Observations of an economist environmentalist

Living away from the tax man

noreply@blogger.com (Cameron Murray) — Thu, 05 Jan 2012 06:10:00 +0000

This post originally published at MacroBusiness

The Commonwealth Treasury released a consultation paper last month on propose reforms to Fringe Benefits Tax (FBT), particularly, the tax treatment of Living Away From Home Allowances (LAFHA).

Apparently there are two major concerns leading to this reform. The first, but unstated reason, is to increase tax revenue – which is more clearly articulated in the Treasurer’s statement:

LAHFA tax-free increased from $162 million in 2004-05 to $740 million in 2010-11. The reform will raise taxes by $683.3million over the forward estimates.

The second reason is described as follows:

A particular concern is the growing use of the concession by employers (including through labour hire and contract management companies) to allow temporary resident workers coming to Australia to convert their taxable salary into a tax‐free allowance. This provides them with an unfair advantage over local Australian workers.
… An area of growing concern is the use of LAFHA by employers (including through labour hire and contract management companies) to attract temporary resident workers to Australia by including tax‐free LAFHA payments as part of their remuneration. These payments are effectively a re‐characterisation of taxable salary or wage income
…The changes will ensure a level playing field exists between hiring an Australian worker or a temporary resident worker living at home in Australia, in the same place, doing the same job.

Indeed, as the paper suggests,

The living‐away‐from‐home allowance is one of the most popular searched terms for workers on the 457 Visa.

So what are the changes?

Put simply, to claim accommodation costs and food expenses as a fringe benefits tax exempt LAFHA allowance, the employee must maintain a home in Australia they are living away from for work. This is a change from the current treatment whereby there needs to be no evidence of actually living away from an Australian home for temporary visa holders (who, by definition, are living away from home, although not required to actually maintain a home). They, and their employer, are simply enjoying a tax advantage compared to a local worker.

The second change involves tightening the qualifying criteria to ensure that any FBT exempt LAFHA reflects the actual costs incurred. The below table summarises the proposed new tax treatment.

We know that this will turn off a $683million tax loophole. But just how many people could have their working conditions affected by the change? And what flow-on effects can be expected?

First, temporary residents on 457 visas are they key group able to access LAFHA tax advantages, and will be the main group affected by the reforms. We can see in the table below that there has been a significant boom, and tapering in 457 visa numbers since the mid 2000s.

Currently, around 1% of the workforce is made up of the approximately 110,000 457 visa holders, but this is expected to grow over the coming years, as reforms implemented in November allow for a more streamlined visa approval process, and longer stays of six years.

I imagine the likely flow-on effects to be most acute in the real estate markets of mining-boom towns. The new incentive means that domestic and foreign workers may prefer fly-in fly-out arrangements, as relocating becomes less attractive in after-tax terms, even if the cost of employment to the company is the same.

In terms of rental markets nationally, this will take tiny slice off demand at the margins, as this foreign workforce, occupying around 3% of rental homes, will be less enthusiastically spending tax-free income on accommodation. The top end of the city markets will see much of this change.

The big question politically is whether this will have much of an impact on the demand for overseas skilled workers, and whether it will encourage the education and training of local workers by industry groups for their own future benefit. I can’t say there being a major impact, but the uproar from the employment agent industry seems to suggest that the impact on the ease of attracting foreign workers may be significant. At any rate, these reforms will provide a better set of incentives for local skill development.

Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter@rumplestatskin

BRICs can't hold the wall

noreply@blogger.com (Cameron Murray) — Mon, 12 Dec 2011 12:12:00 +0000

This post first appeared at Macrobusiness

Not a day goes by when some economic commentator notes the ‘decoupling’ of economic growth of the developed and emerging economies. Europe looks almost certain to have a 2012 recession, and the US continues to have doggedly high unemployment with very soft conditions all around. Brazil, Russia, India and China, the BRICs, are meant to be taking up the slack, especially with domestic demand in China, to keep global growth on track.

But just as my suburb has a hard time decoupling from the rest of the city with which we trade our goods and services, the BRICs are nestled solidly in the layered courses of the integrated global economic masonry.

In the least reported economic news of the month, Brazil’s GDP was flat in the September quarter. During 2010, Brazil’s economy grew 7.5%, while the year to September 2011 saw a mere 2.1% growth, with an obvious trend – down. I am not sure what is on the horizon turn this around for Brazil, apart from a surprise boost in economic activity in Europe and the US (chart from here):

India was expected, much like China, to continue to grow at double-digit rates, but has just recorded its slowest GDP growth for two years, at 6.9%. Particularly:

The manufacturing sector, which contributes nearly 16 percent of GDP, grew at a measly 2.7 percent, down from 7.8 percent a year ago. Agricultural output rose an annual 3.2 percent for the same period, down from5.4 percent a year ago.
The worst hit was mining, which showed a decline of 2.9 percent after growing by 8 percent in the same period last year.

Here is how Indian GDP growth has looked since 1990, with the September annual measure marked in addition to the annual measures:

The trend path for growth in India is looking to be heavily influenced by external factors. Of course, exports make up about 20% of the Indian economy, so one must take external conditions into consideration. Further, around 32% of the Indian economy is involved with capital investment, which can be easily scuttled should prevailing global market conditions render the financial returns unattractive.

Russia is bucking the trend a little, with GDP growth up from 3.4% annual in the second quarter, to 4.8% over the year to September 2011. Currently this appears stable, but relatively slow.

Which brings us to China. Well, I’m not sure what more I can add on China, but the image below shows that growth is remains high, but is doesn’t appear to be taking off in a hurry. Annual growth has been steadily falling for the past 18 months, from 12% in early 2010, to 9.4% in the latest data:

I am not one to criticize a bit of economic stability, and the higher rates of growth on a lower base do mean that the share of economic expansion of the BRIC is relatively high. But with these levels of growth I can’t see how the BRICs are meant to support the waning demand of the much larger western economies. In terms ofshares of the global economy, Japan is 8.75%, US at 26%, the EU15 at 26%. For the BRICs, Brazil is 2.4%, Russia is 1.9%, India is 2.3% and China is 7.5% – or 14.1% in total for the BRICs.

For some more perspective, the US military budget is about $1trillion pa, or half the size of the Brazilian economy, or two-thirds the size of the Russian economy.

Clearly, very strong growth rates from such a small economic base would be required to counteract even very moderate contractions in the developed world, and this is not visible in the trends we are seeing. You can’t simply decouple the globally integrated economy while capital and goods are traded freely.

Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter@rumplestatskin

Economics of piracy

noreply@blogger.com (Cameron Murray) — Wed, 07 Dec 2011 06:23:00 +0000

This post first appeared at Macrobusiness

Public debate over Internet piracy is riddled with contradictions and fingerprints of vested interests. In the US, congress is considering the Stop Online Piracy Act (SOPA), while in Australia, an alliance of internet service providers had their proposal to crack down on piracy rejected by the Australian content Industry Group (group of music, software and games content owners). The proposal:

…would see an ISP provide one education notice, three warning notices and one discovery notice to customers alleged to have infringed on copyright by the copyright holder, and, if a customer continued to infringe after this, the ISPs would tell the rights holder, which may then decide to apply for a subpoena to get access to the customer’s details for legal action.

Given that the application of knowledge is the engine of economic growth, one must intuitively consider copyright and patent laws as a significant burden on growth (China?). Moves to curb piracy, as many economists are keen to point out, generally reduce consumer welfare, and in many cases reduce the profits of content owners who benefit from platform effects.

A key misapplied economic in the piracy debate is that greater incentives ‘bring about’ greater supply. That somehow, without a massive payoff, people would stop inventing and creating. Imagine, people following their passions, even in something as obscure as blogging about economics, for their own rewards, rather than monetary payment. History shows that creative contributions are independent of copyright and even patent protection.

Or, as The Economist magazine put it recently, “copyright theft robs artists and businesses of their livelihoods”. Given that regulations create markets, and market actors play by the rules of the game, this point is partly true. But is begs the question of whether markets provide better outcomes for both producers and consumers with or without copyright laws (or the evasion of the laws).

Consider the music industry. Recent research suggests that music piracy can be beneficial to the music industry as a whole, but not those who are already superstars.

The effect of this is that piracy increases the diversity of music in the short run, and increases the supply of superstars in the longer run. In this sense, piracy is efficient, as it corrects a market imperfection.
…
This raises the possibility that opposition to file-sharing is strongest amongst those performerswhose success depends upon their fame more than their ability.

In software markets the ‘victims’ of piracy gain substantial benefits through platform effects (the result of strangely named two-sided markets). The battle between mobile operating systems is demonstrating how platform effects work. If Apples iOS is a platform for selling apps and music through online stores, Apple should be happy with piracy of its operating system, because the more ubiquitous their system, the more valuable their platform dependent inline retailing. Microsoft, especially with its Office suite, shows that being ubiquitous means a cornering the market so that competitors cannot crack it. Everyone insists on perfect compatibility with Office, because it is so common. And it is partly so common because of the degree of piracy, rather than of sales. Without piracy, these effects are greatly diminished.

Microsoft has even suggested that if you are going to pirate software, make sure it is theirs.

For some time, big software companies have tried to make the argument that a copy of pirated software is equivalent to a lost sale This is pretty ridiculous for a couple reasons. For one thing, there’s no reason to think that a given user of pirated software would have actually purchased a legitimate copy.
Furthermore, the argument ignores the fact that companies actually benefit in some ways from piracy, because a user of pirated software is likely to purchase software from the same maker at some point down the road. This latter point is something that even Bill Gates has admitted, even while Microsoft continues to talk tough about cracking down on piracy.
Now the company is stating more clearly that it knows there are some benefits to piracy. Jeff Raikes, head of the company’s business group, said at a recent investor conference that while the company is against piracy, if you are going to pirate software, it hopes you pirate Microsoft software. He cited the above reasoning, noting that users of pirated Microsoft software are likely to purchase from the company later on. He said the company wants to push for legal licensing, but doesn’t want to push so hard so as to destroy a valuable part of its user base.
The company recently got a stark reminder of this lesson when a school in Russia said it wouldswitch to Linux to avoid future hassles with the pirate police. Of course, this moderate stance seems at odds with the company’s recent hyper-aggressive anti-piracy push, which resulted in many mistaken piracy accusations. Either way, Raikes’ comments completely destroy the line about pirated software being equivalent to lost sales; if it actually were, Raikes would be telling people to pirate the software of Microsoft’s competitors.

Google is probably the best example of a platform business. Their Chief Economist Hal Varian has been known to comment that whatever new software Google produces, if it increases the attraction of the Internet, then it is good for Google.

Content piracy has improved our lives, with some very minor costs to a small group of content owners whose lobbying efforts have already results in having the rules changed in their favour (thank Walt Disney). Whether this trend persists in the light of rapidly evolving content distribution methods I am not sure.

Tips, suggestions, comments and requests to rumplestatskin@gmail.com + follow me on Twitter@rumplestatskin

QLD CSG - the race for first gas

noreply@blogger.com (Cameron Murray) — Sat, 26 Nov 2011 10:49:00 +0000

*I am now posting a daily column at Macrobusiness under the alias Rumplestatskin. This post first appeared at Macrobusiness on 18 Nov 2011.

While debate continues around land access and groundwater contamination, the coal seam gas industry in Queensland is powering ahead in a race for ‘first gas’. Which begs the question, why the rush?

It is no secret that government is a few steps behind the resource companies in terms of providing a solid regulatory framework for the industry to operate within. This is particularly the case for the management of CSG water in river catchments already plagued by their own water management issues (although DERM has released a CSG Water Management Policy and is investigating other beneficial use options).

Making substantial investments ahead of certain regulatory obligations appears a risky move on the part of the gas companies. After all, the gas will still be under your lease if you wait for some policy certainty, and sunk investments will provide substantial bargaining power to government to expand their wish-list as they finalise their policies. You won’t walk away from a billion dollar investment because the government makes you spend a little extra on over-the-top sweeteners to local communities.

The frantic pace of investment can be explained by the strategic first-mover advantages on offer to the winner of the race to produce ‘first gas’. British Gas’s Australian subsidiary QGC is a current favourite to win this race (to have their 'first gas' first), although Santos is a contender.

Stanford professors Lieberman and Montgomery published a defining article on first-mover advantage back in 1987 (ironically gaining a type of early-mover advantage on the study of first-mover advantages). They addressed the conditions under which such advantages are likely to exist, and we can use the ideas from their paper to better understand the advantages from winning the race for first gas.

Preemptive investment in plant and equipment

The first mover, or even second mover, to begin construction of pipeline and plant will gain a huge negotiating advantage during the expected consolidation of the sector; especially if the pipeline(s) is designed with surplus capacity. The owner of the first pipeline(s) can offer gas transport to other firms for less than the cost of constructing a their own pipeline. Once these first pipelines are operational, the sector will bargain a solution to avoid further uneconomical duplication, but there will be a balance of power in these negotiations to the pipeline owners.

QGC’s bargaining power was significantly enhanced by last year’s approved 15 year no-coverage declaration of its proposed pipeline from the Surat Basin to Curtis Island (see map below). This approval means that the pipeline cannot be declared for open access (which would oblige QGC to provide other gas companies access to the pipeline at a regulatory price) during this period, giving it the security to invest. QGC argued (quite rightly) that the pipeline would be economic to duplicate, and that access would not be in the public interest. But only two pipelines appear economical for the expected production of the area, so there will be second mover advantages as well.

But QGC’s no-coverage declaration also added significant extra time pressures, since the approval will lapse after three years if the pipeline is not constructed and in use. Santos noted in its submission to the National Competition Council in April 2010 that QGC is unlikely to meet that three year deadline, and hence their pipeline may not be protected from a regulatory access regime. The pressure is on for QGC:

Consolidation of the sector is also likely to occur in other parts of the production chain (see below), including upstream exploration and drilling, and in particular the liquefaction stage on Curtis Island where the industry is likely to negotiate a more efficient option than the four separate plants:

Overall, the sector may consolidate extraction rights themselves by a number of means. The first mover (to construct a pipeline and plant) may buy out other tenements from a strong bargaining position, or perhaps partnerships and joint ventures will emerge with other gas producers, or even straightforward private arrangements for utilising the first mover’s pipeline and plant.

If QGC and Santos build pipelines and plant with excess capacity, they can take a share of rents from other gas companies through these types of consolidations, which is publicly their intention:

“BG Group now has the strategic advantage of being the first to make a financial decision, with construction of its project to begin immediately.
Consolidation in the CSG and LNG sector in Queensland is widely expected, and as the “first mover”, BG will be one of the main players with whom other hopefuls will now want to talk.” (here)

Given this likely eventuality, other players have pushed through with plans of their own to stay in the race for the top two, given the payoff for success is so great:

The $35 billion Australia Pacific LNG (APLNG) joint venture will theoretically become neighbours with BG, Santos/Petronas and Shell, which have all announced plans to build separate plants on Curtis Island, off Gladstone, in Queensland.However, consolidation is expected in the sector.

Switching costs and buyer choice under uncertainty

Finally, the leaders of the race for first gas will have greater opportunity to monopolise contract negotiations, and develop strong buyer relationships. The typically long contracts in the gas market reinforce the dominant position of first movers. Santos, for example, currently has a 20 year contract with Petronas, while QGC has a 20 year contract to supply CNOOC, a Chinese state-controlled oil producer.

As a final note, the pace of development is important financially simply by bringing forward returns on a multi-billion dollar investment.

So how do you get a first-mover advantage? Lieberman and Montgomery suggest the following:

A firm gains first-mover opportunities through some combination of proficiency and luck. Various types of proficiency may be involved, including technological foresight, perceptive market research, or skillful product or process development.

I would add strong relationships with government officials, which can help push through approvals ahead of the pack, and often ahead of the formation of government policy.

This regulatory relationship is clearly a real concern. Santos has cautioned against regulatory interference in the expected industry consolidation process, through, for example, unpredictable outcomes of no-coverage applications, given the massive impact it will have on bargaining power between gas companies. Favourable treatment in such deliberations is a true source of industry power.

I am not a gas industry insider and there may very well be some subtle considerations I have overlooked. But on the surface, the evidence is strong that the pace of development, beyond the pace of development of environmental regulation for CSG production, is being primarily driven by the race for first gas.

This means there is a trade-off between the pace of development, and the quality of the development these environmental regulations. A slower pace of development may provide incentives to better optimise investment for the industry as a whole (rather than the first mover), and opportunities for the communities affected by the industry’s development to better understand what is happening before having their input into policy making.

This leads to another question, would eliminating advantages to the first-mover slow development to allow regulation to catch up?

This is not as simple as it might sound. The threat of open access declarations could have the exact reverse effect of completely rendering the pipeline unviable. Of course, government could simply build one and charge a fixed rate of return charge to all gas companies. I wouldn’t, however, expect the operation of this pipeline to be particularly efficient, and it would still lead to lobbying by the industry players over the operation of the government’s access regime.

A creative solution might be to regulate against exporting LNG from Curtis Island until a date sufficiently late for all companies to be contenders for completing their proposed pipeline and plant. Perhaps this will encourage consolidation of the sector prior to gas being delivered. But in all honesty, I can’t think of a way to eliminate the race, without eliminating some of the benefits of CSG development, and without picking winners.

Maybe the simple solution is for government to take a hard line when it matters, such as during assessment of environmental impact statements, and incur some delays at that point for the sake of nudging trade-offs in favour of the wider community. Delaying approvals at early stages may have provided the time to collect better data about the geology and underground hydrological effects of CSG extraction.

I personally believe CSG development can be a great benefit to Queensland and Australia over the next quarter of a century, but the political class being targeted by industry lobbying needs to be aware that their hard hat photo opportunities and premature approvals are inherently trading off benefits between external stakeholders and late entrants, and the industry’s first mover(s).

US observations

noreply@blogger.com (Cameron Murray) — Tue, 11 Oct 2011 05:57:00 +0000

Two observations today. The first is the graph below showing the median houshold income in the US since 2000 (ht.Felix Salmon). Suprisingly the recovery from the 2008/09 recession has not resulted in an income boost, but in fact a dramatic continuation of the decline.

The second observation is that big banks on Wall Street are participating in a program to 'buy' their own police (ht.Yves Smith). Which is all the more ironic this week as the Occupy Wall Street protestors rally against regulatory capture and the greed of the corporate world in seeking pursuing these ventures. These officers are paid a token hourly rate by participating corporates, but their training and insurance is provided by the city. Privatise profits, socialise losses. That's not capitalism.

The fall out from the financial crisis is not over.

Media watch – cosleeping report

noreply@blogger.com (Cameron Murray) — Tue, 04 Oct 2011 22:52:00 +0000

Within 24 hours of the Victorian Coroner’s Prevention Unit releasing a background report into infant deaths from co-sleeping (parents sharing beds with infants), no less than 31 media outlets have reproduced the media release beneath fear-inducing, but unrelated, headlines.

A credible journalist would have read the Coroner’s background study and found that its conclusions are nothing like what the headlines suggest (perhaps the subeditors need to pull their heads in). As the study itself notes -

The study was restricted to a case series of deaths, for which no comparison groups were available. Without being able to compare the proportion of co-sleeping among the fatal cases to the proportion of co-sleeping among non-fatal cases, it is not possible to provide an estimate of the increased risk of death attributable to co-sleeping.

In fact, the study is just an analysis of a selection of case-study data to inform an ongoing investigation, for which the Victorian Coroner is currently seeking input. The investigation was triggered because the proportion of unexplained infant ‘sleep’ deaths associated with co-sleeping increased from 21 to 45% between 2008 and 2010 (7 deaths to 15 deaths).

Is it too much to ask that journalists actually read the source of their article before writing and offer an objective view, rather than induce fear in new mothers with unrelated headlines and loose presentation of the facts?

If any of these journalists had modicum of mathematical aptitude they would have realised that proportion of infant deaths from co-sleeping is meaningless without knowing the proportion of infants who co-sleep. If 90% of infants co-sleep, but the only make up 45% of unexplained sleeping deaths, then that is some evidence to show it is probably not a factor.

And most bizarrely, if the rate of co-sleeping is constant, than some other factor MUST be to blame for the changing ratio (even if that factor is random variability).

Unfortunately the evidence on sleeping habits of infants during this period is limited. This survey from 2008 shows that, in a sample of 6383 breastfeeding mothers with babies under 1 year old, about 37% of mothers co-sleep with their baby. If that ratio has increased since that time it may very well explain most of the data seen by the Coroner. Other evidence suggests that breastfeeding mothers are three-times more likely to bed-share, and the ABS estimates that about 48% of babies under one year of age are breastfed (consistent between 1995 and 2001), although the proportion declines from about 85% to 30% over the period. This gives a rough picture of co-sleeping habits in 2008 of about 29% - with co-sleeping deaths at 21% in this period.

Given the massive limitations of Coroner’s report, and the inherent variability in the year-to-year infant deaths statistics (the same debate occurs around pool fencing laws), the report itself seemed rather lacking with regard to the extensive existing literature on the topic. For example, this research surveyed 4656 families internationally about sleeping arrangements and found that

Rates of bedsharing varied considerably (2–88%) and it appeared to be more common in the samples with a lower awareness of SIDS, but not necessarily a high SIDS rate.

A summary of the results is graphed below.

One major factor limiting the understanding of infant sleep death risks are omitted variables. The ABS surveys on breastfeeding show strong trends between mother’s age and educational attainment and breastfeeding habit. Also, the confounding factors of alcohol intake and smoking (and other health risk exposure) of the infant need to be taken into account to begin to point the finger at sleeping arrangements. With this data available one can separate the impact of co-sleeping risks from the impact from other health risk on infant ‘sleep’ deaths. No doubt and the Coroner’s inquiry progresses these issues will be addressed in detail.

The creative destruction of retail

noreply@blogger.com (Cameron Murray) — Wed, 28 Sep 2011 10:08:00 +0000

The great Australian retail adjustment is happening now at a store near you.

Myer Managing Director Bernie Brookes recently announced the retailer’s plans for more serious efforts in online retailing, with $9million set aside to improve Myer’s online presence.
Target yesterday sent a letter to suppliers explaining why they are going to pay 5% less for all their goods from now on – take it or leave it (ht: Adrian).
Mark McInnes, head of Premier Investments, the owner of Dotti, Just Jeans, Portmans and Jay Jays outlets, has closed 19 stores and threatens to close more if he cannot bargain down the rents paid by his remaining stores.
Masters, the hardware joint venture between Woolworths and Lowe’s Companies Inc, opened its first stores early this month to compete with Bunnings in the hardware and homewares market.
Dick Smith has also had his say about the supermarket discounting wars and executive pay.

Not only are the retailers making some tough decisions, but shopping centre owner Stockland, whose CEO Matthew back in February noted the sunny outlook for their three Rs strategy – residential, retail and retirement – is finally coming to grips with reality and is rushing to offload a selection of retail property holdings.

Read full post at MacroBusiness...

How the CPI hid the housing bubble

noreply@blogger.com (Cameron Murray) — Tue, 20 Sep 2011 03:16:00 +0000

Recent discussions about the CPI have brushed over a key change that occurred in the construction of the index in 1998. In its 13th Series the CPI became a pure price index utilising an acquisitions approach, rather than a cost-of-living index utilising an outlays approach. One feature of this change is that it removed land costs for owner-occupiers – something which doesn’t appear to reflect reality and provides some intriguing results.
...
Read the full article at MacroBusiness

Quarry Australia has no people

noreply@blogger.com (Cameron Murray) — Mon, 12 Sep 2011 03:33:00 +0000

Fungibility is a feature of a good where two items of that good are so close in their features that they equal substitutes. Currency is the ultimate example. If I lend someone $50 it doesn’t matter to me whether that same $50 note is returned, or another equally good $50 note. Other fungible goods include standardised commodities like wheat, raw metals, oil.

But is labour the same?

I doubt many businesses would be happy to lend an employee for a few days work elsewhere then receive a different person back when the job is done. While there are people with very similar skills and experience who may be suitable substitutes, this is not the case in general. The idea that some workers are subsitutes for some others, but all workers are not substitutable, forms the great divide between the policy prescriptions of the Austrian economists and the Keynesians, and may be one reason for the apparent failure of Keynesian stimulus to ‘create’ jobs in the US. It also explains why labour costs in some industries can rise even with relatively high unemployment.
...
Read the full article at MacroBusiness.

Stimulus for a recession that never was

noreply@blogger.com (Cameron Murray) — Tue, 06 Sep 2011 22:11:00 +0000

*I am now posting as a regular contributor at Macrobusiness under the alias Rumplestatskin. I will be posting copies of posts at both websites for the coming weeks.

Hands up who knew that Australia avoided a technical recession in the aftermath of the GFC? Kevin Rudd certainly got some miles out of it, noting in his farewell speech how proud he was of that fact and the role his government played. But as usual all is not what it seems. The Keynesians shouldn’t be celebrating just yet, as Professor Tony Makin explains:

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

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

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

If the behaviour of Australia’s business cycle in the aftermath of the GFC had been assessed by an independent committee of economists with reference to a broader range of macroeconomic indicators in this way, a recession, albeit mild, would most likely have been declared for 2008-09.

In his more technical analysis of the impact of fiscal stimulus, Professor Makin kindly summarises some of the other key measures in the National Accounts (in the below table), and notes the following:

Though routinely ignored in economic commentary, the real gross and net domestic and national income series are especially important measures of Australia’s international macroeconomic performance because they reflect the impact of the terms of trade (or ratio of prices received for exports to prices paid for imports) on the economy.Other notable recession features included declining total hours worked (for 5 straight quarters in the market sector), falling compensation to employees and increased unemployment.

But what is most interesting from the good professor’s analysis is the delay he observes between the recession and the appearance of fiscal stimulus in the data. He finds that:

Federal public investment actually contributed negatively to total expenditure over the critical December 2008 and March 2009 quarters, being -0.2 and -0.1 respectively, as did public investment by State and Local governments. As a result of administrative delays in implementing infrastructure spending, total public spending did increase by the end of 2009, but only after the worst of the GFC had passed, and then arguably crowded out private investment spending at the time.

Now there are obviously administrative delays to get $40billion spent on school halls and home insulation (not so much with cash handouts), but this very practical aspect of such Keynesian intervention must be addressed – how can governments time economic stimulus measures appropriately unless they have perfect foresight?

Professor Makin argues that the drop in the value of the Aussie dollar, and interest rate adjustments, are what ‘saved’ us from a technical recession, and not the delayed fiscal spending. Not only that, but government spending ramped up just as the private sector was itself recovering from the downturn, arguably crowding out private investment (although I personally wouldn’t suggest this is a major factor).

While no doubt Australia’s economic performance of the past two years has been exceptional by any global measure, our combined monetary, exchange rate and fiscal stimulus, with their various time lags, were also exceptional over this period and arguably excessive. Now that these measures have run their course perhaps our economy will have a second chance to adjust to a more stable level, with higher savings and lower spending. Today’s National Accounts numbers will provide further insights into key sectors of the economy now that the fiscal stimulus measures have fully ceased.

The Rolex economy

noreply@blogger.com (Cameron Murray) — Mon, 05 Sep 2011 22:40:00 +0000

*I am now posting as a regular contributor at Macrobusiness under the alias Rumplestatskin. I will be posting copies of posts at both websites for the coming weeks.

I was recently in touch with a Swiss friend of mine who casually mentioned that the Swiss government was taken action to help their economy adjust to the undesirable strength of the Franc (CHF), shown in the charts below. Given that the Australian government and the RBA have been silent about the disruptive impact of the high dollar on manufacturing, tourism and education, it makes for an interesting comparison.

On the financial battleground, it appears that not only has the Swiss government lowered interest rates to zero and intervened to increase liquidity and help weaken the currency, they are also talking about deposit fees to make their currency less attractive to the tsunami of financial speculation surging around the globe.

(Also bizarre is that this high currency nation perched in the Alps has a GDP which is comprised of 50% exports, with net exports at 12% of GDP. Indeed Switzerland has been a net exporter of goods and services every quarter since 1981. Meanwhile our exports are just 21% of GDP and we have been a net importer in annual terms for decades.)

In addition to directly targeting the currency, the Swiss are taking on the challenge by trying to boost productivity to ‘make room’ for a higher currency. The Swiss Commission for Technology and Innovation (CTI) has boosted efforts to commercialise new technologies to offset currency impacts on Swiss manufacturers by doubling the value of grants accessible in the next twelve months, and broadening the qualifying criteria. After all, innovation in production techniques is the key to improving productivity and economic growth.

No doubt such investment is driven by Johann Schneider-Ammann, Head of the Federal Department of Economic Affairs, who appears to understand and promote the role of productivity as the driver of growth. In a recent speech entitled Strengthening Switzerland as a manufacturing location, made at the opening of a new Nestle production centre, he made the following comments (my emphasis).

We must continue to invest in training, research and innovation. It is essential for personnel at all levels to be well trained. Thanks to our dual-track system of vocational and professional education and training, we have programmes with a strong practical focus. Education, research and innovation must be given top priority. Switzerland should continue to produce talent of the highest calibre. Only in this way can we maintain our leading innovative position and continue to be competitive.

Market liberalisation and the removal of trade barriers are essential for Switzerland, and especially for a multinational company such as Nestlé. We are familiar with the problems and challenges which the global product trade faces on a daily basis. I therefore aim to ensure that we have access to the important growth markets and remove unnecessary trade barriers within Switzerland and abroad. I am in favour of extending our network of preferential agreements with major dynamic economies such as China, India and Russia.

I am aware of the agricultural policy framework under which food companies such as Nestlé produce in Switzerland. These are currently compounded by the strong Swiss franc. This is weakening our export competitiveness considerably. I assure you that I will do everything I can to maintain or improve current conditions for Swiss companies which export abroad including the food industry.

The labour market in Switzerland is flexible, and should remain so. The freedom of movement between Switzerland and the EU is to our overall economic advantage. Nonetheless, we still require accompanying measures to ensure that this advantage is not weakened. I also believe in the importance of nurturing a healthy relationship between social partners.

One could argue that if Australia did not have mineral and energy wealth to fall back on, we would be doing similar things and would have our leaders making similar speeches out of necessity. Perhaps that’s true. But choosing the short term lazy option of quarry Australia, which has been promoted by the RBA and others, is not a recipe for a stable and prosperous economy. As I have said before:

My main concern is that frighteningly, the RBA, and probably much of the government, sees Australia’s future as a single bet on mining, and is willing to sacrifice much of the remaining economy for this to happen. Unfortunately this is a lose-lose proposition for most of the country.

All other sectors of the economy lose while the mining investment booms. When it crashes, we all lose because there is nothing else left in the economy to absorb capacity in a relatively short period. Remember, the minerals will be in the ground if we don’t mine them now, but the decades of production chains elsewhere in the economy are easily destroyed and slow to rebuild.

I acknowledge that the RBA has a single tool in its toolbox, but surely the message we should be hearing is that a strong and stable economy is a diverse economy. Quarry Australia is a very volatile and risky place to want to be.

We could learn some lessons from Swiss economic policy.

Improving the house price and income debate

noreply@blogger.com (Cameron Murray) — Thu, 01 Sep 2011 12:10:00 +0000

While the RBA has warned of the risks of leveraging into the housing market on national television, they, and other analysts, have also presented a stable picture of the housing market, by estimating a house price to household income ratio of about 4x, and accompanying such analysis with statements like the ratio of housing prices to income has been reasonably flat for a number of years.

Or, when he is at his best, Glenn Stevens can calm the nerves of recent home buyers with comments like this -

The other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio it about 4 ½ and it hasn’t moved much either way for 10 years.

I think I can safely say that most of Australia would disagree with this assessment of stability in the housing market or support from economic 'fundamentals'. Indeed even the RBA's own representations seem a little schizophrenic on the subject, with a recent report noting that the price-to-income ratio actually increased by 50% between 2001 and 2004.

Dwelling price growth significantly outpaced growth in household disposable income, with the nationwide dwelling price-to-income ratio rising from around 2½ in the mid 1990s to a little over 3 by 2001 and then to 4½ at its peak in early 2004.

Which is it Glenn? Did the ratio increase by 50% in that period, or hasn't it moved much either way for ten years?

One reason for the clash between public views on housing and the 'stability stance' we see out of the RBA is that the RBA grossly overestimates household incomes.

I have examined the data used by the RBA and other analysts from the National Accounts (Table 14), and tried to replicate their method and reconcile the differences with ABS household survey data, which more accurately reflects household income available for current consumption. It is possible, and I have shown my results in shown in the table below.

ABS household survey data shows that at the beginning of 2010, the average household income was $88,113 before tax and $74,360 after tax. This closely reconciles with my own household income estimates from the National Accounts data in 2010 (within 1.3%). Unfortunately due to the need to estimate the total number of households between census years, this method has quite a large margin for error.

Given the average national dwelling price at that time was $447,994 and the median about $415,000, we are definitely in an uncomfortable range of price-to-income ratios, with 5.0x in average terms using before tax income data, and around 6.0x in after tax terms. In terms of median incomes and dwelling prices, the ratio is probably closer to 5.6x before tax, and 6.8x in after tax income (as recently estimated by fellow blogger Leith van Onselen).

This happens to match the data produced by Rismark (here), after they revised their average price-to-income ratio up after noting the discrepancies in the unadjusted National Accounts data.

While I don’t believe household income and house price comparisons are the best indicator of the state of the housing market (preferring comparisons of rents to incomes and yields to other rates of return in the economy), it does seem that we can use the national accounts data to give a decent regular estimate of household incomes for those who wish to use them for analysis. Maybe the RBA should try it sometime.

Also important to note when comparing incomes to prices is that the debt service ratio, measured as interest payment against incomes, can be misleading. Since this measure is also published by the RBA, I assume they rely upon it in some way.

Below is the household finances graph from the RBA chart pack (available here). We can see that, following the declines in interest rates at the end of 2008, household interest payments have settled at around 12% of disposable income. Note again that the RBA disposable income measure is probably overestimated (there is no specific note about the treatment of imputed rents), meaning the both measures are probably underestimated. But in any case the trends over time still hold.

What we need to consider here is that the interest paid graph shows what might be called a 'debt-service' ratio (although not in the true sense which would cover principle repayments). In regard to the surging household debt the RBA notes that the ...structural decline in interest rates has facilitated the increase in household debt ratios because it reduced debt-servicing costs.

That is true, but would only explain an increase in debt that accompanied flat interest payments as a proportion of income, not increasing interest payments (as I have explain in detail here).

What is also overlooked is that at lower interest rates the difference between the payment of just the interest on debt, and the repayment of interest and principle (to actually reduce the loan balance over a fixed period), greatly increases. For the same interest payment, a high debt balance with a low interest rate is more difficult to repay than a low debt balance with a high interest rate.

The table below shows the amount of debt that a household with an income of $75,000 could service with 20% of their income ($15,000pa) at different interest rates. While a halving of interest rates means the household could double the loan amount and pay the same interest payment, the loan they could actually repay over 30 years increases by far less (as shown in the right hand column).

It is also important to understand this relationship when comparing our household debt burden internationally. The RBA usually makes such comparisons without noting the importance that interest rates make to the burden of this debt on households. Given that mortgage rates vary between 7.5% in Australia to 2.5% in Switzerland and 3% in Germany and much of the EU (and noting the tax deductibility of mortgage interest in Netherlands), these differences are important.

I will finish this analysis by presenting three graphs.

First is a graph of the household occupancy rate. The reason to include this is that while household incomes may be still growing nicely, the number of people per dwelling has been increasing since late 2005, so in per capita terms incomes are not looking as good.

The second graph shows the contributions of insurance premiums and claims to household income (which I removed in my income estimation method). When this number is positive it means that household insurance claims were more that the premiums paid in that period. That’s why we see a massive spike in February 2011 from the claims relating to floods and cyclone Yasi (and amongst other things, the Black Saturday Bushfires in early 2009 – note the data is very cyclical with a summer peak). It seems odd to have either the insurance premiums or claims in estimates of household income (although makes up just a fraction of a percent of the total).

The third and final graph compares the growth in household incomes using each method with the ABS capital city price index. Of course, I have chosen an arbitrary baseline at June 2001, but I do note that mortgage interest rates then were the same then as they are now (indeed mortgage rates were about the same as now back in 1997 - see here), so the deviation observed could easily be interpreted as an overvaluation of housing.

What the graph mostly tells us is that there is a pretty solid reason so many people believe that house prices are historically high and are more likely to fall than rise in the near future, being supported only be our willingness to incur debt, and not our incomes.

Using quarantine as a barrier to trade

noreply@blogger.com (Cameron Murray) — Thu, 01 Sep 2011 03:27:00 +0000

I have been meaning to write about using quarantine as a barrier to trade since Queensland’s banana crop was destroyed by cyclone Yasi last summer and prices at the supermarket shelf hit $14/kilo and more. It seems that leading economist Saul Eslake, and economist turned politician Andrew Leigh, have done the job of deciphering genuine concerns over importing disease, and rent seeking by protected producers.

Let us start with what Andrew had to say.

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Andrew makes the solid points that quarantine and consumer protection is ‘back-door’ protectionism, and gives a good overview of the international legal framework around trade.

Saul Eslake takes different approach by discussing the price impacts on domestic consumers from this type of protection. He also highlighted that in the wake of cyclone Yasi, high banana prices were only helping banana growers whose crops weren’t destroyed, not those who actually lost their crops from the cyclone.

On the matter of importing diseases, he makes a point I have argued to many people in the past. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk? In Eslake’s words-

If bananas and other fruit or vegetables are imported into southern ports, such as Melbourne, Adelaide or Sydney, and are subject upon arrival to appropriate inspections, they are no more likely to spread diseases damaging to Australia's banana industry than the importation of cooked and packaged Canadian salmon has done to Tasmania's salmon industry (another example of protectionism masquerading as ''biosecurity'' where, unusually, commonsense and the interests of consumers ultimately prevailed).

To me the irony of the situation is that most of the crops now requiring protection from foreign pests are imported themselves, and could arguably be classified by an environmentalist as a foreign pest.

The other irony is that the countries that do have these diseases are also exporters and can produce the crop much cheaper than us.

The logical person would ask whether the potential costs from the pest or disease are greater than the benefits derived by consumers from cheaper food? If yes, then we should keep the quarantine restrictions. If no, we should drop them.

I am not trying to say here that all quarantine rules necessarily have greater benefits than there costs. But we have lost 3 out of ten cases brought against us by other WTO member, so if 30% of the quarantine rules can be dropped because their costs outweigh the benefits, that would be good for everyone in the long run.

Property industry propaganda knows no bounds (+market update)

noreply@blogger.com (Cameron Murray) — Wed, 31 Aug 2011 11:22:00 +0000

The above video is from Bernard Salt's presentation at the 2011 Property Council of Australia's 'Geared for Growth' Congress recently held in Darwin. In the presentation he calls for the construction, property and banking sectors to combine forces to fund a lobby group to infiltrate social media, and blogs in particular, to counter the negative sentiment that is leading property markets into the doldrums.

Astonishing. As fellow blogger Tony Harris notes in his detailed analysis of the video -

Who are you really chatting with, when you post on that property forum or blog? A regular person like yourself, or a paid spruiker, funded by the real estate industry?

Around the 8 minute mark Salt discusses the hostile reception to an article he published online spruiking the virtues of growth (population growth I assume). He had this to say about the reader comments -

Not one person in 230 put a reasoned, balanced, measured counter-response. I want to see someone actually in there. Every time you don't respond, negative sentiment extends just that bit further across middle Australia.

After pointing the finger at 'negative sentiment' as the cause of the current economic slowdown he goes on to suggest his solution (screenshot below quote)

I want to see someone, somebody, some group of people, counter the negativism in all theatres, social media, twitter, the blogosphere, seek out and, not destroy, seek out and balance every extreme view - take the fight to them. Sitting back is not an option. I do understand that individuals cannot do this, but surely there is a way to fund a group to do it on your behalf. This it not a pitch for me, but I am surely happy to advise on how to set it up.

What is ironic, to me, is that the property and construction industry lobby groups might actually go for Salt's big idea, as if a few blog comments and Facebook pokes can stop Australia following the rest of the world to its economic destiny.

Salt suggests perhaps they need an (another) 'independent' pro-growth, pro-development sentiment-generating lobby group which could be funded by the BCA, the Property Council of Australian and of all things, the Australian Bankers Association.

The banks would probably join because of the negative sentiment towards them at the moment. Salt comments -

The idea that banks should not get a fair return on their investment is bizarre. We've got this disconnect in Australia between the way we want to live, our superannuation, and our objection to every development, to anyone making a profit.

I for one can understand the concern over bank profits. After all, bank executives and shareholders seem happy to take the profits while taxpayers insure the losses. All the while they have played a key role in the property bubble with their declining lending standards.

Face it Bernard, you can't stop the realities of economics and finance by tweeting 140 characters or less.

And speaking of the realities of economics and finance, that national house price slide accelerated in July according to Rismark. Note that in Perth and Brisbane prices have been falling for more than 12 months, so the falls from peak are much higher than these figures show. From my reading of old data I could guess that Brisbane prices are down about 11% over 15months.

Coinciding with their press release was the most bizarre property analysis yet from Rismark data guru Chris Joye. Joye's analysis of late has been squarely aimed at providing evidence that current house prices are supported by 'economic fundamentals', including the once-off adjustment in interest rates, higher household incomes, and so on.

This time he mightily proclaims to-

... show that by indexing up median Australian dwelling prices by per capita disposable incomes and changes in borrowing capacity (as determined by mortgage rates) one can account for around 90 per cent of the rise in Australian housing costs over the last two and a half decades

Which I guess is a roundabout way of saying prices are 10% overvalued at most. Joye presents the following graph to demonstrate his result, but I can't help wondering why he chose 1986 as a start date. Had he chosen 1990 as the start date he could have shown that houses are undervalued according to his fundamentals, but had he chosen 1998 as his start date, his fundamentals would have only explained about 50% of the house price. Most bizarre.

As I have said before, yes lower interest rates and higher incomes do explain some of the growth, but only about 70% of today's prices. There is also always the risk that incomes will fall as house prices fall, but always the chance that mortgage interest rates will drop to slow any accelerated price declines. The downside risks are far greater than any upside potential in the housing market at the moment, and I do wonder why Chris seems so keen to give the impression that this is not the case.

In other housing news today, Leith van Onselen from the Macrobears superblog [just kidding guys ;-)] has explained in detail in this SMH article why the RBA appears to underplay the risks, and underestimate the size of, the bubble in the Australian housing market. Simply, they use a measure of average household income about 33% higher than actual household incomes. Who would have guessed that the average household disposable income was actually $74,360, and the median just $60,580 - not the $100,000+ used in the RBA's analysis? Not the RBA it seems. Oops.

Finally, I stumbled across this article (somewhat belatedly) arguing essentially that housing supply is driven by housing turnover, and is completely unrelated to price. This might come as a shock to the 'elastify the supply side' believers. It is also odd that mostly valuers and honest property developers seem to be the few groups who argue this concept.

Let me give a few practical examples – First, imagine the construction of a residential unit block – the developer, because of cash flow or financier requirements, needs to sell a large proportion of the development “off-the-plan”.

Simply, until pre-completion sales are locked away nothing gets built.

Second example - for house and land packages in new estates, buyers purchase the block of land first and arrange the construction afterwards. In either case there is no “build it and they will come”. It is the demand that sets the pace.

Which is what I have tried to say for some time, and said back in April like this -

The rate of land and housing supply is determined by the rate of sales of new stock (known as the absorption rate). It has nothing to do with the rate of development approvals or even the price level.

Tobin tax for Australia?

noreply@blogger.com (Cameron Murray) — Tue, 30 Aug 2011 00:51:00 +0000

But I see offhand no other way to prevent financial transactions disguised as trade

In 1972, after the collapse of the Bretton Woods system (where currencies where pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the conversion of currencies. As he says -

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets. (here)

A 1978 article where Tobin reflects on global monetary reform is here, and well worth a read. The relevance to Australia in 2011 is quite clear when he says -

National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exhcanges, without real hardship and without significant sacrifice of the objective of national economic policy with respect to employment, output and inflation.

While Tobin originally suggested that all countries cooperate to implement a standard tax rate, with revenues raised pooled centrally, the idea is equally valid for a single currency-issuing nation to tax conversions of its own currency.

The logic behind the tax is quite sound. An influx of foreign funds only provides domestic benefits when it backs real investment in productive enterprise. And investing in a real business takes time. As Canadian economist Rodney Schmidt noted in 1994

In two-thirds of all the outright forward and [currency] swap transactions, the money moved into another currency for fewer than seven days. In only 1 per cent did the money stay for as long as one year

A currency exchange tax reduces the gains from short term currency trades, and for a single country, allows them to reduce distortionary taxes elsewhere in the economy leading to productivity benefits. It also means there is a strong incentive for national savings to be invested locally, and a cost to banks seeking offshore funding to support their capital requirements. It also provides local governments some degree of control over their economy, rather than being at the mercy of global conditions. These are all good things.

Of course, like any tax, the risk is that governments simply spend this extra revenue unproductively and do not reduce distortionary taxes elsewhere in the economy, which greatly reduces its potential benefits.

In 2009 Brazil implemented a similar financial transaction tax regime that applies to foreign investment in stocks and fixed-income securities at a rate of 2%. And it seemed to work -

Brazil's currency and stocks fell sharply yesterday after the government imposed a 2 per cent tax on foreign portfolio investments to stem the rapid rise of its exchange rate.

But only for a while. The chart below shows the Real regained its strength fairly quickly.

(This is not to be confused with Brazil's former Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira, or CPMF, which was a transaction tax levied at 0.038% on all bank transactions from 1993 till the end of 2007)

Of course the empirical macroeconomic problem arises once again here - would the Real have been even stronger if not for the tax? Who knows? My gut feeling is that because economic agents adapt very quickly to new taxes, their offsetting behaviour can greatly reduce the intended effect.

Since that time, the global battle to devalue domestic currency has resulted in many calls to implement Tobin taxes, from the British Prime Minister to the French President, with all political leaders seeking input from the IMF. The IMF is now coming around to the idea (recently releasing this working paper), and with DSK's likely replacement Christine Lagarde being a fan (here), chances have improved that this tax will be supported globally.

There is even strong support from the economics profession, with1000 economists writing a letter in support of the idea earlier this year. A good summary of the breadth of support (and not) for such a tax is here. Even economists at the Australian Treasury are talking about it.

The cynic in me says that such a tax is unlikely because those who benefit from fast and cheap currency exchange are those with the most money, while those who bear the burden of a high domestic currency are usually the workers in marginally competitive industries.

For Australia I see only upsides to this tax. A lower Australian dollar and reduced foreign investment will help to slowly rebalance our economy to become more diversified and stable again. While the Henry Tax Review overlooked this type of tax, at least we have a backdrop of tax reform to accompany a Tobin tax.

The outcome of this political battle with the global financial elite is anyone's guess.

Anthropologist's view on debt and money

noreply@blogger.com (Cameron Murray) — Sun, 28 Aug 2011 22:17:00 +0000

Over at Naked Capitalism is a fantastic interview with David Graeber, author of Debt: The First 5,000 years. The most intersting point for me is that economists just assumed that since money is currently primarily used to estimate exchange value, that this is the historical reason for the existence of money. While this view of money is often a workable assumption, the deeper social issues surrounding money become easily overlooked when you perceive money primarily as a means of exchange, and ignore the role of debt anf conflict as the tru origins of money.

An excerpt is below, and the full interview is worth reading, especially for those curious about Chartalism, Biblical debt jubilees and so on.

Philip Pilkington: Let’s begin. Most economists claim that money was invented to replace the barter system. But you’ve found something quite different, am I correct?

David Graeber: Yes there’s a standard story we’re all taught, a ‘once upon a time’ — it’s a fairy tale.

It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.

The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.

Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.

So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account?

By the time the curtain goes up on the historical record in ancient Mesopotamia, around 3200 BC, it’s already happened. There’s an elaborate system of money of account and complex credit systems. (Money as medium of exchange or as a standardized circulating units of gold, silver, bronze or whatever, only comes much later.)

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Not so random links, comments and quotes

noreply@blogger.com (Cameron Murray) — Fri, 26 Aug 2011 00:07:00 +0000

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

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

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

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

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

Apple iPad patent fiasco

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

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

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

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

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

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

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

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

Gay marriage - questions

noreply@blogger.com (Cameron Murray) — Wed, 24 Aug 2011 23:07:00 +0000

The gay marriage debate is extremely interesting. I have a few issues that never seem to be resolved, and are often bypassed in discussion on the matter.

1. Marriage is a religious institution essentially designed to encourage conformity to a norm of one sexual partner, and for specialisation of labour in raising children. Why do so many gay people want to acknowledge this ancient religious anti-gay institution at all? In Australia there are almost no external benefits (in the form of tax treatment, visas, welfare etc) for marriage over de facto relationships. Why not just promise each other you'll be faithful till death do you part? In fact, why do straight people continue to be married (I am, and have my reasons, but I'll keep them for another time).

2. If people want 'marriage equality' why can't I marry my sister? Or my mother? Surely to be equal ALL marriage between consenting adults must be allowed? After all, the main social problems of genetic abnormalities from inbreeding can be solved by IVF - the same way gay couples are having children. In fact, two gay men who happen to be brothers should also be able to marry, no? It is love between two adults, so what's wrong with it? I can't believe anyone could argue for gay marriage and not for sibling marriage, especially between gay siblings, since the arguments are all the same.

3. Any study showing the 'superior' outcomes of children from gay couples (of which there are a few - here's a starting point for some academic research) must control for incomes and other social factors. I have a hard time believing that the 'gay couples with children' sample of society has a similar income distribution to 'heterosexual couples with children' and we know this is a huge factor in child development.

4. Is the desire to have children not in any way related to the desire to mate with the opposite sex? I would have thought that the two are somehow related, which makes me feel like there is more of a 'conforming to social identity' issue at play over the desire to be a progressive gay couple with children.

5. Are children raised by gay parents more or less likely to be gay themselves? It seems intuitive that they would be far more likely, both because one parent would be a biological parent, and the nurturing and exposure to 'gay' behaviour. Is this good or bad? Are children really getting a choice? Will marriage legitimise being gay as normal? Is that a problem?

6. Should gay couples be allowed to adopt children? Why not? Should IVF treatment for lesbian couples be subsidised by Medicare? Surely not. It isn't a medical condition. If they want to pay the full cost for privately provided IVF from a voluntary donor, so be it. If they want to meet a guy at a bar and do it the old-fashioned way, that is fine too. But what about gay male couples? What about married gay brothers? Will recognition of marriage be a stepping stone to more subsidies for gay families?

7. What legal rights exist for the biological parent of the child who is not part of the 'parent couple'? If the relationship breaks down, will the courts decide in favour of the biological gay parent, or the surrogate biological parent? Will marriage affect this decision?

8. If two children from gay family each have one of the parents as biological, and the other parent a different surrogate (so they are not 'blood relations'), can they be married? What about if these two children are gay?

In any case, I always wonder why people don't just say why they feel gay marriage is unacceptable instead of beating around the bush about 'equality'. And those who so strongly support gay marriage should think about the flow-on implications to the role of government, the courts, the rights of parents and health care.

If you can't tell, I see no good reasons in favour of gay marriage, and plenty of unresolved issues surrounding rights of married gay couples, particularly regarding children. Of course, I have no problem with two adults choosing to have a relationship with each other, regardless of their gender.

Econompic - negative real interest rates encourage savings

noreply@blogger.com (Cameron Murray) — Tue, 23 Aug 2011 23:15:00 +0000

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

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

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

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

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

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

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

"At current interest rates, an individual will lose purchasing power in their savings account if there is even an inkling of inflation. A common assumption is that the Fed has done this (i.e. pushed interest rates to historic lows) to increase aggregate demand (i.e. if you are earning nothing, you might as well spend it) or to move investors to riskier investments that might provide better momentum for the underlying economy (i.e. an investment in a corporate bond that makes it cheaper for corporations to borrow).

But what if low to negative interest rates in fact causes the opposite... an increase in the savings rate and derisking by investors? This post is based on a very quick and dirty framework I've been thinking about and focuses on the savings rate, but the same framework could (in my opinion) justify why investors may choose to derisk as well. Any feedback would be greatly appreciated.

Getting to $100 Saved

Let's assume our saver knows that in ten years they will need to have $100 saved (for retirement, college education for their kids, a new car, etc...). Earning 0% on their savings, they would need to save $10 / year. If they were to earn a rate of return on that $10 saved each year, by the tenth year they would have excess savings (i.e. the blue and yellow lines).

As a result, if an investor can earn more than 0%, they do not need to save $10 / year, but a smaller amount. The chart below shows how much that $10 can be reduced based on various rates of return on their savings.

Assuming the individual earned $200 / year, the original $10 was 5% of their income (i.e. a 5% savings rate). The various amounts needed to save each year is converted to a savings rate below. It clearly shows that if a saver can earn a rate of return greater than 0% (i.e. if interest rates were higher), they can save less to get to their goal.

Unfortunately, savers aren't currently able to earn 0% on their checking / savings accounts. With any inflation, an investors is faced with negative interest rates. So, to get to a $100 real level of savings, an investors will need to save more than the $10 / year.

I know some readers will point out that an individual can always choose to add more risk to increase their returns, but what happens if that investment doesn't work out? An even higher level of savings, which they may not be willing or able to do.

So there's the very basic framework. What am I missing? "

Electric v petrol scooter

noreply@blogger.com (Cameron Murray) — Mon, 22 Aug 2011 23:40:00 +0000

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

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

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

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

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

Over to Chris.

It’s starting to get fashionable to talk about Electric Cars again. The other day I was in at the local scooter shop the other day getting a tyre sorted out for my Yamaha T-Max scooter (and pondering a new 50cc scoot for my wife) when I spotted this electric scooter. So (being an engineering sort of fella) it is exactly in my nature to use this situation to mull over the whole thing (and present it to people who may not have thought about it).

I have been interested in the concept of an electric scooter for a while now but had not really done much research on the topic.

So since it was right in front of me I thought I'd ask some questions, take some pictures and write about it here.

I will say from the start that I like the idea of an electric scooter for city work more than petrol ones for the simple fact that most scooters are 2 strokes, stink and pollute something fierce.

India made a great move when they legislated their nasty "auto" taxis to use CNG rather than the regular 2 stroke ones of the past. Emissions fell and everyone is healthier and happier for it.

Its true that electric engines will need power from the regular power stations, which are in the main coal fired (at least in Australia). However at the very least we move this pollution to a single more efficient generation source (while introducing a number of other inefficiencies in the middle) which can be more controlled and monitored.

Before dribbling on about that too much I thought I'd toss in a comment about the rear drive on the scooter. A brush-less 48Volt 4000Watt hub mounted motor: man that means it can suck 83 amps!! wow

Which makes for some interesting observations about the changes in engineering of the swingarm and frame (because the forces are different now).

The motor can suck up to 4000 watts of energy out of your buttery but of course will only pull as much as is needed for keeping a constant speed when cruising along at a steady speed (say 50Kmh). This is of course exactly like a petrol powered motor, which sucks fuel faster when pulling power than does when cursing along. Interestingly both produce about 4000 Watts of energy (yes, 49cc scooter or electric scooter give you the same power to take off) which should come as no surprise because thats regulated by government.

[aside: to put this sort of tiddly power delivery into perspective, a "vanilla" motorcycle like a Suzuik GS500 has a motor that will deliver at least 38,000 Watts and a timid car like a Ford something like 48,000 Watts of power. So as things go the electric scooter is not pushing the engineering envelope here]

Putting energy in:

People somehow think of petrol as fuel and electricity as energy, I blame our schools for creating this schizophrenic view of reality. The reality is that fuel (petrol, gas) is energy in liquid form. We release that energy by burning it.

Motors turn that energy release into movement. The electric bike stores energy in rechargeable batteries and gets the energy to recharge the battery from your wall socket using something like this:

This little device (which is about the size of a small shoe box) is the charger for the scooter.

To charge your scooter up you have to plug this in to the wall power and into the bike. You cannot really run a long extension lead to it or you will lose power so we meet:

Problem #1 - where can I recharge

If you have your own house and garage you can probably charge it up in your garage, but if you live in an apartment its quite unlikely you have power available where you park your scooter. So you'll need to find a place where you can park it and recharge it: which takes 4 hours. In contrast the regular scooter recharges with fuel at the local servo and takes about 5 minutes to fill and pay for.

So, with fuel being (at the time of writing) about $1.5 a Liter a petrol powered scooter takes about 5L in the tank and will set you back about $7.50 to fill up from dead empty. It’s unlikely you'll run it dry, so you'll probably put in 3L at a time and walk into the servo to pay your $4 bill while grinning at the people who fill up their cars and are paying something like $60 for that.

So what does it cost to "fill up" the Electric scooter?

Well of course electricity costs, in my area right now power you pull out of the wall costs you about 19c per 1000 watts per hour. It’s normally written as Kw/H which seems to confuse people who often profess to not understand their power bill. It’s not all that had to get. Essentially if you plug in and turn on something which uses 1000W (or a kilo watt or 1Kw) and leave it turned on for an hour it cost you 19c.

So how does this apply to the Electric scooter?

Looking at the charger we see that it supplies about 900Watts to the battery. I'm certain it is not 100% efficient so let’s give it some grace and assume that it’s going to pull out 1000Watts of power from your power point in your home (or wherever its plugged into).

So (based on the above rate for power) a 4 hour charge will cost you something less than a dollar, 78c our thereabouts.

According to the information I have on the scooter (which you can verify here) For this princely sum you get to travel 90Km (only under particular conditions).

That is quite attractive. Sounds like its quite positive when reading the basics. So let’s plumb into the ownership and do a little bit of thinking:

Cost comparison
Ok, so 80 cents gets you 90Km on the scooter, but it will of course vary on how you ride and in what conditions. 90Km is of course also the maximum distance, so if you commute across town 25Km you'll not quite get two trips into the one charge (as 50 + 50 will put you out of battery) and you can't stop and top up on the way like you can with a petrol bike. The actual distance you will get may be less depending on factors like:

· hills
· number of traffic lights
· how heavy you are on the throttle on take off (kiss bye bye to fast take offs)

This means that (unless you want to be pushing it home) you'll have to top up every day (fine if you park in a garage in your home, annoying if you have a flat).

So again you'll be plugging in and paying that 80c every day instead of the potential discussed by the maker and seller of the bikes.

If you were to consider a petrol scooter (as a comparison) such as the Honda Scoopy, assuming you get something like 3l / 100Km (and some have suggested you can get 1.4L/100Km) you will pay $4.50 for that 100Km or $2.25 per day. That’s a worst case scenario too, as if you get 1.5L/100km (which is actually likely) then that'll be more like $1.12 for the trip.

Starting to look like much the same running cost as the 80c for the scooter isn't it?

Of course with the petrol version you have the flexibility that you KNOW how much is in your fuel tank, battery charge level is not as accurate and will depend on how cold it is. You can top up your fuel in minutes but need hours (back home where your charger is) to top up the electric scooter.

So this begs the question of how much is the convenience that petrol provides worth to you?

Back on the costs: an acquaintance of mine who has an electric bicycle (less power) recently changed battery from the standard one. How much? Well think in numbers closer to $1000 than $500 and you're on the path.

So unless you're after a battery for one of those tiddly little electric bicycles (with all that implies) you're thinking big money. This starts to lead into the next problem identified for the Electric Scooter and that is:

Problem #2 real operation costs:

Thinking about the above battery example, how long will your rechargeable battery last? Well its only covered by 1 year warranty. So assuming you use the battery optimally (charge and discharge according to the makers ideals) you'll certainly get a year out of it, perhaps two. But are you going to learn to do that or is convenience going to get in the way?

Consider that at the fuel prices of $1.50 /Liter (and before you say that may rise over 2 years ask yourself if power won't) you will get 20,000Km of travel from $450 of petrol.

If you travel 25Km each way to work, thats 50Km per day = 400 days of travel.

Yes, that's right ... your entire year of fuel bill will blown on a battery replacement. Which means in another way of thinking about it, that you are actually costing yourself an extra 80c a trip just for the hell of it when using an electric scooter.

Ok, but we're CO2 free right? That's got to be worth something hasn't it? Well, let me introduce you to ...

Problem #3 - CO2 generation

Its hard to get figures but it seems that (for coal powered stations) about 900g of CO2 is released for every Kw of electricity. So given that the Electric Scooter will need about 4Kw from the wall every day (using the above situational example) it will thus end up generating about 3.6Kg of C02. Of course you could run it to the edge and charge every second day (and push it home occasionally) halving that figure, but that's up to you (and pushing is good exercise).

In comparison burning petrol will release about 625g of C02 for every litre burnt, so assuming you burn 1.5 litres for your 50Km trip you'll generate about a 1Kg of C02 (Note: these calculations are based on figures for C02 in petrol from here)

so yep ... the petrol version generates less CO2 as well. It’s not looking good to me at this point ...

Naturally at this point someone will make the observation that Electric Scooters are at the beginning of their evolution and that petrol engines benefit from decades of development. Well if you have never gone to school or been taught to do any reading you may believe that line.

Let me assure you that both are quite developed technologies.

Petrol motors are actually not significantly advanced compared to 40 years ago (only we've worked on mainly curbing their emissions of other stuff) when you could buy a 70cc Honda Cub (lovely scooter) which used almost exactly the same amount of petrol as the bikes do today.

Then there is the Brushless DC motors used in the scooters, these have been in commercial use since 1886. So its mainly the battery technology which is changed to make storage more compact and perhaps controller circuits to make the motors more flexible. The basic physics of power required to move something hasn't changed between the motor types.

This does not effect the cost and pollution aspects of this calculation (except to say that modern batteries may be a more significant pollution issue than lead acid batterys).

Problem #4 - capital costs

Right now (if you look closely at the first picture) you'll see that an electric scooter equivalent to a 50cc scooter costs about $4250, while a 4 stroke *(more expensive, much cleaner burning less polluting than 2 stroke) Honda Scoopy will cost you about $2500

Yes, you did read that right, you'll pay nearly double for an equivalent electric scooter which will likely produce as much C02 (if that's of interest to you) and certainly more other significant toxic waste than will the choice of a clean 4 stroke petrol powered scooter (compared to 2 stroke motors which are quite dirty creatures).

An excellent document prepared for the Victorian Competition and Efficiency Commission (here) suggests that scooters are more effective people movers than cars are in cities. No surprise there...

To make the case even more for scooters, according to that same report: "A 2000 report (Motorcycle Transport, Powered Two Wheelers in Victoria) by transport researcher, Professor Marcus Wigan, found that motorcycle riders were the only transport mode to indicate no time delays as part of a trip."

There are articles available written to counterpoint this blog post (such as this one) where they suggest that Electric bikes are better than petrol powered ones. It’s worth noting that these are largely written by people who actually sell the electric alternative (but not the electricity).

It’s interesting to note that in the post I cited above the author makes the comparison between a electric bicycle and a postie bike (Honda CT110). The CT110 is a work horse, it'll carry another 40kg of mail and still accelerate and travel at 60Kmh if you desire, but the author makes a disingenuous comparison with an electric bicycle (which only carries you and you have to pedal too) comes out on top (when he ignores the battery issue). Yet the bicycle has a motor which wouldn't have enough power to pull the skin of a custard when compared to a postie bike ... gosh, bet that'll be popular on the farm!

But what about Solar charging? That would be CO2 free...

Well that's a good point. If you were to get a 1.5 Kw system it would likely produce enough energy on a good day to charge your scooter (if you left it at home) within 5 hours (you don't get 1.5Kw all the time out of them, ask someone who owns one). So for the additional investment of $2500 (around about and you won't be back feeding the grid while your charging) you can be comfortable in the knowledge that you won't pay that extra 80c a day (but you'll still pay the other costs)

So that's $4200 for the scooter, and $2500 for the solar charger system (no rebate on that one) taking your investment to $6700 for a system which needs you to leave the bike home during the day for charging ... sounds great to you too?

So in summary:

It seems like the following to me

· I will save a little per trip (about 80c for a 50Km trip vs $1.25)
· but I pay double to purchase ($4200 vs $2500)
· unknown depreciation losses (but it’s fair to say you can't lose more than $2500 on the petrol scooter)
· pay more for operational costs (the battery will die)
· actually create more pollution in almost every way by using an electric scooter over a petrol one.
· You have to be able to park it where you can charge it (in a secure place or risk getting your charger stolen)
· if your running low in power on the way home you cannot just stop in to a servo to top up.

Why are you buying the scooter? Economy? Environmentally friendly?

The bottom line is if you want to be really environmentally friendly, go get a 50cc to 110cc 4 stroke scooter stop driving your car and help save the world’s atmosphere and resources.

Economies of scale do not equal productivity

noreply@blogger.com (Cameron Murray) — Mon, 22 Aug 2011 00:44:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday thoughts

noreply@blogger.com (Cameron Murray) — Fri, 19 Aug 2011 05:12:00 +0000

Democracy

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

Warren Buffet says tax me more.

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

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

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

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

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

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

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

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

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

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

What is stopping them?

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

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

'Going green'

noreply@blogger.com (Cameron Murray) — Wed, 17 Aug 2011 23:48:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Households better of than 1994... just

noreply@blogger.com (Cameron Murray) — Tue, 16 Aug 2011 00:00:00 +0000

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

He explains the data and method as follows.

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

And he explains the findings

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

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

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

I also have some other concerns:

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

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

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

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

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

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

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

Recycling Jevons Paradox

noreply@blogger.com (Cameron Murray) — Sun, 14 Aug 2011 12:20:00 +0000

I have previously argued (here, here and here) that cost effective recycling actually leads to an increase in the demand for the resource being recycled. This is the opposite of what most environmentalists, and even most economists, believe.

What I probably didn't explain is that not only can recycling increase the demand for the resource being recycled, but it can also increase demand for all other natural resources used in the economy. Yes, a new technology that makes recycling car tyres cheaper than manufacturing new car tyres would increase our demand for tyres (because they are cheaper) and for other resources, like oil. The reason is simple. Automotive transport just became slightly cheaper due to the recycling technology, and the response to this price reduction, however slight, is to increase the demand for automotive transport and all the other resources required to provide it.

This result usually seems counter intuitive at first. But we all accept that improving labour productivity does not decrease the demand for labour. And we all accept that improving agricultural productivity leads to an increase in land under cultivation, due to marginal lands becoming economically viable. So why not recycling? After all, if recycling is cost effective, isn't it also an example of improving the productivity of the material?

At the risk of being painfully repetitive (this is my fourth post on the matter), I will use the 'recycling of labour' as an example.

Suppose there is a task that takes two labourers a month to complete. Given the nature of the task, suitable labour can be found at $1000 per month per man. Now, a new technology allows us to 'recycle' the first mans labour at a cost of $500 per month. Given this is half the cost of employing a second man, recycling is an obvious profitable choice to get the work of two men achieved in a month with only one man. This new technology might comprise new equipment (power tools etc.), or simply the investment in teaching the man new skills.

In any case, one man is achieving two men’s' work for less cost. If I changed the terms a little it is clear how this is actually an example of 'labour recycling'. "Two bottles of cola can be provided with one bottle for less cost" would be a simple summary of the net effect of plastic bottle recycling.

But we know from centuries of experience that recycling labour increases demand for it. And we know that it leads to productivity gains elsewhere in the economy, since you can't improve economic productivity in isolation of the rest of the economy. As Len Brookes once elegantly noted, the 'principle of the indivisibility of economic productivity' means that any technology that improves the productivity (aka efficiency) of one resource, improves the productivity of ALL resources in the economy.

This post was partly inspired by one of Don Boudreaux's blog posts (originally published here). In it he describes recycling more broadly -

After I awaken, I shower and dry myself with a towel that I’ve had for a few years. I don’t discard it after one use. When it gets dirty, I rejuvenate it by processing it through recycling machines that my wife and I own: a washing machine and clothes dryer.

Then I brew coffee and fix breakfast. Each day, I use the same coffee maker that I used the day before. I clean it after each use, recycling it for the next brew. My wife and I drink the coffee from mugs that have been used many times in the past. (One set of our coffee mugs was handed down to us after my wife’s parents used them for several years.)

We also eat our breakfasts using dishes and utensils that are recycled from countless past uses. After breakfast, we recycle our mugs, dishes, and utensils with the help of another recycling machine: an automatic dishwasher.

After breakfast, I dress in clothes that I’ve worn before and that I will wear again. My underwear, my pants, my shirt, my necktie, my belt, my coat, my shoes – all are recycled from previous uses. Indeed, I take my suits and coats to a store specializing in recycling such garments: my local dry-cleaner.

And from a later post -

When materials are worth recycling, markets for their reuse naturally arise. For materials with no natural markets for their reuse, the benefits of recycling are less than its costs – and, therefore, government efforts to promote such recycling waste resources

His use of the term waste in the final sentence is misleading. He means that no consumers will gain from government efforts to promote costly recycling, therefore the resources utilised in recycling are wasted, as they could have been employed elsewhere to better satisfy consumers. However, from a macro viewpoint, it is this very cost INEFFECTIVE recycling that reduces economy wide productivity (aka efficiency) and resource demand.

That is the key lesson here. If an activity in uneconomic, it decreases our total level of economic activity and our total demand for resources. If it is economically justifiable, it increases our demand for natural resources. Indeed, if we are concerned about the externalities associated with using our natural resources we need to restrict the supply of these resources at the source - restrict sand mining locations, reduce allowable mining rights to coal etc. Trying to achieve these environmental outcomes by the most indirect route possible, through the consumer and far upstream production processes, is completely misguided.