes, the result of countless hours or research and design, should be the pinnacle of human endeavour toward running excellence. There are so many people running in this world, both amateur and professional, that you just expect the current technology to be supreme.
But there are a few reasons I became convinced that making the transition away from traditional running shoes (and shoes in general) to VFFs or barefoot was not a step backwards, but a simplifying step forwards.
- I generally prefer to be barefoot where possible
- The book Born to Run by Christopher McDougall was very persuasive
- Harvard researchers have been analysing the difference in running techniques between barefoot and shod and now running with shoes just looks wrong
- I saw a guy wearing VFFs at an adventure race (about 4hours running, kayaking and mountain biking) and thought he must have got the wrong information about how much time is spent in the water and worn his scuba shoes.
But there are a few reasons I became convinced that making the transition away from traditional running shoes (and shoes in general) to VFFs or barefoot was not a step backwards, but a simplifying step forwards.
- I generally prefer to be barefoot where possible
- The book Born to Run by Christopher McDougall was very persuasive
- Harvard researchers have been analysing the difference in running techniques between barefoot and shod and now running with shoes just looks wrong
- I saw a guy wearing VFFs at an adventure race (about 4hours running, kayaking and mountain biking) and thought he must have got the wrong information about how much time is spent in the water and worn his scuba shoes.
I also tried running barefoot in the park a few times a week for a month before buying VFFs (the KSO model). Apart from getting sore calves for a little while, the toe strike technique felt comfortable. I considered forgoing VFFs and simply running barefoot. Nowadays it’s either barefoot or VFFs depending on the distance, my mood, or the weather.
Let me share the experience and comment on the bizarre barefoot running culture that is developing.
Monday, May 10, 2010
Cycling culture through economist eyes
I have been fortunate enough to travel widely in the past decade and sample the breadth of human experience. Today I want to focus specifically on the evolution of cycling culture around the globe.
I have taken note of the popularity of my recent post on the proposed bicycle hire scheme in Brisbane and want to expand some of the points I made about the incentives to (or not to) cycle, and compare the diverse cycling cultures around the world.
The comparison will consider such obvious differences across countries such as speed, cost and safety, but focus on the historical development of cycling culture across countries. I will finish with some ideas about how to cities can embrace cycling as a legitimate mode of transport.
Sunday, May 9, 2010
Confusing macroeconomic situation
Unfortunately we have yet to see what is left of the ‘real economy’ once this artificial situation expires. But at least the RBA has proved their independence.
The reason monetary policy (changing interest rates) works is because is can bring forward, or delay, consumption. Lower interest rates bring forward consumption, as the reward for saving is lowered and people choose to spend more now rather than save and then spend later time periods. The cost of borrowing is also reduced, and can stimulate debt funded current consumption. Conversely, higher interest rates encourage saving and discourage borrowing.
The Nation Building fiscal stimulus package is bringing forward government spending – the exact opposite of what the RBA is trying to do. The remaining $17billion being spent this year will offset the last 3 interest rate increases – each 0.25% rise increased the interest on Australia’s private debt by $4.8billion/annum; money which would have otherwise been spent on present consumption or investment (of course I have overlooked the impact on savings rates in this calculation).
My gut feeling is that the RBA was far more confident then it should have been, and we may see a repeat of the dramatic change in policy that we saw at the end of 2008 when the cash rate was more than halved in a few short months. There might be some money to be made in foreign exchange - I expect the AUD to decline between now and the end of 2010. Another forecast to be tested.
Thursday, May 6, 2010
Friday quick links
A new direction for interest rates?
For risk taking behaviours, the rebound effect even has a name – The Peltzman Effect
New Mysterious Cities of Gold cartoons on the way.
Broken window fallacy or just plain old human optimism? Café Hayek is full of gems.
Ever wondered why all news is bad? A must read on what happens to good news.
...there are huge vested interests trying to prevent good news reaching the public. That is to say, in the ruthless free-market struggle that goes on between pressure groups for media attention and funds, nobody likes to have it said that `their' problem is not urgent and getting worse.
Externalities addressed the Dutch way.
...in the Vondelpark, a delightful reserve in central Amsterdam, it is illegal to let your dog off a leash. But it’s perfectly legal to have sex in the park, so long as it is not in view of a children’s playground. The argument is that the dog may make a mess that imposes costs on the unwary walker, while the couple imposes no costs on other park users.
For risk taking behaviours, the rebound effect even has a name – The Peltzman Effect
New Mysterious Cities of Gold cartoons on the way.
Broken window fallacy or just plain old human optimism? Café Hayek is full of gems.
Ever wondered why all news is bad? A must read on what happens to good news.
...there are huge vested interests trying to prevent good news reaching the public. That is to say, in the ruthless free-market struggle that goes on between pressure groups for media attention and funds, nobody likes to have it said that `their' problem is not urgent and getting worse.
Externalities addressed the Dutch way.
...in the Vondelpark, a delightful reserve in central Amsterdam, it is illegal to let your dog off a leash. But it’s perfectly legal to have sex in the park, so long as it is not in view of a children’s playground. The argument is that the dog may make a mess that imposes costs on the unwary walker, while the couple imposes no costs on other park users.
Tuesday, May 4, 2010
Steve Irwin's way: Economics of wildlife conservation
At Australia Zoo (I had a lovely time there on the weekend, thanks for asking) there are numerous signs posted to encourage visitors not to buy native animal products – crocodile, emu, and kangaroo meat for example. I found this very odd, as crocodile and emu are farmed, and most kangaroo species are not endangered – far from it. So what kind of conservation message was this I wondered?
Steve Irwin expressed his conservation message more clearly on the website:
"Sustainable Use" of native wildlife in so-called modern nations like Australia and the U.S.A. has inadvertently created a multi-million dollar 'bushmeat' industry, where local people kill native wildlife for meat, skins and products. Please don't blame the local people; it's not their fault! They're simply hunting for much needed money. The greatest wildlife perpetrators of today's world are those behind the driving force of "Sustainable Use."
How are the Tiger Farms in Taiwan and China helping to save Tigers in India, SE Asia or Siberia? They are perpetuating the market in Tiger products, which is the single greatest reason for the endangerment of Tigers.
…If we can destroy the market, we'll destroy the industry. Historically the only reason spotted cats, like Leopards and Cheetahs are still found in the wild, is because of peer pressure. It became 'uncool' and controversial to wear spotted cat fur coats, so the market was destroyed and the industry suffered. Slowly, less and less Leopards and Cheetahs were being shot for their skins, and just as well or they would've been extinct 20 years ago.
The principle behind this message is that if we eliminate demand for wildlife products, we will preserve species. But there are alternative ways to protect wildlife and biodiversity (a side note: do we really care about an individual species, or do we use iconic mammals as the canary in the coal mine of biodiversity protection?)
In addition to the ‘demand destruction’ technique, economists propose other ways to preserve threatened species – promote domesticated supply (farm threatened species), the Coase solution (give rights to the species to a group who can profit from non-consumptive use of the animals such as eco-tourism and research), and simple land conservation.
Which of these measures work? Should we try them all, or are they mutually exclusive?
Subscribe to:
Posts (Atom)